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Asset-Backed Financing | 3 Months Ended
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Apr. 01, 2018
Transfers and Servicing [Abstract] |
Asset-Backed Financing | 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 balance sheet 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 in the Consolidated Statement of Income. 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 following tables show the assets and liabilities related to the on-balance sheet asset-backed financings included in the financial statements (in thousands):
| April 1, 2018
| Finance receivables |  | Allowance for credit losses |  | Restricted cash |  | Other assets |  | Total assets |  | Asset-backed debt
On-balance sheet assets and liabilities |  |  |  |  |  |  |  |  |  |  |
Consolidated VIEs |  |  |  |  |  |  |  |  |  |  |
Asset-backed securitizations | $ | 367,584 |  |  | $ | (11,387 | ) |  | $ | 38,207 |  |  | $ | 1,207 |  |  | $ | 395,611 |  |  | $ | 284,793 |
Asset-backed U.S. commercial paper conduit facilities | 299,318 |  |  | (9,297 | ) |  | 16,933 |  |  | 968 |  |  | 307,922 |  |  | 281,311 |
Unconsolidated VIEs |  |  |  |  |  |  |  |  |  |  |
Asset-backed Canadian commercial paper conduit facility | 183,073 |  |  | (3,085 | ) |  | 10,600 |  |  | 320 |  |  | 190,908 |  |  | 158,162 |
Total on-balance sheet assets and liabilities | $ | 849,975 |  |  | $ | (23,769 | ) |  | $ | 65,740 |  |  | $ | 2,495 |  |  | $ | 894,441 |  |  | $ | 724,266 |
| December 31, 2017
| Finance receivables |  | Allowance for credit losses |  | Restricted cash |  | Other assets |  | Total assets |  | Asset-backed debt
On-balance sheet assets and liabilities |  |  |  |  |  |  |  |  |  |  |
Consolidated VIEs |  |  |  |  |  |  |  |  |  |  |
Asset-backed securitizations | $ | 439,301 |  |  | $ | (13,686 | ) |  | $ | 34,919 |  |  | $ | 1,260 |  |  | $ | 461,794 |  |  | $ | 352,624 |
Asset-backed U.S. commercial paper conduit facilities | 300,530 |  |  | (9,392 | ) |  | 13,787 |  |  | 888 |  |  | 305,813 |  |  | 279,457 |
Unconsolidated VIEs |  |  |  |  |  |  |  |  |  |  |
Asset-backed Canadian commercial paper conduit facility | 203,691 |  |  | (3,746 | ) |  | 9,983 |  |  | 470 |  |  | 210,398 |  |  | 174,779 |
Total on-balance sheet assets and liabilities | $ | 943,522 |  |  | $ | (26,824 | ) |  | $ | 58,689 |  |  | $ | 2,618 |  |  | $ | 978,005 |  |  | $ | 806,860 |
| March 26, 2017
| Finance receivables |  | Allowance for credit losses |  | Restricted cash |  | Other assets |  | Total assets |  | Asset-backed debt
On-balance sheet assets and liabilities |  |  |  |  |  |  |  |  |  |  |
Consolidated VIEs |  |  |  |  |  |  |  |  |  |  |
Asset-backed securitizations | $ | 772,152 |  |  | $ | (23,239 | ) |  | $ | 63,473 |  |  | $ | 2,532 |  |  | $ | 814,918 |  |  | $ | 685,374 |
Asset-backed U.S. commercial paper conduit facilities | 304,091 |  |  | (9,178 | ) |  | 15,781 |  |  | 672 |  |  | 311,366 |  |  | 286,205 |
Unconsolidated VIEs |  |  |  |  |  |  |  |  |  |  |
Asset-backed Canadian commercial paper conduit facility | 155,240 |  |  | (3,048 | ) |  | 11,025 |  |  | 382 |  |  | 163,599 |  |  | 141,013 |
Total on-balance sheet assets and liabilities | $ | 1,231,483 |  |  | $ | (35,465 | ) |  | $ | 90,279 |  |  | $ | 3,586 |  |  | $ | 1,289,883 |  |  | $ | 1,112,592 |
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 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 2020 to 2022. 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. There were no on-balance sheet asset-backed securitization transactions during the first quarter of 2018 or 2017. On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE In December 2017, the Company renewed its existing $300.0 million and $600.0 million revolving facility agreements with a third-party bank-sponsored asset-backed U.S. commercial paper conduit. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle receivables held by the relevant SPE as collateral. Under the U.S. Conduit Facilities, the Company may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to the third party bank-sponsored asset-backed commercial paper conduit. The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment of $900.0 million. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The contractual maturity of the debt is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of April 1, 2018, the U.S. Conduit Facilities have an expiration date of December 12, 2018. The Company is the primary beneficiary of its U.S. Conduit Facilities 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. The following table includes quarterly transfers of U.S. retail motorcycle finance receivables to the U.S. Conduit and the respective proceeds (in thousands):
| 2018 |  | 2017
| Transfers |  | Proceeds |  | Transfers |  | Proceeds
First quarter | $ | 32,900 |  |  | $ | 29,300 |  |  | $ | 333,400 |  |  | $ | 300,000 |
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility In June 2017, 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$220.0 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$220.0 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 contractual maturity of the debt is approximately 5 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of April 1, 2018, the Canadian Conduit has an expiration date of June 30, 2018. 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 $32.7 million at April 1, 2018. The maximum exposure is not an indication of the Company's expected loss exposure. The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
| 2018 |  | 2017
| Transfers |  | Proceeds |  | Transfers |  | Proceeds
First quarter | $ | 7,600 |  |  | $ | 6,200 |  |  | $ | 6,300 |  |  | $ | 5,500 |
Off-Balance Sheet Asset-Backed Securitization VIE There were no off-balance sheet asset-backed securitization transactions during first quarter of 2018 or 2017. During the second quarter of 2016, the Company sold retail motorcycle finance receivables with a principal balance of $301.8 million into a securitization VIE that was not consolidated, recognized a gain of $9.3 million and received cash proceeds of $312.6 million. Similar to an on-balance sheet asset-backed securitization, the Company transferred U.S. retail motorcycle finance receivables to an SPE which in turn issued secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitization are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors. In an on-balance sheet asset-backed securitization, the Company retains a financial interest in the VIE in the form of a debt security. As part of this off-balance sheet securitization, the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. The Company is not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and does not have the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. Accordingly, this transaction met the accounting sale requirements under ASC Topic 860 and was recorded as a sale for accounting purposes. Upon the sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain was recognized for the difference between the cash proceeds received, the assets derecognized and the liabilities recognized as part of the transaction. The gain on sale was included in Financial Services revenue in the Consolidated Statement of Income. At April 1, 2018, the assets of this off-balance sheet asset-backed securitization VIE were $127.6 million and represented the current unpaid principal balance of the retail motorcycle finance receivables, which was the Company’s maximum exposure to loss in the off-balance sheet VIE at April 1, 2018. This is based on the unlikely event that all the receivables have underwriting defects or other defects that trigger a violation of certain covenants and that the underlying collateral has no residual value. This maximum exposure is not an indication of expected losses. Servicing Activities The Company services all retail motorcycle finance receivables that it originates. When the Company transfers retail motorcycle finance receivables to SPEs through asset-backed financings, the Company retains the right to service the finance receivables and receives servicing fees based on the securitized finance receivables balance and certain ancillary fees. In on-balance sheet asset-backed financings, servicing fees are eliminated in consolidation and therefore are not recorded on a consolidated basis. In off-balance sheet asset-backed financings, servicing fees and ancillary fees are recorded in Financial Services revenue in the Consolidated Statement of Income. The fees the Company is paid for servicing represent adequate compensation, and consequently, the Company does not recognize a servicing asset or liability. The Company recognized servicing fee income of $0.4 million and $0.6 million during the first quarter of 2018 and 2017, respectively. The unpaid principal balance of retail motorcycle finance receivables serviced by the Company was as follows (in thousands):
| April 1, 2018 |  | December 31, 2017 |  | March 26, 2017
On-balance sheet retail motorcycle finance receivables | $ | 5,923,564 |  |  | $ | 5,993,185 |  |  | $ | 5,867,143 |
Off-balance sheet retail motorcycle finance receivables | 127,643 |  |  | 146,425 |  |  | 212,764 |
Total serviced retail motorcycle finance receivables | $ | 6,051,207 |  |  | $ | 6,139,610 |  |  | $ | 6,079,907 |
The unpaid principal balance of retail motorcycle finance receivables serviced by the Company 30 days or more delinquent was as follows (in thousands):
| Amount 30 days or more past due:
| April 1, 2018 |  | December 31, 2017 |  | March 26, 2017
On-balance sheet retail motorcycle finance receivables | $ | 166,560 |  |  | $ | 227,127 |  |  | $ | 162,386 |
Off-balance sheet retail motorcycle finance receivables | 1,652 |  |  | 2,106 |  |  | 1,476 |
Total serviced retail motorcycle finance receivables | $ | 168,212 |  |  | $ | 229,233 |  |  | $ | 163,862 |
Credit losses, net of recoveries for the retail motorcycle finance receivables serviced by the Company were as follows (in thousands):
| Three months ended
| April 1, 2018 |  | March 26, 2017
On-balance sheet retail motorcycle finance receivables | $ | 32,173 |  |  | $ | 32,902 |
Off-balance sheet retail motorcycle finance receivables | 361 |  |  | 414 |
Total serviced retail motorcycle finance receivables | $ | 32,534 |  |  | $ | 33,316 |

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- Definition The entire disclosure for a transferor's continuing involvement in financial assets that it has transferred in a securitization or asset-backed financing arrangement, the nature of any restrictions on assets reported by an entity in its statement of financial position that relate to a transferred financial asset (including the carrying amounts of such assets), how servicing assets and servicing liabilities are reported, and (for securitization or asset-backed financing arrangements accounted for as sales) when a transferor has continuing involvement with the transferred financial assets and transfers of financial assets accounted for as secured borrowings, how the transfer of financial assets affects an entity's financial position, financial performance, and cash flows. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 860 -URI http://asc.fasb.org/topic&trid=2197590 + Details
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