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Derivative Instruments and Hedging Activities
 9 Months Ended
Sep. 29, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities Derivative 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, Indian rupee, and Pound sterling. The 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 the Company’s motorcycle production and distribution processes. The 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 the anticipated issuance of long-term debt as well as interest rate swaps to reduce the impact of fluctuations in interest rates on floating rate medium-term notes. The Company also utilizes interest rate caps to facilitate certain asset-backed securitization transactions.
All derivative instruments are recognized on the Consolidated balance sheets at fair value. 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 derivative instruments that are designated as cash flow hedges are 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 ongoing basis, whether the derivative instruments that are used in cash flow hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative 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 instruments not designated in hedging relationships are recorded directly in earnings.
The following tables summarize the notional and recorded fair values of the Company’s derivative financial instruments (in thousands):
 
 
Derivatives Designated as Cash Flow Hedging
Instruments Under ASC Topic 815
 
 
September 29, 2019
 
December 31, 2018
 
September 30, 2018
 
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
Foreign currency contracts
 
$
441,131

 
$
11,459

 
$
790

 
$
442,976

 
$
15,071

 
$
313

 
$
512,071

 
$
11,687

 
$
718

Commodity contracts
 
744

 
—

 
56

 
827

 
—

 
46

 
925

 
9

 
—

Treasury rate locks
 
—

 
—

 
—

 
—

 
—

 
—

 
50,000

 
52

 
—

Interest rate swaps
 
900,000

 
—

 
11,164

 
900,000

 
—

 
4,494

 
450,000

 
550

 
—

 
 
$
1,341,875

 
$
11,459

 
$
12,010


$
1,343,803

 
$
15,071

 
$
4,853


$
1,012,996

 
$
12,298

 
$
718

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging
Instruments Under ASC Topic 815
 
 
September 29, 2019
 
December 31, 2018
 
September 30, 2018
 
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
Foreign currency contracts
 
$
193,959

 
$
278

 
$
219

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

Commodity contracts
 
9,485

 
230

 
360

 
5,239

 
—

 
463

 
5,207

 
233

 
213

Interest rate cap
 
427,530

 
4

 
—

 
—

 
—

 
—

 
—

 
—

 
—

 
 
$
630,974


$
512

 
$
579

 
$
5,239

 
$
—

 
$
463

 
$
5,207

 
$
233

 
$
213


The following tables summarize the amounts of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
 
Amount of Gain/(Loss) Recognized in OCI
 
Amount of Gain/(Loss) Reclassified from AOCL
 
Location of Gain/(Loss) Reclassified from AOCL
 
Amounts shown on the Consolidated Statements of Income
 
 
Three months ended
 
Consolidated Statements of Income
line item
 
Three months ended
 
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
 
 
September 29,
2019
 
September 30,
2018
Foreign currency contracts
 
$
13,135

 
$
4,508

 
$
5,826

 
$
5,695

 
Motorcycles cost of goods sold
 
$
748,878

 
$
776,530

Commodity contracts
 
(15
)
 
5

 
(28
)
 
—

 
Motorcycles cost of goods sold
 
$
748,878

 
$
776,530

Treasury rate locks
 
—

 
—

 
(91
)
 
(90
)
 
Interest expense
 
$
7,789

 
$
7,762

Treasury rate locks
 
—

 
52

 
(33
)
 
(33
)
 
Financial Services interest expense
 
$
53,390

 
$
44,696

Interest rate swaps
 
(708
)
 
486

 
(1,463
)
 
(661
)
 
Financial Services interest expense
 
$
53,390

 
$
44,696

 
 
$
12,412

 
$
5,051

 
$
4,211

 
$
4,911

 
 
 
 
 
 

 
 
Amount of Gain/(Loss) Recognized in OCI
 
Amount of Gain/(Loss) Reclassified from AOCL
 
Location of Gain/(Loss) Reclassified from AOCL
 
Amounts shown on the Consolidated Statements of Income
 
 
Nine months ended
 
Consolidated Statements of Income
line item
 
Nine months ended
 
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
 
 
September 29,
2019
 
September 30,
2018
Foreign currency contracts
 
$
14,422

 
$
31,253

 
$
15,947

 
$
(58
)
 
Motorcycles cost of goods sold
 
$
2,576,342

 
$
2,659,740

Commodity contracts
 
(55
)
 
(7
)
 
(45
)
 
(85
)
 
Motorcycles cost of goods sold
 
$
2,576,342

 
$
2,659,740

Treasury rate locks
 
—

 
—

 
(272
)
 
(271
)
 
Interest expense
 
$
23,304

 
$
23,180

Treasury rate locks
 
—

 
93

 
(97
)
 
(103
)
 
Financial Services interest expense
 
$
158,387

 
$
145,089

Interest rate swaps
 
(9,569
)
 
(400
)
 
(2,899
)
 
(950
)
 
Financial Services Interest expense
 
$
158,387

 
$
145,089

 
 
$
4,798

 
$
30,939


$
12,634


$
(1,467
)
 
 
 
 
 
 

As of September 29, 2019, the Company estimates a $4.4 million net gain currently recorded in Accumulated other comprehensive loss (AOCL) will be reclassified into income over the next twelve months.
The following table summarizes the amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments (in thousands). Foreign currency contracts and commodity contracts were recorded in Motorcycles cost of goods sold and the interest rate cap was recorded in Financial services interest expense.
 
 
Amount of Gain/(Loss) Recognized in Income
 
 
Three months ended
 
Nine months ended
 
 
September 29,
2019
 
September 30,
2018
 
September 29,
2019
 
September 30,
2018
Foreign currency contracts
 
$
1,719

 
$
—

 
$
1,602

 
$
—

Commodity contracts
 
(15
)
 
(85
)
 
(8
)
 
59

Interest rate cap
 
(1
)
 
—

 
(142
)
 
—

 
 
$
1,703

 
$
(85
)
 
$
1,452

 
$
59


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.