HOG - 06.28.2015 - 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 28, 2015
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                     to                    
Commission file number 1-9183
 
 
Harley-Davidson, Inc.
(Exact name of registrant as specified in its charter)
 
Wisconsin
 
39-1382325
(State of organization)
 
(I.R.S. Employer Identification No.)
 
 
 
3700 West Juneau Avenue
Milwaukee, Wisconsin
 
53208
(Address of principal executive offices)
 
(Zip code)
Registrants telephone number: (414) 342-4680
None
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x   No   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
x
Accelerated filer
 
¨
 
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes  ¨    No  x
Number of shares of the registrant’s common stock outstanding at July 31, 2015: 205,966,792 shares



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended June 28, 2015
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three months ended
 
Six months ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,650,783

 
$
1,834,285

 
$
3,161,353

 
$
3,405,973

Financial Services
173,609

 
166,414

 
335,984

 
320,774

Total revenue
1,824,392

 
2,000,699

 
3,497,337

 
3,726,747

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
1,003,569

 
1,110,146

 
1,923,864

 
2,089,703

Financial Services interest expense
41,188

 
40,741

 
79,724

 
79,598

Financial Services provision for credit losses
15,175

 
15,961

 
41,422

 
36,292

Selling, administrative and engineering expense
301,944

 
286,156

 
579,693

 
562,577

Total costs and expenses
1,361,876

 
1,453,004

 
2,624,703

 
2,768,170

Operating income
462,516

 
547,695

 
872,634

 
958,577

Investment income
1,450

 
1,772

 
2,772

 
3,431

Interest expense
9

 
393

 
18

 
4,070

Income before provision for income taxes
463,957

 
549,074

 
875,388

 
957,938

Provision for income taxes
164,147

 
194,921

 
305,724

 
337,868

Net income
$
299,810

 
$
354,153

 
$
569,664

 
$
620,070

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.44

 
$
1.63

 
$
2.72

 
$
2.84

Diluted
$
1.44

 
$
1.62

 
$
2.71

 
$
2.82

Cash dividends per common share
$
0.310

 
$
0.275

 
$
0.620

 
$
0.550

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


3

Table of Contents

HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
Six months ended
 
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Net income
$
299,810

 
$
354,153

 
$
569,664

 
$
620,070

Other comprehensive (loss) income, net of tax
 
 
 
 
 
 
 
     Foreign currency translation adjustments
4,251

 
5,733

 
(22,770
)
 
8,681

     Derivative financial instruments
(13,286
)
 
3,150

 
(2,214
)
 
2,923

     Marketable securities
(128
)
 
(74
)
 
(195
)
 
(116
)
     Pension and postretirement benefit plans
8,798

 
6,069

 
17,596

 
12,137

Total other comprehensive (loss) income, net of tax
$
(365
)
 
$
14,878

 
$
(7,583
)
 
$
23,625

Comprehensive income
$
299,445

 
$
369,031

 
$
562,081

 
$
643,695

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



4

Table of Contents

HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
June 28,
2015
 
December 31,
2014
 
June 29,
2014
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
1,247,579

 
$
906,680

 
$
999,346

Marketable securities
52,516

 
57,325

 
57,814

Accounts receivable, net
277,569

 
247,621

 
289,940

Finance receivables, net
2,331,723

 
1,916,635

 
2,281,512

Inventories
395,044

 
448,871

 
371,597

Restricted cash
136,760

 
98,627

 
154,681

Deferred income taxes
94,778

 
89,916

 
90,348

Other current assets
160,421

 
182,420

 
128,460

Total current assets
4,696,390

 
3,948,095

 
4,373,698

Finance receivables, net
4,816,772

 
4,516,246

 
4,537,405

Property, plant and equipment, net
873,007

 
883,077

 
826,467

Prepaid pension costs

 

 
256,279

Goodwill
26,105

 
27,752

 
30,252

Deferred income taxes
66,755

 
77,835

 
2,915

Other long-term assets
85,843

 
75,092

 
49,280

 
$
10,564,872

 
$
9,528,097

 
$
10,076,296

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
407,636

 
$
196,868

 
$
388,342

Accrued liabilities
448,737

 
449,317

 
500,769

Short-term debt
114,983

 
731,786

 
619,622

Current portion of long-term debt
1,551,368

 
1,011,315

 
944,915

Total current liabilities
2,522,724

 
2,389,286

 
2,453,648

Long-term debt
4,560,349

 
3,761,528

 
3,794,396

Pension liability
66,786

 
76,186

 
38,174

Postretirement healthcare liability
196,369

 
203,006

 
209,312

Deferred income taxes

 

 
38,919

Other long-term liabilities
195,017

 
188,805

 
175,587

Commitments and contingencies (Note 16)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued

 

 

Common stock
3,448

 
3,442

 
3,439

Additional paid-in-capital
1,304,855

 
1,265,257

 
1,231,913

Retained earnings
8,898,959

 
8,459,040

 
8,352,168

Accumulated other comprehensive loss
(522,526
)
 
(514,943
)
 
(309,051
)
Treasury stock, at cost
(6,661,109
)
 
(6,303,510
)
 
(5,912,209
)
Total shareholders' equity
3,023,627

 
2,909,286

 
3,366,260

 
$
10,564,872

 
$
9,528,097

 
$
10,076,296




5

Table of Contents

HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
June 28,
2015
 
December 31,
2014
 
June 29,
2014
Balances held by consolidated variable interest entities (Note 5)
 
 
 
 
 
Current finance receivables, net
$
409,198

 
$
312,645

 
$
359,085

Other assets
$
3,067

 
$
3,409

 
$
2,521

Non-current finance receivables, net
$
1,740,420

 
$
1,113,801

 
$
1,495,171

Restricted cash - current and non-current
$
149,418

 
$
110,017

 
$
141,146

Current portion of long-term debt
$
462,008

 
$
366,889

 
$
403,891

Long-term debt
$
1,555,071

 
$
904,644

 
$
1,308,964

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

6

Table of Contents

HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six months ended
 
June 28,
2015
 
June 29,
2014
Net cash provided by operating activities (Note 3)
$
613,944

 
$
570,592

Cash flows from investing activities:
 
 
 
Capital expenditures
(85,180
)
 
(74,523
)
Origination of finance receivables
(1,976,563
)
 
(1,904,577
)
Collections on finance receivables
1,570,431

 
1,518,186

Sales and redemptions of marketable securities
4,500

 
41,010

Other
5,111

 
145

Net cash used by investing activities
(481,701
)
 
(419,759
)
Cash flows from financing activities:
 
 
 
Repayments of senior unsecured notes

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

 

Repayments of medium-term notes

 
(7,220
)
Proceeds from securitization debt
1,195,668

 
847,126

Repayments of securitization debt
(454,332
)
 
(393,655
)
Net decrease in credit facilities and unsecured commercial paper
(616,586
)
 
(48,134
)
Borrowings of asset-backed commercial paper
40,209

 
36,800

Repayments of asset-backed commercial paper
(35,730
)
 
(37,317
)
Net change in restricted cash
(40,159
)
 
(9,874
)
Dividends paid
(129,745
)
 
(120,631
)
Purchase of common stock for treasury
(358,425
)
 
(223,736
)
Excess tax benefits from share-based payments
2,401

 
8,652

Issuance of common stock under employee stock option plans
15,664

 
27,907

Net cash provided by (used by) financing activities
214,351

 
(223,082
)
Effect of exchange rate changes on cash and cash equivalents
(5,695
)
 
4,983

Net increase (decrease) in cash and cash equivalents
$
340,899

 
$
(67,266
)
Cash and cash equivalents:
 
 
 
Cash and cash equivalents—beginning of period
$
906,680

 
$
1,066,612

Net increase (decrease) in cash and cash equivalents
340,899

 
(67,266
)
Cash and cash equivalents—end of period
$
1,247,579

 
$
999,346

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


7

Table of Contents

HARLEY-DAVIDSON, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Use of Estimates
The condensed consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material intercompany transactions are eliminated.
In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the condensed consolidated balance sheets as of June 28, 2015 and June 29, 2014, the condensed consolidated statements of income for the three and six month periods then ended, the condensed consolidated statements of comprehensive income for the three and six month periods then ended and the condensed consolidated statements of cash flows for the six month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2014.
The Company operates in two principal reportable segments: Motorcycles & Related Products (Motorcycles) and Financial Services.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2. New Accounting Standards
Accounting Standards Not Yet Adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 Revenue from Contracts with Customers (ASU No. 2014-09). ASU No. 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In July 2015, the FASB decided to defer the effective date of the new revenue recognition standard by one year to fiscal years beginning after December 15, 2017 and for interim periods therein. The Company is currently evaluating the impact of adoption.
In February 2015, the FASB issued ASU No. 2015-02 Amendments to the Consolidation Analysis (ASU 2015-02). ASU No. 2015-02 amends the guidance within Accounting Standards Codification (ASC) Topic 810, "Consolidation,” to change the analysis that a reporting entity must perform to determine whether it should consolidate certain legal entities. The Company is required to adopt ASU No, 2015-02 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company believes the adoption of ASU No. 2015-02 will not have an impact on its financial results and will only impact the content of the current disclosure.
In April 2015, the FASB issued ASU No. 2015-03 Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03). ASU No. 2015-03 amends the guidance within ASC Topic 835, "Interest", to require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt premiums and discounts. The Company is required to adopt ASU No, 2015-03 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015 on a retrospective basis. Upon adoption, the Company will reclassify its debt issuance costs from other assets to debt on the balance sheet. At June 28, 2015, the Company had $18.4 million of debt issuance costs recorded as assets on the balance sheet.


8

Table of Contents

3. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
June 28,
2015
 
December 31,
2014
 
June 29,
2014
Available-for-sale: Corporate bonds
$
52,516

 
$
57,325

 
$
57,814

Trading securities: Mutual funds
37,698

 
33,815

 
33,567

 
$
90,214

 
$
91,140

 
$
91,381

The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first half of 2015 and 2014, the Company recognized gross unrealized losses of approximately $310,000 and $184,000, respectively, or $195,000 and $116,000 net of taxes, respectively, to adjust amortized cost to fair value. The marketable securities have contractual maturities that generally come due over the next 3 to 22 months.
The Company's trading securities relate to investments held by the Company to fund certain deferred compensation obligations. The trading securities are carried at fair value with gains and losses recorded in net income and investments are included in other long-term assets on the consolidated balance sheets.
Inventories
Inventories are valued at the lower of cost or market. Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories consist of the following (in thousands):
 
June 28,
2015
 
December 31,
2014
 
June 29,
2014
Components at the lower of FIFO cost or market
 
 
 
 
 
Raw materials and work in process
$
137,151

 
$
151,254

 
$
118,720

Motorcycle finished goods
186,326

 
230,309

 
179,314

Parts and accessories and general merchandise
121,469

 
117,210

 
122,289

Inventory at lower of FIFO cost or market
444,946

 
498,773

 
420,323

Excess of FIFO over LIFO cost
(49,902
)
 
(49,902
)
 
(48,726
)
 
$
395,044

 
$
448,871

 
$
371,597


9

Table of Contents

Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Six months ended
 
June 28,
2015
 
June 29,
2014
Cash flows from operating activities:
 
 
 
Net income
$
569,664

 
$
620,070

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
93,640

 
87,123

Amortization of deferred loan origination costs
47,524

 
45,713

Amortization of financing origination fees
4,820

 
4,284

Provision for employee long-term benefits
24,635

 
16,854

Contributions to pension and postretirement plans
(12,725
)
 
(14,035
)
Stock compensation expense
16,734

 
20,768

Net change in wholesale finance receivables related to sales
(418,969
)
 
(510,200
)
Provision for credit losses
41,422

 
36,292

Loss on debt extinguishment

 
1,145

Deferred income taxes
(1,195
)
 
(3,894
)
Foreign currency adjustments
11,041

 
(5,084
)
Other, net
(1,964
)
 
9,332

Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(43,309
)
 
(25,643
)
Finance receivables—accrued interest and other
(270
)
 
(993
)
Inventories
38,012

 
58,741

Accounts payable and accrued liabilities
232,357

 
226,233

Derivative instruments
1,185

 
968

Other
11,342

 
2,918

Total adjustments
44,280

 
(49,478
)
Net cash provided by operating activities
$
613,944

 
$
570,592

4. Finance Receivables
The Company provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.
The Company offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada.
Finance receivables, net, consisted of the following (in thousands):
 
June 28,
2015
 
December 31,
2014
 
June 29,
2014
Retail
$
5,962,685

 
$
5,607,924

 
$
5,603,187

Wholesale
1,325,041

 
952,321

 
1,338,085

 
7,287,726

 
6,560,245

 
6,941,272

Allowance for credit losses
(139,231
)
 
(127,364
)
 
(122,355
)
 
$
7,148,495

 
$
6,432,881

 
$
6,818,917


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A provision for credit losses on finance receivables is charged or credited to earnings in amounts that the Company believes are sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses of principal inherent in the existing portfolio. The allowance for credit losses represents management’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company could differ from the amounts estimated.
Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended June 28, 2015
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
123,777

 
$
9,043

 
$
132,820

Provision for credit losses
16,890

 
(1,715
)
 
15,175

Charge-offs
(21,003
)
 

 
(21,003
)
Recoveries
12,239

 

 
12,239

Balance, end of period
$
131,903

 
$
7,328

 
$
139,231

 
Three months ended June 29, 2014
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
106,776

 
$
7,753

 
$
114,529

Provision for credit losses
16,258

 
(297
)
 
15,961

Charge-offs
(19,018
)
 

 
(19,018
)
Recoveries
10,883

 

 
10,883

Balance, end of period
$
114,899

 
$
7,456

 
$
122,355

 
Six months ended June 28, 2015
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
122,025

 
$
5,339

 
$
127,364

Provision for credit losses
39,433

 
1,989

 
41,422

Charge-offs
(53,736
)
 

 
(53,736
)
Recoveries
24,181

 

 
24,181

Balance, end of period
$
131,903

 
$
7,328

 
$
139,231

 
Six months ended June 29, 2014
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
106,063

 
$
4,630

 
$
110,693

Provision for credit losses
33,466

 
2,826

 
36,292

Charge-offs
(46,361
)
 

 
(46,361
)
Recoveries
21,731

 

 
21,731

Balance, end of period
$
114,899

 
$
7,456

 
$
122,355

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

11

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borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
 
June 28, 2015
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
131,903

 
7,328

 
139,231

Total allowance for credit losses
$
131,903

 
$
7,328

 
$
139,231

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,962,685

 
1,325,041

 
7,287,726

Total finance receivables
$
5,962,685

 
$
1,325,041

 
$
7,287,726

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

 
$

 
$

Collectively evaluated for impairment
122,025

 
5,339

 
127,364

Total allowance for credit losses
$
122,025

 
$
5,339

 
$
127,364

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,607,924

 
952,321

 
6,560,245

Total finance receivables
$
5,607,924

 
$
952,321

 
$
6,560,245

 
June 29, 2014
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
114,899

 
7,456

 
122,355

Total allowance for credit losses
$
114,899

 
$
7,456

 
$
122,355

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,603,187

 
1,338,085

 
6,941,272

Total finance receivables
$
5,603,187

 
$
1,338,085

 
$
6,941,272

There were no wholesale finance receivables at June 28, 2015, December 31, 2014, or June 29, 2014 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either

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collected or charged-off. Accordingly, as of June 28, 2015December 31, 2014 and June 29, 2014, all retail finance receivables were accounted for as interest-earning receivables, of which $18.3 million, $28.7 million and $14.7 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. There were no wholesale receivables on non-accrual status at June 28, 2015, December 31, 2014 or June 29, 2014. At June 28, 2015December 31, 2014 and June 29, 2014, $0.2 million, $0.2 million, and $0.03 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.
An analysis of the aging of past due finance receivables was as follows (in thousands):
 
June 28, 2015
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,819,279

 
$
96,982

 
$
28,150

 
$
18,274

 
$
143,406

 
$
5,962,685

Wholesale
1,324,174

 
513

 
181

 
173

 
867

 
1,325,041

Total
$
7,143,453

 
$
97,495

 
$
28,331

 
$
18,447

 
$
144,273

 
$
7,287,726

 
December 31, 2014
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,427,719

 
$
113,007

 
$
38,486

 
$
28,712

 
$
180,205

 
$
5,607,924

Wholesale
951,660

 
383

 
72

 
206

 
661

 
952,321

Total
$
6,379,379

 
$
113,390

 
$
38,558

 
$
28,918

 
$
180,866

 
$
6,560,245

 
June 29, 2014
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,469,796

 
$
90,617

 
$
28,088

 
$
14,686

 
$
133,391

 
$
5,603,187

Wholesale
1,337,437

 
501

 
113

 
34

 
648

 
1,338,085

Total
$
6,807,233

 
$
91,118

 
$
28,201

 
$
14,720

 
$
134,039

 
$
6,941,272

A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.
The Company manages retail credit risk through its credit approval policy and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment of retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
June 28, 2015
 
December 31, 2014
 
June 29, 2014
Prime
$
4,718,363

 
$
4,435,352

 
$
4,407,364

Sub-prime
1,244,322

 
1,172,572

 
1,195,823

Total
$
5,962,685

 
$
5,607,924

 
$
5,603,187

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

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wholesale portfolio exposures are less consistent. The Company utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower.
The Company uses the following internal credit quality indicators, based on an internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged off, while the dealers classified as Low Risk are least likely to be charged off. The internal rating system considers factors such as the specific borrowers’ ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The recorded investment of wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
 
June 28, 2015
 
December 31, 2014
 
June 29, 2014
Doubtful
$

 
$
954

 
$
4,916

Substandard
7,739

 
7,025

 
4,192

Special Mention
15,343

 

 

Medium Risk
3,245

 
11,557

 
16,202

Low Risk
1,298,714

 
932,785

 
1,312,775

Total
$
1,325,041

 
$
952,321

 
$
1,338,085

5. Asset-Backed Financing
The Company participates in asset-backed financing through both term asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. The Company treats these transactions as secured borrowings because either they are transferred to consolidated variable interest entities (VIEs) or the Company maintains effective control over the assets and does not meet the accounting sale requirements under ASC Topic 860, "Transfers and Servicing" (ASC Topic 860). In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt.
The Company is required to consolidate any VIE in which it is deemed to be the primary beneficiary through having power over the significant activities of the entity and having an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. The Company is considered to have the power over the significant activities of its term asset-backed securitization and asset-backed U.S. commercial paper conduit facility VIEs due to its role as servicer. Servicing fees are typically not considered potentially significant variable interests in a VIE. However, the Company retains a residual interest in the VIEs in the form of a debt security, which gives the Company the right to receive benefits that could be potentially significant to the VIE. Therefore, the Company is the primary beneficiary and consolidates all of these VIEs within its consolidated financial statements.
The Company is not the primary beneficiary of the asset-backed Canadian commercial paper conduit facility VIE; therefore, the Company does not consolidate this VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore does not meet the requirements for sale accounting under ASC Topic 860. As such, the Company retains the transferred assets and the related debt within its Consolidated Balance Sheet.
Servicing fees paid by VIEs to the Company are eliminated in consolidation and therefore are not recorded on a consolidated basis. The Company is not required, and does not currently intend, to provide any additional financial support to its VIEs. Investors and creditors only have recourse to the assets held by the VIEs.


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The following table shows the assets and liabilities related to the asset-backed financings that were included in the financial statements (in thousands):
 
June 28, 2015
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
2,199,018

 
$
(49,400
)
 
$
149,418

 
$
2,857

 
$
2,301,893

 
$
2,017,079

Asset-backed U.S. commercial paper conduit facility

 

 

 
210

 
210

 

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
176,730

 
(2,657
)
 
12,793

 
340

 
187,206

 
160,940

Total on-balance sheet assets and liabilities
$
2,375,748

 
$
(52,057
)
 
$
162,211

 
$
3,407

 
$
2,489,309

 
$
2,178,019

 
December 31, 2014
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
1,458,602

 
$
(32,156
)
 
$
110,017

 
$
2,987

 
$
1,539,450

 
$
1,271,533

Asset-backed U.S. commercial paper conduit facility

 

 

 
422

 
422

 

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

 
(2,965
)
 
12,035

 
262

 
194,431

 
166,912

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

 
$
(35,121
)
 
$
122,052

 
$
3,671

 
$
1,734,303

 
$
1,438,445

 
June 29, 2014
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
1,893,585

 
$
(39,329
)
 
$
141,146

 
$
2,342

 
$
1,997,744

 
$
1,712,855

Asset-backed U.S. commercial paper conduit facility

 

 

 
179

 
179

 

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
203,800

 
(3,235
)
 
13,535

 
240

 
214,340

 
173,224

Total on-balance sheet assets and liabilities
$
2,097,385

 
$
(42,564
)
 
$
154,681

 
$
2,761

 
$
2,212,263

 
$
1,886,079

Term Asset-Backed Securitization VIEs
The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each term asset-backed securitization SPE is a separate legal entity and the U.S. retail motorcycle finance receivables included in the term asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the term asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 2015 to 2022.
During the second quarter of 2015, the Company issued $500.0 million of secured notes through one term asset-backed securitization transaction. The Company also issued $700.0 million of secured notes through one term asset-backed securitization transaction during the first quarter of 2015. During the second quarter of 2014, the Company issued $850.0

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million of secured notes through one term asset-backed securitization transaction. There were no other term asset-backed securitization transactions during the six months ended June 29, 2014.
Asset-Backed U.S. Commercial Paper Conduit Facility VIE
In September 2014, the Company amended and restated its facility (U.S. Conduit) with a third-party bank sponsored asset-backed commercial paper conduit, which provides for a total aggregate commitment of $600.0 million based on, among other things, the amount of eligible U.S. retail motorcycle loans held by a SPE as collateral. Under the facility, the Company may transfer U.S. retail motorcycle finance receivables to a SPE, which in turn may issue debt to third-party bank-sponsored asset-backed commercial paper conduits.
The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal generally based on prevailing commercial paper rates plus a program fee based on outstanding principal, or LIBOR plus a specified margin to the extent the advance is not funded by a conduit lender through the issuance of commercial paper. The U.S. Conduit also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of $600.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, the U.S. Conduit has an expiration date of October 30, 2015.
The SPE had no borrowings outstanding under the U.S. Conduit at June 28, 2015December 31, 2014 or June 29, 2014; therefore, U.S. Conduit assets are restricted as collateral for the payment of fees associated with the unused portion of the total aggregate commitment.
Asset-Backed Canadian Commercial Paper Conduit Facility
In June 2014, the Company amended its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$200.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$200.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of June 28, 2015, the Canadian Conduit had an expiration date of June 30, 2015. The Canadian Conduit was renewed on June 30, 2015 with similar terms and a borrowing amount of up to C$240.0 million with an expiration date of June 30, 2016. The contractual maturity of the debt is approximately 5 years.
As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $26.3 million at June 28, 2015. The maximum exposure is not an indication of the Company's expected loss exposure.
During the second and first quarters of 2015, the Company transferred $26.8 million and $19.2 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $23.4 million and $16.8 million, respectively. During the second and first quarters of 2014, HDFS transferred $26.4 million and $15.7 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $23.1 million and $13.8 million, respectively. The transferred assets are restricted as collateral for the payment of the debt.

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

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Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
 
June 28, 2015
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
1,030,928

 
$
558,660

 
$
472,268

 
$

Marketable securities
90,214

 
37,698

 
52,516

 

Derivatives
26,501

 

 
26,501

 

 
$
1,147,643

 
$
596,358

 
$
551,285

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
986

 
$

 
$
986

 
$

 
December 31, 2014
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
737,024

 
$
482,686

 
$
254,338

 
$

Marketable securities
91,140

 
33,815

 
57,325

 

Derivatives
32,244

 

 
32,244

 

 
$
860,408

 
$
516,501

 
$
343,907

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
2,027

 
$

 
$
2,027

 
$

 
June 29, 2014
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
660,520

 
$
482,780

 
$
177,740

 
$

Marketable securities
91,381

 
33,567

 
57,814

 

Derivatives
3,159

 

 
3,159

 

 
$
755,060

 
$
516,347

 
$
238,713

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
1,478

 
$

 
$
1,478

 
$

Nonrecurring Fair Value Measurements
Repossessed inventory is recorded at the lower of cost or net realizable value through a nonrecurring fair value measurement. The nonrecurring fair value measurement represents the loss recognized to adjust the related finance receivable to the fair value of the repossessed inventory. Repossessed inventory was $13.1 million, $13.4 million and $11.2 million at June 28, 2015, December 31, 2014 and June 29, 2014, for which the fair value adjustment was $1.9 million, $5.0 million and $2.4 million at June 28, 2015, December 31, 2014 and June 29, 2014, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.

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7. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, trade receivables, finance receivables, net, trade payables, debt, and foreign currency exchange and commodity contracts (derivative instruments are discussed further in Note 8).
The following table summarizes the fair value and carrying value of the Company’s financial instruments (in thousands):
 
June 28, 2015
 
December 31, 2014
 
June 29, 2014
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,247,579

 
$
1,247,579

 
$
906,680

 
$
906,680

 
$
999,346

 
$
999,346

Marketable securities
$
90,214

 
$
90,214

 
$
91,140

 
$
91,140

 
$
91,381

 
$
91,381

Derivatives
$
26,501

 
$
26,501

 
$
32,244

 
$
32,244

 
$
3,159

 
$
3,159

Finance receivables, net
$
7,251,671

 
$
7,148,495

 
$
6,519,500

 
$
6,432,881

 
$
6,917,698

 
$
6,818,917

Restricted cash
$
162,211

 
$
162,211

 
$
122,052

 
$
122,052

 
$
154,681

 
$
154,681

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Derivatives
$
986

 
$
986

 
$
2,027

 
$
2,027

 
$
1,478

 
$
1,478

Unsecured commercial paper
$
114,983

 
$
114,983

 
$
731,786

 
$
731,786

 
$
619,622

 
$
619,622

Asset-backed Canadian commercial paper conduit facility
$
160,940

 
$
160,940

 
$
166,912

 
$
166,912

 
$
173,224

 
$
173,224

Medium-term notes
$
4,077,952

 
$
3,933,698

 
$
3,502,536

 
$
3,334,398

 
$
3,049,735

 
$
2,853,232

Term asset-backed securitization debt
$
2,016,232

 
$
2,017,079

 
$
1,270,656

 
$
1,271,533

 
$
1,717,287

 
$
1,712,855

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


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

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The following table summarizes the fair value of the Company’s derivative financial instruments (in thousands):
 
June 28, 2015
 
December 31, 2014
 
June 29, 2014
Derivatives Designated As Hedging
Instruments Under ASC Topic 815
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
Foreign currency contracts(c)
$
367,309

 
$
23,136

 
$

 
$
339,077

 
$
32,244

 
$

 
$
398,338

 
$
3,091

 
$
1,461

Commodity
contracts(c)
1,166

 

 
98

 
1,728

 

 
414

 
1,411

 

 
17

Treasury rate locks(c)
300,000

 
3,365

 

 

 

 

 

 

 

Total
$
668,475

 
$
26,501

 
$
98


$
340,805

 
$
32,244

 
$
414


$
399,749

 
$
3,091

 
$
1,478

 
June 28, 2015
 
December 31, 2014
 
June 29, 2014
Derivatives Not Designated As Hedging
Instruments Under ASC Topic 815
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
Commodity contracts
$
8,218

 
$

 
$
888

 
$
11,804

 
$

 
$
1,613

 
$
7,754

 
$
68

 
$

 
$
8,218


$

 
$
888

 
$
11,804

 
$

 
$
1,613

 
$
7,754

 
$
68

 
$

 
(a)
Foreign currency and commodity contract fair value included in other current assets and Treasury rate lock fair value included in other long-term assets
(b)
Included in accrued liabilities
(c)
Derivative designated as a cash flow hedge
The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
Three months ended
 
Six months ended
Cash Flow Hedges
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Foreign currency contracts
$
(4,458
)
 
$
3,931

 
$
28,210

 
$
2,493

Commodity contracts
(3
)
 
(24
)
 
(123
)
 
191

Treasury rate locks
3,365

 

 
3,365

 

Total
$
(1,096
)
 
$
3,907

 
$
31,452

 
$
2,684

 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
 
 
Three months ended
 
Six months ended
 
Expected to be Reclassified
Cash Flow Hedges
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
 
Over the Next Twelve Months
Foreign currency contracts(a)
$
20,131

 
$
(1,183
)
 
$
35,407

 
$
(2,241
)
 
$
23,461

Commodity contracts(a)
(125
)
 
87

 
(439
)
 
283

 
(98
)
Treasury rate locks(b)

 

 

 

 
191

Total
$
20,006

 
$
(1,096
)
 
$
34,968

 
$
(1,958
)
 
$
23,554

(a)
Gain/(loss) reclassified from accumulated other comprehensive loss (AOCL) to income is included in cost of goods sold
(b)
Gain/(loss) reclassified from accumulated other comprehensive loss (AOCL) to income will be included in interest expense
For the three and six months ended June 28, 2015 and June 29, 2014, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.


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The following tables summarize the amount of gains and losses related to derivative financial instruments not designated as hedging instruments (in thousands):
 
Amount of Gain/(Loss) Recognized in Income on Derivative
 
Three months ended
 
Six months ended
Derivatives Not Designated As Hedges
June 28,
2015
 
June 29,
2014
 
June 28,
2015
 
June 29,
2014
Commodity contracts(a)
$
14

 
$
184

 
$
(526
)
 
$
(144
)
Total
$
14

 
$
184

 
$
(526
)
 
$
(144
)
(a)
Gain/(loss) recognized in income is included in cost of goods sold.
The Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company evaluates counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover its position.

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9. Accumulated Other Comprehensive Loss
The following tables set forth the changes in accumulated other comprehensive loss (AOCL) (in thousands):
</
 
 
Three months ended June 28, 2015
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(30,503
)
 
$
(767
)
 
$
30,114

 
$
(521,005
)
 
$
(522,161
)
Other comprehensive income (loss) before reclassifications
 
5,040

 
(204
)
 
(1,096
)
 

 
3,740

Income tax
 
(789
)
 
76

 
406

 

 
(307
)
Net other comprehensive income (loss) before reclassifications
 
4,251

 
(128
)
 
(690
)
 

 
3,433

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

 

 
(20,131
)
 

 
(20,131
)
Realized (gains) losses - commodities contracts(a)
 

 

 
125

 

 
125

Prior service credits(b)
 

 

 

 
(695
)
 
(695
)
Actuarial losses(b)
 

 

 

 
14,670

 
14,670

Total before tax
 

 

 
(20,006
)
 
13,975

 
(6,031
)
Income tax expense (benefit)
 

 

 
7,410

 
(5,177
)
 
2,233

Net reclassifications
 

 

 
(12,596
)
 
8,798

 
(3,798
)
Other comprehensive income (loss)
 
4,251

 
(128
)
 
(13,286
)
 
8,798

 
(365
)
Balance, end of period
 
$
(26,252
)
 
$
(895
)
 
$
16,828

 
$
(512,207
)
 
$
(522,526
)
 
 
Three months ended June 29, 2014
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
36,274

 
$
(318
)
 
$
(1,907
)
 
$
(357,978
)
 
$
(323,929
)
Other comprehensive income (loss) before reclassifications
 
6,945

 
(117
)
 
3,907

 

 
10,735

Income tax
 
(1,212
)
 
43

 
(1,448
)
 

 
(2,617
)