Financial Services Segment
The Financial Services segment consists of HDFS which is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. HDFS also works with certain unaffiliated insurance companies to provide motorcycle insurance and protection products to motorcycle owners. HDFS conducts business principally in the U.S. and Canada. The Company’s independent dealers and their retail customers in EMEA, Asia Pacific and Latin America are not financed by HDFS, butgenerally have access to financing through other third-party financial institutions, some of which have licensing or branding agreements with the Company or HDFS.
Wholesale Financial Services – HDFS provides wholesale financial services to U.S. and Canadian independent Harley-Davidson dealers, including floorplan and open account financing of motorcycles and motorcycle partsP&A. All U.S. and accessories. HDFS offers wholesale financial services to Harley-Davidson dealers in the United States and Canada, and during 2017, all of suchCanadian independent dealers utilized those servicesHDFS' financing programs at some point during the year.2019.
Retail Financial Services – HDFS provides retail financing to consumers, consisting primarily of installment lending for the purchase of new and used Harley-Davidson motorcycles. HDFS’ retail financial services are available through most independent Harley-Davidson dealerships in the United StatesU.S. and Canada.
Insurance Services – HDFS works with certain unaffiliated insurance companies which offer point-of-sale protection products through most independent Harley-Davidson dealers in both the U.S. and Canada, including motorcycle insurance, extended service contracts and motorcycle maintenance protection. HDFS also direct-markets motorcycle insurance and extended service contracts to owners of Harley-Davidson motorcycles. In addition, HDFS markets a comprehensive package of business insurance coverages and services to owners of independent Harley-Davidson dealerships.
Licensing –HDFS has licensing arrangements with third-party financial institutions that issue credit cards bearing the Harley-Davidson brand in the U.S. and certain international markets. Internationally, HDFS licenses the Harley-Davidson brand to local third-party financial institutions that offer products to the Company’s retail customers such as financing and insurance.
Funding – The Company believes a diversified and cost-effective funding strategy is important to meet HDFS’ goal of providing credit while delivering appropriate returns and profitability. Financial Services operations have beenin 2019 were funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities and asset-backed securitizations.
Competition – The Company regards its ability to offer a package of wholesale and retail financial services in the U.S. and Canada as a significant competitive advantage. Competitors in the financial services industry compete for business based largely on price and, to a lesser extent, service. HDFS competes on convenience, service, brand association, dealer relations, industry experience, terms and price.
In the United States,U.S. and Canada, HDFS financed 61.2%65.9% and 45.0% of new Harley-Davidson motorcycles retailed by independent dealers during 2017,2019, respectively, compared to 61.7%64.9% and 39.9%, respectively, in 2016. In Canada, HDFS financed 41.9% of new Harley-Davidson motorcycles retailed by independent dealers during 2017, compared to 45.3% in 2016.2018. Competitors for retail motorcycle finance business are primarily banks, credit unions and other financial institutions. In the motorcycle insurance business, competition primarily comes from national insurance companies and from insurance agencies serving local or regional markets. For insurance-related products such as extended service contracts, HDFS faces competition from certain regional and national industry participants as well as dealer in-house programs. Competition for the wholesale motorcycle finance business primarily consists of banks and other financial institutions providing wholesale financing to independent Harley-Davidson dealers in their local markets.
Trademarks – HDFS uses various trademarks and trade names for its financial services and products, which are licensed from H-D U.S.A., LLC, including HARLEY-DAVIDSON, H-D and the Bar & Shield logo.
Seasonality – HDFS experiences seasonal variations in retail financing activities based on the timing of regional riding seasons in the U.S. and Canada. In general, from mid-March through August, retail financing volume is greatest. HDFS wholesale financing volume is affected by inventory levels at independent Harley-Davidson dealers. DealersIndependent dealers generally have higher inventory levels of new and used motorcycles in the winter than duringfirst half of the spring and summer riding season.year. As a result, outstanding wholesale financing volume isfinance receivables are generally higher during the winter as compared to the rest of the year.same period.
Regulation – Operations of HDFS (both U.S. and foreign)operations are generally subject in certain instances, to supervision and regulation by statefederal and federalstate administrative agencies and various foreign governmental authorities. Many of the requirements imposed by such entities are in place to provide consumer protection as it pertains to the selling and servicing of financial products and services. Therefore, HDFS operations may be subject to limitations imposed by regulations, laws and judicial and/or
administrative decisions. In the U.S.,
for example, applicable laws include the federal Truth-in-Lending Act, Equal Credit Opportunity Act and Fair Credit Reporting Act.
Depending on the specific facts and circumstances involved, non-compliance with these laws may result in consequences such as limitinglimit the ability of HDFS to collect all or part of the principal or interest on applicable loans, entitling the borrower to rescind the loan or to obtain a refund of amounts previously paid, or could subject HDFS to the payment of damages or penalties and administrative sanctions, including “cease and desist” orders, and could limit the number of loans eligible for HDFSHDFS' securitization programs.
The Dodd-Frank Wall Street Reform and Consumer Protection Act granted the federal Consumer Financial Protection Bureau (CFPB)(the Bureau) significant supervisory, enforcement and rule-making authority in the area of consumer financial products and services. Certain CFPBBureau actions and regulations will directly impact HDFS and its operations. For example, the CFPBBureau has supervisory authority over non-bank larger participants in the vehicle financing market, which includes a non-bank subsidiary of HDFS.
Such regulatory requirements and associated supervision also could limit the discretion of HDFS in operating its business. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any charter, license or registration at issue, as well as the imposition of civil fines, criminal penalties and administrative sanctions.
Employees – As of December 31, 20172019, the Financial Services segment had approximately 600 employees.
Internet Access
The Company’s website address is http://www.harley-davidson.com. The Company’s website address for investor relations is http://investor.harley-davidson.com/.
The Company’s Annual Report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, are available on its investor relations website free of charge as soon as reasonably practicable after it electronically files such material with, or furnishes such material to, the United States Securities and Exchange Commission (SEC).
In addition, the Company makes available, through its investor relations website, the following corporate governance materials: (a)(i) the Company’s Corporate Governance Policy; (b)(ii) Committee Charters approved by the Company’s Board of Directors for the Audit and Finance Committee, Human Resources Committee, Nominating and Corporate Governance Committee and Brand and Sustainability Committee; (c)(iii) the Company’s Financial Code of Ethics; (d)(iv) the Company’s Code of Business Conduct (the Code of Conduct) in nine languages including English; (e); (v) the Conflict of Interest Process for Directors, Executive Officers and Other Employees (the Conflict Process); (f)(vi) a list of the Company’s Board of Directors; (g)(vii) the Company’s Bylaws; (h)(viii) the Company’s Environmental and Energy Policy; (i)(ix) the Company’s Policy for Managing Disclosure of Material Information; (j)(x) the Company’s Supplier Code of Conduct in four languages including English; (k)Conduct; (xi) the Sustainability Strategy Report; (l) the list of compensation survey participants used as market reference points for various components of compensation as reported in the Company’s Notice of Annual Meeting and Proxy Statement filed with the SEC on March 20, 2017, which compensation relates to the Company’s named executive officers; (m)(xii) the California Transparency in Supply Chain Act Disclosure; (n)(xiii) the Statement on Conflict Minerals; (o)(xiv) the Political Engagement and Contributions 2016-2017;2018-2019; and (p)(xv) the Company's Clawback Policy. The Company's Notice of Annual Meeting and Proxy Statement for its 2020 annual meeting of shareholders, which will include information related to the compensation of the Company's named executive officers, will be made available through its investor relations website.
The Company satisfies the disclosure requirements under the Code of Conduct, the Conflict Process and applicable New York Stock Exchange listing requirements regarding waivers of the Code of Conduct or the Conflict Process by disclosing the information in the Company’s proxy statement for its annual meeting of shareholders or on the Company’sits investor relations website. The Company is not including the information contained on or available through any of its websitewebsites as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
Item 1A. Risk Factors
An investment in Harley-Davidson, Inc. involves risks, including those discussed below. These risk factors should be considered carefully before deciding whether to invest in the Company.
| • | The Company may not be able to successfully execute its short-term and long-term business plans and strategies. There is no assurance that the Company will be able to execute its business plans and strategies, including the elements of the More Roads plan for growth that the Company disclosed on July 30, 2018 and updated September 24, 2019, and strengthen its existing business while enabling growth. The Company’s ability to meet the objectives, milestones, outlooks, and goals in the More Roads plan depends upon, among other factors, the Company’s ability to: (i) realize expectations concerning market demand for electric, middleweight, and small-displacement models, which may depend in part on the building of necessary infrastructure, (ii) develop and introduce products on a timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, (iii) successfully carry out its global manufacturing and assembly operations, (iv) manage risks that arise through expanding international manufacturing, operations and sales, (v) effectively implement changes relating to its dealers and distribution methods, (vi) accurately analyze, predict and react to changing market conditions, (vii) perform in a manner that enables the Company to benefit from market opportunities while competing against existing and new competitors, (viii) reduce other costs to offset costs of the More Roads plan and redirect capital without adversely affecting its existing operations, and (ix) avoid adverse impacts to its operations and/or demand for its products that may result from widespread infectious disease, in particular as it relates to its small displacement plans in Asia. Without limitation, the Company sees 2020 as the pivotal year in the transformation of the Company under the More Roads plan, and the Company faces challenges, risks and uncertainties in executing the plan. As a result, the Company may not realize its expectation of significant growth in 2021 or its goals for 2022 under the plan. The Company also may not be able to achieve the 2027 objectives under the Company's long-term strategy to build the next generation of Harley-Davidson riders globally. |
| • | The Company’s strategy to grow ridership may not be successful. The Company has been successful in marketing its products in large part by promoting the experience of Harley-Davidson motorcycling. To sustain and grow the business over the long-term, the Company must grow the sport of motorcycling and continue to be successful selling products and promoting the experience of motorcycling to new customers, including new riders, competitive riders and those who have motorcycle licenses but do not currently ride. The Company’s efforts toward expanding to 4 million total Harley-Davidson riders in the U.S. through 2027 and growing ridership internationally may not be successful, and achieving such growth in ridership may still not adequately meet the desired result of driving unit sales growth. Further, growing ridership in the U.S. may be challenging because the motorcycle market in the U.S. has been stagnant or declining, and the Company expects those conditions to continue. Failure to successfully drive demand for the Company's products may have a material adverse effect on the Company's business and results of operations. |
| • | The Company’s ability to remain competitive is dependent upon its capability to develop and successfully introduce new, innovative and compliant products. The motorcycle market continues to change in terms of styling preferences and advances in new technologies, and at the same time, it is subject to increasing regulations related to safety and emissions. The Company must continue to distinguish its products from its competitors’ products with unique styling and new technologies that consumers desire. The Company may not be able to achieve its goal of introducing 100 new, high-impact motorcycle models between 2017 and 2027, and introducing those models may still not lead to the desired result of driving unit sales growth. As the Company incorporates new and different features and technology into its products, the Company must protect its intellectual property from imitators and ensure its products do not infringe the intellectual property of other companies. In addition, these new products must comply with applicable regulations worldwide and satisfy the potential demand for products that produce lower emissions and achieve better fuel economy. The Company must make product advancements to respond to changing consumer preferences and market demands. The Company must also be able to design and manufacture these products and deliver them to a global marketplace in an efficient and timely manner and at prices that are attractive to customers. There can be no assurances that the Company will be successful in these endeavors or that existing and prospective customers will like or want the Company’s new products. |
| • | Changes in general economic and business conditions, tightening of credit and retail markets, political events or other factors may adversely impact independent dealers’ retail sales. The motorcycle industry is impacted by general economic conditions over which motorcycle manufacturers have little control. These factors can weaken the retail environment and lead to weaker demand for discretionary purchases such as motorcycles. Weakened economic conditions in certain business sectors and geographic areas can also result in reduced demand for the Company's products. Tightening of credit can limit the availability of funds from financial institutions and other lenders and sources of capital which could adversely affect the ability of retail consumers to obtain loans for the purchase of |
| • | Increased supply of and/or declining prices for used motorcycles and excess supply of new motorcycles may adversely impact retail sales of new motorcycles by the Company’s independent dealers. The Company has observed that when the supply of used motorcycles increases or the prices for used Harley-Davidson motorcycles decline, there can be reduced demand among retail purchasers for new Harley-Davidson motorcycles (at or near manufacturer’s suggested retail prices). Further, the Company and its independent dealers can and do take actions that influence the markets for new and used Harley-Davidson motorcycles. For example, introduction of new motorcycle models with significantly different functionality, technology or other customer satisfiers can result in increased supply of used motorcycles, which could result in declining prices for used motorcycles and prior model-year new motorcycles. Also, while the Company has taken steps designed to balance production volumes for its new motorcycles with demand, those steps may not be effective, or the Company’s competitors could choose to supply new motorcycles to the market in excess of demand at reduced prices which could also have the effect of reducing demand for new Harley-Davidson motorcycles (at or near manufacturer’s suggested retail prices). Ultimately, reduced demand among retail purchasers for new Harley-Davidson motorcycles leads to reduced shipments by the Company. |
| • | The financial services operations are exposed to credit risk on its retail and wholesale finance receivables. Credit risk is the risk of loss arising from a failure by a customer, including the Company's independent dealers, to meet the terms of any contract with the Company’s financial services operations. Credit losses are influenced by general business and economic conditions, including unemployment rates, bankruptcy filings and other factors that negatively affect household incomes, as well as contract terms and customer credit profiles. Credit losses are also influenced by the markets for new and used motorcycles, and the Company and its independent dealers can and do take actions that impact those markets. For example, the introduction of new models by the Company that represent significant upgrades on previous models may result in increased supply or decreased demand in the market for used Harley-Davidson branded motorcycles, including those motorcycles that serve as collateral or security for credit that HDFS has extended. This in turn could adversely impact the prices at which repossessed motorcycles may be sold, which may lead to increased credit losses for HDFS. Negative changes in general business, economic or market factors may have an additional adverse impact on the Company’s financial services credit losses and future earnings. The Company believes HDFS' retail credit losses may continue to increase over time due to changing consumer credit behavior, HDFS' efforts to increase prudently structured loan approvals to sub-prime borrowers, and new financing programs that may result in different loan performance than our existing programs. |
| • | The motorcycle industry has become increasingly competitive. Many of the Company’s competitors are more diversified than the Company, and they may compete in all segments of the motorcycle market, other powersports markets and/or the automotive market. Also, the Company’s manufacturer’s suggested retail price for its motorcycles is generally higher than its competitors, and as price becomes a more important factor for consumers in the markets in which the Company competes, the Company may be at a competitive disadvantage. Furthermore, many competitors headquartered outside the U.S. experience a financial benefit from a strengthening in the U.S. dollar relative to their home currency that can enable them to reduce prices to U.S. consumers. In addition, the Company’s financial services operations face competition from various banks, insurance companies and other financial institutions that may have access to additional sources of capital at more competitive rates and terms, particularly for borrowers in higher credit tiers. The Company's responses to these competitive pressures, or its failure to adequately address and respond to these competitive pressures, may have a material adverse effect on the Company’s business and results of operations. |
| • | Expanding international sales and operations subjects the Company to risks that may have a material adverse effect on its business. Expanding international sales and operations is a part of the Company’s long-term business strategy, particularly in light of the U.S. market conditions. There is no assurance that the Company will accomplish this international expansion. Further, to support that strategy, the Company must increase its presence outside the U.S., including additional employees and investment in business infrastructure and operations. International operations and sales are subject to various risks, including political and economic instability, local labor market conditions, the imposition of foreign tariffs and other trade barriers, the impact of foreign government laws and regulations and U.S. laws and regulations that apply to international operations, the effects of income and withholding taxes, governmental expropriation and differences in business practices. The Company may incur increased costs and experience delays or disruptions in product deliveries and payments in connection with international operations and sales that could cause loss of revenues and earnings. Unfavorable changes in the political, regulatory and business climate could have a material adverse effect on the Company’s net sales, financial condition, profitability and cash flows. This includes, for example, the uncertainty related to the impact of United Kingdom’s withdrawal from the European Union (EU) |
| • | Changes in trade policies, including the imposition of tariffs, their enforcement and downstream consequences, may continue to have a material adverse impact on our business, results of operations and outlook. Tariffs and/or other developments with respect to trade policies, trade agreements and government regulations could have a material adverse impact on the Company's business, financial condition and results of operations. Recent tariffs imposed by the EU and China resulted in material increases to the Company’s operating costs in 2018 and 2019. In 2018, the EU placed a 25% incremental tariff (31% total tariff) on motorcycles imported into the EU from the U.S., which is scheduled to increase to a 50% incremental tariff (56% total tariff) effective June 1, 2021. In addition, the U.S. government has imposed increased tariffs on imports from China (Section 301 tariffs), which has resulted in higher costs for components and products sourced from China. |
In 2019, the Company obtained regulatory approvals that allow it to supply its EU markets with Touring, Softail® and Sportster® motorcycles produced at its Thailand operations at reduced tariff rates of 6%. These motorcycles will not be subject to the current 31% or future 56% tariffs that apply to motorcycles sourced from the Company's U.S. facilities. The Company expects wholesale shipments of Thailand-sourced lower-tariff motorcycles in the EU to begin early in the second quarter of 2020(1). Certain Trike and CVO™ models will continue to be sourced from the U.S. and will remain subject to the higher EU tariffs.
Recent U.S. tariffs on imports from China remain largely unmitigated and are expected to cost the Company approximately $15 million in 2020(1). The on-going impact of these tariffs will depend on future trade discussions between the U.S. and China or the Company’s ability to avoid or offset these costs should the tariffs remain in place.
Without limitation, (i) tariffs currently in place, (ii) the imposition by the U.S. government of new tariffs on imports to the U.S. and/or (iii) the imposition by foreign countries of tariffs on U.S. products, including tariffs imposed in response to U.S. tariffs, could materially increase: (a) the cost of Harley-Davidson products that the Company is offering for sale in relevant countries, (b) the cost of certain products that the Company sources from foreign manufacturers and (c) the prices of certain raw materials that the Company utilizes. The Company may not be able to successfully execute its manufacturing strategy. The Company’s manufacturing strategy is designedpass such increased costs on to continuously improve product qualityindependent dealers or their customers, and increase productivity, while reducing costs and increasing flexibility to respond to ongoing changes in the marketplace. Based on the Company’s strategy, the Company may from timenot be able to time, open, close, expand, contract or restructure one or moresecure sources of its manufacturing facilities. The Company believes flexible manufacturing, including flexible supply chains and flexible labor agreements, is the key element to enable improvements in the Company’s ability to respond to customers in a cost effective manner. To execute this strategy, the Company must be successful in its implementation of facility changes and in its continuous improvement efforts, all of which are dependent on the involvement of management, production employees and suppliers. To execute this strategy, the Company must be successful in its continuous improvement efforts which are dependent on the involvement of management, production employees and suppliers. Any inability to achieve these objectives could adversely impact the profitability of the Company’scertain products and its ability to deliver the right product at the right time to the customer.
| • | The Company may not be able to successfully execute its manufacturing strategy. The Company’s manufacturing strategy is designed to continuously improve product quality and increase productivity, while reducing costs and increasing flexibility to respond to ongoing changes in the marketplace. Based on the Company’s strategy, the Company may, from time to time, open, close, expand, contract or restructure one or more of its manufacturing facilities. The Company believes flexible manufacturing, including flexible supply chains and flexible labor agreements, is a key element to enable improvements in the Company’s ability to respond to customers in a cost effective manner(1). To execute this strategy, the Company must be successful in its implementation of facility changes and in its continuous improvement efforts, all of which are dependent on the involvement of management, production employees and suppliers. Any inability to achieve these objectives could adversely impact the profitability of the Company’s products and its ability to deliver the right product at the right time to the customer. |
| • | The Company must prevent and detect issues with its products, components purchased from suppliers and its suppliers’ manufacturing processes to reduce recall campaigns, warranty costs, litigation, product liability claims, delays in new model launches and regulatory investigations. The Company must also complete any recall campaigns within cost expectations. The Company must continually improve and adhere to product development and manufacturing processes and ensure that its suppliers and their sub-tier suppliers adhere to product development and manufacturing processes, to ensure high quality products are sold to retail customers. If product designs or manufacturing processes are defective, the Company could experience delays in new model launches, field actions such as product programs and product recalls, inquiries or investigations from regulatory agencies, and warranty claims and product liability claims, which may involve purported class actions. While the Company uses reasonable methods to estimate the cost of warranty, recall and product liabilities and appropriately reflects those in its financial statements, there is a risk the actual costs could exceed estimates and result in damages that are not covered by insurance. Further, selling products with poor quality, the announcement of recalls and the filing of product liability claims (whether or not successful), may also adversely affect the Company’s reputation and brand strength. |
| • | A cybersecurity breach may adversely affect the Company’s reputation, revenue and earnings. The Company and certain of its third-party service providers and vendors receive, store and transmit digital personal information in connection with the Company’s human resources operations, financial services operations, e-commerce, the Harley Owners Group, dealer management, mobile applications, planned connected vehicle services offerings and other aspects of its business. The Company’s information systems, and those of its third-party service providers and vendors, are vulnerable to continually evolving cybersecurity risks. The Company's plan to offer connected vehicle services will heighten these risks. Unauthorized parties have attempted to and may attempt in the future to gain access to these systems or the information the Company and its third-party service providers and vendors maintain and use through fraud or other means of deceiving our employees and third-party service providers and vendors. Hardware, software or applications the Company develops or obtains from third-parties may contain defects in design or manufacture or other problems that could unexpectedly compromise information security and/or the Company’s operations. The methods used to obtain unauthorized access, disable or degrade service or sabotage systems are constantly evolving and may be difficult to anticipate or detect. The Company has implemented and regularly reviews and updates processes and procedures to protect against unauthorized access to or use of secured data and to prevent data loss. However, the ever-evolving threats mean the Company and third-party service providers and vendors must continually evaluate and adapt systems and processes, and there is no guarantee that they will be adequate to safeguard against all data security breaches or misuses of data. The Company has experienced information security attacks, but to date they have not materially compromised the Company’s computing environment or resulted in a material impact on the Company’s business or operations or the release of confidential information about employees, customers, dealers, suppliers or other third parties. Any future significant compromise or breach of the Company’s data security, whether external or internal, or misuse of customer, employee, dealer, supplier or Company data could result in disruption to the Company’s operations, significant costs, lost sales, fines and lawsuits and/or damage to the Company’s reputation. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous with new and evolving requirements, compliance could also result in the Company being required to incur additional costs. |
| • | The Company is exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency. As a result, a weakening in those foreign currencies relative to the U.S. dollar can adversely affect the Company's revenue margin, and cause volatility in results of operations. Furthermore, many competitors headquartered outside the U.S. experience a financial benefit from a strengthening in the U.S. dollar relative to their home currency that can enable them to reduce prices to U.S. consumers. The Company is also subject to risks associated with changes in prices of commodities. Earnings from the Company’s financial services business are affected by changes in interest rates. Although the Company uses derivative financial instruments to some extent to attempt to manage a portion of its exposure to foreign currency exchange rates, commodity prices, and interest rate risks, the Company does not attempt to manage its entire expected exposure, and these derivative financial instruments generally do not extend beyond one year and may expose the Company to credit risk in the event of counterparty default to the derivative financial instruments. There can be no assurance that in the future the Company will successfully manage these risks. |
| • | The Company’s success depends upon the continued strength of the Harley-Davidson brand. The Company believes that the Harley-Davidson brand has significantly contributed to the success of its business and that maintaining and enhancing the brand is critical to expanding its customer base. Failure to protect the brand from infringers or to grow the value of the Harley-Davidson brand may have a material adverse effect on the Company’s business and results of operations. |
| • | The Company relies on third-party suppliers to obtain raw materials and provide component parts for use in the manufacture of its motorcycles. The Company may experience supply problems relating to raw materials and components such as unfavorable pricing, poor quality or untimely delivery. In certain circumstances, the Company relies on a single supplier to provide the entire requirement of a specific part, and a change in this established supply relationship may cause disruption in the Company’s production schedule. In addition, the price and availability of raw materials and component parts from suppliers can be adversely affected by factors outside of the Company’s control such as the supply of a necessary raw material, natural disasters or widespread infectious disease. Further, the Company's suppliers may experience difficulty in funding their day-to-day cash flow needs because of tightening credit caused by financial market disruption. In addition, adverse economic conditions and related pressure on select suppliers due to difficulties in the global manufacturing arena could adversely affect their ability to supply the Company. Changes in laws and policies relating to trade and taxation may also adversely impact the Company's foreign suppliers. These supplier risks may have a material adverse effect on the Company’s business and results of operations. |
| • | The Company’s operations are dependent upon attracting and retaining skilled employees, including skilled labor, executive officers and other senior leaders. The Company’s future success depends on its continuing ability to identify, hire, develop, motivate, retain and promote skilled personnel for all areas of its organization and to effectively execute reorganization actions within expected costs and realize the expected benefits of those actions. The Company’s current and future total compensation arrangements, which include benefits and incentive awards, may not be successful in attracting new employees and retaining and motivating the Company’s existing employees. In addition, the Company must cultivate and sustain a work environment where employees are engaged and energized in their jobs to maximize their performance, and the Company must effectively execute reorganization actions. If the Company does not succeed in attracting new personnel, retaining existing personnel, implementing effective succession plans and motivating and engaging personnel, including executive officers, the Company may be unable to develop and distribute products and services and effectively execute its plans and strategies. |
| • | The Company primarily sells its products at wholesale and must rely on a network of independent dealers to manage the retail distribution of its products. The Company depends on the capability of its independent dealers to develop and implement effective retail sales plans to create demand among retail purchasers for the motorcycles and related products and services that the dealers purchase from the Company. If the Company’s independent dealers are not successful in these endeavors, then the Company will be unable to maintain or grow its revenues and meet its financial expectations. Further, independent dealers may experience difficulty in funding their day-to-day cash flow needs and paying their obligations resulting from adverse business conditions, such as weakened retail sales and tightened credit. If independent dealers are unsuccessful, they may exit or be forced to exit the business or, in some cases, the Company may seek to terminate relationships with certain independent dealerships. As a result, the Company could face additional adverse consequences related to the termination of independent dealer relationships. Additionally, liquidating a former independent dealer’s inventory of new and used motorcycles can add downward pressure on new and used motorcycle prices. Further, the unplanned loss of any of the Company’s independent dealers may lead to inadequate market coverage for retail sales of new motorcycles and for servicing previously sold motorcycles, create negative impressions of the Company with its retail customers, and adversely impact the Company’s ability to collect wholesale receivables that are associated with that independent dealer. |
| • | The financial services operations are highly dependent on accessing capital markets to fund operations at competitive interest rates, the Company’s access to capital and its cost of capital are highly dependent upon its credit ratings, and any negative credit rating actions will adversely affect its earnings and results of operations. Liquidity is essential to the Company’s financial services business. Disruptions in financial markets may cause lenders and institutional investors to reduce or cease to loan money to borrowers, including financial institutions. The Company’s financial services operations may be negatively affected by difficulty in raising capital in the long-term and short-term capital markets. These negative consequences may in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital and reduced funds available through its financial services operations to provide loans to independent dealers and their retail customers. Additionally, the ability of the Company and its financial services operations to access unsecured capital markets is influenced by their short-term and long-term credit ratings. If the Company’s credit ratings are downgraded or its ratings outlook is negatively changed, then the Company’s cost of borrowing could increase, which may result in reduced earnings and reduced interest margins, and the Company’s access to capital may be disrupted or impaired. |
| • | The Company must invest in and successfully implement new information systems and technology. The Company is continually modifying and enhancing its systems and technology to increase productivity and efficiency and to mitigate failure risks from older/aged technologies currently in its portfolio. The Company has several large, strategic information system projects in process. As new systems and technologies (and related strategies) are implemented, the Company could experience unanticipated difficulties resulting in unexpected costs and adverse impacts to its manufacturing and other business processes. When implemented, the systems and technology may not provide the benefits anticipated and could add costs and complications to ongoing operations. Also, older technologies may fail, which may have a material adverse effect on the Company’s business and results of operations. In the case of the Company's planned electronic vehicle services offering, these risks are heightened because these services are dependent on (i) the successful implementation of complex third-party cloud solutions, (ii) the ability of a rider's motorcycle and mobile application to successfully connect to each other and (iii) the support of cellular carriers. |
| • | The Company must comply with governmental laws and regulations that are subject to change and involve significant costs. The Company’s sales and operations in areas outside the U.S. may be subject to foreign laws, regulations and the legal systems of foreign courts or tribunals. These laws and policies governing operations of foreign-based companies may result in increased costs or restrictions on the ability of the Company to sell its products in certain countries. U.S. laws and policies affecting foreign trade and taxation may also adversely affect the Company's international sales operations. |
The Company’s domestic sales and operations are subject to governmental policies and regulatory actions of agencies of the United States Government, including the Environmental Protection Agency (EPA), SEC,Securities and Exchange Commission (SEC), National Highway Traffic Safety Administration, Department of Labor and Federal Trade Commission. In addition, the Company’s sales and operations are also subject to laws and actions of state legislatures and other local regulators, including independent dealer statutes and licensing laws. Changes in regulations or the imposition of additional regulations may have a material adverse effect on the Company’s business and results of operations.operations
Tax - –The Company is subject to income and non-income based taxes in the U.S. federal and state jurisdictions and in various foreign jurisdictions. Significant judgment is required in determining the Company's worldwide income tax liabilities and other tax liabilities including the impact of the 2017 Tax Cuts and Jobs Act (2017 Tax Act). The Company believes that it complies with applicable tax law.laws. If the governing tax authorities have a different interpretation of the applicable lawlaws or if there is a change in tax law,laws, the Company's financial condition and/or results of operations may be adversely affected. To the extent there are considerable changes to tax laws, the Company may need to readjust its tax strategy, and may not be able to take full advantage of such changes. Furthermore, given the complexity and timing
Environmental –The majority of the 2017 Tax Act, future guidance, interpretations and pronouncements may add clarity to the numerous aspects of the 2017 Tax Act that impact the Company. Future clarifications may give rise to additional unanticipated matters that could impact the Company’s tax liabilities and effective tax rate that result in revisions to the Company’s provisional estimates related to the 2017 Tax Act included in the Company’s 2017 income tax provision, which could in turn adversely impact future operating results.
Financial Services - –The Company’s financial services operations are governed by a wide range of foreign,U.S. federal and state and foreign laws that regulate financial and lending institutions, and financial services activities. In the U.S. for example, these laws include the federal Truth-in-Lending Act, Equal Credit Opportunity Act and Fair Credit Reporting Act. The financial services operations originate the majority of its consumer loans through its subsidiary, Eaglemark Savings Bank, a Nevada state thrift chartered as an industrial loan company. FederalIndustrial Loan Company. U.S. federal and state bodies may in the future impose additional laws, regulation and supervision over the financial services industry.
Violations of, or non-compliance with, relevant laws and regulations may limit the ability of HDFS to collect all or part of the principal or interest on applicable loans, may entitle the borrower to rescind the loan or obtain a refund of amounts previously paid, could subject HDFS to payment of damages, civil fines, or criminal penalties and administrative sanctions and could limit the number of loans eligible for HDFS securitizations programs. Such regulatory requirements and associated supervision also could limit the discretion of HDFS in operating its business, such as through the suspension or revocation of any charter, license or registration at issue, as well as the imposition of administrative sanctions, including "cease and desist" orders. The Company cannot assure that the applicable laws or regulations will not be amended or construed in ways that are adverse to HDFS, that new laws and regulations will not be adopted in the future, or that laws and regulations will not attempt to limit the interest rates or convenience fees charged by HDFS, any of which may adversely affect the business of HDFS or its results of operations.
The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) is a sweeping piece of legislation impacting financial services and the full effect will not be fully known for years,continues to evolve as regulations that are intended to implement the Dodd-Frank Act are adopted, and the text of the Dodd-Frank Act is analyzed by stakeholders and possibly the courts. The Dodd-Frank Act also created the Consumer Financial Protection Bureau (CFPB)(the Bureau). The CFPBBureau has significant enforcement and rule-making authority in the area of consumer financial products and services. The direction that the CFPBBureau will take, the regulations it will adopt, and its interpretation of existing laws
and regulations are all elements that are not yet fully known.known and subject to change. Compliance may be costly and could affect operating results as the implementation of new forms, processes, procedures and controls and infrastructure may be required. Compliance may create operational constraints and place limits on pricing. Failure to comply, as well as changes to laws and regulations, or the imposition of additional laws and regulations, could affect HDFS’ earnings, limit its access to capital, limit the number of loans eligible for HDFS securitization programs and have a material adverse effect on HDFS’ business and results of operations. The CFPBBureau also has supervisory authority over certain
non-bank larger participants in the vehicle financing market, which includes a non-bank subsidiary of HDFS, allowing the CFPBBureau to conduct comprehensive and rigorous on-site examinations that could result in enforcement actions, fines, changes to processes and procedures, product-related changes or consumer refunds, or other actions.
U.S. Public Company - –The Company is also subject to policies and actions of the SEC and New York Stock Exchange (NYSE). Many major competitors of the Company are not subject to the requirements of the SEC or the NYSE rules. As a result, the Company may be required to disclose certain information that may put the Company at a competitive disadvantage to its principal competitors.
| • | Weather may impact retail sales by the Company's independent dealers. The Company has observed that abnormally cold and/or wet conditions in a region, including impacts from hurricanes or unusual storms, could have the effect of reducing demand or changing the timing for purchases of new Harley-Davidson motorcycles. Reduced demand for new Harley-Davidson motorcycles ultimately leads to reduced shipments by the Company. |
| • | The Company’s Motorcycles segment is dependent upon unionized labor. A substantial portion of the hourly production employees working in the Motorcycles segment are represented by unions and covered by collective bargaining agreements. HDMC is currently a party to three collective bargaining agreements with local affiliates of the International Association of Machinists and Aerospace Workers and the United Steelworkers of America. Current collective bargaining agreements with hourly employees in Wisconsin will expire in 2024, and the agreement with employees in Pennsylvania will expire in 2022. There is no certainty that the Company will be successful in negotiating new agreements with these unions that extend beyond the current expiration dates or that these new agreements will be on terms that will allow the Company to be competitive. The Company's decisions regarding opening, closing, expanding, contracting or restructuring its facilities may require changes to existing or new bargaining agreements. Failure to renew agreements when they expire or to establish new collective bargaining agreements on terms acceptable to the Company and the unions could result in the relocation of production facilities, work stoppages or other labor disruptions which may have a material adverse effect on the Company’s business and results of operations. |
| • | The ability of the Company to expand international sales may be impacted by existing or new laws and regulations that impose motorcycle licensing restrictions and limit access to roads and highways. Expanding international sales is a part of the Company’s long-term business strategy. A number of countries have tiered motorcycle licensing requirements that limit the ability of new and younger riders to obtain licenses to operate the Company’s motorcycles, and many countries are considering the implementation of such requirements. These requirements only allow new and/or younger riders to operate smaller displacement motorcycles for certain periods of time. Riders typically are only permitted to obtain a license to ride larger displacement motorcycles upon reaching certain ages and/or having been licensed to ride smaller displacement motorcycles for a certain period of time, and only after passing additional tests and paying additional fees. These requirements pose obstacles to large displacement motorcycle ownership. Other countries have laws and regulations that prohibit motorcycles from being operated on certain roads and highways. These types of laws and regulations could adversely impact the Company’s plans to expand international sales. |
| • | The Company is and may in the future become subject to legal proceedings and commercial or contractual disputes. The uncertainty associated with substantial unresolved claims and lawsuits may harm the Company’s business, financial condition, reputation and brand. The defense of the lawsuits may result in the expenditures of significant financial resources and the diversion of management’s time and attention away from business operations. In addition, although the Company is unable to determine the amount, if any, that it may be required to pay in connection with the resolution of the lawsuits by settlement or otherwise, any such payment may have a material adverse effect on the Company’s business and results of operations. Refer to Item 3. Legal Proceedings in this Form 10-K and in the other periodic reports that the Company files with the SEC for additional detail regarding lawsuits and other claims against the Company. |
| • | The Company, its suppliers and its independent dealers must successfully accommodate a seasonal retail motorcycle sales pattern. The Company records the wholesale sale of a motorcycle when it is shipped to the Company’s independent dealers. The Company's flexible production capability allows it to more closely correlate motorcycle production and wholesale shipments with the retail selling season. Any difficulties in executing flexible production could result in lost production or sales. The Company, its suppliers and its independent dealers must be able to successfully manage changes in production rates, inventory levels and other business processes associated with flexible production. Failure by the Company, its suppliers or its independent dealers to make such adjustments may have a material adverse effect on the Company’s business and results of operations. |
| • | The Company incurs substantial costs with respect to employee pension and healthcare benefits. The Company’s cash funding requirements and its estimates of liabilities and expenses for pensions and healthcare benefits for both active and retired employees are based on several factors that are outside the Company’s control. These factors include funding requirements of the Pension Protection Act of 2006, the rate used to discount the future estimated liabilities, the rate of return on plan assets, current and projected healthcare costs, healthcare reform or legislation, retirement age and mortality. Changes in these factors can impact the expense, liabilities and cash requirements associated with these benefits which could have a material adverse effect on future results of operations, liquidity or shareholders’ equity. In addition, costs associated with these benefits put the Company under significant cost pressure as compared to its competitors that may not bear the costs of similar benefit plans. Furthermore, costs associated with complying with the Patient Protection and Affordable Care Act may produce additional cost pressure on the Company and its health care plans. |
| • | The Company must maintain stakeholder confidence in its corporate governance practices and operating ethics. The Company believes it has a history of good corporate governance and operating ethics. The Company has a Code of Business Conduct that defines how employees interact with various Company stakeholders and addresses issues such as confidentiality, conflict of interest and fair dealing. Failure to maintain its reputation for good corporate governance and strong operating ethics may have a material adverse effect on the Company’s business and results of operations. |
| • | The Company’s operations may be affected by greenhouse emissions and climate change and related regulations. Climate change is receiving increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. The U.S. Congress has previously considered and may in the future implement restrictions on greenhouse gas emissions. In addition, several U.S. states, including states where the Company has manufacturing facilities, have previously considered and may in the future implement greenhouse gas registration and reduction programs. Energy security and availability and its related costs affect all aspects of the Company’s manufacturing operations in the U.S., including the Company’s supply chain. The Company’s manufacturing facilities use energy, including electricity and natural gas, and certain of the Company’s facilities emit amounts of greenhouse gas that may be affected by these legislative and regulatory efforts. Greenhouse gas regulation could increase the price of the electricity the Company purchases, increase costs for use of natural gas, potentially restrict access to or the use of natural gas, require the Company to purchase allowances to offset the Company’s own emissions or result in an overall increase in costs of raw materials, any one of which could increase the Company’s costs, reduce competitiveness in a global economy or otherwise negatively affect the Company’s business, operations or financial results. Many of the Company’s suppliers face similar circumstances. Physical risks to the Company’s business operations as identified by the Intergovernmental Panel on Climate Change and other expert bodies include scenarios such as sea level rise, extreme weather conditions and resource shortages. Extreme weather may disrupt the production and supply of component parts or other items such as natural gas, a fuel necessary for the manufacture of motorcycles and their components. Supply disruptions would raise market rates and jeopardize the continuity of motorcycle production. |
| • | Regulations related to materials that the Company purchases to use in its products could cause the Company to incur additional expenses and may have other adverse consequences. Laws or regulations impacting the Company's supply chain, such as the UK Modern Slavery Act, could affect the sourcing and availability of some of the raw materials that the Company uses in the manufacturing of its products. The Company's supply chain is complex, and if it is not able to fully understand its supply chain, then the Company may face reputational challenges with customers, investors or others and other adverse consequences. For example, many countries in which the Company distributes its products are beginning to introduce regulations that require knowledge and disclosure of virtually all materials and chemicals in the Company’s products. Accordingly, the Company could incur significant costs related to the process of complying with these laws, including potential difficulty or added costs in satisfying the disclosure requirements. |
| • | The Company relies on third parties to perform certain operating and administrative functions for the Company. Similar to suppliers of raw materials and components, the Company may experience problems with outsourced services, such as unfavorable pricing, untimely delivery of services, or poor quality. Also, these suppliers may experience adverse economic conditions due to difficulties in the global economy that could lead to difficulties supporting the Company's operations. In light of the amount and types of functions that the Company has outsourced, these service provider risks may have a material adverse effect on the Company's business and results of operations. |
The Company disclaims any obligation to update these Risk Factorsrisk factors or any other forward-looking statements. The Company assumes no obligation, (andand specifically disclaims any such obligation)obligation, to update these Risk Factorsrisk factors or any other
forward-looking statements to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
| Type of Facility | Location | ||||||
| Motorcycle and Related Products: | |||||||
| Corporate | Milwaukee, WI | ||||||
Product development center | |||||||
| Owned | |||||||
Manufacturing | Menomonee Falls, WI | ||||||
| Owned | |||||||
Manufacturing | Tomahawk, WI | Owned | |||||
Manufacturing | York, PA | ||||||
Manufacturing(d) | Rayong, Thailand | Owned | |||||
Manufacturing | |||||||
| Manaus, Brazil | |||||||
Manufacturing | Bawal, India | ||||||
| Financial Services: | |||||||
Wholesale and retail operations office | Leased | ||||||
| Retail operations office | Carson City, NV | Owned | |||||
| Motorcycle powertrain |
Motorcycle parts fabrication, painting and assembly |
| Assembly of select models for the Brazilian |
Assembly of select models for the Indian market and production of |
Item 3. Legal Proceedings
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter.
Environmental Protection Agency Notice:
Notice – In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in information exchanges and discussions with the EPA. In August 2016, the Company entered into a consent decree with the EPA regarding these issues, and the consent decree was subsequently revised in July 2017 (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. In December 2017, the Department of Justice (DOJ), on behalf of the EPA, filed the Settlement with the U.S. District Court for the District of Columbia for the purpose of obtaining court approval of the Settlement. Three amicus briefs opposing portions of the Settlement were filed with the court by the deadline of January 31, 2018. On March 1, 2018, the Company and the DOJ each filed separate response briefs. The Company anticipatesis awaiting the court will make acourt's decision on whether or not to finalize the Settlement, inand on February 8, 2019 the following months.DOJ filed a status update reminding the court of the current status of the outstanding matter. The Company has an accrual associated with this matter which is includedrecorded in accruedAccrued liabilities in on the Consolidated Balance Sheets,balance sheets, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved
by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
Matter – The Company is involved with government agencies and groups of potentially responsible partiesthe U.S. Navy related to a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although theThe Company is not certain as to the full extent of the environmental contamination at the York facility, it has been workingan agreement with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).
Pennsylvania Department of Environmental Protection and the EPA. The associated cleanup plan documents were submitted for approval in December 2019 and remaining cleanup activities will begin in mid-2020. The Company has an accrual for its estimate of its share of the estimated future Response Costs at the York facility which is includedrecorded in otherOther long-term liabilities in the Consolidated Balance Sheets. While much of the work on the RI/FS is complete, it is still under agency review and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS that is finally approved or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.Consolidated balance sheets.
Product Liability Matters:
Matters – The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidatedConsolidated financial statements.statements.(1)
Item 4. Mine Safety Disclosures
Not ApplicableApplicable.
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Harley-Davidson, Inc. common stock is traded on the New York Stock Exchange Inc. The high and low market prices forunder the common stock, reported as New York Stock Exchange, Inc. Composite Transactions, were as follows:
| 2017 | Low | High | 2016 | Low | High | |||||||||||||
| First quarter | $ | 54.75 | $ | 63.40 | First quarter | $ | 36.36 | $ | 49.99 | |||||||||
| Second quarter | $ | 51.61 | $ | 62.95 | Second quarter | $ | 42.99 | $ | 52.00 | |||||||||
| Third quarter | $ | 45.53 | $ | 56.55 | Third quarter | $ | 41.63 | $ | 57.33 | |||||||||
| Fourth quarter | $ | 44.52 | $ | 52.30 | Fourth quarter | $ | 48.55 | $ | 62.35 | |||||||||
| 2017 | 2016 | 2015 | ||||||||||
| First quarter | $ | 0.365 | $ | 0.350 | $ | 0.310 | ||||||
| Second quarter | 0.365 | 0.350 | 0.310 | |||||||||
| Third quarter | 0.365 | 0.350 | 0.310 | |||||||||
| Fourth quarter | 0.365 | 0.350 | 0.310 | |||||||||
| Total | $ | 1.460 | $ | 1.400 | $ | 1.240 | ||||||
trading symbol HOG. As of February 2, 2018,January 31, 2020, there were 72,28568,506 shareholders of record of Harley-Davidson, Inc. common stock.
The Company’s share repurchases include discretionary share repurchases and shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock awards. The following table contains detailunits. Detail related to the Company's repurchaserepurchases of its common stock based on the date of trade during the quarter ended December 31, 2017:2019 is as follows:
| 2017 Fiscal Month | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |||||||||
| September 25 to October 29 | 635 | $ | 49 | 635 | 10,594,144 | ||||||||
| October 30 to November 26 | 731 | $ | 49 | 731 | 10,594,144 | ||||||||
| November 27 to December 31 | 619 | $ | 49 | 619 | 10,594,144 | ||||||||
| Total | 1,985 | $ | 49 | 1,985 | |||||||||
| 2019 Fiscal Month | Total Number of Shares Purchased(a) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||
| September 30 to November 3 | 569,959 | $ | 35 | 569,959 | 9,851,678 | |||||||
| November 4 to December 1 | 438,496 | $ | 36 | 438,496 | 9,414,221 | |||||||
| December 2 to December 31 | 1,167,849 | $ | 37 | 1,167,849 | 8,246,721 | |||||||
| 2,176,304 | $ | 36 | 2,176,304 | |||||||||
| (a) | Includes discretionary share repurchases and shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units |
In February 2016,2018, the Company's Board of Directors authorized the Company to repurchase up to 20.015.0 million shares of its common stock with no dollar limit or expiration date. As of December 31, 2017, 10.62019, 8.2 million shares remained under this authorization. In February 2018, the Company's Board of Directors authorized the Company to repurchase up to 15.0 million additional shares of its common stock with no dollar limit or expiration date.
Under the share repurchase authorizations,authorization, the Company’s common stock may be purchased through any one or more of a Rule 10b5-1 trading plan and discretionary purchases on the open market, block trades, accelerated share repurchases or privately negotiated transactions. The number of shares repurchased, if any, and the timing of repurchases will depend on a number of factors, including share price, trading volume and general market conditions, as well as on working capital requirements, general business conditions and other factors. The repurchase authority has no expiration date but may be suspended, modified or discontinued at any time.
The Harley-Davidson, Inc. 2014 Incentive Stock Plan and predecessor stock plans permit participants to satisfy all or a portion of the statutory federal, state, and local withholding tax obligations arising in connection with plan awards by electing to (a)(i) have the Company withhold shares otherwise issuable under the award, (b)(ii) tender back shares received in connection with such award or (c)(iii) deliver other previously owned shares, in each case having a value equal to the amount to be withheld.
During the fourth quarter of 20172019, the Company acquired 1,9859,548 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock awards.units.
Item 1212. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of this Annual Report on Form 10-K contains certain information relating to the Company’s equity compensation plans.
The following information in this Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates it by reference into such a filing: the SEC requires the Company to include a line graph presentation comparing cumulative five year Common Stockcommon stock returns with a broad-based stock index and either a nationally recognized industry index or an index of peer companies selected by the Company. The Company has chosen to use the Standard & Poor’s (S&P) 500 Index as the broad-based index and the Standard & Poor’sS&P MidCap 400 Index as a more specific comparison. The Standard & Poor’sS&P MidCap 400 Index was chosen becauseas the Company does not believe that any other published industry or line-of-business index adequately represents the current operations of the Company. The graph assumes a beginning investment of $100 on December 31, 20122014 and that all dividends are reinvested.
| 2012 ($) | 2013 ($) | 2014 ($) | 2015 ($) | 2016 ($) | 2017 ($) | |||||||||||||
| Harley-Davidson, Inc. | 100 | 144 | 139 | 98 | 130 | 116 | ||||||||||||
| Standard & Poor’s MidCap 400 Index | 100 | 132 | 142 | 137 | 165 | 192 | ||||||||||||
| Standard & Poor’s 500 Index | 100 | 132 | 151 | 153 | 171 | 208 | ||||||||||||
| 2014 | 2015 | 2016 | 2017 | 2018 | 2019 | ||||||||||||||||||
| Harley-Davidson, Inc. | $ | 100 | $ | 70 | $ | 93 | $ | 84 | $ | 58 | $ | 66 | |||||||||||
| S&P’s MidCap 400 Index | $ | 100 | $ | 96 | $ | 116 | $ | 135 | $ | 120 | $ | 152 | |||||||||||
| S&P’s 500 Index | $ | 100 | $ | 101 | $ | 113 | $ | 138 | $ | 132 | $ | 174 | |||||||||||
Item 6. Selected Financial Data
| (in thousands, except per share amounts) | 2019 | 2018 | 2017 | 2016 | 2015 | ||||||||||||||
| Revenue: | |||||||||||||||||||
| Motorcycles and Related Products | $ | 4,572,678 | $ | 4,968,646 | $ | 4,915,027 | $ | 5,271,376 | $ | 5,308,744 | |||||||||
| Financial Services | 789,111 | 748,229 | 732,197 | 725,082 | 686,658 | ||||||||||||||
| $ | 5,361,789 | $ | 5,716,875 | $ | 5,647,224 | $ | 5,996,458 | $ | 5,995,402 | ||||||||||
| Net income | $ | 423,635 | $ | 531,451 | $ | 521,759 | $ | 692,164 | $ | 752,207 | |||||||||
| Weighted-average shares: | |||||||||||||||||||
| Basic | 157,054 | 165,672 | 171,995 | 179,676 | 202,681 | ||||||||||||||
| Diluted | 157,804 | 166,504 | 172,932 | 180,535 | 203,686 | ||||||||||||||
| Earnings per share: | |||||||||||||||||||
| Basic | $ | 2.70 | $ | 3.21 | $ | 3.03 | $ | 3.85 | $ | 3.71 | |||||||||
| Diluted | $ | 2.68 | $ | 3.19 | $ | 3.02 | $ | 3.83 | $ | 3.69 | |||||||||
| Dividends paid per share | $ | 1.50 | $ | 1.48 | $ | 1.46 | $ | 1.40 | $ | 1.24 | |||||||||
Assets(a)(c) | $ | 10,528,159 | $ | 10,665,664 | $ | 9,972,672 | $ | 9,890,240 | $ | 9,972,977 | |||||||||
Debt(a) | $ | 7,444,930 | $ | 7,599,276 | $ | 6,988,009 | $ | 6,807,567 | $ | 6,872,198 | |||||||||
Lease obligations(c) | $ | 63,460 | $ | — | $ | — | $ | — | $ | — | |||||||||
Shareholders' equity(b) | $ | 1,803,999 | $ | 1,773,949 | $ | 1,844,277 | $ | 1,920,158 | $ | 1,839,654 | |||||||||
| (In thousands, except per share amounts) | 2017 | 2016 | 2015 | 2014 | 2013 | |||||||||||||||
| Statement of income data: | ||||||||||||||||||||
| Revenue: | ||||||||||||||||||||
| Motorcycles & Related Products | $ | 4,915,027 | $ | 5,271,376 | $ | 5,308,744 | $ | 5,567,681 | $ | 5,258,290 | ||||||||||
| Financial Services | 732,197 | 725,082 | 686,658 | 660,827 | 641,582 | |||||||||||||||
| Total revenue | $ | 5,647,224 | $ | 5,996,458 | $ | 5,995,402 | $ | 6,228,508 | $ | 5,899,872 | ||||||||||
| Net income | $ | 521,759 | $ | 692,164 | $ | 752,207 | $ | 844,611 | $ | 733,993 | ||||||||||
| Weighted-average common shares: | ||||||||||||||||||||
| Basic | 171,995 | 179,676 | 202,681 | 216,305 | 222,475 | |||||||||||||||
| Diluted | 172,932 | 180,535 | 203,686 | 217,706 | 224,071 | |||||||||||||||
| Earnings per common share: | ||||||||||||||||||||
| Basic | $ | 3.03 | $ | 3.85 | $ | 3.71 | $ | 3.90 | $ | 3.30 | ||||||||||
| Diluted | $ | 3.02 | $ | 3.83 | $ | 3.69 | $ | 3.88 | $ | 3.28 | ||||||||||
| Dividends paid per common share | $ | 1.46 | $ | 1.40 | $ | 1.24 | $ | 1.10 | $ | 0.84 | ||||||||||
| Balance sheet data: | ||||||||||||||||||||
Total assets(a) | $ | 9,972,672 | $ | 9,890,240 | $ | 9,972,977 | $ | 9,515,870 | $ | 9,394,765 | ||||||||||
Total debt(a) | $ | 6,988,009 | $ | 6,807,567 | $ | 6,872,198 | $ | 5,492,402 | $ | 5,248,895 | ||||||||||
| Total equity | $ | 1,844,277 | $ | 1,920,158 | $ | 1,839,654 | $ | 2,909,286 | $ | 3,009,486 | ||||||||||
| (a) | The Company adopted |
| (b) | The Company adopted ASU No. 2014-09 on January 1, 2018. Upon adoption, the Company recorded a net increase to the opening balance of Retained earnings of $6.0 million, net of income taxes, to recognize the cumulative effect of the adoption. |
| (c) | The Company adopted ASU No. 2016-02 on January 1, 2019. Upon adoption, the Company recorded Lease assets and related lease liabilities related to the Company's leasing arrangements totaling approximately $60 million. |
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Harley-Davidson, Inc. is the parent company of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). Unless the context otherwise requires, all references to the "Company" include Harley-Davidson, Inc. and all its subsidiaries. The Company operates in two reportable segments: Motorcycles &and Related Products (Motorcycles) and Financial Services.
The “% Change” figures included in the “Results of Operations” section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.
Certain "% Change" deemed not meaningful (NM) have been excluded.
(1) Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” or “estimates”“may,” “will,” “estimates,” “is on-track” or words of similar meaning. Similarly, statements that describe or refer to future expectations, future plans, strategies, objectives, outlooks, targets, guidance, commitments or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, unfavorably or favorably, from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Risk Factors” in Item 1A1A. Risk Factors and underin “Cautionary Statements” in this Item 7 of this report.7. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in the Outlook section“Overview” and “Outlook” sections are only made as of January 30, 201828, 2020 and the remaining forward-looking statements in this report are only made as of the date of the filing of this report (February 21, 2018)19, 2020), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Overview(1)
The Company’s net income for 20172019 was $521.8$423.6 million, or $3.02$2.68 per diluted share, compared to $692.2$531.5 million, or $3.83$3.19 per diluted share, in 2016. 2018.
Operating income from the Motorcycles segment in 2019 was down $157.4$132.7 million compared to 20162018 due primarily due to a 7.9% decrease inlower wholesale motorcycle shipments. shipments, a less favorable product mix and higher costs related to the impact of recent European Union (EU) and China tariffs, partially offset by lower recall costs and lower restructuring expenses.
Operating income from the Financial Services segment in 20172019 was slightly lower than the prior year, decreasing $0.2down $25.2 million or 0.1%.8.6% compared to 2018 due primarily to an increase in the provision for credit losses.
Worldwide independent dealer retail sales of new Harley-Davidson motorcycles decreased 6.7%4.3% in 20172019 compared to 2018. Retail sales were down 5.2% in the prior year. U.S. and decreased 3.0% in international markets compared to 2018. Internationally, retail sales fell 8.5% and international retailgrowth in emerging markets was more than offset by declines in developed markets. Retail sales decreased 3.9%in the U.S. continued to be impacted by a weak U.S. industry; however, the rate of decline for the U.S. industry moderated in 2019. The U.S. 601+cc industry declined 4.1% in 2019 compared to 2018, which was the industry's lowest rate of decline since 2016. InThe Company expects continued headwinds in 2020 in the U.S., and developed international markets.
The Company plans to continue to address these market challenges by focusing on its strategy to build the 601+cc motorcycle industry continuednext generation of riders globally and executing its “More Roads to face significant challenges and international retail sales finished belowHarley-Davidson” (More Roads) plan. The More Roads plan, which extends from 2018 to 2022, is designed to accelerate the Company's expectations.
At the end of 2019, there were 3.1 million Harley-Davidson riders in the U.S., 55,000 more total riders than at the end of 2018. During 2019, 527,000 riders joined the Harley-Davidson brand in the U.S., 25,000 more than the number that joined Harley-Davidson in 2018.* (*Data and analysis based on IHS Markit Motorcycles in Operation (MIO) data for On-Highway and Dual Purposepurpose bikes in the U.S. Snapshot based on data as of January 1, 2018)
IHS Markit Materials speak as of the original publication date thereof and are subject to change without notice. IHS Markit and other trademarks appearing in the IHS Markit Materials are the property of IHS Markit or their respective owners.)
The Company looks forward, it willaims to continue to focus onimprove annual progress towards building committed riders to reach its long-term strategy of growing ridership in the U.S.2027 objective and growingis executing its reach and impact internationally, while growing market share and profitability globally. In 2018, the Company will continueMore Roads plan to expand its independent dealer network outside the U.S. In addition, operations will begin at the Company's new facility in Thailand. This plant, like the Company's facility in Brazil, will support more competitive retail pricing in some of the
Outlook(1)
On January 30, 201828, 2020, the Company announced the following expectations for 2018.2020.
Motorcycles and Related Products Segment – In 2020, the Company expects Motorcycles segment revenue to be approximately $4.53 billion to $4.66 billion, or down 1% to up 2% compared to 2019. Beginning in 2020, the Company is providing revenue guidance in place of motorcycle shipment guidance. The Company believes revenue is a more comprehensive view of the business given the breadth of revenue growth drivers included in the More Roads plan that would not be reflected in motorcycle shipments. These include things such as small displacement motorcycles, electric bicycles, electric two-wheelers for kids and an expanded focus on broadening access to general merchandise products. As the Company transitions from motorcycle shipment guidance to revenue guidance. it provided the following outlook for motorcycle shipments. The Company expects 2020 worldwide motorcycle shipments, including its 601+cc and LiveWire™ motorcycles, to be down modestly, to up slightly, compared to 2019.
The Company expects to ship between 231,000 and 236,000U.S. retail sales of new Harley-Davidson motorcycles to dealersbe lower in 2018, which is down approximately 2%2020 compared to 4% from 2017. The Company's shipment expectation assumes that2019 behind lower U.S. dealer retailindustry sales, will be down, partially offset by growth in international retail sales. Thebut expects the rate of decline to continue to temper during 2020.
During 2020, the Company expects 2018 year-end U.S. retail inventory to be flat to 2017 and flat to up in international markets as it continues to add new dealers.
| • | Its model year 2020 and 2021 motorcycles, including the Pan America™ and Harley-Davidson® Bronx™ middleweight models in late 2020 |
Expansion of the international independent dealer network
However, the Company expects these positive sales impacts are expectedto continue to be more than offsetmet by strong headwinds, including:
A very weakdeclining U.S. motorcycle industry for new motorcycles driven
A relative shift in rider preference toward market segments in which the Company does not currently compete, but plans to enter by flat to declining total demand for combined newthe end of 2020
A marketplace crowded with highly competitive promotions, incentives and used motorcycles and soft, but improving, Harley-Davidson used motorcycle pricesdiscounts
Gross margin is expected to increase in 2020 behind lower year-over-year EU and 2019 motorcycles, a more favorable foreign currency exchange environment than 2017China tariffs and positivestrong operational productivity, including approximately $23 million in incremental Manufacturing Optimization Plan savings, partially offset by unfavorable changes in product mix. However,Refer to the “Restructuring Plan Costs and Savings” section below for further information regarding the Manufacturing Optimization Plan.
During 2020, the Company expects these positive impactsthe impact of recent EU and China tariffs to be more thanapproximately $35 million, which is down significantly from the 2019 impact of recent EU and China tariffs of $97.9 million. The 2020 estimate includes EU tariffs of approximately $20 million resulting from the shipment of remaining high-tariff inventory in Europe and continued tariffs on Trike and CVO™ models which the Company will continue to produce in the U.S. In addition, the Company expects to incur approximately $15 million from U.S. tariffs on imports from China (Section 301 tariffs).
While the Company plans to drive cost out of Selling, administrative and engineering expense, it expects operating expenses to be higher in 2020 due to increased investment in the More Roads plan and the absence of benefits recorded in 2019 related to recalls. In 2019, the Company recognized approximately $34 million of recall benefits primarily driven by supplier recoveries that are not expected to repeat in 2020. In 2020, investment in the More Roads plan is expected to peak as the Company finalizes product development and plans to launch:
New middleweight motorcycles
Electric bicycles
A small displacement motorcycle in China
Finally, the Company does not expect to incur restructuring expense in 2020, which will compare favorably to $32.4 million of restructuring expense in 2019.
Looking to the first quarter of 2020, the Company expects Motorcycles segment revenue to be between $1.09 billion and $1.17 billion, down 2% to 9% compared to the first quarter of 2019. First quarter 2020 Motorcycles segment operating margin as a percent of revenue is also expected to be down approximately 2.5 percentage points compared to the prior year. First quarter 2020 Motorcycles segment gross margin is expected to be flat to the prior year driven by favorable tariff impacts and increased productivity, which are expected to be offset by rising steelunfavorable mix. Selling, administrative and aluminum costs and increased manufacturing expense.
Financial Services Segment – The Company expects 2020 Financial Services segment operating income to be approximately flat compared to 2019 driven by modestly higher interest income largely offset by an increased provision for credit losses and higher interest expense as some lower rate debt matured during 2019. Credit losses are expected to be slightly higher due in part to increased depreciation from recent capital investmentsexpected loss experience on certain financing programs.
Effective January 1, 2020, the Company adopted Accounting Standards Update (ASU) No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). Adoption of this standard will impact how the Company recognizes credit losses on its financial instruments. The Company has completed its work surrounding model development, documentation and validation as well as its evaluation of associated processes, data sources, internal controls and policies. The Company is working through its remaining steps for the adoption of ASU 2016-13, which includes finalizing assumptions related to economic forecasts and appropriate qualitative factors and their associated processes and internal controls. The impact of adoption is expected to result in an initial increase in the new model-year 2018 Softail motorcycles. However,allowance for credit losses in the larger driverrange of increased manufacturing costs$70.0 million to $110.0 million, with a decrease in 2018, as compared to 2017, will be higher costsretained earnings net of $20 to $25 million due to temporary inefficiencies related to the manufacturing optimization plan.
taxes.
The Company expects selling, administrative and engineering expense to be higher in 2018 compared to 2017, but level with 2017 when expressed as a percent of revenue. The Company expects selling, administrative and engineering expense to be up behind increased investments in marketing and product development as the Company works to grow ridership globally.
Harley-Davidson, Inc. – Capital expenditures in 20182020 are expected to be $250 to $270 million, which includes approximately $50$215 million to support the manufacturing optimization plan.$235 million. The Company anticipates it will have the ability to fund all capital expenditures in 20182020 with cash flows generated by operations.
In January 2018, the Company commenced a significant, multi-year manufacturing optimization plan anchored by the consolidation of its plant in Kansas City, Missouri into its plant in York, Pennsylvania and the closure of the Company's wheel operations in Adelaide, Australia (Manufacturing Optimization Plan). The consolidation of U.S. operations included the elimination of approximately 800 jobs at the Kansas City facility and the addition of approximately 450 jobs at the York facility. The Adelaide facility closure resulted in the elimination of approximately 90 jobs.
In November 2018, the Company implemented a reorganization of its workforce (Reorganization Plan). As a result, approximately 70 employees left the Company on an involuntary basis.
The following table summarizesCompany does not expect to incur any additional costs under the expectedrestructuring plans in 2020. The actual costs and estimated savings associated with the Company's manufacturing optimization plan which is describedrestructuring plans were as follows (dollars in more detail in the "Overview" above. The restructuring costs relate to employee termination benefits, accelerated depreciation and other project implementation costs.
millions):
| (in millions) | 2018 | 2019 | 2020 | Total | |||
| Cost related to temporary inefficiencies | $ 20 - $ 25 | $15 - $20 | n/a | $ 35 - $ 45 | |||
| Restructuring expenses | $100 - $115 | $35 - $40 | n/a | $135 - $155 | |||
| $120 - $140 | $50 - $60 | $170 - $200 | |||||
| % cash | 70% | 75% | 70% | ||||
| 2018 | 2019 | 2020 | Annual On-going | ||||
| Annual cash savings | - | $25 - $30 | $45 - $50 | $65 - $75 | |||
| 2018 Actual | 2019 Actual | 2020 Estimated | Total | ||||||||||||
| Manufacturing Optimization Plan: | |||||||||||||||
| Costs related to temporary inefficiencies | $ | 12.9 | $ | 10.3 | $ | — | $ | 23.2 | |||||||
| Restructuring expenses | 89.5 | 32.7 | — | 122.2 | |||||||||||
| $ | 102.4 | $ | 43.0 | $ | — | $ | 145.4 | ||||||||
| Approximate cash expenditures | 60% | ||||||||||||||
| Reorganization Plan: | |||||||||||||||
| Restructuring expenses (benefits) | $ | 3.9 | $ | (0.3 | ) | $ | — | $ | 3.6 | ||||||
| Approximate cash expenditures | 100 | % | |||||||||||||
| 2019 Actual | 2020 Estimated | Annual Ongoing Estimated | |||||||||||||
| Annual cash savings: | |||||||||||||||
| Manufacturing Optimization Plan | $32.2 | $50 - $60 | $65 - $75 | ||||||||||||
| Reorganization Plan | $ 7.0 | $7 | $7 | ||||||||||||
Results of Operations 20172019 Compared to 20162018
Consolidated Results
| (in thousands, except earnings per share) | 2017 | 2016 | (Decrease) Increase | % Change | 2019 | 2018 | (Decrease) Increase | % Change | |||||||||||||||||||||
| Operating income from Motorcycles & Related Products | $ | 615,958 | $ | 773,406 | $ | (157,448 | ) | (20.4 | )% | ||||||||||||||||||||
| Operating income from Motorcycles and Related Products | $ | 289,620 | $ | 422,363 | $ | (132,743 | ) | (31.4 | )% | ||||||||||||||||||||
| Operating income from Financial Services | 275,305 | 275,530 | (225 | ) | (0.1 | ) | 265,988 | 291,160 | (25,172 | ) | (8.6 | ) | |||||||||||||||||
| Operating income | 891,263 | 1,048,936 | (157,673 | ) | (15.0 | ) | 555,608 | 713,523 | (157,915 | ) | (22.1 | ) | |||||||||||||||||
| Other income (expense), net | 16,514 | 3,039 | 13,475 | 443.4 | |||||||||||||||||||||||||
| Investment income | 3,580 | 4,645 | (1,065 | ) | (22.9 | ) | 16,371 | 951 | 15,420 | NM | |||||||||||||||||||
| Interest expense | 31,004 | 29,670 | 1,334 | 4.5 | 31,078 | 30,884 | 194 | 0.6 | |||||||||||||||||||||
| Income before income taxes | 863,839 | 1,023,911 | (160,072 | ) | (15.6 | ) | |||||||||||||||||||||||
| Income before provision for income taxes | 557,415 | 686,629 | (129,214 | ) | (18.8 | ) | |||||||||||||||||||||||
| Provision for income taxes | 342,080 | 331,747 | 10,333 | 3.1 | 133,780 | 155,178 | (21,398 | ) | (13.8 | ) | |||||||||||||||||||
| Net income | $ | 521,759 | $ | 692,164 | $ | (170,405 | ) | (24.6 | )% | $ | 423,635 | $ | 531,451 | $ | (107,816 | ) | (20.3 | )% | |||||||||||
| Diluted earnings per share | $ | 3.02 | $ | 3.83 | $ | (0.81 | ) | (21.1 | )% | $ | 2.68 | $ | 3.19 | $ | (0.51 | ) | (16.0 | )% | |||||||||||
Consolidated operating income was down 15.0%22.1% in 20172019 compared to 2018 driven by a decrease in operating income from the Motorcycles segment which was down $157.4of $132.7 million compared to 2016. Operating and a decrease in operating income forfrom the Financial Services segment decreased by $0.2 million during 2017 as compared to 2016. Please referof $25.2 million. Refer to the “MotorcyclesMotorcycles and Related Products Segment”Segment and “FinancialFinancial Services Segment”Segment discussions following for a more detailed discussionanalysis of the factors affecting operating income.
Other income in 2019 was favorably impacted by lower amortization of actuarial losses related to the Company's defined benefit plans. Investment income increased in 2019 as compared to 2018 due to favorable changes in the fair value of the Company's marketable securities and cash equivalents.
The effective income tax rate for 20172019 was 39.6%24.0% compared to 32.4%22.6% for 2016.2018. The higher effective income tax rate was primarily due to the impact of the 2017 Tax Act enacted in December 2017. The 2017 Tax Act reduces the federal corporatefavorable discrete income tax rate beginningadjustments recorded in 2018 from 35% to 21%; however, because the 2017 Tax Act was enacted in 2017, the Company was required to remeasure its net deferred tax assets in the fourth quarter. The impact of remeasuring the deferred tax asset balances combined with other adjustments related to the 2017 Tax Act resulted in a non-cash income tax charge of $53.1 million in the fourth quarter of 2017.2018.
Diluted earnings per share were $3.02$2.68 in 2017,2019, down 21.1%16.0% compared to 2016.2018. Diluted earnings per share were adversely impacted by the 24.6%20.3% decrease in net income, but benefited from lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 180.5166.5 million in 20162018 to 172.9157.8 million in 20172019 driven by the Company's repurchases of common stock. Please referRefer to "LiquidityLiquidity and Capital Resources"Resources for additional information concerning the Company's share repurchase activity.
Motorcycle Retail Sales and Registration Data
Harley-Davidson Motorcycle Retail Sales(a)
| 2019 | 2018 | (Decrease) Increase | % Change | ||||||||
| United States | 125,960 | 132,868 | (6,908 | ) | (5.2 | )% | |||||
Europe(b) | 38,441 | 41,179 | (2,738 | ) | (6.6 | ) | |||||
| EMEA - Other | 5,645 | 5,423 | 222 | 4.1 | |||||||
| Total EMEA | 44,086 | 46,602 | (2,516 | ) | (5.4 | ) | |||||
Asia Pacific(c) | 17,753 | 18,429 | (676 | ) | (3.7 | ) | |||||
| Asia Pacific - Other | 11,760 | 10,295 | 1,465 | 14.2 | |||||||
| Total Asia Pacific | 29,513 | 28,724 | 789 | 2.7 | |||||||
| Latin America | 9,768 | 10,167 | (399 | ) | (3.9 | ) | |||||
| Canada | 8,946 | 9,690 | (744 | ) | (7.7 | ) | |||||
| Total international retail sales | 92,313 | 95,183 | (2,870 | ) | (3.0 | ) | |||||
| Total worldwide retail sales | 218,273 | 228,051 | (9,778 | ) | (4.3 | )% | |||||
| 2017 | 2016 | Decrease | % Change | |||||||||
| United States | 147,972 | 161,658 | (13,686 | ) | (8.5 | )% | ||||||
Europe(b) | 39,773 | 39,942 | (169 | ) | (0.4 | ) | ||||||
| EMEA - Other | 5,162 | 5,896 | (734 | ) | (12.4 | ) | ||||||
| Total EMEA | 44,935 | 45,838 | (903 | ) | (2.0 | ) | ||||||
| Japan | 9,506 | 10,279 | (773 | ) | (7.5 | ) | ||||||
| Asia Pacific - Other | 20,842 | 22,610 | (1,768 | ) | (7.8 | ) | ||||||
| Total Asia Pacific | 30,348 | 32,889 | (2,541 | ) | (7.7 | ) | ||||||
| Latin America | 9,452 | 9,701 | (249 | ) | (2.6 | ) | ||||||
| Canada | 10,081 | 10,203 | (122 | ) | (1.2 | ) | ||||||
| Total International Retail Sales | 94,816 | 98,631 | (3,815 | ) | (3.9 | ) | ||||||
| Total Worldwide Retail Sales | 242,788 | 260,289 | (17,501 | ) | (6.7 | )% | ||||||
| (a) | Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its independent dealers supply concerning new retail sales, and the Company does not regularly verify the information that its independent dealers supply. This information is subject to revision. |
| (b) |
| (c) | Asia Pacific data includes Japan, Australia, New Zealand and Korea |
increased marketing investments.
The Company's U.S. market share of new 601+cc motorcycles for 20172019 was 50.7%49.1%, down 0.50.6 percentage points compared to 20162018. The Company's U.S. market share reflected the adverse impact of relatively strong growth in segments in which the Company does not currently compete. In the cruiser and touring segments, which represent approximately 70% of the 601+cc market and where the Company currently competes, its market share was up 2.5 percentage points on a full-year basis (Source: Motorcycle Industry Council).
International retail sales of new Harley-Davidson motorcycles were down 3.0% in 2017 were below expectations; however, the Company continues to believe that its strong brand, products and expanded distribution will drive growth in international markets over time. In EMEA, retail2019. Retail sales in Europedeveloped markets were down slightly from 2016 while other EMEA markets decreased 12.4% behind softness in emerging markets including Russia, Middle East and South Africa. In Asia Pacific, retail sales were down compared to 2016 on softness in Japan and Australia and lower6.0% during 2019 partially offset by higher retail sales in emerging markets, compared to 2016.which increased 5.0%. Retail sales increases in Latin Americaemerging markets during 20172019 were driven by growth in various markets, including China and the Company's Association of Southeast Asian Nations (ASEAN) markets. The Company's Thailand manufacturing facility, which enables lower tariffs, was a key factor supporting growth in the Company's ASEAN markets.
In developed international markets, retail sales across most European markets were down on softness in Mexico partially offset2019 given strong 2018 initial retail sales of the Company's new Softail® motorcycles and due to lower Street sales, which were adversely impacted by an increasea recall initiated in Brazil. Canadaearly 2019. Additionally, retail sales were down slightly fromin Japan and Australia in 2019 compared to 2018 behind contracting industry sales and for Japan competitive new product introductions outside of the priortouring and cruiser segments.
The Company's European market share of new 601+cc motorcycles for 2019 was 8.9%, down 1.4 percentage points compared to 2018 (Source: Association des Constructeurs Europeens de Motocycles).
The international independent dealer network expanded during 2019, adding 27 new independent dealer points during the year.
Motorcycle Registration Data - 601+cc(a)
| 2017 | 2016 | Decrease | % Change | 2019 | 2018 | (Decrease) Increase | % Change | ||||||||||||||||
United States(b) | 288,802 | 311,710 | (22,908 | ) | (7.3 | )% | 252,842 | 263,750 | (10,908 | ) | (4.1 | )% | |||||||||||
Europe(c) | 390,619 | 391,936 | (1,317 | ) | (0.3 | )% | 425,998 | 397,669 | 28,329 | 7.1 | % | ||||||||||||
| (a) | Data includes on-road |
| (b) | United States industry data is derived from information provided by Motorcycle Industry |
| (c) | Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 601+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles, |
Motorcycles and Related Products Segment
| 2017 | 2016 | Unit | Unit | |||||||||||||||
| Units | Mix % | Units | Mix % | Decrease | % Change | |||||||||||||
| United States | 144,893 | 60.0 | % | 161,839 | 61.7 | % | (16,946 | ) | (10.5 | )% | ||||||||
| International | 96,605 | 40.0 | % | 100,382 | 38.3 | % | (3,777 | ) | (3.8 | ) | ||||||||
| Harley-Davidson motorcycle units | 241,498 | 100.0 | % | 262,221 | 100.0 | % | (20,723 | ) | (7.9 | )% | ||||||||
| Touring motorcycle units | 99,745 | 41.3 | % | 107,410 | 41.0 | % | (7,665 | ) | (7.1 | )% | ||||||||
| Cruiser motorcycle units | 87,344 | 36.2 | % | 93,422 | 35.6 | % | (6,078 | ) | (6.5 | ) | ||||||||
Sportster® / Street motorcycle units | 54,409 | 22.5 | % | 61,389 | 23.4 | % | (6,980 | ) | (11.4 | ) | ||||||||
| Harley-Davidson motorcycle units | 241,498 | 100.0 | % | 262,221 | 100.0 | % | (20,723 | ) | (7.9 | )% | ||||||||
| 2017 | 2016 | (Decrease) Increase | % Change | ||||||||||||
| Revenue: | |||||||||||||||
| Motorcycles | $ | 3,825,206 | $ | 4,122,113 | $ | (296,907 | ) | (7.2 | )% | ||||||
| Parts & Accessories | 804,363 | 842,637 | (38,274 | ) | (4.5 | ) | |||||||||
| General Merchandise | 262,776 | 284,583 | (21,807 | ) | (7.7 | ) | |||||||||
| Other | 22,682 | 22,043 | 639 | 2.9 | |||||||||||
| Total revenue | 4,915,027 | 5,271,376 | (356,349 | ) | (6.8 | ) | |||||||||
| Cost of goods sold | 3,261,683 | 3,419,710 | (158,027 | ) | (4.6 | ) | |||||||||
| Gross profit | 1,653,344 | 1,851,666 | (198,322 | ) | (10.7 | ) | |||||||||
| Selling & administrative expense | 866,083 | 907,059 | (40,976 | ) | (4.5 | ) | |||||||||
| Engineering expense | 171,303 | 171,201 | 102 | 0.1 | |||||||||||
| Operating expense | 1,037,386 | 1,078,260 | (40,874 | ) | (3.8 | ) | |||||||||
| Operating income from Motorcycles | $ | 615,958 | $ | 773,406 | $ | (157,448 | ) | (20.4 | )% | ||||||
Net Revenue | Cost of Goods Sold | Gross Profit | ||||||||||
| 2016 | $ | 5,272 | $ | 3,420 | $ | 1,852 | ||||||
| Volume | (435 | ) | (264 | ) | (171 | ) | ||||||
| Price, net of related costs | 120 | 59 | 61 | |||||||||
| Foreign currency exchange rates and hedging | 13 | (3 | ) | 16 | ||||||||
| Shipment mix | (55 | ) | (18 | ) | (37 | ) | ||||||
| Raw material prices | — | 17 | (17 | ) | ||||||||
| Manufacturing and other costs | — | 51 | (51 | ) | ||||||||
| Total | (357 | ) | (158 | ) | (199 | ) | ||||||
| 2017 | $ | 4,915 | $ | 3,262 | $ | 1,653 | ||||||
| 2017 | 2016 | Increase (Decrease) | % Change | ||||||||||||
| Interest income | $ | 633,113 | $ | 628,432 | $ | 4,681 | 0.7 | % | |||||||
| Other income | 97,151 | 85,788 | 11,363 | 13.2 | |||||||||||
| Securitization and servicing income | 1,933 | 10,862 | (8,929 | ) | (82.2 | ) | |||||||||
| Financial services revenue | 732,197 | 725,082 | 7,115 | 1.0 | |||||||||||
| Interest expense | 180,193 | 173,756 | 6,437 | 3.7 | |||||||||||
| Provision for credit losses | 132,444 | 136,617 | (4,173 | ) | (3.1 | ) | |||||||||
| Operating expenses | 144,255 | 139,179 | 5,076 | 3.6 | |||||||||||
| Financial Services expense | 456,892 | 449,552 | 7,340 | 1.6 | |||||||||||
| Operating income from Financial Services | $ | 275,305 | $ | 275,530 | $ | (225 | ) | (0.1 | )% | ||||||
| 2017 | 2016 | |||||||
| Balance, beginning of period | $ | 173,343 | $ | 147,178 | ||||
| Provision for credit losses | 132,444 | 136,617 | ||||||
| Charge-offs, net of recoveries | (113,316 | ) | (107,161 | ) | ||||
Other (a) | — | (3,291 | ) | |||||
| Balance, end of period | $ | 192,471 | $ | 173,343 | ||||
| (in thousands, except earnings per share) | 2016 | 2015 | (Decrease) Increase | % Change | |||||||||||
| Operating income from Motorcycles & Related Products | $ | 773,406 | $ | 875,490 | $ | (102,084 | ) | (11.7 | )% | ||||||
| Operating income from Financial Services | 275,530 | 280,205 | (4,675 | ) | (1.7 | ) | |||||||||
| Operating income | 1,048,936 | 1,155,695 | (106,759 | ) | (9.2 | ) | |||||||||
| Investment income | 4,645 | 6,585 | (1,940 | ) | (29.5 | ) | |||||||||
| Interest expense | 29,670 | 12,117 | 17,553 | 144.9 | |||||||||||
| Income before income taxes | 1,023,911 | 1,150,163 | (126,252 | ) | (11.0 | ) | |||||||||
| Provision for income taxes | 331,747 | 397,956 | (66,209 | ) | (16.6 | ) | |||||||||
| Net income | $ | 692,164 | $ | 752,207 | $ | (60,043 | ) | (8.0 | )% | ||||||
| Diluted earnings per share | $ | 3.83 | $ | 3.69 | $ | 0.14 | 3.8 | % | |||||||
| 2016 | 2015 | (Decrease) Increase | % Change | |||||||||
| United States | 161,658 | 168,240 | (6,582 | ) | (3.9 | )% | ||||||
Europe(b) | 39,942 | 36,894 | 3,048 | 8.3 | ||||||||
| EMEA - Other | 5,896 | 6,393 | (497 | ) | (7.8 | ) | ||||||
| Total EMEA | 45,838 | 43,287 | 2,551 | 5.9 | ||||||||
| Japan | 10,279 | 9,700 | 579 | 6.0 | ||||||||
| Asia Pacific - Other | 22,610 | 22,558 | 52 | 0.2 | ||||||||
| Total Asia Pacific | 32,889 | 32,258 | 631 | 2.0 | ||||||||
| Latin America | 9,701 | 11,173 | (1,472 | ) | (13.2 | ) | ||||||
| Canada | 10,203 | 9,669 | 534 | 5.5 | ||||||||
| Total International Retail Sales | 98,631 | 96,387 | 2,244 | 2.3 | ||||||||
| Total Worldwide Retail Sales | 260,289 | 264,627 | (4,338 | ) | (1.6 | )% | ||||||
| 2016 | 2015 | (Decrease) Increase | % Change | |||||||||
United States(b) | 311,710 | 328,818 | (17,108 | ) | (5.2 | )% | ||||||
Europe(c) | 391,936 | 351,773 | 40,163 | 11.4 | % | |||||||
Motorcycle Unit Shipments
| 2016 | 2015 | Unit | Unit | 2019 | 2018 | Unit | Unit | ||||||||||||||||||||||||||||
| Units | Mix % | Units | Mix % | (Decrease) Increase | % Change | Units | Mix % | Units | Mix % | Decrease | % Change | ||||||||||||||||||||||||
| Motorcycle Units: | |||||||||||||||||||||||||||||||||||
| United States | 161,839 | 61.7 | % | 170,688 | 64.1 | % | (8,849 | ) | (5.2 | )% | 124,326 | 58.1 | % | 132,433 | 57.9 | % | (8,107 | ) | (6.1 | )% | |||||||||||||||
| International | 100,382 | 38.3 | % | 95,694 | 35.9 | % | 4,688 | 4.9 | 89,613 | 41.9 | % | 96,232 | 42.1 | % | (6,619 | ) | (6.9 | ) | |||||||||||||||||
| Harley-Davidson motorcycle units | 262,221 | 100.0 | % | 266,382 | 100.0 | % | (4,161 | ) | (1.6 | )% | |||||||||||||||||||||||||
| 213,939 | 100.0 | % | 228,665 | 100.0 | % | (14,726 | ) | (6.4 | )% | ||||||||||||||||||||||||||
| Motorcycle Units: | |||||||||||||||||||||||||||||||||||
| Touring motorcycle units | 107,410 | 41.0 | % | 114,768 | 43.1 | % | (7,358 | ) | (6.4 | )% | 91,018 | 42.5 | % | 101,942 | 44.6 | % | (10,924 | ) | (10.7 | )% | |||||||||||||||
| Cruiser motorcycle units | 93,422 | 35.6 | % | 89,207 | 33.5 | % | 4,215 | 4.7 | |||||||||||||||||||||||||||
Cruiser motorcycle units(a) | 76,052 | 35.6 | % | 78,529 | 34.3 | % | (2,477 | ) | (3.2 | ) | |||||||||||||||||||||||||
Sportster® / Street motorcycle units | 61,389 | 23.4 | % | 62,407 | 23.4 | % | (1,018 | ) | (1.6 | ) | 46,869 | 21.9 | % | 48,194 | 21.1 | % | (1,325 | ) | (2.7 | ) | |||||||||||||||
| Harley-Davidson motorcycle units | 262,221 | 100.0 | % | 266,382 | 100.0 | % | (4,161 | ) | (1.6 | )% | |||||||||||||||||||||||||
| 213,939 | 100.0 | % | 228,665 | 100.0 | % | (14,726 | ) | (6.4 | )% | ||||||||||||||||||||||||||
| (a) | Includes Softail®, CVOTM,and LiveWireTM |
During 2016, wholesale2019, Harley-Davidson motorcycle shipments of Harley-Davidson motorcycles were down 1.6%6.4% compared to the prior year and in line with the 1.6% decrease in dealer retail sales of new Harley-Davidson motorcycles. International shipments as a percentage of the total were up in 2016 as compared to 2015. In addition, shipments of Cruiser motorcycles as a percentage of total shipments increased in 2016 compared to the prior year driven by the strong acceptance of the model-year 2016 S-model motorcycles. Touring motorcycle shipments were down in 2016; however, in the fourth quarter of 2016, the shipmentCompany's guidance. The mix of Touring motorcycles decreased as a percent of total shipments while the mix of Cruiser and Sportster®/Street motorcycles increased reflectingcompared to 2018.
At the high demand for the new 2017 Touring motorcycles featuring the Milwaukee-EightTM engine. Dealerend of 2019, U.S. independent dealer retail inventory of new Harley-Davidson motorcycles in the U.S. at the end of 2016 was down approximately flat1,500 motorcycles compared to the end of 2015.
2018. The Company plans to continue to aggressively manage supply in line with demand. However, the Company does expect 2020 year-end worldwide retail inventory to increase moderately compared to 2019 behind dealer fill of the Company's new middleweight motorcycles and with the replenishment of European dealer inventory, which was reduced at the end of 2019 in anticipation of low-tariff motorcycles sourced from the Company's Thailand facility.(1)
Segment Results
| 2016 | 2015 | (Decrease) Increase | % Change | 2019 | 2018 | (Decrease) Increase | % Change | ||||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||||||||
| Motorcycles | $ | 4,122,113 | $ | 4,127,739 | $ | (5,626 | ) | (0.1 | )% | $ | 3,538,269 | $ | 3,882,963 | $ | (344,694 | ) | (8.9 | )% | |||||||||||
| Parts & Accessories | 842,637 | 862,645 | (20,008 | ) | (2.3 | ) | 713,400 | 754,663 | (41,263 | ) | (5.5 | ) | |||||||||||||||||
| General Merchandise | 284,583 | 292,310 | (7,727 | ) | (2.6 | ) | 237,566 | 241,964 | (4,398 | ) | (1.8 | ) | |||||||||||||||||
| Licensing | 35,917 | 38,676 | (2,759 | ) | (7.1 | ) | |||||||||||||||||||||||
| Other | 22,043 | 26,050 | (4,007 | ) | (15.4 | ) | 47,526 | 50,380 | (2,854 | ) | (5.7 | ) | |||||||||||||||||
| Total revenue | 5,271,376 | 5,308,744 | (37,368 | ) | (0.7 | ) | |||||||||||||||||||||||
| 4,572,678 | 4,968,646 | (395,968 | ) | (8.0 | ) | ||||||||||||||||||||||||
| Cost of goods sold | 3,419,710 | 3,356,284 | 63,426 | 1.9 | 3,229,798 | 3,351,796 | (121,998 | ) | (3.6 | ) | |||||||||||||||||||
| Gross profit | 1,851,666 | 1,952,460 | (100,794 | ) | (5.2 | ) | 1,342,880 | 1,616,850 | (273,970 | ) | (16.9 | ) | |||||||||||||||||
| Operating expenses: | |||||||||||||||||||||||||||||
| Selling & administrative expense | 907,059 | 916,669 | (9,610 | ) | (1.0 | ) | 808,415 | 914,900 | (106,485 | ) | (11.6 | ) | |||||||||||||||||
| Engineering expense | 171,201 | 160,301 | 10,900 | 6.8 | 212,492 | 186,186 | 26,306 | 14.1 | |||||||||||||||||||||
| Operating expense | 1,078,260 | 1,076,970 | 1,290 | 0.1 | |||||||||||||||||||||||||
| Operating income from Motorcycles | $ | 773,406 | $ | 875,490 | $ | (102,084 | ) | (11.7 | )% | ||||||||||||||||||||
| Restructuring expense | 32,353 | 93,401 | (61,048 | ) | (65.4 | ) | |||||||||||||||||||||||
| 1,053,260 | 1,194,487 | (141,227 | ) | (11.8 | ) | ||||||||||||||||||||||||
| Operating income | $ | 289,620 | $ | 422,363 | $ | (132,743 | ) | (31.4 | )% | ||||||||||||||||||||
| Operating margin | 6.3 | % | 8.5 | % | (2.2 | ) | pts. | ||||||||||||||||||||||
The following table includes the estimated impactimpacts of the significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from 20152018 to 20162019 were as follows (in millions):
Net Revenue | Cost of Goods Sold | Gross Profit | Revenue | Cost of Goods Sold | Gross Profit | ||||||||||||||||||
| 2015 | $ | 5,309 | $ | 3,357 | $ | 1,952 | |||||||||||||||||
| 2018 | $ | 4,969 | $ | 3,352 | $ | 1,617 | |||||||||||||||||
| Volume | (109 | ) | (62 | ) | (47 | ) | (307 | ) | (202 | ) | (105 | ) | |||||||||||
| Price, net of related costs | 93 | 39 | 54 | 67 | 34 | 33 | |||||||||||||||||
| Foreign currency exchange rates and hedging | (3 | ) | 45 | (48 | ) | (67 | ) | (40 | ) | (26 | ) | ||||||||||||
| Shipment mix | (18 | ) | (5 | ) | (13 | ) | (89 | ) | (8 | ) | (82 | ) | |||||||||||
| Raw material prices | — | (18 | ) | 18 | — | (1 | ) | 1 | |||||||||||||||
| Manufacturing and other costs | — | 64 | (64 | ) | — | 95 | (95 | ) | |||||||||||||||
| Total | (37 | ) | 63 | (100 | ) | ||||||||||||||||||
| 2016 | $ | 5,272 | $ | 3,420 | $ | 1,852 | |||||||||||||||||
| (396 | ) | (122 | ) | (274 | ) | ||||||||||||||||||
| 2019 | $ | 4,573 | $ | 3,230 | $ | 1,343 | |||||||||||||||||
The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 20152018 to 2016:2019:
On average, wholesale prices on the Company’s 2016 and 2017 model-yearfor motorcycles areshipped in 2019 were higher than in the prior model-yearsyear resulting in thea favorable impact on revenue during the period.revenue. The positive impact ofon revenue favorability resulting from model-year price increases on gross profit was partially offset by increases in costincreased costs related to the additional content added to motorcycles shipped in 2019 as compared to the 2016prior year.
Revenue was adversely impacted by weaker foreign currency exchange rates, relative to the U.S. dollar, as compared to the prior year. The unfavorable revenue impact was partially offset by favorable net foreign currency gains associated with hedging and 2017 model-year motorcycles.balance sheet remeasurements, as compared to the prior year.
Shipment mix adversely impacted gross profit wasdriven by unfavorable changes in the mix of motorcycle families, as well as the mix of models within motorcycle families.
Manufacturing and other costs were negatively impacted by foreign currency due to lower hedge gains, given the significant gains experiencedfixed cost absorption and an increase in the prior year,impact of recent EU and China tariffs. The impact of recent EU and China tariffs was $97.9 million or $74.2 million higher in 2019 compared to 2018.
Operating expenses in 2019 were lower compared to 2018 driven by lower restructuring expenses and favorable net warranty and recall costs. In 2019, net warranty and recall costs were approximately $96 million lower than in 2018 driven by higher than normal supplier recoveries and lower revenues behind a slightly stronger U.S. dollar relative to its foreign currency exposures.
Financial Services Segment
Segment Results
| 2016 | 2015 | Increase (Decrease) | % Change | 2019 | 2018 | Increase (Decrease) | % Change | ||||||||||||||||||||||
| Interest income | $ | 628,432 | $ | 605,770 | $ | 22,662 | 3.7 | % | $ | 678,205 | $ | 645,985 | $ | 32,220 | 5.0 | % | |||||||||||||
| Other income | 85,788 | 80,888 | 4,900 | 6.1 | 110,307 | 101,108 | 9,199 | 9.1 | |||||||||||||||||||||
| Securitization and servicing income | 10,862 | — | 10,862 | — | 599 | 1,136 | (537 | ) | (47.3 | ) | |||||||||||||||||||
| Financial services revenue | 725,082 | 686,658 | 38,424 | 5.6 | |||||||||||||||||||||||||
| Financial Services revenue | 789,111 | 748,229 | 40,882 | 5.5 | |||||||||||||||||||||||||
| Interest expense | 173,756 | 161,983 | 11,773 | 7.3 | 210,438 | 193,187 | 17,251 | 8.9 | |||||||||||||||||||||
| Provision for credit losses | 136,617 | 101,345 | 35,272 | 34.8 | 134,536 | 106,870 | 27,666 | 25.9 | |||||||||||||||||||||
| Operating expense | 139,179 | 143,125 | (3,946 | ) | (2.8 | ) | |||||||||||||||||||||||
| Financial Services expense | 449,552 | 406,453 | 43,099 | 10.6 | |||||||||||||||||||||||||
| Operating expenses | 178,149 | 157,012 | 21,137 | 13.5 | |||||||||||||||||||||||||
| Financial Services expenses | 523,123 | 457,069 | 66,054 | 14.5 | |||||||||||||||||||||||||
| Operating income from Financial Services | $ | 275,530 | $ | 280,205 | $ | (4,675 | ) | (1.7 | )% | $ | 265,988 | $ | 291,160 | $ | (25,172 | ) | (8.6 | )% | |||||||||||
Interest income was favorable in 20162019 due to higher average receivables in the retail and wholesale portfolios. Other income was favorable primarily due to increased revenue from credit card licensing, insurance and protection products and international licensing revenue. Securitization and servicing income was higher primarily due to a $9.3 million gain on the sale ofoutstanding finance receivables with a principal balance of $301.8 million through an off-balance sheet asset-backed securitization during the second quarter of 2016. There was no comparable transaction in the prior year.
at higher average yields. Interest expense increased due to higher average outstanding debt at a higher cost of funds and higher average debt outstanding, partially offset by a lower loss on the extinguishment of a portion of the Company's 6.80% medium-term notes than in 2015.funds.
The provision for credit losses increased $35.3$27.7 million compared to 2015.2018. The retail motorcycle provision increased $39.8$27.2 million during 2016 as a result oflargely driven by higher retail credit losses and increasesan increase in the retail reserve rate. Creditrate compared to a decrease in the retail reserve rate during 2018. The Company believes the increase in credit losses were higher aswas due to inefficiencies resulting from the implementation of a result of deteriorating performance across the portfolio, lowernew loan management system early in 2019, softer used motorcycle valuesprices at auction, and continued unfavorable performance in oil-dependent areas.
the impact of the Company's strategic efforts to build riders, which includes programs such as first-time buyer and dealer-paid no-money down. While these loans may increase the Company's credit losses, the increased revenue from these programs is expected to offset the risk(1).
Annual losses on the Company's retail motorcycle loans were 1.83%2.00% during 20162019 compared to 1.42%1.76% in 2015.2018. The 30-day delinquency rate for retail motorcycle loans at December 31, 20162019 increased to 4.25%4.39% from 3.78%4.12% at December 31, 2015.2018.
Operating expenses increased $21.1 million compared to 2018, which includes higher depreciation associated with the implementation of a new loan management system.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
| 2016 | 2015 | |||||||
| Balance, beginning of period | $ | 147,178 | $ | 127,364 | ||||
| Provision for credit losses | 136,617 | 101,345 | ||||||
| Charge-offs, net of recoveries | (107,161 | ) | (81,531 | ) | ||||
Other (a) | (3,291 | ) | — | |||||
| Balance, end of period | $ | 173,343 | $ | 147,178 | ||||
| 2019 | 2018 | ||||||
| Balance, beginning of period | $ | 189,885 | $ | 192,471 | |||
| Provision for credit losses | 134,536 | 106,870 | |||||
| Charge-offs, net of recoveries | (125,840 | ) | (109,456 | ) | |||
| Balance, end of period | $ | 198,581 | $ | 189,885 | |||
At December 31, 2016,2019, the allowance for credit losses on finance receivables was $166.8$188.5 million for retail receivables and $6.5$10.1 million for wholesale receivables. At December 31, 2015,2018, the allowance for credit losses on finance receivables was $139.3$182.1 million for retail receivables and $7.9$7.8 million for wholesale receivables.
The Company's periodic evaluation of the adequacy of the allowance for credit losses on finance receivables is generally based on the Company's past loan loss experience, known and inherent risks in the portfolio, current economic conditions and the estimated value of any underlying collateral. Please referRefer to Note 57 of the Notes to Consolidated Financial Statementsfinancial statements for further discussion regarding the Company’s allowance for credit losses on finance receivables.
Results of Operations 2018 Compared to 2017
Refer to Item 7. Management's Discussion and Analysis of the Company's Form 10-K for the year ended December 31, 2018 filed with the SEC on February 28, 2019 for a detailed discussion of the results of operations for 2018 compared to 2017 and liquidity and capital resources for 2018 compared to 2017.
Other Matters
New Accounting Standards Not Yet Adopted
Refer to Note 1. Summary of Significant Accounting Policies1 of the Notes to the Financial StatementsConsolidated financial statements for a discussion of new accounting standards that will become effective for the Company in 2018, 20192020 and 2020.2021.
Critical Accounting Estimates
The Company’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Management believes that the following are some of the more critical judgment areas in the application of accounting policies that currently affect the Company’s financial condition and results of operations. Management has discussed the development and selection of these critical accounting estimates with the Audit and Finance Committee of the Company's Board of Directors.
Allowance for Credit Losses on Retail Finance Receivables – The allowance for uncollectible accounts is maintained at a level management believes is adequate to cover the losses of principal in the existing retail finance receivables portfolio.
The retail portfolio consists of a large number of small balance, homogeneous finance receivables. The Company performs a periodic and systematic collective evaluation of the adequacy of the retail allowance. The Company utilizes loss forecast models which consider 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 including items such as unemployment rates.
Product Warranty and Recalls – Estimated warranty costs are accruedrecorded at the time of sale and are based on a combination of historical claim cost data and other known factors that may affect future warranty claims. The estimated costs associated with voluntary recalls are accrued inrecorded when the period that management approvesliability is both probable and commits to the recall.estimable. The accrued cost of a recall is based on an estimate of the cost to repair each affected motorcycle and the number of motorcycles expected to be repaired based on historical data concerning the percentage of affected customers that take advantage of recall offers. In the case of both warranty and recall costs, as actual experience becomes available it is used to update the accruals.
The factors affecting actual warranty and recall costs can be volatile. As a result, actual warranty claims experience and recall costs may differ from estimates, which could lead to material changes in the Company’s accrued warranty and recall costs. The Company’s warranty and recall liabilities are discussed further in Note 114 of the Notes to Consolidated Financial Statements.financial statements.
Pensions and Other Postretirement Healthcare Benefits – The Company has a defined benefit pension plan and several postretirement healthcare benefit plans, which cover certain eligible employees and retirees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees, which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993.
U.S. GAAP requires that companies recognize in their statement of financial position a liability for defined benefit pension and postretirement plans that are underfunded or an asset for defined benefit pension and postretirement benefit plans that are overfunded.
Pension, SERPA and postretirement healthcare obligations and costs are calculated through actuarial valuations. The valuation of benefit obligations and net periodic benefit costs relies on key assumptions including discount rates, mortality, long-term expected return on plan assets, future compensation and healthcare cost trend rates.
The Company determines its discount rate assumptions by referencing high-quality long-term bond rates that are matched to the duration of its own benefit obligations. Based on this analysis, the Company decreased the weighted-average discount rate for pension and SERPA obligations from 4.30%4.38% as of December 31, 20162018 to 3.71%3.49% as of December 31, 2017.2019. The Company decreased the weighted-average discount rate for postretirement healthcare obligations from 4.03%4.23% as of December 31, 2018 to 3.52%.3.26% as of December 31, 2019. The Company determines its healthcare trend assumption for the postretirement healthcare obligation by considering factors such as estimated healthcare inflation, the utilization of healthcare benefits and changes in the health of plan participants. Based on the Company’s assessment of this data as of December 31, 2017,2019, the Company set its healthcare cost trend rate at 7.00%7.25% as of December 31, 2017.2019. The Company expects the healthcare cost trend rate to reach its ultimate rate of 5.00% by 2026.2029.(1) These assumption changes were reflected immediately in the benefit obligation and will be amortized into net periodic benefit costs over future periods.
Plan assets are measured at fair value and are subject to market volatility. In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted to reflect the current view of the long-term investment market.
Changes in the funded status of defined benefit pension and postretirement benefit plans resulting from the difference between assumptions and actual results are initially recognized in other comprehensive income and amortized to expense over future periods. The following information is providedSensitivity to illustratechanges in major assumptions used in the sensitivity of pension and postretirement healthcare obligations and costs to changes in these major assumptionswas as follows (in thousands):
Amounts based on current assumptions | Impact of a 1% decrease in the discount rate | Impact of a 1% decrease in the expected return on assets | Impact of a 1% increase in the healthcare cost trend rate | Amounts based on current assumptions | Impact of a 1% decrease in the discount rate | Impact of a 1% decrease in the expected return on assets | Impact of a 1% increase in the healthcare cost trend rate | ||||||||||||||||||||||||
| 2017 Net periodic benefit costs | |||||||||||||||||||||||||||||||
| 2019 Net periodic benefit cost: | |||||||||||||||||||||||||||||||
| Pension and SERPA | $ | 20,286 | $ | 27,460 | $ | 19,507 | n/a | $ | 11,149 | $ | 32,638 | n/a | $ | 20,054 | |||||||||||||||||
| Postretirement healthcare | $ | 9,615 | $ | 1,162 | $ | 1,741 | $ | 1,687 | $ | 68 | $ | (540 | ) | $ | 587 | $ | 1,938 | ||||||||||||||
| 2017 Benefit obligations | |||||||||||||||||||||||||||||||
| 2019 Benefit obligations: | |||||||||||||||||||||||||||||||
| Pension and SERPA | $ | 2,201,021 | $ | 358,953 | n/a | n/a | $ | 2,212,012 | $ | 363,249 | n/a | n/a | |||||||||||||||||||
| Postretirement healthcare | $ | 338,488 | $ | 31,824 | n/a | $ | 11,984 | $ | 293,505 | $ | 25,816 | $ | 8,768 | n/a | |||||||||||||||||
The amounts based on current assumptions above exclude the impact of settlements, curtailments and special early retirement benefits. This information should not be viewed as predictive of future amounts. The analysis of the impact of a 1% change in the table above does not take into account the cost related to special termination benefits. The calculationcalculations of pension, SERPA and postretirement healthcare obligations and costs isare based on many factors in addition to those discussed here. This information should be considered in combination with the information provided in Note 1215 of the Notes to Consolidated Financial Statements.financial statements.
Income Taxes – The Company accounts for income taxes in accordance with ASCAccounting Standards Codification Topic 740, Income Taxes (Topic 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. These tax laws and regulations are complex and significant judgment is required in determining the Company’s worldwide provision for income taxes and recording the related deferred tax assets and liabilities. In December 2017, the 2017 Tax Act was enacted into law introducing significant changes to the U.S. tax code including a reduction in the U.S. corporate income tax rate from 35% to 21%. In accordance with Topic 740, the Company's 2017 financial statements reflect the impacts of the 2017 Tax Act based on reasonable estimates, and the Company considers these estimates to be provisional under SAB 118. Future guidance, interpretations and pronouncements may add clarity to the numerous aspects of the 2017 Tax Act that may impact the Company. Future clarifications may give rise to additional unanticipated impacts on the Company's tax liabilities or effective tax rate and revisions to the Company’s provisional estimates related to the 2017 Tax Act included in the Company’s 2017 income tax provision. Any such adjustments will be recorded as discrete income tax expenses or benefits in future periods. The provisional amount recorded in the 2017 provision for income taxes related to the enactment of the 2017 Tax Act was $53.1 million.
In the ordinary course of the Company’s business, there are transactions and calculations where the ultimate tax determination is uncertain. Accruals for unrecognized tax benefits are provided for in accordance with the requirements of Topic 740. An unrecognized tax benefit represents the difference between the recognition of benefits related to items for income tax reporting purposes and financial reporting purposes. The unrecognized tax benefit is included within otherOther long-term liabilities in on the Consolidated Balance Sheets.balance sheets. The Company has a liability for interest and penalties on exposure items, if applicable, which is recorded as a component of the overall income tax provision. The Company is regularly audited by tax authorities as a normal course of business. Although the outcome of tax audits is always uncertain, the Company believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provision includes amounts sufficient to pay any assessments.assessments(1). Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
Contractual Obligations
A summary of the Company’s expected payments for significant contractual obligations as of December 31, 20172019 is as follows (in thousands):
| 2018 | 2019-2020 | 2021-2022 | Thereafter | Total | ||||||||||||||||
| Principal payments on debt | $ | 2,405,569 | $ | 2,693,007 | $ | 1,159,715 | $ | 750,000 | $ | 7,008,291 | ||||||||||
| Interest payments on debt | 160,265 | 182,093 | 79,803 | 366,375 | 788,536 | |||||||||||||||
| Operating lease payments | 15,074 | 23,826 | 14,715 | 8,379 | 61,994 | |||||||||||||||
| $ | 2,580,908 | $ | 2,898,926 | $ | 1,254,233 | $ | 1,124,754 | $ | 7,858,821 | |||||||||||
| 2020 | 2021-2022 | 2023-2024 | Thereafter | Total | |||||||||||||||
| Debt: | |||||||||||||||||||
| Principal | $ | 2,326,688 | $ | 3,102,410 | $ | 1,287,918 | $ | 750,000 | $ | 7,467,016 | |||||||||
| Interest | 187,544 | 199,978 | 102,435 | 307,125 | 797,082 | ||||||||||||||
| Leases | 20,755 | 31,240 | 11,177 | 4,589 | 67,761 | ||||||||||||||
| $ | 2,534,987 | $ | 3,333,628 | $ | 1,401,530 | $ | 1,061,714 | $ | 8,331,859 | ||||||||||
Interest for floating rate instruments, as calculated above, assumes rates in effect at December 31, 2017 rates2019 remain constant. For purposes of the above, the principal payment balances for medium-term notes, on-balance sheet asset-backed securitizations, and senior unsecured notes are shown without reduction for unamortized discounts and debt issuance costs.
As of December 31, 2017,2019, the Company generally had no significant purchase obligations, other than those created in the ordinary course of business. Purchase orders issued for inventory and supplies used in product manufacturing generally do not become firm commitments until 90 days prior to expected delivery and can be modified to a certain extent until 30 days prior to expected delivery.
The Company has long-term obligations related to its pension, SERPA and postretirement healthcare plans at December 31, 2017.2019. The Company’s retirement plan obligations and expected future contributions and payments related to these plans are provided in Note 1215 of the Notes to Consolidated Financial Statements.financial statements.
As described in Note 114 of the Notes to Consolidated Financial Statements,financial statements, the Company has unrecognized tax benefits of $72.2$60.1 million and accrued interest and penalties of $30.9$27.6 million as of December 31, 2017.2019. However, the Company cannot make a reasonably reliable estimate of the period of cash settlement for either the liability for unrecognized tax benefits or accrued interest and penalties.
Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter.
Environmental Protection Agency Notice:
Notice – In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in information exchanges and discussions with the EPA. In August 2016, the Company entered into a consent decree with the EPA regarding these issues, and the consent decree was subsequently revised in July 2017 (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. In December 2017, the Department of Justice (DOJ), on behalf of the EPA, filed the Settlement with the U.S. District Court for the District of Columbia for the purpose of obtaining court approval of the Settlement. Three amicus briefs opposing portions of the Settlement were filed with the court by the deadline of January 31, 2018. On March 1, 2018, the Company and the DOJ each filed separate response briefs. The Company anticipatesis awaiting the court will make acourt's decision on whether or not to finalize the Settlement, inand on February 8, 2019, the following months.DOJ filed a status update reminding the court of the current status of the outstanding matter. The Company has an accrual associated with this matter which is includedrecorded in accruedAccrued liabilities in on the Consolidated Balance Sheets,balance sheets, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
Matter – The Company is involved with government agencies and groups of potentially responsible partiesthe U.S. Navy related to a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although theThe Company is not certain as to the full extent of the environmental contamination at the York facility, it has been workingan agreement with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).
Pennsylvania Department of Environmental Protection and the EPA. The associated cleanup plan documents were submitted for approval in December 2019 and remaining cleanup activities will begin in mid-2020. The Company has an accrual for its estimate of its share of the estimated future Response Costs at the York facility which is includedrecorded in otherOther long-term liabilities in the Consolidated Balance Sheets. While much of the work on the RI/FS is complete, it is still under agency review and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS that is finally approved or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.Consolidated balance sheets.
Product Liability Matters:
Matters – The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidatedConsolidated financial statements.statements.(1)
Off-Balance Sheet Arrangements
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 (SPE)(SPEs), which are considered Variable Interest Entities (VIE)variable interest entities (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 SPEs are separate legal entities that assume the risks and rewards of ownership of the retail motorcycle finance receivables they hold. The assets of the VIEs are not available to pay other obligations or claims of the Company’s creditors. The Company’s economic exposure related to the VIEs is generally limited to restricted cash reserve accounts, retained interests and ordinary representations and warranties and related covenants. The VIEs have a limited life and generally terminate upon final distribution of amounts owed to investors.
The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. Most of the Company’s asset-backed financings do not meet the criteria to be treated as a sale for accounting purposes because,as the Company, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt.
During the second quarter of 2016, the Company sold finance receivables with a principal balance of $301.8 million into a securitization VIE. The transaction met the criteria to be treated as a sale for accounting purposes and resulted in an off-balance sheet arrangement becauseas the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. Upon sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain of $9.3 million was recognized in Financial Services Revenue. For more information see Refer to Note 1012 of the Notes to Consolidated Financial Statements.financial statements for additional information.
Liquidity and Capital Resources as of December 31, 20172019
Over the long-term, the Company expects that its business model will continue to generate cash that will allow it to invest in the business, fund future growth opportunities, and return value to shareholders.(1) The Company will continue to evaluate opportunities to return cash to its shareholders through increasing dividends and repurchasing shares. The Company believes the Motorcycles segment operations will continue to be primarily funded through cash flows generated by operations.(1) The Company’sCompany expects the Financial Services segment operations willto continue to be funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, and asset-backed securitizations.(1)
The Company’s strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and cash equivalents and availability under its credit facilities. The following table summarizes the Company’s cash and cash equivalents and availability under its credit and conduit facilities at December 31, 2019 were as follows (in thousands):
| December 31, 2017 | ||||
| Cash and cash equivalents | $ | 687,521 | ||
Credit facilities (a) | 291,518 | |||
Asset-backed U.S. commercial paper conduit facilities (a) | 620,543 | |||
Asset-backed Canadian commercial paper conduit facility (a) | 491 | |||
| Total availability under credit and conduit facilities | 912,552 | |||
| Total | $ | 1,600,073 | ||
| Cash and cash equivalents | $ | 833,868 | |
| Availability under credit and conduit facilities: | |||
| Credit facilities | 1,168,005 | ||
Asset-backed U.S. commercial paper conduit facilities(a) | 600,000 | ||
Asset-backed Canadian commercial paper conduit facility(a) | 54,318 | ||
| 1,822,323 | |||
| $ | 2,656,191 | ||
| (a) | Includes facilities expiring in the next twelve months |
The Company recognizes that it must continue to monitor and adjust its business to changes in the lending environment. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding.(1) The Financial Services operations could be negatively affected by higher costs of funding and the increased difficulty of raising, or potential inabilityunsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds available through its Financial Services
operations to provide loans to independent dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital.
Cash Flow Activity
| 2017 | 2016 | 2015 | 2019 | 2018 | |||||||||||||||
| Net cash provided by operating activities | $ | 1,005,061 | $ | 1,174,339 | $ | 1,100,118 | $ | 868,272 | $ | 1,205,921 | |||||||||
| Net cash used by investing activities | (562,468 | ) | (392,731 | ) | (915,848 | ) | (508,126 | ) | (662,269 | ) | |||||||||
| Net cash used by financing activities | (541,803 | ) | (734,390 | ) | (354,064 | ) | (712,223 | ) | (14,763 | ) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 26,747 | (9,443 | ) | (14,677 | ) | ||||||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (72,463 | ) | $ | 37,775 | $ | (184,471 | ) | |||||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2,305 | ) | (15,351 | ) | |||||||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (354,382 | ) | $ | 513,538 | ||||||||||||||
Operating Activities
The decrease in operating cash flow in 20172019 compared to 20162018 was primarily due primarily to lower net income,sales and unfavorable changes in working capital and higher retirement plan contributions. These negative impacts were partially offset by lower net cash outflows for wholesale lending.
Investing Activities
The Company’s most significant investing activities consist primarily of capital expenditures net changes inand retail finance receivablesreceivable originations and short-term investment activity.collections. Capital expenditures were $206.3181.4 million, $256.3 million and $260.0213.5 million during 2017, 20162019 and 20152018, respectively. The Company anticipates it will continue to have the ability to fund all planned capital expenditures in 2020 with cash flows generated by operations.(1)
Net cash outflows for finance receivables in 2017,2019, which consisted primarily of retail finance receivables, were $125.8$79.5 million lower than 2016in 2018 primarily as a result of a decrease indue to higher retail motorcycle loan originationscollections during 2017. Similarly, 2016 net cash outflows for finance receivables were $125.5 million lower than 2015 primarily due to lower retail motorcycle loan originations during 2016.
Financing Activities
The Company’s financing activities consist primarily of dividend payments, share repurchases and debt activity.
The Company paid dividends of $1.46$1.50 per share totaling $251.9$237.2 million during 2017, $1.402019 and $1.48 per share totaling $252.3$245.8 million during 2016 and $1.24 per share totaling $249.3 million during 2015.2018.
Cash outflows from share repurchases were $465.3 million, $465.3$296.5 million and $1,537.0$390.6 million for 2017, 20162019 and 2015,2018, respectively. Discretionary share repurchases during the years ended December 31, 2019 and 2018 were $286.7 million or 8.2 million shares and $382.0 million or 9.2 million shares, respectively. Share repurchases during 2017, 2016 and 2015 included 8.8 million, 9.9 million and 28.0 million shares of
Financing cash flows related to debt activity resulted in net cash (outflows)/inflows / (outflows) of $155.5 million , ($78.3)$(182.1) million and $1.40 billion$618.1 million for 2017, 20162019 and 20152018, respectively. The Company’s total outstanding debt consisted of the following as of December 31, 2017, 2016 and 2015 (in thousands):
| 2017 | 2016 | 2015 | 2019 | 2018 | |||||||||||||||
| Unsecured commercial paper | $ | 1,273,482 | $ | 1,055,708 | $ | 1,201,380 | $ | 571,995 | $ | 1,135,810 | |||||||||
| Asset-backed Canadian commercial paper conduit facility | 174,779 | 149,338 | 153,839 | 114,693 | 155,951 | ||||||||||||||
| Asset-backed U.S. commercial paper conduit facilities | 279,457 | — | — | 490,427 | 582,717 | ||||||||||||||
| Asset-backed securitization debt, net | 764,392 | 95,167 | |||||||||||||||||
| Medium-term notes, net | 4,165,706 | 4,064,940 | 3,316,949 | 4,760,127 | 4,887,007 | ||||||||||||||
| Senior unsecured notes, net | 741,961 | 741,306 | 740,653 | ||||||||||||||||
| Asset-backed securitization debt, net | 352,624 | 796,275 | 1,459,377 | ||||||||||||||||
| Total debt | $ | 6,988,009 | $ | 6,807,567 | $ | 6,872,198 | |||||||||||||
| Senior notes, net | 743,296 | 742,624 | |||||||||||||||||
| $ | 7,444,930 | $ | 7,599,276 | ||||||||||||||||
To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit rating agency may change or withdraw the Company’s ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. The Company’s short- and long-term debt ratings as of January 2018December 31, 2019 were as follows:
| Short-Term | Long-Term | Outlook | ||||
| Moody’s | P2 | Stable | ||||
| Standard & Poor’s | A2 | Negative | ||||
| Fitch | F1 | A | ||||
Credit Facilities – In May 2017,2019, the Company entered into a $100.0$195.0 million 364-day credit facility which matures in April 2018.May 2020. The Company also has a $675.0$780.0 million five-year credit facility which matures in April 20192023 and a $765.0 million five-year credit facility which matures in April 2021. The new 364-day credit facility and the five-year credit facilities (together, the Global Credit Facilities) bear interest at variable interest 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 under the Global Credit Facilities. The Global Credit Facilities are committed facilities primarily used to support the Company's unsecured commercial paper program. Additionally, during the second quarter of 2017, the Company renewed its $25.0 million credit facility which had expired in May 2017. The $25.0 million credit facility bears interest at variable interest rates, and the Company must pay a fee based on the unused portion of the $25.0 million commitment. The credit facility expires in May 2018.
Unsecured Commercial Paper – Subject to limitations, the Company could issue unsecured commercial paper of up to $1.54$1.74 billion as of December 31, 20172019 supported by the Global Credit Facilities, as discussed above.Facilities. Outstanding unsecured commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. The Company intends to repay unsecured commercial paper as it matures with additional unsecured commercial paper or through other means, such as borrowing under the Global Credit Facilities, borrowing under its asset-backed U.S. commercial paper conduit facilities or through the use of operating cash flow and cash on hand.(1)
Medium-Term Notes – The Company has the following unsecured medium-term notes (collectively, the Notes) issued and outstanding at December 31, 20172019 (in thousands):
| Principal Amount | Rate | Issue Date | Maturity Date | Rate | Issue Date | Maturity Date | ||||||
| $877,488 | 6.80% | May 2008 | June 2018 | |||||||||
| $600,000 | 2.25% | January 2016 | January 2019 | 2.15% | February 2015 | February 2020 | ||||||
| $150,000 | Floating-rate(a) | March 2017 | March 2019 | |||||||||
| $600,000 | 2.40% | September 2014 | September 2019 | |||||||||
| $600,000 | 2.15% | February 2015 | February 2020 | |||||||||
| $450,000 | LIBOR + 0.50% | May 2018 | May 2020 | |||||||||
| $350,000 | 2.40% | March 2017 | June 2020 | 2.40% | March 2017 | June 2020 | ||||||
| $600,000 | 2.85% | January 2016 | January 2021 | 2.85% | January 2016 | January 2021 | ||||||
| $450,000 | LIBOR + 0.94% | November 2018 | March 2021 | |||||||||
| $350,000 | 3.55% | May 2018 | May 2021 | |||||||||
| $550,000 | 4.05% | February 2019 | February 2022 | |||||||||
| $400,000 | 2.55% | June 2017 | June 2022 | 2.55% | June 2017 | June 2022 | ||||||
| $350,000 | 3.35% | February 2018 | February 2023 | |||||||||
$672,936(a) | 3.14% | November 2019 | November 2024 | |||||||||
| (a) | Euro denominated €600.0 million par value remeasured to U.S. dollar at December 31, 2019 |
The Notesfixed-rate medium-term notes provide for semi-annual interest payments and principalthe floating-rate medium-term notes provide for quarterly interest payments. Principal on the medium-term notes is due at maturity. Unamortized discount and debt issuance costs on medium-term notes reduced the outstanding balance by $12.8 million and $13.0 million at December 31, 2019 and 2018, respectively.
Senior Unsecured Notes – In July 2015, the Company issued $750.0 million of unsecured senior unsecured notes in an underwritten offering. The senior unsecured notes provide for semi-annual interest payments and principal due at maturity. $450.0 million of the senior unsecured notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million of the senior unsecured notes mature in July 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – The Company has a revolving facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase from the Company eligible Canadian retail motorcycle finance receivables for proceeds up to C$220.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this facility provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$220.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement ofbetween the Company and the lenders, as of December 31, 2017,2019, the Canadian Conduit has an expiration date of June 30, 2018. The contractual maturity of the debt is approximately 5 years.26, 2020.
| 2019 | 2018 | ||||||||||||||
| Transfers | Proceeds | Transfers | Proceeds | ||||||||||||
| First quarter | $ | — | $ | — | $ | 7,600 | $ | 6,200 | |||||||
| Second quarter | 28,200 | 23,400 | 38,900 | 32,200 | |||||||||||
| Third quarter | — | — | — | — | |||||||||||
| Fourth quarter | — | — | 39,000 | 32,200 | |||||||||||
| $ | 28,200 | $ | 23,400 | $ | 85,500 | $ | 70,600 | ||||||||
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE – On December 13, 2017, theThe Company renewed its existing $300.0 million and $600.0 million revolving facilityhas two separate agreements with a third-party bank-sponsored asset-backed U.S. commercial paper conduit.conduits under which it may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In May 2019, the Company amended its $300.0 million revolving facility agreement to allow for incremental borrowings, at the lender's discretion, of up to an additional $300.0 million in excess of the $300.0 million commitment. The aggregate commitment under this agreement is reduced monthly as collections on the related finance
receivables are applied to the outstanding principal until the outstanding principal balance is less than or equal to $300.0 million, at which point the aggregate commitment will equal $300.0 million. On November 27, 2019, the Company renewed its existing $600.0 million and amended $300.0 million revolving facility agreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the relevant SPE as collateral.
| 2019 | 2018 | ||||||||||||||
| Transfers | Proceeds | Transfers | Proceeds | ||||||||||||
| First quarter | $ | — | $ | — | $ | 32,900 | $ | 29,300 | |||||||
| Second quarter | — | — | 59,100 | 53,300 | |||||||||||
| Third quarter | 174,400 | 154,600 | — | — | |||||||||||
| Fourth quarter | — | — | 400,200 | 356,800 | |||||||||||
| $ | 174,400 | $ | 154,600 | $ | 492,200 | $ | 439,400 | ||||||||
The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment of $900.0 million.commitment. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The 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, the U.S. Conduit Facilities have an expiration date of December 12, 2018.November 25, 2020.
Asset-Backed Securitization VIEs – For all of its asset-backed securitization transactions, the Company transfers U.S. retail motorcycle finance receivables to separate VIEs, which in turn issue secured notes with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchased U.S. retail motorcycle finance receivables. The U.S. retail motorcycle finance receivables included in the asset-backed securitization transactions are not available to pay other obligations or claims of the Company's creditors until the associated debt and other obligations are satisfied. Restricted cash balances held by the VIEs are used only to support the asset-backed securitizations.
The accounting treatment for asset-backed securitizations depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. Most of the Company’s asset-backed securitizations do not meet the criteria to be accounted for as a sale because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt. There is no amortization schedule for the secured notes; however, the debt is reduced monthly as available collections on the related retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual livesnotes have various contractual maturities ranging from 2020 to 2026.
In 2019, the Company transferred $1.12 billion of U.S. retail motorcycle finance receivables to 2022.
two separate SPEs. The SPEs in turn issued $1.03 billion, or $1.02 billion net of discounts and issuance costs, of secured notes through two separate on-balance sheet asset-backed securitization transactions. There were no on oron-balance sheet asset-backed securitization transactions during 2018. There were no off-balance sheet asset-backed securitization transactions during 2017. During the second quarter 2016, the Company sold U.S. retail motorcycle finance receivables with a principal balance of $301.8 million into an asset-backed securitization VIE, and the transaction met the criteria to be accounted for as a sale because the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. Upon the sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain of $9.3 million was recognized in Financial Services revenue.2019 or 2018.
Support Agreement - The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support to maintain HDFS’ fixed-charge coverage at 1.25 and minimum net worth of $40.0 million. Support may be provided at the Company’s option as capital contributions or loans. Accordingly, certain debt covenants may restrict the Company’s ability to withdraw funds from HDFS outside the normal course of business. No amount has ever been provided to HDFS under the support agreement.
Operating and Financial Covenants – HDFS and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the Notesmedium-term and senior notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.
The operating covenants limit the Company’s and HDFS’ ability to:
Under the current financial covenants of the Global Credit Facilities, the ratio of HDFS’ consolidated debt, excluding secured debt, to HDFS’ consolidated shareholders' equity, ratio of HDFSexcluding accumulated other comprehensive loss (AOCL), cannot exceed 10.0010.0 to 1.001.0 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 excluding the debtexcludes that of HDFS and its subsidiaries, and the Company's consolidated shareholders’ equity excluding AOCL), cannot exceed 0.700.7 to 1.001.0 as of the end of any fiscal quarter. No financial covenants are required under the Notesmedium-term and senior notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.
At December 31, 2017, 20162019 and 2015,2018, HDFS and the Company remained in compliance with all of the then existing covenants.
Cautionary Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” “may,” “will,” “estimates,” “is on-track” or words of similar meaning. Similarly, statements that describe or refer to future expectations, future plans, strategies, objectives, outlooks, targets, guidance, commitments or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, unfavorably or favorably, from those anticipated as of the date of this report. Certain of such risks and uncertainties are described below. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are only made as of the date of this report, and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
The Company's ability to meet the targets and expectations noted above depends upon, among other factors, the Company's ability to (i) execute its business strategy,plans and strategies, including the elements of the More Roads to Harley-Davidson accelerated plan for growth that the Company disclosed on July 30, 2018 and updated September 24, 2019, and strengthen its existing business while enabling growth, (ii) manage and predict the impact that new or adjusted tariffs may have on the Company's ability to sell products internationally, and the cost of raw materials and components, (iii) execute its strategy of growing ridership, globally, (iii) effectively execute(iv) successfully carry out its global manufacturing optimization plan within expected costs and timing, (iv)assembly operations, (v) accurately analyze, predict and react to changing market conditions and successfully adjust to shifting global consumer needs and interests, (vi) develop and maintain a productive relationship with Zhejiang Qianjiang Motorcycle Co., Ltd. and launch related products in a timely manner, (vii) develop and introduce products, services and experiences that are successful in the marketplace, (v) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles, (vi) balance production volumes for its new motorcycles with consumer demand, including in circumstances where competitors may be supplying new motorcycles toa timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, (viii) perform in excessa manner that enables the Company to benefit from market opportunities while competing against existing and new competitors, (ix) realize expectations concerning market demand for electric models, which will depend in part on the building of demand at reduced prices, (vii) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing political environment, (viii) manage risks that arise through expanding international manufacturing, operations and sales, (ix) successfully execute the Company's manufacturing strategy, including its flexible production strategy,necessary infrastructure, (x) prevent, detect, and detectremediate any issues with its motorcycles or any issues associated
with the manufacturing processes to avoid delays in new model launches, recall campaigns, regulatory agency investigations, increased warranty costs or litigation and adverse effects on its reputation and brand strength, and carry out any product programs or recalls within expected costs and timing, (xi) continue tomanage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters, (xii) manage the relationshipsimpact that prices for and agreementssupply of used motorcycles may have on its business, including on retail sales of new motorcycles, (xiii) reduce other costs to offset costs of the More Roads to Harley-Davidson plan and redirect capital without adversely affecting its existing business, (xiv) balance production volumes for its new motorcycles with consumer demand, (xv) manage risks that arise through expanding international manufacturing, operations and sales, (xvi) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the Company has withchanging political environment, (xvii) successfully determine, implement on a timely basis, and maintain a manner in which to sell motorcycles in the European Union, China, and ASEAN countries that does not subject its labor unionsmotorcycles to help drive long-term competitiveness, (xii)incremental tariffs, (xviii) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices, (xiii) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio, (xiv) retain and attract talented employees, (xv) prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or Company data and respond to evolving regulatory requirements regarding data security, (xvi)(xix) continue to develop the capabilities of its distributors and dealers, effectively implement changes relating to its dealers and distribution methods and manage the risks that its independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand, (xvii)(xx) retain and attract talented employees, (xxi) prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or Company data and respond to evolving regulatory requirements regarding data security, (xxii) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio, (xxiii) adjust to tax reform, healthcare inflation and reform and pension reform, and successfully estimate the impact of any such
reform on the Company'sCompany’s business, (xviii)(xxiv) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles, (xix) manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters, (xx)(xxv) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities, (xxi)(xxvi) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations, (xxii)(xxvii) manage its exposure to product liability claims and commercial or contractual disputes, and (xxiii)(xxviii) successfully access the capital and/or credit markets on terms (including interest rates) that are acceptable to the Company and within its expectations.
The Company’s operations and/or demand for its products could experience delays or disruptions in its operations as a result ofbe adversely impacted by work stoppages, strikes, natural causes, widespread infectious disease, terrorism, or other factors. Other factors are described in Item 1A. Risk Factors of this report. Many of these risk factors thatare impacted by the Company has disclosed in documents previously filed withcurrent changing capital, credit and retail markets and the Securities and Exchange Commission.
Company's ability to manage through inconsistent economic conditions.
The Company'sCompany’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company'sCompany’s independent dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent dealers and distributors to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company. In addition, the Company'sCompany’s independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors.
In recent years, HDFS has experienced historically low levels of retail credit losses, but there is no assurance that this will continue. The Company believes that HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals to sub-prime borrowers, as well as actions that the Company has taken and could take that impact motorcycle values.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. To reduce such risks, the Company selectively uses derivative financial instruments. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes. Sensitivity analysis is used to manage and monitor foreign currency exchange rate and interest rate risk. Further disclosure relating to the fair value of derivative financial instruments is included in Note 9 of the Notes to Consolidated financial statements.
The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency. As a result, the Company’s earnings are affected by fluctuations in the value of the U.S. dollar relative to foreign currency.currencies. The Company’s most significant foreign currency exchange rate risk relates to the Euro, the Australian dollar, the Japanese yen, the Brazilian real, the Canadian dollar, the British poundMexican peso, Indian rupee, and the Mexican peso.Pound sterling. The Company utilizes foreign currency contracts to mitigate the effect of certain currencies' fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate. At December 31, 20172019 and December 31, 2016,2018, the notional U.S. dollar value of outstanding Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, and Mexican peso, Indian rupee, and Pound sterling foreign currency contracts was $675.7$654.5 million and $554.6$443.0 million, respectively. The Company estimates that a uniform 10% weakening in the value of the U.S. dollar relative to the currencies underlying these contracts would result in a decrease in the fair value of the contracts of approximately $67.2$65.5 million and $52.2$39.9 million as of December 31, 20172019 and December 31, 2016,2018, respectively. Further disclosure relating to the fair value of derivative financial instruments is included in Note 7 of the Notes to Consolidated Financial Statements.
The Company's earnings are affected by changes in the prices of commodities used in the production of motorcycles. The Company uses derivative financial instruments on a limited basis to hedge the prices of certain commodities. At December 31, 2017,2019, the notional value of these instruments was $5.4$8.9 million and theirthe fair value was a net assetliability of $0.3$0.1 million. As of December 31, 2016,2018, the notional value of these instruments was $6.0$6.1 million and theirthe fair value was a net assetliability of $0.5 million. The potential decrease in fair value of these contracts from a 10% adverse change in the underlying commodity prices would not be significant.
HDFS’ earnings are affected by changes in interest rates. HDFS’ interest-rateinterest rate sensitive financial instruments include finance receivables, debt and interest rate derivatives. HDFS utilizes interest rate swaps and caps to reduce the impact of fluctuations in interest rates on its debt. WithAs of December 31, 2019, HDFS had interest rate swaps outstanding with a notional value of $900.0 million and interest rate caps outstanding with a notional value of $376.0 million. As of December 31, 2018, HDFS had interest rate swaps outstanding with a notional value of $900.0 million and no outstanding interest rate caps. HDFS estimates that a 10% decrease in interest rates would result in a decrease in the exceptionfair value of the interest rate swap and cap agreements of $10.2 million and $8.3 million as of December 31, 2019 and 2018, respectively.
HDFS has currency exposure related to financing in currencies other than the functional currency. HDFS utilizes cross-currency swaps to mitigate the effect of the foreign currency exchange rate fluctuations. At December 31, 2019, HDFS' exposure relates to the Euro. As of December 31, 2019, HDFS had a cross-currency swap outstanding with a notional value of $660.8 million. As of December 31, 2018, HDFS had no cross-currency swaps outstanding. HDFS estimates that a 10% adverse change in the underlying foreign currency exchange rate would result in a $4.6 million decrease in the fair value of the swap agreement.
HDFS has short-term commercial paper and debt issued through the commercial paper
conduit facilities the majority of HDFS' debt instruments at December 31, 2017 have fixedthat is subject to changes in interest rates. AHDFS estimates that a one-percentage point increase in the interest rate on commercial paper and debt issued through the commercial paper conduit facilities would increase Financial Services interest expense in 20182020 by approximately $15$10.4 million. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change in interest rates, HDFS may take actions to mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis does not account for these impacts.
Item 8. Consolidated Financial Statements and Supplementary Data
| Page | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Harley-Davidson, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Harley-Davidson, Inc.’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework)(the COSO criteria). In our opinion, Harley-Davidson, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Harley-Davidson, Inc. as of December 31, 20172019 and 2016,2018, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule listed in the Index at item 15(a) and our report dated February 21, 201819, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definitions and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Milwaukee, Wisconsin
February 21, 201819, 2020
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Harley-Davidson, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Harley-Davidson, Inc. as of December 31, 20172019 and 2016,2018, and the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2017,2019, and the related notes and financial statement schedule listed in the Index at item 15(a) (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Harley-Davidson, Inc. at December 31, 20172019 and 2016,2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of December 31, 2017,2019, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework),and our report dated February 21, 201819, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on thesethe Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to frauderror or error.fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to frauderror or error,fraud, and performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
| Allowance for Credit Losses - Retail Finance Receivables | |
| Description of the Matter | The Company’s retail receivable portfolio totaled $6.4 billion as of December 31, 2019, and the associated allowance for credit losses (ACL) was $188.5 million. As discussed in Note 7 to the consolidated financial statements, management utilizes a loss forecast model to estimate losses of its retail receivable portfolio. The loss forecast model utilizes a variety of assumptions including, but not limited to, historical loss trends, known and inherent risk in the portfolio, the value of the underlying collateral, recovery rates and current economic conditions including items such as unemployment rates. Management applies judgment in determining appropriate parameters and assumptions when estimating incurred losses, including the assessment of historical loss experience, the percentage of borrowers that are expected to default, and the valuation of collateral. Auditing management’s estimate of the ACL for retail finance receivables involved a high degree of judgment in evaluating management’s assumptions. |
| How We Addressed the Matter in Our Audit | We tested certain of the Company’s controls over the ACL process, which included, among others, management’s review and approval of the model used to calculate the ACL, management’s validation of data inputs as well as their review and approval of subjective model inputs. We also tested the Company’s controls over the computational accuracy of the output of the model. To test the ACL, our audit procedures included, among others, assessing the appropriateness of the significant assumptions and parameters in the ACL model by evaluating whether historical data utilized within the model was representative of current circumstances, including giving consideration to current economic conditions and recent losses incurred in the portfolio. In performing this evaluation, we also considered any adjustments management made to historical data in response to current trends. Lastly, we tested the completeness and accuracy of data from underlying informational systems used in the model. |
| Product Recall Liability | |
| Description of the Matter | The Company’s liability for product recalls, which represents a loss contingency, was $36.4 million as of December 31, 2019. As discussed in Note 14 to the consolidated financial statements, the Company records the estimated recall cost when the liability is both probable and estimable. The accrued cost of a recall is based on an estimate of the cost to repair each affected motorcycle and the number of motorcycles expected to be repaired based on historical data concerning the percentage of affected customers that take advantage of recall offers. Management applies judgment in determining when to initiate voluntary product recall campaigns. Management also applies judgment in determining assumptions that are in part based on historical experience when estimating the expected costs to repair the motorcycle and the percentage of customers expected to participate in the recall. Auditing the completeness and valuation of the product recall liability involved a high degree of subjectivity in evaluating management’s assumptions. |
| How We Addressed the Matter in Our Audit | We tested certain of the Company’s controls over the product recall liability process, which included, among others, management’s review of claims and identification of claims trends, and development of the assumptions and inputs used to estimate the cost of the product recall, including the motorcycle population subject to the product recall, the cost per motorcycle to repair, and the estimated customer participation percentage. We also tested controls over the completeness of the recalls accrued and the accuracy of the liability calculation. To test the product recall liability, our audit procedures included among others, assessing the appropriateness of the significant assumptions in the product recall calculation by evaluating whether the historical data was representative of current circumstances, including giving consideration to the nature of the current recalls as compared to prior recalls as well as the actual customer participation to-date activity for the identified recalls and the related actual repair costs incurred to-date. In performing the evaluation, we also considered any adjustments management made to historical data in response to current trends, as applicable. We performed sensitivity analyses to assess the impact of possible changes to inputs and assumptions. We reviewed third-party product recall announcements and tested the completeness and accuracy of motorcycle population and repair cost data from underlying systems used in the calculation. Lastly, we performed a lookback analysis of retro rate adjustments, which would be indicative of product performance concerns not captured in the form of a product recall. |
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1982
Milwaukee, Wisconsin
February 21, 2018
19, 2020
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 20172019, 20162018 and 20152017
(In thousands, except per share amounts)
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Motorcycles and Related Products | $ | 4,915,027 | $ | 5,271,376 | $ | 5,308,744 | $ | 4,572,678 | $ | 4,968,646 | $ | 4,915,027 | |||||||||||
| Financial Services | 732,197 | 725,082 | 686,658 | 789,111 | 748,229 | 732,197 | |||||||||||||||||
| Total revenue | 5,647,224 | 5,996,458 | 5,995,402 | ||||||||||||||||||||
| 5,361,789 | 5,716,875 | 5,647,224 | |||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Motorcycles and Related Products cost of goods sold | 3,261,683 | 3,419,710 | 3,356,284 | 3,229,798 | 3,351,796 | 3,272,330 | |||||||||||||||||
| Financial Services interest expense | 180,193 | 173,756 | 161,983 | 210,438 | 193,187 | 180,193 | |||||||||||||||||
| Financial Services provision for credit losses | 132,444 | 136,617 | 101,345 | 134,536 | 106,870 | 132,444 | |||||||||||||||||
| Selling, administrative and engineering expense | 1,181,641 | 1,217,439 | 1,220,095 | 1,199,056 | 1,258,098 | 1,180,176 | |||||||||||||||||
| Total costs and expenses | 4,755,961 | 4,947,522 | 4,839,707 | ||||||||||||||||||||
| Restructuring expense | 32,353 | 93,401 | — | ||||||||||||||||||||
| 4,806,181 | 5,003,352 | 4,765,143 | |||||||||||||||||||||
| Operating income | 891,263 | 1,048,936 | 1,155,695 | 555,608 | 713,523 | 882,081 | |||||||||||||||||
| Other income (expense), net | 16,514 | 3,039 | 9,182 | ||||||||||||||||||||
| Investment income | 3,580 | 4,645 | 6,585 | 16,371 | 951 | 3,580 | |||||||||||||||||
| Interest expense | 31,004 | 29,670 | 12,117 | 31,078 | 30,884 | 31,004 | |||||||||||||||||
| Income before provision for income taxes | 863,839 | 1,023,911 | 1,150,163 | 557,415 | 686,629 | 863,839 | |||||||||||||||||
| Provision for income taxes | 342,080 | 331,747 | 397,956 | 133,780 | 155,178 | 342,080 | |||||||||||||||||
| Net income | $ | 521,759 | $ | 692,164 | $ | 752,207 | $ | 423,635 | $ | 531,451 | $ | 521,759 | |||||||||||
| Earnings per common share: | |||||||||||||||||||||||
| Earnings per share: | |||||||||||||||||||||||
| Basic | $ | 3.03 | $ | 3.85 | $ | 3.71 | $ | 2.70 | $ | 3.21 | $ | 3.03 | |||||||||||
| Diluted | $ | 3.02 | $ | 3.83 | $ | 3.69 | $ | 2.68 | $ | 3.19 | $ | 3.02 | |||||||||||
| Cash dividends per common share | $ | 1.46 | $ | 1.40 | $ | 1.24 | $ | 1.50 | $ | 1.48 | $ | 1.46 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 20172019, 20162018 and 20152017
(In thousands)
| 2017 | 2016 | 2015 | ||||||||||
| Net income | $ | 521,759 | $ | 692,164 | $ | 752,207 | ||||||
| Other comprehensive income (loss), net of tax: | ||||||||||||
| Foreign currency translation adjustments | 46,280 | (9,288 | ) | (55,362 | ) | |||||||
| Derivative financial instruments | (29,778 | ) | 6,638 | (13,156 | ) | |||||||
| Marketable securities | 1,194 | (100 | ) | (394 | ) | |||||||
| Pension and postretirement benefit plans | 47,636 | 52,574 | (31,350 | ) | ||||||||
| Total other comprehensive income (loss), net of tax | 65,332 | 49,824 | (100,262 | ) | ||||||||
| Comprehensive income | $ | 587,091 | $ | 741,988 | $ | 651,945 | ||||||
| 2017 | 2016 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 687,521 | $ | 759,984 | ||||
| Marketable securities | — | 5,519 | ||||||
| Accounts receivable, net | 329,986 | 285,106 | ||||||
| Finance receivables, net | 2,105,662 | 2,076,261 | ||||||
| Inventories | 538,202 | 499,917 | ||||||
| Restricted cash | 47,518 | 52,574 | ||||||
| Other current assets | 175,853 | 174,491 | ||||||
| Total current assets | 3,884,742 | 3,853,852 | ||||||
| Finance receivables, net | 4,859,424 | 4,759,197 | ||||||
| Property, plant and equipment, net | 967,781 | 981,593 | ||||||
| Prepaid pension costs | 19,816 | — | ||||||
| Goodwill | 55,947 | 53,391 | ||||||
| Deferred income taxes | 109,073 | 167,729 | ||||||
| Other long-term assets | 75,889 | 74,478 | ||||||
| $ | 9,972,672 | $ | 9,890,240 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 227,597 | $ | 235,318 | ||||
| Accrued liabilities | 529,822 | 486,652 | ||||||
| Short-term debt | 1,273,482 | 1,055,708 | ||||||
| Current portion of long-term debt, net | 1,127,269 | 1,084,884 | ||||||
| Total current liabilities | 3,158,170 | 2,862,562 | ||||||
| Long-term debt, net | 4,587,258 | 4,666,975 | ||||||
| Pension liability | 54,606 | 84,442 | ||||||
| Postretirement healthcare liability | 118,753 | 173,267 | ||||||
| Other long-term liabilities | 209,608 | 182,836 | ||||||
| Commitments and contingencies (Note 14) | ||||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, none issued | — | — | ||||||
| Common stock, 181,286,547 and 180,595,054 shares issued, respectively | 1,813 | 1,806 | ||||||
| Additional paid-in-capital | 1,422,808 | 1,381,862 | ||||||
| Retained earnings | 1,607,570 | 1,337,673 | ||||||
| Accumulated other comprehensive loss | (500,049 | ) | (565,381 | ) | ||||
| Treasury stock (13,195,731 and 4,647,345 shares, respectively), at cost | (687,865 | ) | (235,802 | ) | ||||
| Total shareholders’ equity | 1,844,277 | 1,920,158 | ||||||
| $ | 9,972,672 | $ | 9,890,240 | |||||
| 2017 | 2016 | |||||||
| Balances held by consolidated variable interest entities (Note 10) | ||||||||
| Current finance receivables, net | $ | 194,813 | $ | 225,289 | ||||
| Other assets | $ | 2,148 | $ | 2,781 | ||||
| Non-current finance receivables, net | $ | 521,940 | $ | 643,047 | ||||
| Restricted cash - current and non-current | $ | 48,706 | $ | 57,057 | ||||
| Current portion of long-term debt, net | $ | 209,247 | $ | 241,396 | ||||
| Long-term debt, net | $ | 422,834 | $ | 554,879 | ||||
| 2019 | 2018 | 2017 | |||||||||
| Net income | $ | 423,635 | $ | 531,451 | $ | 521,759 | |||||
| Other comprehensive income (loss), net of tax: | |||||||||||
| Foreign currency translation adjustments | 8,795 | (25,010 | ) | 46,280 | |||||||
| Marketable securities | — | — | 1,194 | ||||||||
| Derivative financial instruments | (16,371 | ) | 20,009 | (29,778 | ) | ||||||
| Pension and postretirement benefit plans | 100,311 | (16,286 | ) | 47,636 | |||||||
| 92,735 | (21,287 | ) | 65,332 | ||||||||
| Comprehensive income | $ | 516,370 | $ | 510,164 | $ | 587,091 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWSBALANCE SHEETS
| 2017 | 2016 | 2015 | ||||||||||
| Net cash provided by operating activities (Note 2) | $ | 1,005,061 | $ | 1,174,339 | $ | 1,100,118 | ||||||
| Cash flows from investing activities: | ||||||||||||
| Capital expenditures | (206,294 | ) | (256,263 | ) | (259,974 | ) | ||||||
| Origination of finance receivables | (3,591,948 | ) | (3,664,495 | ) | (3,751,830 | ) | ||||||
| Collections on finance receivables | 3,228,311 | 3,175,031 | 3,136,885 | |||||||||
| Proceeds from finance receivables sold | — | 312,571 | — | |||||||||
| Sales and redemptions of marketable securities | 6,916 | 40,014 | 11,507 | |||||||||
| Acquisition of business | — | — | (59,910 | ) | ||||||||
| Other | 547 | 411 | 7,474 | |||||||||
| Net cash used by investing activities | (562,468 | ) | (392,731 | ) | (915,848 | ) | ||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of medium-term notes | 893,668 | 1,193,396 | 595,386 | |||||||||
| Repayments of medium-term notes | (800,000 | ) | (451,336 | ) | (610,331 | ) | ||||||
| Proceeds from issuance of senior unsecured notes | — | — | 740,385 | |||||||||
| Proceeds from securitization debt | — | — | 1,195,668 | |||||||||
| Repayments of securitization debt | (444,671 | ) | (665,400 | ) | (1,008,135 | ) | ||||||
| Borrowings of asset-backed commercial paper | 469,932 | 62,396 | 87,442 | |||||||||
| Repayments of asset-backed commercial paper | (176,227 | ) | (71,500 | ) | (72,727 | ) | ||||||
| Net increase (decrease) in credit facilities and unsecured commercial paper | 212,809 | (145,812 | ) | 469,473 | ||||||||
| Net change in restricted cash | 8,458 | 43,495 | 11,410 | |||||||||
| Dividends paid | (251,862 | ) | (252,321 | ) | (249,262 | ) | ||||||
| Purchase of common stock for treasury | (465,263 | ) | (465,341 | ) | (1,537,020 | ) | ||||||
| Excess tax benefits from share-based payments | — | 2,251 | 3,468 | |||||||||
| Issuance of common stock under employee stock option plans | 11,353 | 15,782 | 20,179 | |||||||||
| Net cash used by financing activities | (541,803 | ) | (734,390 | ) | (354,064 | ) | ||||||
| Effect of exchange rate changes on cash and cash equivalents | 26,747 | (9,443 | ) | (14,677 | ) | |||||||
| Net (decrease) increase in cash and cash equivalents | $ | (72,463 | ) | $ | 37,775 | $ | (184,471 | ) | ||||
| Cash and cash equivalents: | ||||||||||||
| Cash and cash equivalents—beginning of period | $ | 759,984 | $ | 722,209 | $ | 906,680 | ||||||
| Net (decrease) increase in cash and cash equivalents | (72,463 | ) | 37,775 | (184,471 | ) | |||||||
| Cash and cash equivalents—end of period | $ | 687,521 | $ | 759,984 | $ | 722,209 | ||||||
(In thousands, except share amounts)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Balance | Total | ||||||||||||||||||||||
Issued Shares | Balance | ||||||||||||||||||||||||||
| Balance December 31, 2014 | 344,174,653 | $ | 3,442 | $ | 1,265,257 | $ | 8,459,040 | $ | (514,943 | ) | $ | (6,303,510 | ) | $ | 2,909,286 | ||||||||||||
| Net income | — | — | — | 752,207 | — | — | 752,207 | ||||||||||||||||||||
| Total other comprehensive loss, net of tax (Note 8) | — | — | — | — | (100,262 | ) | — | (100,262 | ) | ||||||||||||||||||
| Dividends | — | — | — | (249,262 | ) | — | — | (249,262 | ) | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (1,537,020 | ) | (1,537,020 | ) | ||||||||||||||||||
| Share-based compensation and 401(k) match made with Treasury shares | — | — | 39,457 | — | — | 1,394 | 40,851 | ||||||||||||||||||||
| Issuance of nonvested stock | 162,193 | 2 | (2 | ) | — | — | — | — | |||||||||||||||||||
| Exercise of stock options | 518,858 | 5 | 20,174 | — | — | — | 20,179 | ||||||||||||||||||||
| Tax benefit of equity awards | — | — | 3,675 | — | — | — | 3,675 | ||||||||||||||||||||
| Balance December 31, 2015 | 344,855,704 | $ | 3,449 | $ | 1,328,561 | $ | 8,961,985 | $ | (615,205 | ) | $ | (7,839,136 | ) | $ | 1,839,654 | ||||||||||||
| Net income | — | — | — | 692,164 | — | — | 692,164 | ||||||||||||||||||||
| Total other comprehensive income, net of tax (Note 8) | — | — | — | — | 49,824 | — | 49,824 | ||||||||||||||||||||
| Dividends | — | — | — | (252,321 | ) | — | — | (252,321 | ) | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (465,341 | ) | (465,341 | ) | ||||||||||||||||||
| Share-based compensation and 401(k) match made with Treasury shares | — | — | 36,956 | — | — | 2,870 | 39,826 | ||||||||||||||||||||
| Issuance of nonvested stock | 272,479 | 2 | (2 | ) | — | — | — | — | |||||||||||||||||||
| Exercise of stock options | 466,871 | 5 | 15,777 | — | — | — | 15,782 | ||||||||||||||||||||
| Tax benefit of equity awards | — | — | 570 | — | — | — | 570 | ||||||||||||||||||||
| Retirement of treasury stock | (165,000,000 | ) | (1,650 | ) | — | (8,064,155 | ) | — | 8,065,805 | — | |||||||||||||||||
| Balance December 31, 2016 | 180,595,054 | $ | 1,806 | $ | 1,381,862 | $ | 1,337,673 | $ | (565,381 | ) | $ | (235,802 | ) | $ | 1,920,158 | ||||||||||||
| Net income | — | — | — | 521,759 | — | — | 521,759 | ||||||||||||||||||||
| Total other comprehensive income, net of tax (Note 8) | — | — | — | — | 65,332 | — | 65,332 | ||||||||||||||||||||
| Dividends | — | — | — | (251,862 | ) | — | — | (251,862 | ) | ||||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (465,263 | ) | (465,263 | ) | ||||||||||||||||||
| Share-based compensation and 401(k) match made with Treasury shares | — | — | 29,600 | — | — | 13,200 | 42,800 | ||||||||||||||||||||
| Issuance of nonvested stock | 408,950 | 4 | (4 | ) | — | — | — | — | |||||||||||||||||||
| Exercise of stock options | 282,543 | 3 | 11,350 | — | — | — | 11,353 | ||||||||||||||||||||
| Balance December 31, 2017 | 181,286,547 | $ | 1,813 | $ | 1,422,808 | $ | 1,607,570 | $ | (500,049 | ) | $ | (687,865 | ) | $ | 1,844,277 | ||||||||||||
| 2019 | 2018 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 833,868 | $ | 1,203,766 | |||
| Marketable securities | — | 10,007 | |||||
| Accounts receivable, net | 259,334 | 306,474 | |||||
| Finance receivables, net | 2,272,522 | 2,214,424 | |||||
| Inventories, net | 603,571 | 556,128 | |||||
| Restricted cash | 64,554 | 49,275 | |||||
| Other current assets | 168,974 | 144,368 | |||||
| 4,202,823 | 4,484,442 | ||||||
| Finance receivables, net | 5,101,844 | 5,007,507 | |||||
| Property, plant and equipment, net | 847,382 | 904,132 | |||||
| Prepaid pension costs | 56,014 | — | |||||
| Goodwill | 64,160 | 55,048 | |||||
| Deferred income taxes | 101,204 | 141,464 | |||||
| Lease assets | 61,618 | — | |||||
| Other long-term assets | 93,114 | 73,071 | |||||
| $ | 10,528,159 | $ | 10,665,664 | ||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 294,380 | $ | 284,861 | |||
| Accrued liabilities | 582,288 | 601,130 | |||||
| Short-term debt | 571,995 | 1,135,810 | |||||
| Current portion of long-term debt, net | 1,748,109 | 1,575,799 | |||||
| 3,196,772 | 3,597,600 | ||||||
| Long-term debt, net | 5,124,826 | 4,887,667 | |||||
| Lease liabilities | 44,447 | — | |||||
| Pension liabilities | 56,138 | 107,776 | |||||
| Postretirement healthcare liabilities | 72,513 | 94,453 | |||||
| Deferred income taxes | 8,135 | — | |||||
| Other long-term liabilities | 221,329 | 204,219 | |||||
| Commitments and contingencies (Note 16) | |||||||
| Shareholders’ equity: | |||||||
| Preferred stock, none issued | — | — | |||||
| Common stock (Note 5) | 1,828 | 1,819 | |||||
| Additional paid-in-capital | 1,491,004 | 1,459,620 | |||||
| Retained earnings | 2,193,997 | 2,007,583 | |||||
| Accumulated other comprehensive loss | (536,949 | ) | (629,684 | ) | |||
| Treasury stock, at cost (Note 5) | (1,345,881 | ) | (1,065,389 | ) | |||
| 1,803,999 | 1,773,949 | ||||||
| $ | 10,528,159 | $ | 10,665,664 | ||||
HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
December 31, 2019 and 2018
(In thousands, except share amounts)
| 2019 | 2018 | ||||||
| Balances held by consolidated variable interest entities (Note 12) | |||||||
| Finance receivables, net - current | $ | 291,444 | $ | 175,043 | |||
| Other assets | $ | 2,420 | $ | 1,563 | |||
| Finance receivables, net - non-current | $ | 1,027,179 | $ | 591,839 | |||
| Restricted cash - current and non-current | $ | 63,812 | $ | 47,203 | |||
| Current portion of long-term debt, net | $ | 317,607 | $ | 189,693 | |||
| Long-term debt, net | $ | 937,212 | $ | 488,191 | |||
The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2019, 2018 and 2017
(In thousands)
| 2019 | 2018 | 2017 | |||||||||
| Net cash provided by operating activities (Note 6) | $ | 868,272 | $ | 1,205,921 | $ | 1,005,061 | |||||
| Cash flows from investing activities: | |||||||||||
| Capital expenditures | (181,440 | ) | (213,516 | ) | (206,294 | ) | |||||
| Origination of finance receivables | (3,847,322 | ) | (3,752,817 | ) | (3,591,948 | ) | |||||
| Collections on finance receivables | 3,499,717 | 3,325,669 | 3,228,311 | ||||||||
| Purchases of marketable securities | — | (10,007 | ) | — | |||||||
| Sales and redemptions of marketable securities | 10,007 | — | 6,916 | ||||||||
| Acquisition of business | (7,000 | ) | — | — | |||||||
| Other investing activities | 17,912 | (11,598 | ) | 547 | |||||||
| Net cash used by investing activities | (508,126 | ) | (662,269 | ) | (562,468 | ) | |||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of medium-term notes | 1,203,236 | 1,591,828 | 893,668 | ||||||||
| Repayments of medium-term notes | (1,350,000 | ) | (877,488 | ) | (800,000 | ) | |||||
| Proceeds from securitization debt | 1,021,453 | — | — | ||||||||
| Repayments of securitization debt | (353,251 | ) | (257,869 | ) | (444,671 | ) | |||||
| Borrowings of asset-backed commercial paper | 177,950 | 509,742 | 469,932 | ||||||||
| Repayments of asset-backed commercial paper | (318,006 | ) | (212,729 | ) | (176,227 | ) | |||||
| Net (decrease) increase in credit facilities and unsecured commercial paper | (563,453 | ) | (135,356 | ) | 212,809 | ||||||
| Dividends paid | (237,221 | ) | (245,810 | ) | (251,862 | ) | |||||
| Repurchase of common stock | (296,520 | ) | (390,606 | ) | (465,263 | ) | |||||
| Issuance of common stock under employee stock option plans | 3,589 | 3,525 | 11,353 | ||||||||
| Net cash used by financing activities | (712,223 | ) | (14,763 | ) | (550,261 | ) | |||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (2,305 | ) | (15,351 | ) | 26,747 | ||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (354,382 | ) | $ | 513,538 | $ | (80,921 | ) | |||
| Cash, cash equivalents and restricted cash: | |||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | $ | 1,259,748 | $ | 746,210 | $ | 827,131 | |||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (354,382 | ) | 513,538 | (80,921 | ) | ||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 905,366 | $ | 1,259,748 | $ | 746,210 | |||||
| Reconciliation of cash, cash equivalents and restricted cash on the Consolidated balance sheets to the Consolidated statements of cash flows: | |||||||||||
| Cash and cash equivalents | $ | 833,868 | $ | 1,203,766 | $ | 687,521 | |||||
| Restricted cash | 64,554 | 49,275 | 47,518 | ||||||||
| Restricted cash included in Other long-term assets | 6,944 | 6,707 | 11,171 | ||||||||
| Cash, cash equivalents and restricted cash per the Consolidated statements of cash flows | $ | 905,366 | $ | 1,259,748 | $ | 746,210 | |||||
The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2019, 2018 and 2017
(In thousands, except share amounts)
| Common Stock | Additional Paid-in Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Treasury Stock | Total | |||||||||||||||||||||
Issued Shares | Balance | |||||||||||||||||||||||||
| Balance, December 31, 2016 | 180,595,054 | $ | 1,806 | $ | 1,381,862 | $ | 1,337,673 | $ | (565,381 | ) | $ | (235,802 | ) | $ | 1,920,158 | |||||||||||
| Net income | — | — | — | 521,759 | — | — | 521,759 | |||||||||||||||||||
| Other comprehensive income, net of tax (Note 18) | — | — | — | — | 65,332 | — | 65,332 | |||||||||||||||||||
| Dividends | — | — | — | (251,862 | ) | — | — | (251,862 | ) | |||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (465,263 | ) | (465,263 | ) | |||||||||||||||||
| Share-based compensation | — | — | 29,600 | — | — | 13,200 | 42,800 | |||||||||||||||||||
| Issuance of nonvested stock | 408,950 | 4 | (4 | ) | — | — | — | — | ||||||||||||||||||
| Exercise of stock options | 282,543 | 3 | 11,350 | — | — | — | 11,353 | |||||||||||||||||||
| Balance, December 31, 2017 | 181,286,547 | 1,813 | 1,422,808 | 1,607,570 | (500,049 | ) | (687,865 | ) | 1,844,277 | |||||||||||||||||
| Net income | — | — | — | 531,451 | — | — | 531,451 | |||||||||||||||||||
| Other comprehensive loss, net of tax (Note 18) | — | — | — | — | (21,287 | ) | — | (21,287 | ) | |||||||||||||||||
| Dividends | — | — | — | (245,810 | ) | — | — | (245,810 | ) | |||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (390,606 | ) | (390,606 | ) | |||||||||||||||||
| Share-based compensation | — | — | 33,293 | — | — | 13,082 | 46,375 | |||||||||||||||||||
| Issuance of nonvested stock | 485,005 | 4 | (4 | ) | — | — | — | — | ||||||||||||||||||
| Exercise of stock options | 159,673 | 2 | 3,523 | — | — | — | 3,525 | |||||||||||||||||||
| Cumulative effect of change in accounting | — | — | — | 6,024 | — | — | 6,024 | |||||||||||||||||||
| Reclassification of certain tax effects | — | — | — | 108,348 | (108,348 | ) | — | — | ||||||||||||||||||
| Balance, December 31, 2018 | 181,931,225 | 1,819 | 1,459,620 | 2,007,583 | (629,684 | ) | (1,065,389 | ) | 1,773,949 | |||||||||||||||||
| Net income | — | — | — | 423,635 | — | — | 423,635 | |||||||||||||||||||
| Other comprehensive income, net of tax (Note 18) | — | — | — | — | 92,735 | — | 92,735 | |||||||||||||||||||
| Dividends | — | — | — | (237,221 | ) | — | — | (237,221 | ) | |||||||||||||||||
| Repurchase of common stock | — | — | — | — | — | (296,520 | ) | (296,520 | ) | |||||||||||||||||
| Share-based compensation | — | — | 27,804 | — | — | 16,028 | 43,832 | |||||||||||||||||||
| Issuance of nonvested stock | 715,579 | 7 | (7 | ) | — | — | — | — | ||||||||||||||||||
| Exercise of stock options | 169,732 | 2 | 3,587 | — | — | — | 3,589 | |||||||||||||||||||
| Balance, December 31, 2019 | 182,816,536 | $ | 1,828 | $ | 1,491,004 | $ | 2,193,997 | $ | (536,949 | ) | $ | (1,345,881 | ) | $ | 1,803,999 | |||||||||||
The accompanying notes are an integral part of the consolidated financial statements.
HARLEY-DAVIDSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation – All of the Company’s subsidiaries are wholly-owned. The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material intercompany transactions arehave been eliminated.
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 effect of this remeasurement is reported in Motorcycle and Related Products cost of goods sold. The pre-tax gain foraggregate transaction gain/(loss) resulting from foreign currency remeasurements was $15.0$18.0 million, for the year ended 2017. The pre-tax loss for foreign currency remeasurements was $15.1$(19.9) million, and $21.5$15.0 million for the years ended 2016December 31, 2019, 2018 and 2015,2017, respectively.
Use of Estimates – The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires 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 three months90 days or less when purchased to be cash equivalents.
| 2017 | 2016 | |||||||
| Available-for-sale securities: corporate bonds | $ | — | $ | 5,519 | ||||
| Trading securities: mutual funds | 48,006 | 38,119 | ||||||
| Total marketable securities | $ | 48,006 | $ | 43,638 | ||||
Accounts Receivable, Netnet – 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 accountsAccounts receivable, innet on the Company’s consolidatedConsolidated balance sheets.sheets. The allowance for doubtful accounts deducted from total accounts receivable was $4.1$4.9 million and $2.7$4.0 million as of December 31, 20172019 and 2016,2018, respectively. Accounts receivable are written down once management determines that the specific customer does not have the ability to repay the balance in full. The Company’s sales of motorcycles and related products in the U.S. and Canada are financed through HDFS by the purchasing independent dealers through HDFS and the related receivables are included in financeFinance receivables, net on the Consolidated balance sheets.
Inventories, net – Substantially all inventories located in the consolidated balance sheets.
Repossessed Inventory – Repossessed inventory representing recovered collateral on impaired finance receivables is recorded at the lower of cost or net realizable value.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 chargechange to the allowance for credit losses and reclassified to repossessed inventory. Repossessed inventory, is included in otherOther current assets and was $19.6 million and $19.3 million at December 31, 2017 and 2016, respectively.
Property, Plant and Equipment, net – Property, plant and equipment is recorded at cost.cost, net of accumulated depreciation and amortization. Depreciation is determined onusing the straight-line basismethod over the estimated useful lives of the assets. The followingestimated useful lives are used to depreciate the various classesof each class of property, plant and equipment:equipment generally consist of 30 years for buildings, – 30 years;7 years for building equipment and land improvements, – 7 years;3 to 10 years for machinery and equipment, – and 3 to 10 years; furniture and fixtures – 5 years; and software – 3 to 7 years. 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. The impairment test involves comparing the estimated fair value of the reporting unit associated with the goodwill to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, goodwill must be adjusted to its implied fair value. During 20172019 and 20162018, the Company performed a quantitative test on its goodwill balances for impairment and no adjustments were recorded to goodwill as a result of those reviews.
Long-lived Assets – The Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset for assets to be held and used. The Company also reviews the useful life of its long-lived assets when events and circumstances indicate that the actual useful life may be shorter than originally estimated. In the event that the actual useful life is deemed to be shorter than the original useful life, depreciation is adjusted prospectively so that the remaining book value is depreciated over the revised useful life. Refer to Note 3 for additional details surrounding the Company's restructuring activities impacting long-lived assets.
Asset groups classified as held for sale are measured at the lower of carrying amount or fair value less cost to sell, and a loss is recognized for any initial adjustment required to reduce the carrying amount to the fair value less cost to sell in the period the held for sale criteria are met. The fair value less cost to sell must be assessed each reporting period that the asset group remains classified as held for sale. Gains or losses not previously recognized resulting from the sale of an asset group will be recognized on the date of sale.
| 2017 | 2016 | 2015 | ||||||||||
| Balance, beginning of period | $ | 79,482 | $ | 74,217 | $ | 69,250 | ||||||
| Warranties issued during the period | 57,834 | 60,215 | 59,259 | |||||||||
| Settlements made during the period | (82,554 | ) | (99,298 | ) | (96,529 | ) | ||||||
| Recalls and changes to pre-existing warranty liabilities | 39,438 | 44,348 | 42,237 | |||||||||
| Balance, end of period | $ | 94,200 | $ | 79,482 | $ | 74,217 | ||||||
Research and Development Expenses – Expenditures for research activities relating to product development and improvementimprovements are charged against income as incurred and included within selling,Selling, administrative and engineering expenses inexpense on the consolidated statementConsolidated statements of income.income. Research and development expenses were $216.5 million, $191.6 million and $175.2 million for 2019, $172.3 million2018 and $161.2 million for 2017, 2016 and 2015, respectively.
Advertising Costs – The Company expenses the production cost of advertising the first time the advertising takes place.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.media and other means. During 20172019, 20162018 and 20152017, the Company incurred $135.5$171.4 million, $137.4144.3 million and $119.8135.5 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.sold.
New Accounting Standards
Accounting Standards Recently Adopted
In MarchFebruary 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2016-09 Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). ASU 2016-09 amends the guidance on several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, and classification on the statement of cash flows. The Company adopted ASU 2016-09 on January 1, 2017. The Company elected to apply the amendments related to the classification of excess tax benefits on the statement of cash flows on a prospective basis, and prior periods were not adjusted. The adoption of ASU 2016-09 did not have a material impact on the Company's consolidated financial statements.
The Company is currentlyelected the package of practical expedients upon transition that allows entities not to reassess lease identification, classification and initial direct costs for leases that existed prior to adoption. The Company also 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 elected the practical expedient allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets operated by a third-party.
The adoption of ASU 2016-02 resulted in the processinitial recognition of gatheringlease assets and analyzing information necessarylease liabilities related to quantify the impactCompany's leasing arrangements totaling approximately $60 million on January 1, 2019. The adoption of adopting ASU 2016-02 had no impact on opening retained earnings on January 1, 2019 and evaluatingis not expected to materially impact consolidated net income or cash flows on an ongoing basis.
In August 2017, the transition practical expedients it will apply upon adoption.FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 amends Accounting Standards Codification (ASC) 815, Derivatives and Hedging to improve the financial reporting of hedging relationships and to simplify the application of the hedge accounting guidance. The ASU makes various updates to the hedge accounting model, including changing the recognition and presentation of changes in the fair value of the hedging instrument and amending disclosure requirements, among other things. The Company adopted ASU 2017-12 on January 1, 2019 on a prospective basis. The adoption of ASU 2017-12 did not have a material impact on its financial statements.
Accounting Standards Not Yet Adopted
In July 2016, the FASB issued ASU No. 2016-13 Financial Instruments-CreditInstruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. The Company is required towill adopt ASU 2016-13 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019effective January 1, 2020 on a modified retrospective basis. Early adoption is permitted for fiscal years beginning after December 15, 2018. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. Adoption of this standard will impact how the Company recognizes credit losses on its financial instruments. An entity will apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. The Company has completed its work surrounding model development, documentation and validation as well as its evaluation of associated processes, data sources, internal controls and policies. The Company is currently evaluating the impact of adoption of ASU 2016-13 but anticipatesworking through its remaining steps for the adoption of ASU 2016-13, willwhich includes finalizing assumptions related to economic forecasts and appropriate qualitative factors and their associated processes and internal controls. The impact of adoption is expected to result in an initial increase in the annualallowance for credit losses, with a decrease in retained earnings net of taxes. The initial change in the allowance for credit losses at adoption and the ongoing effect of ASU 2016-13 on the provision for credit losses will be impacted by the size and the related allowance for credit losses.
In January 2017, the FASB issued ASU No. 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the requirement to calculate the implied fair value of goodwill. Rather, the goodwill impairment is calculated by comparing the fair value of a reporting unit to its carrying value, and an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value, limited to the total goodwill allocated to the reporting unit. All reporting units apply the same impairment test under the new standard. The Company is required to adopt ASU 2017-04 for its annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
In March 2017,August 2018, the FASB issued ASU No. 2017-07 Compensation2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Retirement Benefits (Topic 715): ImprovingChanges to the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit CostDisclosure Requirements for Fair Value Measurement (ASU 2017-07)2018-13). ASU 2017-072018-13 amends ASC 715, Compensation - Retirement Benefits by requiring employers820 to present the service cost component of net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. Other components of the net periodic benefit cost will be presented separately from the line item that includes the service costeliminate, modify, and outside of any subtotal of operating income.add certain disclosure requirements for fair value measurements. The guidance also limits the components that are eligible for capitalization in assets. The Company is required to adopt ASU 2017-07 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2017. Early adoption is permitted as of the beginning of an annual period for which interim or annual financial statements have not been issued or made available for issuance. The amendments related to the presentation of the components of net periodic benefit cost should be applied retrospectively. The amendments related to the capitalization of certain components in assets should be applied prospectively. The Company's net periodic benefit cost components are disclosed in Note 12.
2018-13 to have material impact on its disclosures.
In FebruaryAugust 2018, the FASB issued ASU No. 2018-02, Reclassification of Certain Tax Effects from Accumulated2018-15, Intangibles - Goodwill and Other Comprehensive Income- Internal-Use Software (Subtopic 350-40) (ASU 2018-02)2018-15). UnderThe new guidance requires a customer in a cloud computing arrangement that is a service contract to follow the existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recordedinternal-use software guidance to determine which implementation costs to capitalize as a component of income taxassets or expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the 2017 Tax Cuts and Jobs Act. The amendments in this ASU also require certain disclosures about stranded tax effects.as incurred. The guidance is effective for fiscal years beginning after December 15, 2018,2019, and interim periods within those fiscal years. The Company does not expect the adoption of ASU 2018-15 to have a material impact on its financial statements.
In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (ASU No. 2019-12). The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and for interim periods within those fiscal years. Early adoption in any period is permitted. The Company’s provisional adjustments recorded in 2017 to account for the impact of the 2017 Tax Cuts and Jobs Act resulted in stranded tax effects. The Company is currently evaluating the timing and impact of adopting ASU 2018-02.2019-12.
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):
| 2019 | 2018 | ||||||
| Motorcycles and Related Products Revenue: | |||||||
| Motorcycles | $ | 3,538,269 | $ | 3,882,963 | |||
| Parts & accessories | 713,400 | 754,663 | |||||
| General merchandise | 237,566 | 241,964 | |||||
| Licensing | 35,917 | 38,676 | |||||
| Other | 47,526 | 50,380 | |||||
| 4,572,678 | 4,968,646 | ||||||
| Financial Services Revenue: | |||||||
| Interest income | 678,205 | 645,985 | |||||
| Securitization and servicing fee income | 599 | 1,136 | |||||
| Other income | 110,307 | 101,108 | |||||
| 789,111 | 748,229 | ||||||
| $ | 5,361,789 | $ | 5,716,875 | ||||
Motorcycles and Related Products
Motorcycles, Parts & Accessories, and General Merchandise – Revenues from the sale of motorcycles, parts & accessories, and general merchandise are recorded when control is transferred to the customer, generally at the time of shipment. The sale of products to independent dealers outside the U.S. and Canada is generally on open account with terms that approximate 30-120 days and the resulting receivables are included in Accounts receivable, net on the Consolidated balance sheets. The sale of products to independent dealers in the U.S. and Canada is financed through HDFS and the related receivables are included in Finance receivables, net on the Consolidated balance sheets.
The Company offers sales incentive programs to independent dealers and retail customers designed to promote the sale of motorcycles, parts & accessories, and general merchandise. The Company estimates its variable consideration sold under its sales incentive programs using the expected value method. The Company accounts for consideration payable to a customer as part of its sales incentives as a reduction of revenue, which is accrued at the later of the date the related sale is recorded or the date the incentive program is both approved and communicated.
The Company offers the right to return eligible parts & accessories and general merchandise. When the Company offers a right to return, it estimates returns based on an analysis of historical trends and records revenue on the initial sale only in the amount that it expects to be entitled. The remaining consideration is deferred in a refund liability account. The refund liability is remeasured for changes in the estimate at each reporting date with a corresponding adjustment to revenue.
Variable consideration related to sales incentives and rights to return is adjusted at the earliest of when the amount of consideration the Company expects to receive changes or the consideration becomes fixed. Adjustments for variable consideration related to previously recognized sales were not material during 2019 and 2018.
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 & 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 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 5 years.
Other Revenue – Other revenue consists primarily of revenue from Harley Owners Group (H.O.G.®) membership sales, motorcycle rental commissions, museum admissions and events, and other miscellaneous products and services.
Financial Services
Interest Income – Interest income on finance receivables is recorded as earned and is based on the average outstanding daily balance for wholesale and retail receivables. Accrued and uncollected interest is classified with Finance receivables, net. Certain loan origination costs related to finance receivables, including payments made to dealers for certain retail loans, are deferred and recorded within Finance receivables, net and amortized over the life of the contract.
Securitization and Servicing Fee Income – Securitization and servicing fee income consists of revenue from servicing and ancillary fees associated with HDFS' off-balance sheet asset-backed securitization transaction, discussed further in Note 12.
Other Income – Other income consists primarily of insurance and licensing revenues. HDFS works with certain unaffiliated insurance companies to offer motorcycle insurance and protection products through most Harley-Davidson independent dealers in the U.S. and Canada. HDFS also works with third-party financial institutions that issue credit cards or offer other financial products bearing the Harley-Davidson brand in the U.S. and internationally. For many of these contracts, the Company grants temporary rights to use the licensed trademarks owned by the Company and collects royalties from its customers in connection with sales of their products. The trademark licenses are considered symbolic intellectual property, which grant the customer a right to access the intellectual property. The Company satisfies its performance obligation over the license period, as it fulfills its promise to grant the customer rights to use and benefit from the intellectual property as well as maintain the intellectual property. Royalty and profit sharing amounts are received either quarterly or per annum, based upon the contract. Revenue, in the form of sales-based royalties, is recognized when the customers’ subsequent sales occur. Revenue will be recognized over the remaining contract terms which range up to 6 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 also 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 (in thousands):
| 2019 | 2018 | ||||||
| Balance, beginning of period | $ | 29,055 | $ | 23,441 | |||
| Balance, end of period | 29,745 | 29,055 | |||||
Previously deferred revenue recognized as revenue in 2019 and 2018 was $26.3 million and $19.6 million, respectively. The Company expects to recognize approximately $15.8 million of the remaining unearned revenue in 2020 and $13.9 million thereafter.
3. Restructuring Expenses
In January 2018, the Company initiated a plan to further improve its manufacturing operations and cost structure by commencing a multi-year manufacturing optimization plan which includes the consolidation of its 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.
The Motorcycles segment incurred $145.4 million of restructuring expenses and other consolidation costs under the Manufacturing Optimization Plan since its inception in 2018, including $43.0 million in 2019. Approximately 60% of total restructuring expenses and other consolidation costs under the Manufacturing Optimization Plan were cash charges.
In November 2018, the Company implemented a reorganization of its workforce (Reorganization Plan). As a result, approximately 70 employees left the Company on an involuntary basis.
Restructuring expense related to the restructuring plans is presented as a line item in the Consolidated statements of income and the accrued restructuring liability is recorded in Accrued liabilities on the Consolidated balance sheets. Changes in the accrued restructuring liability during the years ended December 31, were as follows (in thousands):
| 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 | 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 | |||||||||||
| 2018 | |||||||||||||||||||||||
| Manufacturing Optimization Plan | Reorganization Plan | ||||||||||||||||||||||
| Employee Termination Benefits | Accelerated Depreciation | Other | Total | Employee Termination Benefits | Total | ||||||||||||||||||
| Balance, beginning of period | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||||
| Restructuring expense | 38,666 | 34,654 | 16,182 | 89,502 | 3,899 | 93,401 | |||||||||||||||||
| Utilized - cash | (13,060 | ) | — | (16,095 | ) | (29,155 | ) | (444 | ) | (29,599 | ) | ||||||||||||
| Utilized - non cash | — | (34,654 | ) | — | (34,654 | ) | — | (34,654 | ) | ||||||||||||||
| Foreign currency changes | (648 | ) | — | (8 | ) | (656 | ) | 6 | (650 | ) | |||||||||||||
| Balance, end of period | $ | 24,958 | $ | — | $ | 79 | $ | 25,037 | $ | 3,461 | $ | 28,498 | |||||||||||
The Company incurred incremental Motorcycles and Related Products cost of goods sold due to temporary inefficiencies resulting from implementing the Manufacturing Optimization Plan during 2019 and 2018 of $10.3 million and $12.9 million, respectively.
4. Income Taxes
Provision for income taxes for the years ended December 31, consists of the following (in thousands):
| 2019 | 2018 | 2017 | |||||||||
| Current: | |||||||||||
| Federal | $ | 82,484 | $ | 136,202 | $ | 245,189 | |||||
| State | 6,421 | 23,134 | 24,898 | ||||||||
| Foreign | 23,328 | 29,823 | 21,138 | ||||||||
| 112,233 | 189,159 | 291,225 | |||||||||
| Deferred: | |||||||||||
| Federal | 18,760 | (23,181 | ) | 47,046 | |||||||
| State | 402 | (6,787 | ) | 2,688 | |||||||
| Foreign | 2,385 | (4,013 | ) | 1,121 | |||||||
| 21,547 | (33,981 | ) | 50,855 | ||||||||
| $ | 133,780 | $ | 155,178 | $ | 342,080 | ||||||
During 2017, the Company recorded income tax expense of $53.1 million in connection with the enactment of the “Tax Cuts and Jobs Act” (2017 Tax Act). The Company completed its accounting for all of the initial income tax effects of the 2017 Tax Act during 2018 which resulted in a reduction to income tax expense during 2018 of $1.5 million.
The 2017 Tax 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 components of Income before provision for income taxes for the years ended December 31, were as follows (in thousands):
| 2019 | 2018 | 2017 | |||||||||
| Domestic | $ | 465,798 | $ | 593,099 | $ | 788,878 | |||||
| Foreign | 91,617 | 93,530 | 74,961 | ||||||||
| $ | 557,415 | $ | 686,629 | $ | 863,839 | ||||||
The Provision for income taxes 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:
| 2019 | 2018 | 2017 | ||||||
| Provision at statutory rate | 21.0 | % | 21.0 | % | 35.0 | % | ||
| State taxes, net of federal benefit | 2.5 | 2.6 | 1.9 | |||||
| Foreign rate differential | 0.3 | 0.4 | (0.8 | ) | ||||
| Domestic manufacturing deduction | — | — | (2.2 | ) | ||||
| Foreign derived intangible income | (0.6 | ) | (1.2 | ) | — | |||
| Research and development credit | (1.5 | ) | (1.1 | ) | (0.7 | ) | ||
| Unrecognized tax benefits including interest and penalties | 0.1 | (0.6 | ) | 2.3 | ||||
| Valuation allowance adjustments | 1.4 | 0.1 | (0.1 | ) | ||||
| State credits | (0.8 | ) | — | — | ||||
| Deferred tax balance remeasurement for rate change | — | (1.2 | ) | 5.5 | ||||
| Territorial tax | — | 1.4 | (0.1 | ) | ||||
| Global intangible low-taxed income | 0.2 | 0.4 | — | |||||
| Adjustments for previously accrued taxes | (0.3 | ) | (1.0 | ) | (1.2 | ) | ||
| Rate differential on intercompany transfers | — | 0.9 | — | |||||
| Executive compensation limitation | 0.5 | 0.5 | — | |||||
| Other foreign inclusions | 0.8 | — | — | |||||
| Other | 0.4 | 0.4 | — | |||||
| Provision for income taxes | 24.0 | % | 22.6 | % | 39.6 | % | ||
The principal components of the Company’s deferred income tax assets and liabilities as of December 31, include the following (in thousands):
| 2019 | 2018 | ||||||
| Deferred income tax assets: | |||||||
| Accruals not yet tax deductible | $ | 95,746 | $ | 108,284 | |||
| Pension and postretirement healthcare plan obligations | 17,685 | 48,347 | |||||
| Stock compensation | 11,867 | 13,295 | |||||
| Net operating loss carryforward | 45,279 | 34,842 | |||||
| Valuation allowance | (29,024 | ) | (21,868 | ) | |||
| Other, net | 64,833 | 43,870 | |||||
| 206,386 | 226,770 | ||||||
| Deferred income tax liabilities: | |||||||
| Depreciation, tax in excess of book | (83,477 | ) | (79,326 | ) | |||
| Other | (29,840 | ) | (5,980 | ) | |||
| (113,317 | ) | (85,306 | ) | ||||
| $ | 93,069 | $ | 141,464 | ||||
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 operating loss carryforwards were as follows as of December 31, (in thousands):
| Year of Expiration | 2019 | |||
| 2031 | $ | 256,956 | ||
| 2033 | 166 | |||
| 2034 | 1,915 | |||
| 2038 | 4,460 | |||
| 2039 | 9,922 | |||
| $ | 273,419 | |||
The Company also had Wisconsin research and development credit carryforwards of $18.1 million at December 31, 2019, expiring in 2024-2033.
At December 31, 2019, the Company had a deferred tax asset of $31.4 million related to its state operating loss and Wisconsin research and development credit carryforwards and a deferred tax asset of $13.8 million related to foreign net operating losses.
The Company's valuation allowance was $29.0 million at December 31, 2019 and included $9.6 million related to state operating loss and Wisconsin research and development credit carryforwards, $9.8 million related to foreign net operating losses and $9.6 million related to other deferred tax assets. The increase in the valuation allowance from prior year included $6.7 million related to state operating loss and Wisconsin research and development credit carryforwards and $0.4 million related to foreign net operating losses.
The Company recognizes interest and penalties related to unrecognized tax benefits in Provision for income taxes. Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):
| 2019 | 2018 | ||||||
| Unrecognized tax benefits, beginning of period | $ | 61,411 | $ | 72,230 | |||
| Increase in unrecognized tax benefits for tax positions taken in a prior period | 1,067 | 940 | |||||
| Decrease in unrecognized tax benefits for tax positions taken in a prior period | (5,608 | ) | (9,783 | ) | |||
| Increase in unrecognized tax benefits for tax positions taken in the current period | 4,576 | 3,355 | |||||
| Statute lapses | (325 | ) | — | ||||
| Settlements with taxing authorities | (1,009 | ) | (5,331 | ) | |||
| Unrecognized tax benefits, end of period | $ | 60,112 | $ | 61,411 | |||
The amount of unrecognized tax benefits as of December 31, 2019 and 2018 that, if recognized, would affect the effective tax rate was $53.1 million and $53.7 million, respectively.
The total gross amount of benefit related to interest and penalties associated with unrecognized tax benefits recognized during 2019, 2018 and 2017 in the Consolidated statements of income was $0.1 million, $3.2 million and $2.8 million, respectively.
The total gross amount of interest and penalties associated with unrecognized tax benefits recognized at December 31, 2019 and 2018 in the Consolidated balance sheets was $27.6 million and $27.7 million, respectively.
The Company does not expect a significant change to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year ending December 31, 2020. 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 2015 or for U.S. federal income taxes before 2014. The Company is currently under audit for U.S. federal income taxes for years 2015 and 2016.
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, NaN of which is outstanding. The Company's common stock has a par value of $0.01 per share. Share information regarding the Company's common stock at December 31, was as follows:
| 2019 | 2018 | ||||
| Common stock shares: | |||||
| Authorized | 800,000,000 | 800,000,000 | |||
| Issued | 182,816,536 | 181,931,225 | |||
| Outstanding | 152,468,442 | 159,657,947 | |||
| Treasury stock shares | 30,348,094 | 22,273,278 | |||
Discretionary share repurchases during the years ended December 31, 2019, 2018 and 2017 were $286.7 million or 8.2 million shares, $382.0 million or 9.2 million shares, and $456.1 million or 8.7 million shares, respectively. Share repurchases of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units (RSUs) were $9.8 million or 0.3 million shares, $8.6 million or 0.2 million shares, and $9.2 million or 0.2 million shares during the years ended December 31, 2019, 2018 and 2017, respectively, discussed further in Note 17.
The Company paid cash dividends of $1.50, $1.48, and $1.46 per share during the years ended December 31, 2019, 2018, and 2017, 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):
| 2019 | 2018 | 2017 | |||||||||
| Net income | $ | 423,635 | $ | 531,451 | $ | 521,759 | |||||
| Basic weighted-average shares outstanding | 157,054 | 165,672 | 171,995 | ||||||||
| Effect of dilutive securities – employee stock compensation plan | 750 | 832 | 937 | ||||||||
| Diluted weighted-average shares outstanding | 157,804 | 166,504 | 172,932 | ||||||||
| Earnings per share: | |||||||||||
| Basic | $ | 2.70 | $ | 3.21 | $ | 3.03 | |||||
| Diluted | $ | 2.68 | $ | 3.19 | $ | 3.02 | |||||
Outstanding options to purchase 1.1 million, 1.1 million and 0.8 million shares of common stock during 2019, 2018 and 2017, respectively, were not included in the effect of dilutive securities because the exercise price was greater than the market price and therefore, the effect would have been anti-dilutive.
The Company has a share-based compensation plan under which employees may be granted share-based awards including RSUs. Non-forfeitable dividend equivalents are paid on unvested RSUs. As such, RSUs are considered participating securities under the two-class method of calculating earnings per share as described in ASC Topic 260, Earnings Per Share. The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation as of December 31, 2019, 2018 and 2017.
6. Additional Balance Sheet and Cash Flow Information
The following information represents additional detail for selected line items includedCompany's investments in marketable securities consisted of the consolidated balance sheetsfollowing at December 31, and the statements of cash flows for the years ended December 31.
| 2019 | 2018 | ||||||
| Debt securities | $ | — | $ | 10,007 | |||
| Mutual funds | 52,575 | 44,243 | |||||
| $ | 52,575 | $ | 54,250 | ||||
| 2017 | 2016 | |||||||
| Raw materials and work in process | $ | 161,664 | $ | 140,639 | ||||
| Motorcycle finished goods | 289,530 | 285,281 | ||||||
| Parts and accessories and general merchandise | 139,363 | 122,264 | ||||||
| Inventory at lower of FIFO cost or net realizable value | 590,557 | 548,184 | ||||||
| Excess of FIFO over LIFO cost | (52,355 | ) | (48,267 | ) | ||||
| Total inventories, net | $ | 538,202 | $ | 499,917 | ||||
Inventories, net consisted of the following as of December 31, (in thousands):
| 2019 | 2018 | ||||||
| Raw materials and work in process | $ | 235,433 | $ | 177,110 | |||
| Motorcycle finished goods | 280,306 | 301,630 | |||||
| Parts & accessories and general merchandise | 144,258 | 136,027 | |||||
| Inventory at lower of FIFO cost or net realizable value | 659,997 | 614,767 | |||||
| Excess of FIFO over LIFO cost | (56,426 | ) | (58,639 | ) | |||
| $ | 603,571 | $ | 556,128 | ||||
Inventory obsolescence reserves deducted from FIFO cost were $38.749.3 million and $39.939.0 million as of December 31, 20172019 and 20162018, respectively.
Property, plant and equipment, at costnet consisted of the following as of December 31, (in thousands):
| 2019 | 2018 | ||||||
| Land and related improvements | $ | 75,798 | $ | 73,025 | |||
| Buildings and related improvements | 507,178 | 483,965 | |||||
| Machinery and equipment | 1,609,582 | 1,740,405 | |||||
| Software | 750,978 | 733,180 | |||||
| Construction in progress | 148,805 | 205,786 | |||||
| 3,092,341 | 3,236,361 | ||||||
| Accumulated depreciation | (2,244,959 | ) | (2,332,229 | ) | |||
| $ | 847,382 | $ | 904,132 | ||||
| 2017 | 2016 | |||||||
| Land and related improvements | $ | 70,256 | $ | 65,533 | ||||
| Buildings and related improvements | 464,454 | 464,200 | ||||||
| Machinery and equipment | 1,890,126 | 1,887,269 | ||||||
| Software | 660,090 | 630,114 | ||||||
| Construction in progress | 200,396 | 214,409 | ||||||
| 3,285,322 | 3,261,525 | |||||||
| Accumulated depreciation | (2,317,541 | ) | (2,279,932 | ) | ||||
| Total property, plant and equipment, net | $ | 967,781 | $ | 981,593 | ||||
Accrued liabilities consisted of the following as of December 31, (in thousands):
| 2019 | 2018 | ||||||
| Payroll, employee benefits and related expenses | $ | 113,621 | $ | 125,056 | |||
| Sales incentive programs | 73,354 | 57,525 | |||||
| Warranty and recalls | 57,068 | 103,074 | |||||
| Accrued interest | 49,213 | 47,977 | |||||
| Tax-related accruals | 29,871 | 43,083 | |||||
| Leases | 19,013 | — | |||||
| Fair value of derivative financial instruments | 13,934 | 5,316 | |||||
| Restructuring | 867 | 28,498 | |||||
| Other | 225,347 | 190,601 | |||||
| $ | 582,288 | $ | 601,130 | ||||
| 2017 | 2016 | |||||||
| Payroll, employee benefits and related expenses | $ | 124,093 | $ | 148,221 | ||||
| Warranty and recalls | 75,089 | 57,698 | ||||||
| Sales incentive programs | 48,309 | 43,218 | ||||||
| Tax-related accruals | 25,944 | 26,140 | ||||||
| Fair value of derivative financial instruments | 21,308 | 142 | ||||||
| Accrued interest | 40,347 | 42,788 | ||||||
| Other | 194,732 | 168,445 | ||||||
| Total accrued liabilities | $ | 529,822 | $ | 486,652 | ||||
Operating Cash Flow Information:
– The reconciliation of netNet income to netNet cash provided by operating activities of continuing operations for the years ended December 31, is as follows (in thousands):
| 2019 | 2018 | 2017 | |||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | 423,635 | $ | 531,451 | $ | 521,759 | |||||
| Adjustments to reconcile Net income to Net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | 232,537 | 264,863 | 222,188 | ||||||||
| Amortization of deferred loan origination costs | 76,326 | 81,315 | 82,911 | ||||||||
| Amortization of financing origination fees | 9,823 | 8,367 | 8,045 | ||||||||
| Provision for long-term employee benefits | 13,344 | 36,481 | 29,900 | ||||||||
| Employee benefit plan contributions and payments | (13,256 | ) | (10,544 | ) | (63,277 | ) | |||||
| Stock compensation expense | 33,733 | 35,539 | 32,491 | ||||||||
| Net change in wholesale finance receivables related to sales | (5,822 | ) | (56,538 | ) | 35,172 | ||||||
| Provision for credit losses | 134,536 | 106,870 | 132,444 | ||||||||
| Deferred income taxes | 21,547 | (33,981 | ) | 50,855 | |||||||
| Other, net | 298 | 37,554 | 8,559 | ||||||||
| Changes in current assets and liabilities: | |||||||||||
| Accounts receivable, net | 44,902 | 9,143 | (18,149 | ) | |||||||
| Finance receivables – accrued interest and other | (11,119 | ) | 773 | (1,313 | ) | ||||||
| Inventories, net | (47,576 | ) | (31,059 | ) | (20,584 | ) | |||||
| Accounts payable and accrued liabilities | (18,462 | ) | 196,192 | 10,128 | |||||||
| Derivative financial instruments | 1,936 | 473 | 1,866 | ||||||||
| Other | (28,110 | ) | 29,022 | (27,934 | ) | ||||||
| 444,637 | 674,470 | 483,302 | |||||||||
| Net cash provided by operating activities | $ | 868,272 | $ | 1,205,921 | $ | 1,005,061 | |||||
Cash paid during the years ended December 31, for interest and income taxes was as follows (in thousands):
| 2019 | 2018 | 2017 | |||||||||
| Interest | $ | 229,678 | $ | 207,484 | $ | 204,866 | |||||
| Income taxes | $ | 149,828 | $ | 149,436 | $ | 300,133 | |||||
| 2017 | 2016 | 2015 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net income | $ | 521,759 | $ | 692,164 | $ | 752,207 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
| Depreciation and amortization of intangibles | 222,188 | 209,555 | 198,074 | |||||||||
| Amortization of deferred loan origination costs | 82,911 | 86,681 | 93,546 | |||||||||
| Amortization of financing origination fees | 8,045 | 9,252 | 9,975 | |||||||||
| Provision for long-term employee benefits | 29,900 | 38,273 | 60,824 | |||||||||
| Employee benefit plan contributions and payments | (63,277 | ) | (55,809 | ) | (28,490 | ) | ||||||
| Stock compensation expense | 32,491 | 32,336 | 29,433 | |||||||||
| Net change in wholesale finance receivables related to sales | 35,172 | (3,233 | ) | (113,970 | ) | |||||||
| Provision for credit losses | 132,444 | 136,617 | 101,345 | |||||||||
| Gain on off-balance sheet asset-backed securitization | — | (9,269 | ) | — | ||||||||
| Loss on debt extinguishment | — | 118 | 1,099 | |||||||||
| Deferred income taxes | 50,855 | (165 | ) | (16,484 | ) | |||||||
| Other, net | 8,559 | (6,907 | ) | 20,913 | ||||||||
| Changes in current assets and liabilities: | ||||||||||||
| Accounts receivable, net | (18,149 | ) | (45,934 | ) | (13,665 | ) | ||||||
| Finance receivables – accrued interest and other | (1,313 | ) | (1,489 | ) | (3,046 | ) | ||||||
| Inventories | (20,584 | ) | 85,072 | (155,222 | ) | |||||||
| Accounts payable and accrued liabilities | 10,128 | 38,237 | 138,823 | |||||||||
| Derivative instruments | 1,866 | (3,413 | ) | (5,615 | ) | |||||||
| Other | (27,934 | ) | (27,747 | ) | 30,371 | |||||||
| Total adjustments | 483,302 | 482,175 | 347,911 | |||||||||
| Net cash provided by operating activities | $ | 1,005,061 | $ | 1,174,339 | $ | 1,100,118 | ||||||
| 2017 | 2016 | 2015 | ||||||||||
| Interest | $ | 204,866 | $ | 185,804 | $ | 148,654 | ||||||
| Income taxes | $ | 300,113 | $ | 356,553 | $ | 371,547 | ||||||
Interest paid represents interest payments of HDFS (included in financial services interest expense) and interest payments of the Company, (includedincluded in Financial Services interest expense)expense and Interest expense on the Consolidated statements of income.
| 2017 | 2016 | 2015 | ||||||||||
| Balance, beginning of period | $ | 53,391 | $ | 54,182 | $ | 27,752 | ||||||
| Business acquisitions | — | — | 28,567 | |||||||||
| Currency translation | 2,556 | (791 | ) | (2,137 | ) | |||||||
| Balance, end of period | $ | 55,947 | $ | 53,391 | $ | 54,182 | ||||||
| 2017 | ||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Estimated useful life (years) | |||||||||||
| Intangible assets other than goodwill | ||||||||||||||
| Reacquired distribution rights | $ | 13,933 | $ | (13,933 | ) | $ | — | 2 | ||||||
| Customer relationships | 7,860 | (950 | ) | 6,910 | 20 | |||||||||
| Total other intangible assets | $ | 21,793 | $ | (14,883 | ) | $ | 6,910 | |||||||
| 2016 | ||||||||||||||
| Gross Carrying Amount | Accumulated Amortization | Net | Estimated useful life (years) | |||||||||||
| Intangible assets other than goodwill | ||||||||||||||
| Reacquired distribution rights | $ | 12,928 | $ | (9,157 | ) | $ | 3,771 | 2 | ||||||
| Customer relationships | 7,293 | (517 | ) | 6,776 | 20 | |||||||||
| Total other intangible assets | $ | 20,221 | $ | (9,674 | ) | $ | 10,547 | |||||||
| Estimated Amortization | ||||
| 2018 | $ | 384 | ||
| 2019 | 384 | |||
| 2020 | 384 | |||
| 2021 | 384 | |||
| 2022 | 384 | |||
| Thereafter | 4,990 | |||
| Total | $ | 6,910 | ||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| Wholesale | ||||||||||||||||||||
| United States | $ | 939,621 | $ | 961,150 | $ | 965,379 | $ | 903,380 | $ | 800,491 | ||||||||||
| Canada | 77,336 | 65,440 | 58,481 | 48,941 | 44,721 | |||||||||||||||
| Total wholesale | 1,016,957 | 1,026,590 | 1,023,860 | 952,321 | 845,212 | |||||||||||||||
| Retail | ||||||||||||||||||||
| United States | 5,901,002 | 5,769,410 | 5,803,071 | 5,398,006 | 5,051,245 | |||||||||||||||
| Canada | 239,598 | 212,801 | 188,400 | 209,918 | 213,799 | |||||||||||||||
| Total retail | 6,140,600 | 5,982,211 | 5,991,471 | 5,607,924 | 5,265,044 | |||||||||||||||
| 7,157,557 | 7,008,801 | 7,015,331 | 6,560,245 | 6,110,256 | ||||||||||||||||
| Allowance for credit losses | (192,471 | ) | (173,343 | ) | (147,178 | ) | (127,364 | ) | (110,693 | ) | ||||||||||
| Total finance receivables, net | $ | 6,965,086 | $ | 6,835,458 | $ | 6,868,153 | $ | 6,432,881 | $ | 5,999,563 | ||||||||||
The Company provides retail financial services to customers of the Company’s independent 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 contracts and are primarily related to sales of motorcycles to the dealers’ customers. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts. As of December 31, 20172019 and 2016,2018, 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 the Company’s independent dealers. Wholesale loans to independent dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada. Wholesale finance receivables are related primarily to motorcycles and related parts and accessories sales.
Finance receivables, net at December 31, were as follows (in thousands):
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| Retail finance receivables: | |||||||||||||||||||
| United States | $ | 6,180,236 | $ | 6,103,378 | $ | 5,901,002 | $ | 5,769,410 | $ | 5,803,071 | |||||||||
| Canada | 236,192 | 224,823 | 239,598 | 212,801 | 188,400 | ||||||||||||||
| 6,416,428 | 6,328,201 | 6,140,600 | 5,982,211 | 5,991,471 | |||||||||||||||
| Wholesale finance receivables: | |||||||||||||||||||
| United States | 1,067,880 | 1,007,956 | 939,621 | 961,150 | 965,379 | ||||||||||||||
| Canada | 88,639 | 75,659 | 77,336 | 65,440 | 58,481 | ||||||||||||||
| 1,156,519 | 1,083,615 | 1,016,957 | 1,026,590 | 1,023,860 | |||||||||||||||
| 7,572,947 | 7,411,816 | 7,157,557 | 7,008,801 | 7,015,331 | |||||||||||||||
| Allowance for credit losses | (198,581 | ) | (189,885 | ) | (192,471 | ) | (173,343 | ) | (147,178 | ) | |||||||||
| $ | 7,374,366 | $ | 7,221,931 | $ | 6,965,086 | $ | 6,835,458 | $ | 6,868,153 | ||||||||||
Approved but unfunded retail finance loans totaled $160.4 million and $154.8 million at December 31, 2019 and 2018, respectively. Unused lines of credit extended to the Company's wholesale finance customers totaled $1.27$1.14 billion and $1.32$1.21 billion at December 31, 20172019 and 2016, respectively. Approved but unfunded retail finance loans totaled $166.3 million and $177.9 million at December 31, 2017 and 2016,2018, respectively.
Wholesale finance receivables are generally contractually due within one year. On As of December 31, 20172019, contractual maturities of total finance receivables were as follows (in thousands):
| United States | Canada | Total | |||||||||
| 2020 | $ | 2,177,277 | $ | 138,251 | $ | 2,315,528 | |||||
| 2021 | 1,188,915 | 52,390 | 1,241,305 | ||||||||
| 2022 | 1,329,148 | 56,629 | 1,385,777 | ||||||||
| 2023 | 1,486,564 | 61,211 | 1,547,775 | ||||||||
| 2024 | 1,061,450 | 16,350 | 1,077,800 | ||||||||
| Thereafter | 4,762 | — | 4,762 | ||||||||
| $ | 7,248,116 | $ | 324,831 | $ | 7,572,947 | ||||||
| United States | Canada | Total | ||||||||||
| 2018 | $ | 2,018,646 | $ | 126,345 | $ | 2,144,991 | ||||||
| 2019 | 1,160,372 | 51,764 | 1,212,136 | |||||||||
| 2020 | 1,251,444 | 56,173 | 1,307,617 | |||||||||
| 2021 | 1,250,821 | 60,957 | 1,311,778 | |||||||||
| 2022 | 1,144,281 | 21,695 | 1,165,976 | |||||||||
| Thereafter | 15,059 | — | 15,059 | |||||||||
| Total | $ | 6,840,623 | $ | 316,934 | $ | 7,157,557 | ||||||
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizes loss forecast models which consider 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 including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and therefore are not reported as impaired loans
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. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive, discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. 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, current economic conditions and the value of the underlying collateral.
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):
| 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 | |||||
| 2018 | |||||||||||
| Retail | Wholesale | Total | |||||||||
| Balance, beginning of period | $ | 186,254 | $ | 6,217 | $ | 192,471 | |||||
| Provision for credit losses | 105,292 | 1,578 | 106,870 | ||||||||
| Charge-offs | (154,433 | ) | (8 | ) | (154,441 | ) | |||||
| Recoveries | 44,985 | — | 44,985 | ||||||||
| Balance, end of period | $ | 182,098 | $ | 7,787 | $ | 189,885 | |||||
| 2017 | |||||||||||
| Retail | Wholesale | Total | |||||||||
| Balance, beginning of period | $ | 166,810 | $ | 6,533 | $ | 173,343 | |||||
| Provision for credit losses | 132,760 | (316 | ) | 132,444 | |||||||
| Charge-offs | (160,972 | ) | — | (160,972 | ) | ||||||
| Recoveries | 47,656 | — | 47,656 | ||||||||
| Balance, end of period | $ | 186,254 | $ | 6,217 | $ | 192,471 | |||||
| 2016 | ||||||||||||
| Retail | Wholesale | Total | ||||||||||
| Balance, beginning of period | $ | 139,320 | $ | 7,858 | $ | 147,178 | ||||||
| Provision for credit losses | 137,942 | (1,325 | ) | 136,617 | ||||||||
| Charge-offs | (148,566 | ) | — | (148,566 | ) | |||||||
| Recoveries | 41,405 | — | 41,405 | |||||||||
Other (a) | (3,291 | ) | — | (3,291 | ) | |||||||
| Balance, end of period | $ | 166,810 | $ | 6,533 | $ | 173,343 | ||||||
| 2015 | ||||||||||||
| Retail | Wholesale | Total | ||||||||||
| Balance, beginning of period | $ | 122,025 | $ | 5,339 | $ | 127,364 | ||||||
| Provision for credit losses | 98,826 | 2,519 | 101,345 | |||||||||
| Charge-offs | (123,911 | ) | — | (123,911 | ) | |||||||
| Recoveries | 42,380 | — | 42,380 | |||||||||
| Balance, end of period | $ | 139,320 | $ | 7,858 | $ | 147,178 | ||||||
| 2017 | ||||||||||||
| Retail | Wholesale | Total | ||||||||||
| Allowance for credit losses, ending balance: | ||||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | ||||||
| Collectively evaluated for impairment | 186,254 | 6,217 | 192,471 | |||||||||
| Total allowance for credit losses | $ | 186,254 | $ | 6,217 | $ | 192,471 | ||||||
| Finance receivables, ending balance: | ||||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | ||||||
| Collectively evaluated for impairment | 6,140,600 | 1,016,957 | 7,157,557 | |||||||||
| Total finance receivables | $ | 6,140,600 | $ | 1,016,957 | $ | 7,157,557 | ||||||
| 2016 | ||||||||||||
| Retail | Wholesale | Total | ||||||||||
| Allowance for credit losses, ending balance: | ||||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | ||||||
| Collectively evaluated for impairment | 166,810 | 6,533 | 173,343 | |||||||||
| Total allowance for credit losses | $ | 166,810 | $ | 6,533 | $ | 173,343 | ||||||
| Finance receivables, ending balance: | ||||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | ||||||
| Collectively evaluated for impairment | 5,982,211 | 1,026,590 | 7,008,801 | |||||||||
| Total finance receivables | $ | 5,982,211 | $ | 1,026,590 | $ | 7,008,801 | ||||||
Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. As retailPortions of the allowance for credit losses are established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covers estimated losses on finance receivables which are collectively reviewed for impairment.
Impaired finance receivables also include loans that have been modified in troubled debt restructurings as a concession to borrowers experiencing financial difficulty. Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are collectivelynot significant.
The allowance for credit losses and notfinance receivables by portfolio, segregated by those amounts that are individually reviewedevaluated for impairment this portfolio does not have specifically impaired finance receivables. At and those that are collectively evaluated for impairment, at December 31, 2017 and 2016, there were nowas as follows (in thousands):
| 2019 | |||||||||||
| Retail | Wholesale | Total | |||||||||
| Allowance for credit losses, ending balance: | |||||||||||
| Individually evaluated for impairment | $ | — | $ | 2,100 | $ | 2,100 | |||||
| Collectively evaluated for impairment | 188,501 | 7,980 | 196,481 | ||||||||
| $ | 188,501 | $ | 10,080 | $ | 198,581 | ||||||
| Finance receivables, ending balance: | |||||||||||
| Individually evaluated for impairment | $ | — | $ | 4,601 | $ | 4,601 | |||||
| Collectively evaluated for impairment | 6,416,428 | 1,151,918 | 7,568,346 | ||||||||
| $ | 6,416,428 | $ | 1,156,519 | $ | 7,572,947 | ||||||
| 2018 | |||||||||||
| Retail | Wholesale | Total | |||||||||
| Allowance for credit losses, ending balance: | |||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | |||||
| Collectively evaluated for impairment | 182,098 | 7,787 | 189,885 | ||||||||
| $ | 182,098 | $ | 7,787 | $ | 189,885 | ||||||
| Finance receivables, ending balance: | |||||||||||
| Individually evaluated for impairment | $ | — | $ | — | $ | — | |||||
| Collectively evaluated for impairment | 6,328,201 | 1,083,615 | 7,411,816 | ||||||||
| $ | 6,328,201 | $ | 1,083,615 | $ | 7,411,816 | ||||||
Additional information related to the wholesale finance receivables that were on non-accrual status orare individually deemed to be impaired under ASC Topic 310, “Receivables.”Receivables at December 31, 2019 includes (in thousands):
| Recorded Investment | Unpaid Principal Balance | Related Allowance | Average Recorded Investment | Interest Income Recognized | |||||||||||||||
| Wholesale: | |||||||||||||||||||
| No related allowance recorded | $ | — | $ | — | $ | — | $ | — | $ | — | |||||||||
| Related allowance recorded | 4,994 | 4,601 | 2,100 | 4,976 | — | ||||||||||||||
| $ | 4,994 | $ | 4,601 | $ | 2,100 | $ | 4,976 | $ | — | ||||||||||
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed, or the finance receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off.
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 finance receivable becomes uncollectible 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. The recorded investment of non-accrual status wholesale finance receivables at December 31, 2019 was $5.0 million. At December 31, 2019, $2.6 million of wholesale finance receivables were over 90 days or more past due and on non-accrual status. There were no wholesale receivables on non-accrual status at December 31, 2018.
An aging analysis of the aging of past due finance receivables at December 31, was as follows (in thousands):
| 2019 | |||||||||||||||||||||||
| 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 | $ | 6,171,930 | $ | 142,479 | $ | 53,995 | $ | 48,024 | $ | 244,498 | $ | 6,416,428 | |||||||||||
| Wholesale financial receivables | 1,152,416 | 1,145 | 384 | 2,574 | 4,103 | 1,156,519 | |||||||||||||||||
| $ | 7,324,346 | $ | 143,624 | $ | 54,379 | $ | 50,598 | $ | 248,601 | $ | 7,572,947 | ||||||||||||
| 2017 | ||||||||||||||||||||||||
| Current | 31-60 Days Past Due | 61-90 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Total Finance Receivables | |||||||||||||||||||
| Retail | $ | 5,913,473 | $ | 139,629 | $ | 47,539 | $ | 39,959 | $ | 227,127 | $ | 6,140,600 | ||||||||||||
| Wholesale | 1,016,000 | 595 | 245 | 117 | 957 | 1,016,957 | ||||||||||||||||||
| Total | $ | 6,929,473 | $ | 140,224 | $ | 47,784 | $ | 40,076 | $ | 228,084 | $ | 7,157,557 | ||||||||||||
| 2018 | |||||||||||||||||||||||
| 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 | $ | 6,100,186 | $ | 136,945 | $ | 49,825 | $ | 41,245 | $ | 228,015 | $ | 6,328,201 | |||||||||||
| Wholesale financial receivables | 1,081,729 | 522 | 273 | 1,091 | 1,886 | 1,083,615 | |||||||||||||||||
| $ | 7,181,915 | $ | 137,467 | $ | 50,098 | $ | 42,336 | $ | 229,901 | $ | 7,411,816 | ||||||||||||
| 2016 | ||||||||||||||||||||||||
| Current | 31-60 Days Past Due | 61-90 Days Past Due | Greater than 90 Days Past Due | Total Past Due | Total Finance Receivables | |||||||||||||||||||
| Retail | $ | 5,760,818 | $ | 131,302 | $ | 49,642 | $ | 40,449 | $ | 221,393 | $ | 5,982,211 | ||||||||||||
| Wholesale | 1,024,995 | 1,000 | 319 | 276 | 1,595 | 1,026,590 | ||||||||||||||||||
| Total | $ | 6,785,813 | $ | 132,302 | $ | 49,961 | $ | 40,725 | $ | 222,988 | $ | 7,008,801 | ||||||||||||
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):
| 2019 | 2018 | 2017 | 2016 | 2015 | |||||||||||||||
| United States | $ | 47,138 | $ | 41,285 | $ | 39,051 | $ | 39,399 | $ | 31,677 | |||||||||
| Canada | 888 | 1,051 | 1,025 | 1,326 | 1,192 | ||||||||||||||
| $ | 48,026 | $ | 42,336 | $ | 40,076 | $ | 40,725 | $ | 32,869 | ||||||||||
| 2017 | 2016 | 2015 | 2014 | 2013 | ||||||||||||||||
| United States | $ | 39,051 | $ | 39,399 | $ | 31,677 | $ | 27,800 | $ | 23,770 | ||||||||||
| Canada | 1,025 | 1,326 | 1,192 | 1,118 | 1,031 | |||||||||||||||
| Total | $ | 40,076 | $ | 40,725 | $ | 32,869 | $ | 28,918 | $ | 24,801 | ||||||||||
A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.
The Company manages retail credit risk through its credit approval policy 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. Retail loans with a FICO score of 640 or above at origination are generally considered prime, and loans with a FICO score below 640 are generally considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment of retail finance receivables, by credit quality indicator at December 31, was as follows (in thousands):
| 2019 | 2018 | ||||||
| Prime | $ | 5,278,093 | $ | 5,183,754 | |||
| Sub-prime | 1,138,335 | 1,144,447 | |||||
| $ | 6,416,428 | $ | 6,328,201 | ||||
| 2017 | 2016 | |||||||
| Prime | $ | 4,966,193 | $ | 4,768,420 | ||||
| Sub-prime | 1,174,407 | 1,213,791 | ||||||
| Total | $ | 6,140,600 | $ | 5,982,211 | ||||
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 management’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. 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 recorded investment of wholesale finance receivables, by internal credit quality indicator at December 31, was as follows (in thousands):
| 2019 | 2018 | ||||||
| Doubtful | $ | 11,664 | $ | 2,210 | |||
| Substandard | 6,122 | 9,660 | |||||
| Special Mention | 16,125 | 10,299 | |||||
| Medium Risk | 16,800 | 25,802 | |||||
| Low Risk | 1,105,808 | 1,035,644 | |||||
| $ | 1,156,519 | $ | 1,083,615 | ||||
| 2017 | 2016 | |||||||
| Doubtful | $ | 688 | $ | 1,333 | ||||
| Substandard | 3,837 | 1,773 | ||||||
| Special Mention | 26,866 | 30,152 | ||||||
| Medium Risk | 9,917 | 14,620 | ||||||
| Low Risk | 975,649 | 978,712 | ||||||
| Total | $ | 1,016,957 | $ | 1,026,590 | ||||
Changes in the carrying amount of goodwill in the Motorcycles segment for the years ended December 31, was as interest rates,follows (in thousands):
| 2019 | 2018 | 2017 | |||||||||
| Balance, beginning of period | $ | 55,048 | $ | 55,947 | $ | 53,391 | |||||
| Acquisitions | 9,520 | — | — | ||||||||
| Currency translation | (408 | ) | (899 | ) | 2,556 | ||||||
| Balance, end of period | $ | 64,160 | $ | 55,048 | $ | 55,947 | |||||
Intangible assets, excluding goodwill, included in the Motorcycles segment consist primarily of customer relationships and trademarks with useful lives ranging from 5 to 20 years. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Intangible assets are recorded in Other long-term assets on the Consolidated balance sheets. The gross carrying amounts at December 31, 2019 and 2018 differ from the acquisition date amounts due to changes in foreign currency exchange rates,rates. Intangible assets at December 31, were as follows (in thousands):
| 2019 | 2018 | 2017 | |||||||||
| Gross carrying amount | $ | 12,837 | $ | 7,234 | $ | 7,860 | |||||
| Accumulated amortization | (2,240 | ) | (1,236 | ) | (950 | ) | |||||
| $ | 10,597 | $ | 5,998 | $ | 6,910 | ||||||
Amortization of intangible assets, excluding goodwill, is recorded in Selling, administrative and commodity prices. The Company usesengineering expense on the market approach to deriveConsolidated statements of income and was $0.9 million, $0.4 million and $4.2 million for 2019, 2018 and 2017, respectively. Future amortization of the fair value for its level 2 fair value
| 2020 | $ | 1,061 | |
| 2021 | 1,061 | ||
| 2022 | 1,061 | ||
| 2023 | 1,061 | ||
| 2024 | 820 | ||
| Thereafter | 5,533 | ||
| $ | 10,597 | ||
| 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents | $ | 488,432 | $ | 358,500 | $ | 129,932 | $ | — | ||||||||
| Marketable securities | 48,006 | 48,006 | — | — | ||||||||||||
| Derivatives | 1,769 | — | 1,769 | — | ||||||||||||
| Total | $ | 538,207 | $ | 406,506 | $ | 131,701 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | $ | 21,308 | $ | — | $ | 21,308 | $ | — | ||||||||
| 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | |||||||||||||
| Assets: | ||||||||||||||||
| Cash equivalents | $ | 531,519 | $ | 426,266 | $ | 105,253 | $ | — | ||||||||
| Marketable securities | 43,638 | 38,119 | 5,519 | — | ||||||||||||
| Derivatives | 29,034 | — | 29,034 | — | ||||||||||||
| Total | $ | 604,191 | $ | 464,385 | $ | 139,806 | $ | — | ||||||||
| Liabilities: | ||||||||||||||||
| Derivatives | $ | 142 | $ | — | $ | 142 | $ | — | ||||||||
| 2017 | 2016 | |||||||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | |||||||||||||
| Assets: | ||||||||||||||||
| Finance receivables, net | $ | 7,021,549 | $ | 6,965,086 | $ | 6,921,037 | $ | 6,835,458 | ||||||||
| Liabilities: | ||||||||||||||||
| Unsecured commercial paper | $ | 1,273,482 | $ | 1,273,482 | $ | 1,055,708 | $ | 1,055,708 | ||||||||
| Asset-backed U.S. commercial paper conduit facilities | $ | 279,457 | $ | 279,457 | $ | — | $ | — | ||||||||
| Asset-backed Canadian commercial paper conduit facility | $ | 174,779 | $ | 174,779 | $ | 149,338 | $ | 149,338 | ||||||||
| Medium-term notes | $ | 4,189,092 | $ | 4,165,706 | $ | 4,139,462 | $ | 4,064,940 | ||||||||
| Senior unsecured notes | $ | 784,433 | $ | 741,961 | $ | 744,552 | $ | 741,306 | ||||||||
| Asset-backed securitization debt | $ | 351,767 | $ | 352,624 | $ | 797,688 | $ | 796,275 | ||||||||
9. Derivative Financial Instruments and Hedging Activities
The Company is exposed to certain risks such asfrom fluctuations in foreign currency exchange rate risk,rates, interest rate riskrates and commodity price risk.prices. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures which prohibit the use of financial instruments for speculative trading purposes.
The Company sells products in foreign currencies and utilizes foreign currency exchange contracts to mitigate the effects of foreign currency exchange rate fluctuations related to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Indian rupee, and Pound sterling. The 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, as well as cross-currency swaps to mitigate the effect of foreign currency exchange rate fluctuations on foreign 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 sheetsheets at fair value. In accordance with ASC Topic 815, "DerivativesDerivatives 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 derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative financial instruments that are designated as cash flow hedges the effective portion of gains and losses that result from changes in the fair value of derivative instruments isare 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 on-goingongoing basis, whether the derivativesderivative financial instruments that are used in itscash flow hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative financial instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative financial instruments that do not qualify for hedge accountingdesignated as hedges are recorded at fair valuenot speculative and any changes in fair value are recorded in current period earnings.
The notional and recorded fair values of the Company's derivative financial instruments under ASC Topic 815, at December 31, were as follows (in thousands):
| 2017 | 2016 | ||||||||||||||||||||||||
Derivatives Designated As Hedging Instruments Under ASC Topic 815 | Notional Value | Asset Fair Value(a) | Liability Fair Value(b) | Notional Value | Asset Fair Value(a) | Liability Fair Value(b) | |||||||||||||||||||
Foreign currency contracts(c) | $ | 675,724 | $ | 1,388 | $ | 21,239 | $ | 554,551 | $ | 28,528 | $ | 142 | |||||||||||||
Commodities contracts(c) | 915 | — | 69 | 992 | 177 | — | |||||||||||||||||||
| Total | $ | 676,639 | $ | 1,388 | $ | 21,308 | $ | 555,543 | $ | 28,705 | $ | 142 | |||||||||||||
| 2017 | 2016 | ||||||||||||||||||||||||
Derivatives Not Designated As Hedging Instruments Under ASC Topic 815 | Notional Value | Asset Fair Value(a) | Liability Fair Value(b) | Notional Value | Asset Fair Value(a) | Liability Fair Value(b) | |||||||||||||||||||
| Commodities contracts | $ | 4,532 | $ | 381 | $ | — | $ | 5,025 | $ | 329 | $ | — | |||||||||||||
| Total | $ | 4,532 | $ | 381 | $ | — | $ | 5,025 | $ | 329 | $ | — | |||||||||||||
Derivative Financial Instruments Designated as Cash Flow Hedging Instruments | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
Notional Value | Other Current Assets | Accrued Liabilities | Notional Value | Other Current Assets | Accrued Liabilities | |||||||||||||||||||
| Foreign currency contracts | $ | 434,321 | $ | 3,505 | $ | 3,661 | $ | 442,976 | $ | 15,071 | $ | 313 | ||||||||||||
| Commodity contracts | 616 | — | 80 | 827 | — | 46 | ||||||||||||||||||
| Cross-currency swap | 660,780 | 8,326 | — | — | — | — | ||||||||||||||||||
| Interest rate swaps | 900,000 | — | 9,181 | 900,000 | — | 4,494 | ||||||||||||||||||
| $ | 1,995,717 | $ | 11,831 | $ | 12,922 | $ | 1,343,803 | $ | 15,071 | $ | 4,853 | |||||||||||||
Derivative Financial Instruments Not Designated as Hedging Instruments | ||||||||||||||||||||||||
| 2019 | 2018 | |||||||||||||||||||||||
Notional Value | Other Current Assets | Accrued Liabilities | Notional Value | Other Current Assets | Accrued Liabilities | |||||||||||||||||||
| Foreign currency contracts | $ | 220,139 | $ | 721 | $ | 865 | $ | — | $ | — | $ | — | ||||||||||||
| Commodity contracts | 8,270 | 95 | 147 | 5,239 | — | 463 | ||||||||||||||||||
| Interest rate cap | 375,980 | 2 | — | — | — | — | ||||||||||||||||||
| $ | 604,389 | $ | 818 | $ | 1,012 | $ | 5,239 | $ | — | $ | 463 | |||||||||||||
The following tables summarize the amount of gains and losses for the following years ended December 31 related to derivative financial instruments designated as cash flow hedges for the years ended December 31, were as follows (in thousands):
Amount of Gain/(Loss) Recognized in OCI, before tax | ||||||||||||
| Cash Flow Hedges | 2017 | 2016 | 2015 | |||||||||
| Foreign currency contracts | $ | (53,964 | ) | $ | 28,099 | $ | 45,810 | |||||
| Commodities contracts | (246 | ) | 77 | (421 | ) | |||||||
| Treasury rate locks | (719 | ) | — | (7,381 | ) | |||||||
| Total | $ | (54,929 | ) | $ | 28,176 | $ | 38,008 | |||||
Gain/(Loss) Recognized in OCI | Gain/(Loss) Reclassified from AOCL into Income | ||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Foreign currency contracts | $ | 8,235 | $ | 41,657 | $ | (53,964 | ) | $ | 21,433 | $ | 11,492 | $ | (7,202 | ) | |||||||||
| Commodity contracts | (103 | ) | 34 | (246 | ) | (70 | ) | 24 | — | ||||||||||||||
| Cross-currency swap | 8,326 | — | — | 12,156 | — | — | |||||||||||||||||
| Treasury rate locks | — | 41 | (719 | ) | (492 | ) | (498 | ) | (442 | ) | |||||||||||||
| Interest rate swaps | (9,981 | ) | (6,046 | ) | — | (5,295 | ) | (1,552 | ) | — | |||||||||||||
| $ | 6,477 | $ | 35,686 | $ | (54,929 | ) | $ | 27,732 | $ | 9,466 | $ | (7,644 | ) | ||||||||||
Amount of Gain/(Loss) Reclassified from AOCL into Income | |||||||||||||||||
| Cash Flow Hedges | 2017 | 2016 | 2015 | Expected to be Reclassified Over the Next Twelve Months | |||||||||||||
Foreign currency contracts(a) | $ | (7,202 | ) | $ | 18,253 | $ | 59,730 | $ | (20,178 | ) | |||||||
Commodities contracts(a) | — | (258 | ) | (677 | ) | (69 | ) | ||||||||||
Treasury rate locks(b) | (442 | ) | (362 | ) | (151 | ) | (506 | ) | |||||||||
| Total | $ | (7,644 | ) | $ | 17,633 | $ | 58,902 | $ | (20,753 | ) | |||||||
Motorcycles cost of goods sold | Selling, administrative & engineering expense | Interest expense | Financial Services interest expense | ||||||||||||
| 2019 | |||||||||||||||
| Line item on the Consolidated statements of income 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 swap | $ | — | $ | 12,156 | $ | — | $ | — | |||||||
| Treasury rate locks | $ | — | $ | — | $ | (362 | ) | $ | (130 | ) | |||||
| Interest rate swaps | $ | — | $ | — | $ | — | $ | (5,295 | ) | ||||||
| 2018 | |||||||||||||||
| Line item on the Consolidated statements of income in which the effects of cash flow hedges are recorded | $ | 3,351,796 | $ | 1,258,098 | $ | 30,884 | $ | 193,187 | |||||||
| Gain/(loss) reclassified from AOCL into income: | |||||||||||||||
| Foreign currency contracts | $ | 11,492 | $ | — | $ | — | $ | — | |||||||
| Commodity contracts | $ | 24 | $ | — | $ | — | $ | — | |||||||
| Treasury rate locks | $ | — | $ | — | $ | (362 | ) | $ | (136 | ) | |||||
| Interest rate swaps | $ | — | $ | — | $ | — | $ | (1,552 | ) | ||||||
| 2017 | |||||||||||||||
| Line item on the Consolidated statements of income in which the effects of cash flow hedges are recorded | $ | 3,272,330 | $ | 1,180,176 | $ | 31,004 | $ | 180,193 | |||||||
| Gain/(loss) reclassified from AOCL into income: | |||||||||||||||
| Foreign currency contracts | $ | (7,202 | ) | $ | — | $ | — | $ | — | ||||||
| Treasury rate locks | $ | — | $ | — | $ | (362 | ) | $ | (80 | ) | |||||
The amount of net gain included in Accumulated other comprehensive loss (AOCL) at December 31, 2019, estimated to be reclassified into income over the next twelve months was $16.4 million.
The amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments were as follows (in thousands). Foreign currency contracts and commodity contracts were recorded in Motorcycles cost of goods sold and the interest rate cap was recorded in Financial Services interest expense.
Amount of Gain/(Loss) Recognized in Income | |||||||||||
| 2019 | 2018 | 2017 | |||||||||
| Foreign currency contracts | $ | 191 | $ | — | $ | — | |||||
| Commodity contracts | 17 | (430 | ) | 503 | |||||||
| Interest rate cap | (143 | ) | — | — | |||||||
| $ | 65 | $ | (430 | ) | $ | 503 | |||||
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 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 for 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.
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 13 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. Leases do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense for the year ended December 31, 2019 was $27.4 million. This includes variable lease costs related to leases involving assets operated by a third-party of approximately $6.5 million. 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):
Amount of Gain/(Loss) Recognized in Income on Derivative | ||||||||||||
| Derivatives not Designated as Hedges | 2017 | 2016 | 2015 | |||||||||
Commodities contracts(a) | $ | 503 | $ | 167 | $ | (648 | ) | |||||
| Total | $ | 503 | $ | 167 | $ | (648 | ) | |||||
| 2019 | |||
| Lease assets | $ | 61,618 | |
| Accrued liabilities | $ | 19,013 | |
| Lease liabilities | 44,447 | ||
| $ | 63,460 | ||
Future maturities of the Company's operating lease liabilities at December 31, 2019 were as follows (in thousands):
| 2020 | $ | 20,755 | |
| 2021 | 17,972 | ||
| 2022 | 13,268 | ||
| 2023 | 6,590 | ||
| 2024 | 4,587 | ||
| Thereafter | 4,589 | ||
| Future lease payments | 67,761 | ||
| Present value discount | (4,301 | ) | |
| Lease liability | $ | 63,460 | |
Other lease information surrounding the Company's operating leases as of December 31, was as follows (dollars in thousands):
| 2019 | |||
| Cash outflows for amounts included in the measurement of lease liabilities | $ | 21,491 | |
| Right-of-use assets obtained in exchange for lease obligations | $ | 21,759 | |
| Weighted-average remaining lease term (in years) | 4.68 | |
| Weighted-average discount rate | 2.1 | % |
| 2017 | ||||||||||||||||||||
| Foreign currency translation adjustments | Marketable securities | Derivative financial instruments | Pension and postretirement benefit plans | Total | ||||||||||||||||
| Balance, beginning of period | $ | (68,132 | ) | $ | (1,194 | ) | $ | 12,524 | $ | (508,579 | ) | $ | (565,381 | ) | ||||||
| Other comprehensive income (loss) before reclassifications | 52,145 | 1,896 | (54,929 | ) | 24,321 | 23,433 | ||||||||||||||
| Income tax | (5,865 | ) | (702 | ) | 20,338 | (5,711 | ) | 8,060 | ||||||||||||
| Net other comprehensive income (loss) before reclassifications | 46,280 | 1,194 | (34,591 | ) | 18,610 | 31,493 | ||||||||||||||
| Reclassifications: | ||||||||||||||||||||
Realized (gains) losses - foreign currency contracts(a) | — | — | 7,202 | — | 7,202 | |||||||||||||||
Realized (gains) losses - treasury rate locks(b) | — | — | 442 | — | 442 | |||||||||||||||
Prior service credits(c) | — | — | — | (1,153 | ) | (1,153 | ) | |||||||||||||
Actuarial losses(c) | — | — | — | 47,254 | 47,254 | |||||||||||||||
| Total before tax | — | — | 7,644 | 46,101 | 53,745 | |||||||||||||||
| Income tax benefit | — | — | (2,831 | ) | (17,075 | ) | (19,906 | ) | ||||||||||||
| Net reclassifications | — | — | 4,813 | 29,026 | 33,839 | |||||||||||||||
| Other comprehensive income (loss) | 46,280 | 1,194 | (29,778 | ) | 47,636 | 65,332 | ||||||||||||||
| Balance, end of period | $ | (21,852 | ) | $ | — | $ | (17,254 | ) | $ | (460,943 | ) | $ | (500,049 | ) | ||||||
| 2016 | ||||||||||||||||||||
| Foreign currency translation adjustments | Marketable securities | Derivative financial instruments | Pension and postretirement benefit plans | Total | ||||||||||||||||
| Balance, beginning of period | $ | (58,844 | ) | $ | (1,094 | ) | $ | 5,886 | $ | (561,153 | ) | $ | (615,205 | ) | ||||||
| Other comprehensive (loss) income before reclassifications | (7,591 | ) | (159 | ) | 28,176 | 33,937 | 54,363 | |||||||||||||
| Income tax | (1,697 | ) | 59 | (10,436 | ) | (12,570 | ) | (24,644 | ) | |||||||||||
| Net other comprehensive (loss) income before reclassifications | (9,288 | ) | (100 | ) | 17,740 | 21,367 | 29,719 | |||||||||||||
| Reclassifications: | ||||||||||||||||||||
Realized (gains) losses - foreign currency contracts(a) | — | — | (18,253 | ) | — | (18,253 | ) | |||||||||||||
Realized (gains) losses - commodities contracts(a) | — | — | 258 | — | 258 | |||||||||||||||
Realized (gains) losses - treasury rate lock(b) | — | — | 362 | — | 362 | |||||||||||||||
Prior service credits(c) | — | — | — | (1,784 | ) | (1,784 | ) | |||||||||||||
Actuarial losses(c) | — | — | — | 49,888 | 49,888 | |||||||||||||||
Curtailment and settlement losses(c) | — | — | — | 1,463 | 1,463 | |||||||||||||||
| Total before tax | — | — | (17,633 | ) | 49,567 | 31,934 | ||||||||||||||
| Income tax expense (benefit) | — | — | 6,531 | (18,360 | ) | (11,829 | ) | |||||||||||||
| Net reclassifications | — | — | (11,102 | ) | 31,207 | 20,105 | ||||||||||||||
| Other comprehensive (loss) income | (9,288 | ) | (100 | ) | 6,638 | 52,574 | 49,824 | |||||||||||||
| Balance, end of period | $ | (68,132 | ) | $ | (1,194 | ) | $ | 12,524 | $ | (508,579 | ) | $ | (565,381 | ) | ||||||
| 2015 | ||||||||||||||||||||
| Foreign currency translation adjustments | Marketable securities | Derivative financial instruments | Pension and postretirement benefit plans | Total | ||||||||||||||||
| Balance, beginning of period | $ | (3,482 | ) | $ | (700 | ) | $ | 19,042 | $ | (529,803 | ) | $ | (514,943 | ) | ||||||
| Other comprehensive (loss) income before reclassifications | (48,309 | ) | (626 | ) | 38,008 | (106,059 | ) | (116,986 | ) | |||||||||||
| Income tax | (7,053 | ) | 232 | (14,079 | ) | 39,284 | 18,384 | |||||||||||||
| Net other comprehensive (loss) income before reclassifications | (55,362 | ) | (394 | ) | 23,929 | (66,775 | ) | (98,602 | ) | |||||||||||
| Reclassifications: | ||||||||||||||||||||
Realized (gains) losses - foreign currency contracts(a) | — | — | (59,730 | ) | — | (59,730 | ) | |||||||||||||
Realized (gains) losses - commodities contracts(a) | — | — | 677 | — | 677 | |||||||||||||||
Realized (gains) losses - treasury rate lock(b) | — | — | 151 | — | 151 | |||||||||||||||
Prior service credits(c) | — | — | — | (2,782 | ) | (2,782 | ) | |||||||||||||
Actuarial losses(c) | — | — | — | 58,680 | 58,680 | |||||||||||||||
Curtailment and settlement losses(c) | — | — | — | 368 | 368 | |||||||||||||||
| Total before tax | — | — | (58,902 | ) | 56,266 | (2,636 | ) | |||||||||||||
| Income tax expense (benefit) | — | — | 21,817 | (20,841 | ) | 976 | ||||||||||||||
| Net reclassifications | — | — | (37,085 | ) | 35,425 | (1,660 | ) | |||||||||||||
| Other comprehensive loss | (55,362 | ) | (394 | ) | (13,156 | ) | (31,350 | ) | (100,262 | ) | ||||||||||
| Balance, end of period | $ | (58,844 | ) | $ | (1,094 | ) | $ | 5,886 | $ | (561,153 | ) | $ | (615,205 | ) | ||||||
Debt with a contractual term less than one year is generally classified as short-term debt and consisted of the following as ofat December 31, (in thousands):
| 2019 | 2018 | ||||||
| Unsecured commercial paper | $ | 571,995 | $ | 1,135,810 | |||
| 2017 | 2016 | |||||||
| Unsecured commercial paper | $ | 1,273,482 | $ | 1,055,708 | ||||
| Total short-term debt | $ | 1,273,482 | $ | 1,055,708 | ||||
Debt with a contractual term greater than one year is generally classified as long-term debt and consisted of the following as ofat December 31, (in thousands):
| 2019 | 2018 | |||||||||
| Secured debt: | ||||||||||
| Asset-backed Canadian commercial paper conduit facility | $ | 114,693 | $ | 155,951 | ||||||
| Asset-backed U.S. commercial paper conduit facilities | 490,427 | 582,717 | ||||||||
| Asset-backed securitization debt | 766,965 | 95,216 | ||||||||
| Unamortized discounts and debt issuance costs | (2,573 | ) | (49 | ) | ||||||
| 1,369,512 | 833,835 | |||||||||
| 2017 | 2016 | |||||||
| Secured debt (Note 10) | ||||||||
| Asset-backed Canadian commercial paper conduit facility | $ | 174,779 | $ | 149,338 | ||||
| Asset-backed U.S. commercial paper conduit facilities | 279,457 | — | ||||||
| Asset-backed securitization debt | 353,085 | 797,755 | ||||||
| Less: unamortized discount and debt issuance costs | (461 | ) | (1,480 | ) | ||||
| Total secured debt | 806,860 | 945,613 | ||||||
| Unsecured notes (at par value) | ||||||||
| 2.70% Medium-term notes due in 2017, issued January 2012 | — | 400,000 | ||||||
| 1.55% Medium-term notes due in 2017, issued November 2014 | — | 400,000 | ||||||
| 6.80% Medium-term notes due in 2018, issued May 2008 | 877,488 | 877,488 | ||||||
| 2.25% Medium-term notes due in 2019, issued January 2016 | 600,000 | 600,000 | ||||||
Floating-rate Medium-term notes due in 2019, issued March 2017(a) | 150,000 | — | ||||||
| 2.40% Medium-term notes due in 2019, issued September 2014 | 600,000 | 600,000 | ||||||
| 2.15% Medium-term notes due in 2020, issued February 2015 | 600,000 | 600,000 | ||||||
| 2.40% Medium-term notes due in 2020, issued March 2017 | 350,000 | — | ||||||
| 2.85% Medium-term notes due in 2021, issued January 2016 | 600,000 | 600,000 | ||||||
| 2.55% Medium-term notes due in 2022, issued June 2017 | 400,000 | — | ||||||
| 3.50% Senior unsecured notes due in 2025, issued July 2015 | 450,000 | 450,000 | ||||||
| 4.625% Senior unsecured notes due in 2045, issued July 2015 | 300,000 | 300,000 | ||||||
| Less: unamortized discount and debt issuance costs | (19,821 | ) | (21,242 | ) | ||||
| Gross long-term debt | 5,714,527 | 5,751,859 | ||||||
| Less: current portion of long-term debt, net of unamortized discount and issuance costs | (1,127,269 | ) | (1,084,884 | ) | ||||
| Total long-term debt | $ | 4,587,258 | $ | 4,666,975 | ||||
| 2019 | 2018 | |||||||||
| Unsecured notes (at par value): | ||||||||||
| Medium-term notes: | ||||||||||
| Due in 2019, issued January 2016 | 2.25 | % | — | 600,000 | ||||||
| Due in 2019, issued March 2017 | LIBOR + 0.35% | — | 150,000 | |||||||
| Due in 2019, issued September 2014 | 2.40 | % | — | 600,000 | ||||||
| Due in 2020, issued February 2015 | 2.15 | % | 600,000 | 600,000 | ||||||
| Due in 2020, issued May 2018 | LIBOR + 0.50% | 450,000 | 450,000 | |||||||
| Due in 2020, issued March 2017 | 2.40 | % | 350,000 | 350,000 | ||||||
| Due in 2021, issued January 2016 | 2.85 | % | 600,000 | 600,000 | ||||||
| Due in 2021, issued in November 2018 | LIBOR + 0.94% | 450,000 | 450,000 | |||||||
| Due in 2021, issued May 2018 | 3.55 | % | 350,000 | 350,000 | ||||||
| Due in 2022, issued February 2019 | 4.05 | % | 550,000 | — | ||||||
| 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 2024, issued November 2019(a) | 3.14 | % | 672,936 | — | ||||||
| Unamortized discounts and debt issuance costs | (12,809 | ) | (12,993 | ) | ||||||
| 4,760,127 | 4,887,007 | |||||||||
| Senior notes: | ||||||||||
| Due in 2025, issued July 2015 | 3.50 | % | 450,000 | 450,000 | ||||||
| Due in 2045, issued July 2015 | 4.625 | % | 300,000 | 300,000 | ||||||
| Unamortized discounts and debt issuance costs | (6,704 | ) | (7,376 | ) | ||||||
| 743,296 | 742,624 | |||||||||
| 5,503,423 | 5,629,631 | |||||||||
| Long-term debt | 6,872,935 | 6,463,466 | ||||||||
| Current portion of long-term debt, net | (1,748,109 | ) | (1,575,799 | ) | ||||||
| Long-term debt, net | $ | 5,124,826 | $ | 4,887,667 | ||||||
| (a) | Euro denominated €600.0 million par value remeasured to U.S. dollar at December 31, 2019 |
The Company’s expectedfuture principal payments foron debt obligations as of December 31, 2017 is2019 were as follows (in thousands):
| 2020 | $ | 2,326,688 | |
| 2021 | 1,751,129 | ||
| 2022 | 1,351,281 | ||
| 2023 | 614,982 | ||
| 2024 | 672,936 | ||
| Thereafter | 750,000 | ||
| $ | 7,467,016 | ||
| 2018 | $ | 2,405,569 | ||
| 2019 | 1,594,518 | |||
| 2020 | 1,098,489 | |||
| 2021 | 721,705 | |||
| 2022 | 438,010 | |||
| Thereafter | 750,000 | |||
| Total | $ | 7,008,291 | ||
Unsecured Commercial Paper – Commercial paper maturities may range up to 365 days from the issuance date. The weighted-average interest rate of outstanding commercial paper balances was 1.48%1.94% and 0.93%2.79% at December 31, 20172019 and 2016,2018, respectively.
Credit Facilities – In May 2017,2019, the Company entered into a $100.0$195.0 million 364-day credit facility which matures in April 2018.May 2020. The Company also has a $675.0$780.0 million five-year credit facility which matures in April 20192023 and a $765.0 million five-year credit facility which matures in April 2021. The new 364-day credit facility and the five-year credit facilities (together, the Global Credit Facilities) bear interest at variable interest 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 under the Global Credit Facilities. The Global Credit Facilities are committed facilities and primarily used to support the Company's unsecured commercial paper program. Additionally, during the second quarter of 2017, the Company renewed its $25.0 million credit facility which expired in May 2017.
Unsecured Notes – The $25.0 million credit facility bears interest at variable interest rates, and the Company must pay a fee based on the unused portion of the $25.0 million commitment. The credit facility expires in May 2018.
During 2017, the Company did not repurchase anyJanuary, March, and September of its medium-term notes. During 2016 and 2015, the Company repurchased an aggregate of $1.2 million and $9.3 million, respectively, of its 6.80% medium-term notes which mature in June 2018. As a result, the Company recognized in financial services interest expense $0.1 million and $1.12019, $600.0 million of loss on extinguishment of debt, respectively, which included unamortized discounts and fees. During March and November 2017, $400.02.25%, $150.0 million of 2.70%floating-rate, and $400.0$600.0 million of 1.55%2.40% medium-term notes matured, respectively, and the principal and accrued interest were paid in full. During June 2018, $877.5 million of 6.80% medium-term notes matured, and the principal and accrued interest were paid in full.
Operating and Financial Covenants – HDFS and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the Notesmedium-term and senior notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.
The operating covenants limit the Company’s and HDFS’HDFS' ability to:
Assume or incur certain liens;
Participate in certain mergers or consolidations; and
Purchase or hold margin stock.
Under the current financial covenants of the Global Credit Facilities, the ratio of HDFS’ consolidated debt, excluding secured debt, to HDFS’ consolidated shareholders' equity, ratio of HDFSexcluding accumulated other comprehensive loss (AOCL), cannot exceed 10.0010.0 to 1.001.0 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 excluding the debtexcludes that of HDFS and its subsidiaries, and the Company's consolidated shareholders’ equity excluding AOCL), cannot exceed 0.700.7 to 1.001.0 as of the end of any fiscal quarter. No financial covenants are required under the Notesmedium-term and senior or the U.S. or Canadian asset-backed commercial paper conduit facilities.
At December 31, 20172019 and 2016,2018, HDFS and the Company remained in compliance with all of thesethe then existing covenants.
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. See Note 1 for more information onIn 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 income.
The Company is not required, and does not currently intend, to provide any additional financial support to the on- or off-balance sheet VIEs associated with these transactions. Investors and creditors in these transactions only have recourse to the assets held by the VIEs.
The following table shows the assets and liabilities related to the on-balance sheet asset-backed financings included in the financial statements Consolidated balance sheets at December 31, were as follows (in thousands):
| 2019 | |||||||||||||||||||||||
| 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 | $ | 826,047 | $ | (24,935 | ) | $ | 36,037 | $ | 778 | $ | 837,927 | $ | 764,392 | ||||||||||
| Asset-backed U.S. commercial paper conduit facilities | 533,587 | (16,076 | ) | 27,775 | 1,642 | 546,928 | 490,427 | ||||||||||||||||
| Unconsolidated VIEs: | |||||||||||||||||||||||
| Asset-backed Canadian commercial paper conduit facility | 232,699 | (2,786 | ) | 7,686 | 296 | 237,895 | 114,693 | ||||||||||||||||
| $ | 1,592,333 | $ | (43,797 | ) | $ | 71,498 | $ | 2,716 | $ | 1,622,750 | $ | 1,369,512 | |||||||||||
| 2018 | |||||||||||||||||||||||
| Finance receivables | Allowance for credit losses | Restricted cash | Other assets | Total assets | Asset-backed debt | ||||||||||||||||||
| On-balance sheet assets and liabilities: | |||||||||||||||||||||||
| Consolidated VIEs: | |||||||||||||||||||||||
| Asset-backed securitizations | $ | 158,718 | $ | (4,691 | ) | $ | 17,191 | $ | 329 | $ | 171,547 | $ | 95,167 | ||||||||||
| Asset-backed U.S. commercial paper conduit facilities | 631,588 | (18,733 | ) | 30,012 | 1,234 | 644,101 | 582,717 | ||||||||||||||||
| Unconsolidated VIEs: | |||||||||||||||||||||||
| Asset-backed Canadian commercial paper conduit facility | 181,774 | (3,130 | ) | 8,779 | 343 | 187,766 | 155,951 | ||||||||||||||||
| $ | 972,080 | $ | (26,554 | ) | $ | 55,982 | $ | 1,906 | $ | 1,003,414 | $ | 833,835 | |||||||||||
| 2017 | |||||||||||||||||||||||
| Finance receivables | Allowance for credit losses | Restricted cash | Other assets | Total assets | Asset-backed debt | ||||||||||||||||||
| On-balance sheet assets and liabilities | |||||||||||||||||||||||
| Consolidated VIEs | |||||||||||||||||||||||
| Asset-backed securitizations | $ | 439,301 | $ | (13,686 | ) | $ | 34,919 | $ | 1,260 | $ | 461,794 | $ | 352,624 | ||||||||||
| Asset-backed U.S. commercial paper conduit facilities | 300,530 | (9,392 | ) | 13,787 | 888 | 305,813 | 279,457 | ||||||||||||||||
| Unconsolidated VIEs | |||||||||||||||||||||||
| Asset-backed Canadian commercial paper conduit facility | 203,691 | (3,746 | ) | 9,983 | 470 | 210,398 | 174,779 | ||||||||||||||||
| Total on-balance sheet assets and liabilities | $ | 943,522 | $ | (26,824 | ) | $ | 58,689 | $ | 2,618 | $ | 978,005 | $ | 806,860 | ||||||||||
| 2016 | |||||||||||||||||||||||
| 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 | $ | 893,804 | $ | (25,468 | ) | $ | 57,057 | $ | 2,452 | $ | 927,845 | $ | 796,275 | ||||||||||
| Asset-backed U.S. commercial paper conduit facilities | — | — | — | 329 | 329 | — | |||||||||||||||||
| Unconsolidated VIEs | |||||||||||||||||||||||
| Asset-backed Canadian commercial paper conduit facility | 165,719 | (3,573 | ) | 10,090 | 426 | 172,662 | 149,338 | ||||||||||||||||
| Total on-balance sheet assets and liabilities | $ | 1,059,523 | $ | (29,041 | ) | $ | 67,147 | $ | 3,207 | $ | 1,100,836 | $ | 945,613 | ||||||||||
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’ contractual livesnotes have various contractual maturities ranging from 20192020 to 2022.2026.
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.
During 2019, the Company transferred $539.1 million and $580.2 million, respectively, of U.S. retail motorcycle finance receivables to SPEs. The SPEs in turn issued $500.0 million and $525.0 million, or $498.7 million and $522.6 million net of discounts and issuance costs, respectively, of secured notes through on-balance sheet asset-backed securitization transactions. There were no0 on-balance sheet asset-backed securitization transactions during 2017 or 2016.2018. At December 31, 2017,2019, the Company's consolidatedConsolidated balance sheetsheets 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 | |||
| June 2019 | $525,000 | 2.37% | July 2020 - November 2026 | |||
| May 2019 | $500,000 | 3.05% | July 2026 | |||
| Issue Date | Principal Amount at Date of Issuance | Weighted-Average Rate at Date of Issuance | Contractual Maturity Date | |||
| May 2015 | $500,000 | 0.88% | May 2016 - December 2022 | |||
| January 2015 | $700,000 | 0.89% | February 2016 - August 2022 | |||
| April 2014 | $850,000 | 0.66% | April 2015 - October 2021 | |||
In addition, outstanding balances related to the following secured notes included in the Company's consolidatedConsolidated balance sheet sheets at December 31, 20162018 were repaid during 20172019 (in thousands):
| Issue Date | Principal Amount at Date of Issuance | Weighted-Average Rate at Date of Issuance | Contractual Maturity Date | |||
| May 2015 | $500,000 | 0.88% | May 2016 - December 2022 | |||
| January 2015 | $700,000 | 0.89% | February 2016 - August 2022 | |||
| Issue Date | Principal Amount at Date of Issuance | Weighted-Average Rate at Date of Issuance | Contractual Maturity Date | ||||
| April 2013 | $650,000 | 0.57% | May 2014 - December 2020 | ||||
For the years ended December 31, 20172019 and 20162018, interest expense on the secured notes was $7.913.3 million and $13.13.2 million, respectively, which is included in financial servicesFinancial Services interest expense.expense. The weighted average interest rate of the outstanding on-balance sheet asset-backed securitization transactions was 1.53%2.36% and 1.31%1.67% at December 31, 20172019 and 20162018, respectively.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE
– The Company has two separate agreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits under which it may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In May 2019, the Company amended its $300.0 million revolving facility agreement to allow for incremental borrowings, at the lender's discretion, of up to an additional $300.0 million in excess of the $300.0 million commitment. The aggregate commitment under this agreement is reduced monthly as collections on the related finance receivables are applied to the outstanding principal until the outstanding principal balance is less than or equal to $300.0 million, at which point the aggregate commitment will equal $300.0 million. On December 13, 2017,November 27, 2019, the Company renewed its existing $300.0$600.0 million and $600.0amended $300.0 million revolving facility agreements with a third partythird-party bank-sponsored asset-backed U.S. commercial paper conduit.conduits. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.
Under the U.S. Conduit Facilities, the Company may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to the third party bank-sponsored asset-backed commercial paper conduit. The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment of $900.0 million.commitment. There is no amortization schedule; however, the debt will be reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The 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, the U.S. Conduit Facilities have an expiration date of December 12, 2018.November 25, 2020.
The Company is the primary beneficiary of its U.S. Conduit Facilities VIE because it retains servicing rights and a residual interest in the VIE in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
| 2019 | 2018 | ||||||||||||||
| Transfers | Proceeds | Transfers | Proceeds | ||||||||||||
| First quarter | $ | — | $ | — | $ | 32,900 | $ | 29,300 | |||||||
| Second quarter | — | — | 59,100 | 53,300 | |||||||||||
| Third quarter | 174,400 | 154,600 | — | — | |||||||||||
| Fourth quarter | — | — | 400,200 | 356,800 | |||||||||||
| $ | 174,400 | $ | 154,600 | $ | 492,200 | $ | 439,400 | ||||||||
For the years ended December 31, 2019 and 2018, interest expense under the U.S. Conduit Facilities during 2016was $18.5 million and did not have an outstanding balance at December 31, 2016. The contractual maturity of the debt$10.9 million, respectively, which is approximately 5 years.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility
– In June 2017,2019, the Company amendedrenewed its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the
agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$220.0 million. The transferred assets are restricted as collateral for the payment of debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$220.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The contractual maturityexpected remaining term of the debtrelated receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, the Canadian Conduit expires on June 30, 2018.
The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company doesn’tdoes 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 doesn’tdoes not meet the requirements for sale accounting.
As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, is $35.6$123.2 million at December 31, 2017.2019. The maximum exposure is not an indication of the Company's expected loss exposure.
The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
| 2019 | 2018 | ||||||||||||||
| Transfers | Proceeds | Transfers | Proceeds | ||||||||||||
| First quarter | $ | — | $ | — | $ | 7,600 | $ | 6,200 | |||||||
| Second quarter | 28,200 | 23,400 | 38,900 | 32,200 | |||||||||||
| Third quarter | — | — | — | — | |||||||||||
| Fourth quarter | — | — | 39,000 | 32,200 | |||||||||||
| $ | 28,200 | $ | 23,400 | $ | 85,500 | $ | 70,600 | ||||||||
For the years ended December 31, 2019 and 2018, interest expense on the Canadian Conduit was $3.6 million and $3.8 million, respectively, which is included in Financial Services interest expense. The weighted average interest rate of the outstanding Canadian Conduit was 2.68% at December 31, 2019 and 2018.
Off-Balance Sheet Asset-Backed Securitization VIE
– There were no off-balance sheet asset-backed securitization transactions during the yearyears ended December 31, 2019, 2018 and 2017. During the second quarter of 2016, the Company sold retail motorcycle finance receivables with a principal balance of $301.8 million into a securitization VIE that was not consolidated, recognized a gain of $9.3 million and received cash proceeds of $312.6 million. Similar to an on-balance sheet asset-backed securitization, the Company transferred U.S. retail motorcycle finance receivables to ana SPE which in turn issued secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the term asset-backed securitization are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors. In an on-balance sheet asset-backed securitization, the Company retains a financial interest in the VIE in the form of a debt security. As part of this off-balance sheet securitization, the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants.
The Company is not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and does not have the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. Accordingly, this transaction met the accounting sale requirements under ASC Topic 860 and was recorded as a sale for accounting purposes. Upon the sale, the retail motorcycle finance receivables were removed from the Company’sConsolidated balance sheetsheets and a gain was recognized for the difference between the cash proceeds received, the assets derecognized and the liabilities recognized as part of the transaction. The gain on sale was included in financial servicesFinancial Services revenue in the Consolidated Statementstatements of Income.income.
At December 31, 2017,2019, the assets of this off-balance sheet asset-backed securitization VIE were $146.4$35.2 million and represented the current unpaid principal balance of the retail motorcycle finance receivables, which was the Company’s maximum exposure to loss in the off-balance sheet VIE at December 31, 2017.2019. This is based on the unlikely event that all the receivables have underwriting defects or other defects that trigger a violation of certain covenants and that the underlying collateral has no residual value. This maximum exposure is not an indication of expected losses.
Servicing Activities
–The Company services all retail motorcycle finance receivables that it originates. When the Company transfers retail motorcycle finance receivables to SPEs through asset-backed financings, the Company retains the right to service the finance receivables and receives servicing fees based on the securitized finance receivables balance and certain ancillary fees. In on-balance sheet asset-backed financing,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 Statementstatements of Income.income. The fees the Company is paid for servicing represent adequate compensation and, consequently, the Company does not recognize a servicing asset or liability. The Company recognized servicing fee income of $1.9$0.6 million and $1.6$1.1 million for the years ended December 31, 20172019 and December 31, 2016,2018, respectively.
The unpaid principal balance of serviced retail motorcycle finance receivables serviced by the Company at December 31, was as follows (in thousands):
| 2017 | 2016 | 2019 | 2018 | |||||||||||
| On-balance sheet retail motorcycle finance receivables | $ | 5,993,185 | $ | 5,839,467 | $ | 6,274,551 | $ | 6,185,350 | ||||||
| Off-balance sheet retail motorcycle finance receivables | 146,425 | 236,706 | 35,197 | 79,613 | ||||||||||
| Total serviced retail motorcycle finance receivables | $ | 6,139,610 | $ | 6,076,173 | ||||||||||
| $ | 6,309,748 | $ | 6,264,963 | |||||||||||
The unpaid principal balance of servicedretail motorcycle finance receivables serviced by the Company 30 days or more delinquent at December 31, was as follows (in thousands):
| Amount 30 days or more past due: | Amount 30 days or more past due | |||||||||||||
| 2017 | 2016 | 2019 | 2018 | |||||||||||
| On-balance sheet retail motorcycle finance receivables | $ | 227,127 | $ | 221,393 | $ | 244,498 | $ | 228,015 | ||||||
| Off-balance sheet retail motorcycle finance receivables | 2,106 | 1,858 | 885 | 1,658 | ||||||||||
| Total serviced retail motorcycle finance receivables | $ | 229,233 | $ | 223,251 | ||||||||||
| $ | 245,383 | $ | 229,673 | |||||||||||
Credit losses, net of recoveries for the servicedretail motorcycle finance receivables serviced by the Company, for the years ended December 31, were as follows (in thousands):
| 2019 | 2018 | ||||||
| On-balance sheet retail motorcycle finance receivables | $ | 125,840 | $ | 109,448 | |||
| Off-balance sheet retail motorcycle finance receivables | 458 | 907 | |||||
| $ | 126,298 | $ | 110,355 | ||||
| 2017 | 2016 | ||||||
| On-balance sheet retail motorcycle finance receivables | $ | 113,316 | $ | 107,161 | |||
| Off-balance sheet retail motorcycle finance receivables | 1,191 | 820 | |||||
| Total serviced retail motorcycle finance receivables | $ | 114,507 | $ | 107,981 | |||
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, cross-currency swaps, and treasury rate locks are valued using quoted forward rates and prices; interest rate swaps and caps are valued using quoted interest rates and yield curves; investments in marketable securities and cash equivalents are valued using quoted prices.
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 22, 2017, "H.R.1", also known as the "Tax Cuts31, (in thousands):
| 2019 | |||||||||||
| Balance | Level 1 | Level 2 | |||||||||
| Assets: | |||||||||||
| Cash equivalents | $ | 624,832 | $ | 459,885 | $ | 164,947 | |||||
| Marketable securities | 52,575 | 52,575 | — | ||||||||
| Derivative financial instruments | 12,649 | — | 12,649 | ||||||||
| $ | 690,056 | $ | 512,460 | $ | 177,596 | ||||||
| Liabilities: | |||||||||||
| Derivative financial instruments | $ | 13,934 | $ | — | $ | 13,934 | |||||
| 2018 | |||||||||||
| Balance | Level 1 | Level 2 | |||||||||
| Assets: | |||||||||||
| Cash equivalents | $ | 998,601 | $ | 728,800 | $ | 269,801 | |||||
| Marketable securities | 54,250 | 44,243 | 10,007 | ||||||||
| Derivative financial instruments | 15,071 | — | 15,071 | ||||||||
| $ | 1,067,922 | $ | 773,043 | $ | 294,879 | ||||||
| Liabilities: | |||||||||||
| Derivative financial instruments | $ | 5,316 | $ | — | $ | 5,316 | |||||
Nonrecurring Fair Value Measurements – Repossessed inventory was $21.4 million and Jobs Act" (2017 Tax Act) was signed into law. The 2017 Tax Act resulted in an income tax charge of $53.1$20.2 million all ofat December 31, 2019 and 2018, respectively, for which the Company regards as provisional. Given the complexityfair value adjustment was $11.9 million and timing of the 2017 Tax Act, the Company has recorded the impact of the 2017 Tax Act based on reasonable estimates and considers these estimates to be provisional under SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118). The Company was impacted by the following aspects of the 2017 Tax Act: the remeasurement of net deferred tax assets resulting from the federal income tax rate change from 35% to 21%, a one-time transition tax related to the inclusion of deferred foreign earnings in U.S. taxable income, the write-off of foreign tax credit deferred tax assets related to withholding tax on foreign dividend payments, state tax estimates related to the conformity of federal tax law changes (notably the transition tax and 100% expensing of certain qualified property acquired and placed in service after September 27, 2017), and other smaller items.
Fair Value of Financial Instruments Measured at Cost – The carrying value of the computationsCompany’s Cash and intentcash equivalents and Restricted cash approximates their fair values. The fair value and carrying value of Congress as defined in the 2017 Tax Act. The one-time transition tax which is based on the Company’s accumulated post-1986 deferred foreign earnings did not have a significant impact on income tax expense. Uncertainty concerning the transition tax exists due to the lack of guidance within the 2017 Tax Act regarding certain highly technical aspects of the current year tax calculation as well as the deferred tax impacts. It is expectedremaining financial instruments that future guidance will be issued that will enable the Company to refine these calculations.
| 2017 | 2016 | 2015 | ||||||||||
| Current: | ||||||||||||
| Federal | $ | 245,189 | $ | 284,489 | $ | 363,803 | ||||||
| State | 24,898 | 28,406 | 37,811 | |||||||||
| Foreign | 21,138 | 19,017 | 12,826 | |||||||||
| 291,225 | 331,912 | 414,440 | ||||||||||
| Deferred: | ||||||||||||
| Federal | 47,046 | (4,250 | ) | (15,474 | ) | |||||||
| State | 2,688 | 7,038 | (2,264 | ) | ||||||||
| Foreign | 1,121 | (2,953 | ) | 1,254 | ||||||||
| 50,855 | (165 | ) | (16,484 | ) | ||||||||
| Total | $ | 342,080 | $ | 331,747 | $ | 397,956 | ||||||
| 2019 | 2018 | ||||||||||||||
| Fair Value | Carrying Value | Fair Value | Carrying Value | ||||||||||||
| Assets: | |||||||||||||||
| Finance receivables, net | $ | 7,419,627 | $ | 7,374,366 | $ | 7,304,334 | $ | 7,221,931 | |||||||
| Liabilities: | |||||||||||||||
| Debt: | |||||||||||||||
| Unsecured commercial paper | $ | 571,995 | $ | 571,995 | $ | 1,135,810 | $ | 1,135,810 | |||||||
| Asset-backed U.S. commercial paper conduit facilities | $ | 490,427 | $ | 490,427 | $ | 582,717 | $ | 582,717 | |||||||
| Asset-backed Canadian commercial paper conduit facility | $ | 114,693 | $ | 114,693 | $ | 155,951 | $ | 155,951 | |||||||
| Medium-term notes | $ | 4,816,153 | $ | 4,760,127 | $ | 4,829,671 | $ | 4,887,007 | |||||||
| Senior notes | $ | 774,949 | $ | 743,296 | $ | 707,198 | $ | 742,624 | |||||||
| Asset-backed securitization debt | $ | 768,094 | $ | 764,392 | $ | 94,974 | $ | 95,167 | |||||||
| 2017 | 2016 | 2015 | ||||||||||
| Domestic | $ | 788,878 | $ | 954,138 | $ | 1,101,427 | ||||||
| Foreign | 74,961 | 69,773 | 48,736 | |||||||||
| Total | $ | 863,839 | $ | 1,023,911 | $ | 1,150,163 | ||||||
Debt – The provision for income taxes differs from the amount that would be provided by applying the statutory U.S. corporate income tax ratecarrying value of debt is generally amortized cost, net of discounts and debt issuance costs. The fair value of unsecured commercial paper is calculated using Level 2 inputs and approximates carrying value due to its short maturity. The fair value of debt provided under the following itemsU.S. Conduit Facilities and Canadian Conduit Facility is calculated using Level 2 inputs and approximates carrying value since the interest rates charged under the facility 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 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).
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 provides a standard three-year limited warranty. In addition, the Company provides a one-year warranty for parts and accessories. The warranty coverage for the years ended December 31:
| 2017 | 2016 | 2015 | |||||||
| Provision at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| State taxes, net of federal benefit | 1.9 | 1.8 | 1.8 | ||||||
| Foreign rate differential | (0.8 | ) | (0.6 | ) | (0.4 | ) | |||
| Domestic manufacturing deduction | (2.2 | ) | (2.1 | ) | (2.1 | ) | |||
| Research and development credit | (0.7 | ) | (0.4 | ) | (0.4 | ) | |||
| Unrecognized tax benefits including interest and penalties | 2.3 | (1.3 | ) | 1.1 | |||||
| Valuation allowance adjustments | (0.1 | ) | 0.1 | (0.1 | ) | ||||
| Deferred remeasurement for rate change | 5.5 | — | — | ||||||
| Tax reform territorial tax | (0.1 | ) | — | — | |||||
| Adjustments for previously accrued taxes | (1.2 | ) | 0.2 | (0.1 | ) | ||||
| Other | — | (0.3 | ) | (0.2 | ) | ||||
| Provision for income taxes | 39.6 | % | 32.4 | % | 34.6 | % | |||
| 2017 | 2016 | |||||||
| Deferred tax assets: | ||||||||
| Accruals not yet tax deductible | $ | 92,158 | $ | 141,961 | ||||
| Pension and postretirement benefit plan obligations | 37,357 | 88,741 | ||||||
| Stock compensation | 12,669 | 19,051 | ||||||
| Net operating loss carryforward | 33,171 | 33,587 | ||||||
| Valuation allowance | (21,561 | ) | (30,953 | ) | ||||
| Other, net | 52,422 | 56,903 | ||||||
| 206,216 | 309,290 | |||||||
| Deferred tax liabilities: | ||||||||
| Depreciation, tax in excess of book | (88,989 | ) | (139,268 | ) | ||||
| Other | (8,154 | ) | (2,293 | ) | ||||
| (97,143 | ) | (141,561 | ) | |||||
| Total | $ | 109,073 | $ | 167,729 | ||||
product is sold to a retail customer. The Company reviews its deferred tax asset valuation allowancesaccrues for future warranty claims at the time of sale using an estimated cost based primarily 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 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.
| 2019 | 2018 | 2017 | |||||||||
| Balance, beginning of period | $ | 131,740 | $ | 94,200 | $ | 79,482 | |||||
| Warranties issued during the period | 50,470 | 53,367 | 57,834 | ||||||||
| Settlements made during the period | (90,404 | ) | (79,300 | ) | (82,554 | ) | |||||
| Recalls and changes to pre-existing warranty liabilities | (2,013 | ) | 63,473 | 39,438 | |||||||
| Balance, end of period | $ | 89,793 | $ | 131,740 | $ | 94,200 | |||||
| 2017 | 2016 | |||||||
| Unrecognized tax benefits, beginning of period | $ | 55,539 | $ | 73,100 | ||||
| Increase in unrecognized tax benefits for tax positions taken in a prior period | 9,513 | 2,828 | ||||||
| Decrease in unrecognized tax benefits for tax positions taken in a prior period | (3,749 | ) | (21,061 | ) | ||||
| Increase in unrecognized tax benefits for tax positions taken in the current period | 13,779 | 7,402 | ||||||
| Statute lapses | — | (1,907 | ) | |||||
| Settlements with taxing authorities | (2,852 | ) | (4,823 | ) | ||||
| Unrecognized tax benefits, end of period | $ | 72,230 | $ | 55,539 | ||||
The amount of unrecognized tax benefits as of liability for recall campaigns was $36.4 million, $73.3 million and $35.3 million at December 31, 2017 that, if recognized, would affect the effective tax rate was $63.1 million.
The Company has a qualified defined benefit pension plan and several postretirement healthcare benefit plans. The plans which cover certain eligible employees and retirees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993.
Pension benefits are based primarily on years of service and, for certain plans, levels of compensation. EmployeesPlan participants are eligible to receive postretirement healthcare benefits upon attaining age 55 after rendering at least 10 years of service to the Company. Some of the plans require employeeparticipant contributions to partially offset benefit costs.
Obligations and Funded Status:
The following table provides the changes in the benefit obligations,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, 2017 and 2016 measurement dateswere as follows (in thousands):
| Pension and SERPA Benefits | Postretirement Healthcare Benefits | ||||||||||||||
| 2019 | 2018 | 2019 | 2018 | ||||||||||||
| Change in benefit obligation: | |||||||||||||||
| Benefit obligation, beginning of period | $ | 1,984,708 | $ | 2,201,021 | $ | 286,574 | $ | 338,488 | |||||||
| Service cost | 25,408 | 32,340 | 4,449 | 7,180 | |||||||||||
| Interest cost | 85,483 | 82,778 | 11,753 | 11,556 | |||||||||||
| Actuarial losses (gains) | 236,719 | (213,583 | ) | 9,590 | (42,039 | ) | |||||||||
| Plan participant contributions | — | — | 1,999 | 2,492 | |||||||||||
| Plan amendments | 8,371 | (12,926 | ) | — | (4,710 | ) | |||||||||
| Special early retirement benefits | 1,583 | — | — | — | |||||||||||
| Benefits paid | (126,079 | ) | (106,280 | ) | (20,860 | ) | (23,448 | ) | |||||||
| Net curtailments and settlements | (4,181 | ) | 1,358 | — | (2,945 | ) | |||||||||
| Benefit obligation, end of period | 2,212,012 | 1,984,708 | 293,505 | 286,574 | |||||||||||
| Change in plan assets: | |||||||||||||||
| Fair value of plan assets, beginning of period | 1,874,618 | 2,162,885 | 190,357 | 217,537 | |||||||||||
| Return on plan assets | 459,388 | (185,468 | ) | 41,717 | (13,287 | ) | |||||||||
| Plan participant contributions | — | — | 1,999 | 2,492 | |||||||||||
| Benefits paid | (124,784 | ) | (102,799 | ) | (13,081 | ) | (16,385 | ) | |||||||
| Fair value of plan assets, end of period | 2,209,222 | 1,874,618 | 220,992 | 190,357 | |||||||||||
| Funded status of the plan | $ | (2,790 | ) | $ | (110,090 | ) | $ | (72,513 | ) | $ | (96,217 | ) | |||
| Funded status as recognized on the Consolidated balance sheets: | |||||||||||||||
| Prepaid pension costs | $ | 56,014 | $ | — | $ | — | $ | — | |||||||
| Accrued liabilities | (2,666 | ) | (2,314 | ) | — | (1,764 | ) | ||||||||
| Pension liabilities | (56,138 | ) | (107,776 | ) | — | — | |||||||||
| Postretirement healthcare liabilities | — | — | (72,513 | ) | (94,453 | ) | |||||||||
| $ | (2,790 | ) | $ | (110,090 | ) | $ | (72,513 | ) | $ | (96,217 | ) | ||||
| Amounts included in Accumulated other comprehensive loss, net of tax: | |||||||||||||||
| Prior service credits | $ | (6,489 | ) | $ | (14,371 | ) | $ | (7,559 | ) | $ | (9,381 | ) | |||
| Actuarial losses (gains) | 496,919 | 593,608 | (1,321 | ) | 12,005 | ||||||||||
| $ | 490,430 | $ | 579,237 | $ | (8,880 | ) | $ | 2,624 | |||||||
| Pension and SERPA Benefits | Postretirement Healthcare Benefits | |||||||||||||||
| 2017 | 2016 | 2017 | 2016 | |||||||||||||
| Change in benefit obligation: | ||||||||||||||||
| Benefit obligation, beginning of period | $ | 1,986,435 | $ | 2,009,000 | $ | 346,431 | $ | 354,739 | ||||||||
| Service cost | 31,584 | 33,437 | 7,500 | 7,478 | ||||||||||||
| Interest cost | 85,076 | 90,827 | 13,648 | 14,814 | ||||||||||||
| Actuarial losses (gains) | 195,444 | 13,481 | (8,408 | ) | (4,647 | ) | ||||||||||
| Plan participant contributions | — | — | 2,525 | 2,669 | ||||||||||||
| Plan amendments | (13,227 | ) | — | — | — | |||||||||||
| Benefits paid | (84,291 | ) | (160,310 | ) | (23,208 | ) | (28,622 | ) | ||||||||
| Benefit obligation, end of period | 2,201,021 | 1,986,435 | 338,488 | 346,431 | ||||||||||||
| Change in plan assets: | ||||||||||||||||
| Fair value of plan assets, beginning of period | 1,899,889 | 1,841,967 | 170,092 | 156,765 | ||||||||||||
| Actual return on plan assets | 320,144 | 188,376 | 32,445 | 13,327 | ||||||||||||
| Company contributions | 25,000 | 25,000 | 15,000 | — | ||||||||||||
| Plan participant contributions | — | — | 2,525 | 2,669 | ||||||||||||
| Benefits paid | (82,148 | ) | (155,454 | ) | (2,525 | ) | (2,669 | ) | ||||||||
| Fair value of plan assets, end of period | 2,162,885 | 1,899,889 | 217,537 | 170,092 | ||||||||||||
| Funded status of the plans, December 31 | $ | (38,136 | ) | $ | (86,546 | ) | $ | (120,951 | ) | $ | (176,339 | ) | ||||
| Amounts recognized in the Consolidated Balance Sheets, December 31: | ||||||||||||||||
| Prepaid benefit costs (long-term assets) | $ | 19,816 | $ | — | $ | — | $ | — | ||||||||
| Accrued benefit liability (current liabilities) | (3,346 | ) | (2,104 | ) | (2,198 | ) | (3,072 | ) | ||||||||
| Accrued benefit liability (long-term liabilities) | (54,606 | ) | (84,442 | ) | (118,753 | ) | (173,267 | ) | ||||||||
| Net amount recognized | $ | (38,136 | ) | $ | (86,546 | ) | $ | (120,951 | ) | $ | (176,339 | ) | ||||
During 2019, 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. During 2018, the actuarial gains related to this obligation were due primarily to an increase in the discount rate, favorable claim cost experience and a change in the benefit delivery structure.
The funded status of the qualified pension plan and the SERPA plans are combined above. Plan level information for plansPlans 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 millions)thousands):
| 2017 | 2016 | 2019 | 2018 | ||||||||||||
| Plans with PBOs in excess of fair value of plan assets: | |||||||||||||||
| Plans with PBO in excess of fair value of plan assets: | |||||||||||||||
| PBO | $ | 58.0 | $ | 1,986.4 | $ | 58,804 | $ | 1,984,708 | |||||||
| Fair value of plan assets | $ | — | $ | 1,899.9 | $ | — | $ | 1,874,618 | |||||||
| �� | |||||||||||||||
| Plans with ABOs in excess of fair value of plan assets: | |||||||||||||||
| PBO | $ | 58.0 | $ | 52.3 | |||||||||||
| Plans with ABO in excess of fair value of plan assets: | |||||||||||||||
| ABO | $ | 42.1 | $ | 38.4 | $ | 44,232 | $ | 40,085 | |||||||
| Fair value of plan assets | $ | — | $ | — | $ | — | $ | — | |||||||
The total ABO for all the Company's pension and SERPA plans combined was $2.10$2.12 billion and $1.90$1.90 billion as of December 31, 20172019 and 2016,2018, respectively.
Benefit Costs:
Service costs are 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 years ended December 31, include the following (in thousands):
| Pension and SERPA Benefits | Postretirement Healthcare Benefits | ||||||||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Service cost | $ | 25,408 | $ | 32,340 | $ | 31,584 | $ | 4,449 | $ | 7,180 | $ | 7,500 | |||||||||||
| Interest cost | 85,483 | 82,778 | 85,076 | 11,753 | 11,556 | 13,648 | |||||||||||||||||
| Expected return on plan assets | (142,323 | ) | (147,671 | ) | (141,385 | ) | (14,030 | ) | (14,161 | ) | (12,623 | ) | |||||||||||
| Amortization of unrecognized: | |||||||||||||||||||||||
| Prior service (credit) cost | (1,930 | ) | (420 | ) | 1,018 | (2,381 | ) | (1,842 | ) | (2,171 | ) | ||||||||||||
| Net loss | 44,511 | 64,773 | 43,993 | 277 | 1,817 | 3,261 | |||||||||||||||||
| Special early retirement benefits | 1,583 | — | — | — | — | — | |||||||||||||||||
| Curtailment loss (gain) | — | 1,017 | — | (960 | ) | (886 | ) | — | |||||||||||||||
| Settlement loss | 1,503 | — | — | — | — | — | |||||||||||||||||
| Net periodic benefit cost | $ | 14,235 | $ | 32,817 | $ | 20,286 | $ | (892 | ) | $ | 3,664 | $ | 9,615 | ||||||||||
Pension and SERPA Benefits | Postretirement Healthcare Benefits | |||||||||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||||||||
| Service cost | $ | 31,584 | $ | 33,437 | $ | 40,039 | $ | 7,500 | $ | 7,478 | $ | 8,259 | ||||||||||||
| Interest cost | 85,076 | 90,827 | 87,345 | 13,648 | 14,814 | 14,166 | ||||||||||||||||||
| Special early retirement benefits | — | — | 10,563 | — | — | 622 | ||||||||||||||||||
| Expected return on plan assets | (141,385 | ) | (145,781 | ) | (144,929 | ) | (12,623 | ) | (12,069 | ) | (11,506 | ) | ||||||||||||
| Amortization of unrecognized: | ||||||||||||||||||||||||
| Prior service cost (credit) | 1,018 | 1,019 | 435 | (2,171 | ) | (2,803 | ) | (3,217 | ) | |||||||||||||||
| Net loss | 43,993 | 46,351 | 54,709 | 3,261 | 3,537 | 3,971 | ||||||||||||||||||
| Settlement loss | — | 1,463 | 368 | — | — | — | ||||||||||||||||||
| Net periodic benefit cost | $ | 20,286 | $ | 27,316 | $ | 48,530 | $ | 9,615 | $ | 10,957 | $ | 12,295 | ||||||||||||
The expected return on plan assets is calculated based on the market-relatedmarket related value of plan assets. The market-relatedmarket related value of plan assets is different from the fair value in that asset gains/gains and losses are smoothed over a five yearfive-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-relatedmarket 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-relatedmarket 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.
Pension and SERPA Benefits | Postretirement Healthcare Benefits | Total | ||||||||||
| Prior service credit | $ | (4,136 | ) | $ | (5,871 | ) | $ | (10,007 | ) | |||
| Net actuarial loss | 450,754 | 20,196 | 470,950 | |||||||||
| Total | $ | 446,618 | $ | 14,325 | $ | 460,943 | ||||||
Pension and SERPA Benefits | Postretirement Healthcare Benefits | Total | ||||||||||
| Prior service credit | $ | (329 | ) | $ | (1,409 | ) | $ | (1,738 | ) | |||
| Net actuarial loss | 45,364 | 1,391 | 46,755 | |||||||||
| Total | $ | 45,035 | $ | (18 | ) | $ | 45,017 | |||||
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 | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 | 2018 | 2017 | ||||||||||||
| Assumptions for benefit obligations: | |||||||||||||||||
| Discount rate | 3.49 | % | 4.38 | % | 3.71 | % | 3.26 | % | 4.23 | % | 3.52 | % | |||||
| Rate of compensation increase | 3.39 | % | 3.38 | % | 3.43 | % | n/a | n/a | n/a | ||||||||
| Assumptions for net periodic benefit cost: | |||||||||||||||||
| Discount rate | 4.38 | % | 3.71 | % | 4.30 | % | 4.23 | % | 3.52 | % | 4.03 | % | |||||
| Expected return on plan assets | 7.10 | % | 7.25 | % | 7.25 | % | 7.25 | % | 7.25 | % | 7.25 | % | |||||
| Rate of compensation increase | 3.38 | % | 3.43 | % | 3.50 | % | n/a | n/a | n/a | ||||||||
Pension and SERPA Benefits | Postretirement Healthcare Benefits | |||||||||||||||||
| 2017 | 2016 | 2015 | 2017 | 2016 | 2015 | |||||||||||||
| Assumptions for benefit obligations: | ||||||||||||||||||
| Discount rate | 3.71 | % | 4.30 | % | 4.53 | % | 3.52 | % | 4.03 | % | 4.29 | % | ||||||
| Rate of compensation | 3.43 | % | 3.50 | % | 3.50 | % | n/a | n/a | n/a | |||||||||
| Assumptions for net periodic benefit cost: | ||||||||||||||||||
| Discount rate | 4.30 | % | 4.53 | % | 4.21 | % | 4.03 | % | 4.29 | % | 3.99 | % | ||||||
| Expected return on plan assets | 7.25 | % | 7.50 | % | 7.75 | % | 7.25 | % | 7.50 | % | 7.70 | % | ||||||
| Rate of compensation increase | 3.50 | % | 3.50 | % | 4.00 | % | 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 approximately 63%56% equities and 37%44% fixed-income and cash. Assets are rebalanced regularly to keep the actual allocation in line with targets. Equity holdings primarily include investments in small-, medium- and large-cap companies in the U.S. (including, including Company stock),stock, investments in developed and emerging foreign markets and other investments such as private equity and real estate. Fixed-income holdings consist of U.S. government and agency securities, state and municipal bonds, corporate bonds from diversified industries and foreign obligations. In addition, cash 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 the 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 approximately 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 6.
13. The fair values of the Company’s pension plan assets as of at December 31, 20172019 were as follows (in thousands):
| Balance | Level 1 | Level 2 | |||||||||
| Cash and cash equivalents | $ | 35,463 | $ | — | $ | 35,463 | |||||
| Equity holdings: | |||||||||||
| U.S. companies | 728,892 | 707,276 | 21,616 | ||||||||
| Foreign companies | 79,707 | 77,275 | 2,432 | ||||||||
| Harley-Davidson common stock | 47,365 | 47,365 | — | ||||||||
| Pooled equity funds | 377,301 | 377,301 | — | ||||||||
| Other | 72 | 72 | — | ||||||||
| 1,233,337 | 1,209,289 | 24,048 | |||||||||
| Fixed-income holdings: | |||||||||||
| U.S. Treasuries | 67,234 | 67,234 | — | ||||||||
| Federal agencies | 15,434 | — | 15,434 | ||||||||
| Corporate bonds | 583,475 | — | 583,475 | ||||||||
| Pooled fixed income funds | 142,134 | 48,674 | 93,460 | ||||||||
| Foreign bonds | 103,439 | — | 103,439 | ||||||||
| Municipal bonds | 12,339 | — | 12,339 | ||||||||
| 924,055 | 115,908 | 808,147 | |||||||||
| Plan assets subject to fair value leveling | 2,192,855 | $ | 1,325,197 | $ | 867,658 | ||||||
| Plan assets measured at net asset value: | |||||||||||
| Limited partnership interests | 4,118 | ||||||||||
| Real estate investment trusts | 12,249 | ||||||||||
| 16,367 | |||||||||||
| $ | 2,209,222 | ||||||||||
| Balance as of December 31, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||||
| Cash and cash equivalents | $ | 51,082 | $ | 1,057 | $ | 50,025 | ||||||
| Equity holdings: | ||||||||||||
| U.S. companies | 722,527 | 705,111 | 17,416 | |||||||||
| Foreign companies | 78,765 | 78,765 | — | |||||||||
| Harley-Davidson common stock | 64,800 | 64,800 | — | |||||||||
| Pooled equity funds | 416,881 | 416,881 | — | |||||||||
| Other | 119 | 119 | — | |||||||||
| Total equity holdings | 1,283,092 | 1,265,676 | 17,416 | |||||||||
| Fixed-income holdings: | ||||||||||||
| U.S. Treasuries | 39,866 | 39,866 | — | |||||||||
| Federal agencies | 29,188 | — | 29,188 | |||||||||
| Corporate bonds | 462,563 | — | 462,563 | |||||||||
| Pooled fixed income funds | 189,361 | 61,875 | 127,486 | |||||||||
| Foreign bonds | 81,732 | — | 81,732 | |||||||||
| Municipal bonds | 11,800 | — | 11,800 | |||||||||
| Total fixed-income holdings | 814,510 | 101,741 | 712,769 | |||||||||
| Total assets in the fair value hierarchy | 2,148,684 | $ | 1,368,474 | $ | 780,210 | |||||||
| Assets measured at net asset value as a practical expedient: | ||||||||||||
| Limited partnership interests | 9,099 | |||||||||||
| Real estate investment trust | 5,102 | |||||||||||
| Total pension plan assets | $ | 2,162,885 | ||||||||||
Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $64.847.4 million at December 31, 20172019.
The fair values of the Company’s postretirement healthcare plan assets as of at December 31, 20172019 were as follows (in thousands):
| Balance | Level 1 | Level 2 | |||||||||
| Cash and cash equivalents | $ | 2,458 | $ | — | $ | 2,458 | |||||
| Equity holdings: | |||||||||||
| U.S. companies | 104,399 | 104,399 | — | ||||||||
| Foreign companies | 22,422 | 21,744 | 678 | ||||||||
| Pooled equity funds | 25,029 | 25,029 | — | ||||||||
| Other | 7 | 7 | — | ||||||||
| 151,857 | 151,179 | 678 | |||||||||
| Fixed-income holdings: | |||||||||||
| U.S. Treasuries | 5,782 | 5,782 | — | ||||||||
| Federal agencies | 7,986 | — | 7,986 | ||||||||
| Corporate bonds | 8,425 | — | 8,425 | ||||||||
| Pooled fixed income funds | 36,720 | 36,720 | — | ||||||||
| Foreign bonds | 672 | — | 672 | ||||||||
| Municipal bonds | 454 | — | 454 | ||||||||
| 60,039 | 42,502 | 17,537 | |||||||||
| Plan assets subject to fair value leveling | 214,354 | $ | 193,681 | $ | 20,673 | ||||||
| Plan assets measured at net asset value: | |||||||||||
| Real estate investment trusts | 6,638 | ||||||||||
| $ | 220,992 | ||||||||||
| Balance as of December 31, 2017 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||||
| Cash and cash equivalents | $ | 19,317 | $ | — | $ | 19,317 | ||||||
| Equity holdings: | ||||||||||||
| U.S. companies | 101,720 | 101,720 | — | |||||||||
| Foreign companies | 19,498 | 19,495 | 3 | |||||||||
| Pooled equity funds | 23,563 | 23,563 | — | |||||||||
| Other | 14 | 14 | — | |||||||||
| Total equity holdings | 144,795 | 144,792 | 3 | |||||||||
| Fixed-income holdings: | ||||||||||||
| U.S. Treasuries | 6,803 | 6,803 | — | |||||||||
| Federal agencies | 5,060 | — | 5,060 | |||||||||
| Corporate bonds | 6,756 | — | 6,756 | |||||||||
| Pooled fixed income funds | 27,461 | 27,461 | — | |||||||||
| Foreign bonds | 311 | — | 311 | |||||||||
| Municipal bonds | 284 | — | 284 | |||||||||
| Total fixed-income holdings | 46,675 | 34,264 | 12,411 | |||||||||
| Total assets in the fair value hierarchy | 210,787 | $ | 179,056 | $ | 31,731 | |||||||
| Assets measured at net asset value as a practical expedient: | ||||||||||||
| Real estate investment trust | 6,750 | |||||||||||
| Total postretirement healthcare plan assets | $ | 217,537 | ||||||||||
The fair values of the Company’s pension plan assets as of at December 31, 20162018 were as follows (in thousands):
| Balance | Level 1 | Level 2 | |||||||||
| Cash and cash equivalents | $ | 40,984 | $ | — | $ | 40,984 | |||||
| Equity holdings: | |||||||||||
| U.S. companies | 636,308 | 621,459 | 14,849 | ||||||||
| Foreign companies | 66,143 | 66,143 | — | ||||||||
| Harley-Davidson common stock | 43,455 | 43,455 | — | ||||||||
| Pooled equity funds | 330,476 | 330,476 | — | ||||||||
| Other | 85 | 85 | — | ||||||||
| 1,076,467 | 1,061,618 | 14,849 | |||||||||
| Fixed-income holdings: | |||||||||||
| U.S. Treasuries | 45,102 | 45,102 | — | ||||||||
| Federal agencies | 27,811 | — | 27,811 | ||||||||
| Corporate bonds | 434,070 | — | 434,070 | ||||||||
| Pooled fixed income funds | 140,630 | 42,400 | 98,230 | ||||||||
| Foreign bonds | 83,852 | 266 | 83,586 | ||||||||
| Municipal bonds | 9,276 | — | 9,276 | ||||||||
| 740,741 | 87,768 | 652,973 | |||||||||
| Plan assets subject to fair value leveling | 1,858,192 | $ | 1,149,386 | $ | 708,806 | ||||||
| Plan assets measured at net asset value: | |||||||||||
| Limited partnership interests | 5,918 | ||||||||||
| Real estate investment trust | 10,508 | ||||||||||
| 16,426 | |||||||||||
| $ | 1,874,618 | ||||||||||
| Balance as of December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||||
| Cash and cash equivalents | $ | 84,548 | $ | 1,284 | $ | 83,264 | ||||||
| Equity holdings: | ||||||||||||
| U.S. companies | 603,568 | 586,302 | 17,266 | |||||||||
| Foreign companies | 50,256 | 50,256 | — | |||||||||
| Harley-Davidson common stock | 74,301 | 74,301 | — | |||||||||
| Pooled equity funds | 316,225 | 316,225 | — | |||||||||
| Other | 105 | 105 | — | |||||||||
| Total equity holdings | 1,044,455 | 1,027,189 | 17,266 | |||||||||
| Fixed-income holdings: | ||||||||||||
| U.S. Treasuries | 41,089 | 41,089 | — | |||||||||
| Federal agencies | 36,210 | — | 36,210 | |||||||||
| Corporate bonds | 418,522 | — | 418,522 | |||||||||
| Pooled fixed income funds | 170,741 | 57,543 | 113,198 | |||||||||
| Foreign bonds | 69,871 | — | 69,871 | |||||||||
| Municipal bonds | 12,509 | — | 12,509 | |||||||||
| Total fixed-income holdings | 748,942 | 98,632 | 650,310 | |||||||||
| Total assets in the fair value hierarchy | 1,877,945 | $ | 1,127,105 | $ | 750,840 | |||||||
| Assets measured at net asset value as a practical expedient: | ||||||||||||
| Limited partnership interests | 9,321 | |||||||||||
| Real estate investment trust | 12,623 | |||||||||||
| Total pension plan assets | $ | 1,899,889 | ||||||||||
Included in the pension plan assets are were 1,273,592 shares of the Company’s common stock with a market value of $74.3$43.5 million at December 31, 2016.2018.
The fair values of the Company’s postretirement healthcare plan assets as of at December 31, 20162018 were as follows (in thousands):
| Balance | Level 1 | Level 2 | |||||||||
| Cash and cash equivalents | $ | 5,276 | $ | — | $ | 5,276 | |||||
| Equity holdings: | |||||||||||
| U.S. companies | 86,975 | 86,949 | 26 | ||||||||
| Foreign companies | 16,342 | 16,342 | — | ||||||||
| Pooled equity funds | 20,747 | 20,747 | — | ||||||||
| Other | 9 | 9 | — | ||||||||
| 124,073 | 124,047 | 26 | |||||||||
| Fixed-income holdings: | |||||||||||
| U.S. Treasuries | 8,707 | 8,707 | — | ||||||||
| Federal agencies | 5,445 | — | 5,445 | ||||||||
| Corporate bonds | 6,590 | — | 6,590 | ||||||||
| Pooled fixed income funds | 33,959 | 33,959 | — | ||||||||
| Foreign bonds | 538 | — | 538 | ||||||||
| Municipal bonds | 272 | — | 272 | ||||||||
| 55,511 | 42,666 | 12,845 | |||||||||
| Plan assets subject to fair value leveling | 184,860 | $ | 166,713 | $ | 18,147 | ||||||
| Plan assets measured at net asset value: | |||||||||||
| Real estate investment trust | 5,497 | ||||||||||
| $ | 190,357 | ||||||||||
| Balance as of December 31, 2016 | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | ||||||||||
| Cash and cash equivalents | $ | 4,442 | $ | 1,180 | $ | 3,262 | ||||||
| Equity holdings: | ||||||||||||
| U.S. companies | 84,643 | 84,643 | — | |||||||||
| Foreign companies | 14,190 | 13,995 | 195 | |||||||||
| Pooled equity funds | 19,132 | 19,132 | — | |||||||||
| Other | 9 | 9 | — | |||||||||
| Total equity holdings | 117,974 | 117,779 | 195 | |||||||||
| Fixed-income holdings: | ||||||||||||
| U.S. Treasuries | 12,262 | 12,262 | — | |||||||||
| Federal agencies | 7,364 | — | 7,364 | |||||||||
| Corporate bonds | 11,750 | — | 11,750 | |||||||||
| Pooled fixed income funds | 9,690 | — | 9,690 | |||||||||
| Foreign bonds | 633 | — | 633 | |||||||||
| Municipal bonds | 459 | — | 459 | |||||||||
| Total fixed-income holdings | 42,158 | 12,262 | 29,896 | |||||||||
| Total assets in the fair value hierarchy | 164,574 | $ | 131,221 | $ | 33,353 | |||||||
| Assets measured at net asset value as a practical expedient: | ||||||||||||
| Real estate investment trust | 5,518 | |||||||||||
| Total postretirement healthcare plan assets | $ | 170,092 | ||||||||||
For 2018,2020, the Company’s overall expected long-term rate of return is 7.25%6.70% for pension assets and 7.25%7.00% 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 raterates used in determining the accumulated postretirement benefit obligation of the healthcare plans waswere as follows:
| 2019 | 2018 | ||||
| Healthcare cost trend rate for next year | 7.25 | % | 6.75 | % | |
| 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 | 2026 | |||
| 2017 | 2016 | |||||
| Healthcare cost trend rate for next year | 7.00 | % | 7.25 | % | ||
| Rate to which the cost trend rate is assumed to decline (the ultimate rate) | 5.00 | % | 5.00 | % | ||
| Year that the rate reaches the ultimate trend rate | 2026 | 2021 | ||||
One Percent Increase | One Percent Decrease | |||||||
| Total of service and interest cost components in 2017 | $ | 648 | $ | (623 | ) | |||
| Accumulated benefit obligation as of December 31, 2017 | $ | 11,984 | $ | (10,940 | ) | |||
Future Contributions and Benefit Payments:
During 2017,2019, the Company voluntarily contributed $25.0 milliondid not make any voluntary contributions to its qualified pension plan and $15.0 million to itsor postretirement healthcare plans. No pension plan contributions are required in 2018.2020. The Company expects that 20182020 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 for the next five years and thereafteras of December 31, 2019 were as follows (in thousands):
| Pension Benefits | SERPA Benefits | Postretirement Healthcare Benefits | |||||||||
| 2020 | $ | 97,227 | $ | 2,666 | $ | 23,328 | |||||
| 2021 | $ | 98,376 | $ | 3,000 | $ | 23,501 | |||||
| 2022 | $ | 101,566 | $ | 3,309 | $ | 23,625 | |||||
| 2023 | $ | 104,864 | $ | 4,176 | $ | 23,307 | |||||
| 2024 | $ | 108,436 | $ | 4,401 | $ | 22,902 | |||||
| 2025-2028 | $ | 590,687 | $ | 29,048 | $ | 109,195 | |||||
Pension Benefits | SERPA Benefits | Postretirement Healthcare Benefits | ||||||||||
| 2018 | $ | 90,510 | $ | 3,346 | $ | 28,446 | ||||||
| 2019 | $ | 92,694 | $ | 2,325 | $ | 28,309 | ||||||
| 2020 | $ | 95,930 | $ | 2,843 | $ | 27,351 | ||||||
| 2021 | $ | 98,109 | $ | 3,294 | $ | 26,175 | ||||||
| 2022 | $ | 102,258 | $ | 3,528 | $ | 25,096 | ||||||
| 2023-2027 | $ | 574,745 | $ | 27,719 | $ | 120,438 | ||||||
Defined Contribution Plans:
The Company has various defined contribution benefit plans that in total cover substantially all full-time employees. Employees can make voluntary contributions in accordance with the provisions of their respective plan, which includes a 401(k) tax deferral option. The Company makes additional contributions to the plans on behalf of the employees and expensed $21.9 million, $20.1 million and $19.0 million $18.2 millionduring 2019, 2018 and $18.0 million for Company contributions during 2017, 2016 and 2015, respectively.respectively related to the contributions.
| 2018 | $ | 15,074 | ||
| 2019 | 14,225 | |||
| 2020 | 9,601 | |||
| 2021 | 8,523 | |||
| 2022 | 6,192 | |||
| Thereafter | 8,379 | |||
| Total operating lease payments | $ | 61,994 | ||
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter.
Environmental Protection Agency Notice:
Notice – In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in information exchanges and discussions with the EPA. In August 2016, the Company entered into a consent decree with the EPA regarding these issues, and the consent decree was subsequently revised in July 2017 (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. In December 2017, the Department of Justice (DOJ), on behalf of the EPA, filed the Settlement with the U.S. District Court for the District of Columbia for the purpose of obtaining court approval of the Settlement. Three amicus briefs opposing portions of the Settlement were filed with the court by the deadline of January 31, 2018. On March 1, 2018, the Company and the DOJ each filed separate response briefs. The Company anticipatesis awaiting the court will make acourt's decision on whether or not to finalize the Settlement, inand on February 8, 2019 the following months.DOJ filed a status update reminding the court of the current status of the outstanding matter. The Company has an accrual associated with this matter which is includedrecorded in accruedAccrued liabilities in on the Consolidated Balance Sheets,balance sheets, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
Matter – The Company is involved with government agencies and groups of potentially responsible partiesthe U.S. Navy related to a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although theThe Company is not certain as to the full extent of the environmental contamination at the York facility, it has been workingan agreement with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).
Pennsylvania Department of Environmental Protection and the EPA. The associated cleanup plan documents were submitted for approval in December 2019 and remaining cleanup activities will begin in mid-2020. The Company has an accrual for its estimate of its share of the estimated future Response Costs at the York facility which is includedrecorded in otherOther long-term liabilities in the Consolidated Balance Sheets. While much of the work on the RI/FS is complete, it is still under agency review and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS that is finally approved or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.Consolidated balance sheets.
Product Liability Matters:
Matters – The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidatedConsolidated financial statements.
| Shares Repurchased | Authorization Remaining at December 31, 2017 | |||||||||||
| Board of Directors’ Authorization | 2017 | 2016 | 2015 | |||||||||
| 1997 Authorization | — | — | 0.9 | — | ||||||||
| 2007 Authorization | — | — | 0.9 | — | ||||||||
| 2014 Authorization | — | — | 20.0 | — | ||||||||
| 2015 Authorization | — | 9.0 | 6.0 | — | ||||||||
| 2016 Authorization | 8.7 | 0.7 | — | 10.6 | ||||||||
| Total | 8.7 | 9.7 | 27.8 | 10.6 | ||||||||
17. Share-Based Awards
The Company has a share-based compensation plan which was approved by its shareholders in April 2014 (Plan)(the Plan) under which theits Board of Directors may grant to employees share-based awards including restricted stock units (RSUs), performance shares, and nonqualified stock options and stock appreciation rights (SARs).options. Performance shares include a three-year performance period with vesting based on achievement of internal performance targets. Forfeitures are estimated at the grant date and adjusted when it is likely to change. RSUs granted under the Plan vest ratably over a three-year period with the first one-third of the grant vesting one year after the date of grant. Dividends are paid on RSUs settled with stock and performance shares settled with stock. Dividend equivalents are paid on RSUs and performance shares settled with cash. TheStock options and SARs granted under the Plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and vest ratably over a three-year period with the first one-third of the grant becoming exercisable one year after the date of grant. The options and SARs expire 10 years from the date of grant. At December 31, 2017,2019, there were 10.87.2 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 income. 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 2019, 2018 and 2017 was $33.7 million, $35.5 million and $32.5 million, respectively, or $25.8 million, $27.2 million and $20.5 million net of taxes, respectively.
Restricted Stock Units and Performance Shares - Settled in Stock:
Stock – The fair value of RSUs and performance shares settled in stock is determined based on the market price of the Company’s shares on the grant date. The following table summarizes the activity for these awards for the year ended December 31, 20172019 was as follows (in thousands, except for per share amounts):
| Shares & Units | Weighted-Average Fair Value Per Share | |||||
| Nonvested, beginning of period | 1,894 | $ | 48 | |||
| Granted | 1,149 | $ | 37 | |||
| Vested | (717 | ) | $ | 46 | ||
| Forfeited | (315 | ) | $ | 41 | ||
| Nonvested, end of period | 2,011 | $ | 43 | |||
| Shares / Units | Grant Date Fair Value Per Share | ||||||
| Nonvested, beginning of period | 1,371 | $ | 46 | ||||
| Granted | 730 | $ | 56 | ||||
| Vested | (408 | ) | $ | 51 | |||
| Forfeited | (92 | ) | $ | 50 | |||
| Nonvested, end of period | 1,601 | $ | 49 | ||||
As of December 31, 2017,2019, there was $33.9$31.1 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 1.7 years.
Restricted Stock Units and Performance Shares - Settled in Cash:
Cash – RSUs and performance shares that are settled in cash are recorded in the Company’s consolidatedConsolidated 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 following table summarizes the activity for these awards for the year ended December 31, 20172019 was as follows (in thousands, except for per share amounts):
| Units | Weighted-Average Fair Value Per Share | |||||
| Nonvested, beginning of period | 105 | $ | 39 | |||
| Granted | 94 | $ | 38 | |||
| Vested | (48 | ) | $ | 37 | ||
| Forfeited | (24 | ) | $ | 35 | ||
| Nonvested, end of period | 127 | $ | 38 | |||
| Units | Weighted-Average Grant Date Fair Value Per Share | ||||||
| Nonvested, beginning of period | 124 | $ | 54 | ||||
| Granted | 56 | $ | 52 | ||||
| Vested | (49 | ) | $ | 60 | |||
| Forfeited | (30 | ) | $ | 59 | |||
| Nonvested, end of period | 101 | $ | 53 | ||||
Stock Options:
Options – There were no0 stock options granted in 2017 and 2016. In 2015, the Company estimated the grant date fair value2019, 2018 or 2017. All outstanding stock options were vested as of its option awards granted using a lattice-based option valuation model. The Company believes that the lattice-based option valuation model provided a more precise estimate of fair value than the Black-Scholes option pricing model. Lattice-based option valuation models utilize ranges of assumptions over the expected term of the options. The Company used implied volatility to determine the expected volatility of its stock. The Company used historical data to estimate option exercise and employee termination within the valuation model. The expected term of options granted was derived from the output of the option valuation model and represents the average period of time that options granted are expected to be outstanding. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.Assumptions used in calculating the lattice-based fair value of options granted during 2015 were as follows:
| Options | Weighted- Average Price | ||||||
| Options outstanding, beginning of period | 1,878 | $ | 49 | ||||
| Options exercised | (282 | ) | $ | 40 | |||
| Options forfeited | (192 | ) | $ | 68 | |||
| Options outstanding, end of period | 1,404 | $ | 48 | ||||
| Exercisable, end of period | 1,309 | $ | 47 | ||||
| 2017 | 2016 | 2015 | ||||||||||
| Exercised | $ | 4,051 | $ | 9,595 | $ | 9,890 | ||||||
| Outstanding | $ | 11,711 | $ | 22,383 | $ | 16,605 | ||||||
| Exercisable | $ | 11,711 | $ | 22,383 | $ | 16,605 | ||||||
2018. The Company’s policy is to issue new shares of common stock upon the exercise of employee stock options.
| Price Range | Weighted-Average Contractual Life | Options | Weighted-Average Exercise Price | ||||||
| $10.01 to $20 | 1.2 | 151 | $ | 13 | |||||
| $20.01 to $30 | 2.1 | 145 | $ | 24 | |||||
| $30.01 to $40 | 0.1 | 37 | $ | 39 | |||||
| $40.01 to $50 | 3.6 | 239 | $ | 44 | |||||
| $50.01 to $60 | 4.6 | 193 | $ | 52 | |||||
| $60.01 to $70 | 5.2 | 639 | $ | 63 | |||||
| Options outstanding | 4.0 | 1,404 | $ | 48 | |||||
| Options exercisable | 3.7 | 1,309 | $ | 47 | |||||
| 2017 | 2016 | |||||
| Expected average term (in years) | 5.7 | 5.2 - 5.7 | ||||
| Expected volatility | 28% - 31% | 28% - 31% | ||||
| Expected dividend yield | 2.9 | % | 2.4 | % | ||
| Risk-free interest rate | 1.3% - 2.5% | 0.5% - 2.6% | ||||
| Options | Weighted-Average Exercise Price | |||||
| Outstanding, beginning of period | 1,055 | $ | 50 | |||
| Exercised | (168 | ) | $ | 21 | ||
| Forfeited | (71 | ) | $ | 54 | ||
| Outstanding, end of period | 816 | $ | 56 | |||
| Exercisable, end of period | 816 | $ | 56 | |||
| SARs | Weighted-Average Price | ||||||
| Outstanding, beginning of period | 75 | $ | 37 | ||||
| Granted | — | $ | — | ||||
| Exercised | (32 | ) | $ | 31 | |||
| Forfeited | (16 | ) | $ | 62 | |||
| Outstanding, end of period | 27 | $ | 30 | ||||
| Exercisable, end of period | 27 | $ | 30 | ||||
The weighted-average fairaggregate intrinsic value related to stock options exercised, outstanding and exercisable as of SARs granted during the year ended December 31, 2015 was $13.
| 2019 | 2018 | 2017 | |||||||||
| Exercised | $ | 2,614 | $ | 3,855 | $ | 4,051 | |||||
| Outstanding | $ | 52 | $ | 2,366 | $ | 11,711 | |||||
| Exercisable | $ | 52 | $ | 2,366 | $ | 11,711 | |||||
Stock options outstanding at December 31, 2019 were as follows (options in thousands):
| Price Range | Weighted-Average Contractual Life | Options | Weighted-Average Exercise Price | ||||||
| $20.01 to $30 | 0.5 | 4 | $ | 24 | |||||
| $40.01 to $50 | 1.6 | 207 | $ | 44 | |||||
| $50.01 to $60 | 2.9 | 157 | $ | 52 | |||||
| $60.01 to $70 | 4.3 | 448 | $ | 63 | |||||
| Options outstanding | 3.0 | 816 | $ | 56 | |||||
| Options exercisable | 3.0 | 816 | $ | 56 | |||||
18. Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive loss (AOCL) for the years ended December 31, were as follows (in thousands):
| 2019 | |||||||||||||||||||
| Foreign currency translation adjustments | Marketable securities | 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 gain on derivative 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 | ) | |||||
| 2018 | |||||||||||||||||||
| Foreign currency translation adjustments | Marketable securities | Derivative financial instruments | Pension and postretirement benefit plans | Total | |||||||||||||||
| Balance, beginning of period | $ | (21,852 | ) | $ | — | $ | (17,254 | ) | $ | (460,943 | ) | $ | (500,049 | ) | |||||
| Other comprehensive (loss) income, before reclassifications | (28,212 | ) | — | 35,686 | (84,725 | ) | (77,251 | ) | |||||||||||
| Income tax benefit (expense) | 3,202 | — | (8,455 | ) | 19,893 | 14,640 | |||||||||||||
| (25,010 | ) | — | 27,231 | (64,832 | ) | (62,611 | ) | ||||||||||||
| Reclassifications: | |||||||||||||||||||
| Net gain on derivative instruments | — | — | (9,466 | ) | — | (9,466 | ) | ||||||||||||
Prior service credits(a) | — | — | — | (2,262 | ) | (2,262 | ) | ||||||||||||
Actuarial losses(a) | — | — | — | 66,590 | 66,590 | ||||||||||||||
Curtailment and settlement gains(a) | — | — | — | (886 | ) | (886 | ) | ||||||||||||
| Reclassifications before tax | — | — | (9,466 | ) | 63,442 | 53,976 | |||||||||||||
| Income tax benefit (expense) | — | — | 2,244 | (14,896 | ) | (12,652 | ) | ||||||||||||
| — | — | (7,222 | ) | 48,546 | 41,324 | ||||||||||||||
| Other comprehensive (loss) income | (25,010 | ) | — | 20,009 | (16,286 | ) | (21,287 | ) | |||||||||||
| Reclassification of certain tax effects | (2,746 | ) | — | (970 | ) | (104,632 | ) | (108,348 | ) | ||||||||||
| Balance, end of period | $ | (49,608 | ) | $ | — | $ | 1,785 | $ | (581,861 | ) | $ | (629,684 | ) | ||||||
| 2017 | 2016 | 2015 | ||||||||||
Numerator: | ||||||||||||
| Income used in computing basic and diluted earnings per share | $ | 521,759 | $ | 692,164 | $ | 752,207 | ||||||
Denominator: | ||||||||||||
| Denominator for basic earnings per share-weighted-average common shares | 171,995 | 179,676 | 202,681 | |||||||||
| Effect of dilutive securities – employee stock compensation plan | 937 | 859 | 1,005 | |||||||||
| Denominator for diluted earnings per share- adjusted weighted-average shares outstanding | 172,932 | 180,535 | 203,686 | |||||||||
| Earnings per common share: | ||||||||||||
| Basic | $ | 3.03 | $ | 3.85 | $ | 3.71 | ||||||
| Diluted | $ | 3.02 | $ | 3.83 | $ | 3.69 | ||||||
| 2017 | |||||||||||||||||||
| Foreign currency translation adjustments | Marketable securities | Derivative financial instruments | Pension and postretirement benefit plans | Total | |||||||||||||||
| Balance, beginning of period | $ | (68,132 | ) | $ | (1,194 | ) | $ | 12,524 | $ | (508,579 | ) | $ | (565,381 | ) | |||||
| Other comprehensive income (loss), before reclassifications | 52,145 | 1,896 | (54,929 | ) | 24,321 | 23,433 | |||||||||||||
| Income tax (expense) benefit | (5,865 | ) | (702 | ) | 20,338 | (5,711 | ) | 8,060 | |||||||||||
| 46,280 | 1,194 | (34,591 | ) | 18,610 | 31,493 | ||||||||||||||
| Reclassifications: | |||||||||||||||||||
| Net loss on derivative instruments | — | — | 7,644 | — | 7,644 | ||||||||||||||
Prior service credits(a) | — | — | — | (1,153 | ) | (1,153 | ) | ||||||||||||
Actuarial losses(a) | — | — | — | 47,254 | 47,254 | ||||||||||||||
| Reclassifications before tax | — | — | 7,644 | 46,101 | 53,745 | ||||||||||||||
| Income tax expense | — | — | (2,831 | ) | (17,075 | ) | (19,906 | ) | |||||||||||
| — | — | 4,813 | 29,026 | 33,839 | |||||||||||||||
| Other comprehensive income (loss) | 46,280 | 1,194 | (29,778 | ) | 47,636 | 65,332 | |||||||||||||
| Balance, end of period | $ | (21,852 | ) | $ | — | $ | (17,254 | ) | $ | (460,943 | ) | $ | (500,049 | ) | |||||
| (a) | Amounts reclassified are included in the computation of net periodic benefit cost, discussed further in Note 15. |
Reportable Segments:
Segments – Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two2 segments: the Motorcycles &and Related Products (Motorcycles) segment and the Financial Services segment.Services. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations.
The Motorcycles segment consists of HDMC which designs, manufactures and sells at wholesale on-road Harley-Davidson motorcycles as well as motorcycle parts, accessories, general merchandise and related services. The Company’s products are sold to retail customers primarily through a network of independent dealers. The Company conducts business on a global basis, with sales in the United States,U.S., Canada, Latin America, Europe/Middle East/Africa (EMEA), Asia Pacific, and Asia Pacific.
Latin America.
The Financial Services segment consists of HDFS which providesis engaged in the business of financing and servicing wholesale inventory receivables and retail financing and providesconsumer loans, primarily for the purchase of Harley-Davidson motorcycles. HDFS also works with certain unaffiliated insurance companies to provide motorcycle insurance and insurance-related programs primarilyprotection products to Harley-Davidson dealers and their retail customers.motorcycle owners. HDFS conducts business principally in the United StatesU.S. and Canada.
| 2019 | 2018 | 2017 | |||||||||
| Motorcycles and Related Products: | |||||||||||
| Motorcycles revenue | $ | 4,572,678 | $ | 4,968,646 | $ | 4,915,027 | |||||
| Gross profit | 1,342,880 | 1,616,850 | 1,642,697 | ||||||||
| Selling, administrative and engineering expense | 1,020,907 | 1,101,086 | 1,035,921 | ||||||||
| Restructuring expense | 32,353 | 93,401 | — | ||||||||
| Operating income | 289,620 | 422,363 | 606,776 | ||||||||
| Financial Services: | |||||||||||
| Financial Services revenue | 789,111 | 748,229 | 732,197 | ||||||||
| Financial Services expense | 523,123 | 457,069 | 456,892 | ||||||||
| Operating income | 265,988 | 291,160 | 275,305 | ||||||||
| Operating income | $ | 555,608 | $ | 713,523 | $ | 882,081 | |||||
| 2017 | 2016 | 2015 | ||||||||||
| Motorcycles net revenue | $ | 4,915,027 | $ | 5,271,376 | $ | 5,308,744 | ||||||
| Gross profit | 1,653,344 | 1,851,666 | 1,952,460 | |||||||||
| Selling, administrative and engineering expense | 1,037,386 | 1,078,260 | 1,076,970 | |||||||||
| Operating income from Motorcycles | 615,958 | 773,406 | 875,490 | |||||||||
| Financial Services revenue | 732,197 | 725,082 | 686,658 | |||||||||
| Financial Services expense | 456,892 | 449,552 | 406,453 | |||||||||
| Operating income from Financial Services | 275,305 | 275,530 | 280,205 | |||||||||
| Operating income | $ | 891,263 | $ | 1,048,936 | $ | 1,155,695 | ||||||
Financial Services revenue includes $6.9$10.0 million, $4.4$9.0 million and $6.9 million of interest thatpaid by HDMC paid to HDFS on wholesale finance receivables in 20172019, 20162018 and 20152017, respectively. The offsetting cost of these interest incentives was recorded as a reduction to Motorcycles revenue.
| Motorcycles | Financial Services | Consolidated | |||||||||
| 2019: | |||||||||||
| Assets | $ | 2,548,115 | $ | 7,980,044 | $ | 10,528,159 | |||||
| Depreciation and amortization | $ | 223,656 | $ | 8,881 | $ | 232,537 | |||||
| Capital expenditures | $ | 176,264 | $ | 5,176 | $ | 181,440 | |||||
| 2018: | |||||||||||
| Assets | $ | 2,562,931 | $ | 8,102,733 | $ | 10,665,664 | |||||
| Depreciation and amortization | $ | 260,707 | $ | 4,156 | $ | 264,863 | |||||
| Capital expenditures | $ | 197,905 | $ | 15,611 | $ | 213,516 | |||||
| 2017: | |||||||||||
| Assets | $ | 2,449,603 | $ | 7,523,069 | $ | 9,972,672 | |||||
| Depreciation and amortization | $ | 215,639 | $ | 6,549 | $ | 222,188 | |||||
| Capital expenditures | $ | 193,204 | $ | 13,090 | $ | 206,294 | |||||
| Motorcycles | Financial Services | Consolidated | ||||||||||
| 2017 | ||||||||||||
| Total assets | $ | 2,449,603 | $ | 7,523,069 | $ | 9,972,672 | ||||||
| Depreciation and amortization | $ | 215,639 | $ | 6,549 | $ | 222,188 | ||||||
| Capital expenditures | $ | 193,204 | $ | 13,090 | $ | 206,294 | ||||||
| 2016 | ||||||||||||
| Total assets | $ | 2,490,450 | $ | 7,399,790 | $ | 9,890,240 | ||||||
| Depreciation and amortization | $ | 202,122 | $ | 7,433 | $ | 209,555 | ||||||
| Capital expenditures | $ | 245,316 | $ | 10,947 | $ | 256,263 | ||||||
| 2015 | ||||||||||||
| Total assets | $ | 2,522,249 | $ | 7,450,728 | $ | 9,972,977 | ||||||
| Depreciation and amortization | $ | 188,926 | $ | 9,148 | $ | 198,074 | ||||||
| Capital expenditures | $ | 249,772 | $ | 10,202 | $ | 259,974 | ||||||
Geographic Information:
Information – Included in the consolidatedConsolidated financial statements are the following amounts relating to geographic locations for the years ended December 31, (in thousands):
| 2019 | 2018 | 2017 | |||||||||
Motorcycles revenue(a): | |||||||||||
| United States | $ | 2,971,223 | $ | 3,159,049 | $ | 3,215,513 | |||||
| EMEA | 743,385 | 893,589 | 790,725 | ||||||||
| Canada | 210,381 | 230,211 | 232,883 | ||||||||
| Japan | 156,644 | 161,370 | 180,938 | ||||||||
| Australia and New Zealand | 117,525 | 147,561 | 168,670 | ||||||||
| Other countries | 373,520 | 376,866 | 326,298 | ||||||||
| $ | 4,572,678 | $ | 4,968,646 | $ | 4,915,027 | ||||||
Financial Services revenue(a): | |||||||||||
| United States | $ | 754,535 | $ | 712,898 | $ | 698,383 | |||||
| Canada | 22,799 | 23,120 | 22,580 | ||||||||
| Europe | 8,435 | 8,411 | 6,845 | ||||||||
| Other countries | 3,342 | 3,800 | 4,389 | ||||||||
| $ | 789,111 | $ | 748,229 | $ | 732,197 | ||||||
Long-lived assets(b): | |||||||||||
| United States | $ | 757,594 | $ | 838,446 | $ | 912,032 | |||||
| International: | |||||||||||
| Thailand | 78,651 | 50,331 | 31,087 | ||||||||
| Other countries | 11,137 | 15,355 | 24,662 | ||||||||
| 89,788 | 65,686 | 55,749 | |||||||||
| $ | 847,382 | $ | 904,132 | $ | 967,781 | ||||||
| 2017 | 2016 | 2015 | ||||||||||
Revenue from Motorcycles(a): | ||||||||||||
| United States | $ | 3,215,513 | $ | 3,579,129 | $ | 3,768,069 | ||||||
| EMEA | 790,725 | 798,489 | 728,198 | |||||||||
| Japan | 180,938 | 200,309 | 162,675 | |||||||||
| Canada | 232,883 | 212,099 | 178,042 | |||||||||
| Australia and New Zealand | 168,670 | 181,809 | 165,854 | |||||||||
| Other foreign countries | 326,298 | 299,541 | 305,906 | |||||||||
| Total revenue from Motorcycles | $ | 4,915,027 | $ | 5,271,376 | $ | 5,308,744 | ||||||
Revenue from Financial Services(a): | ||||||||||||
| United States | $ | 698,383 | $ | 692,784 | $ | 656,888 | ||||||
| Europe | 6,845 | 6,528 | 5,373 | |||||||||
| Canada | 22,580 | 21,626 | 21,180 | |||||||||
| Other foreign countries | 4,389 | 4,144 | 3,217 | |||||||||
| Total revenue from Financial Services | $ | 732,197 | $ | 725,082 | $ | 686,658 | ||||||
Long-lived assets(b): | ||||||||||||
| United States | $ | 912,032 | $ | 943,479 | $ | 915,509 | ||||||
| International | 55,749 | 38,114 | 26,909 | |||||||||
| Total long-lived assets | $ | 967,781 | $ | 981,593 | $ | 942,418 | ||||||
| (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, |
20. Supplemental Consolidating Data
The supplemental consolidating data for the periods noted is presented for informational purposes. The supplemental consolidating data may bepurposes and is different than segment information presented elsewhere due to the allocation of intercompany eliminationsconsolidating reporting adjustments to reportingthe reportable segments. All supplementalSupplemental consolidating data is presented in thousands.
as follows (in thousands):
| Year Ended December 31, 2019 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| Revenue: | |||||||||||||||
| Motorcycles and Related Products | $ | 4,593,585 | $ | — | $ | (20,907 | ) | $ | 4,572,678 | ||||||
| Financial Services | — | 779,163 | 9,948 | 789,111 | |||||||||||
| 4,593,585 | 779,163 | (10,959 | ) | 5,361,789 | |||||||||||
| Costs and expenses: | |||||||||||||||
| Motorcycles and Related Products cost of goods sold | 3,229,798 | — | — | 3,229,798 | |||||||||||
| Financial Services interest expense | — | 210,438 | — | 210,438 | |||||||||||
| Financial Services provision for credit losses | — | 134,536 | — | 134,536 | |||||||||||
| Selling, administrative and engineering expense | 1,034,921 | 175,258 | (11,123 | ) | 1,199,056 | ||||||||||
| Restructuring expense | 32,353 | — | — | 32,353 | |||||||||||
| 4,297,072 | 520,232 | (11,123 | ) | 4,806,181 | |||||||||||
| Operating income | 296,513 | 258,931 | 164 | 555,608 | |||||||||||
| Other income (expense), net | 16,514 | — | — | 16,514 | |||||||||||
| Investment income | 196,371 | — | (180,000 | ) | 16,371 | ||||||||||
| Interest expense | 31,078 | — | — | 31,078 | |||||||||||
| Income before provision for income taxes | 478,320 | 258,931 | (179,836 | ) | 557,415 | ||||||||||
| Provision for income taxes | 75,278 | 58,502 | — | 133,780 | |||||||||||
| Net income | $ | 403,042 | $ | 200,429 | $ | (179,836 | ) | $ | 423,635 | ||||||
| Year Ended December 31, 2017 | ||||||||||||||||
HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| Revenue: | ||||||||||||||||
| Motorcycles and Related Products | $ | 4,925,003 | $ | — | $ | (9,976 | ) | $ | 4,915,027 | |||||||
| Financial Services | — | 734,008 | (1,811 | ) | 732,197 | |||||||||||
| Total revenue | 4,925,003 | 734,008 | (11,787 | ) | 5,647,224 | |||||||||||
| Costs and expenses: | ||||||||||||||||
| Motorcycles and Related Products cost of goods sold | 3,261,683 | — | — | 3,261,683 | ||||||||||||
| Financial Services interest expense | — | 180,193 | — | 180,193 | ||||||||||||
| Financial Services provision for credit losses | — | 132,444 | — | 132,444 | ||||||||||||
| Selling, administrative and engineering expense | 1,038,994 | 154,232 | (11,585 | ) | 1,181,641 | |||||||||||
| Total costs and expenses | 4,300,677 | 466,869 | (11,585 | ) | 4,755,961 | |||||||||||
| Operating income | 624,326 | 267,139 | (202 | ) | 891,263 | |||||||||||
| Investment income | 199,580 | — | (196,000 | ) | 3,580 | |||||||||||
| Interest expense | 31,004 | — | — | 31,004 | ||||||||||||
| Income before provision for income taxes | 792,902 | 267,139 | (196,202 | ) | 863,839 | |||||||||||
| Provision for income taxes | 214,175 | 127,905 | — | 342,080 | ||||||||||||
| Net income | $ | 578,727 | $ | 139,234 | $ | (196,202 | ) | $ | 521,759 | |||||||
| Year Ended December 31, 2018 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| Revenue: | |||||||||||||||
| Motorcycles and Related Products | $ | 4,981,445 | $ | — | $ | (12,799 | ) | $ | 4,968,646 | ||||||
| Financial Services | — | 747,432 | 797 | 748,229 | |||||||||||
| 4,981,445 | 747,432 | (12,002 | ) | 5,716,875 | |||||||||||
| Costs and expenses: | |||||||||||||||
| Motorcycles and Related Products cost of goods sold | 3,352,438 | — | (642 | ) | 3,351,796 | ||||||||||
| Financial Services interest expense | — | 193,187 | — | 193,187 | |||||||||||
| Financial Services provision for credit losses | — | 106,870 | — | 106,870 | |||||||||||
| Selling, administrative and engineering expense | 1,104,919 | 164,623 | (11,444 | ) | 1,258,098 | ||||||||||
| Restructuring expense | 93,401 | — | — | 93,401 | |||||||||||
| 4,550,758 | 464,680 | �� | (12,086 | ) | 5,003,352 | ||||||||||
| Operating income | 430,687 | 282,752 | 84 | 713,523 | |||||||||||
| Other income (expense), net | 3,039 | — | — | 3,039 | |||||||||||
| Investment income | 235,951 | — | (235,000 | ) | 951 | ||||||||||
| Interest expense | 30,884 | — | — | 30,884 | |||||||||||
| Income before provision for income taxes | 638,793 | 282,752 | (234,916 | ) | 686,629 | ||||||||||
| Provision for income taxes | 85,153 | 70,025 | — | 155,178 | |||||||||||
| Net income | $ | 553,640 | $ | 212,727 | $ | (234,916 | ) | $ | 531,451 | ||||||
| Year Ended December 31, 2016 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| Revenue: | ||||||||||||||||
| Motorcycles and Related Products | $ | 5,281,355 | $ | — | $ | (9,979 | ) | $ | 5,271,376 | |||||||
| Financial Services | — | 726,736 | (1,654 | ) | 725,082 | |||||||||||
| Total revenue | 5,281,355 | 726,736 | (11,633 | ) | 5,996,458 | |||||||||||
| Costs and expenses: | ||||||||||||||||
| Motorcycles and Related Products cost of goods sold | 3,419,710 | — | — | 3,419,710 | ||||||||||||
| Financial Services interest expense | — | 173,756 | — | 173,756 | ||||||||||||
| Financial Services provision for credit losses | — | 136,617 | — | 136,617 | ||||||||||||
| Selling, administrative and engineering expense | 1,080,020 | 149,157 | (11,738 | ) | 1,217,439 | |||||||||||
| Total costs and expenses | 4,499,730 | 459,530 | (11,738 | ) | 4,947,522 | |||||||||||
| Operating income | 781,625 | 267,206 | 105 | 1,048,936 | ||||||||||||
| Investment income | 187,645 | — | (183,000 | ) | 4,645 | |||||||||||
| Interest expense | 29,670 | — | — | 29,670 | ||||||||||||
| Income before provision for income taxes | 939,600 | 267,206 | (182,895 | ) | 1,023,911 | |||||||||||
| Provision for income taxes | 231,986 | 99,761 | — | 331,747 | ||||||||||||
| Net income | $ | 707,614 | $ | 167,445 | $ | (182,895 | ) | $ | 692,164 | |||||||
| Year Ended December 31, 2017 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| Revenue: | |||||||||||||||
| Motorcycles and Related Products | $ | 4,925,003 | $ | — | $ | (9,976 | ) | $ | 4,915,027 | ||||||
| Financial Services | — | 734,008 | (1,811 | ) | 732,197 | ||||||||||
| 4,925,003 | 734,008 | (11,787 | ) | 5,647,224 | |||||||||||
| Costs and expenses: | |||||||||||||||
| Motorcycles and Related Products cost of goods sold | 3,272,330 | — | — | 3,272,330 | |||||||||||
| Financial Services interest expense | — | 180,193 | — | 180,193 | |||||||||||
| Financial Services provision for credit losses | — | 132,444 | — | 132,444 | |||||||||||
| Selling, administrative and engineering expense | 1,037,529 | 154,232 | (11,585 | ) | 1,180,176 | ||||||||||
| 4,309,859 | 466,869 | (11,585 | ) | 4,765,143 | |||||||||||
| Operating income | 615,144 | 267,139 | (202 | ) | 882,081 | ||||||||||
| Other income (expense), net | 9,182 | — | — | 9,182 | |||||||||||
| Investment income | 199,580 | — | (196,000 | ) | 3,580 | ||||||||||
| Interest expense | 31,004 | — | — | 31,004 | |||||||||||
| Income before provision for income taxes | 792,902 | 267,139 | (196,202 | ) | 863,839 | ||||||||||
| Provision for income taxes | 214,175 | 127,905 | — | 342,080 | |||||||||||
| Net income | $ | 578,727 | $ | 139,234 | $ | (196,202 | ) | $ | 521,759 | ||||||
| Year Ended December 31, 2015 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| Revenue: | ||||||||||||||||
| Motorcycles and Related Products | $ | 5,318,850 | $ | — | $ | (10,106 | ) | $ | 5,308,744 | |||||||
| Financial Services | — | 688,211 | (1,553 | ) | 686,658 | |||||||||||
| Total revenue | 5,318,850 | 688,211 | (11,659 | ) | 5,995,402 | |||||||||||
| Costs and expenses: | ||||||||||||||||
| Motorcycles and Related Products cost of goods sold | 3,356,284 | — | — | 3,356,284 | ||||||||||||
| Financial Services interest expense | — | 161,983 | — | 161,983 | ||||||||||||
| Financial Services provision for credit losses | — | 101,345 | — | 101,345 | ||||||||||||
| Selling, administrative and engineering expense | 1,078,525 | 153,229 | (11,659 | ) | 1,220,095 | |||||||||||
| Total costs and expenses | 4,434,809 | 416,557 | (11,659 | ) | 4,839,707 | |||||||||||
| Operating income | 884,041 | 271,654 | — | 1,155,695 | ||||||||||||
| Investment income | 106,585 | — | (100,000 | ) | 6,585 | |||||||||||
| Interest expense | 12,117 | — | — | 12,117 | ||||||||||||
| Income before provision for income taxes | 978,509 | 271,654 | (100,000 | ) | 1,150,163 | |||||||||||
| Provision for income taxes | 300,499 | 97,457 | — | 397,956 | ||||||||||||
| Net income | $ | 678,010 | $ | 174,197 | $ | (100,000 | ) | $ | 752,207 | |||||||
| December 31, 2019 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| ASSETS | |||||||||||||||
| Current assets: | |||||||||||||||
| Cash and cash equivalents | $ | 470,649 | $ | 363,219 | $ | — | $ | 833,868 | |||||||
| Marketable securities | — | — | — | — | |||||||||||
| Accounts receivable, net | 369,717 | — | (110,383 | ) | 259,334 | ||||||||||
| Finance receivables, net | — | 2,272,522 | — | 2,272,522 | |||||||||||
| Inventories, net | 603,571 | — | — | 603,571 | |||||||||||
| Restricted cash | — | 64,554 | — | 64,554 | |||||||||||
| Other current assets | 110,145 | 59,665 | (836 | ) | 168,974 | ||||||||||
| 1,554,082 | 2,759,960 | (111,219 | ) | 4,202,823 | |||||||||||
| Finance receivables, net | — | 5,101,844 | — | 5,101,844 | |||||||||||
| Property, plant and equipment, net | 794,131 | 53,251 | — | 847,382 | |||||||||||
| Prepaid pension costs | 56,014 | — | — | 56,014 | |||||||||||
| Goodwill | 64,160 | — | — | 64,160 | |||||||||||
| Deferred income taxes | 62,768 | 39,882 | (1,446 | ) | 101,204 | ||||||||||
| Lease assets | 55,722 | 5,896 | — | 61,618 | |||||||||||
| Other long-term assets | 166,972 | 19,211 | (93,069 | ) | 93,114 | ||||||||||
| $ | 2,753,849 | $ | 7,980,044 | $ | (205,734 | ) | $ | 10,528,159 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||
| Current liabilities: | |||||||||||||||
| Accounts payable | $ | 266,710 | $ | 138,053 | $ | (110,383 | ) | $ | 294,380 | ||||||
| Accrued liabilities | 463,491 | 119,186 | (389 | ) | 582,288 | ||||||||||
| Short-term debt | — | 571,995 | — | 571,995 | |||||||||||
| Current portion of long-term debt, net | — | 1,748,109 | — | 1,748,109 | |||||||||||
| 730,201 | 2,577,343 | (110,772 | ) | 3,196,772 | |||||||||||
| Long-term debt, net | 743,296 | 4,381,530 | — | 5,124,826 | |||||||||||
| Lease liability | 38,783 | 5,664 | — | 44,447 | |||||||||||
| Pension liability | 56,138 | — | — | 56,138 | |||||||||||
| Postretirement healthcare liability | 72,513 | — | — | 72,513 | |||||||||||
| Deferred income taxes | 6,219 | 1,916 | — | 8,135 | |||||||||||
| Other long-term liabilities | 180,033 | 38,693 | 2,603 | 221,329 | |||||||||||
| Commitments and contingencies (Note 16) | |||||||||||||||
| Shareholders’ equity | 926,666 | 974,898 | (97,565 | ) | 1,803,999 | ||||||||||
| $ | 2,753,849 | $ | 7,980,044 | $ | (205,734 | ) | $ | 10,528,159 | |||||||
| December 31, 2017 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 338,186 | $ | 349,335 | $ | — | $ | 687,521 | ||||||||
| Accounts receivable, net | 483,709 | — | (153,723 | ) | 329,986 | |||||||||||
| Finance receivables, net | — | 2,105,662 | — | 2,105,662 | ||||||||||||
| Inventories | 538,202 | — | — | 538,202 | ||||||||||||
| Restricted cash | — | 47,518 | — | 47,518 | ||||||||||||
| Other current assets | 132,999 | 48,521 | (5,667 | ) | 175,853 | |||||||||||
| Total current assets | 1,493,096 | 2,551,036 | (159,390 | ) | 3,884,742 | |||||||||||
| Finance receivables, net | — | 4,859,424 | — | 4,859,424 | ||||||||||||
| Property, plant and equipment, net | 922,280 | 45,501 | — | 967,781 | ||||||||||||
| Prepaid pension costs | 19,816 | — | — | 19,816 | ||||||||||||
| Goodwill | 55,947 | — | — | 55,947 | ||||||||||||
| Deferred income taxes | 66,877 | 43,515 | (1,319 | ) | 109,073 | |||||||||||
| Other long-term assets | 138,344 | 23,593 | (86,048 | ) | 75,889 | |||||||||||
| $ | 2,696,360 | $ | 7,523,069 | $ | (246,757 | ) | $ | 9,972,672 | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 214,263 | $ | 167,057 | $ | (153,723 | ) | $ | 227,597 | |||||||
| Accrued liabilities | 444,028 | 90,942 | (5,148 | ) | 529,822 | |||||||||||
| Short-term debt | — | 1,273,482 | — | 1,273,482 | ||||||||||||
| Current portion of long-term debt, net | — | 1,127,269 | — | 1,127,269 | ||||||||||||
| Total current liabilities | 658,291 | 2,658,750 | (158,871 | ) | 3,158,170 | |||||||||||
| Long-term debt, net | 741,961 | 3,845,297 | — | 4,587,258 | ||||||||||||
| Pension liability | 54,606 | — | — | 54,606 | ||||||||||||
| Postretirement healthcare liability | 118,753 | — | — | 118,753 | ||||||||||||
| Other long-term liabilities | 171,200 | 35,503 | 2,905 | 209,608 | ||||||||||||
| Commitments and contingencies (Note 14) | ||||||||||||||||
| Shareholders’ equity | 951,549 | 983,519 | (90,791 | ) | 1,844,277 | |||||||||||
| $ | 2,696,360 | $ | 7,523,069 | $ | (246,757 | ) | $ | 9,972,672 | ||||||||
| December 31, 2018 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| ASSETS | |||||||||||||||
| Current assets: | |||||||||||||||
| Cash and cash equivalents | $ | 544,548 | $ | 659,218 | $ | — | $ | 1,203,766 | |||||||
| Marketable securities | 10,007 | — | — | 10,007 | |||||||||||
| Accounts receivable, net | 425,727 | — | (119,253 | ) | 306,474 | ||||||||||
| Finance receivables, net | — | 2,214,424 | — | 2,214,424 | |||||||||||
| Inventories, net | 556,128 | — | — | 556,128 | |||||||||||
| Restricted cash | — | 49,275 | — | 49,275 | |||||||||||
| Other current assets | 91,172 | 59,070 | (5,874 | ) | 144,368 | ||||||||||
| 1,627,582 | 2,981,987 | (125,127 | ) | 4,484,442 | |||||||||||
| Finance receivables, net | — | 5,007,507 | — | 5,007,507 | |||||||||||
| Property, plant and equipment, net | 847,176 | 56,956 | — | 904,132 | |||||||||||
| Goodwill | 55,048 | — | — | 55,048 | |||||||||||
| Deferred income taxes | 105,388 | 37,603 | (1,527 | ) | 141,464 | ||||||||||
| Other long-term assets | 144,122 | 18,680 | (89,731 | ) | 73,071 | ||||||||||
| $ | 2,779,316 | $ | 8,102,733 | $ | (216,385 | ) | $ | 10,665,664 | |||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||||||
| Current liabilities: | |||||||||||||||
| Accounts payable | $ | 258,587 | $ | 145,527 | $ | (119,253 | ) | $ | 284,861 | ||||||
| Accrued liabilities | 496,643 | 110,063 | (5,576 | ) | 601,130 | ||||||||||
| Short-term debt | — | 1,135,810 | — | 1,135,810 | |||||||||||
| Current portion of long-term debt, net | — | 1,575,799 | — | 1,575,799 | |||||||||||
| 755,230 | 2,967,199 | (124,829 | ) | 3,597,600 | |||||||||||
| Long-term debt, net | 742,624 | 4,145,043 | — | 4,887,667 | |||||||||||
| Pension liability | 107,776 | — | — | 107,776 | |||||||||||
| Postretirement healthcare liability | 94,453 | — | — | 94,453 | |||||||||||
| Other long-term liabilities | 164,243 | 37,142 | 2,834 | 204,219 | |||||||||||
| Commitments and contingencies (Note 16) | |||||||||||||||
| Shareholders’ equity | 914,990 | 953,349 | (94,390 | ) | 1,773,949 | ||||||||||
| $ | 2,779,316 | $ | 8,102,733 | $ | (216,385 | ) | $ | 10,665,664 | |||||||
| December 31, 2016 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| ASSETS | ||||||||||||||||
| Current assets: | ||||||||||||||||
| Cash and cash equivalents | $ | 425,540 | $ | 334,444 | $ | — | $ | 759,984 | ||||||||
| Marketable securities | 5,019 | 500 | — | 5,519 | ||||||||||||
| Accounts receivable, net | 450,186 | — | (165,080 | ) | 285,106 | |||||||||||
| Finance receivables, net | — | 2,076,261 | — | 2,076,261 | ||||||||||||
| Inventories | 499,917 | — | — | 499,917 | ||||||||||||
| Restricted cash | — | 52,574 | — | 52,574 | ||||||||||||
| Other current assets | 127,606 | 46,934 | (49 | ) | 174,491 | |||||||||||
| Total current assets | 1,508,268 | 2,510,713 | (165,129 | ) | 3,853,852 | |||||||||||
| Finance receivables, net | — | 4,759,197 | — | 4,759,197 | ||||||||||||
| Property, plant and equipment, net | 942,634 | 38,959 | — | 981,593 | ||||||||||||
| Goodwill | 53,391 | — | — | 53,391 | ||||||||||||
| Deferred income taxes | 103,487 | 66,152 | (1,910 | ) | 167,729 | |||||||||||
| Other long-term assets | 132,835 | 24,769 | (83,126 | ) | 74,478 | |||||||||||
| $ | 2,740,615 | $ | 7,399,790 | $ | (250,165 | ) | $ | 9,890,240 | ||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||
| Current liabilities: | ||||||||||||||||
| Accounts payable | $ | 219,353 | $ | 181,045 | $ | (165,080 | ) | $ | 235,318 | |||||||
| Accrued liabilities | 395,907 | 90,910 | (165 | ) | 486,652 | |||||||||||
| Short-term debt | — | 1,055,708 | — | 1,055,708 | ||||||||||||
| Current portion of long-term debt, net | — | 1,084,884 | — | 1,084,884 | ||||||||||||
| Total current liabilities | 615,260 | 2,412,547 | (165,245 | ) | 2,862,562 | |||||||||||
| Long-term debt, net | 741,306 | 3,925,669 | — | 4,666,975 | ||||||||||||
| Pension liability | 84,442 | — | — | 84,442 | ||||||||||||
| Postretirement healthcare liability | 173,267 | — | — | 173,267 | ||||||||||||
| Other long-term liabilities | 150,391 | 29,697 | 2,748 | 182,836 | ||||||||||||
| Commitments and contingencies (Note 14) | ||||||||||||||||
| Shareholders’ equity | 975,949 | 1,031,877 | (87,668 | ) | 1,920,158 | |||||||||||
| $ | 2,740,615 | $ | 7,399,790 | $ | (250,165 | ) | $ | 9,890,240 | ||||||||
| Year Ended December 31, 2019 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| Cash flows from operating activities: | |||||||||||||||
| Net income | $ | 403,042 | $ | 200,429 | $ | (179,836 | ) | $ | 423,635 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
| Depreciation and amortization | 223,656 | 8,881 | — | 232,537 | |||||||||||
| Amortization of deferred loan origination costs | — | 76,326 | — | 76,326 | |||||||||||
| Amortization of financing origination fees | 672 | 9,151 | — | 9,823 | |||||||||||
| Provision for long-term employee benefits | 13,344 | — | — | 13,344 | |||||||||||
| Employee benefit plan contributions and payments | (13,256 | ) | — | — | (13,256 | ) | |||||||||
| Stock compensation expense | 30,396 | 3,337 | — | 33,733 | |||||||||||
| Net change in wholesale finance receivables related to sales | — | — | (5,822 | ) | (5,822 | ) | |||||||||
| Provision for credit losses | — | 134,536 | — | 134,536 | |||||||||||
| Deferred income taxes | 20,952 | 676 | (81 | ) | 21,547 | ||||||||||
| Other, net | 4,425 | (3,963 | ) | (164 | ) | 298 | |||||||||
| Changes in current assets and liabilities: | |||||||||||||||
| Accounts receivable, net | 53,772 | — | (8,870 | ) | 44,902 | ||||||||||
| Finance receivables - accrued interest and other | — | (11,119 | ) | — | (11,119 | ) | |||||||||
| Inventories, net | (47,576 | ) | — | — | (47,576 | ) | |||||||||
| Accounts payable and accrued liabilities | (43,211 | ) | (4,107 | ) | 28,856 | (18,462 | ) | ||||||||
| Derivative financial instruments | 1,808 | 128 | — | 1,936 | |||||||||||
| Other | (33,105 | ) | 10,033 | (5,038 | ) | (28,110 | ) | ||||||||
| 211,877 | 223,879 | 8,881 | 444,637 | ||||||||||||
| Net cash provided by operating activities | 614,919 | 424,308 | (170,955 | ) | 868,272 | ||||||||||
| Cash flows from investing activities: | |||||||||||||||
| Capital expenditures | (176,264 | ) | (5,176 | ) | — | (181,440 | ) | ||||||||
| Origination of finance receivables | — | (7,053,898 | ) | 3,206,576 | (3,847,322 | ) | |||||||||
| Collections on finance receivables | — | 6,715,338 | (3,215,621 | ) | 3,499,717 | ||||||||||
| Sales and redemptions of marketable securities | 10,007 | — | — | 10,007 | |||||||||||
| Acquisition of business | (7,000 | ) | — | — | (7,000 | ) | |||||||||
| Other investing activities | 17,912 | — | — | 17,912 | |||||||||||
| Net cash used by investing activities | (155,345 | ) | (343,736 | ) | (9,045 | ) | (508,126 | ) | |||||||
| Year Ended December 31, 2017 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income | $ | 578,727 | $ | 139,234 | $ | (196,202 | ) | $ | 521,759 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization of intangibles | 215,639 | 6,549 | — | 222,188 | ||||||||||||
| Amortization of deferred loan origination costs | — | 82,911 | — | 82,911 | ||||||||||||
| Amortization of financing origination fees | 655 | 7,390 | — | 8,045 | ||||||||||||
| Provision for long-term employee benefits | 29,900 | — | — | 29,900 | ||||||||||||
| Employee benefit plan contributions and payments | (63,277 | ) | — | — | (63,277 | ) | ||||||||||
| Stock compensation expense | 29,570 | 2,921 | — | 32,491 | ||||||||||||
| Net change in wholesale finance receivables related to sales | — | — | 35,172 | 35,172 | ||||||||||||
| Provision for credit losses | — | 132,444 | — | 132,444 | ||||||||||||
| Deferred income taxes | 29,949 | 21,497 | (591 | ) | 50,855 | |||||||||||
| Other, net | 4,858 | 3,498 | 203 | 8,559 | ||||||||||||
| Changes in current assets and liabilities: | ||||||||||||||||
| Accounts receivable, net | (6,792 | ) | — | (11,357 | ) | (18,149 | ) | |||||||||
| Finance receivables—accrued interest and other | — | (1,313 | ) | — | (1,313 | ) | ||||||||||
| Inventories | (20,584 | ) | — | — | (20,584 | ) | ||||||||||
| Accounts payable and accrued liabilities | 9,753 | (11,497 | ) | 11,872 | 10,128 | |||||||||||
| Derivative instruments | 1,785 | 81 | — | 1,866 | ||||||||||||
| Other | (31,868 | ) | (1,684 | ) | 5,618 | (27,934 | ) | |||||||||
| Total adjustments | 199,588 | 242,797 | 40,917 | 483,302 | ||||||||||||
| Net cash provided by operating activities | 778,315 | 382,031 | (155,285 | ) | 1,005,061 | |||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Capital expenditures | (193,204 | ) | (13,090 | ) | — | (206,294 | ) | |||||||||
| Origination of finance receivables | — | (7,109,624 | ) | 3,517,676 | (3,591,948 | ) | ||||||||||
| Collections on finance receivables | — | 6,786,702 | (3,558,391 | ) | 3,228,311 | |||||||||||
| Sales and redemptions of marketable securities | 6,916 | — | — | 6,916 | ||||||||||||
| Other | 547 | — | — | 547 | ||||||||||||
| Net cash used by investing activities | (185,741 | ) | (336,012 | ) | (40,715 | ) | (562,468 | ) | ||||||||
| Year Ended December 31, 2019 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| Cash flows from financing activities: | |||||||||||||||
| Proceeds from issuance of medium-term notes | — | 1,203,236 | — | 1,203,236 | |||||||||||
| Repayments of medium-term notes | — | (1,350,000 | ) | — | (1,350,000 | ) | |||||||||
| Proceeds from securitization debt | — | 1,021,453 | — | 1,021,453 | |||||||||||
| Repayments of securitization debt | — | (353,251 | ) | — | (353,251 | ) | |||||||||
| Borrowings of asset-backed commercial paper | — | 177,950 | — | 177,950 | |||||||||||
| Repayments of asset-backed commercial paper | — | (318,006 | ) | — | (318,006 | ) | |||||||||
| Net decrease in credit facilities and unsecured commercial paper | — | (563,453 | ) | — | (563,453 | ) | |||||||||
| Dividends paid | (237,221 | ) | (180,000 | ) | 180,000 | (237,221 | ) | ||||||||
| Repurchase of common stock | (296,520 | ) | — | — | (296,520 | ) | |||||||||
| Issuance of common stock under employee stock option plans | 3,589 | — | — | 3,589 | |||||||||||
| Net cash used by financing activities | (530,152 | ) | (362,071 | ) | 180,000 | (712,223 | ) | ||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (3,321 | ) | 1,016 | — | (2,305 | ) | |||||||||
| Net decrease in cash, cash equivalents and restricted cash | $ | (73,899 | ) | $ | (280,483 | ) | $ | — | $ | (354,382 | ) | ||||
| Cash, cash equivalents and restricted cash: | |||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | $ | 544,548 | $ | 715,200 | $ | — | $ | 1,259,748 | |||||||
| Net decrease in cash, cash equivalents and restricted cash | (73,899 | ) | (280,483 | ) | — | (354,382 | ) | ||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 470,649 | $ | 434,717 | $ | — | $ | 905,366 | |||||||
| Year Ended December 31, 2017 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from issuance of medium-term notes | — | 893,668 | — | 893,668 | ||||||||||||
| Repayments of medium-term notes | — | (800,000 | ) | — | (800,000 | ) | ||||||||||
| Repayments of securitization debt | — | (444,671 | ) | — | (444,671 | ) | ||||||||||
| Borrowings of asset-backed commercial paper | — | 469,932 | — | 469,932 | ||||||||||||
| Repayments of asset-backed commercial paper | — | (176,227 | ) | — | (176,227 | ) | ||||||||||
| Net increase in credit facilities and unsecured commercial paper | — | 212,809 | — | 212,809 | ||||||||||||
| Net change in restricted cash | — | 8,458 | — | 8,458 | ||||||||||||
| Dividends paid | (251,862 | ) | (196,000 | ) | 196,000 | (251,862 | ) | |||||||||
| Purchase of common stock for treasury | (465,263 | ) | — | — | (465,263 | ) | ||||||||||
| Issuance of common stock under employee stock option plans | 11,353 | — | — | 11,353 | ||||||||||||
| Net cash used by financing activities | (705,772 | ) | (32,031 | ) | 196,000 | (541,803 | ) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | 25,844 | 903 | — | 26,747 | ||||||||||||
| Net (decrease) increase in cash and cash equivalents | $ | (87,354 | ) | $ | 14,891 | $ | — | $ | (72,463 | ) | ||||||
| Cash and cash equivalents: | ||||||||||||||||
| Cash and cash equivalents—beginning of period | $ | 425,540 | $ | 334,444 | $ | — | $ | 759,984 | ||||||||
| Net (decrease) increase in cash and cash equivalents | (87,354 | ) | 14,891 | — | (72,463 | ) | ||||||||||
| Cash and cash equivalents—end of period | $ | 338,186 | $ | 349,335 | $ | — | $ | 687,521 | ||||||||
| Year Ended December 31, 2018 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| Cash flows from operating activities: | |||||||||||||||
| Net income | $ | 553,640 | $ | 212,727 | $ | (234,916 | ) | $ | 531,451 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
| Depreciation and amortization of intangibles | 260,707 | 4,156 | — | 264,863 | |||||||||||
| Amortization of deferred loan origination costs | — | 81,315 | — | 81,315 | |||||||||||
| Amortization of financing origination fees | 663 | 7,704 | — | 8,367 | |||||||||||
| Provision for long-term employee benefits | 36,481 | — | — | 36,481 | |||||||||||
| Employee benefit plan contributions and payments | (10,544 | ) | — | — | (10,544 | ) | |||||||||
| Stock compensation expense | 31,855 | 3,684 | — | 35,539 | |||||||||||
| Net change in wholesale finance receivables related to sales | — | — | (56,538 | ) | (56,538 | ) | |||||||||
| Provision for credit losses | — | 106,870 | — | 106,870 | |||||||||||
| Deferred income taxes | (41,905 | ) | 7,716 | 208 | (33,981 | ) | |||||||||
| Other, net | 36,840 | 798 | (84 | ) | 37,554 | ||||||||||
| Changes in current assets and liabilities: | |||||||||||||||
| Accounts receivable, net | 43,613 | — | (34,470 | ) | 9,143 | ||||||||||
| Finance receivables – accrued interest and other | — | 773 | — | 773 | |||||||||||
| Inventories, net | (31,059 | ) | — | — | (31,059 | ) | |||||||||
| Accounts payable and accrued liabilities | 152,930 | (1,778 | ) | 45,040 | 196,192 | ||||||||||
| Derivative financial instruments | 337 | 136 | — | 473 | |||||||||||
| Other | 39,031 | (10,216 | ) | 207 | 29,022 | ||||||||||
| 518,949 | 201,158 | (45,637 | ) | 674,470 | |||||||||||
| Net cash provided by operating activities | 1,072,589 | 413,885 | (280,553 | ) | 1,205,921 | ||||||||||
| Cash flows from investing activities: | |||||||||||||||
| Capital expenditures | (197,905 | ) | (15,611 | ) | — | (213,516 | ) | ||||||||
| Origination of finance receivables | — | (7,192,063 | ) | 3,439,246 | (3,752,817 | ) | |||||||||
| Collections on finance receivables | — | 6,719,362 | (3,393,693 | ) | 3,325,669 | ||||||||||
| Purchases of marketable securities | (10,007 | ) | — | — | (10,007 | ) | |||||||||
| Other investing activities | (11,598 | ) | — | — | (11,598 | ) | |||||||||
| Net cash used by investing activities | (219,510 | ) | (488,312 | ) | 45,553 | (662,269 | ) | ||||||||
| Year Ended December 31, 2016 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income | $ | 707,614 | $ | 167,445 | $ | (182,895 | ) | $ | 692,164 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization of intangibles | 202,122 | 7,433 | — | 209,555 | ||||||||||||
| Amortization of deferred loan origination costs | — | 86,681 | — | 86,681 | ||||||||||||
| Amortization of financing origination fees | 654 | 8,598 | — | 9,252 | ||||||||||||
| Provision for long-term employee benefits | 38,273 | — | — | 38,273 | ||||||||||||
| Employee benefit plan contributions and payments | (55,809 | ) | — | — | (55,809 | ) | ||||||||||
| Stock compensation expense | 29,811 | 2,525 | — | 32,336 | ||||||||||||
| Net change in wholesale finance receivables related to sales | — | — | (3,233 | ) | (3,233 | ) | ||||||||||
| Provision for credit losses | — | 136,617 | — | 136,617 | ||||||||||||
| Gain on off-balance sheet asset-backed securitization | — | (9,269 | ) | — | (9,269 | ) | ||||||||||
| Loss on debt extinguishment | — | 118 | — | 118 | ||||||||||||
| Deferred income taxes | 7,772 | (7,705 | ) | (232 | ) | (165 | ) | |||||||||
| Other, net | (7,041 | ) | 239 | (105 | ) | (6,907 | ) | |||||||||
| Changes in current assets and liabilities: | ||||||||||||||||
| Accounts receivable, net | (67,621 | ) | — | 21,687 | (45,934 | ) | ||||||||||
| Finance receivables – accrued interest and other | — | (1,489 | ) | — | (1,489 | ) | ||||||||||
| Inventories | 85,072 | — | — | 85,072 | ||||||||||||
| Accounts payable and accrued liabilities | 26,005 | 25,027 | (12,795 | ) | 38,237 | |||||||||||
| Derivative instruments | (3,413 | ) | — | — | (3,413 | ) | ||||||||||
| Other | (25,415 | ) | (2,332 | ) | — | (27,747 | ) | |||||||||
| Total adjustments | 230,410 | 246,443 | 5,322 | 482,175 | ||||||||||||
| Net cash provided by operating activities | 938,024 | 413,888 | (177,573 | ) | 1,174,339 | |||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Capital expenditures | (245,316 | ) | (10,947 | ) | — | (256,263 | ) | |||||||||
| Origination of finance receivables | — | (7,420,177 | ) | 3,755,682 | (3,664,495 | ) | ||||||||||
| Collections on finance receivables | — | 6,936,140 | (3,761,109 | ) | 3,175,031 | |||||||||||
| Proceeds from finance receivables sold | — | 312,571 | — | 312,571 | ||||||||||||
| Sales and redemptions of marketable securities | 40,014 | — | — | 40,014 | ||||||||||||
| Other | 411 | — | — | 411 | ||||||||||||
| Net cash used by investing activities | (204,891 | ) | (182,413 | ) | (5,427 | ) | (392,731 | ) | ||||||||
| Year Ended December 31, 2018 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| Cash flows from financing activities: | |||||||||||||||
| Proceeds from issuance of medium-term notes | — | 1,591,828 | — | 1,591,828 | |||||||||||
| Repayments of medium-term notes | — | (877,488 | ) | — | (877,488 | ) | |||||||||
| Repayments of securitization debt | — | (257,869 | ) | — | (257,869 | ) | |||||||||
| Borrowings of asset-backed commercial paper | — | 509,742 | — | 509,742 | |||||||||||
| Repayments of asset-backed commercial paper | — | (212,729 | ) | — | (212,729 | ) | |||||||||
| Net decrease in credit facilities and unsecured commercial paper | — | (135,356 | ) | — | (135,356 | ) | |||||||||
| Dividends paid | (245,810 | ) | (235,000 | ) | 235,000 | (245,810 | ) | ||||||||
| Repurchase of common stock | (390,606 | ) | — | — | (390,606 | ) | |||||||||
| Issuance of common stock under employee stock option plans | 3,525 | — | — | 3,525 | |||||||||||
| Net cash (used by) provided by financing activities | (632,891 | ) | 383,128 | 235,000 | (14,763 | ) | |||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (13,826 | ) | (1,525 | ) | — | (15,351 | ) | ||||||||
| Net increase in cash, cash equivalents and restricted cash | $ | 206,362 | $ | 307,176 | $ | — | $ | 513,538 | |||||||
| Cash, cash equivalents and restricted cash: | |||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | $ | 338,186 | $ | 408,024 | $ | — | $ | 746,210 | |||||||
| Net increase in cash, cash equivalents and restricted cash | 206,362 | 307,176 | — | 513,538 | |||||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 544,548 | $ | 715,200 | $ | — | $ | 1,259,748 | |||||||
| Year Ended December 31, 2017 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| Cash flows from operating activities: | |||||||||||||||
| Net income | $ | 578,727 | $ | 139,234 | $ | (196,202 | ) | $ | 521,759 | ||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||||||
| Depreciation and amortization | 215,639 | 6,549 | — | 222,188 | |||||||||||
| Amortization of deferred loan origination costs | — | 82,911 | — | 82,911 | |||||||||||
| Amortization of financing origination fees | 655 | 7,390 | — | 8,045 | |||||||||||
| Provision for long-term employee benefits | 29,900 | — | — | 29,900 | |||||||||||
| Employee benefit plan contributions and payments | (63,277 | ) | — | — | (63,277 | ) | |||||||||
| Stock compensation expense | 29,570 | 2,921 | — | 32,491 | |||||||||||
| Net change in wholesale finance receivables related to sales | — | — | 35,172 | 35,172 | |||||||||||
| Provision for credit losses | — | 132,444 | — | 132,444 | |||||||||||
| Deferred income taxes | 29,949 | 21,497 | (591 | ) | 50,855 | ||||||||||
| Other, net | 4,858 | 3,498 | 203 | 8,559 | |||||||||||
| Changes in current assets and liabilities: | |||||||||||||||
| Accounts receivable, net | (6,792 | ) | — | (11,357 | ) | (18,149 | ) | ||||||||
| Finance receivables – accrued interest and other | — | (1,313 | ) | — | (1,313 | ) | |||||||||
| Inventories, net | (20,584 | ) | — | — | (20,584 | ) | |||||||||
| Accounts payable and accrued liabilities | 9,753 | (11,497 | ) | 11,872 | 10,128 | ||||||||||
| Derivative financial instruments | 1,785 | 81 | — | 1,866 | |||||||||||
| Other | (31,868 | ) | (1,684 | ) | 5,618 | (27,934 | ) | ||||||||
| 199,588 | 242,797 | 40,917 | 483,302 | ||||||||||||
| Net cash provided by operating activities | 778,315 | 382,031 | (155,285 | ) | 1,005,061 | ||||||||||
| Cash flows from investing activities: | |||||||||||||||
| Capital expenditures | (193,204 | ) | (13,090 | ) | — | (206,294 | ) | ||||||||
| Origination of finance receivables | — | (7,109,624 | ) | 3,517,676 | (3,591,948 | ) | |||||||||
| Collections on finance receivables | — | 6,786,702 | (3,558,391 | ) | 3,228,311 | ||||||||||
| Sales and redemptions of marketable securities | 6,916 | — | — | 6,916 | |||||||||||
| Other investing activities | 547 | — | — | 547 | |||||||||||
| Net cash used by investing activities | (185,741 | ) | (336,012 | ) | (40,715 | ) | (562,468 | ) | |||||||
| Year Ended December 31, 2016 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from issuance of medium-term notes | — | 1,193,396 | — | 1,193,396 | ||||||||||||
| Repayments of medium-term notes | — | (451,336 | ) | — | (451,336 | ) | ||||||||||
| Repayments of securitization debt | — | (665,400 | ) | — | (665,400 | ) | ||||||||||
| Borrowings of asset-backed commercial paper | — | 62,396 | — | 62,396 | ||||||||||||
| Repayments of asset-backed commercial paper | — | (71,500 | ) | — | (71,500 | ) | ||||||||||
| Net decrease in credit facilities and unsecured commercial paper | — | (145,812 | ) | — | (145,812 | ) | ||||||||||
| Net change in restricted cash | — | 43,495 | — | 43,495 | ||||||||||||
| Dividends paid | (252,321 | ) | (183,000 | ) | 183,000 | (252,321 | ) | |||||||||
| Purchase of common stock for treasury | (465,341 | ) | — | — | (465,341 | ) | ||||||||||
| Excess tax benefits from share-based payments | 2,251 | — | — | 2,251 | ||||||||||||
| Issuance of common stock under employee stock option plans | 15,782 | — | — | 15,782 | ||||||||||||
| Net cash used by financing activities | (699,629 | ) | (217,761 | ) | 183,000 | (734,390 | ) | |||||||||
| Effect of exchange rate changes on cash and cash equivalents | (8,407 | ) | (1,036 | ) | — | (9,443 | ) | |||||||||
| Net increase in cash and cash equivalents | $ | 25,097 | $ | 12,678 | $ | — | $ | 37,775 | ||||||||
| Cash and cash equivalents: | ||||||||||||||||
| Cash and cash equivalents – beginning of period | $ | 400,443 | $ | 321,766 | $ | — | $ | 722,209 | ||||||||
| Net increase in cash and cash equivalents | 25,097 | 12,678 | — | 37,775 | ||||||||||||
| Cash and cash equivalents – end of period | $ | 425,540 | $ | 334,444 | $ | — | $ | 759,984 | ||||||||
| Year Ended December 31, 2017 | |||||||||||||||
| HDMC Entities | HDFS Entities | Consolidating Adjustments | Consolidated | ||||||||||||
| Cash flows from financing activities: | |||||||||||||||
| Proceeds from issuance of medium-term notes | — | 893,668 | — | 893,668 | |||||||||||
| Repayments of medium-term notes | — | (800,000 | ) | — | (800,000 | ) | |||||||||
| Repayments of securitization debt | — | (444,671 | ) | — | (444,671 | ) | |||||||||
| Borrowings of asset-backed commercial paper | — | 469,932 | — | 469,932 | |||||||||||
| Repayments of asset-backed commercial paper | — | (176,227 | ) | — | (176,227 | ) | |||||||||
| Net increase in credit facilities and unsecured commercial paper | — | 212,809 | — | 212,809 | |||||||||||
| Dividends paid | (251,862 | ) | (196,000 | ) | 196,000 | (251,862 | ) | ||||||||
| Repurchase of common stock | (465,263 | ) | — | — | (465,263 | ) | |||||||||
| Issuance of common stock under employee stock option plans | 11,353 | — | — | 11,353 | |||||||||||
| Net cash used by financing activities | (705,772 | ) | (40,489 | ) | 196,000 | (550,261 | ) | ||||||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 25,844 | 903 | — | 26,747 | |||||||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | $ | (87,354 | ) | $ | 6,433 | $ | — | $ | (80,921 | ) | |||||
| Cash, cash equivalents and restricted cash: | |||||||||||||||
| Cash, cash equivalents and restricted cash, beginning of period | $ | 425,540 | $ | 401,591 | $ | — | $ | 827,131 | |||||||
| Net (decrease) increase in cash, cash equivalents and restricted cash | (87,354 | ) | 6,433 | — | (80,921 | ) | |||||||||
| Cash, cash equivalents and restricted cash, end of period | $ | 338,186 | $ | 408,024 | $ | — | $ | 746,210 | |||||||
| Year Ended December 31, 2015 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| Cash flows from operating activities: | ||||||||||||||||
| Net income | $ | 678,010 | $ | 174,197 | $ | (100,000 | ) | $ | 752,207 | |||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||||||
| Depreciation and amortization of intangibles | 188,926 | 9,148 | — | 198,074 | ||||||||||||
| Amortization of deferred loan origination costs | — | 93,546 | — | 93,546 | ||||||||||||
| Amortization of financing origination fees | 267 | 9,708 | — | 9,975 | ||||||||||||
| Provision for long-term employee benefits | 60,824 | — | — | 60,824 | ||||||||||||
| Employee benefit plan contributions and payments | (28,490 | ) | — | — | (28,490 | ) | ||||||||||
| Stock compensation expense | 26,775 | 2,658 | — | 29,433 | ||||||||||||
| Net change in wholesale finance receivables related to sales | — | — | (113,970 | ) | (113,970 | ) | ||||||||||
| Provision for credit losses | — | 101,345 | — | 101,345 | ||||||||||||
| Loss on debt extinguishment | — | 1,099 | — | 1,099 | ||||||||||||
| Deferred income taxes | (4,792 | ) | (11,692 | ) | — | (16,484 | ) | |||||||||
| Other, net | 19,625 | 1,288 | — | 20,913 | ||||||||||||
| Changes in current assets and liabilities: | ||||||||||||||||
| Accounts receivable, net | 4,055 | — | (17,720 | ) | (13,665 | ) | ||||||||||
| Finance receivables – accrued interest and other | — | (3,046 | ) | — | (3,046 | ) | ||||||||||
| Inventories | (155,222 | ) | — | — | (155,222 | ) | ||||||||||
| Accounts payable and accrued liabilities | 81,929 | 18,539 | 38,355 | 138,823 | ||||||||||||
| Derivative instruments | (5,615 | ) | — | — | (5,615 | ) | ||||||||||
| Other | 33,658 | (3,287 | ) | — | 30,371 | |||||||||||
| Total adjustments | 221,940 | 219,306 | (93,335 | ) | 347,911 | |||||||||||
| Net cash provided by operating activities | 899,950 | 393,503 | (193,335 | ) | 1,100,118 | |||||||||||
| Cash flows from investing activities: | ||||||||||||||||
| Capital expenditures | (249,772 | ) | (10,202 | ) | — | (259,974 | ) | |||||||||
| Origination of finance receivables | — | (7,836,279 | ) | 4,084,449 | (3,751,830 | ) | ||||||||||
| Collections on finance receivables | — | 7,127,999 | (3,991,114 | ) | 3,136,885 | |||||||||||
| Sales and redemptions of marketable securities | 11,507 | — | — | 11,507 | ||||||||||||
| Acquisition of business | (59,910 | ) | — | — | (59,910 | ) | ||||||||||
| Other | 7,474 | — | — | 7,474 | ||||||||||||
| Net cash used by investing activities | (290,701 | ) | (718,482 | ) | 93,335 | (915,848 | ) | |||||||||
| Year Ended December 31, 2015 | ||||||||||||||||
| HDMC Entities | HDFS Entities | Eliminations | Consolidated | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||||
| Proceeds from issuance of medium-term notes | — | 595,386 | — | 595,386 | ||||||||||||
| Repayments of medium-term notes | — | (610,331 | ) | — | (610,331 | ) | ||||||||||
| Proceeds from issuance of senior unsecured notes | 740,385 | — | — | 740,385 | ||||||||||||
| Intercompany borrowing activity | 250,000 | (250,000 | ) | — | — | |||||||||||
| Proceeds from securitization debt | — | 1,195,668 | — | 1,195,668 | ||||||||||||
| Repayments of securitization debt | — | (1,008,135 | ) | — | (1,008,135 | ) | ||||||||||
| Borrowings of asset-backed commercial paper | — | 87,442 | — | 87,442 | ||||||||||||
| Repayments of asset-backed commercial paper | — | (72,727 | ) | — | (72,727 | ) | ||||||||||
| Net increase in credit facilities and unsecured commercial paper | — | 469,473 | — | 469,473 | ||||||||||||
| Net change in restricted cash | — | 11,410 | — | 11,410 | ||||||||||||
| Dividends paid | (249,262 | ) | (100,000 | ) | 100,000 | (249,262 | ) | |||||||||
| Purchase of common stock for treasury | (1,537,020 | ) | — | — | (1,537,020 | ) | ||||||||||
| Excess tax benefits from share-based payments | 3,468 | — | — | 3,468 | ||||||||||||
| Issuance of common stock under employee stock option plans | 20,179 | — | — | 20,179 | ||||||||||||
| Net cash (used by) provided by financing activities | (772,250 | ) | 318,186 | 100,000 | (354,064 | ) | ||||||||||
| Effect of exchange rate changes on cash and cash equivalents | (10,451 | ) | (4,226 | ) | — | (14,677 | ) | |||||||||
| Net decrease in cash and cash equivalents | $ | (173,452 | ) | $ | (11,019 | ) | $ | — | $ | (184,471 | ) | |||||
| Cash and cash equivalents: | ||||||||||||||||
| Cash and cash equivalents – beginning of period | $ | 573,895 | $ | 332,785 | $ | — | $ | 906,680 | ||||||||
| Net decrease in cash and cash equivalents | (173,452 | ) | (11,019 | ) | — | (184,471 | ) | |||||||||
| Cash and cash equivalents – end of period | $ | 400,443 | $ | 321,766 | $ | — | $ | 722,209 | ||||||||
21. Supplementary Unaudited Quarterly Financial Data
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | ||||||||||||||||||||||||||||
| (In millions, except per share data) | March 31, 2019 | April 1, 2018 | June 30, 2019 | July 1, 2018 | Sep 29, 2019 | Sep 30, 2018 | Dec 31, 2019 | Dec 31, 2018 | |||||||||||||||||||||||
| Motorcycles: | |||||||||||||||||||||||||||||||
| Revenue | $ | 1,195.6 | $ | 1,363.9 | $ | 1,434.0 | $ | 1,525.1 | $ | 1,068.9 | $ | 1,123.9 | $ | 874.1 | $ | 955.6 | |||||||||||||||
| Operating income (loss) | $ | 108.4 | $ | 172.8 | $ | 180.7 | $ | 243.4 | $ | 47.0 | $ | 65.7 | $ | (46.5 | ) | $ | (59.5 | ) | |||||||||||||
| Financial Services: | |||||||||||||||||||||||||||||||
| Revenue | $ | 188.7 | $ | 178.2 | $ | 198.6 | $ | 188.1 | $ | 203.6 | $ | 191.7 | $ | 198.2 | $ | 190.2 | |||||||||||||||
| Operating income | $ | 58.7 | $ | 63.6 | $ | 75.5 | $ | 80.5 | $ | 72.9 | $ | 83.8 | $ | 58.9 | $ | 63.3 | |||||||||||||||
| Consolidated: | |||||||||||||||||||||||||||||||
| Income (loss) before taxes | $ | 170.4 | $ | 230.2 | $ | 256.1 | $ | 319.4 | $ | 117.3 | $ | 141.2 | $ | 13.7 | $ | (4.1 | ) | ||||||||||||||
| Net income | $ | 127.9 | $ | 174.8 | $ | 195.6 | $ | 242.3 | $ | 86.6 | $ | 113.9 | $ | 13.5 | $ | 0.5 | |||||||||||||||
| Earnings per share: | |||||||||||||||||||||||||||||||
| Basic | $ | 0.80 | $ | 1.04 | $ | 1.23 | $ | 1.45 | $ | 0.55 | $ | 0.69 | $ | 0.09 | $ | — | |||||||||||||||
| Diluted | $ | 0.80 | $ | 1.03 | $ | 1.23 | $ | 1.45 | $ | 0.55 | $ | 0.68 | $ | 0.09 | $ | — | |||||||||||||||
22. Subsequent Events
Event
In February 2018,January 2020, HDFS issued $350.0$525.0 million of medium-termsecured notes that mature in February 2023 and havethrough an annualon-balance sheet asset-backed securitization transaction at a weighted average interest rate of 3.35%1.83%.
1st Quarter | 2nd Quarter | 3rd Quarter | 4th Quarter | |||||||||||||||||||||||||||||
| Mar 26, 2017 | Mar 27, 2016 | June 25, 2017 | June 26, 2016 | Sep 24, 2017 | Sep 25, 2016 | Dec 31, 2017 | Dec 31, 2016 | |||||||||||||||||||||||||
| Motorcycles: | ||||||||||||||||||||||||||||||||
| Revenue | $ | 1,328.7 | $ | 1,576.6 | $ | 1,577.1 | $ | 1,670.1 | $ | 962.1 | $ | 1,091.6 | $ | 1,047.0 | $ | 933.0 | ||||||||||||||||
| Operating income | $ | 238.8 | $ | 332.5 | $ | 319.6 | $ | 322.7 | $ | 19.6 | $ | 108.9 | $ | 37.8 | $ | 9.3 | ||||||||||||||||
| Financial Services: | ||||||||||||||||||||||||||||||||
| Revenue | $ | 173.2 | $ | 173.4 | $ | 188.0 | $ | 191.0 | $ | 189.1 | $ | 183.2 | $ | 181.9 | $ | 177.6 | ||||||||||||||||
| Operating income | $ | 52.6 | $ | 56.4 | $ | 81.9 | $ | 89.6 | $ | 77.1 | $ | 69.4 | $ | 63.7 | $ | 60.1 | ||||||||||||||||
| Consolidated: | ||||||||||||||||||||||||||||||||
| Income before taxes | $ | 284.7 | $ | 382.4 | $ | 394.4 | $ | 405.9 | $ | 89.9 | $ | 173.0 | $ | 94.8 | $ | 62.6 | ||||||||||||||||
| Net income | $ | 186.4 | $ | 250.5 | $ | 258.9 | $ | 280.4 | $ | 68.2 | $ | 114.1 | $ | 8.3 | $ | 47.2 | ||||||||||||||||
| Earnings per common share: | ||||||||||||||||||||||||||||||||
| Basic | $ | 1.06 | $ | 1.37 | $ | 1.48 | $ | 1.55 | $ | 0.40 | $ | 0.64 | $ | 0.05 | $ | 0.27 | ||||||||||||||||
| Diluted | $ | 1.05 | $ | 1.36 | $ | 1.48 | $ | 1.55 | $ | 0.40 | $ | 0.64 | $ | 0.05 | $ | 0.27 | ||||||||||||||||
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
– In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Management’s Report on Internal Control over Financial Reporting
– The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria established in Internal Control – Integrated Framework (2013 Framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s evaluation under the framework in Internal Control – Integrated Framework, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.2019. Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated Financial Statementsfinancial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of the Company’s internal control over financial reporting.
Attestation Report of Independent Registered Public Accounting Firm
– The attestation report required under this Item 9A is contained in Item 8 of Part II8. Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K under the heading “ReportReport of Independent Registered Public Accounting Firm.”Firm.
Changes in Internal Controls
– There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 20172019 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information to be included in the Company’s definitive proxy statement for the 20182020 annual meeting of shareholders which will be filed on or about March 26, 2018 (the Proxy Statement), under the captions “QuestionsQuestions and Answers about the Company – Who are our Executive Officers for SEC Purposes?,” “Corporate Governance PrinciplesBoard Matters and Board MattersCorporate Governance – Audit and Finance Committee” “Proposal I –, Proposal 1: Election of Directors” “Section 16(a), Section 16(A) Beneficial Ownership Reporting Compliance,” “Audit, Audit and Finance Committee Report”, and “Corporate Governance Principles and Board Matters and Corporate Governance – Independence of Directors”Directors is incorporated by reference herein.
The Company has adopted the Harley-Davidson, Inc. Financial Code of Ethics applicable to the Company’s chief executive officer, the chief financial officer, the principal accounting officer and the controllerChief Executive Officer, Chief Financial Officer, Principal Accounting Officer, Controller and other persons performing similar finance functions. The Company has posted a copy of the Harley-Davidson, Inc. Financial Code of Ethics on the Company’s website at http://investor.harley-davidson.com/. The Company intends to satisfy the disclosure requirements under Item 5.05 of the Securities and Exchange Commission’s Current Report on Form 8-K regarding amendments to, or waivers from, the Harley-Davidson, Inc. Financial Code of Ethics by posting such information on its website at www.harley-davidson.com.www.harley-davidson.com. The Company is not including the information contained on or available through its website as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.
Item 11. Executive Compensation
The information to be included in the Proxy Statement under the captions “Executive Compensation” Executive Compensation and “HumanHuman Resources Committee Report on Executive Compensation”Compensation is incorporated by reference herein.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Information to be included in the Proxy Statement under the caption “CommonCommon Stock Ownership of Certain Beneficial Owners and Management”Management is incorporated by reference herein.
The following table provides information about the Company’s equity compensation plans (including individual compensation arrangements) as of December 31, 20172019:
| Plan Category | Number of securities to be issued upon the exercise of outstanding options | Weighted- average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | |||||||
| Equity compensation plans approved by shareholders: | ||||||||||
| Management employees | 1,404,287 | $ | 48.13 | 10,768,576 | ||||||
| Equity compensation plans not approved by shareholders: | ||||||||||
| Union employees: | ||||||||||
| Kansas City, MO | — | $ | — | 26,718 | ||||||
| York, PA | — | $ | — | 96,770 | ||||||
| Non employees: | ||||||||||
| Board of Directors | — | $ | — | 33,466 | ||||||
| — | $ | — | 156,954 | |||||||
| Total all plans | 1,404,287 | 10,925,530 | ||||||||
| Plan Category | Number of securities to be issued upon the exercise of outstanding options | Weighted-average exercise price of outstanding options | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in the first column) | |||||||
| Plan approved by shareholders: | ||||||||||
| Management employees | 815,676 | $ | 55.76 | 7,196,998 | ||||||
| Plan not approved by shareholders: | ||||||||||
| Non-employee Board of Directors | — | $ | — | 218,029 | ||||||
| 815,676 | 7,415,027 | |||||||||
The Company's Director Compensation Policy provides non-employee Directors with compensation that includes an annual retainer as well as a grant of share units. The payment of share units is deferred until a directorDirector ceases to serve as a directorDirector and the share units are payable at that time in actual shares of common stock. The Company's Director Compensation Policy also provides that a non-employee Director may elect to receive 50% or 100% of the annual retainer to be paid in each calendar year in the form of common stock based upon the fair market value of the common stock at the time of the annual meeting of shareholders. Each Director must receive a minimum of one-half of his or hertheir annual retainer in common stock until the Director reaches the Director stock ownership guidelines defined below.
In May 2016, the Company's Board of Directors approved the “Board of Directors and Senior Executive Stock Ownership Guidelines” (Ownership Guidelines). The Ownership Guidelines stipulate that all Directors hold five times their annual retainer in shares of Common Stockcommon stock and Vice Presidents, General Managers or higher (Senior Executives) hold from two times to six times of their base salary in shares of common stock, or certain rights to acquire common stock, depending on their level. The Directors and Senior Executives have five years from the date they are elected a Director or become a senior executiveSenior Executive to accumulate the appropriate number of shares of common stock. Restricted stock, restricted stock units, shares held in 401(k) accounts, shares issuable under vested unexercised stock options, performance shares and performance share units (at target amount), stock appreciation rights, deferred stock units and shares of common stock held directly count toward satisfying the guidelines for common stock ownership.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information to be included in the Proxy Statement under the captions Certain Transactions and Board Matters and Corporate Governance – Independence of Directors are incorporated by reference herein.
Item 14. Principal Accounting Fees and Services
The information to be included in the Proxy Statement under the caption “Certain Transactions” and “Corporate Governance Principles and Board Matters – IndependenceProposal 5: Ratification of Directors” is incorporated by reference herein.
PART IV
Item 15. Exhibits and Financial Statements
(a) The following documents are filed as part of this Form 10-K:
| (1 | ) | Financial Statements | ||
| Consolidated statements of income for each of the three years in the period ended December 31, 2017 | ||||
| Consolidated statements of comprehensive income for each of the three years in the period ended December 31, 2017 | ||||
| Consolidated balance sheets at December 31, 2017 and December 31, 2016 | ||||
| Consolidated statements of cash flows for each of the three years in the period ended December 31, 2017 | ||||
| Consolidated statements of shareholders’ equity for each of the three years in the period ended December 31, 2017 | ||||
| Notes to consolidated financial statements | ||||
| (2 | ) | Financial Statement Schedule | ||
| Schedule II – Valuation and qualifying accounts | ||||
| (3 | ) | Exhibits | ||
| (1) | Financial Statements under Item 8. Consolidated Financial Statements and Supplementary Data | |
| (2) | Financial Statement Schedule | |
| (3) | ||
Reference is made to the separate Index to Exhibits contained on pages 114108 through 118111 filed herewith.
All other schedules are omitted since the required information is not present or is not present in amounts sufficient to require submission of the schedules.
Item 16. Form 10-K Summary
None.
HARLEY-DAVIDSON, INC.
SCHEDULE II - CONSOLIDATED VALUATION AND QUALIFYING ACCOUNTS
Years ended December 31, 20172019, 20162018 and 20152017
(In thousands)
| 2017 | 2016 | 2015 | 2019 | 2018 | 2017 | ||||||||||||||||||
| Accounts receivable – allowance for doubtful accounts | |||||||||||||||||||||||
| Accounts receivable - Allowance for doubtful accounts | |||||||||||||||||||||||
| Balance, beginning of period | $ | 2,741 | $ | 2,905 | $ | 3,458 | $ | 4,007 | $ | 4,091 | $ | 2,741 | |||||||||||
| Provision charged to expense | 1,328 | (101 | ) | 266 | 1,569 | 731 | 1,328 | ||||||||||||||||
| Reserve adjustments | 99 | (63 | ) | (276 | ) | 7 | (137 | ) | 99 | ||||||||||||||
| Write-offs, net of recoveries | (77 | ) | — | (543 | ) | (655 | ) | (678 | ) | (77 | ) | ||||||||||||
| Balance, end of period | $ | 4,091 | $ | 2,741 | $ | 2,905 | $ | 4,928 | $ | 4,007 | $ | 4,091 | |||||||||||
| Finance receivables – allowance for credit losses | |||||||||||||||||||||||
| Finance receivables - Allowance for credit losses | |||||||||||||||||||||||
| Balance, beginning of period | $ | 173,343 | $ | 147,178 | $ | 127,364 | $ | 189,885 | $ | 192,471 | $ | 173,343 | |||||||||||
| Provision for credit losses | 132,444 | 136,617 | 101,345 | 134,536 | 106,870 | 132,444 | |||||||||||||||||
| Charge-offs, net of recoveries | (113,316 | ) | (107,161 | ) | (81,531 | ) | (125,840 | ) | (109,456 | ) | (113,316 | ) | |||||||||||
Other(a) | — | (3,291 | ) | — | |||||||||||||||||||
| Balance, end of period | $ | 192,471 | $ | 173,343 | $ | 147,178 | $ | 198,581 | $ | 189,885 | $ | 192,471 | |||||||||||
Inventories – allowance for obsolescence(b) | |||||||||||||||||||||||
Inventories - Allowance for obsolescence(a) | |||||||||||||||||||||||
| Balance, beginning of period | $ | 39,873 | $ | 26,740 | $ | 17,775 | $ | 39,015 | $ | 38,669 | $ | 39,873 | |||||||||||
| Provision charged to expense | 16,940 | 21,137 | 19,564 | 24,984 | 25,722 | 16,940 | |||||||||||||||||
| Reserve adjustments | 306 | (88 | ) | (1,028 | ) | (39 | ) | (332 | ) | 306 | |||||||||||||
| Write-offs, net of recoveries | (18,450 | ) | (7,916 | ) | (9,571 | ) | (14,611 | ) | (25,044 | ) | (18,450 | ) | |||||||||||
| Balance, end of period | $ | 38,669 | $ | 39,873 | $ | 26,740 | $ | 49,349 | $ | 39,015 | $ | 38,669 | |||||||||||
| Deferred tax assets – valuation allowance | |||||||||||||||||||||||
| Deferred tax assets - Valuation allowance | |||||||||||||||||||||||
| Balance, beginning of period | $ | 30,953 | $ | 20,659 | $ | 25,462 | $ | 21,868 | $ | 21,561 | $ | 30,953 | |||||||||||
| Adjustments | (9,392 | ) | 10,294 | (4,803 | ) | 7,156 | 307 | (9,392 | ) | ||||||||||||||
| Balance, end of period | $ | 21,561 | $ | 30,953 | $ | 20,659 | $ | 29,024 | $ | 21,868 | $ | 21,561 | |||||||||||
| (a) |
| Inventory obsolescence reserves deducted from cost determined on first-in, first-out (FIFO) basis, before deductions for last-in, first-out (LIFO) valuation reserves. |
INDEX TO EXHIBITS [Items 15(a)(3) and 15(c)] | ||
| Exhibit No. | Description | |
| Asset Purchase Agreement, dated April 30, 2015, among Harley-Davidson Canada LP, Fred Deeley Imports Ltd. and Harley-Davidson Motor Company, Inc., as amended (incorporated herein by reference to Exhibit 2.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 28, 2015 (File No. 1-9183)) | ||
| Restated Articles of Incorporation as amended through April 27, 2015 (incorporated herein by reference to Exhibit 3.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 29, 2015 (File No. 1-9183)) | ||
| Harley-Davidson, Inc. By-Laws, as amended through April 27, 2015 (incorporated herein by reference by reference to Exhibit 3.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 29, 2015 (File No. 1-9183)) | ||
| 5-Year Credit Agreement, dated as of April | ||
| Indenture, dated as of March 4, 2011, among Harley-Davidson Financial Services, Inc., Issuer, Harley-Davidson Credit Corp., Guarantor, and Bank of New York Mellon Trust Company, N.A., Trustee (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Current Report on Form 8-K dated March 1, 2011 (File No. 1-9183)) | ||
| Officers' Certificate, dated September 16, 2014, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the forms of 2.400% Medium-Term Notes due 2019 (incorporated herein by reference to Exhibit 4.14 to the Registrant’s Annual Report | ||
| Officers' Certificate, dated February 26, 2015, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 2.150% Medium-Term Notes due 2020 (incorporated herein by reference to Exhibit 4.10 to the Registrant’s Annual Report | ||
| Indenture, dated July 28, 2015, by and between Harley-Davidson, Inc. and The Bank of New York Mellon Trust Company, N.A., as Trustee. (incorporated herein by reference to Exhibit 4.1 to the Registrant's Current Report on Form 8-K dated July 28, 2015 (File No. 1-9183)) | ||
| Officers' Certificate, dated July 28, 2015 establishing the form of 3.500% Senior Notes due 2025 and 4.625% Senior Notes due 2045 (incorporated herein by reference to Exhibit 4.2 to the Registrant's Current Report on From 8-K dates July 28, 2015 (File No. 1-9183)) | ||
| Officers' Certificate dated January 8, 2016, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 2.250% Medium-Term Notes due 2019 (incorporated herein by reference to Exhibit 4.2 to the Registrant's Current Report on Form 8-K dated January 5, 2016 (File No. 1-9183)) | ||
| Officers' Certificate, dated January 8, 2016, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 2.850% Medium-Term Notes due 2021 (incorporated herein by reference to Exhibit 4.3 to the Registrant's Current Report on Form 8-K dated January 5, 2016 (File No. 1-9183)) | ||
| Amendment No. | ||
| 5-Year Credit Agreement, dated as of April 7, 2016 among the Company, certain subsidiaries of the Company, the financial institutions parties thereto and JPMorgan Chase Bank, N.A., as among other things, global administrative agent (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 27, 2016 (File No. 1-9183)) | ||
| Amendment No. 1 5-year Credit Agreement, dated as of April 7, 2016, among the Company, certain subsidiaries of the Company, the financial institutions parties thereto, and JPMorgan Chase Bank, N.A., as, among other things, global administrative agent, relating to the 5-year Credit Agreement, dated as of April 7, 2014 among the Company, certain subsidiaries of the Company, the financial institutions parties thereto and JPMorgan Chase Bank, N.A., as among other things, global administrative agent (incorporated herein by reference to Exhibit 4.2 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 27, 2016 (File No. 1-9183)) | ||
| Officers' Certificate, dated March 10, 2017, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 2.400% Medium-Term Notes due 2020 (incorporated herein by reference to Exhibit 4.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 1-9183)) | ||
| Officers' Certificate, dated March 10, 2017, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of Floating Rate Medium-Term Notes due 2019 (incorporated herein by reference to Exhibit 4.15 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 1-9183)) | ||
Various instruments relating to the Company’s long-term debt described in this report need not be filed herewith pursuant to Item 601(b)(4)(iii)(A) of Regulation S-K. The registrant, by signing this report, agrees to furnish the Securities and Exchange Commission, upon its request, with a copy of any such instrument.
| * | Represents a management contract or compensatory plan, contract or arrangement in which a Director or named executive officer of the Company participated. |
108
INDEX TO EXHIBITS [Items 15(a)(3) and 15(c)] | ||
| Exhibit No. | Description | |
| Officers' Certificate, dated June 9, 2017, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 2.550% Medium-Term Notes due 2022 (incorporated herein by reference to Exhibit 4.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2017 (File No. 1-9183)) | ||
| Officers' Certificate, dated February 9, 2018, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 3.350% Medium-Term Notes due 2023 (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2018 (File No. 1-9183)) | ||
| Officers' Certificate, dated May 21, 2018, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 3.550% Medium-Term Notes due 2021(incorporated herein by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2018 (File No. 1-9183)) | ||
| Officers' Certificate, dated May 21, 2018, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of Floating Rate Medium-Term Notes due 2020 (incorporated herein by reference to Exhibit 4.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 1, 2018 (File No. 1-9183)) | ||
| Officers' Certificate, dated November 28, 2018, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of Floating Rate Medium-Term Notes due 2021 (incorporated herein by reference to Exhibit 4.20 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 1-9183)) | ||
| Officers' Certificate, dated February 4, 2019, pursuant to Sections 102 and 301 of the Indenture, dated March 4, 2011, with the form of 4.05% Medium-Term Notes due 2022 (incorporated herein by reference to Exhibit 4.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2019 (File No. 1-9183)) | ||
| Fiscal Agency Agreement, dated November 19, 2019, relating to the 0.9% Medium Term Notes due November 2024, among certain subsidiaries of the Company, The Bank of New York Mellon Trust Company, N.A. and The Bank of New York Mellon, London Branch | ||
| 364-Day Credit Agreement, dated May 13, 2019, among the Company, certain subsidiaries of the Company, the financial institutions parties thereto, and JPMorgan Chase Bank, N.A., as, among other things, global administrative agent | ||
| Description of Registrants Securities | ||
| Harley-Davidson, Inc. 2004 Incentive Stock Plan as amended through April 28, 2007 (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 1, 2007 (File No. 1-9183)) | ||
| Harley-Davidson, Inc. 2009 Incentive Stock Plan (incorporated herein by reference to Appendix A to the Company’s definitive proxy statement on Schedule 14A for the Company’s Annual Meeting of Shareholders held on April 25, 2009 filed on April 3, 2009 (File No. 1-9183)) | ||
Amended and Restated Harley-Davidson, Inc. 2014 Incentive Stock Plan | ||
| Amended and Restated Harley-Davidson, Inc. Director Stock Plan as amended effective December 1, 2014 (incorporated herein by reference to Exhibit 10.6 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2014 (File No. 1-9183)) | ||
| Director Compensation Policy approved April 29, 2016 (incorporated herein by reference from Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 26, 2016 (File No. 1-9183)) | ||
| Deferred Compensation Plan for Nonemployee Directors as amended and restated effective January 1, 2009 (incorporated herein by reference to Exhibit 10.14 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 1-9183)) | ||
| Harley-Davidson Management Deferred Compensation Plan as amended and restated effective January 1, 2017 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 25, 2016 (File No. 1-9183)) | ||
| Harley-Davidson, Inc. Employee Incentive Plan (incorporated herein by reference to the Appendix to the Company’s definitive proxy statement on Schedule 14A for the Company’s Annual Meeting of Shareholders held April 25, 2015 (File No. 1-9183)) | ||
| Harley-Davidson, Inc. Short-Term Incentive Plan for Senior Executives (incorporated herein by reference to Appendix D to the Company’s definitive proxy statement on Schedule 14A for the Company’s Annual Meeting of Shareholders held April 30, 2011 (File No. 1-9183)) | ||
| Harley-Davidson Pension Benefit Restoration Plan as amended and restated effective January 1, 2009 (incorporated herein by reference to Exhibit 10.9 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008 (File No. 1-9183)) | ||
| Form of Notice of Grant of Stock Options and Option Agreement of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2009 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2010 (File No. 1-9183)) | ||
| * | Represents a management contract or compensatory plan, contract or arrangement in which a Director or named executive officer of the Company participated. |
109
INDEX TO EXHIBITS [Items 15(a)(3) and 15(c)] | ||
| Exhibit No. | Description | |
| Form of Notice of Grant of Stock Options and Option Agreement (Transition Agreement) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2009 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2010 (File No. 1-9183)) | ||
| Form of Notice of Special Grant of Stock Options and Option Agreement (Transition Agreement) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2009 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2010 (File No. 1-9183)) | ||
| Form of Notice of Grant of Stock Appreciation Rights and Stock Appreciation Rights Agreement of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2009 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.10 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2010 (File No. 1-9183)) | ||
| Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2009 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.7 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2010 (File No. 1-9183)) | ||
| Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Transition Agreement) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2009 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.8 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 28, 2010 (File No. 1-9183)) | ||
| Form of Notice of Grant of Stock Options and Option Agreement of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2009 Incentive Stock Plan to each of Messrs. Hund, Levatich and Olin (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K dated May 1, 2009 (File No. 1-9183)) | ||
| Form of Notice of Grant of Stock Options and Option Agreement of Harley-Davidson, Inc. under the Harley-Davidson Inc. 1995 Stock Option Plan and the Harley-Davidson, Inc. 2004 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.21 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-9183)) | ||
| Form of Notice of Special Grant of Stock Options and Option Agreement of Harley-Davidson, Inc. under the Harley-Davidson Inc. 1995 Stock Option Plan and the Harley-Davidson, Inc. 2004 Incentive Stock Plan (incorporated herein by reference to Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2005 (File No. 1-9183)) | ||
| Form of Notice of Grant | ||
| Form of Notice of Grant | ||
Form of Notice of Grant | ||
| Form of Transition Agreement between the Registrant and each of Messrs. Levatich and Olin (incorporated herein by reference to Exhibit 10.4 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-9183)) | ||
| Transition Agreement between the Registrant and Mr. Hund dated November 30, 2009 (incorporated herein by reference to Exhibit 10.5 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2009 (File No. 1-9183)) | ||
Form of Aircraft Time Sharing Agreement between the Registrant and each of Messrs. Levatich, Olin, | ||
| Form of Non-competition and Non-solicitation Agreement between Harley-Davidson Canada LP, Fred Deeley Imports Ltd. and Harley-Davidson Motor Company, Inc., as amended (incorporated herein by reference to exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended June 28, 2015 (File No. 1-9183)) | ||
| Harley-Davidson Retiree Insurance Allowance Plan, as amended and restated effective January 1, 2016 (incorporated herein by reference to Exhibit 10.44 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2016 (File No. 1-9183)) | ||
| Form of Notice of Award of Performance Shares and Performance Share Agreement (Standard) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2017 (incorporated herein by reference to Exhibit 10.1 to the Registrant’s Annual Report on Form 10-Q for the quarter ended March 26, 2017 (File No. 1-9183)) | ||
| * | Represents a management contract or compensatory plan, contract or arrangement in which a Director or named executive officer of the Company participated. |
110
INDEX TO EXHIBITS [Items 15(a)(3) and 15(c)] | ||
| Exhibit No. | Description | |
| Form of Notice of Award of Performance | ||
| Form of Notice of Award of Performance Shares and Performance Share Agreement (Transition Agreement) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2017 (incorporated herein by reference to Exhibit 10.3 to the Registrant’s Annual Report on Form 10-Q for the quarter ended March 26, 2017 (File No. 1-9183)) | ||
| Form of Notice of Award of | ||
| Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Standard), Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Standard International), Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Special), Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Special Retention), and Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Transition Agreement) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2018 (incorporated herein by reference to Exhibit 10.43 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 1-9183)) | ||
| Form of Notice of Award of Performance Shares and Performance Shares Agreement (Standard), Form of Notice of Award of Performance Share Units and Performance Share Unit Agreement (Standard International), and Form of Notice of Award of Performance Shares and Performance Shares Agreement (Transition Agreement) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2018 (incorporated herein by reference to Exhibit 10.44 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 1-9183)) | ||
| Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Standard), Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Standard International), Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Special), and Form of Notice of Award of Restricted Stock Units and Restricted Stock Unit Agreement (Special Retention) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2019 (incorporated herein by reference to Exhibit 10.45 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 1-9183)) | ||
| Form of Notice of Award of Performance Shares and Performance Shares Agreement (Standard) and Form of Notice of Award of Performance Share Units and Performance Share Unit Agreement (Standard International) of Harley-Davidson, Inc. under the Harley-Davidson, Inc. 2014 Incentive Stock Plan first approved for use in February 2019 (incorporated herein by reference to Exhibit 10.46 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2018 (File No. 1-9183)) | ||
| Separation Agreement and Release between the Registrant and Mr. Grimmer dated October 25, 2019 | ||
| Harley-Davidson, Inc. Subsidiaries | ||
| Consent of Independent Registered Public Accounting Firm | ||
| Chief Executive Officer Certification pursuant to Rule 13a-14(a) | ||
| Chief Financial Officer Certification pursuant to Rule 13a-14(a) | ||
| Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. §1350 | ||
| 101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document | |
| 101.SCH | XBRL Taxonomy Extension Schema Document | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document | |
| 104 | Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101 | |
| * | Represents a management contract or compensatory plan, contract or arrangement in which a |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on February 21, 201819, 2020.
| HARLEY-DAVIDSON, INC. | ||
| By: | /S/ Matthew S. Levatich | |
| Matthew S. Levatich | ||
| President and Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on February 21, 201819, 2020.
| Name | Title | |
| /S/ Matthew S. Levatich | President and Chief Executive Officer | |
| Matthew S. Levatich | (Principal executive officer) | |
| /S/ John A. Olin | Senior Vice President and Chief Financial Officer | |
| John A. Olin | (Principal financial officer) | |
| /S/ Mark R. Kornetzke | Chief Accounting Officer | |
| Mark R. Kornetzke | (Principal accounting officer) | |
| /S/ Troy Alstead | Director | |
| Troy Alstead | ||
| /S/ R. John Anderson | Director | |
| R. John Anderson | ||
| /S/ Michael J. Cave | Non-Executive Chairman | |
| Michael J. Cave | ||
| /S/ Allan Golston | Director | |
| Allan Golston | ||
| /S/ Sara L. Levinson | Director | |
| Sara L. Levinson | ||
| /S/ N. Thomas Linebarger | Director | |
| N. Thomas Linebarger | ||
| /S/ Brian Niccol | Director | |
| Brian Niccol | ||
| /S/ Maryrose Sylvester | Director | |
| Maryrose Sylvester | ||
| /S/ Jochen Zeitz | Director | |
| Jochen Zeitz | ||