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 and Harley-Davidson Financial Services. 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 resulting from foreign currency remeasurements was $22.0 million, $3.8 million, and $18.0 million for the years ended December 31, 2021, 2020 and 2019, 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.
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 $2.4 million and $3.7 million as of December 31, 2021 and 2020, 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 Harley-Davidson Financial Services by the purchasing 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 $318.5 million and $221.9 million at December 31, 2021 and 2020, 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.
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 2021 and 2020, 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.
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 $175.1 million, $202.4 million and $216.5 million for 2021, 2020 and 2019, 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 2021, 2020 and 2019, the Company incurred $107.6 million, $134.6 million and $171.4 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 December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Income Taxes (Topic 740): 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 Company adopted ASU 2019-12 on January 1, 2021 on a prospective basis. The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements.
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): | | | | | | | | | | | |
| 2021 | | 2020 |
| Motorcycles and Related Products: | | | |
| Motorcycles | $ | 3,477,395 | | | $ | 2,350,407 | |
| Parts and accessories | 741,797 | | | 659,634 | |
| Apparel | 228,106 | | | 186,068 | |
| Licensing | 37,790 | | | 29,750 | |
| Other | 55,152 | | | 38,195 | |
| 4,540,240 | | | 3,264,054 | |
| Financial Services: | | | |
| Interest income | 671,708 | | | 682,517 | |
| Other | 124,360 | | | 107,806 | |
| 796,068 | | | 790,323 | |
| $ | 5,336,308 | | | $ | 4,054,377 | |
Motorcycles and Related Products
Motorcycles, Parts and Accessories, and Apparel – Revenues from the sale of motorcycles, parts and accessories, and apparel 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 Harley-Davidson Financial Services and the related receivables are included in Finance receivables, net on the Consolidated balance sheets.
The Company offers sales incentive programs to dealers and retail customers designed to promote the sale of motorcycles, parts and accessories, and apparel. 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 parts and accessories and apparel. 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 2021 and 2020.
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 parts and accessories. 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.
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 Accounting Standards Codification (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 4 years.
Other – Other revenue consists primarily of revenue from Harley Owners Group® (H.O.G.) membership sales, sales of electric balance bikes for children, 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. Harley-Davidson Financial Services works with certain unaffiliated insurance companies to offer motorcycle insurance and protection products through most dealers in the U.S. and Canada. Harley-Davidson Financial Services 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 4 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): | | | | | | | | | | | |
| 2021 | | 2020 |
| Balance, beginning of period | $ | 36,614 | | | $ | 29,745 | |
| Balance, end of period | $ | 40,092 | | | $ | 36,614 | |
Previously deferred revenue recognized as revenue in 2021 and 2020 was $24.7 million and $19.7 million, respectively. The Company expects to recognize approximately $18.3 million of the remaining unearned revenue in 2022 and $21.8 million thereafter.
3. Restructuring Activities
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 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 resulted in the termination of approximately 70 employees.
Since the inception of the 2020 restructuring activities, the Company has incurred cumulative restructuring expenses of $133.4 million, including $121.8 million and $11.6 million in the Motorcycles and Financial Services segments, respectively. The Company does not expect restructuring expenses of any significance in 2022.
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): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | |
| Employee Termination Benefits | | Contract Terminations
& Other | | Non-Current Asset Adjustments | | Total | | | | | | | | |
| Balance, beginning of period | $ | 7,724 | | | $ | 16,196 | | | $ | — | | | $ | 23,920 | | | | | | | | | |
| Restructuring (benefit) expense | (1,400) | | | 4,405 | | | 410 | | | 3,415 | | | | | | | | | |
Utilized – cash | (6,025) | | | (17,608) | | | — | | | (23,633) | | | | | | | | | |
Utilized – non cash | — | | | — | | | (410) | | | (410) | | | | | | | | | |
| Foreign currency changes | (178) | | | (119) | | | — | | | (297) | | | | | | | | | |
| Balance, end of period | $ | 121 | | | $ | 2,874 | | | $ | — | | | $ | 2,995 | | | | | | | | | |
| 2020 | | |
| Employee Termination Benefits | | Contract Terminations
& Other | | Non-Current Asset 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 included 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 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 Benefits | | Accelerated Depreciation | | Other | | Total | | Employee Termination Benefits | | Total |
| Balance, beginning of period | $ | 24,958 | | | $ | — | | | $ | 79 | | | $ | 25,037 | | | $ | 3,461 | | | $ | 28,498 | |
| Restructuring expense (benefit) | 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 | |
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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 of $10.3 million.
4. Income Taxes
Income tax provision (benefit) for the years ended December 31, consists of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Current: | | | | | |
| Federal | $ | 134,111 | | | $ | 4,877 | | | $ | 82,484 | |
| State | 14,508 | | | 2,614 | | | 6,421 | |
| Foreign | 28,266 | | | 19,560 | | | 23,328 | |
| 176,885 | | | 27,051 | | | 112,233 | |
| Deferred: | | | | | |
| Federal | (2,169) | | | (30,779) | | | 18,760 | |
| State | (3,795) | | | (11,579) | | | 402 | |
| Foreign | (1,708) | | | (1,721) | | | 2,385 | |
| (7,672) | | | (44,079) | | | 21,547 | |
| $ | 169,213 | | | $ | (17,028) | | | $ | 133,780 | |
The components of Income (loss) before income taxes for the years ended December 31, were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Domestic | $ | 698,578 | | | $ | (81,522) | | | $ | 465,798 | |
| Foreign | 120,659 | | | 65,792 | | | 91,617 | |
| $ | 819,237 | | | $ | (15,730) | | | $ | 557,415 | |
Income tax provision (benefit) differs from the amount that would be provided by applying the statutory U.S. corporate income tax rate for the years ended December 31, due to the following items (in thousands):
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| 2021 | | 2020 | | 2019 |
| Provision (benefit) at statutory rate | $ | 172,040 | | | $ | (3,303) | | | $ | 117,057 | |
| State taxes, net of federal benefit | 16,568 | | | 822 | | | 14,165 | |
| Foreign rate differential | 4,303 | | | 60 | | | 1,665 | |
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| Foreign derived intangible income | — | | | — | | | (3,108) | |
| Research and development credit | (8,046) | | | (8,442) | | | (8,200) | |
| Unrecognized tax benefits including interest and penalties | (6,554) | | | (8,567) | | | 289 | |
| Valuation allowance adjustments | (1,928) | | | 9,675 | | | 8,070 | |
| State credits | (5,403) | | | (13,106) | | | (4,704) | |
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| Global intangible low-taxed income | 1,143 | | | 1,480 | | | 1,113 | |
| Adjustments for previously accrued taxes | (8,500) | | | (4,951) | | | (1,755) | |
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| Executive compensation limitation | 3,104 | | | 2,543 | | | 2,620 | |
| Other foreign inclusions | 34 | | | 4,415 | | | 4,202 | |
| Other | 2,452 | | | 2,346 | | | 2,366 | |
| Income tax provision (benefit) | $ | 169,213 | | | $ | (17,028) | | | $ | 133,780 | |
The 2017 Tax Cuts and Jobs Act subjects U.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 of December 31, include the following (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Deferred income tax assets: | | | |
| Accruals not yet tax deductible | $ | 133,150 | | | $ | 142,100 | |
| Pension and postretirement healthcare plan obligations | — | | | 6,499 | |
| Stock compensation | 10,908 | | | 9,619 | |
| Net operating loss and research & development tax credit carryforwards | 60,401 | | | 55,857 | |
| Other | 66,245 | | | 78,051 | |
| 270,704 | | | 292,126 | |
| Valuation allowance | (33,596) | | | (38,072) | |
| 237,108 | | | 254,054 | |
| Deferred income tax liabilities: | | | |
| Depreciation, tax in excess of book | (66,301) | | | (74,579) | |
| Pension and postretirement healthcare plan obligations | (67,741) | | | — | |
| Other | (29,405) | | | (29,544) | |
| (163,447) | | | (104,123) | |
| $ | 73,661 | | | $ | 149,931 | |
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's gross state net operating loss carryforwards were as follows at December 31, (in thousands): | | | | | | | | | | | | | | |
| Year of Expiration | | 2021 | | 2020 |
| 2031 | | $ | 236,624 | | | $ | 252,142 | |
| 2033 | | 46 | | | 49 | |
| 2034 | | 112 | | | 2,455 | |
| 2035 | | 7,882 | | | 7,800 | |
| 2037 | | 433 | | | — | |
| 2038 | | 5,601 | | | 3,992 | |
| 2039 | | 13,581 | | | 11,710 | |
| 2040 | | 34,613 | | | 29,836 | |
| 2041 | | 3,486 | | | — | |
| Indefinite | | 8,441 | | | 9,449 | |
| | $ | 310,819 | | | $ | 317,433 | |
The Company also had Wisconsin research and development credit carryforwards of $38.1 million at December 31, 2021, expiring in 2024-2036 and a foreign tax credit carryforward of $4.0 million expiring in 2030-2031.
At December 31, 2021, the Company had a deferred tax asset of $48.9 million related to its state net operating loss and Wisconsin research and development credit carryforwards and a deferred tax asset of $11.5 million related to foreign net operating losses.
The Company's valuation allowance was $33.6 million at December 31, 2021 and included $18.2 million related to state net operating loss and Wisconsin research and development credit carryforwards, $7.2 million related to foreign net operating loss carryforwards and $8.1 million related to other deferred tax assets. The change in the valuation allowance from prior year included an increase of $0.6 million related to state net operating loss and Wisconsin research and development credit carryforwards and a decrease of $5.1 million related to foreign operations.
The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax provision (benefit). Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands): | | | | | | | | | | | |
| 2021 | | 2020 |
| Unrecognized tax benefits, beginning of period | $ | 50,597 | | | $ | 60,112 | |
| Increase in unrecognized tax benefits for tax positions taken in a prior period | 35 | | | 1,649 | |
| Decrease in unrecognized tax benefits for tax positions taken in a prior period | (6,402) | | | (12,560) | |
| Increase in unrecognized tax benefits for tax positions taken in the current period | 3,188 | | | 3,092 | |
| Statute lapses | (2,340) | | | — | |
| Settlements with taxing authorities | (222) | | | (1,696) | |
| Unrecognized tax benefits, end of period | $ | 44,856 | | | $ | 50,597 | |
The amount of unrecognized tax benefits as of December 31, 2021 and 2020 that, if recognized, would affect the effective tax rate was $38.4 million and $43.8 million, respectively.
The total gross amount of benefit related to interest and penalties associated with unrecognized tax benefits recognized during 2021, 2020 and 2019 in the Consolidated statements of operations was $2.6 million, $2.1 million and $0.1 million, respectively.
The total gross amount of interest and penalties associated with unrecognized tax benefits recognized at December 31, 2021 and 2020 in the Consolidated balance sheets was $22.9 million and $25.5 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 ending December 31, 2022. 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 the U.S. federal and Wisconsin state jurisdictions and various other state and foreign jurisdictions. The Company is no longer subject to income tax examinations for Wisconsin state income taxes before 2017 or for U.S. federal income taxes before 2018.
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 at December 31, was as follows:
| | | | | | | | | | | |
| 2021 | | 2020 |
| Common stock shares: | | | |
| Authorized | 800,000,000 | | | 800,000,000 | |
| Issued | 169,364,686 | | | 168,503,526 | |
| Outstanding | 153,569,061 | | | 152,930,740 | |
| | | |
| Treasury stock shares | 15,795,625 | | | 15,572,786 | |
There were no discretionary share repurchases during the years ended December 31, 2021 and 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 (RSUs) and performance shares were $11.6 million or 0.3 million shares, $8.0 million or 0.3 million shares, and $9.8 million or 0.3 million shares during the years ended December 31, 2021, 2020 and 2019, respectively, discussed further in Note 17.
The Company paid cash dividends of $0.60, $0.44, and $1.50 per share during the years ended December 31, 2021, 2020, and 2019, respectively.
Earnings Per Share – The computation of basic and diluted earnings per share for the years ended December 31, was as follows (in thousands except per share amounts):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Net income | $ | 650,024 | | | $ | 1,298 | | | $ | 423,635 | |
| | | | | |
| Basic weighted-average shares outstanding | 153,747 | | | 153,186 | | | 157,054 | |
| Effect of dilutive securities – employee stock compensation plan | 1,233 | | | 722 | | | 750 | |
| Diluted weighted-average shares outstanding | 154,980 | | | 153,908 | | | 157,804 | |
| Earnings per share: | | | | | |
| Basic | $ | 4.23 | | | $ | 0.01 | | | $ | 2.70 | |
| Diluted | $ | 4.19 | | | $ | 0.01 | | | $ | 2.68 | |
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 0.5 million, 1.4 million and 1.1 million shares during 2021, 2020 and 2019, respectively.
6. Additional Balance Sheet and Cash Flow Information
Investments in marketable securities consisted of the following at December 31, (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
| | | |
| Mutual funds | $ | 49,650 | | | $ | 52,061 | |
| | | |
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.
Inventories, net consisted of the following as of December 31, (in thousands): | | | | | | | | | | | |
| 2021 | | 2020 |
| Raw materials and work in process | $ | 347,915 | | | $ | 211,979 | |
| Motorcycle finished goods | 345,956 | | | 281,132 | |
| Parts and accessories and apparel | 103,191 | | | 84,469 | |
| Inventory at lower of FIFO cost or net realizable value | 797,062 | | | 577,580 | |
| Excess of FIFO over LIFO cost | (84,120) | | | (54,083) | |
| $ | 712,942 | | | $ | 523,497 | |
Inventory obsolescence reserves deducted from FIFO cost were $63.0 million and $72.0 million as of December 31, 2021 and 2020, respectively.
Property, plant and equipment, net consisted of the following as of December 31, (in thousands): | | | | | | | | | | | |
| 2021 | | 2020 |
| Land and related improvements | $ | 71,549 | | | $ | 69,518 | |
| Buildings and related improvements | 405,160 | | | 428,171 | |
| Machinery and equipment | 1,614,177 | | | 1,577,337 | |
| Software | 750,490 | | | 759,675 | |
| Construction in progress | 113,615 | | | 188,823 | |
| 2,954,991 | | | 3,023,524 | |
| Accumulated depreciation | (2,271,007) | | | (2,279,740) | |
| $ | 683,984 | | | $ | 743,784 | |
Software, net of accumulated amortization, included in Property, plant and equipment, net, was $79.8 million and $100.7 million as of December 31, 2021 and 2020, respectively.
Accrued liabilities consisted of the following as of December 31, (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Payroll, employee benefits and related expenses | $ | 159,474 | | | $ | 107,511 | |
| Sales incentive programs | 42,980 | | | 52,820 | |
| Warranty and recalls | 39,635 | | | 44,415 | |
| Interest | 54,001 | | | 65,590 | |
| Tax-related accruals | 34,279 | | | 24,238 | |
| Deferred revenue | 18,293 | | | 18,070 | |
| Leases | 17,369 | | | 17,081 | |
| Fair value of derivative financial instruments | 2,361 | | | 25,521 | |
| Restructuring | 2,995 | | | 23,920 | |
| Other | 230,594 | | | 178,048 | |
| $ | 601,981 | | | $ | 557,214 | |
Deposits – Beginning in 2020, Harley-Davidson Financial Services 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. The Company had $290.3 million and $80.0 million, net of fees, of interest-bearing brokered certificates of deposit outstanding as of December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021, the liabilities for deposits are included in Short-term deposits, net or Long-term deposits, net on the Consolidated balance sheets based upon the term of each brokered certificate of deposit issued. As of December 31, 2020, all deposits were classified as short-term. 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.
Future maturities of the Company's certificates of deposit as of December 31, 2021 were as follows (in thousands):
| | | | | |
| 2022 | $ | 72,475 | |
| 2023 | 74,304 | |
| 2024 | 64,696 | |
| 2025 | — | |
| 2026 | 79,742 | |
| Thereafter | — | |
| Unamortized fees | (891) | |
| $ | 290,326 | |
Operating Cash Flow – The reconciliation of Net income to Net cash provided by operating activities for the years ended December 31, was as follows (in thousands): | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 650,024 | | | $ | 1,298 | | | $ | 423,635 | |
| Adjustments to reconcile Net income to Net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 165,185 | | | 185,715 | | | 232,537 | |
| Amortization of deferred loan origination costs | 86,115 | | | 71,142 | | | 76,326 | |
| Amortization of financing origination fees | 13,810 | | | 14,435 | | | 9,823 | |
| Provision for long-term employee benefits | 8,317 | | | 40,833 | | | 13,344 | |
| Employee benefit plan contributions and payments | (17,133) | | | (20,722) | | | (13,256) | |
| Stock compensation expense | 42,156 | | | 23,494 | | | 33,733 | |
| Net change in wholesale finance receivables related to sales | 89,001 | | | 531,701 | | | (5,822) | |
| Provision for credit losses | 25,049 | | | 181,870 | | | 134,536 | |
| | | | | |
| | | | | |
| | | | | |
| Deferred income taxes | (7,672) | | | (44,079) | | | 21,547 | |
| Other, net | (9,985) | | | 10,345 | | | 2,234 | |
| Changes in current assets and liabilities: | | | | | |
| Accounts receivable, net | (53,463) | | | 127,657 | | | 44,902 | |
| Finance receivables – accrued interest and other | 13,316 | | | 7,418 | | | (11,119) | |
| Inventories, net | (207,550) | | | 80,858 | | | (47,576) | |
| Accounts payable and accrued liabilities | 173,548 | | | (43,087) | | | (18,462) | |
| | | | | |
| Other current assets | 4,983 | | | 9,012 | | | (28,110) | |
| 325,677 | | | 1,176,592 | | | 444,637 | |
| Net cash provided by operating activities | $ | 975,701 | | | $ | 1,177,890 | | | $ | 868,272 | |
Cash paid during the years ended December 31, for interest and income taxes was as follows (in thousands): | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Interest | $ | 191,663 | | | $ | 245,961 | | | $ | 229,678 | |
| Income taxes | $ | 155,579 | | | $ | 30,675 | | | $ | 149,828 | |
Interest paid represents interest payments of Harley-Davidson Financial Services 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 dealers in the U.S. and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts and are primarily related to 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 of December 31, 2021 and 2020, approximately 11% of gross outstanding retail finance receivables were originated in Texas; there were no other states that accounted for more than 10% of gross outstanding retail finance receivables.
The Company offers wholesale financing to its dealers in the U.S. and Canada. 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.
Finance receivables, net at December 31, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| Retail finance receivables: | | | | | | | | | |
| United States | $ | 6,303,293 | | | $ | 6,128,269 | | | $ | 6,180,236 | | | $ | 6,103,378 | | | $ | 5,901,002 | |
| Canada | 190,226 | | | 215,926 | | | 236,192 | | | 224,823 | | | 239,598 | |
| 6,493,519 | | | 6,344,195 | | | 6,416,428 | | | 6,328,201 | | | 6,140,600 | |
| Wholesale finance receivables: | | | | | | | | | |
| United States | 400,160 | | | 459,495 | | | 1,067,880 | | | 1,007,956 | | | 939,621 | |
| Canada | 17,621 | | | 30,254 | | | 88,639 | | | 75,659 | | | 77,336 | |
| 417,781 | | | 489,749 | | | 1,156,519 | | | 1,083,615 | | | 1,016,957 | |
| 6,911,300 | | | 6,833,944 | | | 7,572,947 | | | 7,411,816 | | | 7,157,557 | |
| Allowance for credit losses | (339,379) | | | (390,936) | | | (198,581) | | | (189,885) | | | (192,471) | |
| | | | | | | | | |
| | | | | | | | | |
| $ | 6,571,921 | | | $ | 6,443,008 | | | $ | 7,374,366 | | | $ | 7,221,931 | | | $ | 6,965,086 | |
Approved but unfunded retail finance loans totaled $175.9 million and $134.9 million at December 31, 2021 and 2020, respectively. Unused lines of credit extended to the Company's wholesale finance customers totaled $1.70 billion and $1.64 billion at December 31, 2021 and 2020, respectively.
Wholesale finance receivables are generally contractually due within one year. As of December 31, 2021, contractual maturities of total finance receivables were as follows (in thousands): | | | | | | | | | | | | | | | | | |
| United States | | Canada | | Total |
| 2022 | $ | 1,468,277 | | | $ | 58,001 | | | $ | 1,526,278 | |
| 2023 | 1,200,378 | | | 42,949 | | | 1,243,327 | |
| 2024 | 1,347,423 | | | 46,712 | | | 1,394,135 | |
| 2025 | 1,439,253 | | | 50,844 | | | 1,490,097 | |
| 2026 | 1,075,717 | | | 9,341 | | | 1,085,058 | |
| Thereafter | 172,405 | | | — | | | 172,405 | |
| $ | 6,703,453 | | | $ | 207,847 | | | $ | 6,911,300 | |
On January 1, 2020, the Company adopted ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (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, 2021 and 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 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. Changes in the Company’s outlook on economic conditions impacted the retail and wholesale estimates for expected credit losses at December 31, 2021. During 2021, the U.S. economy and the Company’s outlook on economic conditions improved from 2020; however, the pace of economic recovery remained uncertain as demonstrated by unemployment levels above those experienced prior to the COVID-19 pandemic, muted consumer confidence, rising inflation, global supply chain disruptions, and continuing COVID-19 pandemic-related challenges across the U.S., among other factors. As such, at the end of 2021, the Company’s outlook on economic conditions included slow economic improvement in its economic scenario weighting.
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, specific problem loan trends, and others, as appropriate.
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):
| | | | | | | | | | | | | | | | | |
| | 2021 |
| Retail | | Wholesale | | Total |
| Balance, beginning of period | $ | 371,738 | | | $ | 19,198 | | | $ | 390,936 | |
| Provision for credit losses | 31,338 | | | (6,289) | | | 25,049 | |
| Charge-offs | (122,637) | | | — | | | (122,637) | |
| Recoveries | 45,881 | | | 150 | | | 46,031 | |
| Balance, end of period | $ | 326,320 | | | $ | 13,059 | | | $ | 339,379 | |
| | | | | | | | | | | | | | | | | |
| | 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 | |
(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 was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Total |
| U.S. Retail: | | | | | | | | | | | | | |
| Super prime | $ | 1,010,636 | | | $ | 484,479 | | | $ | 316,390 | | | $ | 171,763 | | | $ | 65,753 | | | $ | 27,424 | | | $ | 2,076,445 | |
| Prime | 1,391,385 | | | 712,858 | | | 470,177 | | | 277,206 | | | 142,288 | | | 82,169 | | | 3,076,083 | |
| Sub-prime | 476,688 | | | 273,787 | | | 182,002 | | | 105,330 | | | 61,923 | | | 51,035 | | | 1,150,765 | |
| 2,878,709 | | | 1,471,124 | | | 968,569 | | | 554,299 | | | 269,964 | | | 160,628 | | | 6,303,293 | |
| Canadian Retail: | | | | | | | | | | | | | |
| Super prime | 51,779 | | | 32,724 | | | 27,073 | | | 13,984 | | | 4,619 | | | 1,614 | | | 131,793 | |
| Prime | 16,882 | | | 12,675 | | | 9,244 | | | 6,230 | | | 3,628 | | | 1,779 | | | 50,438 | |
| Sub-prime | 2,356 | | | 2,134 | | | 1,571 | | | 947 | | | 606 | | | 381 | | | 7,995 | |
| 71,017 | | | 47,533 | | | 37,888 | | | 21,161 | | | 8,853 | | | 3,774 | | | 190,226 | |
| $ | 2,949,726 | | | $ | 1,518,657 | | | $ | 1,006,457 | | | $ | 575,460 | | | $ | 278,817 | | | $ | 164,402 | | | $ | 6,493,519 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| 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 | | | $ | 6,344,195 | |
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 finance receivables, by vintage and credit quality indicator, was as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 | | 2016 & Prior | | Total |
| Non-Performing | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| Doubtful | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Substandard | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Special Mention | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Medium Risk | — | | | — | | | — | | | — | | | — | | | — | | | — | |
| Low Risk | 380,211 | | | 11,379 | | | 11,047 | | | 10,565 | | | 3,662 | | | 917 | | | 417,781 | |
| $ | 380,211 | | | $ | 11,379 | | | $ | 11,047 | | | $ | 10,565 | | | $ | 3,662 | | | $ | 917 | | | $ | 417,781 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| 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 | |
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. All retail finance receivables accrue interest until either collected or charged-off. The Company reverses accrued interest related to charged-off accounts against interest income when the account is charged-off. The Company reversed $16.8 million and $19.1 million of accrued interest against interest income during the years ended December 31, 2021 and 2020, respectively. Due to the timely write-off of accrued interest, the Company made the election provided under ASC Topic 326, Financial Instruments - Credit Losses to exclude accrued interest from its allowance for credit losses. Accordingly, as of December 31, 2021 and 2020, all retail finance receivables were accounted for as interest-earning receivables, of which $34.8 million and $33.1 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. 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. There were no charged-off accounts during 2021. As such, the Company did not reverse any accrued interest. The Company reversed $0.4 million of accrued interest related to the charge-off of Non-Performing dealer loans during the year ended December 31, 2020. There were no dealers on non-accrual status at December 31, 2021 or December 31, 2020.
The aging analysis of finance receivables at December 31, was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 |
| | Current | | 31-60 Days
Past Due | | 61-90 Days
Past Due | | Greater than
90 Days
Past Due | | Total
Past Due | | Total
Finance
Receivables |
| Retail finance receivables | $ | 6,298,485 | | | $ | 115,942 | | | $ | 44,326 | | | $ | 34,766 | | | $ | 195,034 | | | $ | 6,493,519 | |
| Wholesale finance receivables | 417,720 | | | 9 | | | 1 | | | 51 | | | 61 | | | 417,781 | |
| $ | 6,716,205 | | | $ | 115,951 | | | $ | 44,327 | | | $ | 34,817 | | | $ | 195,095 | | | $ | 6,911,300 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2020 |
| | Current | | 31-60 Days
Past Due | | 61-90 Days
Past Due | | Greater than
90 Days
Past Due | | Total
Past Due | | Total
Finance
Receivables |
| Retail finance receivables | $ | 6,164,369 | | | $ | 106,818 | | | $ | 39,933 | | | $ | 33,075 | | | $ | 179,826 | | | $ | 6,344,195 | |
| Wholesale finance receivables | 489,556 | | | 166 | | | 23 | | | 4 | | | 193 | | | 489,749 | |
| $ | 6,653,925 | | | $ | 106,984 | | | $ | 39,956 | | | $ | 33,079 | | | $ | 180,019 | | | $ | 6,833,944 | |
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):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| United States | $ | 33,850 | | | $ | 32,599 | | | $ | 47,138 | | | $ | 41,285 | | | $ | 39,051 | |
| Canada | 967 | | | 480 | | | 888 | | | 1,051 | | | 1,025 | |
| $ | 34,817 | | | $ | 33,079 | | | $ | 48,026 | | | $ | 42,336 | | | $ | 40,076 | |
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, 2021 and December 31, 2020. 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. Starting in the second quarter of 2020, the Company granted 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. During the first half of 2021, the volume of extensions declined from the levels experienced during 2020 as a result of the COVID-19 pandemic, but extensions did not return to pre-COVID-19 pandemic levels until the end of the second quarter of 2021. The Company discontinued extensions specific to the COVID-19 pandemic at the beginning of the third quarter of 2021; however, it continues to grant standard payment extensions to customers in accordance with its policies.
8. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill in the Motorcycles segment for the years ended December 31, was as follows (in thousands):
| | | | | | | | | | | | | |
| 2021 | | 2020 | | |
| Balance, beginning of period | $ | 65,976 | | | $ | 64,160 | | | |
| | | | | |
| Currency translation | (2,799) | | | 1,816 | | | |
| Balance, end of period | $ | 63,177 | | | $ | 65,976 | | | |
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. Intangible assets at December 31, were as follows (in thousands): | | | | | | | | | | | | | |
| 2021 | | 2020 | | |
| Gross carrying amount | $ | 11,300 | | | $ | 12,979 | | | |
| Accumulated amortization | (3,786) | | | (3,350) | | | |
| $ | 7,514 | | | $ | 9,629 | | | |
Amortization of intangible assets, excluding goodwill, recorded in Selling, administrative and engineering expense on the Consolidated statements of operations was $0.4 million, $1.1 million and $0.9 million for 2021, 2020 and 2019, respectively. Future amortization of the Company's intangible assets as of December 31, 2021 is as follows (in thousands): | | | | | |
| 2022 | $ | 847 | |
| 2023 | 847 | |
| 2024 | 691 | |
| 2025 | 639 | |
| 2026 | 639 | |
| Thereafter | 3,851 | |
| $ | 7,514 | |
The Financial Services segment had no goodwill or intangible assets at December 31, 2021 and 2020.
9. Derivative Financial Instruments and Hedging Activities
The Company is exposed to risks from fluctuations in foreign currency exchange rates, interest rates and commodity prices. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures which prohibit the use of financial instruments for speculative trading purposes.
The Company sells products in foreign currencies and utilizes foreign currency exchange contracts to mitigate the effects of foreign currency exchange rate fluctuations related to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Chinese yuan, 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 (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. Cash flow activity associated with the Company's derivative financial instruments is recorded in Cash flows from operating activities on the Consolidated statement of cash flow.
The notional and fair values of the Company's derivative financial instruments under ASC Topic 815, at December 31, were as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative Financial Instruments
Designated as Cash Flow Hedging Instruments |
| | 2021 | | 2020 |
| Notional
Value | | Other
Current Assets | | Accrued Liabilities | | Notional
Value | | Other
Current Assets | | Accrued Liabilities |
|
| Foreign currency contracts | $ | 562,262 | | | $ | 14,644 | | | $ | 1,388 | | | $ | 533,925 | | | $ | 11 | | | $ | 21,927 | |
| Commodity contracts | 996 | | | 19 | | | 39 | | | 671 | | | — | | | 52 | |
| Cross-currency swaps | 1,367,460 | | | 35,071 | | | — | | | 1,367,460 | | | 138,622 | | | — | |
| | | | | | | | | | | |
| Interest rate swaps | — | | | — | | | — | | | 450,000 | | | — | | | 3,086 | |
| $ | 1,930,718 | | | $ | 49,734 | | | $ | 1,427 | | | $ | 2,352,056 | | | $ | 138,633 | | | $ | 25,065 | |
| Derivative Financial Instruments
Not Designated as Hedging Instruments |
| | 2021 | | 2020 |
| Notional
Value | | Other
Current Assets | | Accrued Liabilities | | Notional
Value | | Other
Current Assets | | Accrued Liabilities |
|
| Foreign currency contracts | $ | 241,935 | | | $ | 1,299 | | | $ | 916 | | | $ | 245,494 | | | $ | 737 | | | $ | 435 | |
| Commodity contracts | 10,631 | | | 641 | | | 18 | | | 6,806 | | | 849 | | | 21 | |
| Interest rate caps | 504,526 | | | 360 | | | — | | | 978,058 | | | 47 | | | — | |
| $ | 757,092 | | | $ | 2,300 | | | $ | 934 | | | $ | 1,230,358 | | | $ | 1,633 | | | $ | 456 | |
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)
Recognized in OCI | | Gain/(Loss)
Reclassified from AOCL into Income |
| 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Foreign currency contracts | $ | 29,602 | | | $ | (14,507) | | | $ | 8,235 | | | $ | (12,531) | | | $ | 9,859 | | | $ | 21,433 | |
| Commodity contracts | 345 | | | (160) | | | (103) | | | 313 | | | (189) | | | (70) | |
| Cross-currency swaps | (103,551) | | | 130,297 | | | 8,326 | | | (115,200) | | | 153,472 | | | 12,156 | |
| Treasury rate lock contracts | — | | | — | | | — | | | (502) | | | (492) | | | (492) | |
| Interest rate swaps | 397 | | | (8,449) | | | (9,981) | | | (2,689) | | | (14,543) | | | (5,295) | |
| $ | (73,207) | | | $ | 107,181 | | | $ | 6,477 | | | $ | (130,609) | | | $ | 148,107 | | | $ | 27,732 | |
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 December 31, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| | Motorcycles
cost of goods sold | | Selling, administrative &
engineering expense | | Interest expense | | Financial Services interest expense |
| 2021 |
| Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded | $ | 3,243,287 | | | $ | 1,048,174 | | | $ | 30,972 | | | $ | 192,944 | |
| | | | | | | |
| Gain/(loss) reclassified from AOCL into income: | | | | | | | |
| Foreign currency contracts | $ | (12,531) | | | $ | — | | | $ | — | | | $ | — | |
| Commodity contracts | $ | 313 | | | $ | — | | | $ | — | | | $ | — | |
| Cross-currency swaps | $ | — | | | $ | (115,200) | | | $ | — | | | $ | — | |
| Treasury rate lock contracts | $ | — | | | $ | — | | | $ | (363) | | | $ | (139) | |
| Interest rate swaps | $ | — | | | $ | — | | | $ | — | | | $ | (2,689) | |
| 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 | | | $ | 31,121 | | | $ | 246,447 | |
| | | | | | | |
| Gain/(loss) reclassified from AOCL into income: | | | | | | | |
| Foreign currency contracts | $ | 9,859 | | | $ | — | | | $ | — | | | $ | — | |
| Commodity contracts | $ | (189) | | | $ | — | | | $ | — | | | $ | — | |
| Cross-currency swaps | $ | — | | | $ | 153,472 | | | $ | — | | | $ | — | |
| Treasury rate lock contracts | $ | — | | | $ | — | | | $ | (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 | | | $ | 31,078 | | | $ | 210,438 | |
| | | | | | | |
| Gain/(loss) reclassified from AOCL into income: | | | | | | | |
| Foreign currency contracts | $ | 21,433 | | | $ | — | | | $ | — | | | $ | — | |
| Commodity contracts | $ | (70) | | | $ | — | | | $ | — | | | $ | — | |
| Cross-currency swaps | $ | — | | | $ | 12,156 | | | $ | — | | | $ | — | |
| Treasury rate lock contracts | $ | — | | | $ | — | | | $ | (362) | | | $ | (130) | |
| Interest rate swaps | $ | — | | | $ | — | | | $ | — | | | $ | (5,295) | |
The amount of net loss included in Accumulated other comprehensive loss (AOCL) at December 31, 2021, estimated to be reclassified into income over the next 12 months was $1.2 million.
The amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments as of December 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 operating expense.
| | | | | | | | | | | | | | | | | |
| | Amount of Gain/(Loss)
Recognized in Income |
| 2021 | | 2020 | | 2019 |
| Foreign currency contracts | $ | (2,374) | | | $ | (205) | | | $ | 191 | |
| Commodity contracts | 1,966 | | | (148) | | | 17 | |
| Interest rate caps | 313 | | | (532) | | | (143) | |
| $ | (95) | | | $ | (885) | | | $ | 65 | |
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 used in manufacturing and distribution processes.
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 6 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 ended December 31, 2021 and 2020 was $24.9 million and $26.7 million, respectively. This includes variable lease costs related to assets used in manufacturing and distribution processes of approximately $4.4 million and $5.6 million for the years ended December 31, 2021 and 2020, respectively. Other variable and short-term lease costs were not material.
Balance sheet information related to the Company's leases at December 31, was as follows (in thousands): | | | | | | | | | | | | | |
| 2021 | | 2020 | | |
| Lease assets | $ | 49,625 | | | $ | 45,203 | | | |
| | | | | |
| Accrued liabilities | $ | 17,369 | | | $ | 17,081 | | | |
| Lease liabilities | 29,904 | | | 30,115 | | | |
| $ | 47,273 | | | $ | 47,196 | | | |
Future maturities of the Company's operating lease liabilities as of December 31, 2021 were as follows (in thousands):
| | | | | |
| 2022 | $ | 18,059 | |
| 2023 | 10,050 | |
| 2024 | 7,640 | |
| 2025 | 6,000 | |
| 2026 | 5,043 | |
| Thereafter | 1,974 | |
| Future lease payments | 48,766 | |
| Present value discount | (1,493) | |
| Lease liabilities | $ | 47,273 | |
Other lease information surrounding the Company's operating leases as of December 31, was as follows (dollars in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Cash outflows for amounts included in the measurement of lease liabilities | $ | 25,117 | | $ | 20,533 |
| ROU assets obtained in exchange for lease obligations, net of modifications | $ | 25,111 | | $ | 1,833 |
| Weighted-average remaining lease term (in years) | 3.86 | | 3.78 |
| Weighted-average discount rate | 1.9 | % | | 3.1 | % |
11. Debt
Debt with a contractual term less than 12 months is generally classified as short-term and consisted of the following at December 31, (in thousands):
| | | | | | | | | | | |
| 2021 | | 2020 |
| Unsecured commercial paper | $ | 751,286 | | | $ | 1,014,274 | |
Debt with a contractual term greater than 12 months is generally classified as long-term and consisted of the following at December 31, (in thousands):
| | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 |
| Secured debt: | | | | | |
| Asset-backed Canadian commercial paper conduit facility | | | $ | 85,054 | | | $ | 116,678 | |
| Asset-backed U.S. commercial paper conduit facilities | | | 272,589 | | | 402,205 | |
| Asset-backed securitization debt | | | 1,634,753 | | | 1,800,393 | |
| Unamortized discounts and debt issuance costs | | | (7,611) | | | (8,437) | |
| | | 1,984,785 | | | 2,310,839 | |
| | | | | | | | | | | | | | | | | |
| | | 2021 | | 2020 |
| Unsecured notes (at par value): | | | | | |
| Medium-term notes: | | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| Due in 2021, issued January 2016 | 2.85% | | — | | | 600,000 | |
| Due in 2021, issued in November 2018 | LIBOR + 0.94% | | — | | | 450,000 | |
| Due in 2021, issued May 2018 | 3.55% | | — | | | 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% | | 737,302 | | | 797,206 | |
Due in 2024, issued November 2019(b) | 3.14% | | 680,586 | | | 735,882 | |
| Due in 2025, issued June 2020 | 3.35% | | 700,000 | | | 700,000 | |
| Unamortized discounts and debt issuance costs | | | (9,228) | | | (15,374) | |
| | | 3,408,660 | | | 4,917,714 | |
| 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 | | | (5,332) | | | (6,023) | |
| | | 744,668 | | | 743,977 | |
| | | 4,153,328 | | | 5,661,691 | |
| Long-term debt | | | 6,138,113 | | | 7,972,530 | |
| Current portion of long-term debt, net | | | (1,542,496) | | | (2,039,597) | |
| Long-term debt, net | | | $ | 4,595,617 | | | $ | 5,932,933 | |
(a)Euro denominated €650.0 million par value remeasured to U.S. dollar at December 31, 2021 and 2020, respectively
(b)Euro denominated €600.0 million par value remeasured to U.S. dollar at December 31, 2021 and 2020, respectively
The Company’s future principal payments on debt obligations as of December 31, 2021 were as follows (in thousands):
| | | | | |
| 2022 | $ | 2,302,568 | |
| 2023 | 1,735,386 | |
| 2024 | 1,125,031 | |
| 2025 | 1,367,781 | |
| 2026 | 80,804 | |
| Thereafter | 300,000 | |
| $ | 6,911,570 | |
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 0.40% and 1.34% at December 31, 2021 and 2020, 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 its $780.0 million five-year credit facility in April 2020 to $707.5 million with no change to the maturity date of April 2023. Additionally, the Company had a $350.0 million 364-day credit facility that matured in May 2021. The five-year credit facilities (together, the Global Credit Facilities) bear interest at variable rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities 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 January, March, and May of 2021, $600.0 million of 2.85%, $450.0 million of floating rate, and $350.0 million of 3.55% medium-term notes matured, respectively, and the principal and accrued interest were paid in full. During February, May, and June of 2020, $600.0 million of 2.15%, $450.0 million of floating rate, and $350.0 million of 2.40% medium-term notes matured, respectively, and the principal and accrued interest were paid in full.
Operating and Financial Covenants – Harley-Davidson Financial Services 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 Harley-Davidson Financial Services 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 Harley-Davidson Financial Services’ consolidated debt, excluding secured debt, to Harley-Davidson Financial Services consolidated allowance for credit losses on finance receivables plus Harley-Davidson Financial Services’ 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 Harley-Davidson Financial Services 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, 2021 and 2020, Harley-Davidson Financial Services 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 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): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt |
| On-balance sheet assets and liabilities: | | | | | | | | | | | |
| Consolidated VIEs: | | | | | | | | | | | |
| Asset-backed securitizations | $ | 2,048,194 | | | $ | (102,779) | | | $ | 123,717 | | | $ | 2,328 | | | $ | 2,071,460 | | | $ | 1,627,142 | |
| Asset-backed U.S. commercial paper conduit facility | 297,454 | | | (14,898) | | | 20,567 | | | 654 | | | 303,777 | | | 272,589 | |
| Unconsolidated VIEs: | | | | | | | | | | | |
| Asset-backed Canadian commercial paper conduit facility | 97,180 | | | (3,990) | | | 6,191 | | | 139 | | | 99,520 | | | 85,054 | |
| $ | 2,442,828 | | | $ | (121,667) | | | $ | 150,475 | | | $ | 3,121 | | | $ | 2,474,757 | | | $ | 1,984,785 | |
| 2020 |
| Finance receivables | | Allowance for credit losses | | Restricted cash | | Other assets | | Total assets | | Asset-backed debt |
| On-balance sheet assets and liabilities: | | | | | | | | | | | |
| Consolidated VIEs: | | | | | | | | | | | |
| Asset-backed securitizations | $ | 2,129,372 | | | $ | (124,627) | | | $ | 116,268 | | | $ | 2,622 | | | $ | 2,123,635 | | | $ | 1,791,956 | |
| Asset-backed U.S. commercial paper conduit facilities | 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 | |
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 2024 to 2029.
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 2021, the Company transferred $1.30 billion of U.S. retail motorcycle finance receivables to two separate SPEs which, in turn, issued $1.18 billion, or $1.17 billion net of discounts and issuance costs, of secured notes through two separate on-balance sheet asset-backed securitization transactions. 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.
At December 31, 2021, the Consolidated balance sheets included outstanding balances related to the following secured notes with the related maturity dates and interest rates (in thousands): | | | | | | | | | | | | | | | | | | | | |
| Issue Date | | Principal Amount
at Date of Issuance | | Weighted-Average Rate
at Date of Issuance | | Contractual Maturity Date
at Date of Issuance |
| August 2021 | | $575,000 | | 0.42% | | August 2022 - May 2029 |
| February 2021 | | $600,000 | | 0.30% | | February 2022 - September 2028 |
| 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, 2020 that were repaid in full during 2021. For the years ended December 31, 2021 and 2020, interest expense on the secured notes was $32.4 million and $42.1 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 1.36% and 2.39% at December 31, 2021 and 2020, 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 banks and their 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 (the U.S. Conduit Facility) with third-party banks and their 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 banks and their 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. On November 19, 2021, the Company renewed the U.S. Conduit Facility. Availability under 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, with provisions for a transition to other benchmark rates, generally aligning to recommendations published by the Alternative Reference Rates Committee convened by the Federal Reserve Board and Federal Reserve Bank of New York. In each of these cases, a program fee is assessed based on the outstanding debt principal balance. 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 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of December 31, 2021, the U.S. Conduit Facility has an expiration date of November 18, 2022.
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 2021, the Company transferred $83.5 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $71.5 million of debt under the U.S. Conduit Facility. 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.
For the year ended December 31, 2021 interest expense under the U.S. Conduit Facility was a total of $5.3 million. 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. The interest expense is included in Financial Services interest expense. The weighted average interest rate of the outstanding U.S. Conduit Facility was 1.77% and 1.61% at December 31, 2021 and 2020, respectively.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – In June 2021, 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$125.0 million. Prior to the renewal and amendment, the Canadian Conduit was 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 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$125.0 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, 2021, the Canadian Conduit has an expiration date of June 27, 2022.
The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company does not consolidate the VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore does not meet the requirements for sale accounting.
As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $14.5 million at December 31, 2021. The maximum exposure is not an indication of the Company's expected loss exposure.
In 2021, the Company transferred $32.8 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $27.4 million. In 2020, the Company transferred $77.9 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $61.6 million.
For the years ended December 31, 2021 and 2020, interest expense on the Canadian Conduit was $1.9 million and $2.9 million, respectively, which is included in Financial Services interest expense. The weighted average interest rate of the outstanding Canadian Conduit was 1.79% and 2.13% at December 31, 2021 and 2020, respectively.
Off-Balance Sheet Asset-Backed Securitization VIE – There were no off-balance sheet asset-backed securitization transactions during the years ended December 31, 2021, 2020 and 2019. During the second quarter of 2016, the Company sold retail motorcycle finance receivables into a securitization VIE that was not consolidated. 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.
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 servicing represent adequate compensation and, consequently, the Company does not recognize a servicing asset or liability. The Company repurchased the finance receivables associated with the off-balance sheet securitization VIE in April 2020. As such, the Company did not recognize any servicing fee income in 2021. The Company recognized servicing fee income of $0.1 million in 2020.
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): | | | | | | | | | | | | | | | | | | | |
| 2021 | | |
| Balance | | Level 1 | | Level 2 | | |
| Assets: | | | | | | | |
| Cash equivalents | $ | 1,617,887 | | | $ | 1,337,900 | | | $ | 279,987 | | | |
| Marketable securities | 49,650 | | | 49,650 | | | — | | | |
| | | | | | | |
| Derivative financial instruments | 52,034 | | | — | | | 52,034 | | | |
| $ | 1,719,571 | | | $ | 1,387,550 | | | $ | 332,021 | | | |
| Liabilities: | | | | | | | |
| Derivative financial instruments | $ | 2,361 | | | $ | — | | | $ | 2,361 | | | |
| 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 | | | |
Nonrecurring Fair Value Measurements – Repossessed inventory was $18.3 million and $17.7 million at December 31, 2021 and 2020, respectively, for which the fair value adjustment was $2.9 million and $4.2 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): | | | | | | | | | | | | | | | | | | | | | | | |
| | 2021 | | 2020 |
| | Fair Value | | Carrying Value | | Fair Value | | Carrying Value |
| Assets: | | | | | | | |
| Finance receivables, net | $ | 6,794,499 | | | $ | 6,571,921 | | | $ | 6,586,348 | | | $ | 6,443,008 | |
| Liabilities: | | | | | | | |
| Deposits, net | $ | 293,602 | | | $ | 290,326 | | | $ | 79,965 | | | $ | 79,965 | |
| Debt: | | | | | | | |
| Unsecured commercial paper | $ | 751,286 | | | $ | 751,286 | | | $ | 1,014,274 | | | $ | 1,014,274 | |
| Asset-backed U.S. commercial paper conduit facilities | $ | 272,589 | | | $ | 272,589 | | | $ | 402,205 | | | $ | 402,205 | |
| Asset-backed Canadian commercial paper conduit facility | $ | 85,054 | | | $ | 85,054 | | | $ | 116,678 | | | $ | 116,678 | |
| Asset-backed securitization debt | $ | 1,633,749 | | | $ | 1,627,142 | | | $ | 1,817,892 | | | $ | 1,791,956 | |
| Medium-term notes | $ | 3,513,815 | | | $ | 3,408,660 | | | $ | 5,118,928 | | | $ | 4,917,714 | |
| Senior notes | $ | 790,373 | | | $ | 744,668 | | | $ | 828,141 | | | $ | 743,977 | |
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, net – The carrying value of deposits is amortized cost. The fair value of deposits is estimated based upon rates currently available for deposits with similar terms and maturities. Fair value is calculated using Level 3 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.
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 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 shipment 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 liabilities are 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):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Balance, beginning of period | $ | 69,208 | | | $ | 89,793 | | | $ | 131,740 | |
| Warranties issued during the period | 41,489 | | | 32,042 | | | 50,470 | |
| Settlements made during the period | (40,015) | | | (51,420) | | | (90,404) | |
| Recalls and changes to pre-existing warranty liabilities | (9,061) | | | (1,207) | | | (2,013) | |
| Balance, end of period | $ | 61,621 | | | $ | 69,208 | | | $ | 89,793 | |
The liability for recall campaigns was $16.9 million, $24.7 million and $36.4 million at December 31, 2021, 2020 and 2019, 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 generally 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 |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Change in benefit obligation: | | | | | | | |
| Benefit obligation, beginning of period | $ | 2,390,435 | | | $ | 2,212,012 | | | $ | 315,245 | | | $ | 293,505 | |
| Service cost | 24,570 | | | 27,224 | | | 5,147 | | | 11,761 | |
| Interest cost | 61,988 | | | 76,447 | | | 6,505 | | | 9,391 | |
| Actuarial (gains) losses | (92,157) | | | 228,081 | | | (24,190) | | | 18,824 | |
| Plan participant contributions | — | | | — | | | 2,337 | | | 2,140 | |
| | | | | | | |
| | | | | | | |
| Benefits paid | (138,043) | | | (137,381) | | | (18,743) | | | (19,703) | |
| Net curtailments and settlements | (72,198) | | | (15,948) | | | — | | | (673) | |
| Benefit obligation, end of period | 2,174,595 | | | 2,390,435 | | | 286,301 | | | 315,245 | |
| | | | | | | |
| Change in plan assets: | | | | | | | |
| Fair value of plan assets, beginning of period | 2,433,975 | | | 2,209,222 | | | 244,035 | | | 220,992 | |
| Return on plan assets | 189,974 | | | 361,674 | | | 30,504 | | | 36,349 | |
| | | | | | | |
| Plan participant contributions | — | | | — | | | 2,337 | | | 2,140 | |
| Benefits paid | (137,482) | | | (136,921) | | | (13,931) | | | (15,446) | |
| Fair value of plan assets, end of period | 2,486,467 | | | 2,433,975 | | | 262,945 | | | 244,035 | |
| Funded status of the plan | $ | 311,872 | | | $ | 43,540 | | | $ | (23,356) | | | $ | (71,210) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Pension and SERPA Benefits | | Postretirement Healthcare Benefits |
| | 2021 | | 2020 | | 2021 | | 2020 |
| Funded status as recognized on the Consolidated balance sheets: | | | | | | | |
| Pension and postretirement assets | $ | 332,586 | | | $ | 82,537 | | | $ | 53,566 | | | $ | 13,174 | |
| Accrued liabilities | (1,976) | | | (8,814) | | | (361) | | | (361) | |
| Pension and postretirement liabilities | (18,738) | | | (30,183) | | | (76,561) | | | (84,023) | |
| $ | 311,872 | | | $ | 43,540 | | | $ | (23,356) | | | $ | (71,210) | |
| | | | | | | |
| Amounts included in Accumulated other comprehensive loss, net of tax: | | | | | | | |
| Prior service credits | $ | 2,457 | | | $ | (5,712) | | | $ | (3,661) | | | $ | (5,438) | |
| Actuarial losses (gains) | 232,622 | | | 445,804 | | | (36,905) | | | (4,942) | |
| $ | 235,079 | | | $ | 440,092 | | | $ | (40,566) | | | $ | (10,380) | |
During 2021, actuarial gains related to the obligation for pension and SERPA benefits were due primarily to an increase in the discount rate and changes in demographic assumptions, partially offset by changes in mortality assumptions. In addition, during 2021, the obligation was impacted by a curtailment gain recorded in connection with the Company's decision to cease benefit accruals for salaried employees after December 31, 2022. 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 2021, the actuarial gains related to the obligation for postretirement healthcare benefits were due primarily to an increase in the discount rate and favorable claim cost adjustments. During 2020, the actuarial losses related to the obligation for postretirement healthcare benefits were due primarily to a decrease 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): | | | | | | | | | | | |
| 2021 | | 2020 |
| Plans with PBO in excess of fair value of plan assets: | | | |
| PBO | $ | 20,715 | | | $ | 38,996 | |
| Fair value of plan assets | $ | — | | | $ | — | |
| | | |
| Plans with ABO in excess of fair value of plan assets: | | | |
| | | |
| ABO | $ | 18,165 | | | $ | 30,598 | |
| Fair value of plan assets | $ | — | | | $ | — | |
The total ABO for all the Company's pension and SERPA plans combined was $2.16 billion and $2.30 billion as of December 31, 2021 and 2020, respectively.
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 income (expense), 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 |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Service cost | $ | 24,570 | | | $ | 27,224 | | | $ | 25,408 | | | $ | 5,147 | | | $ | 11,761 | | | $ | 4,449 | |
| Interest cost | 61,988 | | | 76,447 | | | 85,483 | | | 6,505 | | | 9,391 | | | 11,753 | |
| Expected return on plan assets | (131,494) | | | (135,056) | | | (142,323) | | | (13,978) | | | (13,870) | | | (14,030) | |
| Amortization of unrecognized: | | | | | | | | | | | |
| Prior service credit | (1,247) | | | (1,088) | | | (1,930) | | | (2,323) | | | (2,381) | | | (2,381) | |
| Net loss | 67,933 | | | 65,489 | | | 44,511 | | | 1,056 | | | 492 | | | 277 | |
| Special early retirement benefits | — | | | — | | | 1,583 | | | — | | | — | | | — | |
| Curtailment (gain) loss | (10,562) | | | 74 | | | — | | | — | | | (392) | | | (960) | |
| Settlement loss | 722 | | | 2,742 | | | 1,503 | | | — | | | — | | | — | |
| Net periodic benefit cost | $ | 11,910 | | | $ | 35,832 | | | $ | 14,235 | | | $ | (3,593) | | | $ | 5,001 | | | $ | (892) | |
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 |
| | 2021 | | 2020 | | 2019 | | 2021 | | 2020 | | 2019 |
| Assumptions for benefit obligations: | | | | | | | | | | | |
| Discount rate | 2.89 | % | | 2.62 | % | | 3.49 | % | | 2.72 | % | | 2.11 | % | | 3.26 | % |
| Rate of compensation increase | 3.49 | % | | 3.34 | % | | 3.39 | % | | n/a | | n/a | | n/a |
| Assumptions for net periodic benefit cost: | | | | | | | | | | | |
| Discount rate | 2.67 | % | | 3.49 | % | | 4.38 | % | | 2.11 | % | | 3.26 | % | | 4.23 | % |
| Expected return on plan assets | 6.20 | % | | 6.70 | % | | 7.10 | % | | 6.69 | % | | 7.00 | % | | 7.25 | % |
| Rate of compensation increase | 3.34 | % | | 3.39 | % | | 3.38 | % | | 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 47% equities and 53% 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., 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.
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, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| Balance | | Level 1 | | Level 2 | | |
| Cash and cash equivalents | $ | 55,192 | | | $ | — | | | $ | 55,192 | | | |
| Equity holdings: | | | | | | | |
| U.S. companies | 949,787 | | | 942,297 | | | 7,490 | | | |
| Foreign companies | 67,111 | | | 63,245 | | | 3,866 | | | |
| | | | | | | |
| Pooled equity funds | 350,356 | | | 350,356 | | | — | | | |
| Other | 63 | | | 63 | | | — | | | |
| | | | | | | |
| 1,367,317 | | | 1,355,961 | | | 11,356 | | | |
| Fixed-income holdings: | | | | | | | |
| U.S. Treasuries | 76,943 | | | 76,943 | | | — | | | |
| Federal agencies | 14,680 | | | — | | | 14,680 | | | |
| Corporate bonds | 690,319 | | | — | | | 690,319 | | | |
| Pooled fixed income funds | 148,860 | | | 54,302 | | | 94,558 | | | |
| Foreign bonds | 112,293 | | | 207 | | | 112,086 | | | |
| Municipal bonds | 12,549 | | | — | | | 12,549 | | | |
| 1,055,644 | | | 131,452 | | | 924,192 | | | |
| Plan assets subject to fair value leveling | 2,478,153 | | | $ | 1,487,413 | | | $ | 990,740 | | | |
| | | | | | | |
| Plan assets measured at net asset value: | | | | | | | |
| Private equity investments | 509 | | | | | | | |
| Real estate investments | 7,805 | | | | | | | |
| 8,314 | | | | | | | |
| $ | 2,486,467 | | | | | | | |
The fair values of the Company’s postretirement healthcare plan assets at December 31, 2021 were as follows (in thousands): | | | | | | | | | | | | | | | | | | | |
| Balance | | Level 1 | | Level 2 | | |
| Cash and cash equivalents | $ | 6,081 | | | $ | — | | | $ | 6,081 | | | |
| Equity holdings: | | | | | | | |
| U.S. companies | 132,812 | | | 132,790 | | | 22 | | | |
| Foreign companies | 25,062 | | | 25,051 | | | 11 | | | |
| Pooled equity funds | 30,302 | | | 30,302 | | | — | | | |
| Other | 6 | | | 6 | | | — | | | |
| 188,182 | | | 188,149 | | | 33 | | | |
| Fixed-income holdings: | | | | | | | |
| U.S. Treasuries | 221 | | | 221 | | | — | | | |
| Federal agencies | 42 | | | — | | | 42 | | | |
| Corporate bonds | 1,967 | | | — | | | 1,967 | | | |
| Pooled fixed income funds | 46,150 | | | 45,878 | | | 272 | | | |
| Foreign bonds | 320 | | | 1 | | | 319 | | | |
| Municipal bonds | 36 | | | — | | | 36 | | | |
| 48,736 | | | 46,100 | | | 2,636 | | | |
| Plan assets subject to fair value leveling | 242,999 | | | $ | 234,249 | | | $ | 8,750 | | | |
| | | | | | | |
| Plan assets measured at net asset value: | | | | | | | |
| Private equity investments | $ | 15,593 | | | | | | | |
| Real estate investments | 4,353 | | | | | | | |
| $ | 262,945 | | | | | | | |
Included in the pension and postretirement healthcare plan assets are 1,273,592 shares of the Company’s common stock with a market value of $48.0 million at December 31, 2021.
The fair values of the Company’s pension plan assets at December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| Balance | | Level 1 | | Level 2 | | |
| | | | | | | |
| Cash and cash equivalents | $ | 56,153 | | | $ | — | | | $ | 56,153 | | | |
| Equity holdings: | | | | | | | |
| U.S. companies | 785,227 | | | 769,583 | | | 15,644 | | | |
| Foreign companies | 114,013 | | | 106,783 | | | 7,230 | | | |
| Harley-Davidson common stock | 46,741 | | | 46,741 | | | — | | | |
| Pooled equity funds | 381,538 | | | 381,538 | | | — | | | |
| Other | 66 | | | 66 | | | — | | | |
| | | | | | | |
| 1,327,585 | | | 1,304,711 | | | 22,874 | | | |
| Fixed-income holdings: | | | | | | | |
| U.S. Treasuries | 59,116 | | | 59,116 | | | — | | | |
| Federal agencies | 15,230 | | | — | | | 15,230 | | | |
| Corporate bonds | 691,003 | | | — | | | 691,003 | | | |
| Pooled fixed income funds | 148,717 | | | 51,456 | | | 97,261 | | | |
| Foreign bonds | 110,062 | | | — | | | 110,062 | | | |
| Municipal bonds | 14,671 | | | — | | | 14,671 | | | |
| 1,038,799 | | | 110,572 | | | 928,227 | | | |
| Plan assets subject to fair value leveling | 2,422,537 | | | $ | 1,415,283 | | | $ | 1,007,254 | | | |
| | | | | | | |
| Plan assets measured at net asset value: | | | | | | | |
| Private equity investments | 537 | | | | | | | |
| Real estate investments | 10,901 | | | | | | | |
| 11,438 | | | | | | | |
| $ | 2,433,975 | | | | | | | |
Included in the pension plan assets were 1,273,592 shares of the Company’s common stock with a market value of $46.7 million at December 31, 2020.
The fair values of the Company’s postretirement healthcare plan assets at December 31, 2020 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| Balance | | Level 1 | | Level 2 | | |
| | | | | | | |
| Cash and cash equivalents | $ | 4,306 | | | $ | — | | | $ | 4,306 | | | |
| Equity holdings: | | | | | | | |
| U.S. companies | 115,272 | | | 115,272 | | | — | | | |
| Foreign companies | 29,670 | | | 29,670 | | | — | | | |
| Pooled equity funds | 27,207 | | | 27,207 | | | — | | | |
| Other | 5 | | | 5 | | | — | | | |
| 172,154 | | | 172,154 | | | — | | | |
| Fixed-income holdings: | | | | | | | |
| U.S. Treasuries | 2,873 | | | 2,873 | | | — | | | |
| Federal agencies | 6,970 | | | — | | | 6,970 | | | |
| Corporate bonds | 12,460 | | | — | | | 12,460 | | | |
| Pooled fixed income funds | 37,989 | | | 37,989 | | | — | | | |
| Foreign bonds | 970 | | | — | | | 970 | | | |
| Municipal bonds | 458 | | | — | | | 458 | | | |
| 61,720 | | | 40,862 | | | 20,858 | | | |
| Plan assets subject to fair value leveling | 238,180 | | | $ | 213,016 | | | $ | 25,164 | | | |
| | | | | | | |
| Plan assets measured at net asset value: | | | | | | | |
| | | | | | | |
| Real estate investments | 5,855 | | | | | | | |
| $ | 244,035 | | | | | | | |
For 2022, the Company’s overall expected long-term rate of return is 5.60% for pension assets and 6.80% 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:
| | | | | | | | | | | |
| 2021 | | 2020 |
| Healthcare cost trend rate for next year | 6.75 | % | | 7.00 | % |
| 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 in 2022. The Company expects that 2022 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.
The Company's future expected benefit payments as of December 31, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| Pension Benefits | | SERPA Benefits | | Postretirement Healthcare Benefits | | |
| 2022 | $ | 101,171 | | | $ | 2,003 | | | $ | 22,016 | | | |
| 2023 | $ | 102,778 | | | $ | 1,448 | | | $ | 22,152 | | | |
| 2024 | $ | 105,037 | | | $ | 1,482 | | | $ | 22,190 | | | |
| 2025 | $ | 108,579 | | | $ | 1,343 | | | $ | 22,119 | | | |
| 2026 | $ | 110,598 | | | $ | 1,344 | | | $ | 22,094 | | | |
| 2027-2031 | $ | 568,066 | | | $ | 6,397 | | | $ | 106,147 | | | |
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 $19.4 million, $21.7 million and $21.9 million during 2021, 2020 and 2019, respectively related to the contributions.
16. Commitments and Contingencies
Litigation and Other Claims – The Company is subject to lawsuits and other claims related to product, commercial, employee, environmental 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. The Company accrues for matters when losses are both probable and estimable. 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. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and there are no material exposures to loss in excess of amounts accrued and insured for losses related to these matters.
LiveWire Transaction – On December 13, 2021, the Company and AEA-Bridges Impact Corp. (ABIC), a special purpose acquisition company (SPAC), announced that they have entered into a definitive business combination agreement under which LiveWire, the Company's electric motorcycle division, will become a separate business of the Company and ABIC will combine with LiveWire to create a new publicly traded company. The parties expect that the transaction will be financed by ABIC’s $400 million cash held in trust (assuming no redemptions by ABIC’s shareholders in the context of the transaction), a $100 million cash investment from the Company, and a $100 million investment from an independent strategic investor, Kwang Yang Motor Co., Ltd. (KYMCO). In addition, to the extent any shares of the SPAC are redeemed, the Company will invest an additional amount equal to the dollar value of such redemptions up to a maximum of $100 million.
The transaction, which has been approved by the boards of directors of both the Company and ABIC, is expected to close in the first half of 2022. The consummation of the business combination is subject to the approval of ABIC’s shareholders as well as other conditions and regulatory approvals. Upon closing of the transaction, the Company will retain a controlling financial interest in LiveWire. The expectation is that, upon closing of the transaction, the Company will retain an equity interest in the separate public company of approximately 74%. As the controlling shareholder following the transaction, the Company will continue to consolidate LiveWire’s results, with additional adjustments to recognize non-controlling shareholder interests.
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 and, beginning with the 2021 grant, include a vesting component based on a Total Shareholder Return (TSR) relative to a peer group. RSUs granted under the Plan generally 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 granted in 2021 include a service component to vest and a market condition to become exercisable. The 2021 stock options expire 10 years from the grant date or, if the grantee's employment ceases prior to December 31, 2023, 6 years from the grant date. Stock options granted prior to 2021 expire 10 years from the date of grant. At December 31, 2021, there were 2.8 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-based award compensation expense recognized by the Company during 2021, 2020 and 2019 was $42.2 million, $23.5 million and $33.7 million, respectively, or $32.3 million, $18.0 million and $25.8 million net of taxes, respectively.
Restricted Stock Units and Performance Shares - Settled in Stock – The fair value of RSUs settled in stock and performance shares settled in stock that do not contain a market condition is determined based on the market price of the Company’s stock on the grant date. The performance shares settled in stock granted in 2021 contain a relative TSR market condition. The Company estimated the fair value of the TSR component using a Monte Carlo simulation. The Company uses historical volatility to determine the expected volatility of its performance shares that include a TSR component. The risk-free rate for periods within the contractual life of the grant is based on the U.S. Treasury rates at the time of grant. Assumptions used to calculate the grant date fair value of the performance shares granted during 2021, by grant date, were as follows:
| | | | | | | | | | | | | |
| February 2021 | | May 2021 | | |
| Expected volatility | 52.01 | % | | 54.99 | % | | |
| Risk-free interest rate | 0.18 | % | | 0.27 | % | | |
The activity for these awards for the year ended December 31, 2021 was as follows (in thousands, except for per share amounts):
| | | | | | | | | | | |
| Shares & Units | | Weighted-Average Fair Value Per Share |
| Nonvested, beginning of period | 1,769 | | | $ | 36 | |
| Granted | 1,769 | | | $ | 34 | |
| Vested | (763) | | | $ | 34 | |
| Forfeited | (293) | | | $ | 35 | |
| Nonvested, end of period | 2,482 | | | $ | 35 | |
As of December 31, 2021, there was $41.2 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 1.9 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, 2021 was as follows (in thousands, except for per share amounts):
| | | | | | | | | | | |
| Units | | Weighted-Average Fair Value Per Share |
| Nonvested, beginning of period | 156 | | | $ | 36 | |
| Granted | 206 | | | $ | 36 | |
| Vested | (64) | | | $ | 36 | |
| Forfeited | (33) | | | $ | 41 | |
| Nonvested, end of period | 265 | | | $ | 36 | |
Stock Options – The Company estimated the grant date fair value of its 2021 stock option award using a Monte Carlo simulation, assuming a 1.49% expected dividend yield, an expected volatility rate of 44.1%, a risk-free interest rate of 1.21%, and an expected term of 5.5 years. The Company uses historical volatility to determine the expected volatility of its stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury rates at the time of grant. The expected term of options granted assumes the options will be exercised halfway between the time that they are earned based on achieving the market condition and the end of the award term. There were no stock options granted in 2020 or 2019.
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, 2021 were as follows (in thousands, except for per share amounts):
| | | | | | | | | | | |
| Options | | Weighted-Average Exercise Price |
| Outstanding, beginning of period | 658 | | | $ | 56 | |
| Options granted | 500 | | | $ | 37 | |
| Exercised | (98) | | | $ | 44 | |
| Forfeited | (67) | | | $ | 47 | |
| Outstanding, end of period | 993 | | | $ | 48 | |
| | | |
| Exercisable, end of period | 493 | | | $ | 59 | |
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):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Exercised | $ | 289 | | | $ | 21 | | | $ | 2,614 | |
| Outstanding | $ | 530 | | | $ | — | | | $ | 52 | |
| Exercisable | $ | — | | | $ | — | | | $ | 52 | |
Stock options outstanding at December 31, 2021 were as follows (options in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Price Range | | Weighted-Average
Contractual Life | | Options | | Weighted-Average
Exercise Price |
| | | | | | |
| | | | | | |
$30.01 to $40 | | 10.0 | | 500 | | | $ | 37 | |
$40.01 to $50 | | 0.1 | | 29 | | | $ | 45 | |
$50.01 to $60 | | 1.0 | | 116 | | | $ | 52 | |
$60.01 to $70 | | 1.7 | | 348 | | | $ | 63 | |
| Options outstanding | | 5.8 | | 993 | | | $ | 48 | |
| | | | | | |
| Options exercisable | | 1.5 | | 493 | | | $ | 59 | |
18. Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive loss for the years ended December 31, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2021 |
| Foreign currency translation adjustments | | | | Derivative financial instruments | | Pension and postretirement benefit plans | | Total |
| Balance, beginning of period | $ | (7,589) | | | | | $ | (46,116) | | | $ | (429,712) | | | $ | (483,417) | |
| Other comprehensive (loss) income, before reclassifications | (38,988) | | | | | (73,207) | | | 251,790 | | | 139,595 | |
| Income tax benefit (expense) | 2,176 | | | | | 15,883 | | | (59,120) | | | (41,061) | |
| (36,812) | | | | | (57,324) | | | 192,670 | | | 98,534 | |
| Reclassifications: | | | | | | | | | |
| | | | | | | | | |
| Net losses on derivative financial instruments | — | | | | | 130,609 | | | — | | | 130,609 | |
Prior service credits(a) | — | | | | | — | | | (3,570) | | | (3,570) | |
Actuarial losses(a) | — | | | | | — | | | 68,989 | | | 68,989 | |
Curtailment and settlement losses(a) | — | | | | | — | | | (9,840) | | | (9,840) | |
| Reclassifications before tax | — | | | | | 130,609 | | | 55,579 | | | 186,188 | |
| Income tax expense | — | | | | | (29,174) | | | (13,050) | | | (42,224) | |
| — | | | | | 101,435 | | | 42,529 | | | 143,964 | |
| Other comprehensive (loss) income | (36,812) | | | | | 44,111 | | | 235,199 | | | 242,498 | |
| Balance, end of period | $ | (44,401) | | | | | $ | (2,005) | | | $ | (194,513) | | | $ | (240,919) | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 |
| Foreign currency translation adjustments | | | | Derivative financial instruments | | Pension and postretirement 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 translation adjustments | | | | Derivative financial instruments | | Pension and postretirement 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) | |
(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 and Harley-Davidson Financial Services. 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 the activities of Harley-Davidson Motor Company which designs, manufactures and sells motorcycles. The Motorcycles segment also sells motorcycle parts, accessories, and apparel as well as licenses its trademarks. The Company’s products are sold to retail customers primarily through a network of 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 the activities of Harley-Davidson Financial Services 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. Harley-Davidson Financial Services also works with certain unaffiliated insurance companies to provide motorcycle insurance and protection products to motorcycle owners. Harley-Davidson Financial Services conducts business principally in the U.S. and Canada.
Selected segment information is set forth below for the years ended December 31, (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
| Motorcycles and Related Products: | | | | | |
| Motorcycles revenue | $ | 4,540,240 | | | $ | 3,264,054 | | | $ | 4,572,678 | |
| Gross profit | 1,296,953 | | | 828,309 | | | 1,342,880 | |
| Selling, administrative and engineering expense | 885,587 | | | 895,321 | | | 1,020,907 | |
| Restructuring expense | 2,741 | | | 119,110 | | | 32,353 | |
| Operating income (loss) | 408,625 | | | (186,122) | | | 289,620 | |
| Financial Services: | | | | | |
| Financial Services revenue | 796,068 | | | 790,323 | | | 789,111 | |
| Financial Services expense | 380,580 | | | 583,623 | | | 523,123 | |
| Restructuring expense | 674 | | | 10,899 | | | — | |
| Operating income | 414,814 | | | 195,801 | | | 265,988 | |
| Operating income | $ | 823,439 | | | $ | 9,679 | | | $ | 555,608 | |
Financial Services revenue includes $6.1 million and $10.0 million of interest paid by Harley-Davidson Motor Company to Harley-Davidson Financial Services on wholesale finance receivables in 2020 and 2019, respectively. The offsetting cost of these interest incentives was recorded as a reduction to Motorcycles revenue. Harley-Davidson Financial Services did not earn any interest from Harley-Davidson Motor Company on wholesale finance receivables in 2021.
Additional segment information is set forth below as of December 31, (in thousands):
| | | | | | | | | | | | | | | | | |
| Motorcycles | | Financial Services | | Consolidated |
| 2021: | | | | | |
| Assets | $ | 3,308,292 | | | $ | 7,742,763 | | | $ | 11,051,055 | |
| Depreciation and amortization | $ | 155,969 | | | $ | 9,216 | | | $ | 165,185 | |
| Capital expenditures | $ | 115,995 | | | $ | 4,186 | | | $ | 120,181 | |
| 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 | |
Geographic Information – Included in the Consolidated financial statements are the following amounts relating to geographic locations for the years ended December 31, (in thousands):
| | | | | | | | | | | | | | | | | |
| 2021 | | 2020 | | 2019 |
Motorcycles revenue(a): | | | | | |
| United States | $ | 3,021,103 | | | $ | 2,043,851 | | | $ | 2,971,223 | |
| EMEA | 709,941 | | | 589,943 | | | 743,385 | |
| Canada | 182,655 | | | 99,219 | | | 210,381 | |
| Japan | 150,253 | | | 137,815 | | | 156,644 | |
| Australia and New Zealand | 138,036 | | | 107,891 | | | 117,525 | |
| Other countries | 338,252 | | | 285,335 | | | 373,520 | |
| $ | 4,540,240 | | | $ | 3,264,054 | | | $ | 4,572,678 | |
Financial Services revenue(a): | | | | | |
| United States | $ | 765,917 | | | $ | 757,730 | | | $ | 754,535 | |
| Canada | 18,613 | | | 20,353 | | | 22,799 | |
| Europe | 7,464 | | | 8,300 | | | 8,435 | |
| Other countries | 4,074 | | | 3,940 | | | 3,342 | |
| $ | 796,068 | | | $ | 790,323 | | | $ | 789,111 | |
Long-lived assets(b): | | | | | |
| United States | $ | 595,375 | | | $ | 644,224 | | | $ | 757,594 | |
| Thailand | 81,927 | | | 94,749 | | | 78,651 | |
| Other countries | 6,682 | | | 4,811 | | | 11,137 | |
| 88,609 | | | 99,560 | | | 89,788 | |
| $ | 683,984 | | | $ | 743,784 | | | $ | 847,382 | |
(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.
20. Supplemental Consolidating Data
The supplemental consolidating legal entity data for Harley-Davidson Motor Company, Harley-Davidson Financial Services and related consolidating adjustments is presented for informational purposes. The legal entity income statement information presented below differs from reportable segment income statement information due to the allocation of legal entity consolidating adjustments to income for reportable segments. Supplemental consolidating data for 2021 is as follows (in thousands): | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
| Revenue: | | | | | | | |
| Motorcycles and Related Products | $ | 4,564,703 | | | $ | — | | | $ | (24,463) | | | $ | 4,540,240 | |
| Financial Services | — | | | 788,736 | | | 7,332 | | | 796,068 | |
| 4,564,703 | | | 788,736 | | | (17,131) | | | 5,336,308 | |
| Costs and expenses: | | | | | | | |
| Motorcycles and Related Products cost of goods sold | 3,243,287 | | | — | | | — | | | 3,243,287 | |
| Financial Services interest expense | — | | | 192,944 | | | — | | | 192,944 | |
| Financial Services provision for credit losses | — | | | 25,049 | | | — | | | 25,049 | |
| Selling, administrative and engineering expense | 899,088 | | | 166,332 | | | (17,246) | | | 1,048,174 | |
| Restructuring expense | 2,741 | | | 674 | | | — | | | 3,415 | |
| 4,145,116 | | | 384,999 | | | (17,246) | | | 4,512,869 | |
| Operating income | 419,587 | | | 403,737 | | | 115 | | | 823,439 | |
| Other income, net | 20,076 | | | — | | | — | | | 20,076 | |
| Investment income | 246,694 | | | — | | | (240,000) | | | 6,694 | |
| Interest expense | 30,972 | | | — | | | — | | | 30,972 | |
| Income before income taxes | 655,385 | | | 403,737 | | | (239,885) | | | 819,237 | |
| Income tax provision | 73,590 | | | 95,623 | | | — | | | 169,213 | |
| Net income | $ | 581,795 | | | $ | 308,114 | | | $ | (239,885) | | | $ | 650,024 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
| Revenue: | | | | | | | |
| Motorcycles and Related Products | $ | 3,279,407 | | | $ | — | | | $ | (15,353) | | | $ | 3,264,054 | |
| Financial Services | — | | | 783,421 | | | 6,902 | | | 790,323 | |
| 3,279,407 | | | 783,421 | | | (8,451) | | | 4,054,377 | |
| Costs and expenses: | | | | | | | |
| Motorcycles and Related Products cost of goods sold | 2,435,745 | | | — | | | — | | | 2,435,745 | |
| Financial Services interest expense | — | | | 246,447 | | | — | | | 246,447 | |
| Financial Services provision for credit losses | — | | | 181,870 | | | — | | | 181,870 | |
| Selling, administrative and engineering expense | 907,257 | | | 152,258 | | | (8,888) | | | 1,050,627 | |
| Restructuring expense | 119,110 | | | 10,899 | | | — | | | 130,009 | |
| 3,462,112 | | | 591,474 | | | (8,888) | | | 4,044,698 | |
| Operating (loss) income | (182,705) | | | 191,947 | | | 437 | | | 9,679 | |
| Other expense, net | (1,848) | | | — | | | — | | | (1,848) | |
| Investment income | 107,560 | | | — | | | (100,000) | | | 7,560 | |
| Interest expense | 31,121 | | | — | | | — | | | 31,121 | |
| (Loss) income before income taxes | (108,114) | | | 191,947 | | | (99,563) | | | (15,730) | |
| Income tax (benefit) provision | (59,231) | | | 42,203 | | | — | | | (17,028) | |
| Net (loss) income | $ | (48,883) | | | $ | 149,744 | | | $ | (99,563) | | | $ | 1,298 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2021 |
| | Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
| ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | $ | 1,078,205 | | | $ | 796,540 | | | $ | — | | | $ | 1,874,745 | |
| | | | | | | |
| Accounts receivable, net | 284,674 | | | — | | | (102,526) | | | 182,148 | |
| Finance receivables, net | — | | | 1,465,544 | | | — | | | 1,465,544 | |
| Inventories, net | 712,942 | | | — | | | — | | | 712,942 | |
| Restricted cash | — | | | 128,935 | | | — | | | 128,935 | |
| Other current assets | 96,714 | | | 92,295 | | | (3,232) | | | 185,777 | |
| 2,172,535 | | | 2,483,314 | | | (105,758) | | | 4,550,091 | |
| Finance receivables, net | — | | | 5,106,377 | | | — | | | 5,106,377 | |
| Property, plant and equipment, net | 655,091 | | | 28,893 | | | — | | | 683,984 | |
| Pension and postretirement assets | 386,152 | | | — | | | — | | | 386,152 | |
| Goodwill | 63,177 | | | — | | | — | | | 63,177 | |
| Deferred income taxes | 17,180 | | | 77,956 | | | (12,214) | | | 82,922 | |
| Lease assets | 42,362 | | | 7,263 | | | — | | | 49,625 | |
| Other long-term assets | 193,819 | | | 38,960 | | | (104,052) | | | 128,727 | |
| $ | 3,530,316 | | | $ | 7,742,763 | | | $ | (222,024) | | | $ | 11,051,055 | |
| LIABILITIES AND SHAREHOLDERS’ EQUITY | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | $ | 356,309 | | | $ | 121,195 | | | $ | (102,526) | | | $ | 374,978 | |
| Accrued liabilities | 497,038 | | | 107,380 | | | (2,437) | | | 601,981 | |
| Short-term deposits, net | — | | | 72,146 | | | — | | | 72,146 | |
| Short-term debt | — | | | 751,286 | | | — | | | 751,286 | |
| Current portion of long-term debt, net | — | | | 1,542,496 | | | — | | | 1,542,496 | |
| 853,347 | | | 2,594,503 | | | (104,963) | | | 3,342,887 | |
| Long-term deposits, net | — | | | 218,180 | | | — | | | 218,180 | |
| Long-term debt, net | 744,668 | | | 3,850,949 | | | — | | | 4,595,617 | |
| Lease liabilities | 22,437 | | | 7,467 | | | — | | | 29,904 | |
| Pension and postretirement liabilities | 95,299 | | | — | | | — | | | 95,299 | |
| Deferred income taxes | 18,899 | | | 1,531 | | | (11,169) | | | 9,261 | |
| Other long-term liabilities | 154,950 | | | 49,610 | | | 2,103 | | | 206,663 | |
| Commitments and contingencies (Note 16) | | | | | | | |
| Shareholders’ equity | 1,640,716 | | | 1,020,523 | | | (107,995) | | | 2,553,244 | |
| $ | 3,530,316 | | | $ | 7,742,763 | | | $ | (222,024) | | | $ | 11,051,055 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2020 |
| | Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating 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 | |
| Short-term deposits, net | — | | | 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 liabilities | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
| Cash flows from operating activities: | | | | | | | |
| Net income | $ | 581,795 | | | $ | 308,114 | | | $ | (239,885) | | | $ | 650,024 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | |
| Depreciation and amortization | 155,969 | | | 9,216 | | | — | | | 165,185 | |
| Amortization of deferred loan origination costs | — | | | 86,115 | | | — | | | 86,115 | |
| Amortization of financing origination fees | 691 | | | 13,119 | | | — | | | 13,810 | |
| Provision for long-term employee benefits | 8,317 | | | — | | | — | | | 8,317 | |
| Employee benefit plan contributions and payments | (17,133) | | | — | | | — | | | (17,133) | |
| Stock compensation expense | 38,909 | | | 3,247 | | | — | | | 42,156 | |
| Net change in wholesale finance receivables related to sales | — | | | — | | | 89,001 | | | 89,001 | |
| Provision for credit losses | — | | | 25,049 | | | — | | | 25,049 | |
| | | | | | | |
| Deferred income taxes | (16,279) | | | 8,723 | | | (116) | | | (7,672) | |
| Other, net | (8,346) | | | (1,523) | | | (116) | | | (9,985) | |
| Changes in current assets and liabilities: | | | | | | | |
Accounts receivable, net | (78,961) | | | — | | | 25,498 | | | (53,463) | |
| Finance receivables - accrued interest and other | — | | | 13,316 | | | — | | | 13,316 | |
Inventories, net | (207,550) | | | — | | | — | | | (207,550) | |
Accounts payable and accrued liabilities | 174,615 | | | 23,373 | | | (24,440) | | | 173,548 | |
| | | | | | | |
| Other current assets | 10,982 | | | (5,501) | | | (498) | | | 4,983 | |
| 61,214 | | | 175,134 | | | 89,329 | | | 325,677 | |
| Net cash provided by operating activities | 643,009 | | | 483,248 | | | (150,556) | | | 975,701 | |
| Cash flows from investing activities: | | | | | | | |
| Capital expenditures | (115,995) | | | (4,186) | | | — | | | (120,181) | |
| Origination of finance receivables | — | | | (7,409,811) | | | 3,166,101 | | | (4,243,710) | |
| Collections on finance receivables | — | | | 7,157,849 | | | (3,255,545) | | | 3,902,304 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Other investing activities | 2,140 | | | — | | | — | | | 2,140 | |
| Net cash used by investing activities | (113,855) | | | (256,148) | | | (89,444) | | | (459,447) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2021 |
| | Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating Adjustments | | Consolidated |
| Cash flows from financing activities: | | | | | | | |
| | | | | | | |
| Repayments of medium-term notes | — | | | (1,400,000) | | | — | | | (1,400,000) | |
| | | | | | | |
| Proceeds from securitization debt | — | | | 1,169,910 | | | — | | | 1,169,910 | |
| Repayments of securitization debt | — | | | (1,340,638) | | | — | | | (1,340,638) | |
| Borrowings of asset-backed commercial paper | — | | | 98,863 | | | — | | | 98,863 | |
| Repayments of asset-backed commercial paper | — | | | (261,367) | | | — | | | (261,367) | |
| Net increase in unsecured commercial paper | — | | | (260,250) | | | — | | | (260,250) | |
| | | | | | | |
| Net increase in deposits | — | | | 210,112 | | | — | | | 210,112 | |
| Dividends paid | (92,426) | | | (240,000) | | | 240,000 | | | (92,426) | |
| Repurchase of common stock | (11,623) | | | — | | | — | | | (11,623) | |
| | | | | | | |
| Other financing activities | 2,488 | | | — | | | — | | | 2,488 | |
| Net cash (used) provided by financing activities | (101,561) | | | (2,023,370) | | | 240,000 | | | (1,884,931) | |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (15,549) | | | 277 | | | — | | | (15,272) | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | $ | 412,044 | | | $ | (1,795,993) | | | $ | — | | | $ | (1,383,949) | |
| | | | | | | |
| | | | | | | |
| Cash, cash equivalents and restricted cash: | | | | | | | |
| Cash, cash equivalents and restricted cash, beginning of period | $ | 666,161 | | | $ | 2,743,007 | | | $ | — | | | $ | 3,409,168 | |
| Net increase (decrease) in cash, cash equivalents and restricted cash | 412,044 | | | (1,795,993) | | | — | | | (1,383,949) | |
| Cash, cash equivalents and restricted cash, end of period | $ | 1,078,205 | | | $ | 947,014 | | | $ | — | | | $ | 2,025,219 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating 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 | (3,022) | | | 13,803 | | | (436) | | | 10,345 | |
| 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) | |
| | | | | | | |
| Other current assets | 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) | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, 2020 |
| | Harley-Davidson Motor Company | | Harley-Davidson Financial Services | | Consolidating 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 | |
| | | | | | | |
| Net increase in 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 2022, Harley-Davidson Financial Services issued $500.0 million of medium-term notes that mature in February 2027 and have an annual interest rate of 3.05%.