HARLEY-DAVIDSON, INC. 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 the
U.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 in U.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 ).
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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 by
Motorcycle Industry Council . This third-party data is subject to revision and
update.
(c)Europe data includes Austria , Belgium , Denmark , Finland , France , Germany ,
Italy , Luxembourg, Netherlands , Norway , Spain , Sweden , Switzerland , and the
United Kingdom . Industry data is derived from information provided by Management
Services Helwig Schmitt GmbH . Prior year registrations have been revised to
exclude Greece and Portugal 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.
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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 the U.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 (incremental European Union (EU) and China tariffs
imposed beginning in 2018 on the Company's products shipped from the U.S. and
incremental U.S. tariffs imposed beginning in 2018 on certain items imported
from China ) were $24.5 million in 2020 compared to $97.9 million in 2019. The
Company began to wholesale motorcycles sourced from its Thailand facility in the
EU during the second quarter of 2020 which reduced the cost of tariffs incurred
through the majority of 2020.
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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 the U.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 the U.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 at December 31, 2020
decreased to 3.18% from 4.39% at December 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 at December 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 on January 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.
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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)On January 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.
At December 31, 2020 , the allowance for credit losses on finance receivables was
$371.7 million for retail receivables and $19.2 million for wholesale
receivables. At December 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
ended December 31, 2019 filed with the SEC on February 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 the Audit and Finance Committee of the Company's Board
of Directors.
Allowance for Credit Losses on Retail Finance Receivables - On January 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 of December 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 after
January 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 to January 1, 2020 , the Company performed a periodic and
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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 of December 31,
2019 to 2.62% as of December 31, 2020 . The Company decreased the
weighted-average discount rate for postretirement healthcare obligations from
3.26% as of December 31, 2019 to 2.11% as of December 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 of December 31,
2020 , the Company set its healthcare cost trend rate at 7.00% as of December 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 the U.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
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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 The Hardwire , the Company expects its business model to generate cash
that will allow it to invest in the business and brand, fund The Hardwire
initiatives, and return value to shareholders.(1) The Company's cash allocation
priorities are first to fund growth through The Hardwire 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 at
December 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 at December 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 of December 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 ended
December 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 ended
December 31, 2020 and 2019, respectively. As of December 31, 2020 , there were
18.2 million shares remaining on a board-approved share repurchase
authorization.
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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 of December 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. At December 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 the Federal Deposit
Insurance Corporation (FDIC) insurance coverage limits.
Credit Facilities - In April 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 in April 2021 . The new five-year credit facility
matures in April 2025 . The Company also amended its $780.0 million five-year
credit facility to $707.5 million with no change to the maturity date of April
2023 . The Company also had a $195.0 million 364-day credit facility which was
due to mature in May 2020 . In April 2020 , the Company extended the maturity date
of this credit facility to August 2020 ; however, this facility was terminated on
May 18, 2020 . At the time of termination, there were no outstanding borrowings
under this 364-day credit facility. On June 1, 2020 , the Company entered into a
new $350.0 million 364-day credit facility, and on June 4, 2020 , the Company
borrowed $150.0 million under this facility. On December 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 of December 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-backed U.S. commercial paper conduit facilities or through the use of
operating cash flow and cash on hand.(1)
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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 to U.S. dollar at
December 31, 2020
(b)Euro denominated €600.0 million par value remeasured to U.S. dollar at
December 31, 2020
The fixed-rate U.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 at December 31, 2020 and 2019, respectively.
Senior Notes - In July 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 in July 2025 and have an interest rate of 3.50%, and
$300.0 million of the senior notes mature in July 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 to C$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 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 between the Company and the
lenders, as of December 31, 2020 , the Canadian Conduit has an expiration date of
June 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-Backed U.S. Commercial Paper Conduit Facilities VIE -
Until November 25, 2020 , the Company had two separate agreements with
third-party bank-sponsored asset-backed U.S. commercial paper conduits, a $300.0
million revolving facility agreement and a $600.0 million revolving facility
agreement (together, the Former U.S. Conduit Facilities). On November 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-backed U.S. commercial paper conduits. Under the revolving
facility agreement, the Company may transfer U.S. retail motorcycle finance
receivables to an SPE, which in turn may issue debt to those third-party
bank-sponsored asset-backed U.S. commercial paper conduits. In addition to the
$900.0 million aggregate commitment, the agreement allows for additional
borrowings, at the lender's discretion, of up to $300.0 million . Availability
under the $900.0 million revolving facility (the U.S. Conduit Facility) is based
on, among other things, the amount of eligible U.S. retail motorcycle finance
receivables held by the SPE as collateral.
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In 2020, the Company transferred $195.3 million of U.S. retail motorcycle
finance receivables to an SPE which, in turn, issued $163.6 million of debt
under the Former U.S. Conduit Facilities. In 2019, the Company transferred
$174.4 million of U.S. retail motorcycle finance receivables to an SPE which, in
turn, issued $154.6 million of debt under the Former U.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. The U.S. Conduit Facility also provides for an unused commitment fee
based on the unused portion of the total aggregate commitment. When calculating
the unused fee, the aggregate commitment does not include any unused portion of
the $300.0 million additional borrowings allowed. There is no amortization
schedule; however, the debt is reduced monthly as available collections on the
related finance receivables are applied to outstanding principal. Upon
expiration of the U.S. Conduit Facility, any outstanding principal will continue
to be reduced monthly through available collections. The expected remaining term
of the related receivables held by the SPE is approximately 4 years. Unless
earlier terminated or extended by mutual agreement of the Company and the
lenders, as of December 31, 2020 , the U.S. Conduit Facility has an expiration
date of November 19, 2021 .
Asset-Backed Securitization VIEs - For all of its asset-backed securitization
transactions, the Company transfers U.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 purchased U.S. retail motorcycle finance receivables.
The U.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 of U.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 of U.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 the U.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.
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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 the U.S. or Canadian asset-backed commercial paper conduit
facilities.
At December 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 The Hardwire , 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 in India ; (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 the European Union , China , and the Company's Association of
Southeast Asian Nations (ASEAN) countries that does not subject its motorcycles
to incremental tariffs; (r) manage its Thailand 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
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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 Risk
The 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 the U.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. At December 31,
2020 and 2019, the notional U.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 the U.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
of December 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. At December 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 of December 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
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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 of December 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
of December 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 of December 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 of December 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 the U.S.
dollar relative to foreign currencies and interest rates. At December 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. At December 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 of December 31, 2020 and 2019, respectively. The
amount as of December 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
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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
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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,
effective January 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
ended December 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 1982
Milwaukee, Wisconsin
February 23, 2021
43
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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
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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
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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
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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
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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 of Harley-Davidson, Inc. and its
subsidiaries, all of which are wholly-owned (the Company), including the
accounts of the group of companies referred to as Harley-Davidson Motor Company
(HDMC) and Harley-Davidson Financial Services (HDFS). In addition, certain
variable interest entities (VIEs) related to secured financing are consolidated
as the Company is the primary beneficiary. All intercompany accounts and
material intercompany transactions 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 ended December 31, 2020 , 2019 and 2018, respectively.
Use of Estimates - The preparation of financial statements in conformity with
U.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 in
March 2020 . The COVID-19 pandemic has restricted the level of economic activity
in the U.S. and around the world and the full extent of its impact is not yet
known. The Company's financial results for the period ending December 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 the U.S. and Canada 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 of
December 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 the U.S. and Canada 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 the U.S. are valued
using the last-in, first-out (LIFO) method. Other inventories totaling $221.9
million and $326.5 million at December 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.
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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
In July 2016 , the Financial 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 on January 1, 2020 using a modified retrospective approach
for financial instruments measured at amortized cost.
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On January 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 applicable U.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.
In January 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 on
January 1, 2020 on a prospective basis. The adoption of ASU 2017-04 did not have
an effect on the Company's consolidated financial statements.
In August 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 on January 1, 2020 . The adoption of ASU 2018-13 did
not have a material impact on the Company's disclosures.
In August 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 on January 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
In December 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
after December 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.
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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 ended
December 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 the U.S. and
Canada 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 the
U.S. and Canada 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.
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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 the U.S. and Canada . HDFS also works with third-party
financial institutions that issue credit cards or offer other financial products
bearing the Harley-Davidson brand in the U.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 of December 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 in India . The workforce reduction resulted in the
termination of approximately 500 employees. In addition, the India action will
result in the termination of approximately 70 employees.
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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 of December 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 in Kansas City, Missouri , into its plant in York ,
Pennsylvania , and the closure of its wheel operations in Adelaide, Australia
(Manufacturing Optimization Plan). The consolidation of operations resulted in
the elimination of approximately 800 jobs at the Kansas City facility and the
addition of approximately 450 jobs at the York facility through 2019. The
Adelaide facility closure resulted in the elimination of approximately 90 jobs.
Through December 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--------------------------------------------------------------------------------
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 ended December 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--------------------------------------------------------------------------------
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
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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 had Wisconsin research and development credit carryforwards of
$33.8 million at December 31, 2020 , expiring in 2024-2035.
At December 31, 2020 , the Company had a deferred tax asset of $45.9 million
related to its state operating loss and Wisconsin 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 at December 31, 2020 and
included $17.7 million related to state operating loss and Wisconsin 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 and Wisconsin 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.
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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 of December 31, 2020 and 2019, respectively.
Property, plant and equipment, net consisted of the following as of December 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 of December 31, 2020
and 2019, respectively.
Accrued liabilities consisted of the following as of December 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. At December 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 the Federal Deposit
Insurance Corporation insurance coverage limits.
60
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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 at December 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 at December 31, 2020 and 2019, respectively.
Wholesale finance receivables are generally contractually due within one year.
As of December 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
On January 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 of December 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 after
January 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 to January 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
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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 after January 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 to January 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 the
January 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 the U.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 ended December 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)On January 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's
U.S. and Canadian retail finance receivables, the Company determines the credit
quality indicator for each loan at origination and does not update the credit
quality indicator subsequent to the loan origination date.
As loan performance by credit quality indicator differs between the U.S. and
Canadian retail loans, the Company's credit quality indicators vary for the two
portfolios. For U.S. retail finance receivables, those with a FICO score of 740
or above at origination are generally considered super prime, loans with a FICO
score between 640 and 740 are generally categorized as prime, and loans with
FICO score below 640 are generally considered sub-prime. For Canadian retail
finance receivables, those with a FICO score of 700 or above at origination are
generally considered super prime, loans with a FICO score between 620 and 700
are generally categorized as prime, and loans with FICO score below 620 are
generally considered sub-prime.
The amortized cost of the Company's U.S. and Canadian retail finance receivables
by vintage and credit quality indicator, at December 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 at December 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's January 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, at December 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
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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 at December 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 of
December 31, 2020 and December 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
On March 4, 2019 , the Company purchased certain assets and liabilities of
StaCyc, 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 ended December 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
at December 31, 2020 and 2019 differ from the acquisition date amounts due to
changes in foreign currency exchange rates. Intangible assets at December 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 ended December 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
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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 to U.S. dollar at
December 31, 2020
(b)Euro denominated €600.0 million par value remeasured to U.S. dollar at
December 31, 2020 and 2019, respectively
The Company's future principal payments on debt obligations as of December 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% at December 31, 2020 and 2019,
respectively.
Credit Facilities - In April 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 in April 2021 . The new five-year credit facility
matures in April 2025 . The Company also amended the $780.0 million five-year
credit facility to $707.5 million with no change to the maturity date of April
2023 . The Company also had a $195.0 million 364-day credit facility which was
due to mature in May 2020 . In April 2020 , the Company extended the maturity date
of this credit facility to August 2020 ; however, this facility was terminated on
May 18, 2020 . At the time of termination, there were no outstanding borrowings
under this 364-day credit facility. On June 1, 2020 , the Company entered into a
new $350.0 million 364-day credit facility, and on June 4, 2020 , the Company
borrowed $150.0 million under this facility. On December 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
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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-rate U.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 the U.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 the U.S. or Canadian asset-backed commercial paper conduit
facilities.
At December 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 under U.S. GAAP. Each SPE then converts those
assets into cash, through the issuance of debt. The Company retains servicing
rights for all of the retail motorcycle finance receivables transferred to SPEs
as part of an asset-backed financing. The accounting treatment for asset-backed
financings depends on the terms of the related transaction and the Company's
continuing involvement with the VIE.
In transactions where the Company has power over the significant activities of
the VIE and has an obligation to absorb losses or the right to receive benefits
from the VIE that are potentially significant to the VIE, the Company is the
primary beneficiary of the VIE and consolidates the VIE within its consolidated
financial statements. On a consolidated basis, the asset-backed financing is
treated as a secured borrowing in this type of transaction and is referred to as
an on-balance sheet asset-backed financing.
In transactions where the Company is not the primary beneficiary of the VIE, the
Company must determine whether it can achieve a sale for accounting purposes
under ASC Topic 860, Transfers and Servicing (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
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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 at December 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-backed U.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-backed U.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 transfers U.S.
retail motorcycle finance receivables to SPEs which in turn issue secured notes
to investors, with various maturities and interest rates, secured by future
collections of the purchased U.S. retail motorcycle finance receivables. Each
on-balance sheet asset-backed securitization SPE is a separate legal entity, and
the U.S. retail motorcycle finance receivables included in the asset-backed
securitizations are only available for payment of the secured debt and other
obligations arising from the asset-backed securitization transactions and are
not available to pay other obligations or claims of the Company's creditors
until the associated secured debt and other obligations are satisfied.
Restricted cash balances held by the SPEs are used only to support the
securitizations. There are no amortization schedules for the secured notes;
however, the debt is reduced monthly as available collections on the related
U.S. retail motorcycle finance receivables are applied to outstanding principal.
The secured notes currently have various contractual maturities ranging from
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 of U.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 of U.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.
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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 at
December 31, 2019 that were repaid in full during 2020. For the years ended
December 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% at
December 31, 2020 and 2019, respectively.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE -
Until November 25, 2020 , the Company had two separate agreements with
third-party bank-sponsored asset-backed U.S. commercial paper conduits, a
$300.0 million revolving facility agreement and a $600.0 million revolving
facility agreement (together, the Former U.S. Conduit Facilities). On November
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-backed U.S. commercial paper conduits. Under
the revolving facility agreement, the Company may transfer U.S. retail
motorcycle finance receivables to an SPE, which in turn may issue debt to those
third-party bank-sponsored asset-backed U.S. commercial paper conduits. In
addition to the $900.0 million aggregate commitment, the agreement allows for
additional borrowings, at the lender's discretion, of up to $300.0 million .
Availability under the $900.0 million revolving facility (the U.S. Conduit
Facility) is based on, among other things, the amount of eligible U.S. retail
motorcycle finance receivables held by the SPE as collateral.
Under the U.S. Conduit Facility, the assets of the SPE are restricted as
collateral for the payment of the debt or other obligations arising in the
transaction and are not available to pay other obligations or claims of the
Company's creditors. The terms for this debt provide for interest on the
outstanding principal based on prevailing commercial paper rates if funded by a
conduit lender through the issuance of commercial paper. If not funded by a
conduit lender through the issuance of commercial paper, the terms of the
interest are based on LIBOR. In each of these cases, a program fee is assessed
based on the outstanding principal. The U.S. Conduit Facility also provides for
an unused commitment fee based on the unused portion of the total aggregate
commitment. When calculating the unused fee, the aggregate commitment does not
include any unused portion of the $300.0 million additional borrowings allowed.
There is no amortization schedule; however, the debt is reduced monthly as
available collections on the related finance receivables are applied to
outstanding principal. Upon expiration of the U.S. Conduit Facility, any
outstanding principal will continue to be reduced monthly through available
collections. The expected remaining term of the related receivables held by the
SPE is approximately 4 years. Unless earlier terminated or extended by mutual
agreement of the Company and the lenders, as of December 31, 2020 , the U.S.
Conduit Facility has an expiration date of November 19, 2021 .
The Company is the primary beneficiary of its U.S. Conduit Facility VIE because
it retains servicing rights and a residual interest in the VIE in the form of a
debt security. As the servicer, the Company is the variable interest holder with
the power to direct the activities of the VIE that most significantly impact the
VIE's economic performance. As a residual interest holder, the Company has the
obligation to absorb losses and the right to receive benefits which could
potentially be significant to the VIE.
In 2020, the Company transferred $195.3 million of U.S. retail motorcycle
finance receivables to an SPE which, in turn, issued $163.6 million of debt
under the Former U.S. Conduit Facilities. In 2019, the Company transferred
$174.4 million of U.S. retail motorcycle finance receivables to an SPE which, in
turn, issued $154.6 million of debt under the Former U.S. Conduit Facilities.
For the year ended December 31, 2020 interest expense under the Former U.S.
Conduit Facilities and U.S. Conduit Facility was a total of $8.9 million. For
the year ended December 31, 2019 interest expense under the Former U.S. Conduit
Facilities was $18.5 million. The interest expense is included in Financial
Services interest expense. The weighted average interest rate of the outstanding
U.S. Conduit Facility was 1.61% at December 31, 2020. The weighted average
interest rate of the outstanding Former U.S. Conduit Facilities was 2.63% at
December 31, 2019.
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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
transferred U.S. retail motorcycle finance receivables to an SPE which in turn
issued secured notes to investors, with various maturities and interest rates,
secured by future collections of the purchased U.S. retail motorcycle finance
receivables. The off-balance sheet asset-backed securitization SPE was a
separate legal entity, and the U.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
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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
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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
the U.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.
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14. Product Warranty and Recall Campaigns
The Company currently provides a standard two-year limited warranty on all new
motorcycles sold worldwide, except in Japan , 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
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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.
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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 11,556Expected 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 the U.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 of U.S. government and agency securities, state and municipal bonds,
corporate bonds from diversified industries and foreign obligations. In
addition, cash
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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 the U.S. , investments in developed
and emerging foreign markets and other investments such as private equity and
real estate. Fixed-income holdings consist of U.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
1,038,799 110,572 928,227Plan 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 20,858Plan 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
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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
924,055 115,908 808,147Plan 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.
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--------------------------------------------------------------------------------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 17,537Plan 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
the U.S. Navy related to a matter involving the cleanup of soil and groundwater
contamination at its York , Pennsylvania facility. The York facility was formerly
used by the U.S. Navy and AMF prior to the purchase of the York facility by the
Company from AMF in 1981. The Company has an agreement with the U.S. Navy which
calls for the U.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 the York facility (Response Costs).
A site wide remedial investigation/feasibility study and a proposed final remedy
for the York facility have been completed and approved by the Pennsylvania
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-
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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
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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)
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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) and
Harley-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 the U.S. , Canada , Europe /Middle
East /Africa (EMEA), Asia Pacific , and Latin 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 the U.S. and Canada .
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--------------------------------------------------------------------------------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
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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.
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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 ConsolidatedRevenue:
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
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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
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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)
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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--------------------------------------------------------------------------------
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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