Harley-Davidson, Inc. is the parent company ofHarley-Davidson Motor Company (HDMC) andHarley-Davidson Financial Services (HDFS). Unless the context otherwise requires, all references to the "Company" includeHarley-Davidson, Inc. and all its subsidiaries. The Company operates in two segments: Motorcycles and Related Products (Motorcycles) and Financial Services. The "% Change" figures included in the "Results of Operations" section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented. Certain "% Change" deemed not meaningful (NM) have been excluded. (1) Note Regarding Forward-Looking Statements The Company intends that certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company "believes," "anticipates," "expects," "plans," "may," "will," "estimates," "targets," "intend" or words of similar meaning. Similarly, statements that describe or refer to future expectations, future plans, strategies, objectives, outlooks, targets, guidance, commitments or goals are also forward-looking statements. Such forward- 20 -------------------------------------------------------------------------------- looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, unfavorably or favorably, from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including in Item 1A. Risk Factors and under the "Cautionary Statements" section in this Item 7. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in the "Overview" and "Guidance" sections in this Item 7 are only made as ofFebruary 2, 2021 and the remaining forward-looking statements in this report are only made as of the date of the filing of this report (February 23, 2021 ), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Overview(1) The Company's net income for 2020 was$1.3 million , or$0.01 per diluted share, compared to$423.6 million , or$2.68 per diluted share in 2019 on lower operating income in both the Motorcycles and Financial Services segments. The Motorcycles segment reported an operating loss of$186.1 million in 2020 down$475.7 million from operating income of$289.6 million in 2019. The decline in operating income was due primarily to a 32.1% decrease in wholesale motorcycle shipments, a less favorable product mix and higher restructuring expenses, partially offset by reduced selling, administrative and engineering expenses. Operating income from the Financial Services segment in 2020 was down$70.2 million or 26.4% compared to 2019 due primarily to an increase in the provision for credit losses, higher interest expense and restructuring charges. The provision for credit losses was higher due to negative economic conditions during 2020 and also reflects the continued impact of the 2020 adoption of a new accounting standard related to the recognition of expected credit losses. The new standard requires recognition of full lifetime expected credit losses upon initial recognition of a financial instrument carried at amortized cost, replacing the prior, incurred loss methodology. The Company adopted the new accounting standard onJanuary 1, 2020 using a modified retrospective approach. As a result, prior period results were not restated. Worldwide independent dealer retail sales of new Harley-Davidson motorcycles decreased 17.4% in 2020 compared to 2019. Retail sales were adversely impacted primarily in the first half of 2020, by a temporary suspension of the Company's manufacturing operations, from mid-March throughMay 2020 , and independent dealer closures related to the COVID-19 pandemic. The Company believes retail sales in the second half of 2020, compared to prior year, were adversely impacted by the Company's decision to reset its new model year launch timing, beginning in 2020, from the third quarter to the first quarter. In addition, the Company believes lower dealer inventory levels related to its new approach to supply and inventory management also resulted in lower retail sales during the second half of 2020 compared to the same period last year. COVID-19 Pandemic Response and Recovery Actions(1) Cash Preservation - During 2020, the Company delivered on its previously disclosed plans to reduce planned capital and planned non-capital spending to preserve approximately$250 million of cash in 2020. The spending reductions exclude the impact of restructuring charges as discussed further under "Restructuring Plan Costs and Savings". Also, during 2020, the Company suspended discretionary share repurchases and reduced its cash dividend to$0.02 per share for the second, third and fourth quarters of 2020. Liquidity - At the end 2020, the Company had$4.7 billion of available liquidity through cash, cash equivalents and availability under its credit and conduit facilities. Liquidity is discussed in more detail under "Liquidity and Capital Resources". Supporting Dealers and Riders - The Company's response and recovery plans have included supporting global dealers and customers. HDFS continues to work with qualified retail borrowers who have been impacted by the COVID-19 pandemic by offering short-term adjustments to payment due dates. These temporary extensions do not affect the associated interest rate or loan term. At the end of 2020, the volume of payment extensions on eligible retail loans declined, but has not yet returned to pre-COVID-19 pandemic levels. The Company continues to grant payment extensions to customers in accordance with its policies. Community Strength - The Company continues to proactively manage through the COVID-19 pandemic and has implemented robust protocols to keep workers safe in its manufacturing facilities. Most non-production workers continue to work remotely in light of the COVID-19 pandemic. The full impact of the COVID-19 pandemic on future results depends on future developments, such as the ultimate duration and scope of the pandemic, the success of vaccination programs, and its impact on the Company's customers, independent dealers, distributors, and suppliers. While the Company's manufacturing operations were temporarily suspended and subsequently resumed in 2020, COVID-19 pandemic related impacts and disruptions could occur in the future. Future 21 -------------------------------------------------------------------------------- impacts and disruptions could have an adverse effect on production, supply chains, distribution, and demand for the Company's products. Refer to Item 1A. Risk Factors for additional information regarding the potential impact of the COVID-19 pandemic on the Company. The Rewire During 2020, the Company executed a set of actions, referred to as The Rewire. The Rewire was a critical overhaul of the Company's business to set the Company on a new course and provide a solid foundation to execute its 2021-2025 strategic plan, TheHardwire . Key elements of The Rewire included the following: New operating model with reduced complexity and increased speed - The Company implemented a new operating model to eliminate duplication and complexity across its global operations resulting in fewer positions across the Company's global operations and annual ongoing savings as discussed further under "Restructuring Plan Costs and Savings". Reset global business and focus on high-potential markets - The Company plans to concentrate on approximately 50 markets primarily inNorth America ,Europe and parts ofAsia Pacific that represent a high percentage of the Company's expected volume and growth potential. Refined motorcycle line-up and high-impact product launches - The Company streamlined its planned product portfolio, changed its model year launch timing and go-to-market practices for maximum impact and success. Growth through Parts & Accessories (P&A) and General Merchandise (GM) - P&A andGM are now organized around dedicated leaders with strategies poised for new growth as the Company invests in new channel strategies and better product assortments. Protecting value - The Company is operating with a new approach to supply and inventory management, with a focus on a strong independent dealer network to better preserve the value and desirability of Harley-Davidson motorcycles for customers. The Company believes a strong network of profitable dealers is essential to delivering the most desirable Harley-Davidson experience. The Company reduced its global dealer network during 2020 and continues work to optimize its network of independent dealers to strengthen priority markets and provide and improve the customer experience. TheHardwire (1) TheHardwire is the Company's 2021-2025 strategic plan guided by its mission and vision, which the Company introduced onFebruary 2, 2021 . The plan targets long-term profitable growth through focused efforts that extend and strengthen the brand and drive value for all stakeholders. The Company's ambition is to enhance its position as the most desirable motorcycle brand in the world. Desirability is a motivating force driven by emotion. Refer to Item 1. Business for more details on TheHardwire strategic plan and financial targets. Guidance(1) OnFebruary 2, 2021 , the Company announced the following guidance for 2021. During 2021, the first year of TheHardwire , the Company expects to continue to manage through the ongoing uncertainties brought on by the COVID-19 pandemic and its impact on revenue and its supply chain. The Company's guidance for 2021 is as follows: •Motorcycles segment revenue growth, compared to 2020, between 20% and 25% •Motorcycles segment operating margin as a percent of revenue of 5% to 7%, which includes approximately$115 million of gross annual cost savings resulting from 2020 restructuring actions •Approximately$20 million of restructuring expense •Financial Services operating income growth, compared to 2020, between 10% and 15% •Capital expenditures between$190 and$220 million 22 -------------------------------------------------------------------------------- Restructuring Plan Costs and Savings(1) During 2020, the Company initiated certain restructuring activities as part of The Rewire including a workforce reduction, the termination of certain current and future products, facility changes, optimizing its global independent dealer network, exiting certain international markets, and discontinuing its sales and manufacturing operations inIndia . These actions included restructuring expenses related to employee termination costs, contract termination costs and non-current asset adjustments. The workforce reduction resulted in the elimination of approximately 700 positions globally, including the termination of approximately 500 employees. In addition, theIndia action will result in the termination of approximately 70 employees. The Company incurred$130 million of restructuring expense in connection with these actions during 2020. The Company expects to incur total restructuring expenses for these actions of approximately$150 million , including approximately$20 million in 2021. The Company's total estimated restructuring expense is down from its previous estimate of$169 million . The Company continues to expect ongoing gross savings resulting from these restructuring activities of approximately$115 million . Refer to Note 3 of the Notes to Consolidated financial statements for additional information regarding the Company's restructuring expenses. Results of Operations 2020 Compared to 2019 Consolidated Results (Decrease) (in thousands, except earnings per share) 2020 2019 Increase % Change Operating (loss) income from Motorcycles and Related Products$ (186,122) $ 289,620 $ (475,742) NM Operating income from Financial Services 195,801 265,988 (70,187) (26.4) Operating income 9,679 555,608 (545,929) (98.3) Other (expense) income, net (1,848) 16,514 (18,362) NM Investment income 7,560 16,371 (8,811) (53.8) Interest expense 31,121 31,078 43 0.1 (Loss) income before income taxes (15,730) 557,415 (573,145) NM Income tax (benefit) provision (17,028) 133,780 (150,808) NM Net income$ 1,298 $ 423,635 $ (422,337) (99.7) % Diluted earnings per share$ 0.01 $ 2.68 $ (2.67) (99.6) % The Company reported operating income of$9.7 million in 2020 compared to$555.6 million in 2019. The Motorcycles segment incurred a$186.1 million operating loss in 2020, a decline from operating income of$289.6 million in 2019. Operating income from the Financial Services segment decreased$70.2 million , or 26.4%, compared to 2019. Refer to the Motorcycles and Related Products Segment and Financial Services Segment discussions for a more detailed analysis of the factors affecting operating results. Other (expense) income in 2020 was impacted by lower non-operating income related to the Company's defined benefit plans. Investment income decreased in 2020 as compared to 2019 driven by lower income from investments in marketable securities. The Company's effective income tax rate for 2020 was a 108.3% benefit compared to a 24.0% expense for 2019. The Company recorded an income tax benefit during 2020 due to a pre-tax loss and discrete income tax benefits related primarily to favorable tax audit settlements with taxing authorities during the year. Diluted earnings per share was$0.01 in 2020 compared to$2.68 in 2019. Diluted earnings per share were adversely impacted by the decrease in net income, but benefited from lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 157.8 million in 2019 to 153.9 million in 2020 driven by the Company's discretionary repurchases of common stock during 2019. Refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity. 23 -------------------------------------------------------------------------------- Motorcycle Retail Sales and Registration Data Harley-Davidson Motorcycle Retail Sales(a) Retail unit sales of new Harley-Davidson motorcycles were as follows: 2020 2019 Decrease % Change United States 103,650 125,960 (22,310) (17.7) % Canada 6,477 8,946 (2,469) (27.6)Total North America 110,127 134,906 (24,779) (18.4)
(16.3) Asia Pacific 27,220 29,513 (2,293) (7.8) Latin America 5,995 9,768 (3,773) (38.6) Total worldwide retail sales 180,248 218,273 (38,025) (17.4) % (a)Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its independent dealers supply concerning new retail sales, and the Company does not regularly verify the information that its independent dealers supply. This information is subject to revision. During 2020, primarily in the first half of the year, retail sales of new Harley-Davidson motorcycles were adversely impacted by the COVID-19 pandemic which resulted in the temporary closure of the Company's manufacturing facilities and the temporary closure of many of its independent dealerships. Retail sales in the second half of 2020 were adversely impacted by lower retail inventory as the Company continued to aggressively manage the supply of its motorcycles into the independent dealer network under its new supply and inventory management approach. The Company's approach to supply and inventory management is focused on profitable and desirable volume aimed at helping drive retail pricing to preserve the value and desirability of Harley-Davidson motorcycles for customers. Under this approach, the Company will continue to aggressively manage the supply of new motorcycles into the independent dealer network. At the end of 2020, independent dealer retail inventory of new Harley-Davidson motorcycles was down approximately 64% or 24,000 units in theU.S. and approximately 59% worldwide compared to the end of 2019. The Company's decision to reset its annual new model year launch from August to early in the first quarter also impacted retail sales in 2020. Previously, the Company launched its new model year motorcycles in the third quarter with new product available inU.S. markets in August, followed by international markets as product was distributed globally. While the Company believes the initial shift from August has adversely impacted year-over-year retail sales comparisons, it believes an early-year launch better aligns with the seasonality of retail demand allowing products a full riding season to sell and minimizes aged inventory and floor plan costs that might accumulate during the off season. The Company's U.S. market share of new 601+cc motorcycles for 2020 was 42.1%, down 7.0 percentage points compared to 2019 (Source:Motorcycle Industry Council ). The Company's U.S. market share fell on weaker retail sales performance relative to the industry, as well as stronger performance in segments outside of the Company's Touring and Cruiser segments. The Company's European market share of new 601+cc motorcycles for 2020 was 7.7%, down 1.4 percentage points compared to 2019 (Source:Management Services Helwig Schmitt GmbH ). 24 -------------------------------------------------------------------------------- Motorcycle Registration Data - 601+cc(a) Industry retail registration data for new motorcycles was as follows: 2020 2019 Decrease % Change United States(b) 241,792 252,842 (11,050) (4.4) % Europe(c) 411,079 413,254 (2,175) (0.5) % (a)Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt peak power equivalents greater than 600cc's (601+cc). On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table. (b)United States industry data is derived from information provided byMotorcycle Industry Council . This third-party data is subject to revision and update. (c)Europe data includesAustria ,Belgium ,Denmark ,Finland ,France ,Germany ,Italy , Luxembourg,Netherlands ,Norway ,Spain ,Sweden ,Switzerland , and theUnited Kingdom . Industry data is derived from information provided byManagement Services Helwig Schmitt GmbH . Prior year registrations have been revised to excludeGreece andPortugal registrations. This third-party data is subject to revision and update. Motorcycles and Related Products Segment Motorcycle Unit Shipments Wholesale Harley-Davidson motorcycle unit shipments were as follows: 2020 2019 Unit Unit Units Mix % Units Mix % Decrease % Change Motorcycle Units: United States 79,731 54.9 % 124,326 58.1 % (44,595) (35.9) % International 65,515 45.1 % 89,613 41.9 % (24,098) (26.9) 145,246 100.0 % 213,939 100.0 % (68,693) (32.1) % Motorcycle Units: Touring motorcycle units 56,067 38.6 % 91,018 42.5 % (34,951) (38.4) % Cruiser motorcycle units(a) 55,229 38.0 % 76,052 35.6 % (20,823) (27.4) Sportster® / Street motorcycle units 33,950 23.4 % 46,869 21.9 % (12,919) (27.6) 145,246 100.0 % 213,939 100.0 % (68,693) (32.1) % (a)Includes Softail®, CVOTM, and LiveWireTM During 2020, Harley-Davidson motorcycle shipments were down 32.1% from 2019 reflecting the impact of the temporary suspension of the Company's global manufacturing operations and the temporary closure of independent dealers in the first half of 2020 resulting from the COVID-19 pandemic. In addition, the Company's new approach to supply and inventory management and the change in new model year launch timing adversely impacted wholesale shipments compared to 2019. The mix of Touring motorcycles shipped during 2020 decreased as a percent of total shipments while the mix of Cruiser and Sportster/Street motorcycles increased compared to 2019. 25 -------------------------------------------------------------------------------- Segment Results Condensed statements of operations for the Motorcycles segment were as follows (in thousands): (Decrease) % 2020 2019 Increase Change Revenue: Motorcycles$ 2,350,407 $ 3,538,269 $ (1,187,862) (33.6) % Parts & Accessories 659,634 713,400 (53,766) (7.5) General Merchandise 186,068 237,566 (51,498) (21.7) Licensing 29,750 35,917 (6,167) (17.2) Other 38,195 47,526 (9,331) (19.6) 3,264,054 4,572,678 (1,308,624) (28.6) Cost of goods sold 2,435,745 3,229,798 (794,053) (24.6) Gross profit 828,309 1,342,880 (514,571) (38.3) Operating expenses: Selling & administrative expense 697,483 808,415 (110,932) (13.7) Engineering expense 197,838 212,492 (14,654) (6.9) Restructuring expense 119,110 32,353 86,757 268.2 1,014,431 1,053,260 (38,829) (3.7) Operating (loss) income$ (186,122) $ 289,620 $ (475,742) NM Operating margin (5.7) % 6.3 % (12.0) pts. The estimated impacts of the significant factors affecting the comparability of revenue, cost of goods sold and gross profit from 2019 to 2020 were as follows (in millions): Cost of Goods Revenue Sold Gross Profit 2019$ 4,573 $ 3,230 $ 1,343 Volume (1,282) (832) (450) Price, net of related costs 55 7 48 Foreign currency exchange rates and hedging (11) 23 (34) Shipment mix (71) (7) (64) Raw material prices - (10) 10 Manufacturing and other costs - 25 (25) (1,309) (794) (515) 2020$ 3,264 $ 2,436 $ 828 The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2019 to 2020: •The decrease in volume was due to lower wholesale motorcycle shipments and lower P&A and General Merchandise sales. •During 2020, revenue benefited from higher wholesale prices for motorcycles and lower sales incentives. The positive impact on revenue was partially offset by increased costs related to additional content added to motorcycles shipped in 2020 as compared to the prior year. •Revenue was adversely impacted by weaker foreign currency exchange rates relative to theU.S. dollar. In addition, unfavorable net foreign currency losses associated with hedging and balance sheet remeasurements also reduced gross profit in 2020 as compared to the prior year. •Changes in the shipment mix between motorcycle families had an adverse impact on gross profit during 2020 as compared to 2019. Additionally, unfavorable mix within P&A contributed to the impact. •Manufacturing and other costs were adversely impacted by a higher fixed cost per unit on lower production volumes. This unfavorable impact was partially offset by lower incremental tariff costs and the absence of temporary inefficiencies related to the manufacturing restructuring activities in 2019. Incremental tariff costs (incrementalEuropean Union (EU) andChina tariffs imposed beginning in 2018 on the Company's products shipped from theU.S. and incrementalU.S. tariffs imposed beginning in 2018 on certain items imported fromChina ) were$24.5 million in 2020 compared to$97.9 million in 2019. The Company began to wholesale motorcycles sourced from itsThailand facility in the EU during the second quarter of 2020 which reduced the cost of tariffs incurred through the majority of 2020. 26 -------------------------------------------------------------------------------- Operating expenses were lower in 2020 compared to 2019 due primarily to lower employee related cost on reduced headcount, reduced incentive-based compensation cost and lower discretionary spending as the Company aggressively managed costs, including its efforts to reduce planned non-capital spending as part of its COVID-19 pandemic response and recovery actions. The decrease was partially offset by an increase in restructuring expense. Refer to Note 3 of the Notes to Consolidated financial statements for additional information regarding the Company's restructuring expenses. Financial Services Segment Segment Results Condensed statements of operations for the Financial Services segment were as follows (in thousands): Increase 2020 2019 (Decrease) % Change Interest income$ 682,517 $ 678,205 $ 4,312 0.6 % Other income 107,806 110,906 (3,100) (2.8) Financial Services revenue 790,323 789,111 1,212 0.2 Financial Services expenses: Interest expense 246,447 210,438 36,009
17.1
Provision for credit losses 181,870 134,536 47,334
35.2 Operating expenses 155,306 178,149 (22,843) (12.8) Restructuring expense 10,899 - 10,899 100.0 594,522 523,123 71,399 13.6 Operating income$ 195,801 $ 265,988 $ (70,187) (26.4) % Interest income was favorable in 2020 compared to 2019 due to a higher average retail yield, partially offset by lower average outstanding finance receivables. Other income decreased in 2020 compared to 2019 due in part to lower investment income. Interest expense increased due to higher average outstanding debt, partially offset by a lower cost of funds. The provision for credit losses increased$47.3 million compared to 2019 primarily due to unfavorable economic conditions during 2020, partially offset by favorable 2020 retail credit loss performance. The provision for credit losses was up significantly as compared to 2019 driven by the impact of the COVID-19 pandemic on theU.S. economy and the Company's outlook on future economic conditions. The Company believes that there is significant uncertainty surrounding future economic outcomes. As such, the Company considered various third-party economic forecast scenarios and applied a probability-weighting to those economic forecast scenarios. At the end of 2020, the Company's outlook on economic conditions included a heavy emphasis on pessimistic economic trend assumptions as the COVID-19 pandemic continued to restrain theU.S. economy. The Company will continue to monitor economic trends and conditions. The Company's expectations surrounding its economic forecasts may change in future periods as additional information becomes available. The 30-day delinquency rate for retail motorcycle loans atDecember 31, 2020 decreased to 3.18% from 4.39% atDecember 31, 2019 . The improved delinquency rate was primarily driven by a high volume of short-term COVID-19 pandemic related extensions during the second quarter of 2020 and into the first part of the third quarter of 2020 on eligible retail loans to help customers get through financial difficulties associated with the pandemic. Through the remainder of 2020, the volume of payment extensions on eligible retail loans declined but has not yet returned to pre-COVID-19 pandemic levels. The Company continues to grant payment extensions to customers in accordance with its policies. Annual losses on the Company's retail motorcycle loans were 1.38% during 2020 compared to 2.00% in 2019. The favorable retail credit loss performance was due to lower delinquencies driven by the COVID-19 pandemic related loan payment extensions earlier in the year as well as improved used motorcycle values at auction due to a limited supply of new and used motorcycles. The allowance for credit losses atDecember 31, 2020 was determined in accordance with Accounting Standards Update (ASU) No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), a new accounting standard the Company adopted onJanuary 1, 2020 that requires recognition of full lifetime expected credit losses upon initial recognition of a financial instrument, replacing the prior, incurred loss methodology. The Company adopted the new accounting standard using a modified retrospective approach. As a result, prior period results were not restated. Operating expenses decreased$22.8 million compared to 2019 as the Company aggressively managed costs, including its efforts to reduce planned non-capital spending as part of its COVID-19 pandemic response and recovery actions. 27 -------------------------------------------------------------------------------- Additionally, the Financial Services segment incurred restructuring expense of$10.9 million in 2020. Refer to Note 3 of the Notes to Consolidated financial statements for additional information regarding the Company's restructuring expenses. Changes in the allowance for credit losses on finance receivables were as follows (in thousands): 2020 2019 Balance, beginning of period$ 198,581 $ 189,885 Cumulative effect of change in accounting(a) 100,604 - Provision for credit losses 181,870 134,536 Charge-offs, net of recoveries (90,119) (125,840) Balance, end of period$ 390,936 $ 198,581 (a)OnJanuary 1, 2020 , the Company adopted ASU 2016-13 and increased the allowance for loan loss through retained earnings, net of income taxes, to establish an allowance that represents expected lifetime credit losses on the finance receivable portfolios at date of adoption. AtDecember 31, 2020 , the allowance for credit losses on finance receivables was$371.7 million for retail receivables and$19.2 million for wholesale receivables. AtDecember 31, 2019 , the allowance for credit losses on finance receivables was$188.5 million for retail receivables and$10.1 million for wholesale receivables. Refer to Note 7 of the Notes to Consolidated financial statements for further discussion regarding the Company's allowance for credit losses on finance receivables. Results of Operations 2019 Compared to 2018 Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual Report on Form 10-K for the year endedDecember 31, 2019 filed with theSEC onFebruary 19, 2020 for a detailed discussion of the results of operations for 2019 compared to 2018 and liquidity and capital resources for 2019 compared to 2018. Other Matters New Accounting Standards Not Yet Adopted Refer to Note 1 of the Notes to Consolidated financial statements for a discussion of new accounting standards that will become effective for the Company in 2021 and 2022. Critical Accounting Estimates The Company's financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Management believes that the following are some of the more critical judgment areas in the application of accounting policies that currently affect the Company's financial condition and results of operations. Management has discussed the development and selection of these critical accounting estimates with theAudit and Finance Committee of the Company's Board of Directors. Allowance for Credit Losses on Retail Finance Receivables - OnJanuary 1, 2020 , the Company adopted ASU 2016-13, which requires an entity to recognize expected lifetime losses on finance receivables upon origination. The allowance for credit losses on retail finance receivables as ofDecember 31, 2020 represents the Company's estimate of lifetime losses for its retail finance receivables. Prior to the adoption of ASU 2016-13, the Company maintained an allowance for credit losses on retail finance receivables based on the Company's estimate of probable losses inherent in the retail finance receivable portfolio as of the balance sheet date. 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. For periods afterJanuary 1, 2020 , 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 expected life of the retail portfolio. For periods beyond the Company's reasonable and supportable forecasts, the Company reverts to its average historical loss experience for a three-year period using a mean-reversion process. 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. For periods prior toJanuary 1, 2020 , the Company performed a periodic and 28 -------------------------------------------------------------------------------- systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilized loss forecast models which considered 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. Refer to Note 7 of the Notes to Consolidated financial statements for further discussion regarding the Company's allowance for credit losses on finance receivables. Product Warranty and Recalls - Estimated warranty costs are recorded at the time of sale and are based on a combination of historical claim cost data and other known factors that may affect future warranty claims. The estimated costs associated with voluntary recalls are recorded when the liability is both probable and estimable. The accrued cost of a recall is based on an estimate of the cost to repair each affected motorcycle and the number of motorcycles expected to be repaired based on historical data concerning the percentage of affected customers that take advantage of recall offers. In the case of both warranty and recall costs, as actual experience becomes available it is used to update the accruals. The factors affecting actual warranty and recall costs can be volatile. As a result, actual warranty claims experience and recall costs may differ from estimates, which could lead to material changes in the Company's accrued warranty and recall costs. The Company's warranty and recall liabilities are discussed further in Note 14 of the Notes to Consolidated financial statements. Pensions and Other Postretirement Healthcare Benefits - The Company has a defined benefit pension plan and postretirement healthcare benefit plans, which cover certain eligible employees and retirees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees.U.S. Generally Accepted Accounting Principles (GAAP) requires that companies recognize in their consolidated balance sheets a liability for defined benefit pension and postretirement plans that are underfunded or an asset for defined benefit pension and postretirement benefit plans that are overfunded. Pension, SERPA and postretirement healthcare obligations and costs are calculated through actuarial valuations. The valuation of benefit obligations and net periodic benefit costs relies on key assumptions including discount rates, mortality, long-term expected return on plan assets, future compensation and healthcare cost trend rates. The Company determines its discount rate assumptions by referencing high-quality long-term bond rates that are matched to the duration of its benefit obligations. Based on this analysis, the Company decreased the weighted-average discount rate for pension and SERPA obligations from 3.49% as ofDecember 31, 2019 to 2.62% as ofDecember 31, 2020 . The Company decreased the weighted-average discount rate for postretirement healthcare obligations from 3.26% as ofDecember 31, 2019 to 2.11% as ofDecember 31, 2020 . The Company determines its healthcare trend assumption for the postretirement healthcare obligation by considering factors such as estimated healthcare inflation, the utilization of healthcare benefits and changes in the health of plan participants. Based on the Company's assessment of this data as ofDecember 31, 2020 , the Company set its healthcare cost trend rate at 7.00% as ofDecember 31, 2020 . The Company expects the healthcare cost trend rate to reach its ultimate rate of 5.00% by 2029.(1) These assumption changes were reflected immediately in the benefit obligation and will be amortized into net periodic benefit costs over future periods. Plan assets are measured at fair value and are subject to market volatility. In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted to reflect the current view of the long-term investment market. 29 --------------------------------------------------------------------------------
Changes in the funded status of defined benefit pension and postretirement benefit plans resulting from the difference between assumptions and actual results are initially recognized in other comprehensive income (loss) and amortized to expense over future periods. Sensitivity to changes in major assumptions used in the pension and postretirement healthcare obligations and costs was as follows (in thousands):
Impact of a 1% Impact of a 1% Amounts based Impact of a 1% increase in the decrease in the on current decrease in the healthcare expected return on assumptions discount rate cost trend rate assets 2020 Net periodic benefit cost: Pension and SERPA$ 33,016 $ 31,108 n/a $ 20,164 Postretirement healthcare$ 5,393 $ (843) $ 435 $ 1,985 2020 Benefit obligations: Pension and SERPA$ 2,390,435 $ 393,880 n/a n/a Postretirement healthcare$ 315,245 $ 28,651 $ 8,295 n/a The amounts based on current assumptions above exclude the impact of settlements, curtailments and special early retirement benefits. This information should not be viewed as predictive of future amounts. The analysis of the impact of a 1% change in the table above does not take into account the cost related to special termination benefits. The calculations of pension, SERPA and postretirement healthcare obligations and costs are based on many factors in addition to those discussed here. This information should be considered in combination with the information provided in Note 15 of the Notes to Consolidated financial statements. Income Taxes - The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes (Topic 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company reviews its deferred income tax asset valuation allowances on a quarterly basis or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred income tax asset is considered, along with any positive or negative evidence including tax law changes. Since future financial results and tax law may differ from previous estimates, periodic adjustments to the Company's valuation allowances may be necessary. The Company is subject to income taxes in theU.S. and numerous foreign jurisdictions. These tax laws and regulations are complex and significant judgment is required in determining the Company's worldwide provision for income taxes and recording the related deferred tax assets and liabilities. In the ordinary course of the Company's business, there are transactions and calculations where the ultimate tax determination is uncertain. Accruals for unrecognized tax benefits are provided for in accordance with the requirements of Topic 740. An unrecognized tax benefit represents the difference between the recognition of benefits related to items for income tax reporting purposes and financial reporting purposes. The unrecognized tax benefit is included within Other long-term liabilities on the Consolidated balance sheets. The Company has a liability for interest and penalties on exposure items, if applicable, which is recorded as a component of the overall income tax provision. The Company is regularly audited by tax authorities as a normal course of business. Although the outcome of tax audits is always uncertain, the Company believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provision includes amounts sufficient to pay any assessments(1). Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. Refer to Note 4 of the Notes to Consolidated financial statements for further discussion regarding the Company's income taxes. Commitments and Contingencies The Company is subject to lawsuits and other claims related to environmental, product 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. 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. Refer to Note 16 of the Notes to Consolidated financial statements for a discussion of the Company's commitments and contingencies. 30 -------------------------------------------------------------------------------- Liquidity and Capital Resources The Company's response to the COVID-19 pandemic included actions to preserve cash and secure additional liquidity. During 2020, the Company delivered on its previously disclosed plans to reduce planned capital and non-capital spending to preserve approximately$250 million of cash in 2020 (excludes the impact of cash restructuring charges). In addition, the Company suspended all discretionary share repurchases and reduced its cash dividend to$.02 per share in the second, third and fourth quarters of 2020. Going forward, the Company believes the Motorcycles segment operations will continue to be primarily funded through cash flows generated by operations.(1) The Company expects the Financial Services segment operations to continue to be funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, asset-backed securitizations and deposits.(1) Through TheHardwire , the Company expects its business model to generate cash that will allow it to invest in the business and brand, fund TheHardwire initiatives, and return value to shareholders.(1) The Company's cash allocation priorities are first to fund growth through TheHardwire initiatives, then to reward shareholders through dividends. The Company's Board of Directors approved a 2021 first quarter dividend of$.15 per share. At this time, significant discretionary share repurchases are not planned as the Company prioritizes cash for these top two priorities.(1) The Company's strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and cash equivalents and availability under its credit facilities. The Company's cash and cash equivalents and availability under its credit and conduit facilities atDecember 31, 2020 were as follows (in thousands): Cash and cash equivalents$ 3,257,203 Availability under credit and conduit facilities: Credit facilities 750,726 Asset-backed U.S. commercial paper conduit facility(a) 600,000
Asset-backed Canadian commercial paper conduit facility(a) 55,980
$ 4,663,909 (a)Includes facilities expiring in the next 12 months which the Company expects to renew prior to expiration.(1) To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit rating agency may change or withdraw the Company's ratings based on its assessment of the Company's current and future ability to meet interest and principal repayment obligations. The Company's short-term debt ratings affect its ability to issue unsecured commercial paper. The Company's short- and long-term debt ratings as ofDecember 31, 2020 were as follows: Short-Term Long-Term Outlook Moody's P3 Baa3 Stable Standard & Poor's A2 BBB Negative Fitch F2 A- Negative The Company recognizes that it must continue to monitor and adjust its business to changes in the lending environment. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding.(1) The Financial Services operations could be negatively affected by higher costs of funding and increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) These negative consequences could in turn adversely affect the Company's business and results of operations in various ways, including through higher costs of capital, reduced funds available through its Financial Services operations to provide loans to independent dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital. 31 --------------------------------------------------------------------------------
Cash Flow Activity
Cash flow activities for the years ended
2020 2019 Net cash provided by operating activities$ 1,177,890 $ 868,272 Net cash used by investing activities (66,783) (508,126) Net cash provided (used) by financing activities 1,373,983 (712,223)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
18,712 (2,305) Net increase (decrease) in cash, cash equivalents and restricted cash$ 2,503,802 $ (354,382) Operating Activities The increase in operating cash flow in 2020 compared to 2019 was primarily due to favorable changes in working capital, led by a decline in accounts receivable and inventory levels as well as favorable cash flows from decreased wholesale financing activity due to lower loan originations. The Company continues to expect that it will generate sufficient cash inflows from operations to fund its ongoing operating cash requirements including those related to existing contractual commitments. The Company's purchase orders for inventory used in manufacturing generally do not become firm commitments until 90 days prior to expected delivery. The Company's material contractual operating cash commitments atDecember 31, 2020 relate to leases, retirement plan obligations and income taxes. The Company's long-term lease obligations and future payments are discussed further in Note 10 of the Notes to Consolidated financial statements. The Company's expected future contributions and benefit payments related to its defined benefit retirement plans are discussed further in Note 15 of the Notes to Consolidated financial statements. As described in Note 4 of the Notes to Consolidated financial statements, the Company has a liability for unrecognized tax benefits of$50.6 million and related accrued interest and penalties of$25.5 million as ofDecember 31, 2020 . The Company cannot reasonably estimate the period of cash settlement for either the liability for unrecognized tax benefits or accrued interest and penalties. Investing Activities The Company's most significant investing activities consist of capital expenditures and retail finance receivable originations and collections. Capital expenditures were$131.1 million and$181.4 million during 2020 and 2019, respectively. The Company's 2021 plan includes estimated capital expenditures between$190 to$220 million , all of which the Company expects to fund with net cash flow generated by operations.(1) Net cash outflows for finance receivables in 2020, which consisted primarily of retail finance receivables, were$390.4 million lower than in 2019 primarily due to lower retail motorcycle loan originations during 2020. The Company funds its finance receivables net lending activity through the issuance of debt, discussed in "Financing Activities" below. Financing Activities The Company's financing activities consist primarily of dividend payments, share repurchases and debt activities. The Company paid dividends of$0.44 per share totaling$68.1 million during 2020 and$1.50 per share totaling$237.2 million during 2019. Cash outflows for share repurchases were$8.0 million and$296.5 million for 2020 and 2019, respectively. In the first quarter of 2020, the Company suspended discretionary share repurchases; as a result, there were no discretionary share repurchases in 2020. Discretionary share repurchases during the year endedDecember 31, 2019 were$286.7 million or 8.2 million shares. Share repurchases of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units were$8.0 million or 0.3 million shares and$9.8 million or 0.3 million shares during the years endedDecember 31, 2020 and 2019, respectively. As ofDecember 31, 2020 , there were 18.2 million shares remaining on a board-approved share repurchase authorization. 32 -------------------------------------------------------------------------------- Financing cash flows related to debt and deposit activities resulted in net cash inflows/(outflows) of$1.45 billion and$(182.1) million for 2020 and 2019, respectively. The Company's total outstanding debt and deposits consisted of the following as ofDecember 31 , (in thousands): 2020 2019 Outstanding debt: Unsecured commercial paper$ 1,014,274 $ 571,995 Asset-backed Canadian commercial paper conduit facility 116,678
114,693
Asset-backedU.S. commercial paper conduit facilities 402,205
490,427
Asset-backed securitization debt, net 1,791,956 764,392 Medium-term notes, net 4,917,714 4,760,127 Senior notes, net 743,977 743,296$ 8,986,804 $ 7,444,930 Deposits$ 79,965 $ - Refer to Note 11 of the Notes to Consolidated financial statements for a summary of future principal payments on debt obligations. Deposits - During 2020, HDFS began offering brokered certificates of deposit to customers indirectly through contractual arrangements with third-party banks and/or securities brokerage firms through its bank subsidiary. AtDecember 31, 2020 , the Company had$80.0 million , net of fees, of short-term interest-bearing brokered certificates of deposit outstanding. Each separate brokered certificate of deposit is issued under a master certificate and, as such, all outstanding brokered certificates of deposit are considered below theFederal Deposit Insurance Corporation (FDIC) insurance coverage limits. Credit Facilities - InApril 2020 , the Company entered into a$707.5 million five-year credit facility to replace the$765.0 million five-year credit facility that was due to mature inApril 2021 . The new five-year credit facility matures inApril 2025 . The Company also amended its$780.0 million five-year credit facility to$707.5 million with no change to the maturity date ofApril 2023 . The Company also had a$195.0 million 364-day credit facility which was due to mature inMay 2020 . InApril 2020 , the Company extended the maturity date of this credit facility toAugust 2020 ; however, this facility was terminated onMay 18, 2020 . At the time of termination, there were no outstanding borrowings under this 364-day credit facility. OnJune 1, 2020 , the Company entered into a new$350.0 million 364-day credit facility, and onJune 4, 2020 , the Company borrowed$150.0 million under this facility. OnDecember 9, 2020 , the Company amended this facility to allow for the early repayment of the$150.0 million borrowing, which was repaid in full on this date, along with the related interest. The five-year credit facilities (together, the Global Credit Facilities), as well as the$350.0 million 364-day credit facility, bear interest at variable rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities and the$350.0 million 364-day credit facility also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments. The Global Credit Facilities are committed facilities primarily used to support the Company's unsecured commercial paper program. Unsecured Commercial Paper - Subject to limitations, the Company could issue unsecured commercial paper of up to$1.42 billion as ofDecember 31, 2020 supported by the Global Credit Facilities. Outstanding unsecured commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. The Company intends to repay unsecured commercial paper as it matures with additional unsecured commercial paper or through other means, such as borrowing under the Global Credit Facilities or the$350.0 million 364-day credit facility, borrowing under its asset-backedU.S. commercial paper conduit facilities or through the use of operating cash flow and cash on hand.(1) 33 --------------------------------------------------------------------------------
Medium-Term Notes - The Company has the following unsecured medium-term notes
issued and outstanding at
Principal Amount Rate Issue Date Maturity Date$600,000 2.85% January 2016 January 2021$450,000 LIBOR + 0.94% November 2018 March 2021$350,000 3.55% May 2018 May 2021$550,000 4.05% February 2019 February 2022$400,000 2.55% June 2017 June 2022$350,000 3.35% February 2018 February 2023$797,206 (a) 4.94% May 2020 May 2023$735,882 (b) 3.14% November 2019 November 2024$700,000 3.35% June 2020 June 2025 (a)Euro denominated €650.0 million par value remeasured toU.S. dollar atDecember 31, 2020 (b)Euro denominated €600.0 million par value remeasured toU.S. dollar atDecember 31, 2020 The fixed-rateU.S. dollar-denominated medium-term notes provide for semi-annual interest payments, the fixed-rate foreign currency-denominated medium-term notes provide for annual interest payments, and the floating-rate medium-term notes provide for quarterly interest payments. Principal on the medium-term notes is due at maturity. Unamortized discounts and debt issuance costs on the medium-term notes reduced the outstanding balance by$15.4 million and$12.8 million atDecember 31, 2020 and 2019, respectively. Senior Notes - InJuly 2015 , the Company issued$750.0 million of unsecured senior notes in an underwritten offering. The senior notes provide for semi-annual interest payments and principal due at maturity.$450.0 million of the senior notes mature inJuly 2025 and have an interest rate of 3.50%, and$300.0 million of the senior notes mature inJuly 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015. On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility - The Company has a revolving 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 from the Company eligible Canadian retail motorcycle finance receivables for proceeds up toC$220.0 million . The transferred assets are restricted as collateral for the payment of the associated debt. The terms for this facility 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 ofC$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 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 ofDecember 31, 2020 , the Canadian Conduit has an expiration date ofJune 25, 2021 . In 2020, the Company transferred$77.9 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of$61.6 million . In 2019, the Company transferred$28.2 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of$23.4 million . On-Balance Sheet Asset-BackedU.S. Commercial Paper Conduit Facilities VIE - UntilNovember 25, 2020 , the Company had two separate agreements with third-party bank-sponsored asset-backedU.S. commercial paper conduits, a$300.0 million revolving facility agreement and a$600.0 million revolving facility agreement (together, the FormerU.S. Conduit Facilities). OnNovember 25, 2020 , the Company amended each revolving facility agreement by consolidating the two agreements into one$900.0 million revolving facility agreement with third-party bank-sponsored asset-backedU.S. commercial paper conduits. Under the revolving facility agreement, the Company may transferU.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backedU.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$900.0 million revolving facility (theU.S. Conduit Facility) is based on, among other things, the amount of eligibleU.S. retail motorcycle finance receivables held by the SPE as collateral. 34 -------------------------------------------------------------------------------- In 2020, the Company transferred$195.3 million ofU.S. retail motorcycle finance receivables to an SPE which, in turn, issued$163.6 million of debt under the FormerU.S. Conduit Facilities. In 2019, the Company transferred$174.4 million ofU.S. retail motorcycle finance receivables to an SPE which, in turn, issued$154.6 million of debt under the FormerU.S. Conduit Facilities. 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. In each of these cases, a program fee is assessed based on the outstanding principal. TheU.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 theU.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 4 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as ofDecember 31, 2020 , theU.S. Conduit Facility has an expiration date ofNovember 19, 2021 . Asset-Backed Securitization VIEs - For all of its asset-backed securitization transactions, the Company transfersU.S. retail motorcycle finance receivables to separate VIEs, which in turn issue secured notes with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchasedU.S. retail motorcycle finance receivables. TheU.S. retail motorcycle finance receivables included in the asset-backed securitization transactions are not available to pay other obligations or claims of the Company's creditors until the associated debt and other obligations are satisfied. Restricted cash balances held by the VIEs are used only to support the asset-backed securitizations. The accounting treatment for asset-backed securitizations depends on the terms of the related transaction and the Company's continuing involvement with the VIE. The Company's current outstanding asset-backed securitizations do not meet the criteria to be accounted for as a sale because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt. There is no amortization schedule for the secured notes; however, the debt is reduced monthly as available collections on the related retail motorcycle finance receivables are applied to outstanding principal. The secured notes have various contractual maturities ranging from 2022 to 2028. In 2020, the Company transferred$2.42 billion ofU.S. retail motorcycle finance receivables to four separate SPEs which, in turn, issued$2.08 billion , or$2.06 billion net of discounts and issuance costs, of secured notes through four separate on-balance-sheet asset-backed securitization transactions. In 2019, the Company transferred$1.12 billion ofU.S. retail motorcycle finance receivables to two separate SPEs which, in turn, issued$1.03 billion , or$1.02 billion net of discount and issuance costs, of secured notes through two separate on-balance sheet asset-backed securitization transactions. Support Agreement - The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support to maintain HDFS' fixed-charge coverage at 1.25 and minimum net worth of$40.0 million . Support may be provided at the Company's option as capital contributions or loans. Accordingly, certain debt covenants may restrict the Company's ability to withdraw funds from HDFS outside the normal course of business. No amount has ever been provided to HDFS under the support agreement. Operating and Financial Covenants - HDFS and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the medium-term and senior notes and theU.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below. The operating covenants limit the Company's and HDFS' ability to: •Assume or incur certain liens; •Participate in certain mergers or consolidations; and •Purchase or hold margin stock. 35 -------------------------------------------------------------------------------- Under the current financial covenants of the Global Credit Facilities, the ratio of HDFS' consolidated debt, excluding secured debt, to HDFS' consolidated allowance for credit losses on finance receivables plus HDFS' consolidated shareholders' equity, excluding accumulated other comprehensive loss (AOCL), cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and consolidated shareholders' equity (where the Company's consolidated debt in each case excludes that of HDFS and its subsidiaries, and the Company's consolidated shareholders' equity excluding AOCL), cannot exceed 0.7 to 1.0 as of the end of any fiscal quarter. No financial covenants are required under the medium-term and senior notes or theU.S. or Canadian asset-backed commercial paper conduit facilities. AtDecember 31, 2020 and 2019, HDFS and the Company remained in compliance with all of the then existing covenants. Cautionary Statements The Company intends that certain matters discussed in this report are "forward-looking statements" intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company "believes," "anticipates," "expects," "plans," "may," "will," "estimates," "targets," "intend" or words of similar meaning. Similarly, statements that describe or refer to future expectations, future plans, strategies, objectives, outlooks, targets, guidance, commitments or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, unfavorably or favorably, from those anticipated as of the date of this report. Certain of such risks and uncertainties are described below. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are only made as of the date of this report, and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. Important factors that could affect future results and cause those results to differ materially from those expressed in the forward-looking statements include, among others, the following: (i) the COVID-19 pandemic, including the length and severity of the pandemic across the globe and the pace of recovery following the pandemic and (ii) the Company's ability to: (a) execute its business plans and strategies, including TheHardwire , successfully execute its remodeled approach to supply and inventory management, and strengthen its existing business while allowing for desirable growth; (b) accurately analyze, predict and react to changing market conditions and successfully adjust to shifting global consumer needs and interests, including successfully implementing a distributor model in fifteen international markets; (c) successfully access the capital and/or credit markets on terms that are acceptable to the Company and within its expectations; (d) successfully carry out its global manufacturing and assembly operations; (e) develop and introduce products, services and experiences on a timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, including successfully implementing and executing plans to strengthen and grow its leadership position in Touring, large Cruiser and Trike, and growing its complementary businesses; (f) perform in a manner that enables the Company to benefit from market opportunities while competing against existing and new competitors; (g) prevent, detect, and remediate any issues with its motorcycles or any issues associated with the manufacturing processes to avoid delays in new model launches, recall campaigns, regulatory agency investigations, increased warranty costs or litigation and adverse effects on its reputation and brand strength, and carry out any product programs or recalls within expected costs and timing; (h) manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters; (i) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles; (j) realize expectations concerning market demand for electric models, which will depend in part on the building of necessary infrastructure; (k) successfully manage and reduce costs throughout the business; (l) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing political environment; (m) continue to develop the capabilities of its distributors and dealers, effectively implement changes relating to its dealers and distribution methods and manage the risks that its independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand; (n) develop and maintain a productive relationship with Zhejiang Qianjiang Motorcycle Co., Ltd. and launch related products in a timely manner; (o) develop and maintain a productive relationship with Hero MotoCorp as a distributor and licensee of the Harley-Davidson brand name inIndia ; (p) manage and predict the impact that new or adjusted tariffs may have on the Company's ability to sell products internationally, and the cost of raw materials and components; (q) successfully maintain a manner in which to sell motorcycles in theEuropean Union ,China , and theCompany's Association of Southeast Asian Nations (ASEAN) countries that does not subject its motorcycles to incremental tariffs; (r) manage itsThailand corporate and manufacturing operation in a manner that allows the Company to avail itself of preferential free trade agreements and duty rates, and sufficiently lower prices of its motorcycles in certain markets; (s) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices; (t) retain and attract talented employees, and eliminate personnel duplication, inefficiencies and complexity throughout the organization; (u) prevent a cybersecurity breach involving 36 -------------------------------------------------------------------------------- consumer, employee, dealer, supplier, or Company data and respond to evolving regulatory requirements regarding data security; (v) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio; (w) adjust to tax reform, healthcare inflation and reform and pension reform, and successfully estimate the impact of any such reform on the Company's business; (x) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles; (y) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities; (z) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations; (aa) manage its exposure to product liability claims and commercial or contractual disputes; (bb) continue to manage the relationships and agreements that the Company has with its labor unions to help drive long-term competitiveness; (cc) accurately predict the margins of its Motorcycles and Related Products segment in light of, among other things, tariffs, the cost associated with product development initiatives and the Company's complex global supply chain; and (dd) successfully develop and launch the pre-owned motorcycle program, Harley-Davidson Certified. The Company's operations, demand for its products, and its liquidity could be adversely impacted by work stoppages, facility closures, strikes, natural causes, widespread infectious disease, terrorism, or other factors. Other factors are described in Item 1A. Risk Factors of this report. Many of these risk factors are impacted by the current changing capital, credit and retail markets and the Company's ability to manage through inconsistent economic conditions. The Company's ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company's independent dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent dealers to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company. In addition, the Company's independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions, the impact of the COVID-19 pandemic, or other factors. In recent years, HDFS has experienced historically low levels of retail credit losses, but there is no assurance that this will continue. The Company believes that HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals to sub-prime borrowers, as well as actions that the Company has taken and could take that impact motorcycle values. Item 7A. Quantitative and Qualitative Disclosures About Market RiskThe Company is exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. To reduce such risks, the Company selectively uses derivative financial instruments. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes. Sensitivity analysis is used to manage and monitor foreign currency exchange rate and interest rate risks. Further disclosure relating to the fair value of the Company's derivative financial instruments is included in Note 9 of the Notes to Consolidated financial statements. Motorcycles and Related Products Segment The Company sells its motorcycles and related products internationally and in most markets those sales are made in the foreign country's local currency. As a result, the Motorcycles segment operating results are affected by fluctuations in the value of theU.S. dollar relative to foreign currencies. The Company's most significant foreign currency exchange rate risk resulting from the sale of motorcycles and related products relates to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Chinese yuan, Indian rupee,Singapore dollar, Thai baht and Pound sterling. The Company utilizes foreign currency contracts to mitigate the effect of certain currencies' fluctuations on Motorcycles segment operating results. The foreign currency contracts are entered into with banks and allow the Company to exchange currencies at a future date, based on a fixed exchange rate. AtDecember 31, 2020 and 2019, the notionalU.S. dollar value of outstanding foreign currency contracts was$779.4 million and$654.5 million , respectively. The Company estimates that a uniform 10% weakening in the value of theU.S. dollar relative to the currencies underlying these contracts would result in a decrease in the fair value of the contracts of approximately$80.2 million and$65.5 million as ofDecember 31, 2020 and 2019, respectively. The Company purchases commodities for use in the production of motorcycles. As a result, Motorcycles segment operating income is affected by changes in commodity prices. The Company uses derivative financial instruments on a limited basis to hedge the prices of certain commodities. AtDecember 31, 2020 , the notional value of these instruments was$7.5 million and the fair value was a net asset of$0.8 million . As ofDecember 31, 2019 , the notional value of these instruments was$8.9 million and the fair value was a net liability of$0.1 million . The potential decrease in fair value of these contracts from a 10% adverse change in the underlying commodity prices would not be significant. 37 -------------------------------------------------------------------------------- Financial Services Segment The Company has interest rate sensitive financial instruments including finance receivables, debt and interest rate derivative financial instruments. As a result, Financial Services operating income is affected by changes in interest rates. The Company utilizes interest rate swaps and caps to reduce the impact of fluctuations in interest rates on its floating-rate medium-term notes and its asset-backed securitization transactions, respectively. As ofDecember 31, 2020 , HDFS had interest rate swaps outstanding with a notional value of$450.0 million and interest rate caps outstanding with a notional value of$978.1 million . As ofDecember 31, 2019 , HDFS had interest rate swaps outstanding with a notional value of$900.0 million and interest rate caps with a notional value of$376.0 million . As ofDecember 31, 2020 , HDFS estimates that a 10% decrease in interest rates would not result in a material change to the fair value of the interest rate swap and cap agreements. As ofDecember 31, 2019 , HDFS estimated that a 10% decrease in interest rates would result in a decrease in the fair value of the interest rate swap and cap agreements of$10.2 million . HDFS has also has short-term commercial paper and debt issued through the commercial paper conduit facilities that is subject to changes in interest rates which it does not hedge. The Company estimates that a one-percentage point increase in the interest rate on commercial paper and debt issued through the commercial paper conduit facilities would increase Financial Services interest expense in 2021 by approximately$15.5 million . This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change in interest rates, the Company may take actions to mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis does not account for these impacts. The Company has foreign denominated medium-term notes. As a result, Financial Services operating income is affected by fluctuations in the value of theU.S. dollar relative to foreign currencies and interest rates. AtDecember 31, 2020 , this exposure related to the Euro. The Company utilizes cross-currency swaps to mitigate the effect of the foreign currency exchange rate and interest rate fluctuations related to foreign denominated debt. AtDecember 31, 2020 and 2019, the Company has cross-currency swaps outstanding with a notional value of$1.4 billion and$660.8 million , respectively. The Company estimates that a 10% adverse change in the underlying foreign currency exchange rate and interest rate would result in a$170.6 million and$76.2 million decrease in the fair value of the swap agreements as ofDecember 31, 2020 and 2019, respectively. The amount as ofDecember 31, 2019 reflects a revision to the amount included in the Company's 2019 Annual Report on Form 10-K. 38 --------------------------------------------------------------------------------
Item 8. Consolidated Financial Statements and Supplementary Data
Page Reports of Independent Registered Public Accounting Firm 40 Consolidated Statements of Operations 44 Consolidated Statements of Comprehensive Income 45 Consolidated Balance Sheets 46 Consolidated Statements of Cash Flows 48 Consolidated Statements of Shareholders' Equity 49 Notes to Consolidated Financial Statements 50 1. Summary of Significant Accounting Policies 50 2. Revenue 53 3. Restructuring Activities 54 4. Income Taxes 56 5. Capital Stock and Earnings Per Share 59 6. Additional Balance Sheet and Cash Flow Information 59 7. Finance Receivables 61 8.Goodwill and Intangible Assets 67 9. Derivative Financial Instruments and Hedging Activities 68 10. Leases 71 11. Debt 72 12. Asset-Backed Financing 74 13. Fair Value 78 14. Product Warranty and Recall Campaigns 80 15. Employee Benefit Plans and Other Postretirement Benefits 80 16. Commitments and Contingencies 87 17. Share-Based Awards 87 18. Accumulated Other Comprehensive Loss 89 19. Reportable Segments and Geographic Information 90 20. Supplemental Consolidating Data 93 21. Subsequent Event 96 39
-------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Opinion on Internal Control over Financial Reporting We have auditedHarley-Davidson, Inc.'s internal control over financial reporting as ofDecember 31, 2020 , based on criteria established in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission (2013 framework) (the COSO criteria). In our opinion,Harley-Davidson, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as ofDecember 31, 2020 , based on the COSO criteria. We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) (PCAOB), the consolidated balance sheets ofHarley-Davidson, Inc. as ofDecember 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period endedDecember 31, 2020 , and the related notes and financial statement schedule listed in the Index at item 15(a) and our report datedFebruary 23, 2021 expressed an unqualified opinion thereon. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. Definitions and Limitations of Internal Control Over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. /s/Ernst & Young LLP Milwaukee, Wisconsin February 23, 2021 40
-------------------------------------------------------------------------------- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of
Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets ofHarley-Davidson, Inc. (the Company) as ofDecember 31, 2020 and 2019, the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period endedDecember 31, 2020 , and the related notes and financial statement schedule listed in the Index at item 15(a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position ofHarley-Davidson, Inc. atDecember 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period endedDecember 31, 2020 , in conformity withU.S. generally accepted accounting principles. We also have audited, in accordance with the standards of thePublic Company Accounting Oversight Board (United States ) (PCAOB), the Company's internal control over financial reporting as ofDecember 31, 2020 , based on criteria established in Internal Control - Integrated Framework issued by theCommittee of Sponsoring Organizations of theTreadway Commission (2013 framework), and our report datedFebruary 23, 2021 expressed an unqualified opinion thereon. Adoption of ASU 2016-13 As discussed in Note 1 of the consolidated financial statements, the Company changed its method of accounting for credit losses in 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and the related amendments. See below for discussion of our related critical audit matter. Basis for Opinion These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with theU.S. federal securities laws and the applicable rules and regulations of theSecurities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. 41 -------------------------------------------------------------------------------- Allowance for Credit Losses - Retail Finance
Receivables
Description of the The Company's retail receivable portfolio totaled
2020, and the associated allowance for credit
losses (ACL) was
discussed above and in Notes 1 and 7 to the
consolidated financial statements,
effectiveJanuary 1, 2020 , the Company adopted ASU
2016-13, Financial Instruments
- Credit Losses (ASC 326): Measurement of Credit
Losses on Financial Instruments,
which requires the Company to recognize expected
lifetime losses on finance
receivables held at amortized cost, upon
origination. Upon adoption, the Company
increased its ACL by$100.6 million and reduced
retained earnings net, of deferred
taxes, by$78.2 million through a
cumulative-effect adjustment. The Company
utilizes a vintage-based loss forecast methodology
to measure the expected retail
finance receivables credit losses. Economic
forecasts for a two-year period are
incorporated into the methodology to reflect the
estimated impact of changes in
future economic conditions. To establish the
economic forecasts, management
considers various third-party economic forecast
scenarios and applies a
probability-weighting to those economic forecast
scenarios. For periods beyond the
Company's incorporated economic 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.
Auditing management's estimate of the ACL for
retail finance receivables was
especially challenging due to the complexity of
management's retail receivables
loss forecasting models and subjective management assumptions applied in determining the probability-weighting of its economic forecasts. How We Addressed the We obtained an understanding, evaluated the design, and tested the operating Matter in Our Audit effectiveness of internal controls over the ACL process. These procedures included testing controls over management's review of key
assumptions such as the economic
forecasts, the development and operation of the
ACL models, and the completeness
and accuracy of key inputs and assumptions used in
the ACL models.
To test the ACL, our audit procedures included,
among others, evaluating the
Company's loss forecasting models, the economic
forecasts prepared by management,
and the underlying data used in the models. We
involved our internal specialists
in evaluating the model methodology and model
performance and tested key modeling
assumptions. We evaluated management's judgments
in probability-weighting
different third-party economic forecast scenarios
and compared management's
economic forecasts to other available information
for contrary or corroborative
evidence. Additionally, we tested the accuracy of
data utilized within the models
and re-performed the model calculations for a
sample of loans. In addition, we
reviewed the Company's historical loss statistics,
peer information, and
subsequent events and considered whether this
information corroborates or
contradicts management's measurement of the ACL. 42 -------------------------------------------------------------------------------- Restructuring activities
Description of the The Company recorded
endedDecember 31, 2020 . As discussed in Note 3 to
the consolidated financial
statements, restructuring activities included a
workforce reduction, the
termination of certain products, facility changes,
optimizing the global
independent dealer network, exiting certain
international markets, and
discontinuing the sales and manufacturing
operations in
resulted in restructuring expenses that included
employee termination costs,
contract termination costs and non-current asset
adjustments. The Company's
liability for accrued restructuring expenses was
31, 2020. Auditing the Company's restructuring expenses was
complex due to the
comprehensive scope of the different actions taken
which required management
to assess the timing of recognition of the costs
associated with these
actions. In addition, determining the
classification and disclosure of
restructuring expenses in the consolidated
financial statement required the
Company to maintain detailed record-keeping of the
various restructuring
activities.
How We Addressed the We obtained an understanding, evaluated the design, and tested the operating Matter in Our Audit effectiveness of internal controls over the restructuring process. These
procedures included testing controls over
authorization of the significant
restructuring actions, management's review and
assessment of the accounting
treatment and timing of recognition for
significant actions, and the Company's
review of the presentation and disclosure of
restructuring activities.
To test the restructuring costs and year-end
restructuring liability, our
audit procedures included, among others, gaining
an understanding of approved
restructuring actions and evaluating the
accounting treatment and timing of
recognition for significant actions. In addition,
we tested the Company's
computation of restructuring expenses and year-end
liability, reviewed a
sample of contracts and settlement agreements, and
tested cash payments made
related to the restructuring actions. We also
tested the presentation and
disclosure of the restructuring expenses in the
consolidated financial
statements. /s/Ernst & Young LLP We have served as the Company's auditor since 1982Milwaukee, Wisconsin February 23, 2021 43 --------------------------------------------------------------------------------
HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF OPERATIONS Years ended December 31, 2020, 2019 and 2018 (In thousands, except per share amounts) 2020 2019 2018 Revenue: Motorcycles and Related Products$ 3,264,054 $ 4,572,678 $ 4,968,646 Financial Services 790,323 789,111 748,229 4,054,377 5,361,789 5,716,875 Costs and expenses: Motorcycles and Related Products cost of goods sold 2,435,745 3,229,798 3,351,796 Financial Services interest expense 246,447 210,438 193,187 Financial Services provision for credit losses 181,870 134,536 106,870 Selling, administrative and engineering expense 1,050,627 1,199,056 1,258,098 Restructuring expense 130,009 32,353 93,401 4,044,698 4,806,181 5,003,352 Operating income 9,679 555,608 713,523 Other (expense) income, net (1,848) 16,514 3,039 Investment income 7,560 16,371 951 Interest expense 31,121 31,078 30,884 (Loss) income before income taxes (15,730) 557,415 686,629 Income tax (benefit) provision (17,028) 133,780 155,178 Net income$ 1,298 $ 423,635 $ 531,451 Earnings per share: Basic$ 0.01 $ 2.70 $ 3.21 Diluted$ 0.01 $ 2.68 $ 3.19 Cash dividends per share$ 0.44 $ 1.50 $ 1.48
The accompanying notes are integral to the consolidated financial statements.
44 --------------------------------------------------------------------------------
HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME Years ended December 31, 2020, 2019 and 2018 (In thousands) 2020 2019 2018 Net income$ 1,298 $
423,635
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments 33,224
8,795 (25,010)
Derivative financial instruments (31,530)
(16,371) 20,009
Pension and postretirement benefit plans 51,838 100,311 (16,286) 53,532 92,735 (21,287) Comprehensive income$ 54,830 $ 516,370 $ 510,164
The accompanying notes integral part to the consolidated financial statements.
45 --------------------------------------------------------------------------------
HARLEY-DAVIDSON, INC. CONSOLIDATED BALANCE SHEETSDecember 31, 2020 and 2019 (In thousands) 2020 2019 ASSETS Current assets: Cash and cash equivalents $
3,257,203
Accounts receivable, net 143,082 259,334 Finance receivables, net of allowance of$72,632 and$43,006 1,509,539 2,272,522 Inventories, net 523,497 603,571 Restricted cash 131,642 64,554 Other current assets 280,470 168,974 5,845,433 4,202,823
Finance receivables, net of allowance of
5,101,844 Property, plant and equipment, net 743,784 847,382 Pension and postretirement assets 95,711 56,014 Goodwill 65,976 64,160 Deferred income taxes 158,538 101,204 Lease assets 45,203 61,618 Other long-term assets 122,487 93,114$ 12,010,601 $ 10,528,159 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable$ 290,904 $ 294,380 Accrued liabilities 557,214 582,288 Deposits 79,965 - Short-term debt 1,014,274 571,995 Current portion of long-term debt, net 2,039,597 1,748,109 3,981,954 3,196,772 Long-term debt, net 5,932,933 5,124,826 Lease liabilities 30,115 44,447 Pension and postretirement liabilities 114,206 128,651 Deferred income taxes 8,607 8,135 Other long-term liabilities 220,001 221,329 Commitments and contingencies (Note 16) Shareholders' equity: Preferred stock, none issued - - Common stock (Note 5) 1,685 1,828 Additional paid-in-capital 1,507,706 1,491,004 Retained earnings 1,284,823 2,193,997 Accumulated other comprehensive loss (483,417) (536,949) Treasury stock, at cost (Note 5) (588,012) (1,345,881) 1,722,785 1,803,999$ 12,010,601 $ 10,528,159 46
--------------------------------------------------------------------------------
HARLEY-DAVIDSON, INC. CONSOLIDATED BALANCE SHEETS (continued)December 31, 2020 and 2019 (In thousands) 2020 2019
Balances held by consolidated variable interest entities (Note 12) Finance receivables, net - current
$ 530,882 $ 291,444 Other assets$ 3,753 $ 2,420 Finance receivables, net - non-current$ 1,889,472 $ 1,027,179 Restricted cash - current and non-current$ 142,892 $ 63,812 Current portion of long-term debt, net$ 608,987 $ 317,607 Long-term debt, net $
1,585,174
The accompanying notes are integral to the consolidated financial statements.
47 --------------------------------------------------------------------------------
HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Years ended December 31, 2020, 2019 and 2018 (In thousands) 2020 2019 2018 Net cash provided by operating activities (Note 6)$ 1,177,890 $ 868,272 $ 1,205,921 Cash flows from investing activities: Capital expenditures (131,050) (181,440) (213,516) Origination of finance receivables (3,497,486) (3,847,322) (3,752,817) Collections on finance receivables 3,540,289 3,499,717 3,325,669 Purchases of marketable securities - - (10,007) Sales and redemptions of marketable securities - 10,007 - Acquisition of business - (7,000) - Other investing activities 21,464 17,912 (11,598) Net cash used by investing activities (66,783) (508,126) (662,269) Cash flows from financing activities: Proceeds from issuance of medium-term notes 1,396,602 1,203,236 1,591,828 Repayments of medium-term notes (1,400,000) (1,350,000) (877,488) Proceeds from securitization debt 2,064,450 1,021,453 - Repayments of securitization debt (1,041,751) (353,251) (257,869) Borrowings of asset-backed commercial paper 225,187 177,950 509,742 Repayments of asset-backed commercial paper (318,828) (318,006) (212,729) Net increase (decrease) in unsecured commercial paper 444,380 (563,453) (135,356) Deposits 79,947 - - Dividends paid (68,087) (237,221) (245,810) Repurchase of common stock (8,006) (296,520) (390,606) Issuance of common stock under share-based plans 89 3,589 3,525 Net cash provided (used) by financing activities 1,373,983 (712,223) (14,763)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
18,712 (2,305) (15,351)
Net increase (decrease) in cash, cash equivalents and restricted cash
$ 2,503,802
Cash, cash equivalents and restricted cash: Cash, cash equivalents and restricted cash, beginning of period
$ 905,366
2,503,802 (354,382) 513,538
Cash, cash equivalents and restricted cash, end of period
Reconciliation of cash, cash equivalents and restricted cash on the Consolidated balance sheets to the Consolidated statements of cash flows: Cash and cash equivalents$ 3,257,203 $ 833,868 $ 1,203,766 Restricted cash 131,642 64,554 49,275 Restricted cash included in Other long-term assets 20,323 6,944 6,707
Cash, cash equivalents and restricted cash per the Consolidated statements of cash flows
$ 3,409,168
The accompanying notes are integral to the consolidated financial statements.
48 --------------------------------------------------------------------------------
HARLEY-DAVIDSON, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY Years ended December 31, 2020, 2019 and 2018 (In thousands, except share amounts) Accumulated Common Stock Additional Other Issued Paid-in Retained Comprehensive Shares Balance Capital Earnings Loss Treasury Stock Total Balance, December 31, 2017 181,286,547$ 1,813 $ 1,422,808 $ 1,607,570 $ (500,049) $ (687,865) $ 1,844,277 Net income - - - 531,451 - - 531,451 Other comprehensive loss, net of tax (Note 18) - - - - (21,287) - (21,287) Dividends ($1.48 per share) - - - (245,810) - - (245,810) Repurchase of common stock - - - - - (390,606) (390,606) Share-based compensation 644,678 6 36,812 - - 13,082 49,900 Cumulative effect of change in accounting - - - 6,024 - - 6,024 Reclassification of certain tax effects - - - 108,348 (108,348) - - Balance, December 31, 2018 181,931,225 1,819 1,459,620 2,007,583 (629,684) (1,065,389) 1,773,949 Net income - - - 423,635 - - 423,635 Other comprehensive income, net of tax (Note 18) - - - - 92,735 - 92,735 Dividends ($1.50 per share) - - - (237,221) - - (237,221) Repurchase of common stock - - - - - (296,520) (296,520) Share-based compensation 885,311 9 31,384 - - 16,028 47,421 Balance, December 31, 2019 182,816,536 1,828 1,491,004 2,193,997 (536,949) (1,345,881) 1,803,999 Net income - - - 1,298 - - 1,298 Other comprehensive income, net of tax (Note 18) - - - - 53,532 - 53,532 Dividends ($0.44 per share) - - - (68,087) - - (68,087) Repurchase of common stock - - - - - (8,006) (8,006) Share-based compensation 686,990 7 16,702 - - 1,569 18,278 Retirement of treasury stock (15,000,000) (150) - (764,156) - 764,306 - Cumulative effect of change in accounting - - - (78,229) - - (78,229) Balance, December 31, 2020 168,503,526$ 1,685 $ 1,507,706 $ 1,284,823 $ (483,417) $ (588,012) $ 1,722,785
The accompanying notes are integral to the consolidated financial statements.
49 -------------------------------------------------------------------------------- HARLEY-DAVIDSON, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies Principles of Consolidation and Basis of Presentation - The consolidated financial statements include the accounts ofHarley-Davidson, Inc. and its subsidiaries, all of which are wholly-owned (the Company), including the accounts of the group of companies referred to asHarley-Davidson Motor Company (HDMC) andHarley-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 have been eliminated. The Company operates in two reportable segments: Motorcycles and Related Products (Motorcycles) and Financial Services. Substantially all of the Company's international subsidiaries use their respective local currency as their functional currency. Assets and liabilities of international subsidiaries have been translated at period-end exchange rates, and revenues and expenses have been translated using average exchange rates for the period. Monetary assets and liabilities denominated in a currency that is different from an entity's functional currency are remeasured from the transactional currency to the entity's functional currency on a monthly basis. The aggregate transaction gain/(loss) resulting from foreign currency remeasurements was$3.8 million ,$18.0 million , and$(19.9) million for the years endedDecember 31, 2020 , 2019 and 2018, respectively. Use of Estimates - The preparation of financial statements in conformity withU.S. generally accepted accounting principles (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. During the first quarter of 2020, the outbreak of a novel strain of coronavirus (COVID-19) spread throughout the world, and it was recognized as a pandemic inMarch 2020 . The COVID-19 pandemic has restricted the level of economic activity in theU.S. and around the world and the full extent of its impact is not yet known. The Company's financial results for the period endingDecember 31, 2020 reflect the impact of the COVID-19 pandemic, the most significant of which relates to the allowance for credit losses as discussed in Note 7. Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents. Accounts Receivable, net - The Company's motorcycles and related products are sold to independent dealers outside theU.S. andCanada generally on open account and the resulting receivables are included in Accounts receivable, net on the Consolidated balance sheets. The allowance for doubtful accounts deducted from total accounts receivable was$3.7 million and$4.9 million as ofDecember 31, 2020 and 2019, respectively. The Company's evaluation of the allowance for doubtful accounts includes a review to identify non-performing accounts which are evaluated individually. The remaining accounts receivable balances are evaluated in the aggregate based on an aging analysis. The allowance for doubtful accounts is based on factors including past loss experience, the value of collateral, and if applicable, reasonable and supportable economic forecasts. Accounts receivable are written down once management determines that the specific customer does not have the ability to repay the balance in full. The Company's sales of motorcycles and related products in theU.S. andCanada are financed through HDFS by the purchasing independent dealers and the related receivables are included in Finance receivables, net on the Consolidated balance sheets. Inventories, net - Substantially all inventories located in theU.S. are valued using the last-in, first-out (LIFO) method. Other inventories totaling$221.9 million and$326.5 million atDecember 31, 2020 and 2019, respectively, are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Repossessed Inventory - Repossessed inventory representing recovered collateral on impaired finance receivables is recorded at the lower of cost or net realizable value through a fair value remeasurement. In the period during which the collateral is repossessed, the related finance receivable is adjusted to the fair value of the collateral through a change to the allowance for credit losses and reclassified to repossessed inventory, included in Other current assets on the Consolidated balance sheets. 50 -------------------------------------------------------------------------------- Property, Plant and Equipment, net - Property, plant and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of each class of property, plant and equipment generally consist of 30 years for buildings, 7 years for building and land improvements, 3 to 10 years for machinery and equipment, and 3 to 7 years for software. Accelerated methods of depreciation are used for income tax purposes.Goodwill -Goodwill represents the excess of acquisition cost over the fair value of the net assets purchased.Goodwill is tested for impairment, based on financial data related to the reporting unit to which it has been assigned, at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value, limited to the total goodwill allocated to the reporting unit. During 2020 and 2019, the Company tested its goodwill balances for impairment and no adjustments were recorded to goodwill as a result of those reviews. Long-lived Assets - The Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset for assets to be held and used. The Company also reviews the useful life of its long-lived assets when events and circumstances indicate that the actual useful life may be shorter than originally estimated. In the event that the actual useful life is deemed to be shorter than the original useful life, depreciation is adjusted prospectively so that the remaining book value is depreciated over the revised useful life. Refer to Note 3 for additional details surrounding the Company's restructuring activities impacting long-lived assets. Asset groups classified as held for sale are measured at the lower of carrying amount or fair value less cost to sell, and a loss is recognized for any initial adjustment required to reduce the carrying amount to the fair value less cost to sell in the period the held for sale criteria are met. The fair value less cost to sell must be assessed each reporting period that the asset group remains classified as held for sale. Gains or losses not previously recognized resulting from the sale of an asset group will be recognized on the date of sale. Research and Development Expenses - Expenditures for research activities relating to product development and improvements are charged against income as incurred and included within Selling, administrative and engineering expense on the Consolidated statements of operations. Research and development expenses were$202.4 million ,$216.5 million and$191.6 million for 2020, 2019 and 2018, respectively. Advertising Costs - The Company expenses the production cost of advertising the first time the advertising takes place within Selling, administrative and engineering expense. Advertising costs relate to the Company's efforts to promote its products and brands through the use of media and other means. During 2020, 2019 and 2018, the Company incurred$134.6 million ,$171.4 million and$144.3 million in advertising costs, respectively. Shipping and Handling Costs - The Company classifies shipping and handling costs as a component of Motorcycles and Related Products cost of goods sold. New Accounting Standards Accounting Standards Recently Adopted InJuly 2016 , theFinancial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 changes how a company recognizes expected credit losses on financial instruments carried at amortized cost basis, by requiring recognition of the full lifetime expected credit losses upon initial recognition of the financial instrument. ASU 2016-13 replaced the incurred loss methodology. The Company adopted ASU 2016-13 onJanuary 1, 2020 using a modified retrospective approach for financial instruments measured at amortized cost. 51 -------------------------------------------------------------------------------- OnJanuary 1, 2020 , the Company remeasured the allowance for credit losses on financial instruments under the new accounting standard. The difference was recorded as a cumulative effect adjustment to Retained earnings, net of income taxes. The initial adoption of ASU 2016-13 did not impact the Company's Consolidated statements of operations. The effect of adopting ASU 2016-13 on the Company's Consolidated balance sheets was as follows (in thousands): Effect of December 31, 2019 Adoption January 1, 2020 ASSETS Finance receivables(a)$ 7,572,947 $ -$ 7,572,947 Allowance for credit losses on finance receivables(a) $ (198,581)$ (100,604) $ (299,185) Deferred income taxes $ 101,204$ 22,484 $ 123,688 LIABILITIES AND SHAREHOLDERS' EQUITY Accrued liabilities $ 582,288 $ 109$ 582,397 Retained earnings$ 2,193,997 $ (78,229) $ 2,115,768 (a)Reported as Finance receivables, net on the Consolidated balance sheets, allocated between current and non-current Financial Statement Comparability to Prior Periods - Beginning in 2020, under ASU 2016-13, the Company recognizes full lifetime expected credit losses upon initial recognition of the associated financial instrument carried at amortized cost basis. Under ASU 2016-13, changes in the allowance for credit losses and the impact on the provision for credit losses will be affected by the size and composition of the Company's finance receivables portfolios, economic conditions, reasonable and supportable forecasts, and other appropriate factors at each reporting period. Prior periods have not been restated and will continue to be reported in accordance with the previously applicableU.S. GAAP, which generally required that a credit loss be incurred before it was recognized. As such, prior periods will not be comparable to the current period. Additional information on the Company's finance receivables is discussed further in Note 7. InJanuary 2017 , the FASB issued ASU No. 2017-04 Intangibles -Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplified the subsequent measurement of goodwill by eliminating the requirement to calculate the implied fair value of goodwill. Rather, the goodwill impairment is calculated by comparing the fair value of a reporting unit to its carrying value, and an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value, limited to the total goodwill allocated to the reporting unit. All reporting units apply the same impairment test under the new standard. The Company adopted ASU 2017-04 onJanuary 1, 2020 on a prospective basis. The adoption of ASU 2017-04 did not have an effect on the Company's consolidated financial statements. InAugust 2018 , the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). ASU 2018-13 amended ASC 820 to eliminate, modify, and add certain disclosure requirements for fair value measurements. The amendments were required to be applied retrospectively, with the exception of a few disclosure additions, which were to be applied on a prospective basis. The Company adopted ASC 2018-13 onJanuary 1, 2020 . The adoption of ASU 2018-13 did not have a material impact on the Company's disclosures. InAugust 2018 , the FASB issued ASU No. 2018-15, Intangibles -Goodwill and Other -Internal-Use Software (Subtopic 350-40) (ASU 2018-15). The new guidance requires a customer in a cloud computing arrangement that is a service contract to follow the existing internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. The Company adopted ASU 2018-15 onJanuary 1, 2020 on a prospective basis. The adoption of ASU 2018-15 did not have a material impact on the Company's consolidated financial statements. Accounting Standards Not Yet Adopted InDecember 2019 , the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU 2019-12). The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning afterDecember 15, 2020 and for interim periods within those fiscal years. Early adoption is permitted. The Company does not expect the adoption of ASU 2019-12 to have a material impact on its consolidated financial statements. 52 -------------------------------------------------------------------------------- 2. 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 for the years endedDecember 31 , (in thousands): 2020 2019 Motorcycles and Related Products: Motorcycles$ 2,350,407 $ 3,538,269 Parts & Accessories 659,634 713,400 General Merchandise 186,068 237,566 Licensing 29,750 35,917 Other 38,195 47,526 3,264,054 4,572,678 Financial Services: Interest income 682,517 678,205 Other 107,806 110,906 790,323 789,111$ 4,054,377 $ 5,361,789 Motorcycles and Related Products Motorcycles, Parts & Accessories, and General Merchandise - Revenues from the sale of motorcycles, Parts & Accessories (P&A), and General Merchandise are recorded when control is transferred to the customer, generally at the time of shipment. The sale of products to independent dealers outside theU.S. andCanada is generally on open account with terms that approximate 30-120 days and the resulting receivables are included in Accounts receivable, net on the Consolidated balance sheets. The sale of products to independent dealers in theU.S. andCanada is financed through HDFS and the related receivables are included in Finance receivables, net on the Consolidated balance sheets. The Company offers sales incentive programs to independent dealers and retail customers designed to promote the sale of motorcycles, P&A, and General Merchandise. The Company estimates its variable consideration sold under its sales incentive programs using the expected value method. The Company accounts for consideration payable to a customer as part of its sales incentives as a reduction of revenue, which is accrued at the later of the date the related sale is recorded or the date the incentive program is both approved and communicated. The Company offers the right to return eligible P&A and General Merchandise. When the Company offers a right to return, it estimates returns based on an analysis of historical trends and records revenue on the initial sale only in the amount that it expects to be entitled. The remaining consideration is deferred in a refund liability account. The refund liability is remeasured for changes in the estimate at each reporting date with a corresponding adjustment to revenue. Variable consideration related to sales incentives and rights to return is adjusted at the earliest of when the amount of consideration the Company expects to receive changes or the consideration becomes fixed. Adjustments for variable consideration related to previously recognized sales were not material during 2020 and 2019. Shipping and handling costs associated with freight after control of a product has transferred to a customer are accounted for as fulfillment costs. The Company accrues for the shipping and handling in the same period that the related revenue is recognized. The Company offers standard, limited warranties on its motorcycles and P&A. These warranties provide assurance that the product will function as expected and are not separate performance obligations. The Company accounts for estimated warranty costs as a liability when control of the product transfers to the customer. 53 -------------------------------------------------------------------------------- Licensing - The Company licenses the Harley-Davidson name and other trademarks owned by the Company and collects royalties from its licensees. The trademark licenses are considered symbolic intellectual property, which grant the licensees a right to access the Company's intellectual property. The Company satisfies its performance obligation over the license period, as the Company fulfills its promise to grant the licensees rights to use and benefit from the intellectual property as well as maintain the intellectual property. Payment is typically due within thirty days of the end of each quarter for the royalties earned in that quarter. Revenue, in the form of sales-based royalties, is recognized when the licensees' subsequent sales occur. The Company applies the practical expedient in ASC Topic 606, Revenue from Contracts with Customers, to recognize licensing revenues in the amount that the Company has the right to invoice because the royalties due each period correspond directly with the value of the Company's performance to date. Revenue will be recognized over the remaining contract terms which range up to 2 years. Other - Other revenue consists primarily of revenue from Harley Owners Group® (H.O.G.) membership sales, motorcycle rental commissions, museum admissions and events, and other miscellaneous products and services. Financial Services Interest Income - Interest income on finance receivables is recorded as earned and is based on the average outstanding daily balance for wholesale and retail receivables. Accrued and uncollected interest is classified with Finance receivables, net. Certain loan origination costs related to finance receivables, including payments made to dealers for certain retail loans, are deferred and recorded within Finance receivables, net and amortized over the life of the contract. Other Income - Other income consists primarily of insurance and licensing revenues. HDFS works with certain unaffiliated insurance companies to offer motorcycle insurance and protection products through most Harley-Davidson independent dealers in theU.S. andCanada . HDFS also works with third-party financial institutions that issue credit cards or offer other financial products bearing the Harley-Davidson brand in theU.S. and internationally. For many of these contracts, the Company grants temporary rights to use the licensed trademarks owned by the Company and collects royalties from its customers in connection with sales of their products. The trademark licenses are considered symbolic intellectual property, which grant the customer a right to access the intellectual property. The Company satisfies its performance obligation over the license period, as it fulfills its promise to grant the customer rights to use and benefit from the intellectual property as well as maintain the intellectual property. Royalty and profit sharing amounts are received either quarterly or per annum, based upon the contract. Revenue, in the form of sales-based royalties, is recognized when the customers' subsequent sales occur. Revenue will be recognized over the remaining contract terms which range up to 5 years. The Company is the primary obligor for certain other insurance related contracts and, as a result, revenue is recognized over the life of the contract as the Company fulfills its performance obligation. Contract Liabilities 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 H.O.G. memberships and extended service plan contracts. 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 as ofDecember 31 , (in thousands): 2020 2019 Balance, beginning of period$ 29,745 $ 29,055 Balance, end of period 36,614 29,745 Previously deferred revenue recognized as revenue in 2020 and 2019 was$19.7 million and$26.3 million , respectively. The Company expects to recognize approximately$15.4 million of the remaining unearned revenue in 2021 and$21.2 million thereafter. 3. Restructuring Activities Expenses associated with the Company's restructuring activities are included in Restructuring expense on the Consolidated statements of operations. 2020 Restructuring Activities - In 2020, the Company initiated restructuring activities including a workforce reduction, the termination of certain current and future products, facility changes, optimizing its global independent dealer network, exiting certain international markets, and discontinuing its sales and manufacturing operations inIndia . The workforce reduction resulted in the termination of approximately 500 employees. In addition, theIndia action will result in the termination of approximately 70 employees. 54 -------------------------------------------------------------------------------- Restructuring expenses incurred related to the 2020 restructuring activities were$130.0 million , including$119.1 million in the Motorcycles segment and$10.9 million in the Financial Services segment. The Company expects remaining restructuring expenses related to the 2020 restructuring activities to be approximately$20 million , which is expected to be recognized in 2021 when the actions are completed. The total estimated restructuring activities of approximately$150 million includes approximately$139 million and$11 million expected to be in incurred in the Motorcycles and Financial Services segments, respectively. Total expected restructuring expenses under the 2020 restructuring activities include approximately$30 million related to employee termination benefits,$90 million related to contract termination and other costs and$30 million related to non-current asset adjustments, including accelerated depreciation and other adjustments to the carrying value of non-current assets. Changes in accrued restructuring expenses for the 2020 restructuring activities, which are included in Accrued liabilities on the Consolidated balance sheets, were as follows as ofDecember 31 , (in thousands): 2020 Employee Contract Non-Current Termination Terminations Asset Benefits & Other Adjustments Total Balance, beginning of period $ - $ - $ - $ - Restructuring expense 28,913 70,894 30,202 130,009 Utilized - cash (21,494) (54,773) - (76,267) Utilized - non cash - - (30,202) (30,202) Foreign currency changes 305 75 - 380 Balance, end of period $ 7,724$ 16,196 $ -$ 23,920 2018 Restructuring Activities - In 2018, the Company initiated a plan to further improve its manufacturing operations and cost structure by commencing a multi-year manufacturing optimization plan which includes the consolidation of its motorcycle assembly plant inKansas City, Missouri , into its plant inYork ,Pennsylvania , and the closure of its wheel operations inAdelaide, Australia (Manufacturing Optimization Plan). The consolidation of operations resulted in the elimination of approximately 800 jobs at theKansas City facility and the addition of approximately 450 jobs at theYork facility through 2019. TheAdelaide facility closure resulted in the elimination of approximately 90 jobs. ThroughDecember 31, 2019 the Motorcycles segment incurred cumulative restructuring expenses of$122.2 million and other costs related to temporary inefficiencies of$23.2 million under the Manufacturing Optimization Plan. The Manufacturing Optimization Plan was completed in 2019. In 2018, the Company initiated a reorganization of its workforce (Reorganization Plan), which was completed in 2019. As a result, approximately 70 employees left the Company on an involuntary basis. Restructuring expenses for the 2018 Restructuring Activities were limited to the Motorcycles segment and were recorded during 2019 and 2018. Changes in accrued restructuring expenses for the 2018 restructuring activities, which are included in Accrued liabilities on the Consolidated balance sheets during 2019 and 2018 were as follows (in thousands). The changes in accrued restructuring expenses during 2020 related to the 2018 restructuring activities were immaterial. 2019 Manufacturing Optimization Plan Reorganization Plan Employee Termination Accelerated Employee Termination Benefits Depreciation Other Total Benefits Total Balance, beginning of period $ 24,958 $ -$ 79 $ 25,037 $ 3,461$ 28,498 Restructuring expense 15 14,684 17,971 32,670 (317) 32,353 Utilized - cash (24,102) - (16,950) (41,052) (3,118) (44,170) Utilized - non cash - (14,684) (1,094) (15,778) - (15,778) Foreign currency changes (6) - (4) (10) (26) (36) Balance, end of period $ 865 $ -$ 2 $ 867 $ -$ 867 55
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2018 Manufacturing Optimization Plan Reorganization Plan Employee Termination Accelerated Employee Termination Benefits Depreciation Other Total Benefits Total Balance, beginning of period $ - $ - $ - $ - $ - $ - Restructuring expense 38,666 34,654 16,182 89,502 3,899 93,401 Utilized - cash (13,060) - (16,095) (29,155) (444) (29,599) Utilized - non cash - (34,654) - (34,654) - (34,654) Foreign currency changes (648) - (8) (656) 6 (650) Balance, end of period $ 24,958 $ -$ 79 $ 25,037 $ 3,461$ 28,498 The Company incurred incremental Motorcycles and Related Products cost of goods sold due to temporary inefficiencies resulting from implementing the Manufacturing Optimization Plan during 2019 and 2018 of$10.3 million and$12.9 million , respectively. 4. Income Taxes Income tax (benefit) provision for the years endedDecember 31 , consists of the following (in thousands): 2020 2019 2018 Current: Federal$ 4,877 $ 82,484 $ 136,202 State 2,614 6,421 23,134 Foreign 19,560 23,328 29,823 27,051 112,233 189,159 Deferred: Federal (30,779) 18,760 (23,181) State (11,579) 402 (6,787) Foreign (1,721) 2,385 (4,013) (44,079) 21,547 (33,981)$ (17,028) $ 133,780 $ 155,178
The components of (Loss) income before income taxes for the years ended
2020 2019 2018 Domestic$ (81,522) $ 465,798 $ 593,099 Foreign 65,792 91,617 93,530$ (15,730) $ 557,415 $ 686,629 56
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Income tax (benefit) provision differs from the amount that would be provided by
applying the statutory
2020 2019 2018 (Benefit) provision at statutory rate$ (3,303) $ 117,057 $ 144,192 State taxes, net of federal benefit 822 14,165 18,086 Foreign rate differential 60 1,665 2,712 Foreign derived intangible income - (3,108) (8,400) Research and development credit (8,442) (8,200) (7,400) Unrecognized tax benefits including interest and penalties (8,567) 289 (4,121) Valuation allowance adjustments 9,675 8,070 908 State credits (13,106) (4,704) - Deferred tax balance remeasurement for rate change - - (8,098) Territorial tax - - 9,556 Global intangible low-taxed income 1,480 1,113 2,437 Adjustments for previously accrued taxes (4,951) (1,755) (7,196) Rate differential on intercompany transfers - - 6,013 Executive compensation limitation 2,543 2,620 3,171 Other foreign inclusions 4,415 4,202 1,787 Other 2,346 2,366 1,531 Income tax (benefit) provision$ (17,028) $
133,780
The 2017 Tax Cuts and Jobs Act subjectsU.S. shareholders to current tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries for which a company can elect to either recognize deferred taxes or to provide tax expense in the year incurred. The Company has elected to account for GILTI in the year the tax is incurred. The principal components of the Company's deferred income tax assets and liabilities as ofDecember 31 , include the following (in thousands): 2020
2019
Deferred income tax assets: Accruals not yet tax deductible$ 142,100 $
95,746
Pension and postretirement healthcare plan obligations 6,499
17,685
Stock compensation 9,619
11,867
Net operating loss and credit carryforwards 55,857 45,279 Valuation allowance (38,072) (29,024) Other 78,051 64,833 254,054 206,386 Deferred income tax liabilities: Depreciation, tax in excess of book (74,579) (83,477) Other (29,544) (29,840) (104,123) (113,317)$ 149,931 $ 93,069 The Company reviews its deferred income tax asset valuation allowances on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred income tax asset is considered, along with any positive or negative evidence including tax law changes. Since future financial results and tax law may differ from previous estimates, periodic adjustments to the Company's valuation allowances may be necessary. 57 --------------------------------------------------------------------------------
The Company's gross state operating loss carryforwards were as follows at
Year of Expiration 2020 2031$ 252,142 2033 49 2034 2,455 2035 7,800 2038 3,992 2039 11,710 2040 29,836 Indefinite 9,449$ 317,433 The Company also hadWisconsin research and development credit carryforwards of$33.8 million atDecember 31, 2020 , expiring in 2024-2035. AtDecember 31, 2020 , the Company had a deferred tax asset of$45.9 million related to its state operating loss andWisconsin research and development credit carryforwards and a deferred tax asset of$10.0 million related to foreign net operating losses. The Company's valuation allowance was$38.1 million atDecember 31, 2020 and included$17.7 million related to state operating loss andWisconsin research and development credit carryforwards,$6.5 million related to foreign net operating losses and$13.9 million related to other deferred tax assets. The increase in the valuation allowance from prior year included$8.0 million related to state operating loss andWisconsin research and development credit carryforwards and$1.0 million related to foreign net operating losses. The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax (benefit) provision. Changes in the Company's gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands): 2020 2019 Unrecognized tax benefits, beginning of period$ 60,112
1,649 1,067
Decrease in unrecognized tax benefits for tax positions taken in a prior period
(12,560) (5,608)
Increase in unrecognized tax benefits for tax positions taken in the current period
3,092 4,576 Statute lapses - (325) Settlements with taxing authorities (1,696) (1,009) Unrecognized tax benefits, end of period$ 50,597
The amount of unrecognized tax benefits as ofDecember 31, 2020 and 2019 that, if recognized, would affect the effective tax rate was$43.8 million and$53.1 million , respectively. The total gross amount of benefit related to interest and penalties associated with unrecognized tax benefits recognized during 2020, 2019 and 2018 in the Consolidated statements of operations was$2.1 million ,$0.1 million and$3.2 million , respectively. The total gross amount of interest and penalties associated with unrecognized tax benefits recognized atDecember 31, 2020 and 2019 in the Consolidated balance sheets was$25.5 million and$27.6 million , respectively. The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year endingDecember 31, 2021 . However, the Company is under regular audit by tax authorities. The Company believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year. The Company or one of its subsidiaries files income tax returns in theU.S. federal andWisconsin state jurisdictions and various other state and foreign jurisdictions. The Company is no longer subject to income tax examinations forWisconsin state income taxes before 2016 or forU.S. federal income taxes before 2017. 58 -------------------------------------------------------------------------------- 5. Capital Stock and Earnings Per Share Capital Stock - The Company is authorized to issue 2,000,000 shares of preferred stock of$1.00 par value, none of which is outstanding. The Company's common stock has a par value of$0.01 per share. During 2020, the Company retired 15.0 million shares of its treasury stock. Share information regarding the Company's common stock atDecember 31 , was as follows: 2020 2019 Common stock shares: Authorized 800,000,000 800,000,000 Issued 168,503,526 182,816,536 Outstanding 152,930,740 152,468,442 Treasury stock shares 15,572,786 30,348,094 There were no discretionary share repurchases during the year endedDecember 31, 2020 . Discretionary share repurchases during the years endedDecember 31, 2019 and 2018 were$286.7 million or 8.2 million shares and$382.0 million or 9.2 million shares, respectively. Share repurchases of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units (RSUs) were$8.0 million or 0.3 million shares,$9.8 million or 0.3 million shares, and$8.6 million or 0.2 million shares during the years endedDecember 31, 2020 , 2019 and 2018, respectively, discussed further in Note 17. The Company paid cash dividends of$0.44 ,$1.50 , and$1.48 per share during the years endedDecember 31, 2020 , 2019, and 2018, respectively. Earnings Per Share - The computation of basic and diluted earnings per share for the years endedDecember 31 , was as follows (in thousands except per share amounts): 2020 2019 2018 Net income$ 1,298 $ 423,635 $ 531,451 Basic weighted-average shares outstanding 153,186 157,054 165,672 Effect of dilutive securities - employee stock compensation plan 722 750 832 Diluted weighted-average shares outstanding 153,908 157,804 166,504 Earnings per share: Basic$ 0.01 $ 2.70 $ 3.21 Diluted$ 0.01 $ 2.68 $ 3.19 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 1.4 million, 1.1 million and 1.1 million shares during 2020, 2019 and 2018, respectively. 6. Additional Balance Sheet and Cash Flow Information Investments in marketable securities consisted of the following atDecember 31 , (in thousands): 2020 2019 Mutual funds$ 52,061 $ 52,575
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.
59 --------------------------------------------------------------------------------
Inventories, net consisted of the following as of
2020
2019
Raw materials and work in process$ 211,979 $ 235,433 Motorcycle finished goods 281,132
280,306
Parts & Accessories and General Merchandise 84,469
144,258
Inventory at lower of FIFO cost or net realizable value 577,580
659,997 Excess of FIFO over LIFO cost (54,083) (56,426)$ 523,497 $ 603,571 Inventory obsolescence reserves deducted from FIFO cost were$72.0 million and$49.3 million as ofDecember 31, 2020 and 2019, respectively. Property, plant and equipment, net consisted of the following as ofDecember 31 , (in thousands): 2020 2019 Land and related improvements$ 69,518 $ 75,798 Buildings and related improvements 428,171 507,178 Machinery and equipment 1,577,337 1,609,582 Software 759,675 750,978 Construction in progress 188,823 148,805 3,023,524 3,092,341 Accumulated depreciation (2,279,740) (2,244,959)$ 743,784 $ 847,382 Software, net of accumulated amortization, included in Property, plant and equipment, net, was$100.7 million and$138.9 million as ofDecember 31, 2020 and 2019, respectively. Accrued liabilities consisted of the following as ofDecember 31 , (in thousands): 2020 2019 Payroll, employee benefits and related expenses$ 107,511 $ 113,621 Sales incentive programs 52,820 73,354 Warranty and recalls 44,415 57,068 Accrued interest 65,590 49,213 Tax-related accruals 24,238 29,871 Leases 17,081 19,013 Fair value of derivative financial instruments 25,521 13,934 Restructuring 23,920 867 Other 196,118 225,347$ 557,214 $ 582,288 Deposits - During 2020, HDFS began offering brokered certificates of deposit to customers indirectly through contractual arrangements with third-party banks and/or securities brokerage firms through its bank subsidiary. AtDecember 31, 2020 , the Company had$80.0 million , net of fees, of short-term interest-bearing brokered certificates of deposit outstanding. Each separate brokered certificate of deposit is issued under a master certificate and, as such, all outstanding brokered certificates of deposit are considered below theFederal Deposit Insurance Corporation insurance coverage limits. 60 --------------------------------------------------------------------------------
Operating Cash Flow - The reconciliation of Net income to Net cash provided by
operating activities for the years ended
2020 2019 2018 Cash flows from operating activities: Net income$ 1,298 $ 423,635 $ 531,451 Adjustments to reconcile Net income to Net cash provided by operating activities: Depreciation and amortization 185,715 232,537 264,863 Amortization of deferred loan origination costs 71,142 76,326 81,315 Amortization of financing origination fees 14,435 9,823 8,367 Provision for long-term employee benefits 40,833 13,344 36,481 Employee benefit plan contributions and payments (20,722) (13,256) (10,544) Stock compensation expense 23,494 33,733 35,539
Net change in wholesale finance receivables related to sales
531,701 (5,822) (56,538) Provision for credit losses 181,870 134,536 106,870 Deferred income taxes (44,079) 21,547 (33,981) Other, net 13,826 298 37,554 Changes in current assets and liabilities: Accounts receivable, net 127,657 44,902 9,143 Finance receivables - accrued interest and other 7,418 (11,119) 773 Inventories, net 80,858 (47,576) (31,059) Accounts payable and accrued liabilities (43,087) (18,462) 196,192 Derivative financial instruments (3,481) 1,936 473 Other 9,012 (28,110) 29,022 1,176,592 444,637 674,470 Net cash provided by operating activities$ 1,177,890 $
868,272
Cash paid during the years endedDecember 31 , for interest and income taxes was as follows (in thousands): 2020 2019 2018 Interest$ 245,961 $ 229,678 $ 207,484 Income taxes$ 30,675 $ 149,828 $ 149,436 Interest paid represents interest payments of HDFS and interest payments of the Company, included in Financial Services interest expense and Interest expense on the Consolidated statements of operations. 7. Finance Receivables Finance receivables include both retail and wholesale finance receivables, including amounts held by consolidated VIEs. Finance receivables are recorded in the financial statements at amortized cost net of an allowance for credit losses. The Company provides retail financial services to customers of its independent dealers in theU.S. andCanada . 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 independent 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. As ofDecember 31, 2020 and 2019, approximately 11% of gross outstanding retail finance receivables were originated inTexas ; there were no other states that accounted for more than 10% of gross outstanding retail finance receivables. The Company offers wholesale financing to its independent dealers in theU.S. andCanada . 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. 61 --------------------------------------------------------------------------------
Finance receivables, net at
2020 2019 2018 2017 2016 Retail finance receivables: United States$ 6,128,269 $ 6,180,236 $ 6,103,378 $ 5,901,002 $ 5,769,410 Canada 215,926 236,192 224,823 239,598 212,801 6,344,195 6,416,428 6,328,201 6,140,600 5,982,211 Wholesale finance receivables: United States 459,495 1,067,880 1,007,956 939,621 961,150 Canada 30,254 88,639 75,659 77,336 65,440 489,749 1,156,519 1,083,615 1,016,957 1,026,590 6,833,944 7,572,947 7,411,816 7,157,557 7,008,801 Allowance for credit losses (390,936) (198,581) (189,885) (192,471) (173,343)$ 6,443,008 $ 7,374,366 $ 7,221,931 $ 6,965,086 $ 6,835,458 Approved but unfunded retail finance loans totaled$134.9 million and$160.4 million atDecember 31, 2020 and 2019, respectively. Unused lines of credit extended to the Company's wholesale finance customers totaled$1.64 billion and$1.14 billion atDecember 31, 2020 and 2019, respectively. Wholesale finance receivables are generally contractually due within one year. As ofDecember 31, 2020 , contractual maturities of total finance receivables were as follows (in thousands): United States Canada Total 2021$ 1,505,981 $ 76,190 $ 1,582,171 2022 1,194,078 49,038 1,243,116 2023 1,340,552 53,037 1,393,589 2024 1,465,470 57,515 1,522,985 2025 1,001,327 10,400 1,011,727 Thereafter 80,356 - 80,356$ 6,587,764 $ 246,180 $ 6,833,944 OnJanuary 1, 2020 , the Company adopted ASU 2016-13, which requires an entity to recognize expected lifetime losses on finance receivables upon origination. The allowance for credit losses as ofDecember 31, 2020 represents the Company's estimate of lifetime losses for its finance receivables. Prior to the adoption of ASU 2016-13, the Company maintained an allowance for credit losses based on the Company's estimate of probable losses inherent in its finance receivables as of the balance sheet date. Under ASU 2016-13, 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. Based on differences in the nature of the finance receivables and the underlying methodology for calculating the allowance for loan 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. Prior to the adoption of ASU 2016-13, the Company's investment in finance receivables included the same components as the amortized cost under the new accounting guidance. 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. For periods afterJanuary 1, 2020 , 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. For periods prior toJanuary 1, 2020 , the Company performed a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilized 62 -------------------------------------------------------------------------------- loss forecast models which considered 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. 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. For periods afterJanuary 1, 2020 , 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, reasonable and supportable economic forecasts, and the value of the underlying collateral and expected recoveries. For periods prior toJanuary 1, 2020 , the related allowance for credit losses was 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. 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. As part of theJanuary 1, 2020 adoption of ASU 2016-13, the Company expected to be operating in a negative economic environment throughout 2020, and the Company had incorporated the potential for a recession in 2020 into its economic forecast. However, as a result of the COVID-19 pandemic, the Company's outlook on future economic conditions worsened throughout the year and significant uncertainty surrounding future economic outcomes remains. As such, the Company's economic outlook at the end of 2020 included a heavy emphasis on pessimistic economic trend assumptions as the COVID-19 pandemic continues to restrain theU.S. economy. 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 balance. These factors include motorcycle recovery value considerations, delinquency adjustments and specific problem loan trends. 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 management'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. The allowance for credit losses on finance receivables is comprised of individual components relating to wholesale and retail finance receivables. Changes in the allowance for credit losses on finance receivables by portfolio for the year endedDecember 31 , were as follows (in thousands): 2020 Retail Wholesale Total Balance, beginning of period$ 188,501 $ 10,080 $ 198,581 Cumulative effect of change in accounting(a) 95,558 5,046 100,604 Provision for credit losses 175,225 6,645 181,870 Charge-offs (137,371) (2,573) (139,944) Recoveries 49,825 - 49,825 Balance, end of period$ 371,738 $ 19,198 $ 390,936 2019 Retail Wholesale Total Balance, beginning of period$ 182,098 $ 7,787 $ 189,885 Provision for credit losses 132,243 2,293 134,536 Charge-offs (173,358) - (173,358) Recoveries 47,518 - 47,518 Balance, end of period$ 188,501 $ 10,080 $ 198,581 63
--------------------------------------------------------------------------------
2018 Retail Wholesale Total Balance, beginning of period$ 186,254 $ 6,217 $ 192,471 Provision for credit losses 105,292 1,578 106,870 Charge-offs (154,433) (8) (154,441) Recoveries 44,985 - 44,985 Balance, end of period$ 182,098 $ 7,787 $ 189,885 (a)OnJanuary 1, 2020 , the Company adopted ASU 2016-13 and increased the allowance for loan loss through Retained earnings, net of income taxes, to establish an allowance that represents expected lifetime credit losses on the finance receivable portfolios at date of adoption. 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'sU.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 theU.S. and Canadian retail loans, the Company's credit quality indicators vary for the two portfolios. ForU.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'sU.S. and Canadian retail finance receivables by vintage and credit quality indicator, atDecember 31, 2020 , was as follows (in thousands): 2020 2019 2018 2017 2016 2015 & Prior Total U.S. Retail: Super prime$ 822,631 $ 575,977 $ 355,529 $ 165,436 $ 71,360 $ 29,181 $ 2,020,114 Prime 1,133,637 794,058 508,713 293,358 156,688 77,046 2,963,500 Sub-prime 435,875 295,403 177,598 111,163 72,556 52,060 1,144,655 2,392,143 1,665,438 1,041,840 569,957 300,604 158,287 6,128,269 Canadian Retail: Super prime 53,465 48,692 28,581 13,818 5,018 2,011 151,585 Prime 18,568 14,257 10,269 6,727 3,198 2,025 55,044 Sub-prime 3,172 2,498 1,560 1,095 607 365 9,297 75,205 65,447 40,410 21,640 8,823 4,401 215,926$ 2,467,348 $ 1,730,885 $ 1,082,250 $ 591,597 $ 309,427 $ 162,688
Prior to the adoption of ASU 2016-13, retail loans with a FICO score of 640 or above at origination were generally considered prime, and loans with a FICO score below 640 were generally considered sub-prime. These credit quality indicators were determined at the time of loan origination and were not updated subsequent to the loan origination date. The recorded investment in retail finance receivables, by credit quality indicator atDecember 31 , was as follows (in thousands): 2019 Prime$ 5,278,093 Sub-prime 1,138,335$ 6,416,428 64
-------------------------------------------------------------------------------- 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 on a quarterly basis. The amortized cost of wholesale financial receivables, by vintage and credit quality indicator, was as follows as ofDecember 31, 2020 (in thousands): 2020 2019 2018 2017 2016 2015 & Prior Total Non-Performing $ - $ - $ - $ - $ - $ - $ - Doubtful - - - - - - - Substandard - - - - - - - Special Mention 658 365 31 - - - 1,054 Medium Risk 1,925 242 - - - - 2,167 Low Risk 388,568 71,441 13,412 7,887 2,297 2,923 486,528$ 391,151 $ 72,048 $ 13,443 $ 7,887 $ 2,297 $ 2,923 $ 489,749 Dealer risk rating categories prior to the adoption of ASU 2016-13 were consistent with the current risk rating categories with the exception of the Non-Performing category for dealers identified as those in which foreclosure is probable, which was established in connection with theJanuary 1, 2020 adoption. The recorded investment in wholesale finance receivables, by internal credit quality indicator atDecember 31 , was as follows (in thousands): 2019 Doubtful$ 11,664 Substandard 6,122 Special Mention 16,125 Medium Risk 16,800 Low Risk 1,105,808$ 1,156,519 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 interest income when the account is charged-off. The Company reversed$19.1 million of accrued interest against interest income during the year endedDecember 31, 2020 . 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 ASU 2016-13 to exclude accrued interest from its allowance for credit losses. Accordingly, as ofDecember 31, 2020 and 2019, all retail finance receivables were accounted for as interest-earning receivables, of which$33.1 million and$48.0 million , respectively, were 90 days or more past due. 65 -------------------------------------------------------------------------------- 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. The Company reversed$0.4 million of accrued interest related to the charge-off of Non-Performing dealer loans during the year endedDecember 31, 2020 . There were no dealers on non-accrual status atDecember 31, 2020 . The recorded investment of non-accrual status wholesale finance receivables atDecember 31, 2019 was$5.0 million , and of this,$2.6 million were 90 days or more past due. The aging analysis of finance receivables atDecember 31 , was as follows (in thousands): 2020 Greater than Total 31-60 Days 61-90 Days 90 Days Total Finance Current Past Due Past Due Past Due Past Due Receivables
Retail finance receivables
39,933
166 23 4 193 489,749$ 6,653,925 $ 106,984 $ 39,956 $ 33,079 $ 180,019 $ 6,833,944 2019 Greater than Total 31-60 Days 61-90 Days 90 Days Total Finance Current Past Due Past Due Past Due Past Due Receivables
Retail finance receivables
53,995
1,145 384 2,574 4,103 1,156,519$ 7,324,346 $ 143,624 $ 54,379 $ 50,598 $ 248,601 $ 7,572,947 The recorded investment of retail and wholesale finance receivables, excluding non-accrual status finance receivables, that were contractually past due 90 days or more atDecember 31 , for the past five years was as follows (in thousands): 2020 2019 2018 2017 2016 United States$ 32,599 $ 47,138 $ 41,285 $ 39,051 $ 39,399 Canada 480 888 1,051 1,025 1,326$ 33,079 $ 48,026 $ 42,336 $ 40,076 $ 40,725 Prior to the Company'sJanuary 1, 2020 adoption of ASU 2016-13, finance receivables were considered impaired when management determined it was probable that the Company would not be able to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses were established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covered estimated losses on finance receivables which were collectively reviewed for impairment. The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that were individually evaluated for impairment and those that were collectively evaluated for impairment, atDecember 31 , was as follows (in thousands): 2019 Retail Wholesale Total Allowance for credit losses, ending balance: Individually evaluated for impairment $ -$ 2,100 $ 2,100 Collectively evaluated for impairment 188,501 7,980
196,481
$ 188,501 $ 10,080 $ 198,581 Finance receivables, ending balance: Individually evaluated for impairment $ -$ 4,601 $ 4,601 Collectively evaluated for impairment 6,416,428 1,151,918 7,568,346$ 6,416,428 $ 1,156,519 $ 7,572,947 66
--------------------------------------------------------------------------------
Additional information related to the wholesale finance receivables that were
individually deemed to be impaired under ASC Topic 310, Receivables at
Unpaid Recorded Principal Related Average Recorded Interest Income Investment Balance Allowance Investment Recognized Wholesale: No related allowance recorded $ - $ - $ - $ - $ - Related allowance recorded 4,994 4,601 2,100 4,976 -$ 4,994 $ 4,601 $ 2,100 $ 4,976 $ - Retail finance receivables were not evaluated individually for impairment prior to charge-off atDecember 31, 2019 . 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 ofDecember 31, 2020 andDecember 31, 2019 . 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. During the second quarter and into the first part of the third quarter of 2020, the Company offered 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. Through the remainder of 2020, the volume of payment extensions on eligible retail loans declined but has not yet returned to pre-COVID-19 pandemic levels. The Company continues to grant payment extensions to customers in accordance with its policies. 8.Goodwill and Intangible Assets OnMarch 4, 2019 , the Company purchased certain assets and liabilities ofStaCyc, Inc. for total consideration of$14.9 million including cash paid at acquisition of$7.0 million . The primary assets acquired and included in the Motorcycles segment were goodwill of$9.5 million , which was tax deductible, and intangible assets of$5.3 million . Changes in the carrying amount of goodwill in the Motorcycles segment for the years endedDecember 31 , was as follows (in thousands): 2020 2019 2018 Balance, beginning of period$ 64,160 $ 55,048 $ 55,947 Acquisitions - 9,520 - Currency translation 1,816 (408) (899) Balance, end of period$ 65,976 $ 64,160 $ 55,048 Intangible assets, excluding goodwill, included in the Motorcycles segment consist primarily of customer relationships and trademarks with useful lives ranging from 5 to 20 years. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Intangible assets are recorded in Other long-term assets on the Consolidated balance sheets. The gross carrying amounts atDecember 31, 2020 and 2019 differ from the acquisition date amounts due to changes in foreign currency exchange rates. Intangible assets atDecember 31 , were as follows (in thousands): 2020 2019 2018 Gross carrying amount$ 12,979 $ 12,837 $ 7,234 Accumulated amortization (3,350) (2,240) (1,236)$ 9,629 $ 10,597 $ 5,998 67
-------------------------------------------------------------------------------- Amortization of intangible assets, excluding goodwill, recorded in Selling, administrative and engineering expense on the Consolidated statements of operations was$1.1 million ,$0.9 million and$0.4 million for 2020, 2019 and 2018, respectively. Future amortization of the Company's intangible assets as ofDecember 31, 2020 is as follows (in thousands): 2021$ 1,072 2022 1,072 2023 1,072 2024 830 2025 750 Thereafter 4,833$ 9,629 The Financial Services segment had no goodwill or intangible assets atDecember 31, 2020 and 2019. 9. Derivative Financial Instruments and Hedging ActivitiesThe 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, Indian rupee,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 the Company's 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, interest rate swaps to reduce the impact of fluctuations in interest rates on medium-term notes with floating interest rates, and cross-currency swaps to mitigate the effect of foreign currency exchange rate fluctuations on 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 income (loss) (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 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. 68 --------------------------------------------------------------------------------
The notional and fair values of the Company's derivative financial instruments
under ASC Topic 815, at
Derivative Financial Instruments
Designated as Cash Flow Hedging Instruments
2020 2019 Other Notional Other Accrued Notional Current Accrued Value Current Assets Liabilities Value Assets Liabilities Foreign currency contracts$ 533,925 $ 11$ 21,927 $ 434,321 $ 3,505 $ 3,661 Commodity contracts 671 - 52 616 - 80 Cross-currency swaps 1,367,460 138,622 - 660,780 8,326 - Interest rate swaps 450,000 - 3,086 900,000 - 9,181$ 2,352,056 $ 138,633 $ 25,065 $ 1,995,717 $ 11,831 $ 12,922 Derivative Financial Instruments Not Designated as Hedging Instruments 2020 2019 Other Notional Other Accrued Notional Current Accrued Value Current Assets Liabilities Value Assets Liabilities Foreign currency contracts$ 245,494 $ 737 $ 435$ 220,139 $ 721 $ 865 Commodity contracts 6,806 849 21 8,270 95 147 Interest rate caps 978,058 47 - 375,980 2 -$ 1,230,358 $ 1,633 $ 456$ 604,389 $ 818 $ 1,012 The amount of gains and losses related to derivative financial instruments designated as cash flow hedges for the years endedDecember 31 , were as follows (in thousands): Gain/(Loss) Gain/(Loss) Recognized in OCI Reclassified from AOCL into Income 2020 2019 2018 2020 2019 2018
Foreign currency contracts
(160) (103) 34 (189) (70) 24 Cross-currency swaps 130,297 8,326 - 153,472 12,156 - Treasury rate lock contracts - - 41 (492) (492) (498) Interest rate swaps (8,449) (9,981) (6,046) (14,543) (5,295) (1,552)$ 107,181 $ 6,477 $ 35,686 $ 148,107 $ 27,732 $ 9,466 69
--------------------------------------------------------------------------------
The location and amount of gains and losses recognized in income related to
derivative financial instruments designated as cash flow hedges for the years
ended
Financial Motorcycles Selling, Services cost of goods administrative & Interest interest sold engineering expense expense expense 2020 Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded$ 2,435,745 $
1,050,627
Gain/(loss) reclassified from AOCL into income: Foreign currency contracts$ 9,859 $ - $ - $ - Commodity contracts$ (189) $ - $ - $ - Cross-currency swaps $ - $
153,472 $ - $ -
$ - $ -$ (362) $ (130) Interest rate swaps $ - $ - $ -$ (14,543) 2019 Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded$ 3,229,798 $
1,199,056
Gain/(loss) reclassified from AOCL into income: Foreign currency contracts$ 21,433 $ - $ - $ - Commodity contracts$ (70) $ - $ - $ - Cross-currency swaps $ - $
12,156 $ - $ -
$ - $ -$ (362) $ (130) Interest rate swaps $ - $ - $ -$ (5,295) 2018 Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded$ 3,351,796 $
1,258,098
Gain/(loss) reclassified from AOCL into income: Foreign currency contracts$ 11,492 $ - $ - $ - Commodity contracts $ 24 $ - $ - $ - Treasury rate lock contracts $ - $ -$ (362) $ (136) Interest rate swaps $ - $ - $ -$ (1,552) The amount of net loss included in Accumulated other comprehensive loss (AOCL) atDecember 31, 2020 , estimated to be reclassified into income over the next 12 months was$32.9 million . The amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments as ofDecember 31 , were as follows (in thousands). Gains and losses on foreign currency contracts and commodity contracts were recorded in Motorcycles and Related Products cost of goods sold and the interest rate caps were recorded in Financial Services interest expense. Amount of Gain/(Loss) Recognized in Income 2020 2019 2018 Foreign currency contracts$ (205) $ 191 $ - Commodity contracts (148) 17 (430) Interest rate caps (532) (143) -$ (885) $ 65 $ (430) 70
-------------------------------------------------------------------------------- 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 liability 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 operated by a third-party. 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 11 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 years endedDecember 31, 2020 and 2019 was$26.7 million and$27.4 million , respectively. This includes variable lease costs related to leases involving assets operated by a third-party of approximately$5.6 million and$6.5 million for the years endedDecember 31, 2020 and 2019, respectively. Other variable and short-term lease costs were not material. Balance sheet information related to the Company's leases atDecember 31 , was as follows (in thousands): 2020 2019 Lease assets$ 45,203 $ 61,618 Accrued liabilities$ 17,081 $ 19,013 Lease liabilities 30,115 44,447$ 47,196 $ 63,460 71
-------------------------------------------------------------------------------- Future maturities of the Company's operating lease liabilities as ofDecember 31, 2020 were as follows (in thousands): 2021$ 18,160 2022 13,573 2023 5,462 2024 3,518 2025 5,787 Thereafter 3,592 Future lease payments 50,092 Present value discount (2,896) Lease liabilities$ 47,196
Other lease information surrounding the Company's operating leases as of
2020 2019
Cash outflows for amounts included in the measurement of lease liabilities
$
20,533 $ 21,491 Right-of-use assets obtained in exchange for lease obligations, net of modifications
$ 1,833 $ 21,579 Weighted-average remaining lease term (in years) 3.78 4.68 Weighted-average discount rate 3.1 % 2.1 %
11. Debt
Debt with a contractual term less than 12 months is generally classified as
short-term and consisted of the following at
2020 2019
Unsecured commercial paper
Debt with a contractual term greater than 12 months is generally classified as
long-term and consisted of the following at
2020
2019
Secured debt: Asset-backed Canadian commercial paper conduit facility$ 116,678 $ 114,693 Asset-backed U.S. commercial paper conduit facilities 402,205 490,427 Asset-backed securitization debt 1,800,393 766,965 Unamortized discounts and debt issuance costs (8,437) (2,573) 2,310,839 1,369,512 72
-------------------------------------------------------------------------------- 2020 2019 Unsecured notes (at par value): Medium-term notes: Due in 2020, issued February 2015 2.15% - 600,000 Due in 2020, issued May 2018 LIBOR + 0.50% - 450,000 Due in 2020, issued March 2017 2.40% - 350,000 Due in 2021, issued January 2016 2.85% 600,000 600,000 Due in 2021, issued in November 2018 LIBOR + 0.94% 450,000 450,000 Due in 2021, issued May 2018 3.55% 350,000 350,000 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 Due in 2023, issued May 2020(a) 4.94% 797,206 - Due in 2024, issued November 2019(b) 3.14% 735,882 672,936 Due in 2025, issued June 2020 3.35% 700,000 - Unamortized discounts and debt issuance costs (15,374) (12,809) 4,917,714 4,760,127 Senior notes: Due in 2025, issued July 2015 3.50% 450,000 450,000 Due in 2045, issued July 2015 4.625% 300,000 300,000 Unamortized discounts and debt issuance costs (6,023) (6,704) 743,977 743,296 5,661,691 5,503,423 Long-term debt 7,972,530 6,872,935 Current portion of long-term debt, net (2,039,597) (1,748,109) Long-term debt, net$ 5,932,933 $ 5,124,826 (a)Euro denominated €650.0 million par value remeasured toU.S. dollar atDecember 31, 2020 (b)Euro denominated €600.0 million par value remeasured toU.S. dollar atDecember 31, 2020 and 2019, respectively The Company's future principal payments on debt obligations as ofDecember 31, 2020 were as follows (in thousands): 2021$ 3,063,227 2022 1,655,414 2023 1,793,635 2024 1,054,362 2025 700,000 Thereafter 750,000$ 9,016,638 Unsecured Commercial Paper - Commercial paper maturities may range up to 365 days from the issuance date. The weighted-average interest rate of outstanding commercial paper balances was 1.34% and 1.94% atDecember 31, 2020 and 2019, respectively. Credit Facilities - InApril 2020 , the Company entered into a$707.5 million five-year credit facility to replace the$765.0 million five-year credit facility that was due to mature inApril 2021 . The new five-year credit facility matures inApril 2025 . The Company also amended the$780.0 million five-year credit facility to$707.5 million with no change to the maturity date ofApril 2023 . The Company also had a$195.0 million 364-day credit facility which was due to mature inMay 2020 . InApril 2020 , the Company extended the maturity date of this credit facility toAugust 2020 ; however, this facility was terminated onMay 18, 2020 . At the time of termination, there were no outstanding borrowings under this 364-day credit facility. OnJune 1, 2020 , the Company entered into a new$350.0 million 364-day credit facility, and onJune 4, 2020 , the Company borrowed$150.0 million under this facility. OnDecember 9, 2020 , the Company amended this facility to allow for the early repayment of the$150.0 million borrowing, which was repaid in full on this date, along with the related interest. The 73 -------------------------------------------------------------------------------- five-year credit facilities (together, the Global Credit Facilities), as well as the$350.0 million 364-day credit facility, bear interest at variable rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities and the$350.0 million 364-day credit facility also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments. The Global Credit Facilities are committed facilities primarily used to support the Company's unsecured commercial paper program. Unsecured Notes - The fixed-rateU.S. dollar-denominated unsecured notes provide for semi-annual interest payments, the fixed-rate foreign currency-dominated unsecured notes provide for annual interest payments, and the floating-rate unsecured notes provide for quarterly interest payments. Principal on the unsecured notes is due at maturity. During February, May, and June of 2020,$600.0 million of 2.15%,$450.0 million of floating rate, and$350.0 million 2.40% medium-term notes matured, respectively, and the principal and accrued interest were paid in full. During January, March, and September of 2019,$600.0 million of 2.25%,$150.0 million of floating-rate, and$600.0 million of 2.40% medium-term notes matured, respectively, and the principal and accrued interest were paid in full. Operating and Financial Covenants - HDFS and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the medium-term and senior notes and theU.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below. The operating covenants limit the Company's and HDFS' ability to: •Assume or incur certain liens; •Participate in certain mergers or consolidations; and •Purchase or hold margin stock. Under the current financial covenants of the Global Credit Facilities, the ratio of HDFS' consolidated debt, excluding secured debt, to HDFS' consolidated allowance for credit losses on finance receivables plus HDFS' consolidated shareholders' equity, excluding accumulated other comprehensive loss (AOCL), cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and consolidated shareholders' equity (where the Company's consolidated debt in each case excludes that of HDFS and its subsidiaries, and the Company's consolidated shareholders' equity excludes AOCL), cannot exceed 0.7 to 1.0 as of the end of any fiscal quarter. No financial covenants are required under the medium-term or senior notes or theU.S. or Canadian asset-backed commercial paper conduit facilities. AtDecember 31, 2020 and 2019, HDFS and the Company remained in compliance with all of the then existing covenants. 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 underU.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 (ASC Topic 860). 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 74 -------------------------------------------------------------------------------- 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 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 atDecember 31 , were as follows (in thousands): 2020 Finance Allowance for Restricted Asset-backed receivables credit losses cash Other assets Total assets debt On-balance sheet assets and liabilities: Consolidated VIEs: Asset-backed securitizations$ 2,129,372 $ (124,627) $ 116,268 $ 2,622 $ 2,123,635 $ 1,791,956 Asset-backedU.S. commercial paper conduit facility 441,402 (25,793) 26,624 1,131 443,364
402,205
Unconsolidated VIEs: Asset-backed Canadian commercial paper conduit facility 133,976 (6,508) 9,073 126 136,667 116,678$ 2,704,750 $ (156,928) $ 151,965 $ 3,879 $ 2,703,666 $ 2,310,839 2019 Finance Allowance for Restricted Asset-backed receivables credit losses cash Other assets Total assets debt On-balance sheet assets and liabilities: Consolidated VIEs: Asset-backed securitizations$ 826,047 $ (24,935) $ 36,037 $ 778$ 837,927 $ 764,392 Asset-backedU.S. commercial paper conduit facilities 533,587 (16,076) 27,775 1,642 546,928
490,427
Unconsolidated VIEs: Asset-backed Canadian commercial paper conduit facility 132,279 (2,786) 7,686 296 137,475 114,693$ 1,491,913 $ (43,797) $ 71,498 $ 2,716 $ 1,522,330 $ 1,369,512 On-Balance Sheet Asset-Backed Securitization VIEs - The Company transfersU.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 purchasedU.S. retail motorcycle finance receivables. Each on-balance sheet asset-backed securitization SPE is a separate legal entity, and theU.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 relatedU.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes currently have various contractual maturities ranging from 2022 to 2028. 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. In 2020, the Company transferred$2.42 billion ofU.S. retail motorcycle finance receivables to four separate SPEs which, in turn, issued$2.08 billion , or$2.06 billion net of discounts and issuance costs, of secured notes through four separate on-balance sheet asset-backed securitization transactions. In 2019, the Company transferred$1.12 billion ofU.S. retail motorcycle finance receivables to two separate SPEs which, in turn, issued$1.03 billion , or$1.02 billion net of discount and issuance costs, of secured notes through two separate on-balance sheet asset-backed securitization transactions. 75 --------------------------------------------------------------------------------
At
Principal Amount Weighted-Average Rate Contractual Maturity Date Issue Date at Date of Issuance at Date of Issuance at Date of Issuance May 2020$750,178 3.38% April 2028 May 2020$500,000 2.37% October 2021 - October 2028 April 2020$300,000 3.30% November 2027 January 2020$525,000 1.83% February 2021 - April 2027 June 2019$525,000 2.37% July 2020 - November 2026 May 2019$500,000 3.05% July 2026 There were no secured notes included in the Consolidated balance sheets atDecember 31, 2019 that were repaid in full during 2020. For the years endedDecember 31, 2020 and 2019, interest expense on the secured notes was$42.1 million and$13.3 million , respectively, which is included in Financial Services interest expense. The weighted average interest rate of the outstanding on-balance sheet asset-backed securitization transactions was 2.39% and 2.36% atDecember 31, 2020 and 2019, respectively. On-Balance Sheet Asset-BackedU.S. Commercial Paper Conduit Facilities VIE - UntilNovember 25, 2020 , the Company had two separate agreements with third-party bank-sponsored asset-backedU.S. commercial paper conduits, a$300.0 million revolving facility agreement and a$600.0 million revolving facility agreement (together, the FormerU.S. Conduit Facilities). OnNovember 25, 2020 , the Company amended each revolving facility agreement by consolidating the two agreements into one$900.0 million revolving facility agreement with third-party bank-sponsored asset-backedU.S. commercial paper conduits. Under the revolving facility agreement, the Company may transferU.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backedU.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$900.0 million revolving facility (theU.S. Conduit Facility) is based on, among other things, the amount of eligibleU.S. retail motorcycle finance receivables held by the SPE as collateral. Under theU.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. In each of these cases, a program fee is assessed based on the outstanding principal. TheU.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 theU.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 4 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as ofDecember 31, 2020 , theU.S. Conduit Facility has an expiration date ofNovember 19, 2021 . The Company is the primary beneficiary of itsU.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. In 2020, the Company transferred$195.3 million ofU.S. retail motorcycle finance receivables to an SPE which, in turn, issued$163.6 million of debt under the FormerU.S. Conduit Facilities. In 2019, the Company transferred$174.4 million ofU.S. retail motorcycle finance receivables to an SPE which, in turn, issued $154.6 million of debt under the FormerU.S. Conduit Facilities. For the year ended December 31, 2020 interest expense under the FormerU.S. Conduit Facilities andU.S. Conduit Facility was a total of $8.9 million. For the year ended December 31, 2019 interest expense under the FormerU.S. Conduit Facilities was $18.5 million. The interest expense is included in Financial Services interest expense. The weighted average interest rate of the outstandingU.S. Conduit Facility was 1.61% at December 31, 2020. The weighted average interest rate of the outstanding FormerU.S. Conduit Facilities was 2.63% at December 31, 2019. 76 -------------------------------------------------------------------------------- On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility - In June 2020, 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$220.0 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$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 expected remaining term of the related receivables is approximately 4 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of December 31, 2020, the Canadian Conduit has an expiration date of June 25, 2021. 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, is $20.0 million at December 31, 2020. The maximum exposure is not an indication of the Company's expected loss exposure. In 2020, the Company transferred $77.9 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $61.6 million. In 2019, the Company transferred $28.2 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $23.4 million. For the years ended December 31, 2020 and 2019, interest expense on the Canadian Conduit was $2.9 million and $3.6 million, respectively, which is included in Financial Services interest expense. The weighted average interest rate of the outstanding Canadian Conduit was 2.13% and 2.68% at December 31, 2020 and 2019, respectively. Off-Balance Sheet Asset-Backed Securitization VIE - There were no off-balance sheet asset-backed securitization transactions during the years ended December 31, 2020, 2019 and 2018. 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. The gain on sale was included in Financial Services revenue on the Consolidated statements of operations. In April 2020, the Company repurchased the finance receivables associated with this off-balance sheet asset-backed securitization VIE for $27.4 million. Similar to an on-balance sheet asset-backed securitization, the Company transferredU.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 purchasedU.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE was a separate legal entity, and theU.S. retail motorcycle finance receivables included in the asset-backed securitization were only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and were 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 was not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and did 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 in 2016, the retail motorcycle finance receivables were removed from the Company's Consolidated balance sheets 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. 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 statements of operations. The fees the Company is paid for 77 -------------------------------------------------------------------------------- servicing represent adequate compensation and, consequently, the Company does not recognize a servicing asset or liability. The Company recognized servicing fee income of $0.1 million and $0.6 million for the years ended December 31, 2020 and December 31, 2019, respectively. The unpaid principal balance of retail motorcycle finance receivables serviced by the Company at December 31, was as follows (in thousands): 2020
2019
On-balance sheet retail motorcycle finance receivables $ 6,187,300 $ 6,274,551 Off-balance sheet retail motorcycle finance receivables
- 35,197 $ 6,187,300 $ 6,309,748 The unpaid principal balance of retail motorcycle finance receivables serviced by the Company 30 days or more delinquent at December 31, was as follows (in thousands): 2020
2019
On-balance sheet retail motorcycle finance receivables $ 176,733 $ 244,498
Off-balance sheet retail motorcycle finance receivables - 885 $ 176,733 $ 245,383 Credit losses, net of recoveries for the retail motorcycle finance receivables serviced by the Company, for the years ended December 31, were as follows (in thousands): 2020
2019
On-balance sheet retail motorcycle finance receivables $ 87,546 $ 125,840
Off-balance sheet retail motorcycle finance receivables 13
458 $ 87,559 $ 126,298 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 swaps and 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 as of December 31, were as follows (in thousands): 2020 Balance Level 1 Level 2 Assets: Cash equivalents $ 3,019,884 $ 2,819,884 $ 200,000 Marketable securities 52,061 52,061 - Derivative financial instruments 140,266 -
140,266
$ 3,212,211 $ 2,871,945 $
340,266
Liabilities:
Derivative financial instruments $ 25,521 $ - $ 25,521
78 --------------------------------------------------------------------------------
2019 Balance Level 1 Level 2 Assets: Cash equivalents $ 624,832 $ 459,885 $ 164,947 Marketable securities 52,575 52,575 - Derivative financial instruments 12,649 - 12,649 $ 690,056 $ 512,460 $ 177,596
Liabilities:
Derivative financial instruments $ 13,934 $ - $ 13,934
Nonrecurring Fair Value Measurements - Repossessed inventory was $17.7 million and $21.4 million at December 31, 2020 and 2019, respectively, for which the fair value adjustment was $4.2 million and $11.9 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 at December 31, were as follows (in thousands): 2020 2019 Fair Value Carrying Value Fair Value Carrying Value Assets: Finance receivables, net $ 6,586,348 $ 6,443,008 $ 7,419,627 $ 7,374,366 Liabilities: Deposits $ 79,965 $ 79,965 $ - $ - Debt: Unsecured commercial paper $ 1,014,274 $
1,014,274 $ 571,995 $ 571,995
Asset-backed
$ 402,205 $
402,205 $ 490,427 $ 490,427 Asset-backed Canadian commercial paper conduit facility
$ 116,678 $
116,678 $ 114,693 $ 114,693 Asset-backed securitization debt
$ 1,817,892 $
1,791,956 $ 768,094 $ 764,392 Medium-term notes
$ 5,118,928 $ 4,917,714 $ 4,816,153 $ 4,760,127 Senior notes $ 828,141 $ 743,977 $ 774,949 $ 743,296 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 - The carrying value of deposits is amortized cost and approximates carrying value due to the short maturities of the deposits. Fair value is calculated using Level 2 inputs. Debt - The carrying value of debt is generally amortized cost, net of discounts and debt issuance costs. The fair value of unsecured commercial paper and credit facility borrowings are calculated using Level 2 inputs and approximates carrying value due to its short maturity. The fair value of debt provided under theU.S. Conduit Facilities and 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. 79 -------------------------------------------------------------------------------- 14. Product Warranty and Recall Campaigns The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except inJapan , where the Company currently provides a standard three-year limited warranty. The Company also provides a five-year unlimited warranty on the battery for new 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 sale 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 liability were as follows as of December 31, (in thousands): 2020 2019 2018 Balance, beginning of period $ 89,793 $ 131,740 $ 94,200 Warranties issued during the period 32,042 50,470 53,367 Settlements made during the period (51,420) (90,404) (79,300) Recalls and changes to pre-existing warranty liabilities (1,207) (2,013) 63,473 Balance, end of period $ 69,208 $ 89,793 $ 131,740 The liability for recall campaigns was $24.7 million, $36.4 million and $73.3 million at December 31, 2020, 2019 and 2018, respectively. Additionally, the Company recorded supplier recoveries within operating expenses separate from the amounts disclosed above of $28.0 million in 2019. 15. Employee Benefit Plans and Other Postretirement Benefits The Company has a qualified defined benefit 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. Pension benefits are based primarily on years of service and, for certain participants, levels of compensation. Plan participants are eligible to receive postretirement healthcare benefits upon attaining age 55 after rendering at least 10 years of service to the Company. Some of the plans require participant contributions to partially offset benefit costs. Obligations and Funded Status: The changes in the benefit obligation, fair value of plan assets and the funded status of the Company's pension and SERPA plans and the postretirement healthcare plans as of the Company's measurement dates of December 31, were as follows (in thousands): Pension and SERPA Benefits Postretirement Healthcare Benefits 2020 2019 2020 2019 Change in benefit obligation: Benefit obligation, beginning of period $ 2,212,012 $ 1,984,708 $ 293,505 $ 286,574 Service cost 27,224 25,408 11,761 4,449 Interest cost 76,447 85,483 9,391 11,753 Actuarial losses (gains) 228,081 236,719 18,824 9,590 Plan participant contributions - - 2,140 1,999 Plan amendments - 8,371 - - Special early retirement benefits - 1,583 - - Benefits paid (137,381) (126,079) (19,703) (20,860) Net curtailments and settlements (15,948) (4,181) (673) - Benefit obligation, end of period 2,390,435 2,212,012 315,245 293,505 80 -------------------------------------------------------------------------------- Pension and SERPA Benefits Postretirement Healthcare Benefits 2020 2019 2020 2019 Change in plan assets: Fair value of plan assets, beginning of period 2,209,222 1,874,618 220,992 190,357 Return on plan assets 361,674 459,388 36,349 41,717 Plan participant contributions - - 2,140 1,999 Benefits paid (136,921) (124,784) (15,446) (13,081) Fair value of plan assets, end of period 2,433,975 2,209,222 244,035 220,992 Funded status of the plan $ 43,540 $
(2,790) $ (71,210) $ (72,513)
Funded status as recognized on the Consolidated balance sheets: Pension and postretirement assets $ 82,537 $ 56,014 $ 13,174 $ - Accrued liabilities (8,814) (2,666) (361) - Pension and postretirement liabilities (30,183) (56,138) (84,023) (72,513) $ 43,540 $
(2,790) $ (71,210) $ (72,513)
Amounts included in Accumulated other comprehensive loss, net of tax: Prior service credits $ (5,712) $ (6,489) $ (5,438) $ (7,559) Actuarial losses (gains) 445,804 496,919 (4,942) (1,321) $ 440,092 $ 490,430 $ (10,380) $ (8,880) During 2020, actuarial losses related to the obligation for pension and SERPA benefits were due primarily to a decrease in the discount rate, partially offset by changes in mortality assumptions, demographic assumptions and a reduction in plan participants. During 2019, actuarial losses were due primarily to a decrease in the discount rate partially offset by changes in mortality assumptions. During 2020 and 2019, the actuarial losses related to the obligation for postretirement healthcare benefits were due primarily to decreases in the discount rate, partially offset by favorable claim cost adjustments. The funded status of the qualified pension plan and the SERPA plans are combined above. Plans with projected benefit obligations (PBO) or accumulated benefit obligations (ABO) in excess of the fair value of plan assets at December 31, is presented below (in thousands): 2020
2019
Plans with PBO in excess of fair value of plan assets: PBO $ 38,996 $ 58,804 Fair value of plan assets $ - $ -
Plans with ABO in excess of fair value of plan assets:
ABO $ 30,598 $ 44,232 Fair value of plan assets $ - $ -
The total ABO for all the Company's pension and SERPA plans combined was $2.30 billion and $2.12 billion as of December 31, 2020 and 2019, respectively.
81 -------------------------------------------------------------------------------- Benefit Costs: Service cost is allocated among Selling, administrative and engineering expense, Motorcycles and Related Products cost of goods sold and Inventories, net. Amounts capitalized in inventory are not significant. Non-service cost components of net periodic benefit cost are presented in Other (expense) income, net. Components of net periodic benefit costs for the Company's defined benefit plans for the years ended December 31, were as follows (in thousands): Pension and SERPA Benefits Postretirement Healthcare Benefits 2020 2019 2018 2020 2019 2018 Service cost $ 27,224 $ 25,408 $ 32,340 $ 11,761 $ 4,449 $ 7,180 Interest cost 76,447 85,483 82,778 9,391 11,753 11,556
Expected return on plan assets (135,056) (142,323) (147,671)
(13,870) (14,030) (14,161) Amortization of unrecognized: Prior service credit (1,088) (1,930) (420) (2,381) (2,381) (1,842) Net loss 65,489 44,511 64,773 492 277 1,817 Special early retirement benefits - 1,583 - - - - Curtailment loss (gain) 74 - 1,017 (392) (960) (886) Settlement loss 2,742 1,503 - - - -
Net periodic benefit cost $ 35,832 $ 14,235 $ 32,817 $ 5,001 $ (892) $ 3,664
The expected return on plan assets is calculated based on the market related value of plan assets. The market related value of plan assets is different from the fair value in that asset gains and losses are smoothed over a five-year period. Unrecognized gains and losses related to plan obligations and assets are initially recorded in other comprehensive income and result from actual experience that differs from assumed or expected results, and the impacts of changes in assumptions. Unrecognized plan asset gains and losses not yet reflected in the market related value of plan assets are not subject to amortization. Remaining unrecognized gains and losses that exceed 10% of the greater of the projected benefit obligation or the market related value of plan assets are amortized to earnings over the estimated future service period of active plan participants. The impacts of plan amendments, if any, are amortized over the estimated future service period of plan participants at the time of the amendment. Assumptions: Weighted-average assumptions used to determine benefit obligations and net periodic benefit cost at December 31, were as follows: Pension and SERPA Benefits Postretirement Healthcare Benefits 2020 2019 2018 2020 2019 2018 Assumptions for benefit obligations: Discount rate 2.62 % 3.49 % 4.38 % 2.11 % 3.26 % 4.23 % Rate of compensation increase 3.34 % 3.39 % 3.38 % n/a n/a n/a Assumptions for net periodic benefit cost: Discount rate 3.49 % 4.38 % 3.71 % 3.26 % 4.23 % 3.52 % Expected return on plan assets 6.70 % 7.10 % 7.25 % 7.00 % 7.25 % 7.25 % Rate of compensation increase 3.39 % 3.38 % 3.43 % n/a n/a n/a Plan Assets: Pension Plan Assets - The Company's investment objective is to ensure assets are sufficient to pay benefits while mitigating the volatility of retirement plan assets or liabilities recorded in the balance sheet. The Company mitigates volatility through asset diversification and partial asset/liability matching. The investment portfolio for the Company's pension plan assets contains a diversified blend of equity and fixed-income investments. The Company's current overall targeted asset allocation as a percentage of total market value was 53% equities and 47% fixed-income and cash. Assets are rebalanced regularly to keep the actual allocation in line with targets. Equity holdings primarily include investments in small-, medium- and large-cap companies in theU.S. , including Company stock, investments in developed and emerging foreign markets and other investments such as private equity and real estate. Fixed-income holdings consist ofU.S. government and agency securities, state and municipal bonds, corporate bonds from diversified industries and foreign obligations. In addition, cash 82 -------------------------------------------------------------------------------- equivalent balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews. Postretirement Healthcare Plan Assets - The Company's investment objective is to maximize the return on assets to help pay benefits by prudently investing in equities, fixed income and alternative assets. The Company's current overall targeted asset allocation as a percentage of total market value was 69% equities and 31% fixed-income and cash. Equity holdings primarily include investments in small-, medium- and large-cap companies in theU.S. , investments in developed and emerging foreign markets and other investments such as private equity and real estate. Fixed-income holdings consist ofU.S. government and agency securities, state and municipal bonds, corporate bonds from diversified industries and foreign obligations. In addition, cash equivalent balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews. The following tables present the fair values of the plan assets related to the Company's pension and postretirement healthcare plans within the fair value hierarchy as defined in Note 13. The fair values of the Company's pension plan assets at December 31, 2020 were as follows (in thousands): Balance Level 1 Level 2 Cash and cash equivalents $ 56,153 $ - $ 56,153 Equity holdings: U.S. companies 785,227 769,583 15,644 Foreign companies 114,013 106,783 7,230 Harley-Davidson common stock 46,741 46,741 - Pooled equity funds 381,538 381,538 - Other 66 66 - 1,327,585 1,304,711 22,874 Fixed-income holdings: U.S. Treasuries 59,116 59,116 - Federal agencies 15,230 - 15,230 Corporate bonds 691,003 - 691,003 Pooled fixed income funds 148,717 51,456 97,261 Foreign bonds 110,062 - 110,062 Municipal bonds 14,671 - 14,671 1,038,799 110,572 928,227
Plan assets subject to fair value leveling 2,422,537 $ 1,415,283
$ 1,007,254
Plan assets measured at net asset value: Limited partnership interests 537 Real estate investment trusts 10,901 11,438 $ 2,433,975
Included in the pension plan assets are 1,273,592 shares of the Company's common stock with a market value of $46.7 million at December 31, 2020.
83 --------------------------------------------------------------------------------
The fair values of the Company's postretirement healthcare plan assets at December 31, 2020 were as follows (in thousands):
Balance Level 1 Level 2 Cash and cash equivalents $ 4,306 $ - $ 4,306 Equity holdings: U.S. companies 115,272 115,272 - Foreign companies 29,670 29,670 - Pooled equity funds 27,207 27,207 - Other 5 5 - 172,154 172,154 - Fixed-income holdings: U.S. Treasuries 2,873 2,873 - Federal agencies 6,970 - 6,970 Corporate bonds 12,460 - 12,460 Pooled fixed income funds 37,989 37,989 - Foreign bonds 970 - 970 Municipal bonds 458 - 458 61,720 40,862 20,858
Plan assets subject to fair value leveling 238,180 $ 213,016 $ 25,164
Plan assets measured at net asset value:
Real estate investment trusts 5,855 $ 244,035 84
-------------------------------------------------------------------------------- The fair values of the Company's pension plan assets at December 31, 2019 were as follows (in thousands): Balance Level 1 Level 2 Cash and cash equivalents $ 35,463 $ - $ 35,463 Equity holdings: U.S. companies 728,892 707,276 21,616 Foreign companies 79,707 77,275 2,432 Harley-Davidson common stock 47,365 47,365 - Pooled equity funds 377,301 377,301 - Other 72 72 - 1,233,337 1,209,289 24,048 Fixed-income holdings: U.S. Treasuries 67,234 67,234 - Federal agencies 15,434 - 15,434 Corporate bonds 583,475 - 583,475 Pooled fixed income funds 142,134 48,674 93,460 Foreign bonds 103,439 - 103,439 Municipal bonds 12,339 - 12,339 924,055 115,908 808,147
Plan assets subject to fair value leveling 2,192,855 $ 1,325,197
$ 867,658
Plan assets measured at net asset value: Limited partnership interests 4,118 Real estate investment trust 12,249 16,367 $ 2,209,222
Included in the pension plan assets were 1,273,592 shares of the Company's common stock with a market value of $47.4 million at December 31, 2019.
85 --------------------------------------------------------------------------------
The fair values of the Company's postretirement healthcare plan assets at December 31, 2019 were as follows (in thousands):
Balance Level 1 Level 2 Cash and cash equivalents $ 2,458 $ - $ 2,458 Equity holdings: U.S. companies 104,399 104,399 - Foreign companies 22,422 21,744 678 Pooled equity funds 25,029 25,029 - Other 7 7 - 151,857 151,179 678 Fixed-income holdings: U.S. Treasuries 5,782 5,782 - Federal agencies 7,986 - 7,986 Corporate bonds 8,425 - 8,425 Pooled fixed income funds 36,720 36,720 - Foreign bonds 672 - 672 Municipal bonds 454 - 454 60,039 42,502 17,537
Plan assets subject to fair value leveling 214,354 $ 193,681 $ 20,673
Plan assets measured at net asset value:
Real estate investment trust 6,638 $ 220,992 For 2021, the Company's overall expected long-term rate of return is 6.20% for pension assets and 6.70% for postretirement healthcare plan assets. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based on historical returns adjusted to reflect the current view of the long-term investment market. Postretirement Healthcare Cost: The weighted-average healthcare cost trend rates used in determining the accumulated postretirement benefit obligation of the healthcare plans were as follows: 2020 2019 Healthcare cost trend rate for next year 7.00 % 7.25 %
Rate to which the cost trend rate is assumed to decline (the ultimate rate)
5.00 % 5.00 % Year that the rate reaches the ultimate trend rate 2029 2029 Future Contributions and Benefit Payments: Based on the funded status of the qualified pension plan, there is no requirement for the Company to make contributions to the qualified pension plan assets in 2021. The Company expects that 2021 postretirement healthcare plan benefits and benefits due under the SERPA plans will be paid by the Company or, in the case of postretirement healthcare plan benefits, partially funded with plan assets. 86 --------------------------------------------------------------------------------
The Company's future expected benefit payments as of December 31, 2020 were as follows (in thousands):
Pension Benefits SERPA Benefits Postretirement Healthcare Benefits 2021 $ 99,727 $ 8,813 $ 23,444 2022 $ 102,183 $ 1,684 $ 23,707 2023 $ 104,792 $ 1,955 $ 23,775 2024 $ 107,078 $ 1,919 $ 23,465 2025 $ 110,810 $ 1,818 $ 23,157 2026-2030 $ 587,220 $ 11,071 $ 108,384 Defined Contribution Plans: The Company has various defined contribution benefit plans that in total cover substantially all full-time employees. Employees can make voluntary contributions in accordance with the provisions of their respective plan, which includes a 401(k) tax deferral option. The Company makes additional contributions to the plans on behalf of the employees and expensed $21.7 million, $21.9 million and $20.1 million during 2020, 2019 and 2018, respectively related to the contributions. 16. Commitments and Contingencies The Company is subject to lawsuits and other claims related to environmental, product 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. 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. York Environmental Matter - The Company is involved with government agencies and theU.S. Navy related to a matter involving the cleanup of soil and groundwater contamination at itsYork ,Pennsylvania facility. TheYork facility was formerly used by theU.S. Navy and AMF prior to the purchase of theYork facility by the Company from AMF in 1981. The Company has an agreement with theU.S. Navy which calls for theU.S. Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of costs associated with environmental investigation and remediation activities at theYork facility (Response Costs). A site wide remedial investigation/feasibility study and a proposed final remedy for theYork facility have been completed and approved by thePennsylvania Department of Environmental Protection and the United States Environmental Protection Agency (EPA ). The associated cleanup plan documents were approved in February 2020 and the remaining cleanup activities are expected to begin in 2021. The Company has an accrual for its share of the estimated future Response Costs recorded in Other long-term liabilities on the Consolidated balance sheets. Product Liability Matters - The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company's Consolidated financial statements. 17. Share-Based Awards The Company has a share-based compensation plan which was approved by its shareholders in April 2020 (the Plan) under which its Board of Directors may grant to employees share-based awards including restricted stock units (RSUs), performance shares, and nonqualified stock options. Performance shares include a three-year performance period with vesting based on achievement of internal performance targets. RSUs granted under the Plan vest ratably over a three-year period with the first one-third of the grant vesting one year after the date of grant. Dividends are paid on RSUs and performance shares settled with stock. Dividend equivalents are paid on RSUs and performance shares settled with cash. Stock options expire 10 years from the date of grant. At December 31, 2020, there were 5.4 million shares of common stock available for future awards under the Plan. The Company recognizes the cost of its share-based awards in the Consolidated statements of operations. The cost of each share-based equity award is based on the grant date fair value and the cost of each share-based cash-settled award is based on the settlement date fair value. Forfeitures for share-based awards are estimated at the grant date and adjusted when it is likely to change. Share-based award expense is recognized on a straight-line basis over the service or performance periods of each separately vesting tranche within the awards. The expense recognized reflects the number of awards that are ultimately expected to vest based on the service and, if applicable, performance requirements of each award. Total share- 87 -------------------------------------------------------------------------------- based award compensation expense recognized by the Company during 2020, 2019 and 2018 was $23.5 million, $33.7 million and $35.5 million, respectively, or $18.0 million, $25.8 million and $27.2 million net of taxes, respectively. Restricted Stock Units and Performance Shares - Settled in Stock - The fair value of RSUs and performance shares settled in stock is determined based on the market price of the Company's stock on the grant date. The activity for these awards for the year ended December 31, 2020 was as follows (in thousands, except for per share amounts): Weighted-Average Fair Value Per Shares & Units Share Nonvested, beginning of period 2,011 $ 43 Granted 1,189 $ 33 Vested (682) $ 45 Forfeited (749) $ 37 Nonvested, end of period 1,769 $ 36 As of December 31, 2020, there was $19.6 million of unrecognized compensation cost related to RSUs and performance shares settled in stock, net of estimated forfeitures, that is expected to be recognized over a weighted-average period of 1.5 years. Restricted Stock Units and Performance Shares - Settled in Cash - RSUs and performance shares settled in cash are recorded in the Consolidated balance sheets as a liability until vested. The fair value is determined based on the market price of the Company's stock and is remeasured at each balance sheet date. The activity for these awards for the year ended December 31, 2020 was as follows (in thousands, except for per share amounts): Units Weighted-Average Fair Value Per Share Nonvested, beginning of period 127 $ 35 Granted 101 $ 36 Vested (50) $ 33 Forfeited (22) $ 28 Nonvested, end of period 156 $ 37 Stock Options - There were no stock options granted in 2020, 2019 or 2018. All outstanding stock options were vested as of December 31, 2018. The Company's policy is to issue new shares of common stock upon the exercise of employee stock options. The stock option transactions for the year ended December 31, 2020 were as follows (in thousands, except for per share amounts): Options Weighted-Average Exercise Price Outstanding, beginning of period 816 $ 56 Exercised (4) $ 24 Forfeited (154) $ 56 Outstanding, end of period 658 $ 56 Exercisable, end of period 658 $ 56 The aggregate intrinsic value related to stock options exercised, outstanding and exercisable as of and for the years ended December 31, was as follows (in thousands): 2020 2019 2018 Exercised $ 21 $ 2,614 $ 3,855 Outstanding $ - $ 52 $ 2,366 Exercisable $ - $ 52 $ 2,366 88
-------------------------------------------------------------------------------- Stock options outstanding at December 31, 2020 were as follows (options in thousands): Weighted-Average Weighted-Average Price Range Contractual Life Options Exercise Price $40.01 to $50 0.7 173 $ 44 $50.01 to $60 2.0 122 $ 52 $60.01 to $70 2.7 363 $ 63 Options outstanding 2.0 658 $ 56 Options exercisable 2.0 658 $ 56 18. Accumulated Other Comprehensive Loss Changes in Accumulated other comprehensive loss for the years ended December 31, were as follows (in thousands): 2020 Foreign currency Derivative Pension and translation financial postretirement adjustments instruments benefit plans Total Balance, beginning of period $ (40,813) $ (14,586) $ (481,550) $ (536,949) Other comprehensive income, before reclassifications 37,088 107,181 2,193 146,462 Income tax expense (3,864) (23,626) (515) (28,005) 33,224 83,555 1,678 118,457 Reclassifications: Net gains on derivative financial instruments - (148,107) - (148,107) Prior service credits(a) - - (3,469) (3,469) Actuarial losses(a) - - 65,981 65,981 Curtailment and settlement losses(a) - - 3,040 3,040 Reclassifications before tax - (148,107) 65,552 (82,555) Income tax benefit (expense) - 33,022 (15,392) 17,630 - (115,085) 50,160 (64,925) Other comprehensive income (loss) 33,224 (31,530) 51,838 53,532 Balance, end of period $ (7,589) $ (46,116) $ (429,712) $ (483,417) 2019 Foreign currency Derivative Pension and translation financial postretirement adjustments instruments benefit plans Total Balance, beginning of period $ (49,608) $ 1,785 $ (581,861) $ (629,684) Other comprehensive income, before reclassifications 9,229 6,477 90,071 105,777 Income tax expense (434) (1,541) (21,149) (23,124) 8,795 4,936 68,922 82,653 Reclassifications: Net gains on derivative financial instruments - (27,732) - (27,732) Prior service credits(a) - - (4,311) (4,311) Actuarial losses(a) - - 44,788 44,788 Curtailment and settlement losses(a) - - 543 543 Reclassifications before tax - (27,732) 41,020 13,288 Income tax benefit (expense) - 6,425 (9,631) (3,206) - (21,307) 31,389 10,082 Other comprehensive income (loss) 8,795 (16,371) 100,311 92,735 Balance, end of period $ (40,813) $ (14,586) $ (481,550) $ (536,949) 89
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2018 Foreign currency Derivative Pension and translation financial postretirement adjustments instruments benefit plans Total Balance, beginning of period $ (21,852) $ (17,254) $ (460,943) $ (500,049) Other comprehensive (loss) income, before reclassifications (28,212) 35,686 (84,725) (77,251) Income tax benefit (expense) 3,202 (8,455) 19,893 14,640 (25,010) 27,231 (64,832) (62,611) Reclassifications: Net gains on derivative financial instruments - (9,466) - (9,466) Prior service credits(a) - - (2,262) (2,262) Actuarial losses(a) - - 66,590 66,590 Curtailment and settlement gains(a) - - (886) (886) Reclassifications before tax - (9,466) 63,442 53,976 Income tax benefit (expense) - 2,244 (14,896) (12,652) - (7,222) 48,546 41,324 Other comprehensive (loss) income (25,010) 20,009 (16,286) (21,287) Reclassification of certain tax effects (2,746) (970) (104,632) (108,348) Balance, end of period $ (49,608) $ 1,785 $ (581,861) $ (629,684) (a)Amounts reclassified are included in the computation of net periodic benefit cost, discussed further in Note 15. 19. Reportable Segments and Geographic Information Reportable Segments -Harley-Davidson, Inc. is the parent company for the groups of companies referred to as Harley-Davidson Motor Company (HDMC) andHarley-Davidson Financial Services (HDFS). The Company operates in two 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 HDMC which designs, manufactures and sells Harley-Davidson motorcycles as well as motorcycle parts, accessories, general merchandise and services. The Company's products are sold to retail customers primarily through a network of independent dealers. The Company conducts business on a global basis, with sales in theU.S. ,Canada ,Europe /Middle East /Africa (EMEA),Asia Pacific , andLatin America . The Financial Services segment consists of HDFS 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. HDFS also works with certain unaffiliated insurance companies to provide motorcycle insurance and protection products to motorcycle owners. HDFS conducts business principally in theU.S. andCanada . 90 --------------------------------------------------------------------------------
Selected segment information is set forth below for the years ended December 31, (in thousands):
2020 2019 2018 Motorcycles and Related Products: Motorcycles revenue $ 3,264,054 $ 4,572,678 $ 4,968,646 Gross profit 828,309 1,342,880 1,616,850 Selling, administrative and engineering expense 895,321 1,020,907 1,101,086 Restructuring expense 119,110 32,353 93,401 Operating (loss) income (186,122) 289,620 422,363 Financial Services: Financial Services revenue 790,323 789,111 748,229 Financial Services expense 583,623 523,123 457,069 Restructuring expense 10,899 - - Operating income 195,801 265,988 291,160 Operating income $ 9,679 $ 555,608 $ 713,523 Financial Services revenue includes $6.1 million, $10.0 million and $9.0 million of interest paid by HDMC to HDFS on wholesale finance receivables in 2020, 2019 and 2018, respectively. The offsetting cost of these interest incentives was recorded as a reduction to Motorcycles revenue. Additional segment information is set forth below as of December 31, (in thousands): Motorcycles Financial Services Consolidated 2020: Assets $ 2,492,515 $ 9,518,086 $ 12,010,601 Depreciation and amortization $ 177,113 $ 8,602 $ 185,715 Capital expenditures $ 128,798 $ 2,252 $ 131,050 2019: Assets $ 2,548,115 $ 7,980,044 $ 10,528,159 Depreciation and amortization $ 223,656 $ 8,881 $ 232,537 Capital expenditures $ 176,264 $ 5,176 $ 181,440 2018: Assets $ 2,562,931 $ 8,102,733 $ 10,665,664 Depreciation and amortization $ 260,707 $ 4,156 $ 264,863 Capital expenditures $ 197,905 $ 15,611 $ 213,516 91
-------------------------------------------------------------------------------- Geographic Information - Included in the Consolidated financial statements are the following amounts relating to geographic locations for the years ended December 31, (in thousands): 2020 2019 2018 Motorcycles revenue(a): United States $ 2,043,851 $ 2,971,223 $ 3,159,049 EMEA 589,943 743,385 893,589 Canada 99,219 210,381 230,211 Japan 137,815 156,644 161,370 Australia and New Zealand 107,891 117,525 147,561 Other countries 285,335 373,520 376,866 $ 3,264,054 $ 4,572,678 $ 4,968,646 Financial Services revenue(a): United States $ 757,730 $ 754,535 $ 712,898 Canada 20,353 22,799 23,120 Europe 8,300 8,435 8,411 Other countries 3,940 3,342 3,800 $ 790,323 $ 789,111 $ 748,229 Long-lived assets(b): United States $ 644,224 $ 757,594 $ 838,446 International: Thailand 94,749 78,651 50,331 Other countries 4,811 11,137 15,355 99,560 89,788 65,686 $ 743,784 $ 847,382 $ 904,132 (a)Revenue is attributed to geographic regions based on location of customer. (b)Long-lived assets include all long-term assets except those specifically excluded under ASC Topic 280, Segment Reporting, such as deferred income taxes and finance receivables. 92 -------------------------------------------------------------------------------- 20. Supplemental Consolidating Data The supplemental consolidating data is presented for informational purposes and is different than segment information due to the allocation of consolidating reporting adjustments to the reportable segments. Supplemental consolidating data for 2020 is as follows (in thousands): Year Ended December 31, 2020 Consolidating HDMC Entities HDFS Entities Adjustments Consolidated
Revenue:
Motorcycles and Related Products $ 3,279,407 $ - $ (15,353) $ 3,264,054 Financial Services - 783,421 6,902 790,323 3,279,407 783,421 (8,451) 4,054,377 Costs and expenses: Motorcycles and Related Products cost of goods sold 2,435,745 - - 2,435,745 Financial Services interest expense - 246,447 - 246,447 Financial Services provision for credit losses - 181,870 - 181,870 Selling, administrative and engineering expense 907,257 152,258 (8,888) 1,050,627 Restructuring expense 119,110 10,899 - 130,009 3,462,112 591,474 (8,888) 4,044,698 Operating (loss) income (182,705) 191,947 437 9,679 Other expense, net (1,848) - - (1,848) Investment income 107,560 - (100,000) 7,560 Interest expense 31,121 - - 31,121 (Loss) income before income taxes (108,114) 191,947 (99,563) (15,730) Income tax (benefit) provision (59,231) 42,203 - (17,028) Net (loss) income $ (48,883) $ 149,744 $ (99,563) $ 1,298 93
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December 31, 2020 Consolidating HDMC Entities HDFS Entities Adjustments Consolidated
ASSETS Current assets: Cash and cash equivalents $ 666,161 $ 2,591,042 $ - $ 3,257,203 Accounts receivable, net 220,110 - (77,028) 143,082 Finance receivables, net - 1,509,539 - 1,509,539 Inventories, net 523,497 - - 523,497 Restricted cash - 131,642 - 131,642 Other current assets 93,510 190,690 (3,730) 280,470 1,503,278 4,422,913 (80,758) 5,845,433 Finance receivables, net - 4,933,469 - 4,933,469 Property, plant and equipment, net 709,845 33,939 - 743,784 Pension and postretirement assets 95,711 - - 95,711 Goodwill 65,976 - - 65,976 Deferred income taxes 69,688 90,011 (1,161) 158,538 Lease assets 40,564 4,639 - 45,203 Other long-term assets 184,300 33,115 (94,928) 122,487 $ 2,669,362 $ 9,518,086 $ (176,847) $ 12,010,601 LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 277,429 $ 90,503 $ (77,028) $ 290,904 Accrued liabilities 444,786 115,506 (3,078) 557,214 Deposits - 79,965 - 79,965 Short-term debt - 1,014,274 - 1,014,274 Current portion of long-term debt, net - 2,039,597 - 2,039,597 722,215 3,339,845 (80,106) 3,981,954 Long-term debt, net 743,977 5,188,956 - 5,932,933 Lease liability 26,313 3,802 - 30,115 Pension and postretirement liabilities 114,206 - - 114,206 Deferred income taxes 7,166 1,441 - 8,607 Other long-term liabilities 171,242 46,514 2,245 220,001 Commitments and contingencies (Note 16) Shareholders' equity 884,243 937,528 (98,986) 1,722,785 $ 2,669,362 $ 9,518,086 $ (176,847) $ 12,010,601 94
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Year Ended December 31, 2020 Consolidating HDMC Entities HDFS Entities Adjustments Consolidated Cash flows from operating activities: Net (loss) income $ (48,883) $ 149,744 $ (99,563) $ 1,298 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 177,113 8,602 - 185,715 Amortization of deferred loan origination costs - 71,142 - 71,142 Amortization of financing origination fees 681 13,754 - 14,435 Provision for long-term employee benefits 40,833 - - 40,833 Employee benefit plan contributions and payments (20,722) - - (20,722) Stock compensation expense 17,905 1,859 3,730 23,494 Net change in wholesale finance receivables related to sales - - 531,701 531,701 Provision for credit losses - 181,870 - 181,870 Deferred income taxes (19,097) (24,697) (285) (44,079) Other, net 544 13,718 (436) 13,826 Changes in current assets and liabilities: Accounts receivable, net 161,012 - (33,355) 127,657 Finance receivables - accrued interest and other - 7,418 - 7,418 Inventories, net 80,858 - - 80,858 Accounts payable and accrued liabilities (34,755) (40,851) 32,519 (43,087) Derivative financial instruments (3,566) 85 - (3,481) Other 13,929 (4,081) (836) 9,012 414,735 228,819 533,038 1,176,592 Net cash provided by operating activities 365,852 378,563 433,475 1,177,890 Cash flows from investing activities: Capital expenditures (128,798) (2,252) - (131,050) Origination of finance receivables - (5,616,347) 2,118,861 (3,497,486) Collections on finance receivables - 6,192,625 (2,652,336) 3,540,289 Other investing activities 18,073 3,391 - 21,464
Net cash (used) provided by investing activities (110,725)
577,417 (533,475) (66,783) 95 --------------------------------------------------------------------------------
Year Ended December 31, 2020 Consolidating HDMC Entities HDFS Entities Adjustments Consolidated Cash flows from financing activities: Proceeds from issuance of medium-term notes - 1,396,602 - 1,396,602 Repayments of medium-term notes - (1,400,000) - (1,400,000) Proceeds from securitization debt - 2,064,450 - 2,064,450 Repayments of securitization debt - (1,041,751) - (1,041,751) Borrowings of asset-backed commercial paper - 225,187 - 225,187 Repayments of asset-backed commercial paper - (318,828) - (318,828) Net increase in unsecured commercial paper - 444,380 - 444,380 Deposits - 79,947 - 79,947 Dividends paid (68,087) (100,000) 100,000 (68,087) Repurchase of common stock (8,006) - - (8,006) Issuance of common stock under share-based plans 89 - - 89 Net cash (used) provided by financing activities (76,004) 1,349,987 100,000 1,373,983 Effect of exchange rate changes on cash, cash equivalents and restricted cash 16,389 2,323 - 18,712 Net increase in cash, cash equivalents and restricted cash $ 195,512 $ 2,308,290 $ - $ 2,503,802 Cash, cash equivalents and restricted cash: Cash, cash equivalents and restricted cash, beginning of period $ 470,649 $ 434,717 $ - $ 905,366 Net increase in cash, cash equivalents and restricted cash 195,512 2,308,290 - 2,503,802 Cash, cash equivalents and restricted cash, end of period $ 666,161 $ 2,743,007 $ - $ 3,409,168 21. Subsequent Event In February 2021, HDFS issued $600.0 million of secured notes through an on-balance sheet asset-backed securitization transaction at a weighted average interest rate of 0.30%. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Evaluation of Disclosure Controls and Procedures - In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K, the Company's management evaluated, with the participation of the Company's President and Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company's management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure. Management's Report on Internal Control over Financial Reporting - The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management's evaluation under the 96
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framework in Internal Control - Integrated Framework, management has concluded that the Company's internal control over financial reporting was effective as of December 31, 2020.Ernst & Young LLP , an independent registered public accounting firm, has audited the Consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of the Company's internal control over financial reporting. Attestation Report of Independent Registered Public Accounting Firm - The attestation report required under this Item 9A is contained in Item 8. Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K under the heading Report of Independent Registered Public Accounting Firm. Changes in Internal Controls - There were no changes in the Company's internal control over financial reporting that occurred during the quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting. PART III
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