EDGAR 10-K Filing

Company CIK: 793952
Filing Year: 2022
Filename: 793952_10-K_2022_0000793952-22-000014.json

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ITEM 1. BUSINESS
Item 1. Business
General
Harley-Davidson Motor Company was founded in 1903. Harley-Davidson, Inc. was incorporated in 1981, at which time it purchased the Harley-Davidson® motorcycle business from AMF Incorporated in a management buyout. In 1986, Harley-Davidson, Inc. became publicly held. Harley-Davidson, Inc. is the parent company of the group of companies referred to as Harley-Davidson Motor Company and Harley-Davidson Financial Services. Unless the context otherwise requires, all references to the “Company” include Harley-Davidson, Inc. and all of its subsidiaries. The Company operates in two segments: Motorcycles and Related Products (Motorcycles) and Financial Services. The Company's reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations.
Strategy(1)
During 2020, the Company executed a set of actions, referred to as The Rewire. The Rewire was a critical overhaul of the Company's business to set the Company on a new course and to provide a solid foundation to execute its 2021-2025 strategic plan, The Hardwire.
The Hardwire is the Company's 2021-2025 strategic plan guided by its mission and vision, which the Company introduced on February 2, 2021. The plan targets long-term profitable growth through focused efforts that extend and strengthen the brand and drive value for its shareholders. The Company's ambition is to enhance its position as the most desirable motorcycle brand in the world. Desirability is a motivating force driven by emotion. Harley-Davidson has long been associated with igniting desirability, and it is embedded in its vision; it is at the heart of its mission and it is part of its 118-year legacy. To drive desirability, the Company will:
•Design, engineer and advance the most desirable motorcycles in the world - reflected in quality, innovation, and craftsmanship
•Build a lifestyle brand valued for the emotion reflected in every product and experience for riders and non-riders alike
•Focus on customers, delivering adventure and freedom for the soul
The Hardwire strategic priorities are as follows:
Profit focus: Investing in its strongest motorcycle product segments - Harley-Davidson plans to invest significant time and resources on strengthening and growing its leadership positions in its strongest, most profitable motorcycle product segments: Grand American Touring, large Cruiser and Trike.
Selective expansion and redefinition: To win in attractive motorcycle segments and markets - The Company plans to selectively expand into and within motorcycle segments, focusing on product segments that are profitable and aligned with the Company's product and brand capabilities, such as Adventure Touring and middleweight Cruiser.
The Company plans to focus on approximately 50 global markets that matter most to its future growth. This includes the following priority markets: United States, DACH (Germany, Austria, and Switzerland), Japan, China, Canada, France, United Kingdom, Italy, Australia, and New Zealand. The Company will also continue to test further avenues for desirable long-term growth such as premium low-displacement motorcycles.
Lead in Electric: Investing in leading the electric motorcycle market - Electric motorcycles are important to the Company's future and it is committed to and passionate about leading the electric motorcycle market. The focus will be on technology development, with an approach to product and go-to-market actions that reflect the expectations of the targeted customer to deliver the most desirable electric motorcycles in the world. Refer to the LiveWire Transaction discussion included in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of this report for more information regarding recent actions the Company has taken to lead in electric.
Growth beyond bikes: Expanding complementary businesses and engaging beyond product - Harley-Davidson creates products, services and experiences that inspire its customers to discover adventure, find freedom for the soul and live the Harley-Davidson lifestyle. The Company's parts and accessories, apparel and licensing, and Financial Services businesses are all important pillars of the Company's future success as a global lifestyle brand. Through The Hardwire, the Company plans to grow the profitability of these businesses through refreshed product and program offerings, stronger execution and additional opportunities, including digital and in-dealership purchases.
Customer experience: Growing our connection with riders and non-riders - The Hardwire puts customers at the forefront of the Company's products, experiences and investments - from the rider who may dream of motorcycling or just learned to ride, all the way to riders who are deeply passionate about and invested in the Harley-Davidson lifestyle. The Company recognizes the different needs and expectations of its customers and is creating touchpoints tailored to individual needs. Powered by integrated data, the goal is to seamlessly engage with customers, creating a meaningful, unique and personalized experience with Harley-Davidson each and every time.
Inclusive Stakeholder Management: Prioritizing people, planet and profit - The Company strives to deliver long-term value to all stakeholders - people (employees, dealers, customers, suppliers, shareholders, and communities), planet, and profit. Inclusive Stakeholder Management is the unifying theme for how the Company will help drive additional shareholder value for its investors.
In early 2021, the Company provided financial targets for its 2021-2025 strategic plan. The Company is in the process of updating these targets based on 2021 financial results and progress made on The Hardwire strategic priorities to date. The Company expects to provide updated long-term financial targets in the second quarter of 2022.(1)
Motorcycles and Related Products Segment
The Motorcycles segment consists of the activities of Harley-Davidson Motor Company, which designs, manufactures and sells motorcycles. The Motorcycles segment also sells motorcycle parts, accessories, and apparel as well as licenses its trademarks. The Motorcycles segment conducts business on a global basis, with sales in the United States (U.S.), Canada, Europe/Middle East/Africa (EMEA), Asia Pacific, and Latin America. The Company's products are sold to retail customers primarily through a network of independent dealers. Dealers generally stock and sell the Company's motorcycles, parts and accessories, apparel, and licensed products and service motorcycles. Dealership points by geographic location as of December 31, 2021 were as follows:
U.S. Canada EMEA Asia Pacific Latin America Total
Dealership points 615 49 362 276 46 1,348
In 2021, the Company opened its first Company-owned retail dealership in the U.S. which exclusively sells LiveWire electric motorcycles through both in-store and eCommerce channels. All other dealerships included in the table above are independently owned.
The Company also distributes its motorcycles through an independent distributor in India. The independent distributor sells the Company's products through independent Harley-Davidson dealers, included in the table above, as well as their existing dealer network.
The Company's parts and accessories and apparel are also retailed through the Company's eCommerce websites in the U.S. and in certain European markets. Products sold through the U.S. eCommerce website are retailed to consumers through authorized U.S. dealers. Products sold through the European eCommerce website are retailed by the Company directly to the consumer. In addition, the Company utilizes third-party eCommerce websites in other select international markets.
Motorcycles segment revenue by product line as a percent of total revenue for the last three fiscal years was as follows:
2021 2020 2019
Motorcycles 76.6 % 72.0 % 77.4 %
Parts and accessories 16.3 20.2 15.6
Apparel 5.0 5.7 5.2
Licensing 0.8 0.9 0.8
Other products and services 1.3 1.2 1.0
100.0 % 100.0 % 100.0 %
Motorcycles - The Company offers internal combustion engine motorcycles, under the Harley-Davidson brand, and electric powered motorcycles under the LiveWire brand. The Company established LiveWire as a separate brand in mid-2021. Prior to that, the Company offered electric motorcycles under the Harley-Davidson brand since their introduction in 2019. The Company's internal combustion engines generally have displacements that are greater than 600 cubic centimeters (cc), up to a maximum displacement of approximately 1900cc. The Company's electric motorcycles have an electric powered motor with a kilowatt (kW) peak power equivalent to greater than 600cc. The Company markets its motorcycles in six categories that reflect customer needs and preferences and the Company's unique combination of product heritage and innovation. The Company's product categories include: Grand American Touring, Trike, Adventure Touring, Cruiser, Sport and Electric. The motorcycle industry uses the following motorcycle product segments:
•Touring - emphasizes rider comfort and load capacity and incorporates features such as fairings and luggage compartments ideal for long rides, including the Company's Grand American Touring and Trike models
•Dual - designed with the capability for use on-road as well as for some off-road recreational use, including the Company's Adventure Touring models
•Cruiser - emphasizes styling, customization and casual riding including the Company's Cruiser, Sport and Electric models
•Standard - a basic motorcycle typically featuring upright seating for one or two passengers
•Sportbike - incorporates racing technology and performance and aerodynamic styling and riding position
Competition in the motorcycle industry is based upon a number of factors including product capabilities and features, styling, price, quality, reliability, warranty, availability of financing, and quality of the dealer networks that sell the products. The Company believes its motorcycles continue to generally command a premium price at retail relative to competitors’ motorcycles. Harley-Davidson motorcycles offer unique styling, customization, innovative design, distinctive sound, superior quality and reliability and include a warranty. The Company also considers the availability of its line of motorcycle parts and accessories and apparel, the availability of financing through Harley-Davidson Financial Services and its global network of dealers to be competitive advantages.
Industry data includes on-road motorcycles with internal combustion engines with displacements greater than 600cc and electric motorcycles with kW peak power equivalents greater than 600cc (601+cc). In 2021, approximately 81% of the total annual dealer retail sales of new Harley-Davidson motorcycles were sold in the U.S. and European 601+cc markets. Other significant markets for the Company, based on the Company's 2021 retail sales data, include Canada, Japan, Australia and New Zealand and China.
Industry retail registration data(a)(b) for 601+cc motorcycles was as follows:
2021 2020 2019
Industry new motorcycle registrations:
United States(c)
281,502 241,790 252,842
Europe(d)
427,807 411,991 413,254
Harley-Davidson new motorcycle registrations:
United States(c)
125,368 101,744 124,040
Europe(d)
25,429 31,548 37,619
Harley-Davidson market share data:
United States(c)
44.5 % 42.1 % 49.1 %
Europe(d)
5.9 % 7.7 % 9.1 %
(a)Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt (kW) peak power equivalents greater than 600cc's (601+cc). On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table.
(b)The retail registration data for Harley-Davidson motorcycles presented in this table will differ from the Harley-Davidson retail sales data presented in Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations (Item 7). The Company’s source for retail sales data in Item 7 is sales and warranty registrations provided by dealers as compiled by the Company. The retail sales data in Item 7 includes sales of Harley-Davidson Street® 500 motorcycles which are excluded from this table. In addition, small differences may arise related to the timing of data submissions to the independent sources.
(c)U.S. industry data is derived from information provided by the Motorcycle Industry Council. This third-party data is subject to revision and update.
(d)Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. Industry data is derived from information provided by Management Services Helwig Schmitt GmbH. This third-party data is subject to revision and update.
Parts and Accessories - Parts and accessories products are comprised of Genuine Motor Parts and Genuine Motor Accessories. Genuine Motor Parts include replacement parts and Genuine Motor Accessories includes mechanical and cosmetic accessories.
Apparel and Licensing - Apparel, formerly referred to as General Merchandise, includes clothing and riding gear including Genuine MotorClothes®. In addition, the Company creates reach and awareness of the Harley-Davidson brand among its customers and the non-riding public by licensing the name “Harley-Davidson” and other trademarks owned by the Company for use on a range of products.
Patents and Trademarks - The Company strategically manages its portfolio of patents, trade secrets, copyrights, trademarks and other intellectual property.
The Company owns, and continues to obtain, patent rights that relate to its motorcycles and related products and processes for their production. Certain technology-related intellectual property is also protected, where appropriate, by license agreements, confidentiality agreements or other agreements with suppliers, employees and other third parties. The Company diligently protects its intellectual property, including patents and trade secrets, and its rights to innovative and proprietary technologies and designs. This protection, including enforcement, is important as the Company moves forward with investments in new products, designs and technologies. While the Company believes patents are important to its business operations and in the aggregate constitute a valuable asset, the success of the business is not dependent on any one patent or group of patents. The Company’s active patent portfolio has an average remaining age of approximately six years. A patent review committee manages the patent strategy and portfolio of the Company.
Trademarks are important to the Company’s motorcycle and related products businesses and licensing activities. The Company has a vigorous worldwide program of trademark registration and enforcement to maintain and strengthen the value of the trademarks and prevent the unauthorized use of those trademarks. The HARLEY-DAVIDSON trademark and the Bar and Shield trademark are each highly recognizable to the public and are very valuable assets. Additionally, the Company uses numerous other trademarks, trade names and logos which are registered worldwide. The following are among the Company’s trademarks: HARLEY-DAVIDSON, H-D, HARLEY, the Bar & Shield Logo, MOTORCLOTHES, the MotorClothes Logo, the #1 Logo, the Willie G Skull Logo, HARLEY OWNERS GROUP, H.O.G., the H.O.G. Logo, LIVEWIRE, SOFTAIL and SPORTSTER. The HARLEY-DAVIDSON trademark has been used since 1903 and the Bar and Shield trademark since at least 1910. Substantially all of the
Company’s trademarks are owned by H-D U.S.A., LLC, a subsidiary of the Company, which also manages the Company’s global trademark strategy and portfolio.
Marketing - The Company’s brand, products and the riding experience are marketed to consumers worldwide. Marketing occurs primarily through digital and experiential activities as well as through more traditional promotional and advertising activities. Additionally, the Company’s dealers engage in a wide range of local marketing and events.
Experiences that build community and connect consumers with the Harley-Davidson brand and with one another have traditionally been at the center of much of the Company’s marketing efforts. To develop, engage and retain committed riders, the Company participates in and sponsors motorcycle rallies, racing activities, music festivals and other special events. This includes events sponsored by the Harley Owners Group (H.O.G.®) to build community and connect Harley-Davidson motorcycle riders around the world. These activities help inspire interest in riding, foster motorcycle culture and build a passionate community of Harley-Davidson riders. The COVID-19 pandemic continues to impact the Company's ability to participate in and sponsor certain events. The Company has resumed activities; however, it continues to modify the experience to remain compliant with COVID-19 protocols.
Seasonality - The seasonality of the Company’s wholesale motorcycle shipments generally correlates with the timing of retail sales made by dealers. Retail sales generally track closely with regional riding seasons. In addition, during 2020, wholesale shipments and retail sales were impacted by the Company's decision to reset, beginning in 2020, the timing of its annual new model year introduction from the third quarter to the first quarter. As a result of this change, initial shipments of new model year 2021 motorcycles did not occur until the first quarter of 2021.
Motorcycle Manufacturing - The majority of the Company's manufacturing processes are performed at facilities located in the U.S. The Company's U.S. manufacturing facilities supply the U.S. market as well as certain international markets. Additionally, the Company operates facilities in Thailand and Brazil. The Company's Thailand facility manufactures motorcycles for certain Asian and European markets. In Brazil, the Company operates a facility that assembles motorcycles from component kits sourced from the Company’s U.S. facilities and suppliers. The Company's global manufacturing operations are focused on driving world-class quality and performance. A global manufacturing footprint enables the Company to be close to customers, provide quality products at a competitive price and grow its overall business.
Raw Materials and Purchased Components - The Company continues to establish and reinforce long-term, mutually beneficial relationships with its suppliers. Through these collaborative relationships, the Company gains access to technical and commercial resources for application directly to product design, development and manufacturing initiatives. In addition, through a continued focus on collaboration and strong supplier relationships, the Company believes it will be positioned to achieve its strategic objectives and deliver cost and quality improvements over the long-term.(1)
The Company's principal raw materials include steel and aluminum castings, forgings, steel sheet and bar. The Company also purchases certain motorcycle components including, but not limited to, electronic fuel injection systems, batteries, tires, seats, electrical components, instruments and wheels. The Company closely monitors the overall viability of its supply base. The Company is proactively working with its suppliers in an effort to minimize disruptions resulting from supply chain challenges. This includes managing through the impact of the current global shortage of semiconductor chips. During 2021, these challenges resulted in increased costs and disruptions in the availability of certain raw materials and purchased components, which in turn impacted the Company's production, shipments and revenues.
Regulation - International, federal, state and local authorities have various environmental control requirements relating to air, water and noise that affect the business and operations of the Company. The Company strives to ensure that its facilities and products comply with all applicable environmental regulations and standards.
The Company’s motorcycles and certain other products that are sold in the U.S. are subject to certification by the United States Environmental Protection Agency (EPA) and the California Air Resources Board (CARB) for compliance with applicable emissions and noise standards. Certain Harley-Davidson products are designed to comply with EPA and CARB standards and the Company believes it will comply with future requirements when they go into effect.(1) Additionally, certain of the Company’s products must comply with the motorcycle emissions, noise and safety standards of Canada, the European Union, Japan, Brazil and certain other foreign markets where they are sold, and the Company believes its products currently comply with those standards. As the Company expects environmental standards to become more stringent over time, the Company will continue to incur research, development and production costs in this area for the foreseeable future.(1)
The Company, as a manufacturer of motorcycle products, is subject to the U.S. National Traffic and Motor Vehicle Safety Act, which is administered by the U.S. National Highway Traffic Safety Administration (NHTSA). The Company has certified to NHTSA that certain of its motorcycle products comply fully with all applicable federal motor vehicle safety standards and related regulations. The Company has from time to time initiated certain voluntary recalls. During the three years ending in 2021, the Company accrued $5.5 million associated with 9 voluntary recalls.
Financial Services Segment
The Financial Services segment consists of the activities of Harley-Davidson Financial Services which is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. Harley-Davidson Financial Services also works with certain unaffiliated insurance companies to provide motorcycle insurance and protection products to motorcycle owners. Harley-Davidson Financial Services conducts business principally in the U.S. and Canada. The Company’s dealers and their retail customers in EMEA, Asia Pacific and Latin America generally have access to financing through third-party financial institutions, some of which have licensing agreements with Harley-Davidson Financial Services.
Wholesale Financial Services - Harley-Davidson Financial Services provides wholesale financial services to the Company's U.S. and Canadian independent dealers, including floorplan and open account financing of motorcycles and parts and accessories. All the Company's U.S. and Canadian independent dealers utilized Harley-Davidson Financial Services financing programs at some point during 2021.
Retail Financial Services - Harley-Davidson Financial Services provides retail financing to consumers, consisting primarily of installment lending for the purchase of new and used Harley-Davidson motorcycles. Harley-Davidson Financial Services’ retail financial services are available through most of the Company's dealerships in the U.S. and Canada.
Insurance Services - Harley-Davidson Financial Services works with certain unaffiliated insurance companies which offer point-of-sale protection products through most of the Company's dealers in the U.S. and Canada, including motorcycle insurance, extended service contracts and motorcycle maintenance protection. Harley-Davidson Financial Services also direct-markets motorcycle insurance and extended service contracts to owners of Harley-Davidson motorcycles. In addition, Harley-Davidson Financial Services markets a comprehensive package of business insurance coverages and services to owners of the Company's dealerships.
Licensing - Harley-Davidson Financial Services 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, Harley-Davidson Financial Services 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 Harley-Davidson Financial Services’ goal of providing credit while delivering appropriate returns and profitability. Financial Services operations in 2021 were funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, asset-backed securitizations and brokered certificates of deposit that Harley-Davidson Financial Services offers to customers indirectly through contractual arrangements with third-party banks and/or securities brokerage firms through its bank subsidiary.
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. Harley-Davidson Financial Services competes on convenience, service, brand association, dealer relations, industry experience, terms, and price.
In the U.S. and Canada, Harley-Davidson Financial Services financed 64.8% and 33.3% of new Harley-Davidson motorcycles retailed by dealers during 2021, respectively, compared to 67.6% and 42.2%, respectively, during 2020. 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, Harley-Davidson Financial Services 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 dealers in their local markets.
Trademarks - Harley-Davidson Financial Services 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 - Harley-Davidson Financial Services 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. Harley-Davidson Financial Services wholesale financing volume is affected by inventory levels at dealers. Dealers generally have higher inventory in the first half of the year. As a result, outstanding wholesale finance receivables are generally higher during the same period.
Regulation - Harley-Davidson Financial Services operations are generally subject to supervision and regulation by federal and state 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, Harley-Davidson Financial Services 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 limit the ability of Harley-Davidson Financial Services 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 Harley-Davidson Financial Services to the payment of damages or penalties and administrative sanctions, including “cease and desist” orders, and could limit the number of loans eligible for Harley-Davidson Financial Services' securitization programs.
The Dodd-Frank Wall Street Reform and Consumer Protection Act granted the federal Consumer Financial Protection Bureau (the Bureau) significant supervisory, enforcement and rule-making authority in the area of consumer financial products and services. Certain actions and regulations of the Bureau will directly impact Harley-Davidson Financial Services and its operations. For example, the Bureau has supervisory authority over non-bank larger participants in the vehicle financing market, which includes a non-bank subsidiary of Harley-Davidson Financial Services.
Such regulatory requirements and associated supervision also could limit the discretion of Harley-Davidson Financial Services 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.
Eaglemark Savings Bank (ESB), a subsidiary of Harley-Davidson Financial Services, is a Nevada state thrift chartered as an Industrial Loan Company. The activities of ESB are governed by federal laws and regulations and State of Nevada banking laws. ESB is subject to examination by the Federal Deposit Insurance Corporation (FDIC) and Nevada state bank examiners. ESB originates retail loans, retains certain of those loans and sells the remaining loans to a non-banking subsidiary of Harley-Davidson Financial Services. This process allows Harley-Davidson Financial Services to offer retail products with many common characteristics across the U.S. and to similarly service loans to U.S. retail customers.
Human Capital Management
Workforce Composition - As of December 31, 2021, the Company’s global workforce was comprised of approximately 5,800 employees, including approximately 5,200 and 600 employees within the Motorcycles and Financial Services segments, respectively. Of all employees, 86.5% are based in the U.S., 54.4% are salaried, and 41.4%, or approximately 2,400 hourly unionized employees at the Company's U.S. manufacturing facilities, are represented as follows with collective bargaining agreements:
•York, Pennsylvania - International Association of Machinist and Aerospace Workers (IAM); agreement will expire on October 15, 2022
•Milwaukee, Wisconsin - United Steelworkers of America (USW) and IAM; agreements will expire on March 31, 2024
•Tomahawk, Wisconsin - USW, agreement will expire on March 31, 2024
Based on employee-provided identity information, 71.8% of the Company’s global workforce was male and 78.4% of the U.S. workforce was white at the end of 2021. The following table provides gender and race/ethnicity information for the Company's employees at the end of the last two years and for new hires during those years. The information is presented for both the total workforce and for the management and above portion of the Company's workforce. The gender identity information is for the global workforce and the race/ethnicity information is for the U.S. workforce.
Management and Above Total Workforce
Employees New Hires Employees New Hires
2021 2020 2021 2020 2021 2020 2021 2020
Global Gender Identity:
Male 70.5% 71.7% 65.6% 66.7% 71.8% 71.4% 73.8% 69.8%
Female 29.5% 28.3% 34.4% 33.3% 28.2% 28.6% 26.2% 30.3%
Diversity (U.S.):
White 87.4% 90.5% 64.1% 58.1% 78.4% 82.0% 64.4% 69.1%
Of global majority 12.6% 9.5% 35.9% 41.9% 21.6% 18.0% 35.6% 30.9%
Female & Diverse:
U.S. white male 48.9% 51.0% 28.9% 22.9% 49.2% 50.6% 42.9% 31.8%
Global females & U.S. males of global majority 35.7% 33.1% 51.1% 52.1% 40.9% 38.6% 50.1% 41.5%
One of the measures under the Company's 2021 executive leadership long-term incentive awards was to achieve greater than or equal to a 38% diverse representation for the Manager and above salaried workforce from a baseline of 35.8%, using a methodology where each attribute is measured (e.g., a diverse female Manager is one person with two attributes). Applying this same methodology, as of December 31, 2021, 39.3% of the Manager and above workforce was female (global) or diverse (U.S. non-white). The table above measures only one attribute per person.
Employee Wellbeing - Inclusive Stakeholder Management is one of six key priorities under The Hardwire, and the Company believes that the success of The Hardwire will be realized through the engagement and empowerment of its employees. The Company's overall employee wellbeing objectives are to develop an inclusive and diverse workforce and establish progressive work environments, policies, and practices. Progress against those objectives in 2021 included:
•In February 2021, the Company extended employee ownership to all employees by making an equity grant to approximately 4,500 employees not otherwise eligible for equity grants, including hourly production workers.
•In July 2021, the Company issued a global Workplace Ecosystem Policy reflecting a shift to a more flexible workplace environment for employees with the establishment of On-Campus, Hybrid, Remote and Field role categories. Most of the Company's salaried workforce is categorized as Hybrid. The Workplace Ecosystem Policy provides flexibility for individual work hours and “days in office” are not mandated.
•In September 2021, the Company announced to all U.S. employees the availability of free, confidential financial education and one-on-one support through a partnership with Operation HOPE, a non-profit, for purpose organization dedicated to financial dignity and inclusion.
•In October 2021, the Company explained to employees its revamped Total Rewards approach, which includes incentive plans, health care and employee assistance program (EAP) benefits, tuition reimbursement and compensation. As it relates to compensation, the Company announced an upward adjustment in compensation rates (salary and hourly) effective January 1, 2022, added an impact increase mechanism, and clarified the process for awarding spot bonuses. The Company's revamped Total Rewards approach also provides more transparency regarding annual market evaluations of employment positions (through a global compensation survey) and the Company's biennial equity evaluation (conducted with an external third party), both of which may result in individual compensation adjustments.
•The Company continued its strong health and safety performance through 2021, ending the year with a 0.4 recordable rate, 0.4 restricted time (DART) rate and 0.2 lost time (DAFWII) rate for the Company.
•With respect to training and development, during the fourth quarter of 2021 the Company launched a new employee experience that involved approximately 290 new employees learning about the Company and connecting with others, including leaders. The Company also launched a manager development program to help new managers understand their roles and responsibilities as new leaders and continued its development program for leaders with an additional nine
topics of discussion and best practices sharing; approximately 50 people leaders engaged in the Company's “Leading H-D#1 Academy” and approximately 1,200 people leaders followed the Company's talent development toolkit pathway as of December 31, 2021. Overall, the number of active users in the Company's online learning platform increased 21%, to approximately 2,900 active users, in 2021.
•In addition, the Company had four employees participate in a new leadership development program sponsored by the African American Chamber of Commerce Wisconsin and 25 employees in total participated in two different cohorts of the YWCA Southeast Wisconsin’s Conversations on Race program, including employees from outside Wisconsin.
Climate Change
As a producer of heavyweight gasoline-powered motorcycles, the Company recognizes the impact its products and their production have on the environment. The Company continues to strive to reduce its environmental impact across all aspects of its business and has committed to achieving net zero carbon emissions by 2050. The Company aims to have interim targets to get to net zero carbon emissions set by the end of 2022 that are based on the principles of the Science Based Targets initiative to keep the earth’s temperature rise below 1.5°C and the benefits of high-quality carbon credits focused on nature and biodiversity conservation. The Company is focusing on the following areas as it defines its path to achieving net zero carbon emissions: (1) improving fuel economy and reducing emissions for combustion products; (2) working with its suppliers and through the upstream tiers to reduce the impacts of the entire supply chain; (3) using less energy and an increased mix of renewable energy in its factories and offices (and encouraging efforts for energy producers to be carbon neutral); (4) advancing and leading the industry in electric motorcycles; and (5) defining its approach to the use of carbon credits and offsets with a focus on supporting sustainable developments and resiliency. Regulatory developments, global climate changes and consumer preferences will impact the Company’s interim targets.
In addition, climate change-related legislation and regulation could impact the Company and the actions it takes to respond to climate change concerns. The motorcycle industry is already subject to regulations worldwide that govern product characteristics and that differ by region, country, state or province and locality. Regulations continue to be proposed to address concerns regarding the environment, including global climate change and its impact. The precise implications of those actions, as well as future efforts, are uncertain.
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: (i) the Company’s Corporate Governance Policy; (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; (iii) the Company’s Financial Code of Ethics; (iv) the Company’s Code of Business Conduct (the Code of Conduct); (v) the Conflict of Interest Process for Directors, Executive Officers and Other Employees (the Conflict Process); (vi) a list of the Company’s Board of Directors; (vii) the Company’s Bylaws; (viii) the Company’s Environmental and Energy Policy; (ix) the Company’s Policy for Managing Disclosure of Material Information; (x) the Company’s Supplier Code of Conduct; (xi) the Sustainability Strategy Report; (xii) the California Transparency in Supply Chain Act Disclosure; (xiii) the Statement on Conflict Minerals; (xiv) the Political Engagement and Contributions 2017-2020; and (xv) the Company's Clawback Policy. The Company's Notice of Annual Meeting and Proxy Statement for its 2022 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 its investor relations website. The Company is not including the information contained on or available through any of its websites as a part of, or incorporating such information by reference into, this Annual Report on Form 10-K.

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ITEM 1A. RISK FACTORS
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.
Operational Risks
•The Company’s operations have been and may continue to be disrupted to varying degrees due to the COVID-19 pandemic. The spread of COVID-19 and the subsequent actions taken to mitigate the spread impacted the Company's operations and ability to carry out its business as usual. The impact of COVID-19 and associated variants, including changes in consumer and business behavior, pandemic fears, market downturns, and restrictions on business and individual activities, has created significant volatility in the global economy and led to reduced economic activity. The spread of COVID-19 and associated variants (some of which may be more transmissible, such as the Delta and Omicron variants) has also created a disruption in the manufacturing, delivery and overall supply chain of vehicle manufacturers and suppliers, and has led to a global decrease in vehicle sales in markets around the world.
The COVID-19 pandemic has resulted in government authorities implementing numerous measures to try to contain the virus, such as travel bans and restrictions, quarantines, stay-at-home or shelter-in-place orders, and business shutdowns. These measures may adversely impact: (i) the Company's employees and operations; (ii) the operations of the Company's suppliers, vendors and business partners; (iii) the activities of the Company's retail customers; (iv) the Company's production plans, sales and marketing activities; and (v) the Company's business and results of operations. In addition, the Company is not able to conduct various aspects of its business on a remote basis. These measures by government authorities may remain in place, in whole or in part, for a significant period of time and they are likely to continue to adversely affect the Company's sales and marketing activities, and its business, prospects, financial condition and operating results.
In addition, the COVID-19 pandemic has disrupted the Company’s supply chain, operations, and ability to carry out its business as usual, including through: (i) a rapid increase in demand; (ii) supply shortages; (iii) significant global shipment delays, including longer shipping times and increased expedited freight costs; (iv) limiting the ability of the Company’s distributors and dealers to operate; (v) delays to some customer purchase decisions; (vi) adversely impacting the ability of the Company’s retail credit customers to meet their loan obligations on a timely basis and making collection efforts more difficult; (vii) disruption to global capital markets impacting the Company’s access to capital, cost of capital, and overall liquidity levels; and (viii) the cancellation or adjustments to the scope of riding and similar events that are important to the Company’s marketing efforts. While many of the actions implemented to mitigate the spread of COVID-19 have been rolled back in certain markets, the continued spread of COVID-19, and the efforts to avoid that, could do the following, each of which could be material: (i) result in further disruptions of the Company’s supply chain; (ii) again limit the ability of the Company’s distributors and dealers to operate, which could impact their ability to purchase and sell the Company’s products and meet their loan obligations to the Company; (iii) continue to cause some retail customers to delay their purchase decisions, which could cause a decrease in demand for the Company’s product; (iv) continue to adversely impact the ability of the Company’s retail credit customers to meet their loan obligations on a timely basis and make collection efforts more difficult; (v) result in further disruption of global capital markets; and (vi) cause other unpredictable events.
The extent to which the COVID-19 pandemic impacts the Company's business, prospects, financial condition and operating results will depend on future developments, which are highly uncertain and cannot be predicted, including the duration and spread of the pandemic, its severity, the existence and severity of COVID-19 variants, the actions to contain the virus or treat its impact (including the availability of vaccines and the speed and extent of vaccine distribution and acceptance), how quickly and to what extent normal economic and operating activities can resume, and whether and to what extent COVID-19 or variants thereof, including the Delta and Omicron variant which has become widespread in the U.S., re-emerge, spread and impact the Company and its suppliers after normal activities resume. Even after the COVID-19 pandemic has subsided, the Company may continue to experience an adverse impact to its business as a result of the pandemic’s global economic impact, including any recession that has occurred or may occur in the future.
•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 is highly competitive and continues to change in terms of styling preferences and advances in new technologies and, at the same time, is subject to increasing regulations, including related to safety and emissions. Price, reliability, styling, quality, and product features are some of the factors that impact competition in the motorcycle market. The Company must continue to
distinguish its products from its competitors’ products with unique styling and new technologies that consumers desire. Introducing new models may 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, market demands, and legal and regulatory requirements. 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.
•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 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 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 is operating with a remodeled approach to supply and inventory management, that approach 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 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. The Company also faces pricing pressure from international competitors who may have the advantage of manufacturing and marketing products in their respective countries, allowing them to sell products at lower prices within their respective countries. 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 policies and actions of the U.S. Securities and Exchange Commission (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. 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.
•The Company must prevent and detect issues with its products, components purchased from suppliers and their 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 quality issues, 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 with a resulting adverse impact on sales of new products.
•A significant cybersecurity incident or data privacy 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 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. 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 the Company's 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 designed 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 cybersecurity incidents or misuses of data. The Company and certain of the Company's third-party providers have 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 its 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, lawsuits with third-parties, fines and penalties, government enforcement actions, unauthorized release of confidential or otherwise protected information, corruption of data, negative impact on the value of investment in research, development and engineering, remediation costs, 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 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, termination of supply of some of the Company's components or untimely delivery. The prices for these raw materials and components may fluctuate depending on market conditions, which include inflation, exchange rate fluctuations, commodity market volatility, tariffs, embargoes, sanctions, trade policies, and other trade restrictions. 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, capacity constraints, labor shortages or disputes, natural disasters or widespread infectious disease like COVID-19. 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. Such disruptions have resulted in and could further result in manufacturing inefficiencies due to the delay in delivering components for production or having to find alternative components due to lack of availability, and could place the Company in an uncompetitive position resulting in a material adverse effect on its operations, financial condition and/or cash flows.
•The Company depends upon third parties to manufacture and to supply key semiconductor chip components necessary for its motorcycles. The Company may be unable to find alternative sources in a timely manner and its business could continue to be adversely impacted if these manufacturers continue to be unable to provide an adequate supply of semiconductor chips. Semiconductor chips are a vital input component to the electrical architecture of the Company's motorcycles, controlling wide aspects of the motorcycles’ operations. Many of the key semiconductor chips used in the Company's motorcycles come from single-source or limited-source suppliers, and therefore a disruption with any one manufacturer or supplier in the Company's supply chain would continue to have an adverse effect on its ability to effectively produce and timely deliver its motorcycles. Due to the Company's reliance on these semiconductor chips, it is subject to shortages and long lead times in their supply. While the Company has entered into a supply agreement to acquire semiconductor chips, the Company has limited flexibility to
immediately change suppliers in the event of any disruption in the supply of those chips, which could then disrupt production of the Company's motorcycles. The Company is in the process of identifying alternative manufacturers for semiconductor chips. The Company has in the past experienced, and may in the future experience, semiconductor chip shortages, and the availability and cost of these components would be difficult to predict. For example, the manufacturers of the Company's ABS chip and engine control module chip, are experiencing supply shortages, impacting their ability to supply the Company with required volumes, which has impacted the Company's production capacity and could cause the Company to alter its production timelines for certain product lines. Additionally, the Company's manufacturers may also experience temporary or permanent disruptions in their manufacturing operations due to equipment breakdowns, labor strikes or shortages, natural disasters, component or material shortages, cost increases, acquisitions, insolvency, changes in legal or regulatory requirements, or other similar problems. In particular, increased demand for semiconductor chips in 2020, due in part to the COVID-19 pandemic and increased demand for consumer electronics that use these chips, has resulted in a severe global shortage of chips that is continuing. As a result, the Company's ability to source semiconductor chips used in its motorcycles has been and will likely continue to be adversely affected. This shortage resulted in increased chip delivery lead times, delays in the production of the Company's motorcycles, and increased costs to source available semiconductor chips. To the extent this semiconductor chip shortage continues, and the Company is unable to mitigate the effects of this shortage, the Company's ability to deliver sufficient quantities of its motorcycles has been and may continue to be adversely affected. In addition, the Company may be required to incur additional costs and expenses in managing the ongoing semiconductor chips shortage, including additional research and development expenses and engineering design and development costs in the event that new suppliers must be onboarded on an expedited basis.
•The Company primarily sells its products at wholesale and must rely to a large extent on a network of dealers and distributors to manage the retail distribution of its products. The Company depends on the capability of its distributors and 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 distributors and dealers are not successful in these endeavors, or do not appropriately adapt to the evolving retail landscape and implement the Company's retail strategy, including the creation of an innovative go-to-market model blending digital and physical retail formats to create an experience tailored to the local market, then the Company will be unable to maintain or grow its revenues and meet its financial expectations. Further, distributors and 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 distributors and 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 distributors and dealerships. As a result, the Company could face additional adverse consequences related to the termination of distributor and dealer relationships. Additionally, liquidating a former distributor or 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 distributors or 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 dealer.
•Weather may impact retail sales by the Company's 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 and used Harley-Davidson motorcycles and parts and accessories. 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. The Company 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 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.
•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, such as inflation, turnover, and labor strikes or shortages. 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.
Strategic Risks
•The Company may not be able to successfully execute its 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 Company’s strategic plan, The Hardwire. The Company’s ability to meet the strategic priorities in The Hardwire depends upon, among other factors, the Company’s ability to: (i) realize expectations concerning market demand for electric, middleweight, and small-displacement models; (ii) effectively and successfully create a new publicly traded company for its electric motorcycle division, LiveWire, under its definitive business combination agreement with AEA-Bridges Impact Corp. (ABIC); (iii) realize the anticipated business benefits of LiveWire as a separate business; (iv) develop and introduce products, services and experiences on a timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, including successfully implementing and executing plans to strengthen and grow its leadership position in Grand American Touring, larger Cruiser, and Trike, focusing on opportunities in profitable segments, and growing its complementary businesses, including Harley-Davidson Financial Services, HD1 Marketplace, parts and accessories, and apparel and licensing; (v) successfully carry out its global manufacturing and assembly operations; (vi) effectively implement changes relating to its dealers and distribution methods, which include the creation of an innovative go-to-market model blending digital and physical retail formats to create an experience tailored to the local market; (vii) accurately analyze, predict and react to changing market conditions; (viii) perform in a manner that enables the Company to benefit from market opportunities while competing against existing and new competitors; (ix) optimize long-term value for all stakeholders; and (x) avoid adverse impacts to its operations and/or demand for its products that may result due to the ongoing COVID-19 pandemic.
•The business separation of LiveWire could be disruptive to the Company’s business and operations, and there can be no guarantee that it will provide the anticipated business benefits. On December 13, 2021, the Company announced that it had entered into a definitive business combination agreement under which ABIC will combine with LiveWire to create a new publicly traded company. Like any business separation, the separation involves risks, including difficulties associated with the separation of operations, services, and personnel; disruption in operations; the potential loss of key employees; and adverse effects on relationships with business partners. The Company may experience operational and financial risks in connection with separating LiveWire if it is unable to: (i) successfully separate the operations, as well as the accounting, financial controls, management information, technology, data, human resources and other administrative systems and functions, (ii) successfully identify and realize potential opportunities and risks with separating LiveWire, and (iii) successfully manage carve-out related strain on management, operations, and financial resources. The separation requires significant time and resources, and the Company may not manage these processes successfully. The Company may make substantial investments of resources to support the separation, which could result in significant ongoing operating expenses and may divert resources and management attention from other areas the business. If the Company fails to successfully separate the LiveWire business, it may not realize the benefits expected from the separation. Additionally, the Company has incurred, and continues to incur, expenses in connection with the separation, and the completion of the separation requires time and effort by the Company’s management team, which may divert management’s attention from other aspects of business operations. Failure to successfully manage these risks may adversely affect the business and results of operations.
•The consummation of the LiveWire transaction is contingent upon certain factors outside the Company's control and the Company may not realize the expected business benefits from LiveWire as a separate business of the Company. The Company will maintain a controlling equity ownership of LiveWire as a separate business and significant ongoing commercial relationships with it. There are no assurances that LiveWire as a separate consolidated business will be able to execute its business plans and strategies. The consummation of the LiveWire transaction is subject to certain conditions, some of which are beyond the Company's control, that may prevent the transaction from being completed in the expected timeframe or at all. These conditions include the approval of the ABIC shareholders, the amount of available cash (as defined in the business combination agreement) being no less than $270 million and the absence of a LiveWire material adverse effect (as defined in the business combination agreement). The Company’s ability to realize the expected business benefits from LiveWire as a separate business will be affected by, among other factors: (i) the status of LiveWire as a separate business as an early stage company with a history of losses that is expected to incur significant expenses and continuing losses for several years until LiveWire begins significant deliveries of its electric vehicles, which may occur later than expected or not at all; (ii) the ability of LiveWire as a separate business to achieve profitability, which is dependent on the successful development and commercial introduction and acceptance of its electric vehicles, and its services, which may not occur; (iii) that LiveWire as a separate business will be a new entrant into a new space and it may not be able to adequately control the costs of its operations; (iv) the rapidly growing electric vehicle sector and products and services of LiveWire as a separate business are and will be subject to strong competition from a growing list of competitors; (v) the business and prospects of LiveWire as a separate business are heavily dependent on its ability to develop, maintain and strengthen its brand, and it may lose the opportunity to build a critical mass of customers; (vi) the ability of LiveWire as a separate business to execute on its plans to develop, produce, market and sell its electric vehicles; and (vii) the willingness and ability of the retail partners of LiveWire as a separate business, largely drawn from the Company’s traditional motorcycle dealer network, to be able to effectively establish or maintain relationships with customers for electric vehicles. The failure of LiveWire as a separate business to successfully manage these risks may adversely affect the business and results of the Company’s operations.
•International sales and operations subject the Company to risks that may have a material adverse effect on its business. While the Company has narrowed its geographic reach on an international basis, international operations and sales remain an important part of the Company’s strategy. There is no assurance that the Company will succeed with its new approach to international markets which includes focusing on high potential markets, and exiting or reducing its presence in remaining markets. Further, international operations and sales are subject to various risks, including political and economic instability, local labor market conditions, the imposition of foreign tariffs (including retaliatory tariffs in response to tariffs the U.S. imposes) 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. International sales require modification of products to meet local requirements or preferences, which may impact the Company's ability to achieve international sales growth. Business practices that may be accepted in other countries can violate U.S. or other laws that apply to the Company. Violations of laws that apply to the Company's foreign operations, such as the U.S. Foreign Corrupt Practices Act, could result in severe criminal or civil sanctions, could disrupt the Company's business and result in an adverse effect on the Company's reputation, business and results of operations.
•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's reputation may be adversely affected by inappropriate use of its marks or name, including potential negative publicity, loss of confidence, or other damage to the Company's image due to licensed use.
•The timing of a launch of a premium low displacement motorcycle for the China market is uncertain. The Company has identified China as a priority geographic market, and its objectives include launching a premium low displacement motorcycle for the China market. In 2019, the Company announced a collaboration with Zhejiang Qianjiang Motorcycle Co., Ltd. to support the launch of a smaller, more accessible Harley-Davidson motorcycle
planned for the China market. To date, the Company has not yet launched a premium low displacement motorcycle through this collaboration due to regulatory requirements, among other factors. If this collaboration is not productive and/or the Company is not able to launch a premium low displacement motorcycle for the China market, that would adversely affect its growth plans for China.
•The timing and amount of the Company's share repurchase strategy is subject to a number of uncertainties. The Company's Board of Directors has authorized the Company’s discretionary repurchase of outstanding common stock to be systematically completed in the open market or through privately negotiated transactions. The amount and timing of share repurchases are based on a variety of factors that could cause the Company to limit, suspend, or delay future stock repurchases. Such factors include, but are not limited to: (i) unfavorable market and economic conditions, (ii) the trading price of its common stock, (iii) the nature and magnitude of other investment opportunities available to the Company from time to time, and (iv) the availability of cash. Delaying, limiting or suspending the Company's stock repurchase program may negatively affect performance versus earnings per share targets, and ultimately its stock price.
Financial Risks
•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 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 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 Harley-Davidson Financial Services 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 Harley-Davidson Financial Services. 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 Harley-Davidson Financial Services' retail credit losses may continue to increase over time due to changing consumer credit behavior, Harley-Davidson Financial Services' efforts to increase prudently structured loan approvals to sub-prime borrowers, and new financing programs that may result in different loan performance than the Company's existing programs.
•The Company is exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. The Company sells its products globally and in most markets outside the U.S. 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 and margin, and cause volatility in its 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 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 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 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.
Legal, Regulatory & Compliance Risks
•Changes in trade policies, including the imposition of tariffs, their enforcement and downstream consequences, may have a material adverse impact on the Company's 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. 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 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 pass such increased costs on to distributors, dealers or their customers, and the Company may not be able to secure sources of certain products and materials that are not subject to tariffs on a timely basis. Such developments could have a material adverse impact on the Company's business, financial condition and results of operations.
As an example, in 2018, the European Union (EU) placed an incremental tariff on motorcycles imported into the EU from the U.S. On October 30, 2021, the U.S. agreed not to apply Section 232 duties and allow duty-free importation of steel and aluminum from the EU at a historical-based volume and the EU agreed to suspend related tariffs on U.S. products, including the incremental tariff on motorcycles imported into the EU from the U.S. (Tariff Resolution). The Tariff Resolution became effective on January 1, 2022 and will remain in effect until December 31, 2023. During such time, the U.S. and EU will monitor and review the operation of the Tariff Resolution, seeking to conclude the negotiations on steel and aluminum tariffs by the end date of the Tariff Resolution. These negotiations are ongoing and there are no assurances the U.S. and EU will reach a resolution that concludes the trade conflict on steel and aluminum tariffs beyond the expiration of the Tariff Resolution on December 31, 2023. Increased tariffs on motorcycles imported into the EU from the U.S. may adversely impact the Company's sales and profitability.
In addition, the U.S. government imposed increased tariffs on imports from China (Section 301 tariffs), which has resulted in higher costs for components and products sourced from China. The ongoing 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.
•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 U.S. sales and operations are subject to governmental policies and regulatory actions of agencies of the United States Government, including the United States Environmental Protection Agency (EPA), SEC, National Highway Traffic Safety Administration, U.S. 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 dealer statutes and licensing laws. Changes in regulations, changes in interpretations of regulations by governmental agencies, or the imposition of additional regulations may have a material adverse effect on the Company’s business and results of 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 laws. If the governing tax authorities have a different interpretation of the applicable laws or if there is a change in tax 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.
Environmental - Many of the Company's products are subject to statutory and regulatory requirements governing emissions, noise and other matters, including standards imposed by the EPA, state regulatory agencies, such as the California Air Resources Board and regulatory agencies in certain foreign countries where the Company’s motorcycle products are sold. The Company is also subject to statutory and regulatory requirements governing emissions and
noise in the conduct of the Company’s manufacturing operations. Any significant change to the regulatory requirements governing emissions and noise may substantially increase the cost of manufacturing the Company’s products. If the Company fails to meet existing or new requirements, then the Company may be unable to produce and sell certain products or may be subject to fines or penalties.
Further, in response to concerns about global climate changes and related changes in consumer preferences, the Company is likely to face greater regulatory and customer pressure to develop products that generate less emissions. This will require the Company to spend additional funds on research, product development and implementation costs, and subject the Company to the risk that the Company’s competitors may respond to these pressures in a manner that gives them a competitive advantage. Further, if the proposed separation of the business of LiveWire occurs, then in the near term, the LiveWire business will be focusing on electric vehicles and the Company will not be focusing on electric vehicles beyond those offered by LiveWire. As a result, the separation of the LiveWire business will adversely affect the Company's efforts to develop electric vehicles outside of the LiveWire business, at least in the near term, and that could have longer-term negative impacts on the Company's ability to offer electric vehicles in response to pressure to develop products that generate less emissions.
Financial Services - The Company’s financial services operations are governed by a wide range of 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. 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 Harley-Davidson Financial Services 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 Harley-Davidson Financial Services to payment of damages, civil fines, or criminal penalties and administrative sanctions and could limit the number of loans eligible for Harley-Davidson Financial Services securitizations programs. Such regulatory requirements and associated supervision also could limit the discretion of Harley-Davidson Financial Services 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 Harley-Davidson Financial Services, 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 Harley-Davidson Financial Services, any of which may adversely affect the business of Harley-Davidson Financial Services 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 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 the courts. The Dodd-Frank Act also created the Consumer Financial Protection Bureau (the Bureau). The Bureau has significant enforcement and rule-making authority in the area of consumer financial products and services. The direction that the Bureau will take, the regulations it will adopt, and its interpretation of existing laws and regulations are all elements that are not yet fully 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 Harley-Davidson Financial Services’ earnings, limit its access to capital, limit the number of loans eligible for Harley-Davidson Financial Services securitization programs and have a material adverse effect on Harley-Davidson Financial Services’ business and results of operations. The Bureau also has supervisory authority over certain non-bank larger participants in the vehicle financing market, which includes a non-bank subsidiary of Harley-Davidson Financial Services, allowing the Bureau 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.
•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 introducing 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.
General Risks
•Changes in general economic and business conditions, tightening of credit and retail markets, political events or other factors may adversely impact 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 motorcycles from lenders, including Harley-Davidson Financial Services. Should general economic conditions or motorcycle industry demand decline, the Company’s results of operations and financial condition may be substantially adversely affected. The motorcycle industry can also be affected by political conditions and other factors over which motorcycle manufacturers have little control.
•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 Note 16 of the Notes to Consolidated financial statements for a discussion of certain legal proceedings in which the Company is involved.
The Company disclaims any obligation to update these risk factors or any other forward-looking statements. The Company assumes no obligation, and specifically disclaims any such obligation, to update these risk factors or any other forward-looking statements to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
A summary of the principal operating properties of the Company as of December 31, 2021 is as follows:
Type of Facility Location Status
Motorcycle and Related Products:
Corporate office Milwaukee, WI Owned
Product development center Wauwatosa, WI Owned
Manufacturing(a)
Menomonee Falls, WI Owned
Manufacturing(b)
Tomahawk, WI Owned
Manufacturing(c)
York, PA Owned
Manufacturing(d)
Rayong, Thailand Owned
Manufacturing(e)
Manaus, Brazil Leased
Financial Services:
Corporate office Chicago, IL Leased
Wholesale and retail operations office Plano, TX Leased
Retail operations office Reno, NV Leased
(a)Motorcycle powertrain production
(b)Production and painting of motorcycle component parts
(c)Motorcycle parts fabrication, painting and assembly
(d)Motorcycle production for certain Asian and European markets
(e)Assembly of select models for the Brazilian market

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
Refer to Note 16 of the Notes to Consolidated financial statements for a discussion of certain legal proceedings in which the Company is involved.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
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 under the trading symbol HOG. As of January 30, 2022, there were 65,375 shareholders of record of Harley-Davidson, Inc. common stock.
The Company’s share repurchases, which consisted of shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units and performance shares were as follows during the quarter ended December 31, 2021:
2021 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 27 to October 31 - $ - - 18,246,721
November 1 to November 28 2,039 $ 38 2,039 18,246,721
November 29 to December 31 11 $ 37 11 18,246,721
2,050 $ 38 2,050
In February 2018, the Company's Board of Directors authorized the Company to repurchase up to 15.0 million shares of its common stock on a discretionary basis with no dollar limit or expiration date. In February 2020, the Company's Board of Directors authorized the Company to repurchase up to 10.0 million additional shares of its common stock on a discretionary basis with no dollar limit or expiration date. As of December 31, 2021, 18.2 million shares remained under these authorizations. The Company repurchased no shares on a discretionary basis during the quarter ended December 31, 2021. The Company plans to execute discretionary share repurchases in 2022.
Under the share repurchase 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. 2020 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) have the Company withhold shares otherwise issuable under the award, (b) tender back shares received in connection with such award or (c) deliver other previously owned shares, in each case having a value equal to the amount to be withheld. During the fourth quarter of 2021, the Company acquired 2,050 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock units and performance shares.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters within Part III of this Annual Report 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 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) MidCap 400 Index as the broad-based index. The S&P MidCap 400 Index was chosen as the Company does not believe 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, 2016 and that all dividends are reinvested.
2016 2017 2018 2019 2020 2021
Harley-Davidson, Inc. $ 100 $ 90 $ 62 $ 71 $ 71 $ 74
S&P MidCap 400 Index $ 100 $ 116 $ 103 $ 130 $ 148 $ 185

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. [Reserved]

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Harley-Davidson, Inc. is the parent company of the group of companies referred to as Harley-Davidson Motor Company and Harley-Davidson Financial Services. Unless the context otherwise requires, all references to the "Company" include Harley-Davidson, Inc. and all its subsidiaries. The Company operates in two segments: Motorcycles and Related Products (Motorcycles) and Financial Services.
The “% Change” figures included in the Results of Operations section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented. Certain “% Change” deemed not meaningful (NM) have been excluded.
(1) Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” “may,” “will,” “estimates,” “targets,” “intend,” "is on-track," "forecasting," 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 in Item 1A. Risk Factors and under the Cautionary Statements section in this Item 7. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in the Overview and Guidance sections in this Item 7 are only made as of February 8, 2022 and the remaining forward-looking statements in this report are only made as of the date of the filing of this report (February 25, 2022), 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 2021 was $650.0 million, or $4.19 per diluted share, compared to $1.3 million, or $0.01 per diluted share, in 2020 driven by higher operating income in both the Motorcycles and Financial Services segments.
Motorcycles segment operating income was $408.6 million in 2021 compared to an operating loss of $186.1 million in 2020 which was adversely impacted by the onset of the COVID-19 pandemic. The improvement in operating results in 2021 was driven by a 29.8% increase in wholesale motorcycle shipments, favorable product mix, higher pricing and lower restructuring expenses which more than offset higher supply chain and tariff costs incurred in 2021.
Operating income from the Financial Services segment in 2021 was up $219.0 million or 111.9% compared to 2020 driven by a decrease in the provision for credit losses, lower interest expense and lower restructuring charges. The provision for credit losses declined primarily due to improved economic conditions and favorable retail credit loss performance.
Worldwide dealer retail sales of the Company's new motorcycles grew 7.8% in 2021 compared to 2020 driven by strong growth in North America. During 2021, retail sales increased 22.1% in North America compared to 2020, which was partially offset by declines in the Company's markets outside of North America. Refer to the Motorcycles Retail Sales and Registration Data section for further discussion of retail sales results.
The Company is pleased with its 2021 performance, the first year of its five-year strategic plan, The Hardwire, especially in light of the challenges the Company faced in 2021 related to supply chain, European Union (EU) tariffs and managing through the continuing impacts of the COVID-19 pandemic.
Key Factors Impacting the Company
Supply Chain - During 2021, the Company experienced disruption and increased costs related to global supply chain challenges. As a result of these challenges, the Company experienced cost increases for logistics, raw materials and purchased components, as well as supply constraints related to certain components including those impacted by the current global semiconductor chip shortages. These challenges have also resulted in manufacturing disruption and higher manufacturing conversion costs. In response to the supply chain challenges, the Company imposed pricing surcharges in the U.S. during the second half of 2021, worked to optimize production schedules to prioritize more profitable models and markets and enacted tighter operating expense cost controls. The Company expects the supply chain challenges and higher costs will continue in the first half of 2022, but anticipates a moderate improvement, compared to 2021, in the second half of the year across logistics and raw materials. The Company expects semiconductor chip availability to continue to be challenged with some improvement in the second half of 2022 compared to 2021.
Additional European Union Tariffs - Beginning in 2019, the Company operated under Binding Origin Information (BOI) rulings that allowed it to supply its EU markets with certain motorcycles produced at its Thailand manufacturing facility at tariff rates of 6%. In April 2021, the Company received notification from the Economic Ministry of Belgium that, following a request from the EU, the Company would be subject to revocation of the BOI rulings, effective April 19, 2021. As a result of the revocation, all non-electric motorcycles that Harley-Davidson imported into the EU, regardless of origin, were subject to a total tariff rate of 31% beginning on April 19, 2021 that was scheduled to increase to 56% effective June 1, 2021. However, in May 2021, the EU made a decision to delay the increase initially scheduled for June 2021 to December 2021, while tariff negotiations took place between the U.S. and the EU. On October 30, 2021, the U.S. and EU announced an agreement related to the Section 232 tariffs on steel and aluminum that were implemented in 2018 by the U.S. and the subsequent rebalancing tariff measures taken by the EU. This agreement suspended the additional tariffs initially imposed by the EU on the Company's motorcycles in 2018, reducing the total EU tariff rate on the Company’s motorcycles from 31% to 6%, effective January 1, 2022. The EU tariff rate remained at 31% through the end of 2021 rather than increasing to 56% on December 1, 2021 as previously scheduled. The lower 6% tariff rate applies to all motorcycles imported by the Company into the EU, regardless of origin, beginning in 2022. Under the agreement between the U.S. and the EU, the lower tariff rate will remain in effect until December 31, 2023. During such time, the U.S. and EU will monitor and review the operation of the agreement, seeking to conclude the negotiations on steel and aluminum tariffs by December 31, 2023. These negotiations are ongoing, and there are no assurances the U.S. and EU will reach a resolution that concludes the trade conflict on steel and aluminum tariffs beyond December 31, 2023.
To date, the Company continues to pursue its appeals of the revocation of the BOIs and the denial of its application for temporary extended reliance on the 6% tariff rate (for motorcycles produced in Thailand and ordered prior to April 19, 2021), although there is no assurance that these appeals will continue or be successful.
COVID-19 Pandemic - The Company continues to manage through the impacts of the COVID-19 pandemic and its associated variants by keeping safety and community well-being a priority. The Company continues to proactively follow protocols to keep workers safe in its manufacturing facilities, and most non-production workers continue to work remotely in light of the COVID-19 pandemic. The full impact of the COVID-19 pandemic on future results depends on future developments, such as the ultimate duration and scope of the pandemic including associated variants, the success of vaccination programs, the consequences of vaccine requirements, and its impact on the Company's customers, dealers, distributors, and suppliers. Future impacts and disruptions could have an adverse effect on production, supply chains, distribution, and demand for the Company's products.
Restructuring Plan Costs and Savings(1) - During 2020, the Company executed a set of actions, referred to as The Rewire. The actions included certain restructuring activities including a workforce reduction, the termination of certain current and future products, facility changes, optimizing the Company's global dealer network, exiting certain international markets, and discontinuing its sales and manufacturing operations in India. These actions included restructuring expenses related to employee termination costs, contract termination costs and non-current asset adjustments. The workforce reduction resulted in the termination of approximately 570 employees. The Company incurred $130.0 million and $3.4 million of restructuring expense in connection with these actions during 2020 and 2021, respectively. The Company expects ongoing annual gross savings resulting from these restructuring activities of approximately $115 million. The Company began to realize the savings in the second half of 2020 with 2021 being the first year of full annualized savings. Refer to Note 3 of the Notes to Consolidated financial statements for additional information regarding the Company's restructuring expenses.
LiveWire Transaction(1) - On December 13, 2021, the Company and AEA-Bridges Impact Corp. (ABIC), a special purpose acquisition company (SPAC), announced that they have entered into a definitive business combination agreement under which LiveWire, the Company's electric motorcycle division, will become a separate business of the Company and ABIC will combine with LiveWire to create a new publicly traded company. LiveWire plans to redefine motorcycling as the industry-leading, all-electric motorcycle company, with a focus on the urban market and beyond. As a strong and desirable brand with growing global recognition, LiveWire plans to develop the technology of the future and to invest in the capabilities needed to lead the transformation of motorcycling. The parties expect that the transaction will be financed by ABIC’s $400 million cash held in trust (assuming no redemptions by ABIC’s shareholders in the context of the transaction), a $100 million cash investment from the Company, and a $100 million investment from an independent strategic investor, Kwang Yang Motor Co., Ltd. (KYMCO). In addition, to the extent any shares of the SPAC are redeemed, the Company will invest an additional amount equal to the dollar value of such redemptions up to a maximum of $100 million.
The transaction, which has been approved by the boards of directors of both the Company and ABIC, is expected to close in the first half of 2022. The consummation of the business combination is subject to the approval of ABIC’s shareholders as well as other conditions and regulatory approvals. Upon closing of the transaction, the Company will retain a controlling financial interest in LiveWire. The expectation is that, upon closing of the transaction, the Company will retain an equity interest in the separate public company of approximately 74%. As the controlling shareholder following the transaction, the Company will continue to consolidate LiveWire’s results, with additional adjustments to recognize non-controlling shareholder interests.
Guidance(1)
On February 8, 2022, the Company announced the following guidance for 2022:
The Company expects Motorcycles segment revenue growth, compared to 2021, between 5% and 10%. This revenue growth guidance incorporates the Company's current information and expectations for the impact of supply chain challenges including semiconductor chip availability that the industry is facing. The Company expects revenue to be positively impacted by global pricing actions as the Company works to offset cost headwinds across the supply chain. Furthermore, the Company expects revenue growth from parts and accessories and apparel and licensing, as it executes The Hardwire strategy.
The Company expects Motorcycles segment operating margin as a percent of revenue of 11% to 12%. The Company believes the anticipated positive impact from higher motorcycle volume, product mix and pricing, combined with growth in revenue from higher-margin parts and accessories and apparel, will more than offset the expected cost inflation across the supply chain. Also, the removal of the additional EU tariffs is expected to contribute over a percentage point of margin growth. Finally, the Company expects 2022 operating margin to be positively impacted by operating expense leverage, even as the Company increases investment in LiveWire.
The Company expects Financial Services operating income to decline 20% to 25% compared to 2021. This decline is largely a result of the favorable credit loss allowance reductions and lower actual credit losses in 2021 that are not expected to repeat in 2022.
The Company expects capital investments between $190 and $220 million. The Company plans to continue to invest behind product development and capability enhancement in support of The Hardwire strategy.
The Company's capital allocation priorities are to fund growth through The Hardwire initiatives, to pay dividends, and to execute discretionary share repurchases, which the Company plans to do in 2022.
Results of Operations 2021 Compared to 2020
Consolidated Results
(in thousands, except earnings per share) 2021 2020 Increase
(Decrease)
Operating income (loss) from Motorcycles and Related Products $ 408,625 $ (186,122) $ 594,747
Operating income from Financial Services 414,814 195,801 219,013
Operating income 823,439 9,679 813,760
Other income (expense), net 20,076 (1,848) 21,924
Investment income 6,694 7,560 (866)
Interest expense 30,972 31,121 (149)
Income (loss) before income taxes 819,237 (15,730) 834,967
Income tax provision (benefit) 169,213 (17,028) 186,241
Net income $ 650,024 $ 1,298 $ 648,726
Diluted earnings per share $ 4.19 $ 0.01 $ 4.18
The Company reported operating income of $823.4 million in 2021 compared to $9.7 million in 2020. The Motorcycles segment reported operating income of $408.6 million, an improvement from an operating loss of $186.1 million in 2020. Operating income from the Financial Services segment increased $219.0 million compared to 2020. Refer to the Motorcycles and Related Products Segment and Financial Services Segment discussions for a more detailed analysis of the factors affecting operating results.
Other income (expense) in 2021 was impacted by higher non-operating income related to the Company's defined benefit plans. Investment income decreased in 2021 as compared to 2020 driven by lower income from investments in marketable securities.
The Company's effective income tax rate for 2021 was a 20.7% expense compared to a 108.3% benefit for 2020. The Company's 2021 effective tax rate was favorably impacted by discrete income tax benefits recorded during the year. During 2020, the Company recorded a pre-tax loss resulting in an income tax benefit which was further impacted by discrete income tax benefits recorded during 2020.
Diluted earnings per share was $4.19 in 2021 compared to $0.01 in 2020. Diluted weighted average shares outstanding increased from 153.9 million in 2020 to 155.0 million in 2021.
Motorcycle Retail Sales and Registration Data
Motorcycle Retail Sales(a)
Retail unit sales of new Harley-Davidson and LiveWire motorcycles were as follows:
2021 2020 Increase
(Decrease) % Change
United States 126,276 103,650 22,626 21.8 %
Canada 8,137 6,477 1,660 25.6
North America 134,413 110,127 24,286 22.1
Europe/Middle East/Africa (EMEA) 31,101 36,906 (5,805) (15.7)
Asia Pacific 25,090 27,220 (2,130) (7.8)
Latin America 3,652 5,995 (2,343) (39.1)
194,256 180,248 14,008 7.8 %
(a)Data source for retail sales figures shown above is new sales warranty and registration information provided by dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning new retail sales, and the Company does not regularly verify the information that its dealers supply. This information is subject to revision.
Worldwide retail sales of new motorcycles were up 7.8% during 2021 compared to 2020 when retail sales were impacted by the onset of the COVID-19 pandemic. Retail sales during 2021 also reflected strategic decisions made as part of The Rewire.
The increase in retail sales in 2021 was driven by the North American market which was positively impacted by increased demand for the Company's Grand American Touring and large Cruiser motorcycles. Retail sales in 2021 also benefited from the Company's introduction of Pan America™, its new Adventure Touring motorcycles.
Retail sales outside of North America in 2021 were impacted by actions taken under The Rewire to streamline the product portfolio to reduce complexity and direct resources towards the Company's core stronghold products. This includes the Company's decision to discontinue selling Street motorcycles and legacy Sportster motorcycles in EMEA and certain countries within the Asia Pacific and Latin American markets. Latin America retail sales were also impacted during 2021 by the reduction of dealers and pricing actions executed as part of The Rewire in 2020 to restore profitability in those markets. In addition, international retail sales were adversely impacted by longer shipping times.
At the end of 2021, worldwide retail inventory was down approximately 23% compared to the end of 2020 and down a similar amount relative to the end of the third quarter of 2021 primarily due to strong demand, in particular in the U.S. market. Overall, the Company continued to observe strong pricing for both new and used motorcycles and improved dealer profitability.
The Company's U.S. market share of new 601+cc motorcycles for 2021 was 44.5%, up 2.4 percentage points compared to 2020 (Source: Motorcycle Industry Council). The Company's U.S. market share increased on stronger retail sales performance relative to the industry, as well as stronger performance in the Company's Grand American Touring and Cruiser segments.
The Company's European market share of new 601+cc motorcycles for 2021 was 5.9%, down 1.8 percentage points compared to 2020 reflecting the decline in retail sales in Europe (Source: Management Services Helwig Schmitt GmbH).
Motorcycle Registration Data - 601+cc(a)
Industry retail registration data for new motorcycles was as follows:
2021 2020 Increase % Change
United States(b)
281,502 241,790 39,712 16.4 %
Europe(c)
427,807 411,991 15,816 3.8 %
(a)Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt peak power equivalents greater than 600cc's (601+cc). On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table.
(b)United States industry data is derived from information provided by Motorcycle Industry Council. This third-party data is subject to revision and update.
(c)Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. Industry data is derived from information provided by Management Services Helwig Schmitt GmbH. This third-party data is subject to revision and update.
Motorcycles and Related Products Segment
Motorcycle Unit Shipments
Wholesale motorcycle unit shipments were as follows:
2021 2020 Unit Unit
Units Mix % Units Mix % Increase
(Decrease) % Change
Motorcycle Units:
United States 119,909 63.6 % 79,731 54.9 % 40,178 50.4 %
International 68,585 36.4 % 65,515 45.1 % 3,070 4.7
188,494 100.0 % 145,246 100.0 % 43,248 29.8 %
Motorcycle Units:
Grand American Touring(a)
93,961 49.8 % 61,322 42.2 % 32,639 53.2 %
Cruiser(b)
59,494 31.6 % 49,974 34.4 % 9,520 19.0
Adventure Touring 9,916 5.3 % - - % 9,916 100.0
Sportster® / Street
25,123 13.3 % 33,950 23.4 % (8,827) (26.0)
188,494 100.0 % 145,246 100.0 % 43,248 29.8 %
(a)Includes CVOTM and Trike
(b)Includes Softail® and LiveWireTM
During 2021, motorcycle shipments were up 29.8% from 2020 when shipments were adversely impacted by the temporary suspension of the Company's global manufacturing operations and the temporary closure of dealers in the first half of 2020 resulting from the COVID-19 pandemic. The mix of Grand American Touring and Cruiser motorcycles shipped during 2021 increased as a percent of total shipments while the mix of Sportster/Street motorcycles decreased compared to 2020. In addition, motorcycle unit shipments during 2021 include the Company's new Pan America™ models, its first Adventure Touring motorcycles, which were launched in 2021.
Segment Results
Condensed statements of operations for the Motorcycles segment were as follows (in thousands):
2021 2020 Increase
(Decrease) %
Change
Revenue:
Motorcycles $ 3,477,395 $ 2,350,407 $ 1,126,988 47.9 %
Parts and accessories 741,797 659,634 82,163 12.5
Apparel 228,106 186,068 42,038 22.6
Licensing 37,790 29,750 8,040 27.0
Other 55,152 38,195 16,957 44.4
4,540,240 3,264,054 1,276,186 39.1
Cost of goods sold 3,243,287 2,435,745 807,542 33.2
Gross profit 1,296,953 828,309 468,644 56.6
Operating expenses:
Selling & administrative expense 717,053 697,483 19,570 2.8
Engineering expense 168,534 197,838 (29,304) (14.8)
Restructuring expense 2,741 119,110 (116,369) (97.7)
888,328 1,014,431 (126,103) (12.4) %
Operating income (loss) $ 408,625 $ (186,122) $ 594,747 NM
Operating margin 9.0 % (5.7) % 14.7 pts.
The estimated impacts of the significant factors affecting the comparability of revenue, cost of goods sold and gross profit from 2020 to 2021 were as follows (in millions):
Revenue Cost of Goods Sold Gross Profit
2020 $ 3,264.1 $ 2,435.7 $ 828.4
Volume 852.9 575.5 277.4
Price, net of related costs 63.2 (7.0) 70.2
Foreign currency exchange rates and hedging 56.6 22.8 33.8
Shipment mix 303.4 106.9 196.5
Raw material prices - 72.2 (72.2)
Manufacturing and other costs - 37.2 (37.2)
1,276.1 807.6 468.5
2021 $ 4,540.2 $ 3,243.3 $ 1,296.9
The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2020 to 2021:
•The increase in volume was due to higher wholesale motorcycle shipments and higher parts and accessories and apparel sales.
•During 2021, revenue benefited from higher wholesale prices for motorcycles, including pricing surcharges that the Company imposed in the U.S. during the second half of 2021, and lower sales incentives.
•Revenue and gross profit were favorably impacted by stronger foreign currency exchange rates relative to the U.S. dollar, partially offset by unfavorable net foreign currency losses associated with hedging and balance sheet remeasurements recorded in cost of goods sold.
•Changes in the shipment mix between motorcycle families had a favorable impact on revenue and gross profit during 2021 as compared to 2020 due primarily to a higher mix of Grand American Touring and Cruiser models.
•Raw material cost increases were driven by higher prices primarily due to supply chain challenges.
•Manufacturing and other cost increases were due to higher supply chain costs and increased tariff costs, partially offset by a lower fixed cost per unit resulting from higher production volumes. The impact of additional EU tariffs was $55.5 million in 2021 compared to $18.3 million in 2020.
Operating expenses were lower in 2021 compared to 2020 due primarily to lower restructuring costs following the Company's 2020 restructuring actions. Selling, administrative and engineering expenses benefited from cost savings resulting from the Company's 2020 restructuring actions; however, these benefits were offset by increased spending on The Hardwire initiatives. In 2020, operating expenses also benefited from cost saving efforts undertaken to preserve cash at the onset of the COVID-19 pandemic. Refer to Note 3 of the Notes to Consolidated financial statements for additional information regarding the Company's restructuring expenses.
Financial Services Segment
Segment Results
Condensed statements of operations for the Financial Services segment were as follows (in thousands):
2021 2020 (Decrease)
Increase % Change
Financial Services revenue:
Interest income $ 671,708 $ 682,517 $ (10,809) (1.6) %
Other income 124,360 107,806 16,554 15.4
796,068 790,323 5,745 0.7
Financial Services expenses:
Interest expense 192,944 246,447 (53,503) (21.7)
Provision for credit losses 25,049 181,870 (156,821) (86.2)
Operating expenses 162,587 155,306 7,281 4.7
Restructuring expense 674 10,899 (10,225) (93.8)
381,254 594,522 (213,268) (35.9)
Operating income $ 414,814 $ 195,801 $ 219,013 111.9 %
Interest income was lower in 2021 compared to 2020, primarily due to lower average outstanding finance receivables, partially offset by a higher average yield. Other income increased due in part to higher insurance and licensing income. Interest expense decreased due to lower average outstanding debt and a lower cost of funds.
The provision for credit losses decreased $156.8 million compared to 2020 primarily due to improved economic conditions, favorable retail credit loss performance and the Company’s outlook on future economic conditions. However, the pace of economic recovery remains uncertain as demonstrated by unemployment levels above those experienced prior to the COVID-19 pandemic, muted consumer confidence, rising inflation, global supply chain disruptions, and continuing COVID-19 pandemic-related challenges across the U.S., among other factors. As such, at the end of 2021, the Company's outlook on economic conditions and its probability weighting of its economic forecast scenarios included continued slow economic improvement in its economic scenario weighting. The Company’s expectations surrounding its economic forecasts may change in future periods as additional information becomes available.
Annual losses on the Company's retail motorcycle loans were 1.19% during 2021 compared to 1.38% in 2020. The favorable retail credit loss performance was due to elevated used motorcycle values at auction in the U.S. and continued lower than normal delinquency levels driven by benefits provided to individuals under the U.S. federal stimulus packages and COVID-19 pandemic retail payment extensions. Favorable used motorcycle values stemmed from an ongoing low number of motorcycles at auction. The 30-day delinquency rate for retail motorcycle loans at December 31, 2021 increased to 3.33% from 3.18% at December 31, 2020. Although the 30-day delinquency rate was elevated as compared to 2020, the 2021 delinquency rate remained below levels experienced prior to the COVID-19 pandemic. These continued low delinquency levels were driven by benefits to individuals provided under U.S. federal stimulus packages as well as the effects of COVID-19 pandemic-related retail payment extensions. Starting in the second quarter of 2020, the Company granted COVID-19 pandemic-related extensions to help customers get through financial difficulties associated with the pandemic. During 2021, the volume of extensions declined from the levels experienced during 2020 as a result of the COVID-19 pandemic, but extensions did not return to pre-COVID-19 pandemic levels until the end of the second quarter of 2021. Extensions specific to the COVID-19 pandemic were discontinued by the Company at the beginning of the third quarter of 2021. The Company continues to grant standard payment extensions to customers in accordance with its policies. The Company expects the delinquency rate to normalize over time as it moves further away from the influx of stimulus funding.(1)
Operating expenses increased $7.3 million compared to 2020 due to higher employee-related costs and The Hardwire initiatives.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
2021 2020
Balance, beginning of period $ 390,936 $ 198,581
Cumulative effect of change in accounting(a)
- 100,604
Provision for credit losses 25,049 181,870
Charge-offs, net of recoveries (76,606) (90,119)
Balance, end of period $ 339,379 $ 390,936
(a)On January 1, 2020, the Company adopted ASU 2016-13 and increased the allowance for loan loss through retained earnings, net of income taxes, to establish an allowance that represents expected lifetime credit losses on the finance receivable portfolios at date of adoption.
At December 31, 2021, the allowance for credit losses on finance receivables was $326.3 million for retail receivables and $13.1 million for wholesale receivables. At December 31, 2020, the allowance for credit losses on finance receivables was $371.7 million for retail receivables and $19.2 million for wholesale receivables.
Refer to Note 7 of the Notes to Consolidated financial statements for further discussion regarding the Company’s allowance for credit losses on finance receivables.
Results of Operations 2020 Compared to 2019
Refer to Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations of the Company's Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on February 23, 2021 for a detailed discussion of the results of operations for 2020 compared to 2019 and liquidity and capital resources for 2020 compared to 2019.
Other Matters
New Accounting Standards Issued But Not Yet Adopted
There are no new accounting standards issued but not yet adopted that are material to the Company.
Critical Accounting Estimates
The Company’s financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Management believes that the following are some of the more critical judgment areas in the application of accounting policies that currently affect the Company’s financial condition and results of operations. Management has discussed the development and selection of these critical accounting estimates with the Audit and Finance Committee of the Company's Board of Directors.
Allowance for Credit Losses on Retail Finance Receivables - On January 1, 2020, the Company adopted Accounting Standards Update (ASU) No. 2016-13, which requires an entity to recognize expected lifetime losses on finance receivables upon origination. The allowance for credit losses on retail finance receivables as of December 31, 2021 and 2020 represents the Company’s estimate of lifetime losses for its retail finance receivables.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a collective evaluation of the adequacy of the retail allowance for credit losses. For periods after January 1, 2020, the Company utilizes a vintage-based loss forecast methodology that includes decompositions for probability of default, exposure at default, attrition rate, and recovery balance rate. Reasonable and supportable economic forecasts for a two-year period are incorporated into the methodology to reflect the estimated impact of changes in future economic conditions, such as unemployment rates, household obligations or other relevant factors, over the two-year reasonable and supportable period. For periods beyond the Company’s reasonable and supportable forecasts, the Company reverts to its average historical loss experience using a mean-reversion process over a three-year period. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or term as well as other relevant factors.
Refer to Note 7 of the Notes to Consolidated financial statements for further discussion regarding the Company’s allowance for credit losses on finance receivables.
Product Warranty and Recalls - Estimated warranty costs are recorded at the time of sale and are based on a combination of historical claim cost data and other known factors that may affect future warranty claims. The estimated costs
associated with voluntary recalls are recorded when the liability is both probable and estimable. The accrued cost of a recall is based on an estimate of the cost to repair each affected motorcycle and the number of motorcycles expected to be repaired based on historical data concerning the percentage of affected customers that take advantage of recall offers. In the case of both warranty and recall costs, as actual experience becomes available it is used to update the accruals.
The factors affecting actual warranty and recall costs can be volatile. As a result, actual warranty claims experience and recall costs may differ from estimates, which could lead to material changes in the Company’s accrued warranty and recall costs. The Company’s warranty and recall liabilities are discussed further in Note 14 of the Notes to Consolidated financial statements.
Pensions and Other Postretirement Healthcare Benefits - The Company has a defined benefit pension plan and postretirement healthcare benefit plans, which cover certain eligible employees and retirees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees.
U.S. Generally Accepted Accounting Principles (GAAP) requires that companies recognize in their consolidated balance sheets a liability for defined benefit pension and postretirement plans that are underfunded or an asset for defined benefit pension and postretirement benefit plans that are overfunded.
Pension, SERPA and postretirement healthcare obligations and costs are calculated through actuarial valuations. The valuation of benefit obligations and net periodic benefit costs relies on key assumptions including discount rates, mortality, long-term expected return on plan assets, future compensation and healthcare cost trend rates.
The Company determines its discount rate assumptions by referencing high-quality long-term bond rates that are matched to the duration of its benefit obligations. Based on this analysis, the Company increased the weighted-average discount rate for pension and SERPA obligations from 2.62% as of December 31, 2020 to 2.89% as of December 31, 2021. The Company increased the weighted-average discount rate for postretirement healthcare obligations from 2.11% as of December 31, 2020 to 2.72% as of December 31, 2021. 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, 2021, the Company set its healthcare cost trend rate at 6.75% as of December 31, 2021. The Company expects the healthcare cost trend rate to reach its ultimate rate of 5.00% by 2029.(1) These assumption changes were reflected immediately in the benefit obligation and will be amortized into net periodic benefit costs over future periods.
Plan assets are measured at fair value and are subject to market volatility. In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted to reflect the current view of the long-term investment market.
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. Sensitivity to changes in major assumptions used in the pension and postretirement healthcare obligations and costs was as follows (in thousands):
Amounts based
on current
assumptions Impact of a 1%
decrease in the
discount rate Impact of a 1%
increase in the
healthcare
cost trend rate Impact of a 1%
decrease in the
expected return on assets
2021 Net periodic benefit cost:
Pension and SERPA $ 21,750 $ 32,688 n/a $ 21,116
Postretirement healthcare $ (3,593) $ (956) $ 304 $ 2,092
2021 Benefit obligations:
Pension and SERPA $ 2,174,595 $ 333,798 n/a n/a
Postretirement healthcare $ 286,301 $ 25,088 $ 7,341 n/a
The amounts based on current assumptions above exclude the impact of settlements and curtailments. This information should not be viewed as predictive of future amounts. The calculations of pension, SERPA and postretirement healthcare obligations and costs are based on many factors in addition to those discussed here. This information should be considered in combination with the information provided in Note 15 of the Notes to Consolidated financial statements.
Income Taxes - The Company accounts for income taxes in accordance with Accounting Standards Codification Topic 740, Income Taxes (Topic 740). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and other loss carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The Company reviews its deferred income tax asset valuation allowances on a quarterly basis or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred income tax asset is considered, along with any positive or negative evidence including tax law changes. Since future financial results and tax law may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary.
The Company is subject to income taxes in the U.S. and numerous foreign jurisdictions. These tax laws and regulations are complex and significant judgment is required in determining the Company’s worldwide provision for income taxes and recording the related deferred tax assets and liabilities.
In the ordinary course of the Company’s business, there are transactions and calculations where the ultimate tax determination is uncertain. Accruals for unrecognized tax benefits are provided for in accordance with the requirements of Topic 740. An unrecognized tax benefit represents the difference between the recognition of benefits related to items for income tax reporting purposes and financial reporting purposes. The unrecognized tax benefit is included within Other long-term liabilities on the Consolidated balance sheets. The Company has a liability for interest and penalties on exposure items, if applicable, which is recorded as a component of the overall income tax provision. The Company is regularly audited by tax authorities as a normal course of business. Although the outcome of tax audits is always uncertain, the Company believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provision includes amounts sufficient to pay any assessments(1). Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
Refer to Note 4 of the Notes to Consolidated financial statements for further discussion regarding the Company's income taxes.
Commitments and Contingencies
The Company is subject to lawsuits and other claims related to product, commercial, employee, environmental and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter. Refer to Note 16 of the Notes to Consolidated financial statements for a discussion of the Company's commitments and contingencies.
Liquidity and Capital Resources
Based on the Company's current outlook, for both the near and longer terms, it expects Motorcycles segment operations to continue to be funded primarily through cash flows generated by operations and Financial Services segment operations to continue to be funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, asset-backed securitizations and brokered certificates of deposit.(1)
The Company's capital allocation priorities are to fund growth through The Hardwire initiatives, to pay dividends, and to execute discretionary share repurchases, which the Company plans to do in 2022.
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. In response to liquidity concerns related to the COVID-19 pandemic, the Company increased its cash and cash equivalents during 2020 through cash preservation efforts including the suspension of discretionary share repurchases and the issuance of debt. The Company's cash and cash equivalents remained higher than pre-COVID-19 pandemic levels at the end of 2021, but during 2021, the Company began to gradually reduce its cash and cash equivalents from 2020 levels.
The Company’s cash and cash equivalents and availability under its credit and conduit facilities at December 31, 2021 were as follows (in thousands):
Cash and cash equivalents $ 1,874,745
Availability under credit and conduit facilities:
Credit facilities 663,714
Asset-backed U.S. commercial paper conduit facility(a)
627,411
Asset-backed Canadian commercial paper conduit facility(a)
13,381
$ 3,179,251
(a)Includes facilities expiring in the next 12 months which the Company expects to renew prior to expiration.(1)
To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit rating agency may change or withdraw the Company’s ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. The Company’s short- and long-term debt ratings as of December 31, 2021 were as follows:
Short-Term Long-Term Outlook
Moody’s P3 Baa3 Stable
Standard & Poor’s A3 BBB- Stable
Fitch BBB+ Negative
The Company recognizes that it must continue to monitor and adjust its business to changes in the lending environment. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding.(1) The Financial Services operations could be negatively affected by higher costs of funding and increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds available through its Financial Services operations to provide loans to dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital.
Cash Flow Activity
Cash flow activities for the years ended December 31, were as follows (in thousands):
2021 2020
Net cash provided by operating activities $ 975,701 $ 1,177,890
Net cash used by investing activities (459,447) (66,783)
Net cash (used) provided by financing activities (1,884,931) 1,373,983
Effect of exchange rate changes on cash, cash equivalents and restricted cash (15,272) 18,712
Net (decrease) increase in cash, cash equivalents and restricted cash $ (1,383,949) $ 2,503,802
Operating Activities
The decrease in operating cash flow in 2021 compared to 2020 was primarily due to an increase in wholesale financing activity driven by higher loan originations. The Company’s sales of motorcycles and related products to dealers in the U.S. and Canada are financed through Harley-Davidson Financial Services and become finance receivables upon the sale to the dealer and become operating cash flows when the dealer repays the wholesale finance receivable. As a result, the timing of the Company's operating cash flow is impacted by the amount and duration of the wholesale financing that dealers elect to utilize.
The Company's operating cash flows were also lower than in 2020 due to changes in working capital primarily related to inventory and accounts receivable. The Company's accounts receivable balances, which relate primarily to sales outside of North America, declined during 2020 on lower sales which were impacted by the COVID-19 pandemic. Conversely, as shipment volumes recovered in 2021, trade accounts receivable increased. The Company also experienced an increase in inventory during 2021 due primarily to a higher level of upcoming model year motorcycles in inventory, compared to 2020. The Company's inventory levels at year end are impacted by the model year change over which results in the production of
the next model year's motorcycles at the end of the calendar year. These motorcycles are held in inventory until the new model year motorcycles are launched and shipped to dealers in January. In addition, supply chain disruptions also contributed to higher inventory levels at the end of 2021.
The Company continues to expect that it will generate sufficient cash inflows from operations to fund its ongoing operating cash requirements including those related to existing contractual commitments. The Company's purchase orders for inventory used in manufacturing generally do not become firm commitments until 90 days prior to expected delivery. The Company's material contractual operating cash commitments at December 31, 2021 relate to leases, retirement plan obligations and income taxes. The Company's long-term lease obligations and future payments are discussed further in Note 10 of the Notes to Consolidated financial statements. The Company’s expected future contributions and benefit payments related to its defined benefit retirement plans are discussed further in Note 15 of the Notes to Consolidated financial statements. As described in Note 4 of the Notes to Consolidated financial statements, the Company has a liability for unrecognized tax benefits of $44.9 million and related accrued interest and penalties of $22.9 million as of December 31, 2021. The Company cannot reasonably estimate the period of cash settlement for either the liability for unrecognized tax benefits or accrued interest and penalties.
Investing Activities
The Company’s most significant investing activities consist of capital expenditures and retail finance receivable originations and collections. Capital expenditures were $120.2 million and $131.1 million during 2021 and 2020, respectively. The Company's 2022 plan includes estimated capital investments between $190 to $220 million, all of which the Company expects to fund with net cash flow generated by operations.(1)
Net cash outflows for finance receivables in 2021, which consisted primarily of retail finance receivables, were $384.2 million higher than in 2020 primarily due to higher retail finance receivable originations during 2021. The Company funds its finance receivables net lending activity through the issuance of debt and brokered certificates of deposit, discussed in the Financing Activities section.
Financing Activities
The Company’s financing activities consist primarily of dividend payments, share repurchases and debt activities.
The Company paid dividends of $0.60 per share totaling $92.4 million during 2021 and $0.44 per share totaling $68.1 million during 2020.
There were no discretionary share repurchases in 2021 or 2020. Share repurchases of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units and performance shares were $11.6 million or 0.3 million shares and $8.0 million or 0.3 million shares during the years ended December 31, 2021 and 2020, respectively. As of December 31, 2021, there were 18.2 million shares remaining on a board-approved share repurchase authorization.
Financing cash flows related to debt and brokered certificates of deposit activities resulted in net cash (outflows)/inflows of $(1.78) billion and $1.45 billion in 2021 and 2020, respectively. During 2021, debt levels declined in connection with the reduction in cash and cash equivalents as the Company normalized cash balances from the higher levels held at the end of 2020, as discussed earlier in Liquidity and Capital Resources. The Company’s total outstanding debt and liability for brokered certificates of deposit consisted of the following as of December 31, (in thousands):
2021 2020
Outstanding debt:
Unsecured commercial paper $ 751,286 $ 1,014,274
Asset-backed Canadian commercial paper conduit facility 85,054 116,678
Asset-backed U.S. commercial paper conduit facilities 272,589 402,205
Asset-backed securitization debt, net 1,627,142 1,791,956
Medium-term notes, net 3,408,660 4,917,714
Senior notes, net 744,668 743,977
$ 6,889,399 $ 8,986,804
Deposits, net $ 290,326 $ 79,965
Refer to Note 11 of the Notes to Consolidated financial statements for a summary of future principal payments on the Company's debt obligations. Refer to Note 6 of the Notes to Consolidated financial statements for a summary of future maturities on the Company's certificates of deposit.
Deposits - During 2020, Harley-Davidson Financial Services began offering brokered certificates of deposit to customers indirectly through contractual arrangements with third-party banks and/or securities brokerage firms through its bank subsidiary. The Company had $290.3 million and $80.0 million, net of fees, of interest-bearing brokered certificates of deposit outstanding as of December 31, 2021 and 2020, respectively. The deposits are classified as short- and long-term liabilities based upon the term of each brokered certificate of deposit issued. Each separate brokered certificate of deposit is issued under a master certificate, and as such, all outstanding brokered certificates of deposit are considered below the Federal Deposit Insurance Corporation insurance coverage limits.
Credit Facilities - In April 2020, the Company entered into a $707.5 million five-year credit facility to replace the $765.0 million five-year credit facility that was due to mature in April 2021. The new five-year credit facility matures in April 2025. The Company also amended its $780.0 million five-year credit facility in April 2020 to $707.5 million with no change to the maturity date of April 2023. Additionally, the Company had a $350.0 million 364-day credit facility that matured in May 2021. The five-year credit facilities (together, the Global Credit Facilities) bear interest at variable rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments. The Global Credit Facilities are committed facilities primarily used to support the Company's unsecured commercial paper program.
Unsecured Commercial Paper - Subject to limitations, the Company could issue unsecured commercial paper of up to $1.42 billion as of December 31, 2021 supported by the Global Credit Facilities, as discussed above. 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 facility or through the use of operating cash flow and cash on hand.(1)
Medium-Term Notes - The Company had the following unsecured medium-term notes issued and outstanding at December 31, 2021 (in thousands):
Principal Amount Rate Issue Date Maturity Date
$550,000 4.05% February 2019 February 2022
$400,000 2.55% June 2017 June 2022
$350,000 3.35% February 2018 February 2023
$737,302(a)
4.94% May 2020 May 2023
$680,586(b)
3.14% November 2019 November 2024
$700,000 3.35% June 2020 June 2025
(a)Euro denominated €650.0 million par value remeasured to U.S. dollar at December 31, 2021
(b)Euro denominated €600.0 million par value remeasured to U.S. dollar at December 31, 2021
The U.S. dollar-denominated medium-term notes provide for semi-annual interest payments and the foreign currency-denominated medium-term notes provide for annual interest payments. Principal on the medium-term notes is due at maturity. Unamortized discounts and debt issuance costs on the medium-term notes reduced the outstanding balance by $9.2 million and $15.4 million at December 31, 2021 and 2020, respectively.
Senior Notes - In July 2015, the Company issued $750.0 million of unsecured senior notes in an underwritten offering. The senior notes provide for semi-annual interest payments and principal due at maturity. $450.0 million of the senior notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million of the senior notes mature in July 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility - In June 2021, the Company renewed and amended its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$125.0 million. Prior to the renewal and amendment, the Canadian Conduit was contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$220.0 million. The transferred assets are restricted as collateral for the payment of the associated debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$125.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables is approximately 4 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of December 31, 2021, the Canadian Conduit has an expiration date of June 27, 2022.
In 2021, the Company transferred $32.8 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $27.4 million. In 2020, the Company transferred $77.9 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $61.6 million.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE - Until November 25, 2020, the Company had two separate agreements with third-party banks and their asset-backed U.S. commercial paper conduits, a $300.0 million revolving facility agreement and a $600.0 million revolving facility agreement (together, the Former U.S. Conduit Facilities). On November 25, 2020, the Company amended each revolving facility agreement by consolidating the two agreements into one $900.0 million revolving facility agreement (the U.S. Conduit Facility) with third-party banks and their asset-backed U.S. commercial paper conduits. Under the revolving facility agreement, the Company may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party banks and their asset-backed U.S. commercial paper conduits. In addition to the $900.0 million aggregate commitment, the agreement allows for additional borrowings, at the lender’s discretion, of up to $300.0 million. On November 19, 2021, the Company renewed the U.S. Conduit Facility. Availability under the U.S. Conduit Facility is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.
In 2021, the Company transferred $83.5 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $71.5 million of debt under the U.S. Conduit Facility. In 2020, the Company transferred $195.3 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $163.6 million of debt under the Former U.S. Conduit Facilities.
The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates if funded by a conduit lender through the issuance of commercial paper. If not funded by a conduit lender through the issuance
of commercial paper, the terms of the interest are based on LIBOR, with provisions for a transition to other benchmark rates, generally aligning to recommendations published by the Alternative Reference Rates Committee convened by the Federal Reserve Board and Federal Reserve Bank of New York. In each of these cases, a program fee is assessed based on the outstanding debt principal balance. The U.S. Conduit Facility also provides for an unused commitment fee based on the unused portion of the total aggregate commitment. When calculating the unused fee, the aggregate commitment does not include any unused portion of the $300.0 million additional borrowings allowed. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facility, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of December 31, 2021, the U.S. Conduit Facility has an expiration date of November 18, 2022.
Asset-Backed Securitization VIEs - For all of its asset-backed securitization transactions, the Company transfers U.S. retail motorcycle finance receivables to separate VIEs, which in turn issue secured notes with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchased U.S. retail motorcycle finance receivables. The U.S. retail motorcycle finance receivables included in the asset-backed securitization transactions are not available to pay other obligations or claims of the Company's creditors until the associated debt and other obligations are satisfied. Restricted cash balances held by the VIEs are used only to support the asset-backed securitizations.
The accounting treatment for asset-backed securitizations depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. The Company's current outstanding asset-backed securitizations do not meet the criteria to be accounted for as a sale because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings, and as such, 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 currently have various contractual maturities ranging from 2024 to 2029.
In 2021, the Company transferred $1.30 billion of U.S. retail motorcycle finance receivables to two separate SPEs which, in turn, issued $1.18 billion, or $1.17 billion net of discounts and issuance costs, of secured notes through two separate on-balance sheet asset-backed securitization transactions. In 2020, the Company transferred $2.42 billion of U.S. retail motorcycle finance receivables to four separate SPEs which, in turn, issued $2.08 billion, or $2.06 billion net of discounts and issuance costs, of secured notes through four separate on-balance-sheet asset-backed securitization transactions.
Support Agreement - The Company has a support agreement with Harley-Davidson Financial Services whereby, if required, the Company agrees to provide Harley-Davidson Financial Services with financial support to maintain Harley-Davidson Financial Services’ 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. No amount has ever been provided to Harley-Davidson Financial Services under the support agreement.
Operating and Financial Covenants - Harley-Davidson Financial Services and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the medium-term and senior notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.
The operating covenants limit the Company’s and Harley-Davidson Financial Services’ ability to:
•Assume or incur certain liens;
•Participate in certain mergers or consolidations; and
•Purchase or hold margin stock.
Under the current financial covenants of the Global Credit Facilities, the ratio of Harley-Davidson Financial Services’ consolidated debt, excluding secured debt, to Harley-Davidson Financial Services’ consolidated allowance for credit losses on finance receivables plus Harley-Davidson Financial Services' consolidated shareholders' equity, excluding accumulated other comprehensive loss (AOCL), cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and consolidated shareholders’ equity (where the Company's consolidated debt in each case excludes that of Harley-Davidson Financial Services and its subsidiaries, and the Company's consolidated shareholders’ equity excludes AOCL) cannot exceed 0.7 to 1.0 as of the end of any fiscal quarter. No
financial covenants are required under the medium-term or senior notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.
At December 31, 2021 and 2020, Harley-Davidson Financial Services and the Company remained in compliance with all of the then existing covenants.
Cautionary Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” “may,” “will,” “estimates,” “targets,” “intend,” "is on-track," "forecasting," or words of similar meaning. Similarly, statements that describe or refer to future expectations, future plans, strategies, objectives, outlooks, targets, guidance, commitments or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, unfavorably or favorably, from those anticipated as of the date of this report. Certain of such risks and uncertainties are described below. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are only made as of the date of this report, and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Important factors that could affect future results and cause those results to differ materially from those expressed in the forward-looking statements include, among others, the following: (i) the COVID-19 pandemic, including the length and severity of the pandemic across the globe and the pace of recovery following the pandemic and (ii) the Company's ability to: (a) execute its business plans and strategies, including The Hardwire and the evolution of LiveWire as a standalone brand, including the proposed separation of LiveWire into a separate business of the Company through the combination of LiveWire with ABIC, which includes the risks noted below; (b) manage supply chain and logistic issues, including quality issues, availability of semiconductor chip components and the ability to find alternative sources of those components in a timely manner, unexpected interruptions or price increases caused by supplier volatility, raw material shortages or natural disasters, and longer shipping times and increased logistics costs, including successfully implementing pricing surcharges; (c) realize the expected business benefits from the combination of LiveWire with ABIC, which may be affected by, among other things: (I) the ability of LiveWire to: (1) execute its plans to develop, produce, market, and sell its electric vehicles; (2) achieve profitability, which is dependent on the successful development and commercial introduction and acceptance of its electric vehicles, and its services, which may not occur; (3) adequately control the costs of its operations as a new entrant into a new space; (4) develop, maintain, and strengthen its brand; (5) effectively establish and maintain cooperation from its retail partners, largely drawn from the Company's traditional motorcycle dealer network, to be able to effectively establish or maintain relationships with customers for electric vehicles; (II) competition; and (III) other risks and uncertainties indicated from time to time in the final prospectus of ABIC, including under "Risk Factors" therein, and other documents filed or to be filed with the SEC by the Company, LW EV Holdings, Inc. (HoldCo) or ABIC; (d) accurately analyze, predict and react to changing market conditions and successfully adjust to shifting global consumer needs and interests; (e) successfully access the capital and/or credit markets on terms that are acceptable to the Company and within its expectations; (f) successfully carry out its global manufacturing and assembly operations; (g) develop and introduce products, services and experiences on a timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, including successfully implementing and executing plans to strengthen and grow its leadership position in Grand American Touring, large Cruiser and Trike, and grow its complementary businesses; (h) perform in a manner that enables the Company to benefit from market opportunities while competing against existing and new competitors; (i) successfully appeal: (i) the revocation of the Binding Origin Information (BOI) decisions that allowed the Company to supply its European Union (EU) market with certain of its motorcycles produced at its Thailand operations at a reduced tariff rate and (ii) the denial of the Company's application for temporary relief from the effect of the revocation of the BOI decisions; (j) manage and predict the impact that new, reinstated or adjusted tariffs may have on the Company's ability to sell products internationally, and the cost of raw materials and components, including the temporary lifting of the Section 232 steel and aluminum tariffs and incremental tariffs on motorcycles imported into the EU from the U.S., between the U.S. and EU, which expires on December 31, 2023; (k) prevent, detect, and remediate any issues with its motorcycles or any issues associated with the manufacturing processes to avoid delays in new model launches, recall campaigns, regulatory agency investigations, increased warranty costs or litigation and adverse effects on its reputation and brand strength, and carry out any product programs or recalls within expected costs and timing; (l) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles; (m) successfully manage and reduce costs throughout the business; (n) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing political environment; (o) 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 dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand; (p) continue to develop and maintain a productive relationship with Zhejiang Qianjiang Motorcycle Co., Ltd. and launch related products in a timely manner; (q) maintain a productive relationship with Hero MotoCorp as a distributor and licensee of the Harley-Davidson brand name in India; (r) successfully maintain a manner in which to sell motorcycles in China and the Company's Association of Southeast Asian Nations (ASEAN) countries that does not subject its motorcycles to incremental tariffs; (s) manage its Thailand corporate and manufacturing operation in a manner that allows the Company to avail itself of preferential free trade agreements and duty rates, and sufficiently lower prices of its motorcycles in certain markets; (t) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices; (u) retain and attract talented employees, and eliminate personnel duplication, inefficiencies and complexity throughout the organization; (v) prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or Company data and respond to evolving regulatory requirements regarding data security; (w) manage the credit quality, the loan servicing and collection activities, and the recovery rates of Harley-Davidson Financial Services' loan portfolio; (x) adjust to tax reform, healthcare inflation and reform and pension reform, and successfully estimate the impact of any such reform on the Company’s business; (y) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles; (z) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities; (aa) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations; (bb) manage its exposure to product liability claims and commercial or contractual disputes; (cc) continue to manage the relationships and agreements that the Company has with its labor unions to help drive long-term competitiveness; (dd) achieve anticipated results with respect to the Company's pre-owned motorcycle program, Harley-Davidson Certified, and the Company's H-D1 Marketplace; (ee) accurately predict the margins of its Motorcycles and Related Products segment in light of, among other things, tariffs, the cost associated with product development initiatives and the Company's complex global supply chain; and (ff) optimize capital allocation in light of the Company's capital allocation priorities.
The Company’s operations, demand for its products, and its liquidity could be adversely impacted by work stoppages, facility closures, strikes, natural causes, widespread infectious disease, terrorism, or other factors. Other factors are described in Item 1A. Risk Factors of this report. Many of these risk factors are impacted by the current changing capital, credit and retail markets and the Company's ability to manage through inconsistent economic conditions.
The Company’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company’s dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its dealers to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company. In addition, the Company’s dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions, the impact of the COVID-19 pandemic, or other factors.
In recent years, Harley-Davidson Financial Services has experienced historically low levels of retail credit losses, but there is no assurance that this will continue. The Company believes that Harley-Davidson Financial Services' retail credit losses will increase over time due among other things to factors that have contributed recently to low levels of losses, including the favorable impact of recent federal stimulus payments that will not recur.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign currency exchange rates, commodity prices and interest rates. To reduce such risks, the Company selectively uses derivative financial instruments. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes. Sensitivity analysis is used to manage and monitor foreign currency exchange rate and interest rate risks. Further disclosure relating to the fair value of the Company's derivative financial instruments is included in Note 9 of the Notes to Consolidated financial statements.
Motorcycles and Related Products Segment
The Company sells its motorcycles and related products internationally and in most markets those sales are made in the foreign country’s local currency. As a result, the Motorcycles segment operating results are affected by fluctuations in the value of the U.S. dollar relative to foreign currencies. The Company’s most significant foreign currency exchange rate risk resulting from the sale of motorcycles and related products relates to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Chinese yuan, Singapore dollar, Thai baht and Pound sterling. The Company utilizes foreign currency contracts to mitigate the effect of certain currencies' fluctuations on Motorcycles segment operating results. The
foreign currency contracts are entered into with banks and allow the Company to exchange currencies at a future date, based on a fixed exchange rate. At December 31, 2021 and 2020, the notional U.S. dollar value of outstanding foreign currency contracts was $804.2 million and $779.4 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 $78.6 million and $80.2 million as of December 31, 2021 and 2020, respectively.
The Company purchases commodities for use in the production of motorcycles. As a result, Motorcycles segment operating income is affected by changes in commodity prices. The Company uses derivative financial instruments on a limited basis to hedge the prices of certain commodities. At December 31, 2021, the notional value of these instruments was $11.6 million and the fair value was a net asset of $0.6 million. As of December 31, 2020, the notional value of these instruments was $7.5 million and the fair value was a net asset of $0.8 million. The potential decrease in fair value of these contracts from a 10% adverse change in the underlying commodity prices would not be significant.
Financial Services Segment
The Company has interest rate sensitive financial instruments including finance receivables, debt and interest rate derivative financial instruments. As a result, Financial Services operating income is affected by changes in interest rates. The Company utilizes interest rate swaps and caps to reduce the impact of fluctuations in interest rates on its floating-rate medium-term notes and its asset-backed securitization transactions, respectively. As of December 31, 2021, Harley-Davidson Financial Services had interest rate caps outstanding with a notional value of $504.5 million and no interest rate swaps. As of December 31, 2020, Harley-Davidson Financial Services had outstanding interest rate caps with a notional value of $978.1 million and interest rate swaps with a notional value of $450.0 million. At December 31, 2021 and 2020, Harley-Davidson Financial Services estimated that a 10% decrease in interest rates would not result in a material change to the fair value of the interest rate cap agreements. As of December 31, 2020, Harley-Davidson Financial Services estimated that a 10% decrease in interest rates would not result in a material change to the fair value of the interest rate swap agreements.
Harley-Davidson Financial Services also has short-term commercial paper and debt issued through the commercial paper conduit facilities that is subject to changes in interest rates which it does not hedge. The Company estimates that a one-percentage point increase in the interest rate on commercial paper and debt issued through the commercial paper conduit facilities would increase Financial Services interest expense in 2021 by approximately $11.7 million. This analysis does not consider the effects of the reduced level of overall economic activity that could exist in such an environment. Further, in the event of a change in interest rates, the Company may take actions to mitigate its exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, the sensitivity analysis does not account for these impacts.
The Company has foreign denominated medium-term notes, and as a result, Financial Services operating income is affected by fluctuations in the value of the U.S. dollar relative to foreign currencies and interest rates. At December 31, 2021, this exposure related to the Euro. The Company utilizes cross-currency swaps to mitigate the effect of the foreign currency exchange rate and interest rate fluctuations related to foreign denominated debt. The Company had cross-currency swaps outstanding with a notional value of $1.4 billion at December 31, 2021 and 2020. The Company estimates that a 10% adverse change in the underlying foreign currency exchange rate and interest rate would result in a $149.8 million and $170.6 million decrease in the fair value of the swap agreements as of December 31, 2021 and 2020, respectively.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm (PCAOB ID: 42)
Consolidated Statements of Operations
Consolidated Statements of Comprehensive Income
Consolidated Balance Sheets
Consolidated Statements of Cash Flows
Consolidated Statements of Shareholders’ Equity
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
2. Revenue
3. Restructuring Activities
4. Income Taxes
5. Capital Stock and Earnings Per Share
6. Additional Balance Sheet and Cash Flow Information
7. Finance Receivables
8. Goodwill and Intangible Assets
9. Derivative Financial Instruments and Hedging Activities
10. Leases
11. Debt
12. Asset-Backed Financing
13. Fair Value
14. Product Warranty and Recall Campaigns
15. Employee Benefit Plans and Other Postretirement Benefits
16. Commitments and Contingencies
17. Share-Based Awards
18. Accumulated Other Comprehensive Loss
19. Reportable Segments and Geographic Information
20. Supplemental Consolidating Data
21. Subsequent Event
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, 2021, based on criteria established in Internal Control - Integrated Framework issued 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, 2021, 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, 2021 and 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statement schedule listed in the Index at item 15(a) and our report dated February 25, 2022 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 25, 2022
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. (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2021, 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, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021, 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, 2021, 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 25, 2022 expressed an unqualified opinion thereon.
Adoption of ASU 2016-13
As discussed in Note 7 of the consolidated financial statements, the Company changed its method of accounting for credit losses in 2020 due to the adoption of Accounting Standards Update (ASU) No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and the related amendments.
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with 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 error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates 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 the critical audit matter 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 matter below, providing separate opinions on the critical audit matter or on the accounts or disclosures to which it relates.
Allowance for Credit Losses - Retail Finance Receivables
Description of the Matter The Company’s retail receivable portfolio totaled $6.5 billion as of December 31, 2021, and the associated allowance for credit losses (ACL) was $326.3 million. As discussed in Note 7 to the consolidated financial statements, the Company utilizes a vintage-based loss forecast methodology to measure the expected lifetime retail finance receivables credit losses. Economic forecasts for a two-year period are incorporated into the methodology to reflect the estimated impact of changes in future economic conditions. To establish the economic forecasts, management considers various third-party economic forecast scenarios and applies a probability-weighting to those economic forecast scenarios. For periods beyond the Company’s incorporated economic forecasts, the Company reverts to its average historical loss experience using a mean-reversion process over a three-year period. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or term as well as other relevant factors.
Auditing management’s estimate of the ACL for retail finance receivables was especially challenging due to the complexity of management’s retail receivables loss forecasting models and subjective management assumptions applied in determining the probability-weighting of its economic forecasts.
How We Addressed the Matter in Our Audit We obtained an understanding, evaluated the design, and tested the operating effectiveness of internal controls over the ACL process. These procedures included testing controls over management’s review of key assumptions such as the economic forecasts, the monitoring of the ACL models, and the completeness and accuracy of key inputs and assumptions used in the ACL models.
To test the ACL, our audit procedures included, among others, evaluating the Company’s loss forecasting models, the economic forecasts prepared by management, and the underlying data used in the models. We involved our internal specialist to assist with our reperformance of targeted model loss calculations for a sample of loans. We evaluated management’s judgments in probability-weighting different third-party economic forecast scenarios and compared management’s economic forecasts to other available information for contrary or corroborative evidence. In addition, we reviewed the Company’s historical loss statistics, peer information, and subsequent events and considered whether this information corroborates or contradicts management’s measurement of the ACL.
/s/ Ernst & Young LLP
We have served as the Company’s auditor since 1982
Milwaukee, Wisconsin
February 25, 2022
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2021, 2020 and 2019
(In thousands, except per share amounts)
2021 2020 2019
Revenue:
Motorcycles and Related Products $ 4,540,240 $ 3,264,054 $ 4,572,678
Financial Services 796,068 790,323 789,111
5,336,308 4,054,377 5,361,789
Costs and expenses:
Motorcycles and Related Products cost of goods sold 3,243,287 2,435,745 3,229,798
Financial Services interest expense 192,944 246,447 210,438
Financial Services provision for credit losses 25,049 181,870 134,536
Selling, administrative and engineering expense 1,048,174 1,050,627 1,199,056
Restructuring expense 3,415 130,009 32,353
4,512,869 4,044,698 4,806,181
Operating income 823,439 9,679 555,608
Other income (expense), net 20,076 (1,848) 16,514
Investment income 6,694 7,560 16,371
Interest expense 30,972 31,121 31,078
Income (loss) before income taxes 819,237 (15,730) 557,415
Income tax provision (benefit) 169,213 (17,028) 133,780
Net income $ 650,024 $ 1,298 $ 423,635
Earnings per share:
Basic $ 4.23 $ 0.01 $ 2.70
Diluted $ 4.19 $ 0.01 $ 2.68
Cash dividends per share $ 0.60 $ 0.44 $ 1.50
The accompanying notes are integral to the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2021, 2020 and 2019
(In thousands)
2021 2020 2019
Net income $ 650,024 $ 1,298 $ 423,635
Other comprehensive income, net of tax:
Foreign currency translation adjustments (36,812) 33,224 8,795
Derivative financial instruments 44,111 (31,530) (16,371)
Pension and postretirement benefit plans 235,199 51,838 100,311
242,498 53,532 92,735
Comprehensive income $ 892,522 $ 54,830 $ 516,370
The accompanying notes integral part to the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2021 and 2020
(In thousands)
2021 2020
ASSETS
Current assets:
Cash and cash equivalents $ 1,874,745 $ 3,257,203
Accounts receivable, net 182,148 143,082
Finance receivables, net of allowance of $60,734 and $72,632
1,465,544 1,509,539
Inventories, net 712,942 523,497
Restricted cash 128,935 131,642
Other current assets 185,777 280,470
4,550,091 5,845,433
Finance receivables, net of allowance of $278,645 and $318,304
5,106,377 4,933,469
Property, plant and equipment, net 683,984 743,784
Pension and postretirement assets 386,152 95,711
Goodwill 63,177 65,976
Deferred income taxes 82,922 158,538
Lease assets 49,625 45,203
Other long-term assets 128,727 122,487
$ 11,051,055 $ 12,010,601
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 374,978 $ 290,904
Accrued liabilities 601,981 557,214
Short-term deposits, net 72,146 79,965
Short-term debt 751,286 1,014,274
Current portion of long-term debt, net 1,542,496 2,039,597
3,342,887 3,981,954
Long-term deposits, net 218,180 -
Long-term debt, net 4,595,617 5,932,933
Lease liabilities 29,904 30,115
Pension and postretirement liabilities 95,299 114,206
Deferred income taxes 9,261 8,607
Other long-term liabilities 206,663 220,001
Commitments and contingencies (Note 16)
Shareholders’ equity:
Preferred stock, none issued
- -
Common stock (Note 5) 1,694 1,685
Additional paid-in-capital 1,547,011 1,507,706
Retained earnings 1,842,421 1,284,823
Accumulated other comprehensive loss (240,919) (483,417)
Treasury stock, at cost (Note 5) (596,963) (588,012)
2,553,244 1,722,785
$ 11,051,055 $ 12,010,601
HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
December 31, 2021 and 2020
(In thousands)
2021 2020
Balances held by consolidated variable interest entities (Note 12)
Finance receivables, net - current $ 493,543 $ 530,882
Other assets $ 2,982 $ 3,753
Finance receivables, net - non-current $ 1,734,428 $ 1,889,472
Restricted cash - current and non-current $ 144,284 $ 142,892
Current portion of long-term debt, net $ 569,145 $ 608,987
Long-term debt, net $ 1,330,586 $ 1,585,174
The accompanying notes are integral to the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2021, 2020 and 2019
(In thousands)
2021 2020 2019
Net cash provided by operating activities (Note 6) $ 975,701 $ 1,177,890 $ 868,272
Cash flows from investing activities:
Capital expenditures (120,181) (131,050) (181,440)
Origination of finance receivables (4,243,710) (3,497,486) (3,847,322)
Collections on finance receivables 3,902,304 3,540,289 3,499,717
Other investing activities 2,140 21,464 20,919
Net cash used by investing activities (459,447) (66,783) (508,126)
Cash flows from financing activities:
Proceeds from issuance of medium-term notes - 1,396,602 1,203,236
Repayments of medium-term notes (1,400,000) (1,400,000) (1,350,000)
Proceeds from securitization debt 1,169,910 2,064,450 1,021,453
Repayments of securitization debt (1,340,638) (1,041,751) (353,251)
Borrowings of asset-backed commercial paper 98,863 225,187 177,950
Repayments of asset-backed commercial paper (261,367) (318,828) (318,006)
Net (decrease) increase in unsecured commercial paper (260,250) 444,380 (563,453)
Net increase in deposits 210,112 79,947 -
Dividends paid (92,426) (68,087) (237,221)
Repurchase of common stock (11,623) (8,006) (296,520)
Other financing activities 2,488 89 3,589
Net cash (used) provided by financing activities (1,884,931) 1,373,983 (712,223)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (15,272) 18,712 (2,305)
Net (decrease) increase in cash, cash equivalents and restricted cash $ (1,383,949) $ 2,503,802 $ (354,382)
Cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash, beginning of period $ 3,409,168 $ 905,366 $ 1,259,748
Net (decrease) increase in cash, cash equivalents and restricted cash (1,383,949) 2,503,802 (354,382)
Cash, cash equivalents and restricted cash, end of period $ 2,025,219 $ 3,409,168 $ 905,366
Reconciliation of cash, cash equivalents and restricted cash on the Consolidated balance sheets to the Consolidated statements of cash flows:
Cash and cash equivalents $ 1,874,745 $ 3,257,203 $ 833,868
Restricted cash 128,935 131,642 64,554
Restricted cash included in Other long-term assets 21,539 20,323 6,944
Cash, cash equivalents and restricted cash per the Consolidated statements of cash flows $ 2,025,219 $ 3,409,168 $ 905,366
The accompanying notes are integral to the consolidated financial statements.
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years ended December 31, 2021, 2020 and 2019
(In thousands, except share and per share amounts)
Common Stock Additional
Paid-in
Capital Retained
Earnings Accumulated
Other
Comprehensive
Loss Treasury Stock Total
Issued
Shares Balance
Balance, December 31, 2018 181,931,225 $ 1,819 $ 1,459,620 $ 2,007,583 $ (629,684) $ (1,065,389) $ 1,773,949
Net income - - - 423,635 - - 423,635
Other comprehensive income, net of tax (Note 18) - - - - 92,735 - 92,735
Dividends ($1.50 per share)
- - - (237,221) - - (237,221)
Repurchase of common stock - - - - - (296,520) (296,520)
Share-based compensation 885,311 9 31,384 - - 16,028 47,421
Balance, December 31, 2019 182,816,536 1,828 1,491,004 2,193,997 (536,949) (1,345,881) 1,803,999
Net income - - - 1,298 - - 1,298
Other comprehensive income, net of tax (Note 18) - - - - 53,532 - 53,532
Dividends ($0.44 per share)
- - - (68,087) - - (68,087)
Repurchase of common stock - - - - - (8,006) (8,006)
Share-based compensation 686,990 7 16,702 - - 1,569 18,278
Retirement of treasury stock (15,000,000) (150) - (764,156) - 764,306 -
Cumulative effect of change in accounting - - - (78,229) - - (78,229)
Balance, December 31, 2020 168,503,526 1,685 1,507,706 1,284,823 (483,417) (588,012) 1,722,785
Net income - - - 650,024 - - 650,024
Other comprehensive income, net of tax (Note 18) - - - - 242,498 - 242,498
Dividends ($0.60 per share)
- - - (92,426) - - (92,426)
Repurchase of common stock - - - - - (11,623) (11,623)
Share-based compensation 861,160 9 39,305 - - 2,672 41,986
Balance, December 31, 2021 169,364,686 $ 1,694 $ 1,547,011 $ 1,842,421 $ (240,919) $ (596,963) $ 2,553,244
The accompanying notes are integral to 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 - The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its subsidiaries, all of which are wholly-owned (the Company), including the accounts of the group of companies referred to as Harley-Davidson Motor Company and Harley-Davidson Financial Services. In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material intercompany transactions have been eliminated.
The Company operates in two reportable segments: Motorcycles and Related Products (Motorcycles) and Financial Services.
Substantially all of the Company’s international subsidiaries use their respective local currency as their functional currency. Assets and liabilities of international subsidiaries have been translated at period-end exchange rates, and revenues and expenses have been translated using average exchange rates for the period. Monetary assets and liabilities denominated in a currency that is different from an entity's functional currency are remeasured from the transactional currency to the entity's functional currency on a monthly basis. The aggregate transaction gain resulting from foreign currency remeasurements was $22.0 million, $3.8 million, and $18.0 million for the years ended December 31, 2021, 2020 and 2019, respectively.
Use of Estimates - The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires the Company's management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents - The Company considers all highly liquid investments with a maturity of 90 days or less when purchased to be cash equivalents.
Accounts Receivable, net - The Company’s motorcycles and related products are sold to independent dealers outside the U.S. and Canada generally on open account and the resulting receivables are included in Accounts receivable, net on the Consolidated balance sheets. The allowance for doubtful accounts deducted from total accounts receivable was $2.4 million and $3.7 million as of December 31, 2021 and 2020, respectively. The Company’s evaluation of the allowance for doubtful accounts includes a review to identify non-performing accounts which are evaluated individually. The remaining accounts receivable balances are evaluated in the aggregate based on an aging analysis. The allowance for doubtful accounts is based on factors including past loss experience, the value of collateral, and if applicable, reasonable and supportable economic forecasts. Accounts receivable are written down once management determines that the specific customer does not have the ability to repay the balance in full. The Company’s sales of motorcycles and related products in the U.S. and Canada are financed through Harley-Davidson Financial Services by the purchasing dealers and the related receivables are included in Finance receivables, net on the Consolidated balance sheets.
Inventories, net - Substantially all inventories located in the U.S. are valued using the last-in, first-out (LIFO) method. Other inventories totaling $318.5 million and $221.9 million at December 31, 2021 and 2020, respectively, are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method.
Repossessed Inventory - Repossessed inventory representing recovered collateral on impaired finance receivables is recorded at the lower of cost or net realizable value through a fair value remeasurement. In the period during which the collateral is repossessed, the related finance receivable is adjusted to the fair value of the collateral through a change to the allowance for credit losses and reclassified to repossessed inventory, included in Other current assets on the Consolidated balance sheets.
Property, Plant and Equipment, net - Property, plant and equipment is recorded at cost, net of accumulated depreciation and amortization. Depreciation is determined using the straight-line method over the estimated useful lives of the assets. The estimated useful lives of each class of property, plant and equipment generally consist of 30 years for buildings, 7 years for building and land improvements, 3 to 10 years for machinery and equipment, and 3 to 7 years for software. Accelerated methods of depreciation are used for income tax purposes.
Goodwill - Goodwill represents the excess of acquisition cost over the fair value of the net assets purchased. Goodwill is tested for impairment, based on financial data related to the reporting unit to which it has been assigned, at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. If the carrying amount of the reporting unit exceeds its fair value, goodwill is considered impaired and an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value, limited to the total goodwill allocated to the reporting unit. During 2021 and 2020, the Company tested its goodwill balances for impairment and no adjustments were recorded to goodwill as a result of those reviews.
Long-lived Assets - The Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset for assets to be held and used. The Company also reviews the useful life of its long-lived assets when events and circumstances indicate that the actual useful life may be shorter than originally estimated. In the event that the actual useful life is deemed to be shorter than the original useful life, depreciation is adjusted prospectively so that the remaining book value is depreciated over the revised useful life.
Asset groups classified as held for sale are measured at the lower of carrying amount or fair value less cost to sell, and a loss is recognized for any initial adjustment required to reduce the carrying amount to the fair value less cost to sell in the period the held for sale criteria are met. The fair value less cost to sell must be assessed each reporting period that the asset group remains classified as held for sale. Gains or losses not previously recognized resulting from the sale of an asset group will be recognized on the date of sale.
Research and Development Expenses - Expenditures for research activities relating to product development and improvements are charged against income as incurred and included within Selling, administrative and engineering expense on the Consolidated statements of operations. Research and development expenses were $175.1 million, $202.4 million and $216.5 million for 2021, 2020 and 2019, respectively.
Advertising Costs - The Company expenses the production cost of advertising the first time the advertising takes place within Selling, administrative and engineering expense. Advertising costs relate to the Company’s efforts to promote its products and brands through the use of media and other means. During 2021, 2020 and 2019, the Company incurred $107.6 million, $134.6 million and $171.4 million in advertising costs, respectively.
Shipping and Handling Costs - The Company classifies shipping and handling costs as a component of Motorcycles and Related Products cost of goods sold.
New Accounting Standards
Accounting Standards Recently Adopted
In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12). The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted ASU 2019-12 on January 1, 2021 on a prospective basis. The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements.
2. Revenue
The Company recognizes revenue when it satisfies a performance obligation by transferring control of a good or service to a customer. Revenue is measured based on the consideration that the Company expects to be entitled to in exchange for the goods or services transferred. Taxes that are collected from a customer concurrent with revenue-producing activities are excluded from revenue.
Disaggregated revenue by major source was as follows for the years ended December 31, (in thousands):
2021 2020
Motorcycles and Related Products:
Motorcycles $ 3,477,395 $ 2,350,407
Parts and accessories 741,797 659,634
Apparel 228,106 186,068
Licensing 37,790 29,750
Other 55,152 38,195
4,540,240 3,264,054
Financial Services:
Interest income 671,708 682,517
Other 124,360 107,806
796,068 790,323
$ 5,336,308 $ 4,054,377
Motorcycles and Related Products
Motorcycles, Parts and Accessories, and Apparel - Revenues from the sale of motorcycles, parts and accessories, and apparel are recorded when control is transferred to the customer, generally at the time of shipment. The sale of products to independent dealers outside the U.S. and Canada is generally on open account with terms that approximate 30-120 days and the resulting receivables are included in Accounts receivable, net on the Consolidated balance sheets. The sale of products to independent dealers in the U.S. and Canada is financed through Harley-Davidson Financial Services and the related receivables are included in Finance receivables, net on the Consolidated balance sheets.
The Company offers sales incentive programs to dealers and retail customers designed to promote the sale of motorcycles, parts and accessories, and apparel. The Company estimates its variable consideration sold under its sales incentive programs using the expected value method. The Company accounts for consideration payable to a customer as part of its sales incentives as a reduction of revenue, which is accrued at the later of the date the related sale is recorded or the date the incentive program is both approved and communicated.
The Company offers the right to return eligible parts and accessories and apparel. When the Company offers a right to return, it estimates returns based on an analysis of historical trends and records revenue on the initial sale only in the amount that it expects to be entitled. The remaining consideration is deferred in a refund liability account. The refund liability is remeasured for changes in the estimate at each reporting date with a corresponding adjustment to revenue.
Variable consideration related to sales incentives and rights to return is adjusted at the earliest of when the amount of consideration the Company expects to receive changes or the consideration becomes fixed. Adjustments for variable consideration related to previously recognized sales were not material during 2021 and 2020.
Shipping and handling costs associated with freight after control of a product has transferred to a customer are accounted for as fulfillment costs. The Company accrues for the shipping and handling in the same period that the related revenue is recognized.
The Company offers standard, limited warranties on its motorcycles and parts and accessories. These warranties provide assurance that the product will function as expected and are not separate performance obligations. The Company accounts for estimated warranty costs as a liability when control of the product transfers to the customer.
Licensing - The Company licenses the Harley-Davidson name and other trademarks owned by the Company and collects royalties from its licensees. The trademark licenses are considered symbolic intellectual property, which grant the licensees a right to access the Company’s intellectual property. The Company satisfies its performance obligation over the license period, as the Company fulfills its promise to grant the licensees rights to use and benefit from the intellectual property as well as maintain the intellectual property.
Payment is typically due within thirty days of the end of each quarter for the royalties earned in that quarter. Revenue, in the form of sales-based royalties, is recognized when the licensees’ subsequent sales occur. The Company applies the practical expedient in Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers, to recognize licensing revenues in the amount that the Company has the right to invoice because the royalties due each period
correspond directly with the value of the Company’s performance to date. Revenue will be recognized over the remaining contract terms which range up to 4 years.
Other - Other revenue consists primarily of revenue from Harley Owners Group® (H.O.G.) membership sales, sales of electric balance bikes for children, museum admissions and events, and other miscellaneous products and services.
Financial Services
Interest Income - Interest income on finance receivables is recorded as earned and is based on the average outstanding daily balance for wholesale and retail receivables. Accrued and uncollected interest is classified with Finance receivables, net. Certain loan origination costs related to finance receivables, including payments made to dealers for certain retail loans, are deferred and recorded within Finance receivables, net and amortized over the life of the contract.
Other Income - Other income consists primarily of insurance and licensing revenues. Harley-Davidson Financial Services works with certain unaffiliated insurance companies to offer motorcycle insurance and protection products through most dealers in the U.S. and Canada. Harley-Davidson Financial Services also works with third-party financial institutions that issue credit cards or offer other financial products bearing the Harley-Davidson brand in the U.S. and internationally. For many of these contracts, the Company grants temporary rights to use the licensed trademarks owned by the Company and collects royalties from its customers in connection with sales of their products. The trademark licenses are considered symbolic intellectual property, which grant the customer a right to access the intellectual property. The Company satisfies its performance obligation over the license period, as it fulfills its promise to grant the customer rights to use and benefit from the intellectual property as well as maintain the intellectual property. Royalty and profit sharing amounts are received either quarterly or per annum, based upon the contract. Revenue, in the form of sales-based royalties, is recognized when the customers’ subsequent sales occur. Revenue will be recognized over the remaining contract terms which range up to 4 years. The Company is the primary obligor for certain other insurance related contracts and, as a result, revenue is recognized over the life of the contract as the Company fulfills its performance obligation.
Contract Liabilities
The Company maintains certain deferred revenue balances related to payments received at contract inception in advance of the Company’s performance under the contract and generally relates to the sale of H.O.G. memberships and extended service plan contracts. Deferred revenue is recognized as revenue as the Company performs under the contract. Deferred revenue, included in Accrued liabilities and Other long-term liabilities on the Consolidated balance sheets, was as follows as of December 31, (in thousands):
2021 2020
Balance, beginning of period $ 36,614 $ 29,745
Balance, end of period $ 40,092 $ 36,614
Previously deferred revenue recognized as revenue in 2021 and 2020 was $24.7 million and $19.7 million, respectively. The Company expects to recognize approximately $18.3 million of the remaining unearned revenue in 2022 and $21.8 million thereafter.
3. Restructuring Activities
The Company's restructuring activities are included in Restructuring expense on the Consolidated statements of operations.
2020 Restructuring Activities - In 2020, the Company initiated restructuring activities including a workforce reduction, the termination of certain current and future products, facility changes, optimizing its global dealer network, exiting certain international markets, and discontinuing its sales and manufacturing operations in India. The workforce reduction resulted in the termination of approximately 500 employees. In addition, the India action resulted in the termination of approximately 70 employees.
Since the inception of the 2020 restructuring activities, the Company has incurred cumulative restructuring expenses of $133.4 million, including $121.8 million and $11.6 million in the Motorcycles and Financial Services segments, respectively. The Company does not expect restructuring expenses of any significance in 2022.
Changes in accrued restructuring expenses for the 2020 Restructuring Activities, which are included in Accrued liabilities on the Consolidated balance sheets, were as follows as of December 31, (in thousands):
Employee Termination Benefits Contract Terminations
& Other Non-Current Asset Adjustments Total
Balance, beginning of period $ 7,724 $ 16,196 $ - $ 23,920
Restructuring (benefit) expense (1,400) 4,405 410 3,415
Utilized - cash
(6,025) (17,608) - (23,633)
Utilized - non cash
- - (410) (410)
Foreign currency changes (178) (119) - (297)
Balance, end of period $ 121 $ 2,874 $ - $ 2,995
Employee Termination Benefits Contract Terminations
& Other Non-Current Asset Adjustments Total
Balance, beginning of period $ - $ - $ - $ -
Restructuring expense 28,913 70,894 30,202 130,009
Utilized - cash
(21,494) (54,773) - (76,267)
Utilized - non cash
- - (30,202) (30,202)
Foreign currency changes 305 75 - 380
Balance, end of period $ 7,724 $ 16,196 $ - $ 23,920
2018 Restructuring Activities - In 2018, the Company initiated a plan to further improve its manufacturing operations and cost structure by commencing a multi-year manufacturing optimization plan which included the consolidation of its motorcycle assembly plant in Kansas City, Missouri, into its plant in York, Pennsylvania, and the closure of its wheel operations in Adelaide, Australia (Manufacturing Optimization Plan). The consolidation of operations resulted in the elimination of approximately 800 jobs at the Kansas City facility and the addition of approximately 450 jobs at the York facility through 2019. The Adelaide facility closure resulted in the elimination of approximately 90 jobs. Through December 31, 2019 the Motorcycles segment incurred cumulative restructuring expenses of $122.2 million and other costs related to temporary inefficiencies of $23.2 million under the Manufacturing Optimization Plan. The Manufacturing Optimization Plan was completed in 2019.
In 2018, the Company initiated a reorganization of its workforce (Reorganization Plan), which was completed in 2019. As a result, approximately 70 employees left the Company on an involuntary basis.
Restructuring expenses for the 2018 Restructuring Activities were limited to the Motorcycles segment and were recorded during 2019 and 2018. Changes in accrued restructuring expenses for the 2018 restructuring activities, which are included in Accrued liabilities on the Consolidated balance sheets during 2019 were as follows (in thousands). The changes in accrued restructuring expenses during 2020 related to the 2018 restructuring activities were immaterial.
Manufacturing Optimization Plan Reorganization Plan
Employee Termination Benefits Accelerated Depreciation Other Total Employee Termination Benefits Total
Balance, beginning of period $ 24,958 $ - $ 79 $ 25,037 $ 3,461 $ 28,498
Restructuring expense (benefit) 15 14,684 17,971 32,670 (317) 32,353
Utilized - cash (24,102) - (16,950) (41,052) (3,118) (44,170)
Utilized - non cash - (14,684) (1,094) (15,778) - (15,778)
Foreign currency changes (6) - (4) (10) (26) (36)
Balance, end of period $ 865 $ - $ 2 $ 867 $ - $ 867
The Company incurred incremental Motorcycles and Related Products cost of goods sold due to temporary inefficiencies resulting from implementing the Manufacturing Optimization Plan during 2019 of $10.3 million.
4. Income Taxes
Income tax provision (benefit) for the years ended December 31, consists of the following (in thousands):
2021 2020 2019
Current:
Federal $ 134,111 $ 4,877 $ 82,484
State 14,508 2,614 6,421
Foreign 28,266 19,560 23,328
176,885 27,051 112,233
Deferred:
Federal (2,169) (30,779) 18,760
State (3,795) (11,579) 402
Foreign (1,708) (1,721) 2,385
(7,672) (44,079) 21,547
$ 169,213 $ (17,028) $ 133,780
The components of Income (loss) before income taxes for the years ended December 31, were as follows (in thousands):
2021 2020 2019
Domestic $ 698,578 $ (81,522) $ 465,798
Foreign 120,659 65,792 91,617
$ 819,237 $ (15,730) $ 557,415
Income tax provision (benefit) differs from the amount that would be provided by applying the statutory U.S. corporate income tax rate for the years ended December 31, due to the following items (in thousands):
2021 2020 2019
Provision (benefit) at statutory rate $ 172,040 $ (3,303) $ 117,057
State taxes, net of federal benefit 16,568 822 14,165
Foreign rate differential 4,303 60 1,665
Foreign derived intangible income - - (3,108)
Research and development credit (8,046) (8,442) (8,200)
Unrecognized tax benefits including interest and penalties (6,554) (8,567) 289
Valuation allowance adjustments (1,928) 9,675 8,070
State credits (5,403) (13,106) (4,704)
Global intangible low-taxed income 1,143 1,480 1,113
Adjustments for previously accrued taxes (8,500) (4,951) (1,755)
Executive compensation limitation 3,104 2,543 2,620
Other foreign inclusions 34 4,415 4,202
Other 2,452 2,346 2,366
Income tax provision (benefit) $ 169,213 $ (17,028) $ 133,780
The 2017 Tax Cuts and Jobs Act subjects U.S. shareholders to current tax on global intangible low-taxed income (GILTI) earned by certain foreign subsidiaries for which a company can elect to either recognize deferred taxes or to provide tax expense in the year incurred. The Company has elected to account for GILTI in the year the tax is incurred.
The principal components of the Company’s deferred income tax assets and liabilities as of December 31, include the following (in thousands):
2021 2020
Deferred income tax assets:
Accruals not yet tax deductible $ 133,150 $ 142,100
Pension and postretirement healthcare plan obligations - 6,499
Stock compensation 10,908 9,619
Net operating loss and research & development tax credit carryforwards 60,401 55,857
Other 66,245 78,051
270,704 292,126
Valuation allowance (33,596) (38,072)
237,108 254,054
Deferred income tax liabilities:
Depreciation, tax in excess of book (66,301) (74,579)
Pension and postretirement healthcare plan obligations (67,741) -
Other (29,405) (29,544)
(163,447) (104,123)
$ 73,661 $ 149,931
The Company reviews its deferred income tax asset valuation allowances on a quarterly basis, or whenever events or changes in circumstances indicate that a review is required. In determining the requirement for a valuation allowance, the historical and projected financial results of the legal entity or consolidated group recording the net deferred income tax asset is considered, along with any positive or negative evidence including tax law changes. Since future financial results and tax law may differ from previous estimates, periodic adjustments to the Company’s valuation allowances may be necessary.
The Company's gross state net operating loss carryforwards were as follows at December 31, (in thousands):
Year of Expiration 2021 2020
2031 $ 236,624 $ 252,142
2033 46 49
2034 112 2,455
2035 7,882 7,800
2037 433 -
2038 5,601 3,992
2039 13,581 11,710
2040 34,613 29,836
2041 3,486 -
Indefinite 8,441 9,449
$ 310,819 $ 317,433
The Company also had Wisconsin research and development credit carryforwards of $38.1 million at December 31, 2021, expiring in 2024-2036 and a foreign tax credit carryforward of $4.0 million expiring in 2030-2031.
At December 31, 2021, the Company had a deferred tax asset of $48.9 million related to its state net operating loss and Wisconsin research and development credit carryforwards and a deferred tax asset of $11.5 million related to foreign net operating losses.
The Company's valuation allowance was $33.6 million at December 31, 2021 and included $18.2 million related to state net operating loss and Wisconsin research and development credit carryforwards, $7.2 million related to foreign net operating loss carryforwards and $8.1 million related to other deferred tax assets. The change in the valuation allowance from prior year included an increase of $0.6 million related to state net operating loss and Wisconsin research and development credit carryforwards and a decrease of $5.1 million related to foreign operations.
The Company recognizes interest and penalties related to unrecognized tax benefits in Income tax provision (benefit). Changes in the Company’s gross liability for unrecognized tax benefits, excluding interest and penalties, were as follows (in thousands):
2021 2020
Unrecognized tax benefits, beginning of period $ 50,597 $ 60,112
Increase in unrecognized tax benefits for tax positions taken in a prior period 35 1,649
Decrease in unrecognized tax benefits for tax positions taken in a prior period (6,402) (12,560)
Increase in unrecognized tax benefits for tax positions taken in the current period 3,188 3,092
Statute lapses (2,340) -
Settlements with taxing authorities (222) (1,696)
Unrecognized tax benefits, end of period $ 44,856 $ 50,597
The amount of unrecognized tax benefits as of December 31, 2021 and 2020 that, if recognized, would affect the effective tax rate was $38.4 million and $43.8 million, respectively.
The total gross amount of benefit related to interest and penalties associated with unrecognized tax benefits recognized during 2021, 2020 and 2019 in the Consolidated statements of operations was $2.6 million, $2.1 million and $0.1 million, respectively.
The total gross amount of interest and penalties associated with unrecognized tax benefits recognized at December 31, 2021 and 2020 in the Consolidated balance sheets was $22.9 million and $25.5 million, respectively.
The Company does not expect a significant increase or decrease to the total amounts of unrecognized tax benefits related to continuing operations during the fiscal year ending December 31, 2022. However, the Company is under regular audit by tax authorities. The Company believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.
The Company or one of its subsidiaries files income tax returns in the U.S. federal and Wisconsin state jurisdictions and various other state and foreign jurisdictions. The Company is no longer subject to income tax examinations for Wisconsin state income taxes before 2017 or for U.S. federal income taxes before 2018.
5. Capital Stock and Earnings Per Share
Capital Stock - The Company is authorized to issue 2,000,000 shares of preferred stock of $1.00 par value, none of which is outstanding. The Company's common stock has a par value of $0.01 per share. During 2020, the Company retired 15.0 million shares of its treasury stock. Share information regarding the Company's common stock at December 31, was as follows:
2021 2020
Common stock shares:
Authorized 800,000,000 800,000,000
Issued 169,364,686 168,503,526
Outstanding 153,569,061 152,930,740
Treasury stock shares 15,795,625 15,572,786
There were no discretionary share repurchases during the years ended December 31, 2021 and 2020. Discretionary share repurchases during the year ended December 31, 2019 were $286.7 million or 8.2 million shares. Share repurchases of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units (RSUs) and performance shares were $11.6 million or 0.3 million shares, $8.0 million or 0.3 million shares, and $9.8 million or 0.3 million shares during the years ended December 31, 2021, 2020 and 2019, respectively, discussed further in Note 17.
The Company paid cash dividends of $0.60, $0.44, and $1.50 per share during the years ended December 31, 2021, 2020, and 2019, respectively.
Earnings Per Share - The computation of basic and diluted earnings per share for the years ended December 31, was as follows (in thousands except per share amounts):
2021 2020 2019
Net income $ 650,024 $ 1,298 $ 423,635
Basic weighted-average shares outstanding 153,747 153,186 157,054
Effect of dilutive securities - employee stock compensation plan 1,233 722 750
Diluted weighted-average shares outstanding 154,980 153,908 157,804
Earnings per share:
Basic $ 4.23 $ 0.01 $ 2.70
Diluted $ 4.19 $ 0.01 $ 2.68
Shares of common stock related to share-based compensation that were not included in the effect of dilutive securities because the effect would have been anti-dilutive include 0.5 million, 1.4 million and 1.1 million shares during 2021, 2020 and 2019, respectively.
6. Additional Balance Sheet and Cash Flow Information
Investments in marketable securities consisted of the following at December 31, (in thousands):
2021 2020
Mutual funds $ 49,650 $ 52,061
Mutual funds, included in Other long-term assets on the Consolidated balance sheets, are carried at fair value with gains and losses recorded in income. Mutual funds are held to support certain deferred compensation obligations.
Inventories, net consisted of the following as of December 31, (in thousands):
2021 2020
Raw materials and work in process $ 347,915 $ 211,979
Motorcycle finished goods 345,956 281,132
Parts and accessories and apparel 103,191 84,469
Inventory at lower of FIFO cost or net realizable value 797,062 577,580
Excess of FIFO over LIFO cost (84,120) (54,083)
$ 712,942 $ 523,497
Inventory obsolescence reserves deducted from FIFO cost were $63.0 million and $72.0 million as of December 31, 2021 and 2020, respectively.
Property, plant and equipment, net consisted of the following as of December 31, (in thousands):
2021 2020
Land and related improvements $ 71,549 $ 69,518
Buildings and related improvements 405,160 428,171
Machinery and equipment 1,614,177 1,577,337
Software 750,490 759,675
Construction in progress 113,615 188,823
2,954,991 3,023,524
Accumulated depreciation (2,271,007) (2,279,740)
$ 683,984 $ 743,784
Software, net of accumulated amortization, included in Property, plant and equipment, net, was $79.8 million and $100.7 million as of December 31, 2021 and 2020, respectively.
Accrued liabilities consisted of the following as of December 31, (in thousands):
2021 2020
Payroll, employee benefits and related expenses $ 159,474 $ 107,511
Sales incentive programs 42,980 52,820
Warranty and recalls 39,635 44,415
Interest 54,001 65,590
Tax-related accruals 34,279 24,238
Deferred revenue 18,293 18,070
Leases 17,369 17,081
Fair value of derivative financial instruments 2,361 25,521
Restructuring 2,995 23,920
Other 230,594 178,048
$ 601,981 $ 557,214
Deposits - Beginning in 2020, Harley-Davidson Financial Services began offering brokered certificates of deposit to customers indirectly through contractual arrangements with third-party banks and/or securities brokerage firms through its bank subsidiary. The Company had $290.3 million and $80.0 million, net of fees, of interest-bearing brokered certificates of deposit outstanding as of December 31, 2021 and December 31, 2020, respectively. As of December 31, 2021, the liabilities for deposits are included in Short-term deposits, net or Long-term deposits, net on the Consolidated balance sheets based upon the term of each brokered certificate of deposit issued. As of December 31, 2020, all deposits were classified as short-term. Each separate brokered certificate of deposit is issued under a master certificate, and as such, all outstanding brokered certificates of deposit are considered below the Federal Deposit Insurance Corporation insurance coverage limits.
Future maturities of the Company's certificates of deposit as of December 31, 2021 were as follows (in thousands):
2022 $ 72,475
2023 74,304
2024 64,696
2025 -
2026 79,742
Thereafter -
Unamortized fees (891)
$ 290,326
Operating Cash Flow - The reconciliation of Net income to Net cash provided by operating activities for the years ended December 31, was as follows (in thousands):
2021 2020 2019
Cash flows from operating activities:
Net income $ 650,024 $ 1,298 $ 423,635
Adjustments to reconcile Net income to Net cash provided by operating activities:
Depreciation and amortization 165,185 185,715 232,537
Amortization of deferred loan origination costs 86,115 71,142 76,326
Amortization of financing origination fees 13,810 14,435 9,823
Provision for long-term employee benefits 8,317 40,833 13,344
Employee benefit plan contributions and payments (17,133) (20,722) (13,256)
Stock compensation expense 42,156 23,494 33,733
Net change in wholesale finance receivables related to sales 89,001 531,701 (5,822)
Provision for credit losses 25,049 181,870 134,536
Deferred income taxes (7,672) (44,079) 21,547
Other, net (9,985) 10,345 2,234
Changes in current assets and liabilities:
Accounts receivable, net (53,463) 127,657 44,902
Finance receivables - accrued interest and other 13,316 7,418 (11,119)
Inventories, net (207,550) 80,858 (47,576)
Accounts payable and accrued liabilities 173,548 (43,087) (18,462)
Other current assets 4,983 9,012 (28,110)
325,677 1,176,592 444,637
Net cash provided by operating activities $ 975,701 $ 1,177,890 $ 868,272
Cash paid during the years ended December 31, for interest and income taxes was as follows (in thousands):
2021 2020 2019
Interest $ 191,663 $ 245,961 $ 229,678
Income taxes $ 155,579 $ 30,675 $ 149,828
Interest paid represents interest payments of Harley-Davidson Financial Services and interest payments of the Company, included in Financial Services interest expense and Interest expense on the Consolidated statements of operations.
7. Finance Receivables
Finance receivables include both retail and wholesale finance receivables, including amounts held by consolidated VIEs. Finance receivables are recorded in the financial statements at amortized cost net of an allowance for credit losses.
The Company provides retail financial services to customers of its dealers in the U.S. and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts and are primarily related to dealer sales of motorcycles to retail customers. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts. As of December 31, 2021 and 2020, approximately 11% of gross outstanding retail finance receivables were originated in Texas; there were no other states that accounted for more than 10% of gross outstanding retail finance receivables.
The Company offers wholesale financing to its dealers in the U.S. and Canada. Wholesale finance receivables are related primarily to the Company's sale of motorcycles and related parts and accessories to dealers. Wholesale loans to dealers are generally secured by financed inventory or property.
Finance receivables, net at December 31, were as follows (in thousands):
2021 2020 2019 2018 2017
Retail finance receivables:
United States $ 6,303,293 $ 6,128,269 $ 6,180,236 $ 6,103,378 $ 5,901,002
Canada 190,226 215,926 236,192 224,823 239,598
6,493,519 6,344,195 6,416,428 6,328,201 6,140,600
Wholesale finance receivables:
United States 400,160 459,495 1,067,880 1,007,956 939,621
Canada 17,621 30,254 88,639 75,659 77,336
417,781 489,749 1,156,519 1,083,615 1,016,957
6,911,300 6,833,944 7,572,947 7,411,816 7,157,557
Allowance for credit losses (339,379) (390,936) (198,581) (189,885) (192,471)
$ 6,571,921 $ 6,443,008 $ 7,374,366 $ 7,221,931 $ 6,965,086
Approved but unfunded retail finance loans totaled $175.9 million and $134.9 million at December 31, 2021 and 2020, respectively. Unused lines of credit extended to the Company's wholesale finance customers totaled $1.70 billion and $1.64 billion at December 31, 2021 and 2020, respectively.
Wholesale finance receivables are generally contractually due within one year. As of December 31, 2021, contractual maturities of total finance receivables were as follows (in thousands):
United States Canada Total
2022 $ 1,468,277 $ 58,001 $ 1,526,278
2023 1,200,378 42,949 1,243,327
2024 1,347,423 46,712 1,394,135
2025 1,439,253 50,844 1,490,097
2026 1,075,717 9,341 1,085,058
Thereafter 172,405 - 172,405
$ 6,703,453 $ 207,847 $ 6,911,300
On January 1, 2020, the Company adopted ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires an entity to recognize expected lifetime losses on finance receivables upon origination. The allowance for credit losses as of December 31, 2021 and 2020 represents the Company’s estimate of lifetime losses for its finance receivables. Prior to the adoption of ASU 2016-13, the Company maintained an allowance for credit losses based on the Company’s estimate of probable losses inherent in its finance receivables as of the balance sheet date.
Under ASU 2016-13, the Company’s finance receivables are reported at amortized cost, net of the allowance for credit losses. Amortized cost includes the principal outstanding, accrued interest, and deferred loan fees and costs. Based on differences in the nature of the finance receivables and the underlying methodology for calculating the allowance for loan losses, the Company segments its finance receivables into the retail and wholesale portfolios. The Company further disaggregates each portfolio by credit quality indicators. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit quality indicators for each portfolio. Prior to the adoption of ASU 2016-13, the Company’s investment in finance receivables included the same components as the amortized cost under the new accounting guidance.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a collective evaluation of the adequacy of the retail allowance for credit losses. For periods after January 1, 2020, the Company utilizes a vintage-based loss forecast methodology that includes decompositions for probability of default, exposure at default, attrition rate, and recovery balance rate. Reasonable and supportable economic forecasts for a two-year period are incorporated into the methodology to reflect the estimated impact of changes in future economic conditions, such as unemployment rates, household obligations or other relevant factors, over the two-year reasonable and supportable period. For periods beyond the Company’s reasonable and supportable forecasts, the Company reverts to its average historical loss experience using a mean-reversion process over a three-year period. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards,
portfolio mix, or term as well as other relevant factors. For periods prior to January 1, 2020, the Company performed a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilized loss forecast models which considered a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates, and current economic conditions.
The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review to determine whether the loans share similar risk characteristics. The Company individually evaluates loans that do not share risk characteristics. Loans identified as those for which foreclosure is probable are classified as Non-Performing, and a specific allowance for credit losses is established when appropriate. The specific allowance is determined based on the amortized cost of the related finance receivable and the estimated fair value of the collateral, less selling costs and the cash that the Company expects to receive. Finance receivables in the wholesale portfolio not individually assessed are aggregated, based on similar risk characteristics, according to the Company’s internal risk rating system and measured collectively. For periods after January 1, 2020, the related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, reasonable and supportable economic forecasts, and the value of the underlying collateral and expected recoveries. For periods prior to January 1, 2020, the related allowance for credit losses was based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
The Company considers various third-party economic forecast scenarios as part of estimating the allowance for expected credit losses and applies a probability-weighting to those economic forecast scenarios. Changes in the Company’s outlook on economic conditions impacted the retail and wholesale estimates for expected credit losses at December 31, 2021. During 2021, the U.S. economy and the Company’s outlook on economic conditions improved from 2020; however, the pace of economic recovery remained uncertain as demonstrated by unemployment levels above those experienced prior to the COVID-19 pandemic, muted consumer confidence, rising inflation, global supply chain disruptions, and continuing COVID-19 pandemic-related challenges across the U.S., among other factors. As such, at the end of 2021, the Company’s outlook on economic conditions included slow economic improvement in its economic scenario weighting.
Additionally, the historical experience incorporated into the portfolio-specific models does not fully reflect the Company's comprehensive expectations regarding the future. As such, the Company incorporated qualitative factors to establish an appropriate allowance balance. These factors include motorcycle recovery value considerations, delinquency adjustments, specific problem loan trends, and others, as appropriate.
Due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company in either portfolio could differ from the amounts estimated. Further, the Company’s allowance for credit losses incorporates known conditions at the balance sheet date and management’s expectations surrounding the economic forecasts. The Company will continue to monitor future economic trends and conditions. Expectations surrounding the Company's economic forecasts may change in future periods as additional information becomes available.
The allowance for credit losses on finance receivables is comprised of individual components relating to wholesale and retail finance receivables. Changes in the allowance for credit losses on finance receivables by portfolio for the year ended December 31, were as follows (in thousands):
Retail Wholesale Total
Balance, beginning of period $ 371,738 $ 19,198 $ 390,936
Provision for credit losses 31,338 (6,289) 25,049
Charge-offs (122,637) - (122,637)
Recoveries 45,881 150 46,031
Balance, end of period $ 326,320 $ 13,059 $ 339,379
Retail Wholesale Total
Balance, beginning of period $ 188,501 $ 10,080 $ 198,581
Cumulative effect of change in accounting(a)
95,558 5,046 100,604
Provision for credit losses 175,225 6,645 181,870
Charge-offs (137,371) (2,573) (139,944)
Recoveries 49,825 - 49,825
Balance, end of period $ 371,738 $ 19,198 $ 390,936
Retail Wholesale Total
Balance, beginning of period $ 182,098 $ 7,787 $ 189,885
Provision for credit losses 132,243 2,293 134,536
Charge-offs (173,358) - (173,358)
Recoveries 47,518 - 47,518
Balance, end of period $ 188,501 $ 10,080 $ 198,581
(a)On January 1, 2020, the Company adopted ASU 2016-13 and increased the allowance for loan loss through Retained earnings, net of income taxes, to establish an allowance that represents expected lifetime credit losses on the finance receivable portfolios at date of adoption.
The Company manages retail credit risk through its credit approval process and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants, enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. For the Company’s U.S. and Canadian retail finance receivables, the Company determines the credit quality indicator for each loan at origination and does not update the credit quality indicator subsequent to the loan origination date.
As loan performance by credit quality indicator differs between the U.S. and Canadian retail loans, the Company’s credit quality indicators vary for the two portfolios. For U.S. retail finance receivables, those with a FICO score of 740 or above at origination are generally considered super prime, loans with a FICO score between 640 and 740 are generally categorized as prime, and loans with FICO score below 640 are generally considered sub-prime. For Canadian retail finance receivables, those with a FICO score of 700 or above at origination are generally considered super prime, loans with a FICO score between 620 and 700 are generally categorized as prime, and loans with FICO score below 620 are generally considered sub-prime.
The amortized cost of the Company's U.S. and Canadian retail finance receivables by vintage and credit quality indicator was as follows (in thousands):
December 31, 2021
2021 2020 2019 2018 2017 2016 & Prior Total
U.S. Retail:
Super prime $ 1,010,636 $ 484,479 $ 316,390 $ 171,763 $ 65,753 $ 27,424 $ 2,076,445
Prime 1,391,385 712,858 470,177 277,206 142,288 82,169 3,076,083
Sub-prime 476,688 273,787 182,002 105,330 61,923 51,035 1,150,765
2,878,709 1,471,124 968,569 554,299 269,964 160,628 6,303,293
Canadian Retail:
Super prime 51,779 32,724 27,073 13,984 4,619 1,614 131,793
Prime 16,882 12,675 9,244 6,230 3,628 1,779 50,438
Sub-prime 2,356 2,134 1,571 947 606 381 7,995
71,017 47,533 37,888 21,161 8,853 3,774 190,226
$ 2,949,726 $ 1,518,657 $ 1,006,457 $ 575,460 $ 278,817 $ 164,402 $ 6,493,519
December 31, 2020
2020 2019 2018 2017 2016 2015 & Prior Total
U.S. Retail:
Super prime $ 822,631 $ 575,977 $ 355,529 $ 165,436 $ 71,360 $ 29,181 $ 2,020,114
Prime 1,133,637 794,058 508,713 293,358 156,688 77,046 2,963,500
Sub-prime 435,875 295,403 177,598 111,163 72,556 52,060 1,144,655
2,392,143 1,665,438 1,041,840 569,957 300,604 158,287 6,128,269
Canadian Retail:
Super prime 53,465 48,692 28,581 13,818 5,018 2,011 151,585
Prime 18,568 14,257 10,269 6,727 3,198 2,025 55,044
Sub-prime 3,172 2,498 1,560 1,095 607 365 9,297
75,205 65,447 40,410 21,640 8,823 4,401 215,926
$ 2,467,348 $ 1,730,885 $ 1,082,250 $ 591,597 $ 309,427 $ 162,688 $ 6,344,195
The Company's credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. The Company utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower. The Company uses the following internal credit quality indicators, based on an internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon the Company’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged-off, while the dealers classified as Low Risk are least likely to be charged-off. Additionally, the Company classifies dealers identified as those in which foreclosure is probable as Non-Performing. The internal rating system considers factors such as the specific borrower's ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The amortized cost of wholesale finance receivables, by vintage and credit quality indicator, was as follows (in thousands):
December 31, 2021
2021 2020 2019 2018 2017 2016 & Prior Total
Non-Performing $ - $ - $ - $ - $ - $ - $ -
Doubtful - - - - - - -
Substandard - - - - - - -
Special Mention - - - - - - -
Medium Risk - - - - - - -
Low Risk 380,211 11,379 11,047 10,565 3,662 917 417,781
$ 380,211 $ 11,379 $ 11,047 $ 10,565 $ 3,662 $ 917 $ 417,781
December 31, 2020
2020 2019 2018 2017 2016 2015 & Prior Total
Non-Performing $ - $ - $ - $ - $ - $ - $ -
Doubtful - - - - - - -
Substandard - - - - - - -
Special Mention 658 365 31 - - - 1,054
Medium Risk 1,925 242 - - - - 2,167
Low Risk 388,568 71,441 13,412 7,887 2,297 2,923 486,528
$ 391,151 $ 72,048 $ 13,443 $ 7,887 $ 2,297 $ 2,923 $ 489,749
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables at amortized cost, excluding accrued interest, are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed, or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. The Company reverses accrued interest related to charged-off accounts against interest income when the account is charged-off. The Company reversed $16.8 million and $19.1 million of accrued interest against interest income during the years ended December 31, 2021 and 2020, respectively. Due to the timely write-off of accrued interest, the Company made the election provided under ASC Topic 326, Financial Instruments - Credit Losses to exclude accrued interest from its allowance for credit losses. Accordingly, as of December 31, 2021 and 2020, all retail finance receivables were accounted for as interest-earning receivables, of which $34.8 million and $33.1 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once the Company determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due finance receivables until the date the Company determines that foreclosure is probable, and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. Once an account is charged-off, the Company will reverse the associated accrued interest against interest income. As the Company follows a non-accrual policy for interest, the allowance for credit losses excludes accrued interest for the wholesale portfolio. There were no charged-off accounts during 2021. As such, the Company did not reverse any accrued interest. The Company reversed $0.4 million of accrued interest related to the charge-off of Non-Performing dealer loans during the year ended December 31, 2020. There were no dealers on non-accrual status at December 31, 2021 or December 31, 2020.
The aging analysis of finance receivables at December 31, was as follows (in thousands):
Current 31-60 Days
Past Due 61-90 Days
Past Due Greater than
90 Days
Past Due Total
Past Due Total
Finance
Receivables
Retail finance receivables $ 6,298,485 $ 115,942 $ 44,326 $ 34,766 $ 195,034 $ 6,493,519
Wholesale finance receivables 417,720 9 1 51 61 417,781
$ 6,716,205 $ 115,951 $ 44,327 $ 34,817 $ 195,095 $ 6,911,300
Current 31-60 Days
Past Due 61-90 Days
Past Due Greater than
90 Days
Past Due Total
Past Due Total
Finance
Receivables
Retail finance receivables $ 6,164,369 $ 106,818 $ 39,933 $ 33,075 $ 179,826 $ 6,344,195
Wholesale finance receivables 489,556 166 23 4 193 489,749
$ 6,653,925 $ 106,984 $ 39,956 $ 33,079 $ 180,019 $ 6,833,944
The recorded investment of retail and wholesale finance receivables, excluding non-accrual status finance receivables, that were contractually past due 90 days or more at December 31, for the past five years was as follows (in thousands):
2021 2020 2019 2018 2017
United States $ 33,850 $ 32,599 $ 47,138 $ 41,285 $ 39,051
Canada 967 480 888 1,051 1,025
$ 34,817 $ 33,079 $ 48,026 $ 42,336 $ 40,076
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total finance receivables in troubled debt restructurings were not significant as of December 31, 2021 and December 31, 2020. Additionally, in certain situations, the Company may offer short-term adjustments to customer payment due dates without affecting the associated interest rate or loan term. Starting in the second quarter of 2020, the Company granted an increased amount of short-term payment due date extensions on eligible retail loans to help retail customers get through financial difficulties associated with the COVID-19 pandemic. During the first half of 2021, the volume of extensions declined from the levels experienced during 2020 as a result of the COVID-19 pandemic, but extensions did not return to pre-COVID-19 pandemic levels until the end of the second quarter of 2021. The Company discontinued extensions specific to the COVID-19 pandemic at the beginning of the third quarter of 2021; however, it continues to grant standard payment extensions to customers in accordance with its policies.
8. Goodwill and Intangible Assets
Changes in the carrying amount of goodwill in the Motorcycles segment for the years ended December 31, was as follows (in thousands):
2021 2020
Balance, beginning of period $ 65,976 $ 64,160
Currency translation (2,799) 1,816
Balance, end of period $ 63,177 $ 65,976
Intangible assets, excluding goodwill, included in the Motorcycles segment consist primarily of customer relationships and trademarks with useful lives ranging from 5 to 20 years. Intangible assets are amortized on a straight-line basis over their estimated useful lives. Intangible assets are recorded in Other long-term assets on the Consolidated balance sheets. Intangible assets at December 31, were as follows (in thousands):
2021 2020
Gross carrying amount $ 11,300 $ 12,979
Accumulated amortization (3,786) (3,350)
$ 7,514 $ 9,629
Amortization of intangible assets, excluding goodwill, recorded in Selling, administrative and engineering expense on the Consolidated statements of operations was $0.4 million, $1.1 million and $0.9 million for 2021, 2020 and 2019, respectively. Future amortization of the Company's intangible assets as of December 31, 2021 is as follows (in thousands):
2022 $ 847
2023 847
2024 691
2025 639
2026 639
Thereafter 3,851
$ 7,514
The Financial Services segment had no goodwill or intangible assets at December 31, 2021 and 2020.
9. Derivative Financial Instruments and Hedging Activities
The Company is exposed to risks from fluctuations in foreign currency exchange rates, interest rates and commodity prices. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures which prohibit the use of financial instruments for speculative trading purposes.
The Company sells products in foreign currencies and utilizes foreign currency exchange contracts to mitigate the effects of foreign currency exchange rate fluctuations related to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Chinese yuan, Singapore dollar, Thai baht, and Pound sterling. The Company's foreign currency exchange contracts generally have maturities of less than one year.
The Company utilizes commodity contracts to mitigate the effects of commodity price fluctuations related to metals and fuel consumed in the Company’s motorcycle operations. The Company's commodity contracts generally have maturities of less than one year.
The Company periodically utilizes treasury rate lock contracts to fix the interest rate on a portion of the principal related to an anticipated issuance of long-term debt, interest rate swaps to reduce the impact of fluctuations in interest rates on medium-term notes with floating interest rates, and cross-currency swaps to mitigate the effect of foreign currency exchange rate fluctuations on foreign currency-denominated debt. The Company also utilizes interest rate caps to facilitate certain asset-backed securitization transactions.
All derivative financial instruments are recognized on the Consolidated balance sheets at fair value. In accordance with ASC Topic 815, Derivatives and Hedging (ASC Topic 815), the accounting for changes in the fair value of a derivative financial
instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.
Changes in the fair value of derivative financial instruments that are designated as cash flow hedges are initially recorded in Other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an ongoing basis, whether the derivative financial instruments that are designated as cash flow hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. No component of a designated hedging derivative financial instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative financial instruments not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign currency, commodity risks, and interest rate risks. Changes in the fair value of derivative financial instruments not designated as hedging instruments are recorded directly in income. Cash flow activity associated with the Company's derivative financial instruments is recorded in Cash flows from operating activities on the Consolidated statement of cash flow.
The notional and fair values of the Company's derivative financial instruments under ASC Topic 815, at December 31, were as follows (in thousands):
Derivative Financial Instruments
Designated as Cash Flow Hedging Instruments
2021 2020
Notional
Value Other
Current Assets Accrued Liabilities Notional
Value Other
Current Assets Accrued Liabilities
Foreign currency contracts $ 562,262 $ 14,644 $ 1,388 $ 533,925 $ 11 $ 21,927
Commodity contracts 996 19 39 671 - 52
Cross-currency swaps 1,367,460 35,071 - 1,367,460 138,622 -
Interest rate swaps - - - 450,000 - 3,086
$ 1,930,718 $ 49,734 $ 1,427 $ 2,352,056 $ 138,633 $ 25,065
Derivative Financial Instruments
Not Designated as Hedging Instruments
2021 2020
Notional
Value Other
Current Assets Accrued Liabilities Notional
Value Other
Current Assets Accrued Liabilities
Foreign currency contracts $ 241,935 $ 1,299 $ 916 $ 245,494 $ 737 $ 435
Commodity contracts 10,631 641 18 6,806 849 21
Interest rate caps 504,526 360 - 978,058 47 -
$ 757,092 $ 2,300 $ 934 $ 1,230,358 $ 1,633 $ 456
The amount of gains and losses related to derivative financial instruments designated as cash flow hedges for the years ended December 31, were as follows (in thousands):
Gain/(Loss)
Recognized in OCI Gain/(Loss)
Reclassified from AOCL into Income
2021 2020 2019 2021 2020 2019
Foreign currency contracts $ 29,602 $ (14,507) $ 8,235 $ (12,531) $ 9,859 $ 21,433
Commodity contracts 345 (160) (103) 313 (189) (70)
Cross-currency swaps (103,551) 130,297 8,326 (115,200) 153,472 12,156
Treasury rate lock contracts - - - (502) (492) (492)
Interest rate swaps 397 (8,449) (9,981) (2,689) (14,543) (5,295)
$ (73,207) $ 107,181 $ 6,477 $ (130,609) $ 148,107 $ 27,732
The location and amount of gains and losses recognized in income related to derivative financial instruments designated as cash flow hedges for the years ended December 31, were as follows (in thousands):
Motorcycles
cost of goods sold Selling, administrative &
engineering expense Interest expense Financial Services interest expense
Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded $ 3,243,287 $ 1,048,174 $ 30,972 $ 192,944
Gain/(loss) reclassified from AOCL into income:
Foreign currency contracts $ (12,531) $ - $ - $ -
Commodity contracts $ 313 $ - $ - $ -
Cross-currency swaps $ - $ (115,200) $ - $ -
Treasury rate lock contracts $ - $ - $ (363) $ (139)
Interest rate swaps $ - $ - $ - $ (2,689)
Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded $ 2,435,745 $ 1,050,627 $ 31,121 $ 246,447
Gain/(loss) reclassified from AOCL into income:
Foreign currency contracts $ 9,859 $ - $ - $ -
Commodity contracts $ (189) $ - $ - $ -
Cross-currency swaps $ - $ 153,472 $ - $ -
Treasury rate lock contracts $ - $ - $ (362) $ (130)
Interest rate swaps $ - $ - $ - $ (14,543)
Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded $ 3,229,798 $ 1,199,056 $ 31,078 $ 210,438
Gain/(loss) reclassified from AOCL into income:
Foreign currency contracts $ 21,433 $ - $ - $ -
Commodity contracts $ (70) $ - $ - $ -
Cross-currency swaps $ - $ 12,156 $ - $ -
Treasury rate lock contracts $ - $ - $ (362) $ (130)
Interest rate swaps $ - $ - $ - $ (5,295)
The amount of net loss included in Accumulated other comprehensive loss (AOCL) at December 31, 2021, estimated to be reclassified into income over the next 12 months was $1.2 million.
The amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments as of December 31, were as follows (in thousands). Gains and losses on foreign currency contracts and commodity contracts were recorded in Motorcycles and Related Products cost of goods sold and the interest rate caps were recorded in Financial Services operating expense.
Amount of Gain/(Loss)
Recognized in Income
2021 2020 2019
Foreign currency contracts $ (2,374) $ (205) $ 191
Commodity contracts 1,966 (148) 17
Interest rate caps 313 (532) (143)
$ (95) $ (885) $ 65
The Company is exposed to credit loss risk in the event of non-performance by counterparties to its derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to its derivative financial instruments to fail to meet their obligations. To manage credit loss risk, the Company evaluates counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover their position.
10. Leases
The Company determines if an arrangement is or contains a lease at contract inception. Right-of-use (ROU) assets related to the Company's leases are recorded in Lease assets and lease liabilities are recorded in Accrued liabilities and Lease liability on the Consolidated balance sheets.
ROU assets represent the Company’s right to use an underlying asset over the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. The ROU asset also includes prepaid lease payments and initial direct costs and is reduced for lease incentives paid by the lessor. The discount rate used to determine the present value is generally the Company's incremental borrowing rate because the implicit rate in the lease is not readily determinable. The lease term used to calculate the ROU asset and lease liabilities includes periods covered by options to extend or terminate when the Company is reasonably certain the lease term will include these optional periods.
In accordance with ASC Topic 842, Leases (ASC Topic 842), the Company elected the short-term lease practical expedient that allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company has also elected the practical expedient under ASC Topic 842 allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets used in manufacturing and distribution processes.
The Company has operating lease arrangements for sales and administrative offices, manufacturing and distribution facilities, product testing facilities, equipment and vehicles. The Company’s leases have remaining lease terms ranging from 1 to 6 years, some of which include options to extend the lease term for periods generally not greater than 5 years and some of which include options to terminate the leases within 1 year. Certain leases also include options to purchase the leased asset. The Company's leases do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense for the years ended December 31, 2021 and 2020 was $24.9 million and $26.7 million, respectively. This includes variable lease costs related to assets used in manufacturing and distribution processes of approximately $4.4 million and $5.6 million for the years ended December 31, 2021 and 2020, respectively. Other variable and short-term lease costs were not material.
Balance sheet information related to the Company's leases at December 31, was as follows (in thousands):
2021 2020
Lease assets $ 49,625 $ 45,203
Accrued liabilities $ 17,369 $ 17,081
Lease liabilities 29,904 30,115
$ 47,273 $ 47,196
Future maturities of the Company's operating lease liabilities as of December 31, 2021 were as follows (in thousands):
2022 $ 18,059
2023 10,050
2024 7,640
2025 6,000
2026 5,043
Thereafter 1,974
Future lease payments 48,766
Present value discount (1,493)
Lease liabilities $ 47,273
Other lease information surrounding the Company's operating leases as of December 31, was as follows (dollars in thousands):
2021 2020
Cash outflows for amounts included in the measurement of lease liabilities $ 25,117 $ 20,533
ROU assets obtained in exchange for lease obligations, net of modifications $ 25,111 $ 1,833
Weighted-average remaining lease term (in years) 3.86 3.78
Weighted-average discount rate 1.9 % 3.1 %
11. Debt
Debt with a contractual term less than 12 months is generally classified as short-term and consisted of the following at December 31, (in thousands):
2021 2020
Unsecured commercial paper $ 751,286 $ 1,014,274
Debt with a contractual term greater than 12 months is generally classified as long-term and consisted of the following at December 31, (in thousands):
2021 2020
Secured debt:
Asset-backed Canadian commercial paper conduit facility $ 85,054 $ 116,678
Asset-backed U.S. commercial paper conduit facilities 272,589 402,205
Asset-backed securitization debt 1,634,753 1,800,393
Unamortized discounts and debt issuance costs (7,611) (8,437)
1,984,785 2,310,839
2021 2020
Unsecured notes (at par value):
Medium-term notes:
Due in 2021, issued January 2016 2.85%
- 600,000
Due in 2021, issued in November 2018 LIBOR + 0.94%
- 450,000
Due in 2021, issued May 2018 3.55%
- 350,000
Due in 2022, issued February 2019 4.05%
550,000 550,000
Due in 2022, issued June 2017 2.55%
400,000 400,000
Due in 2023, issued February 2018 3.35%
350,000 350,000
Due in 2023, issued May 2020(a)
4.94%
737,302 797,206
Due in 2024, issued November 2019(b)
3.14%
680,586 735,882
Due in 2025, issued June 2020 3.35%
700,000 700,000
Unamortized discounts and debt issuance costs (9,228) (15,374)
3,408,660 4,917,714
Senior notes:
Due in 2025, issued July 2015 3.50%
450,000 450,000
Due in 2045, issued July 2015 4.625%
300,000 300,000
Unamortized discounts and debt issuance costs (5,332) (6,023)
744,668 743,977
4,153,328 5,661,691
Long-term debt 6,138,113 7,972,530
Current portion of long-term debt, net (1,542,496) (2,039,597)
Long-term debt, net $ 4,595,617 $ 5,932,933
(a)Euro denominated €650.0 million par value remeasured to U.S. dollar at December 31, 2021 and 2020, respectively
(b)Euro denominated €600.0 million par value remeasured to U.S. dollar at December 31, 2021 and 2020, respectively
The Company’s future principal payments on debt obligations as of December 31, 2021 were as follows (in thousands):
2022 $ 2,302,568
2023 1,735,386
2024 1,125,031
2025 1,367,781
2026 80,804
Thereafter 300,000
$ 6,911,570
Unsecured Commercial Paper - Commercial paper maturities may range up to 365 days from the issuance date. The weighted-average interest rate of outstanding commercial paper balances was 0.40% and 1.34% at December 31, 2021 and 2020, respectively.
Credit Facilities - In April 2020, the Company entered into a $707.5 million five-year credit facility to replace the $765.0 million five-year credit facility that was due to mature in April 2021. The new five-year credit facility matures in April 2025. The Company also amended its $780.0 million five-year credit facility in April 2020 to $707.5 million with no change to the maturity date of April 2023. Additionally, the Company had a $350.0 million 364-day credit facility that matured in May 2021. The five-year credit facilities (together, the Global Credit Facilities) bear interest at variable rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments. The Global Credit Facilities are committed facilities primarily used to support the Company's unsecured commercial paper program.
Unsecured Notes - The fixed-rate U.S. dollar-denominated unsecured notes provide for semi-annual interest payments, the fixed-rate foreign currency-dominated unsecured notes provide for annual interest payments, and the floating-rate unsecured notes provide for quarterly interest payments. Principal on the unsecured notes is due at maturity.
During January, March, and May of 2021, $600.0 million of 2.85%, $450.0 million of floating rate, and $350.0 million of 3.55% medium-term notes matured, respectively, and the principal and accrued interest were paid in full. During February, May, and June of 2020, $600.0 million of 2.15%, $450.0 million of floating rate, and $350.0 million of 2.40% medium-term notes matured, respectively, and the principal and accrued interest were paid in full.
Operating and Financial Covenants - Harley-Davidson Financial Services and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the medium-term and senior notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.
The operating covenants limit the Company’s and Harley-Davidson Financial Services ability to:
•Assume or incur certain liens;
•Participate in certain mergers or consolidations; and
•Purchase or hold margin stock.
Under the current financial covenants of the Global Credit Facilities, the ratio of Harley-Davidson Financial Services’ consolidated debt, excluding secured debt, to Harley-Davidson Financial Services consolidated allowance for credit losses on finance receivables plus Harley-Davidson Financial Services’ consolidated shareholders' equity, excluding accumulated other comprehensive loss (AOCL), cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and consolidated shareholders’ equity (where the Company's consolidated debt in each case excludes that of Harley-Davidson Financial Services and its subsidiaries, and the Company's consolidated shareholders’ equity excludes AOCL), cannot exceed 0.7 to 1.0 as of the end of any fiscal quarter. No financial covenants are required under the medium-term or senior notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.
At December 31, 2021 and 2020, Harley-Davidson Financial Services and the Company remained in compliance with all of the then existing covenants.
12. Asset-Backed Financing
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPEs), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing. The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE.
In transactions where the Company has power over the significant activities of the VIE and has an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE, the Company is the primary beneficiary of the VIE and consolidates the VIE within its consolidated financial statements. On a consolidated basis, the asset-backed financing is treated as a secured borrowing in this type of transaction and is referred to as an on-balance sheet asset-backed financing.
In transactions where the Company is not the primary beneficiary of the VIE, the Company must determine whether it can achieve a sale for accounting purposes under ASC Topic 860, Transfers and Servicing (ASC Topic 860). To achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond the Company’s control. If the Company does not meet all of these criteria for sale accounting, then the transaction is accounted for as a secured borrowing and is referred to as an on-balance sheet asset-backed financing.
If the Company meets all three of the sale criteria above, the transaction is recorded as a sale for accounting purposes and is referred to as an off-balance sheet asset-backed financing. Upon sale, the retail motorcycle finance receivables are removed from the Company’s Consolidated balance sheets and a gain or loss is recognized for the difference between the cash proceeds received, the assets derecognized, and the liabilities recognized as part of the transaction. The gain or loss on sale is included in Financial Services revenue in the Consolidated statements of operations.
The Company is not required, and does not currently intend, to provide any additional financial support to the on- or off-balance sheet VIEs associated with these transactions. Investors and creditors in these transactions only have recourse to the assets held by the VIEs.
The assets and liabilities related to the on-balance sheet asset-backed financings included in the Consolidated balance sheets at December 31, were as follows (in thousands):
Finance receivables Allowance for credit losses Restricted cash Other assets Total assets Asset-backed debt
On-balance sheet assets and liabilities:
Consolidated VIEs:
Asset-backed securitizations $ 2,048,194 $ (102,779) $ 123,717 $ 2,328 $ 2,071,460 $ 1,627,142
Asset-backed U.S. commercial paper conduit facility 297,454 (14,898) 20,567 654 303,777 272,589
Unconsolidated VIEs:
Asset-backed Canadian commercial paper conduit facility 97,180 (3,990) 6,191 139 99,520 85,054
$ 2,442,828 $ (121,667) $ 150,475 $ 3,121 $ 2,474,757 $ 1,984,785
Finance receivables Allowance for credit losses Restricted cash Other assets Total assets Asset-backed debt
On-balance sheet assets and liabilities:
Consolidated VIEs:
Asset-backed securitizations $ 2,129,372 $ (124,627) $ 116,268 $ 2,622 $ 2,123,635 $ 1,791,956
Asset-backed U.S. commercial paper conduit facilities 441,402 (25,793) 26,624 1,131 443,364 402,205
Unconsolidated VIEs:
Asset-backed Canadian commercial paper conduit facility 133,976 (6,508) 9,073 126 136,667 116,678
$ 2,704,750 $ (156,928) $ 151,965 $ 3,879 $ 2,703,666 $ 2,310,839
On-Balance Sheet Asset-Backed Securitization VIEs - The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each on-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transactions and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes currently have various contractual maturities ranging from 2024 to 2029.
The Company is the primary beneficiary of its on-balance sheet asset-backed securitization VIEs because it retains servicing rights and a residual interest in the VIEs in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
In 2021, the Company transferred $1.30 billion of U.S. retail motorcycle finance receivables to two separate SPEs which, in turn, issued $1.18 billion, or $1.17 billion net of discounts and issuance costs, of secured notes through two separate on-balance sheet asset-backed securitization transactions. In 2020, the Company transferred $2.42 billion of U.S. retail motorcycle finance receivables to four separate SPEs which, in turn, issued $2.08 billion, or $2.06 billion net of discounts and issuance costs, of secured notes through four separate on-balance sheet asset-backed securitization transactions.
At December 31, 2021, the Consolidated balance sheets included outstanding balances related to the following secured notes with the related maturity dates and interest rates (in thousands):
Issue Date Principal Amount
at Date of Issuance Weighted-Average Rate
at Date of Issuance Contractual Maturity Date
at Date of Issuance
August 2021 $575,000 0.42% August 2022 - May 2029
February 2021 $600,000 0.30% February 2022 - September 2028
May 2020 $750,178 3.38% April 2028
May 2020 $500,000 2.37% October 2021 - October 2028
April 2020 $300,000 3.30% November 2027
January 2020 $525,000 1.83% February 2021 - April 2027
June 2019 $525,000 2.37% July 2020 - November 2026
May 2019 $500,000 3.05% July 2026
There were no secured notes included in the Consolidated balance sheets at December 31, 2020 that were repaid in full during 2021. For the years ended December 31, 2021 and 2020, interest expense on the secured notes was $32.4 million and $42.1 million, respectively, which is included in Financial Services interest expense. The weighted average interest rate of the outstanding on-balance sheet asset-backed securitization transactions was 1.36% and 2.39% at December 31, 2021 and 2020, respectively.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE - Until November 25, 2020, the Company had two separate agreements with third-party banks and their asset-backed U.S. commercial paper conduits, a $300.0 million revolving facility agreement and a $600.0 million revolving facility agreement (together, the Former U.S. Conduit Facilities). On November 25, 2020, the Company amended each revolving facility agreement by consolidating the two agreements into one $900.0 million revolving facility agreement (the U.S. Conduit Facility) with third-party banks and their asset-backed U.S. commercial paper conduits. Under the revolving facility agreement, the Company may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party banks and their asset-backed U.S. commercial paper conduits. In addition to the $900.0 million aggregate commitment, the agreement allows for additional borrowings, at the lender’s discretion, of up to $300.0 million. On November 19, 2021, the Company renewed the U.S. Conduit Facility. Availability under the U.S. Conduit Facility is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.
Under the U.S. Conduit Facility, the assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates if funded by a conduit lender through the issuance of commercial paper. If not funded by a conduit lender through the issuance of commercial paper, the terms of the interest are based on LIBOR, with provisions for a transition to other benchmark rates, generally aligning to recommendations published by the Alternative Reference Rates Committee convened by the Federal Reserve Board and Federal Reserve Bank of New York. In each of these cases, a program fee is assessed based on the outstanding debt principal balance. The U.S. Conduit Facility also provides for an unused commitment fee based on the unused portion of the total aggregate commitment. When calculating the unused fee, the aggregate commitment does not include any unused portion of the $300.0 million additional borrowings allowed. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facility, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of December 31, 2021, the U.S. Conduit Facility has an expiration date of November 18, 2022.
The Company is the primary beneficiary of its U.S. Conduit Facility VIE because it retains servicing rights and a residual interest in the VIE in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
In 2021, the Company transferred $83.5 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $71.5 million of debt under the U.S. Conduit Facility. In 2020, the Company transferred $195.3 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $163.6 million of debt under the Former U.S. Conduit Facilities.
For the year ended December 31, 2021 interest expense under the U.S. Conduit Facility was a total of $5.3 million. For the year ended December 31, 2020 interest expense under the Former U.S. Conduit Facilities and U.S. Conduit Facility was a total of $8.9 million. The interest expense is included in Financial Services interest expense. The weighted average interest rate of the outstanding U.S. Conduit Facility was 1.77% and 1.61% at December 31, 2021 and 2020, respectively.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility - In June 2021, the Company renewed its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$125.0 million. Prior to the renewal and amendment, the Canadian Conduit was contractually committed, at the Company's option, to purchase from the Company eligible Canadian retail motorcycle finance receivables for proceeds up to C$220.0 million. The transferred assets are restricted as collateral for the payment of the associated debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$125.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables is approximately 4 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of December 31, 2021, the Canadian Conduit has an expiration date of June 27, 2022.
The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company does not consolidate the VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore does not meet the requirements for sale accounting.
As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $14.5 million at December 31, 2021. The maximum exposure is not an indication of the Company's expected loss exposure.
In 2021, the Company transferred $32.8 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $27.4 million. In 2020, the Company transferred $77.9 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $61.6 million.
For the years ended December 31, 2021 and 2020, interest expense on the Canadian Conduit was $1.9 million and $2.9 million, respectively, which is included in Financial Services interest expense. The weighted average interest rate of the outstanding Canadian Conduit was 1.79% and 2.13% at December 31, 2021 and 2020, respectively.
Off-Balance Sheet Asset-Backed Securitization VIE - There were no off-balance sheet asset-backed securitization transactions during the years ended December 31, 2021, 2020 and 2019. During the second quarter of 2016, the Company sold retail motorcycle finance receivables into a securitization VIE that was not consolidated. In April 2020, the Company repurchased the finance receivables associated with this off-balance sheet asset-backed securitization VIE for $27.4 million.
Similar to an on-balance sheet asset-backed securitization, the Company transferred U.S. retail motorcycle finance receivables to an SPE which in turn issued secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE was a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitization were only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and were not available to pay other obligations or claims of the Company’s creditors. In an on-balance sheet asset-backed securitization, the Company retains a financial interest in the VIE in the form of a debt security. As part of this off-balance sheet securitization, the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants.
The Company was not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and did not have the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. Accordingly, this transaction met the accounting sale requirements under ASC Topic 860 and was recorded as a sale for accounting purposes.
Servicing Activities - The Company services all retail motorcycle finance receivables that it originates. When the Company transfers retail motorcycle finance receivables to SPEs through asset-backed financings, the Company retains the right to service the finance receivables and receives servicing fees based on the securitized finance receivables balance and certain ancillary fees. In on-balance sheet asset-backed financings, servicing fees are eliminated in consolidation and therefore are not recorded on a consolidated basis. In off-balance sheet asset-backed financings, servicing fees and ancillary fees are recorded in Financial Services revenue in the Consolidated statements of operations. The fees the Company is paid for servicing represent adequate compensation and, consequently, the Company does not recognize a servicing asset or liability. The Company repurchased the finance receivables associated with the off-balance sheet securitization VIE in April 2020. As such, the Company did not recognize any servicing fee income in 2021. The Company recognized servicing fee income of $0.1 million in 2020.
13. Fair Value
The Company assesses the inputs used to measure fair value using a three-tier hierarchy.
Level 1 inputs include quoted prices for identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity prices, and yield curves. The Company uses the market approach to derive the fair value for its Level 2 fair value measurements. Foreign currency contracts, commodity contracts, and cross-currency swaps are valued using quoted forward rates and prices; interest rate swaps and caps are valued using quoted interest rates and yield curves.
Level 3 inputs are not observable in the market and include the Company's judgments about the assumptions market participants would use in pricing the asset or liability.
Recurring Fair Value Measurements - The Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, were as follows (in thousands):
Balance Level 1 Level 2
Assets:
Cash equivalents $ 1,617,887 $ 1,337,900 $ 279,987
Marketable securities 49,650 49,650 -
Derivative financial instruments 52,034 - 52,034
$ 1,719,571 $ 1,387,550 $ 332,021
Liabilities:
Derivative financial instruments $ 2,361 $ - $ 2,361
Balance Level 1 Level 2
Assets:
Cash equivalents $ 3,019,884 $ 2,819,884 $ 200,000
Marketable securities 52,061 52,061 -
Derivative financial instruments 140,266 - 140,266
$ 3,212,211 $ 2,871,945 $ 340,266
Liabilities:
Derivative financial instruments $ 25,521 $ - $ 25,521
Nonrecurring Fair Value Measurements - Repossessed inventory was $18.3 million and $17.7 million at December 31, 2021 and 2020, respectively, for which the fair value adjustment was $2.9 million and $4.2 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.
Fair Value of Financial Instruments Measured at Cost - The carrying value of the Company’s Cash and cash equivalents and Restricted cash approximates their fair values. The fair value and carrying value of the Company’s remaining financial instruments that are measured at cost or amortized cost at December 31, were as follows (in thousands):
2021 2020
Fair Value Carrying Value Fair Value Carrying Value
Assets:
Finance receivables, net $ 6,794,499 $ 6,571,921 $ 6,586,348 $ 6,443,008
Liabilities:
Deposits, net $ 293,602 $ 290,326 $ 79,965 $ 79,965
Debt:
Unsecured commercial paper $ 751,286 $ 751,286 $ 1,014,274 $ 1,014,274
Asset-backed U.S. commercial paper conduit facilities $ 272,589 $ 272,589 $ 402,205 $ 402,205
Asset-backed Canadian commercial paper conduit facility $ 85,054 $ 85,054 $ 116,678 $ 116,678
Asset-backed securitization debt $ 1,633,749 $ 1,627,142 $ 1,817,892 $ 1,791,956
Medium-term notes $ 3,513,815 $ 3,408,660 $ 5,118,928 $ 4,917,714
Senior notes $ 790,373 $ 744,668 $ 828,141 $ 743,977
Finance Receivables, net - The carrying value of retail and wholesale finance receivables is amortized cost less an allowance for credit losses. The fair value of retail finance receivables is generally calculated by discounting future cash flows using an estimated discount rate that reflects current credit, interest rate and prepayment risks associated with similar types of instruments. Fair value is determined based on Level 3 inputs. The amortized cost basis of wholesale finance receivables approximates fair value because they are generally either short-term or have interest rates that adjust with changes in market interest rates.
Deposits, net - The carrying value of deposits is amortized cost. The fair value of deposits is estimated based upon rates currently available for deposits with similar terms and maturities. Fair value is calculated using Level 3 inputs.
Debt - The carrying value of debt is generally amortized cost, net of discounts and debt issuance costs. The fair value of unsecured commercial paper and credit facility borrowings are calculated using Level 2 inputs and approximates carrying value due to its short maturity. The fair value of debt provided under the U.S. Conduit Facilities and Canadian Conduit Facility is calculated using Level 2 inputs and approximates carrying value since the interest rates charged under the facilities are tied directly to market rates and fluctuate as market rates change. The fair values of the medium-term notes and senior notes are estimated based upon rates currently available for debt with similar terms and remaining maturities (Level 2 inputs). The fair value of the fixed-rate debt related to on-balance sheet asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities (Level 2 inputs). The fair value of the floating-rate debt related to on-balance sheet asset-backed securitization transactions is calculated using Level 2 inputs and approximates carrying value since the interest rates charged are tied directly to market rates and fluctuate as market rates change.
14. Product Warranty and Recall Campaigns
The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except in Japan, where the Company currently provides a standard three-year limited warranty. The Company also provides a five-year unlimited warranty on the battery for electric motorcycles. In addition, the Company provides a one-year warranty for parts and accessories. The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company accrues for future warranty claims at the time of shipment using an estimated cost based primarily on historical Company claim information.
Additionally, the Company has from time to time initiated certain voluntary recall campaigns. The Company records estimated recall costs when the liability is both probable and estimable. This generally occurs when the Company's management approves and commits to a recall. The warranty and recall liabilities are included in Accrued liabilities and Other long-term liabilities on the Consolidated balance sheets. Changes in the Company’s warranty and recall liability were as follows as of December 31, (in thousands):
2021 2020 2019
Balance, beginning of period $ 69,208 $ 89,793 $ 131,740
Warranties issued during the period 41,489 32,042 50,470
Settlements made during the period (40,015) (51,420) (90,404)
Recalls and changes to pre-existing warranty liabilities (9,061) (1,207) (2,013)
Balance, end of period $ 61,621 $ 69,208 $ 89,793
The liability for recall campaigns was $16.9 million, $24.7 million and $36.4 million at December 31, 2021, 2020 and 2019, respectively. Additionally, the Company recorded supplier recoveries within operating expenses separate from the amounts disclosed above of $28.0 million in 2019.
15. Employee Benefit Plans and Other Postretirement Benefits
The Company has a qualified defined benefit pension plan and postretirement healthcare benefit plans. The plans cover certain eligible employees and retirees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees.
Pension benefits are based primarily on years of service and, for certain participants, levels of compensation. Plan participants are generally eligible to receive postretirement healthcare benefits upon attaining age 55 after rendering at least 10 years of service to the Company. Some of the plans require participant contributions to partially offset benefit costs.
Obligations and Funded Status:
The changes in the benefit obligation, fair value of plan assets and the funded status of the Company’s pension and SERPA plans and the postretirement healthcare plans as of the Company’s measurement dates of December 31, were as follows (in thousands):
Pension and SERPA Benefits Postretirement Healthcare Benefits
2021 2020 2021 2020
Change in benefit obligation:
Benefit obligation, beginning of period $ 2,390,435 $ 2,212,012 $ 315,245 $ 293,505
Service cost 24,570 27,224 5,147 11,761
Interest cost 61,988 76,447 6,505 9,391
Actuarial (gains) losses (92,157) 228,081 (24,190) 18,824
Plan participant contributions - - 2,337 2,140
Benefits paid (138,043) (137,381) (18,743) (19,703)
Net curtailments and settlements (72,198) (15,948) - (673)
Benefit obligation, end of period 2,174,595 2,390,435 286,301 315,245
Change in plan assets:
Fair value of plan assets, beginning of period 2,433,975 2,209,222 244,035 220,992
Return on plan assets 189,974 361,674 30,504 36,349
Plan participant contributions - - 2,337 2,140
Benefits paid (137,482) (136,921) (13,931) (15,446)
Fair value of plan assets, end of period 2,486,467 2,433,975 262,945 244,035
Funded status of the plan $ 311,872 $ 43,540 $ (23,356) $ (71,210)
Pension and SERPA Benefits Postretirement Healthcare Benefits
2021 2020 2021 2020
Funded status as recognized on the Consolidated balance sheets:
Pension and postretirement assets $ 332,586 $ 82,537 $ 53,566 $ 13,174
Accrued liabilities (1,976) (8,814) (361) (361)
Pension and postretirement liabilities (18,738) (30,183) (76,561) (84,023)
$ 311,872 $ 43,540 $ (23,356) $ (71,210)
Amounts included in Accumulated other comprehensive loss, net of tax:
Prior service credits $ 2,457 $ (5,712) $ (3,661) $ (5,438)
Actuarial losses (gains) 232,622 445,804 (36,905) (4,942)
$ 235,079 $ 440,092 $ (40,566) $ (10,380)
During 2021, actuarial gains related to the obligation for pension and SERPA benefits were due primarily to an increase in the discount rate and changes in demographic assumptions, partially offset by changes in mortality assumptions. In addition, during 2021, the obligation was impacted by a curtailment gain recorded in connection with the Company's decision to cease benefit accruals for salaried employees after December 31, 2022. During 2020, actuarial losses related to the obligation for pension and SERPA benefits were due primarily to a decrease in the discount rate, partially offset by changes in mortality assumptions, demographic assumptions and a reduction in plan participants.
During 2021, the actuarial gains related to the obligation for postretirement healthcare benefits were due primarily to an increase in the discount rate and favorable claim cost adjustments. During 2020, the actuarial losses related to the obligation for postretirement healthcare benefits were due primarily to a decrease in the discount rate, partially offset by favorable claim cost adjustments.
The funded status of the qualified pension plan and the SERPA plans are combined above. Plans with projected benefit obligations (PBO) or accumulated benefit obligations (ABO) in excess of the fair value of plan assets at December 31, is presented below (in thousands):
2021 2020
Plans with PBO in excess of fair value of plan assets:
PBO $ 20,715 $ 38,996
Fair value of plan assets $ - $ -
Plans with ABO in excess of fair value of plan assets:
ABO $ 18,165 $ 30,598
Fair value of plan assets $ - $ -
The total ABO for all the Company's pension and SERPA plans combined was $2.16 billion and $2.30 billion as of December 31, 2021 and 2020, respectively.
Benefit Costs:
Service cost is allocated among Selling, administrative and engineering expense, Motorcycles and Related Products cost of goods sold and Inventories, net. Amounts capitalized in inventory are not significant. Non-service cost components of net periodic benefit cost are presented in Other income (expense), net. Components of net periodic benefit costs for the Company's defined benefit plans for the years ended December 31, were as follows (in thousands):
Pension and SERPA Benefits Postretirement Healthcare Benefits
2021 2020 2019 2021 2020 2019
Service cost $ 24,570 $ 27,224 $ 25,408 $ 5,147 $ 11,761 $ 4,449
Interest cost 61,988 76,447 85,483 6,505 9,391 11,753
Expected return on plan assets (131,494) (135,056) (142,323) (13,978) (13,870) (14,030)
Amortization of unrecognized:
Prior service credit (1,247) (1,088) (1,930) (2,323) (2,381) (2,381)
Net loss 67,933 65,489 44,511 1,056 492 277
Special early retirement benefits - - 1,583 - - -
Curtailment (gain) loss (10,562) 74 - - (392) (960)
Settlement loss 722 2,742 1,503 - - -
Net periodic benefit cost $ 11,910 $ 35,832 $ 14,235 $ (3,593) $ 5,001 $ (892)
The expected return on plan assets is calculated based on the market related value of plan assets. The market related value of plan assets is different from the fair value in that asset gains and losses are smoothed over a five-year period.
Unrecognized gains and losses related to plan obligations and assets are initially recorded in other comprehensive income and result from actual experience that differs from assumed or expected results, and the impacts of changes in assumptions. Unrecognized plan asset gains and losses not yet reflected in the market related value of plan assets are not subject to amortization. Remaining unrecognized gains and losses that exceed 10% of the greater of the projected benefit obligation or the market related value of plan assets are amortized to earnings over the estimated future service period of active plan participants. The impacts of plan amendments, if any, are amortized over the estimated future service period of plan participants at the time of the amendment.
Assumptions:
Weighted-average assumptions used to determine benefit obligations and net periodic benefit cost at December 31, were as follows:
Pension and SERPA Benefits Postretirement Healthcare Benefits
2021 2020 2019 2021 2020 2019
Assumptions for benefit obligations:
Discount rate 2.89 % 2.62 % 3.49 % 2.72 % 2.11 % 3.26 %
Rate of compensation increase 3.49 % 3.34 % 3.39 % n/a n/a n/a
Assumptions for net periodic benefit cost:
Discount rate 2.67 % 3.49 % 4.38 % 2.11 % 3.26 % 4.23 %
Expected return on plan assets 6.20 % 6.70 % 7.10 % 6.69 % 7.00 % 7.25 %
Rate of compensation increase 3.34 % 3.39 % 3.38 % n/a n/a n/a
Plan Assets:
Pension Plan Assets - The Company’s investment objective is to ensure assets are sufficient to pay benefits while mitigating the volatility of retirement plan assets or liabilities recorded in the balance sheet. The Company mitigates volatility through asset diversification and partial asset/liability matching. The investment portfolio for the Company's pension plan assets contains a diversified blend of equity and fixed-income investments. The Company’s current overall targeted asset allocation as a percentage of total market value was 47% equities and 53% fixed-income and cash. Assets are rebalanced regularly to keep the actual allocation in line with targets. Equity holdings primarily include investments in small-, medium- and large-cap companies in the U.S., investments in developed and emerging foreign markets and other investments such as private equity and real estate. Fixed-income holdings consist of U.S. government and agency securities, state and municipal
bonds, corporate bonds from diversified industries and foreign obligations. In addition, cash equivalent balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews.
Postretirement Healthcare Plan Assets - The Company's investment objective is to maximize the return on assets to help pay benefits by prudently investing in equities, fixed income and alternative assets. The Company's current overall targeted asset allocation as a percentage of total market value was 69% equities and 31% fixed-income and cash. Equity holdings primarily include investments in small-, medium- and large-cap companies in the U.S., investments in developed and emerging foreign markets and other investments such as private equity and real estate. Fixed-income holdings consist of U.S. government and agency securities, state and municipal bonds, corporate bonds from diversified industries and foreign obligations. In addition, cash equivalent balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews.
The following tables present the fair values of the plan assets related to the Company’s pension and postretirement healthcare plans within the fair value hierarchy as defined in Note 13. The fair values of the Company’s pension plan assets at December 31, 2021 were as follows (in thousands):
Balance Level 1 Level 2
Cash and cash equivalents $ 55,192 $ - $ 55,192
Equity holdings:
U.S. companies 949,787 942,297 7,490
Foreign companies 67,111 63,245 3,866
Pooled equity funds 350,356 350,356 -
Other 63 63 -
1,367,317 1,355,961 11,356
Fixed-income holdings:
U.S. Treasuries 76,943 76,943 -
Federal agencies 14,680 - 14,680
Corporate bonds 690,319 - 690,319
Pooled fixed income funds 148,860 54,302 94,558
Foreign bonds 112,293 207 112,086
Municipal bonds 12,549 - 12,549
1,055,644 131,452 924,192
Plan assets subject to fair value leveling 2,478,153 $ 1,487,413 $ 990,740
Plan assets measured at net asset value:
Private equity investments 509
Real estate investments 7,805
8,314
$ 2,486,467
The fair values of the Company’s postretirement healthcare plan assets at December 31, 2021 were as follows (in thousands):
Balance Level 1 Level 2
Cash and cash equivalents $ 6,081 $ - $ 6,081
Equity holdings:
U.S. companies 132,812 132,790 22
Foreign companies 25,062 25,051 11
Pooled equity funds 30,302 30,302 -
Other 6 6 -
188,182 188,149 33
Fixed-income holdings:
U.S. Treasuries 221 221 -
Federal agencies 42 - 42
Corporate bonds 1,967 - 1,967
Pooled fixed income funds 46,150 45,878 272
Foreign bonds 320 1 319
Municipal bonds 36 - 36
48,736 46,100 2,636
Plan assets subject to fair value leveling 242,999 $ 234,249 $ 8,750
Plan assets measured at net asset value:
Private equity investments $ 15,593
Real estate investments 4,353
$ 262,945
Included in the pension and postretirement healthcare plan assets are 1,273,592 shares of the Company’s common stock with a market value of $48.0 million at December 31, 2021.
The fair values of the Company’s pension plan assets at December 31, 2020 were as follows (in thousands):
Balance Level 1 Level 2
Cash and cash equivalents $ 56,153 $ - $ 56,153
Equity holdings:
U.S. companies 785,227 769,583 15,644
Foreign companies 114,013 106,783 7,230
Harley-Davidson common stock 46,741 46,741 -
Pooled equity funds 381,538 381,538 -
Other 66 66 -
1,327,585 1,304,711 22,874
Fixed-income holdings:
U.S. Treasuries 59,116 59,116 -
Federal agencies 15,230 - 15,230
Corporate bonds 691,003 - 691,003
Pooled fixed income funds 148,717 51,456 97,261
Foreign bonds 110,062 - 110,062
Municipal bonds 14,671 - 14,671
1,038,799 110,572 928,227
Plan assets subject to fair value leveling 2,422,537 $ 1,415,283 $ 1,007,254
Plan assets measured at net asset value:
Private equity investments 537
Real estate investments 10,901
11,438
$ 2,433,975
Included in the pension plan assets were 1,273,592 shares of the Company’s common stock with a market value of $46.7 million at December 31, 2020.
The fair values of the Company’s postretirement healthcare plan assets at December 31, 2020 were as follows (in thousands):
Balance Level 1 Level 2
Cash and cash equivalents $ 4,306 $ - $ 4,306
Equity holdings:
U.S. companies 115,272 115,272 -
Foreign companies 29,670 29,670 -
Pooled equity funds 27,207 27,207 -
Other 5 5 -
172,154 172,154 -
Fixed-income holdings:
U.S. Treasuries 2,873 2,873 -
Federal agencies 6,970 - 6,970
Corporate bonds 12,460 - 12,460
Pooled fixed income funds 37,989 37,989 -
Foreign bonds 970 - 970
Municipal bonds 458 - 458
61,720 40,862 20,858
Plan assets subject to fair value leveling 238,180 $ 213,016 $ 25,164
Plan assets measured at net asset value:
Real estate investments 5,855
$ 244,035
For 2022, the Company’s overall expected long-term rate of return is 5.60% for pension assets and 6.80% for postretirement healthcare plan assets. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based on historical returns adjusted to reflect the current view of the long-term investment market.
Postretirement Healthcare Cost:
The weighted-average healthcare cost trend rates used in determining the accumulated postretirement benefit obligation of the healthcare plans were as follows:
2021 2020
Healthcare cost trend rate for next year 6.75 % 7.00 %
Rate to which the cost trend rate is assumed to decline (the ultimate rate) 5.00 % 5.00 %
Year that the rate reaches the ultimate trend rate 2029 2029
Future Contributions and Benefit Payments:
Based on the funded status of the qualified pension plan, there is no requirement for the Company to make contributions to the qualified pension plan in 2022. The Company expects that 2022 postretirement healthcare plan benefits and benefits due under the SERPA plans will be paid by the Company or, in the case of postretirement healthcare plan benefits, partially funded with plan assets.
The Company's future expected benefit payments as of December 31, 2021 were as follows (in thousands):
Pension Benefits SERPA Benefits Postretirement Healthcare Benefits
2022 $ 101,171 $ 2,003 $ 22,016
2023 $ 102,778 $ 1,448 $ 22,152
2024 $ 105,037 $ 1,482 $ 22,190
2025 $ 108,579 $ 1,343 $ 22,119
2026 $ 110,598 $ 1,344 $ 22,094
2027-2031 $ 568,066 $ 6,397 $ 106,147
Defined Contribution Plans:
The Company has various defined contribution benefit plans that in total cover substantially all full-time employees. Employees can make voluntary contributions in accordance with the provisions of their respective plan, which includes a 401(k) tax deferral option. The Company makes additional contributions to the plans on behalf of the employees and expensed $19.4 million, $21.7 million and $21.9 million during 2021, 2020 and 2019, respectively related to the contributions.
16. Commitments and Contingencies
Litigation and Other Claims - The Company is subject to lawsuits and other claims related to product, commercial, employee, environmental and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The Company accrues for matters when losses are both probable and estimable. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and there are no material exposures to loss in excess of amounts accrued and insured for losses related to these matters.
LiveWire Transaction - On December 13, 2021, the Company and AEA-Bridges Impact Corp. (ABIC), a special purpose acquisition company (SPAC), announced that they have entered into a definitive business combination agreement under which LiveWire, the Company's electric motorcycle division, will become a separate business of the Company and ABIC will combine with LiveWire to create a new publicly traded company. The parties expect that the transaction will be financed by ABIC’s $400 million cash held in trust (assuming no redemptions by ABIC’s shareholders in the context of the transaction), a $100 million cash investment from the Company, and a $100 million investment from an independent strategic investor, Kwang Yang Motor Co., Ltd. (KYMCO). In addition, to the extent any shares of the SPAC are redeemed, the Company will invest an additional amount equal to the dollar value of such redemptions up to a maximum of $100 million.
The transaction, which has been approved by the boards of directors of both the Company and ABIC, is expected to close in the first half of 2022. The consummation of the business combination is subject to the approval of ABIC’s shareholders as well as other conditions and regulatory approvals. Upon closing of the transaction, the Company will retain a controlling financial interest in LiveWire. The expectation is that, upon closing of the transaction, the Company will retain an equity interest in the separate public company of approximately 74%. As the controlling shareholder following the transaction, the Company will continue to consolidate LiveWire’s results, with additional adjustments to recognize non-controlling shareholder interests.
17. Share-Based Awards
The Company has a share-based compensation plan which was approved by its shareholders in April 2020 (the Plan) under which its Board of Directors may grant to employees share-based awards including restricted stock units (RSUs), performance shares, and nonqualified stock options. Performance shares include a three-year performance period with vesting based on achievement of internal performance targets and, beginning with the 2021 grant, include a vesting component based on a Total Shareholder Return (TSR) relative to a peer group. RSUs granted under the Plan generally vest ratably over a three-year period with the first one-third of the grant vesting one year after the date of grant. Dividends are paid on RSUs and performance shares settled with stock. Dividend equivalents are paid on RSUs and performance shares settled with cash. Stock options granted in 2021 include a service component to vest and a market condition to become exercisable. The 2021 stock options expire 10 years from the grant date or, if the grantee's employment ceases prior to December 31, 2023, 6 years from the grant date. Stock options granted prior to 2021 expire 10 years from the date of grant. At December 31, 2021, there were 2.8 million shares of common stock available for future awards under the Plan.
The Company recognizes the cost of its share-based awards in the Consolidated statements of operations. The cost of each share-based equity award is based on the grant date fair value and the cost of each share-based cash-settled award is based on the settlement date fair value. Forfeitures for share-based awards are estimated at the grant date and adjusted when it is likely to change. Share-based award expense is recognized on a straight-line basis over the service or performance periods of each separately vesting tranche within the awards. The expense recognized reflects the number of awards that are ultimately expected to vest based on the service and, if applicable, performance requirements of each award. Total share-based award compensation expense recognized by the Company during 2021, 2020 and 2019 was $42.2 million, $23.5 million and $33.7 million, respectively, or $32.3 million, $18.0 million and $25.8 million net of taxes, respectively.
Restricted Stock Units and Performance Shares - Settled in Stock - The fair value of RSUs settled in stock and performance shares settled in stock that do not contain a market condition is determined based on the market price of the Company’s stock on the grant date. The performance shares settled in stock granted in 2021 contain a relative TSR market condition. The Company estimated the fair value of the TSR component using a Monte Carlo simulation. The Company uses historical volatility to determine the expected volatility of its performance shares that include a TSR component. The risk-free rate for periods within the contractual life of the grant is based on the U.S. Treasury rates at the time of grant. Assumptions used to calculate the grant date fair value of the performance shares granted during 2021, by grant date, were as follows:
February 2021 May 2021
Expected volatility 52.01 % 54.99 %
Risk-free interest rate 0.18 % 0.27 %
The activity for these awards for the year ended December 31, 2021 was as follows (in thousands, except for per share amounts):
Shares & Units Weighted-Average Fair Value Per Share
Nonvested, beginning of period 1,769 $ 36
Granted 1,769 $ 34
Vested (763) $ 34
Forfeited (293) $ 35
Nonvested, end of period 2,482 $ 35
As of December 31, 2021, there was $41.2 million of unrecognized compensation cost related to RSUs and performance shares settled in stock, net of estimated forfeitures, that is expected to be recognized over a weighted-average period of 1.9 years.
Restricted Stock Units and Performance Shares - Settled in Cash - RSUs and performance shares settled in cash are recorded in the Consolidated balance sheets as a liability until vested. The fair value is determined based on the market price of the Company’s stock and is remeasured at each balance sheet date. The activity for these awards for the year ended December 31, 2021 was as follows (in thousands, except for per share amounts):
Units Weighted-Average Fair Value Per Share
Nonvested, beginning of period 156 $ 36
Granted 206 $ 36
Vested (64) $ 36
Forfeited (33) $ 41
Nonvested, end of period 265 $ 36
Stock Options - The Company estimated the grant date fair value of its 2021 stock option award using a Monte Carlo simulation, assuming a 1.49% expected dividend yield, an expected volatility rate of 44.1%, a risk-free interest rate of 1.21%, and an expected term of 5.5 years. The Company uses historical volatility to determine the expected volatility of its stock. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury rates at the time of grant. The expected term of options granted assumes the options will be exercised halfway between the time that they are earned based on achieving the market condition and the end of the award term. There were no stock options granted in 2020 or 2019.
The Company’s policy is to issue new shares of common stock upon the exercise of employee stock options. The stock option transactions for the year ended December 31, 2021 were as follows (in thousands, except for per share amounts):
Options Weighted-Average Exercise Price
Outstanding, beginning of period 658 $ 56
Options granted 500 $ 37
Exercised (98) $ 44
Forfeited (67) $ 47
Outstanding, end of period 993 $ 48
Exercisable, end of period 493 $ 59
The aggregate intrinsic value related to stock options exercised, outstanding and exercisable as of and for the years ended December 31, was as follows (in thousands):
2021 2020 2019
Exercised $ 289 $ 21 $ 2,614
Outstanding $ 530 $ - $ 52
Exercisable $ - $ - $ 52
Stock options outstanding at December 31, 2021 were as follows (options in thousands):
Price Range Weighted-Average
Contractual Life Options Weighted-Average
Exercise Price
$30.01 to $40
10.0 500 $ 37
$40.01 to $50
0.1 29 $ 45
$50.01 to $60
1.0 116 $ 52
$60.01 to $70
1.7 348 $ 63
Options outstanding 5.8 993 $ 48
Options exercisable 1.5 493 $ 59
18. Accumulated Other Comprehensive Loss
Changes in Accumulated other comprehensive loss for the years ended December 31, were as follows (in thousands):
Foreign currency translation adjustments Derivative financial instruments Pension and postretirement benefit plans Total
Balance, beginning of period $ (7,589) $ (46,116) $ (429,712) $ (483,417)
Other comprehensive (loss) income, before reclassifications (38,988) (73,207) 251,790 139,595
Income tax benefit (expense) 2,176 15,883 (59,120) (41,061)
(36,812) (57,324) 192,670 98,534
Reclassifications:
Net losses on derivative financial instruments - 130,609 - 130,609
Prior service credits(a)
- - (3,570) (3,570)
Actuarial losses(a)
- - 68,989 68,989
Curtailment and settlement losses(a)
- - (9,840) (9,840)
Reclassifications before tax - 130,609 55,579 186,188
Income tax expense - (29,174) (13,050) (42,224)
- 101,435 42,529 143,964
Other comprehensive (loss) income (36,812) 44,111 235,199 242,498
Balance, end of period $ (44,401) $ (2,005) $ (194,513) $ (240,919)
Foreign currency translation adjustments Derivative financial instruments Pension and postretirement benefit plans Total
Balance, beginning of period $ (40,813) $ (14,586) $ (481,550) $ (536,949)
Other comprehensive income, before reclassifications 37,088 107,181 2,193 146,462
Income tax expense (3,864) (23,626) (515) (28,005)
33,224 83,555 1,678 118,457
Reclassifications:
Net gains on derivative financial instruments - (148,107) - (148,107)
Prior service credits(a)
- - (3,469) (3,469)
Actuarial losses(a)
- - 65,981 65,981
Curtailment and settlement losses(a)
- - 3,040 3,040
Reclassifications before tax - (148,107) 65,552 (82,555)
Income tax benefit (expense) - 33,022 (15,392) 17,630
- (115,085) 50,160 (64,925)
Other comprehensive income (loss) 33,224 (31,530) 51,838 53,532
Balance, end of period $ (7,589) $ (46,116) $ (429,712) $ (483,417)
Foreign currency translation adjustments Derivative financial instruments Pension and postretirement benefit plans Total
Balance, beginning of period $ (49,608) $ 1,785 $ (581,861) $ (629,684)
Other comprehensive income, before reclassifications 9,229 6,477 90,071 105,777
Income tax expense (434) (1,541) (21,149) (23,124)
8,795 4,936 68,922 82,653
Reclassifications:
Net gains on derivative financial instruments - (27,732) - (27,732)
Prior service credits(a)
- - (4,311) (4,311)
Actuarial losses(a)
- - 44,788 44,788
Curtailment and settlement losses(a)
- - 543 543
Reclassifications before tax - (27,732) 41,020 13,288
Income tax benefit (expense) - 6,425 (9,631) (3,206)
- (21,307) 31,389 10,082
Other comprehensive income (loss) 8,795 (16,371) 100,311 92,735
Balance, end of period $ (40,813) $ (14,586) $ (481,550) $ (536,949)
(a)Amounts reclassified are included in the computation of net periodic benefit cost, discussed further in Note 15.
19. Reportable Segments and Geographic Information
Reportable Segments - Harley-Davidson, Inc. is the parent company for the groups of companies referred to as Harley-Davidson Motor Company and Harley-Davidson Financial Services. The Company operates in two segments: Motorcycles and Related Products (Motorcycles) and Financial Services. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations.
The Motorcycles segment consists of the activities of Harley-Davidson Motor Company which designs, manufactures and sells motorcycles. The Motorcycles segment also sells motorcycle parts, accessories, and apparel as well as licenses its trademarks. The Company’s products are sold to retail customers primarily through a network of dealers. The Company conducts business on a global basis, with sales in the U.S., Canada, Europe/Middle East/Africa (EMEA), Asia Pacific, and Latin America.
The Financial Services segment consists of the activities of Harley-Davidson Financial Services which is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. Harley-Davidson Financial Services also works with certain unaffiliated insurance companies to provide motorcycle insurance and protection products to motorcycle owners. Harley-Davidson Financial Services conducts business principally in the U.S. and Canada.
Selected segment information is set forth below for the years ended December 31, (in thousands):
2021 2020 2019
Motorcycles and Related Products:
Motorcycles revenue $ 4,540,240 $ 3,264,054 $ 4,572,678
Gross profit 1,296,953 828,309 1,342,880
Selling, administrative and engineering expense 885,587 895,321 1,020,907
Restructuring expense 2,741 119,110 32,353
Operating income (loss) 408,625 (186,122) 289,620
Financial Services:
Financial Services revenue 796,068 790,323 789,111
Financial Services expense 380,580 583,623 523,123
Restructuring expense 674 10,899 -
Operating income 414,814 195,801 265,988
Operating income $ 823,439 $ 9,679 $ 555,608
Financial Services revenue includes $6.1 million and $10.0 million of interest paid by Harley-Davidson Motor Company to Harley-Davidson Financial Services on wholesale finance receivables in 2020 and 2019, respectively. The offsetting cost of these interest incentives was recorded as a reduction to Motorcycles revenue. Harley-Davidson Financial Services did not earn any interest from Harley-Davidson Motor Company on wholesale finance receivables in 2021.
Additional segment information is set forth below as of December 31, (in thousands):
Motorcycles Financial Services Consolidated
2021:
Assets $ 3,308,292 $ 7,742,763 $ 11,051,055
Depreciation and amortization $ 155,969 $ 9,216 $ 165,185
Capital expenditures $ 115,995 $ 4,186 $ 120,181
2020:
Assets $ 2,492,515 $ 9,518,086 $ 12,010,601
Depreciation and amortization $ 177,113 $ 8,602 $ 185,715
Capital expenditures $ 128,798 $ 2,252 $ 131,050
2019:
Assets $ 2,548,115 $ 7,980,044 $ 10,528,159
Depreciation and amortization $ 223,656 $ 8,881 $ 232,537
Capital expenditures $ 176,264 $ 5,176 $ 181,440
Geographic Information - Included in the Consolidated financial statements are the following amounts relating to geographic locations for the years ended December 31, (in thousands):
2021 2020 2019
Motorcycles revenue(a):
United States $ 3,021,103 $ 2,043,851 $ 2,971,223
EMEA 709,941 589,943 743,385
Canada 182,655 99,219 210,381
Japan 150,253 137,815 156,644
Australia and New Zealand 138,036 107,891 117,525
Other countries 338,252 285,335 373,520
$ 4,540,240 $ 3,264,054 $ 4,572,678
Financial Services revenue(a):
United States $ 765,917 $ 757,730 $ 754,535
Canada 18,613 20,353 22,799
Europe 7,464 8,300 8,435
Other countries 4,074 3,940 3,342
$ 796,068 $ 790,323 $ 789,111
Long-lived assets(b):
United States $ 595,375 $ 644,224 $ 757,594
Thailand 81,927 94,749 78,651
Other countries 6,682 4,811 11,137
88,609 99,560 89,788
$ 683,984 $ 743,784 $ 847,382
(a)Revenue is attributed to geographic regions based on location of customer.
(b)Long-lived assets include all long-term assets except those specifically excluded under ASC Topic 280, Segment Reporting, such as deferred income taxes and finance receivables.
20. Supplemental Consolidating Data
The supplemental consolidating legal entity data for Harley-Davidson Motor Company, Harley-Davidson Financial Services and related consolidating adjustments is presented for informational purposes. The legal entity income statement information presented below differs from reportable segment income statement information due to the allocation of legal entity consolidating adjustments to income for reportable segments. Supplemental consolidating data for 2021 is as follows (in thousands):
Year Ended December 31, 2021
Harley-Davidson Motor Company Harley-Davidson Financial Services Consolidating Adjustments Consolidated
Revenue:
Motorcycles and Related Products $ 4,564,703 $ - $ (24,463) $ 4,540,240
Financial Services - 788,736 7,332 796,068
4,564,703 788,736 (17,131) 5,336,308
Costs and expenses:
Motorcycles and Related Products cost of goods sold 3,243,287 - - 3,243,287
Financial Services interest expense - 192,944 - 192,944
Financial Services provision for credit losses - 25,049 - 25,049
Selling, administrative and engineering expense 899,088 166,332 (17,246) 1,048,174
Restructuring expense 2,741 674 - 3,415
4,145,116 384,999 (17,246) 4,512,869
Operating income 419,587 403,737 115 823,439
Other income, net 20,076 - - 20,076
Investment income 246,694 - (240,000) 6,694
Interest expense 30,972 - - 30,972
Income before income taxes 655,385 403,737 (239,885) 819,237
Income tax provision 73,590 95,623 - 169,213
Net income $ 581,795 $ 308,114 $ (239,885) $ 650,024
Year Ended December 31, 2020
Harley-Davidson Motor Company Harley-Davidson Financial Services Consolidating Adjustments Consolidated
Revenue:
Motorcycles and Related Products $ 3,279,407 $ - $ (15,353) $ 3,264,054
Financial Services - 783,421 6,902 790,323
3,279,407 783,421 (8,451) 4,054,377
Costs and expenses:
Motorcycles and Related Products cost of goods sold 2,435,745 - - 2,435,745
Financial Services interest expense - 246,447 - 246,447
Financial Services provision for credit losses - 181,870 - 181,870
Selling, administrative and engineering expense 907,257 152,258 (8,888) 1,050,627
Restructuring expense 119,110 10,899 - 130,009
3,462,112 591,474 (8,888) 4,044,698
Operating (loss) income (182,705) 191,947 437 9,679
Other expense, net (1,848) - - (1,848)
Investment income 107,560 - (100,000) 7,560
Interest expense 31,121 - - 31,121
(Loss) income before income taxes (108,114) 191,947 (99,563) (15,730)
Income tax (benefit) provision (59,231) 42,203 - (17,028)
Net (loss) income $ (48,883) $ 149,744 $ (99,563) $ 1,298
December 31, 2021
Harley-Davidson Motor Company Harley-Davidson Financial Services Consolidating Adjustments Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ 1,078,205 $ 796,540 $ - $ 1,874,745
Accounts receivable, net 284,674 - (102,526) 182,148
Finance receivables, net - 1,465,544 - 1,465,544
Inventories, net 712,942 - - 712,942
Restricted cash - 128,935 - 128,935
Other current assets 96,714 92,295 (3,232) 185,777
2,172,535 2,483,314 (105,758) 4,550,091
Finance receivables, net - 5,106,377 - 5,106,377
Property, plant and equipment, net 655,091 28,893 - 683,984
Pension and postretirement assets 386,152 - - 386,152
Goodwill 63,177 - - 63,177
Deferred income taxes 17,180 77,956 (12,214) 82,922
Lease assets 42,362 7,263 - 49,625
Other long-term assets 193,819 38,960 (104,052) 128,727
$ 3,530,316 $ 7,742,763 $ (222,024) $ 11,051,055
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 356,309 $ 121,195 $ (102,526) $ 374,978
Accrued liabilities 497,038 107,380 (2,437) 601,981
Short-term deposits, net - 72,146 - 72,146
Short-term debt - 751,286 - 751,286
Current portion of long-term debt, net - 1,542,496 - 1,542,496
853,347 2,594,503 (104,963) 3,342,887
Long-term deposits, net - 218,180 - 218,180
Long-term debt, net 744,668 3,850,949 - 4,595,617
Lease liabilities 22,437 7,467 - 29,904
Pension and postretirement liabilities 95,299 - - 95,299
Deferred income taxes 18,899 1,531 (11,169) 9,261
Other long-term liabilities 154,950 49,610 2,103 206,663
Commitments and contingencies (Note 16)
Shareholders’ equity 1,640,716 1,020,523 (107,995) 2,553,244
$ 3,530,316 $ 7,742,763 $ (222,024) $ 11,051,055
December 31, 2020
Harley-Davidson Motor Company Harley-Davidson Financial Services Consolidating Adjustments Consolidated
ASSETS
Current assets:
Cash and cash equivalents $ 666,161 $ 2,591,042 $ - $ 3,257,203
Accounts receivable, net 220,110 - (77,028) 143,082
Finance receivables, net - 1,509,539 - 1,509,539
Inventories, net 523,497 - - 523,497
Restricted cash - 131,642 - 131,642
Other current assets 93,510 190,690 (3,730) 280,470
1,503,278 4,422,913 (80,758) 5,845,433
Finance receivables, net - 4,933,469 - 4,933,469
Property, plant and equipment, net 709,845 33,939 - 743,784
Pension and postretirement assets 95,711 - - 95,711
Goodwill 65,976 - - 65,976
Deferred income taxes 69,688 90,011 (1,161) 158,538
Lease assets 40,564 4,639 - 45,203
Other long-term assets 184,300 33,115 (94,928) 122,487
$ 2,669,362 $ 9,518,086 $ (176,847) $ 12,010,601
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable $ 277,429 $ 90,503 $ (77,028) $ 290,904
Accrued liabilities 444,786 115,506 (3,078) 557,214
Short-term deposits, net - 79,965 - 79,965
Short-term debt - 1,014,274 - 1,014,274
Current portion of long-term debt, net - 2,039,597 - 2,039,597
722,215 3,339,845 (80,106) 3,981,954
Long-term debt, net 743,977 5,188,956 - 5,932,933
Lease liabilities 26,313 3,802 - 30,115
Pension and postretirement liabilities 114,206 - - 114,206
Deferred income taxes 7,166 1,441 - 8,607
Other long-term liabilities 171,242 46,514 2,245 220,001
Commitments and contingencies (Note 16)
Shareholders’ equity 884,243 937,528 (98,986) 1,722,785
$ 2,669,362 $ 9,518,086 $ (176,847) $ 12,010,601
Year Ended December 31, 2021
Harley-Davidson Motor Company Harley-Davidson Financial Services Consolidating Adjustments Consolidated
Cash flows from operating activities:
Net income $ 581,795 $ 308,114 $ (239,885) $ 650,024
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 155,969 9,216 - 165,185
Amortization of deferred loan origination costs - 86,115 - 86,115
Amortization of financing origination fees 691 13,119 - 13,810
Provision for long-term employee benefits 8,317 - - 8,317
Employee benefit plan contributions and payments (17,133) - - (17,133)
Stock compensation expense 38,909 3,247 - 42,156
Net change in wholesale finance receivables related to sales - - 89,001 89,001
Provision for credit losses - 25,049 - 25,049
Deferred income taxes (16,279) 8,723 (116) (7,672)
Other, net (8,346) (1,523) (116) (9,985)
Changes in current assets and liabilities:
Accounts receivable, net
(78,961) - 25,498 (53,463)
Finance receivables - accrued interest and other - 13,316 - 13,316
Inventories, net
(207,550) - - (207,550)
Accounts payable and accrued liabilities
174,615 23,373 (24,440) 173,548
Other current assets 10,982 (5,501) (498) 4,983
61,214 175,134 89,329 325,677
Net cash provided by operating activities 643,009 483,248 (150,556) 975,701
Cash flows from investing activities:
Capital expenditures (115,995) (4,186) - (120,181)
Origination of finance receivables - (7,409,811) 3,166,101 (4,243,710)
Collections on finance receivables - 7,157,849 (3,255,545) 3,902,304
Other investing activities 2,140 - - 2,140
Net cash used by investing activities (113,855) (256,148) (89,444) (459,447)
Year Ended December 31, 2021
Harley-Davidson Motor Company Harley-Davidson Financial Services Consolidating Adjustments Consolidated
Cash flows from financing activities:
Repayments of medium-term notes - (1,400,000) - (1,400,000)
Proceeds from securitization debt - 1,169,910 - 1,169,910
Repayments of securitization debt - (1,340,638) - (1,340,638)
Borrowings of asset-backed commercial paper - 98,863 - 98,863
Repayments of asset-backed commercial paper - (261,367) - (261,367)
Net increase in unsecured commercial paper - (260,250) - (260,250)
Net increase in deposits - 210,112 - 210,112
Dividends paid (92,426) (240,000) 240,000 (92,426)
Repurchase of common stock (11,623) - - (11,623)
Other financing activities 2,488 - - 2,488
Net cash (used) provided by financing activities (101,561) (2,023,370) 240,000 (1,884,931)
Effect of exchange rate changes on cash, cash equivalents and restricted cash (15,549) 277 - (15,272)
Net increase (decrease) in cash, cash equivalents and restricted cash $ 412,044 $ (1,795,993) $ - $ (1,383,949)
Cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash, beginning of period $ 666,161 $ 2,743,007 $ - $ 3,409,168
Net increase (decrease) in cash, cash equivalents and restricted cash 412,044 (1,795,993) - (1,383,949)
Cash, cash equivalents and restricted cash, end of period $ 1,078,205 $ 947,014 $ - $ 2,025,219
Year Ended December 31, 2020
Harley-Davidson Motor Company Harley-Davidson Financial Services Consolidating Adjustments Consolidated
Cash flows from operating activities:
Net (loss) income $ (48,883) $ 149,744 $ (99,563) $ 1,298
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Depreciation and amortization 177,113 8,602 - 185,715
Amortization of deferred loan origination costs - 71,142 - 71,142
Amortization of financing origination fees 681 13,754 - 14,435
Provision for long-term employee benefits 40,833 - - 40,833
Employee benefit plan contributions and payments (20,722) - - (20,722)
Stock compensation expense 17,905 1,859 3,730 23,494
Net change in wholesale finance receivables related to sales - - 531,701 531,701
Provision for credit losses - 181,870 - 181,870
Deferred income taxes (19,097) (24,697) (285) (44,079)
Other, net (3,022) 13,803 (436) 10,345
Changes in current assets and liabilities:
Accounts receivable, net
161,012 - (33,355) 127,657
Finance receivables - accrued interest and other - 7,418 - 7,418
Inventories, net
80,858 - - 80,858
Accounts payable and accrued liabilities
(34,755) (40,851) 32,519 (43,087)
Other current assets 13,929 (4,081) (836) 9,012
414,735 228,819 533,038 1,176,592
Net cash provided by operating activities 365,852 378,563 433,475 1,177,890
Cash flows from investing activities:
Capital expenditures (128,798) (2,252) - (131,050)
Origination of finance receivables - (5,616,347) 2,118,861 (3,497,486)
Collections on finance receivables - 6,192,625 (2,652,336) 3,540,289
Other investing activities 18,073 3,391 - 21,464
Net cash (used) provided by investing activities (110,725) 577,417 (533,475) (66,783)
Year Ended December 31, 2020
Harley-Davidson Motor Company Harley-Davidson Financial Services Consolidating Adjustments Consolidated
Cash flows from financing activities:
Proceeds from issuance of medium-term notes - 1,396,602 - 1,396,602
Repayments of medium-term notes - (1,400,000) - (1,400,000)
Proceeds from securitization debt - 2,064,450 - 2,064,450
Repayments of securitization debt - (1,041,751) - (1,041,751)
Borrowings of asset-backed commercial paper - 225,187 - 225,187
Repayments of asset-backed commercial paper - (318,828) - (318,828)
Net increase in unsecured commercial paper - 444,380 - 444,380
Net increase in deposits - 79,947 - 79,947
Dividends paid (68,087) (100,000) 100,000 (68,087)
Repurchase of common stock (8,006) - - (8,006)
Issuance of common stock under share-based plans 89 - - 89
Net cash (used) provided by financing activities (76,004) 1,349,987 100,000 1,373,983
Effect of exchange rate changes on cash, cash equivalents and restricted cash 16,389 2,323 - 18,712
Net increase in cash, cash equivalents and restricted cash $ 195,512 $ 2,308,290 $ - $ 2,503,802
Cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash, beginning of period $ 470,649 $ 434,717 $ - $ 905,366
Net increase in cash, cash equivalents and restricted cash 195,512 2,308,290 - 2,503,802
Cash, cash equivalents and restricted cash, end of period $ 666,161 $ 2,743,007 $ - $ 3,409,168
21. Subsequent Event
In February 2022, Harley-Davidson Financial Services issued $500.0 million of medium-term notes that mature in February 2027 and have an annual interest rate of 3.05%.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures - In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Annual Report on Form 10-K, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and the Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Annual Report on Form 10-K to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Management’s Report on Internal Control over Financial Reporting - The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f). Under the supervision and with the participation of management, including the principal executive officer and principal financial officer, management conducted an evaluation of the effectiveness of the Company’s internal control over financial reporting based on the criteria established in Internal Control - Integrated Framework (2013 Framework) issued by
the Committee of Sponsoring Organizations of the Treadway Commission. Based on management’s evaluation under the framework in Internal Control - Integrated Framework, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2021. Ernst & Young LLP, an independent registered public accounting firm, has audited the Consolidated financial statements included in this Annual Report on Form 10-K and, as part of its audit, has issued an attestation report, included herein, on the effectiveness of the Company’s internal control over financial reporting.
Attestation Report of Independent Registered Public Accounting Firm - The attestation report required under this Item 9A is contained in Item 8. Consolidated Financial Statements and Supplementary Data of this Annual Report on Form 10-K under the heading Report of Independent Registered Public Accounting Firm.
Changes in Internal Controls - There were no changes in the Company’s internal control over financial reporting that occurred during the quarter ended December 31, 2021 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Directors, Executive Officers and Corporate Governance
The information to be included in the Company’s definitive proxy statement for the 2022 annual meeting of shareholders (the Proxy Statement) under the captions Questions and Answers about the Company - Who are our executive officers for SEC purposes?, Board Matters and Corporate Governance - Audit and Finance Committee, Proposal 1: Election of Directors, Section 16(a) Beneficial Ownership Reporting, Audit and Finance Committee Report, and Board Matters and Corporate Governance - Independence of 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, 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. 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.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information to be included in the Proxy Statement under the captions Executive Compensation and Human Resources Committee Report on Executive Compensation is incorporated by reference herein.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
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 Common Stock Ownership of Certain Beneficial Owners and Management is incorporated by reference herein.
The following table provides information about the Company’s equity compensation plans as of December 31, 2021:
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 992,824 $ 47.89 2,845,650
Plan not approved by shareholders:
Non-employee Board of Directors - $ - 119,968
992,824 2,965,618
Documents for the Company’s equity compensation plans have been filed with the Securities and Exchange Commission on a timely basis and included in the list of exhibits to this Annual Report on Form 10-K.
Under the Company’s management plan its Board of Directors may grant to employees share-based awards including restricted stock units (RSUs), performance shares, and nonqualified stock options. Performance shares include a three-year performance period with vesting based on achievement of internal performance targets and, beginning with the 2021 grant, include a vesting component based on a Total Shareholder Return (TSR) relative to a peer group. RSUs vest ratably over a three-year period. Stock options granted under the Plan have an exercise price equal to the fair market value of the underlying stock at the date of grant and for grants made prior to 2021 vest ratably over a three-year period with the first one-third of the grant becoming exercisable one year after the date of grant. Stock options granted under the Plan in 2021 include a service component to vest and a market condition to become exercisable. The 2021 stock options expire 10 years from the grant date or, if the grantee's employment ceases prior to December 31, 2023, 6 years from the grant date. Stock options granted prior to 2021 expire 10 years from the date of grant.
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 Director ceases to serve as a Director 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 their annual retainer in common stock until the Director reaches the Director stock ownership guidelines defined below.
In May 2021, the Human Resources Committee of the Company's Board of Directors approved updated stock ownership guidelines (Ownership Guidelines). The Ownership Guidelines stipulate that all Directors hold five times their annual retainer in shares of common stock, the Chief Executive Officer hold six times his or her base salary in shares of common stock or certain rights to acquire common stock and Senior Management Leaders and other Senior leaders (Senior Executives) hold from one time to three times of their base salary in shares of common stock, or certain rights to acquire common stock, depending on their level. The Directors, the Chief Executive Officer and Senior Executives have five years from either: (i) the date they are elected a Director, become the Chief Executive Officer or become a Senior Executive; or (ii) May 20, 2021, whichever is longer, to accumulate the appropriate number of shares of common stock. Restricted stock, RSUs, shares held in 401(k) accounts, deferred stock units and shares of common stock held directly count toward satisfying the guidelines for common stock ownership.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information to be included in the Company's Proxy Statement under the captions Certain Transactions and Board Matters and Corporate Governance - Independence of Directors are incorporated by reference herein.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accountant Fees and Services
The information to be included in the Company's Proxy Statement under the caption Proposal 3: Ratification of the Selection of Independent Registered Public Accounting Firm - Fees Paid to Ernst & Young LLP is incorporated by reference herein.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits and Financial Statement Schedules
(a) The following documents are filed as part of this Form 10-K:
(1) Financial Statements under Item 8. Consolidated Financial Statements and Supplementary Data
Reports of Independent Registered Public Accounting Firm
Consolidated statements of operations for the years ended December 31, 2021, 2020, and 2019
Consolidated statements of comprehensive income for the years ended December 31, 2021, 2020, and 2019
Consolidated balance sheets at December 31, 2021 and 2020
Consolidated statements of cash flows for the years ended December 31, 2021, 2020, and 2019
Consolidated statements of shareholders’ equity for the years ended December 31, 2021, 2020, and 2019
Notes to Consolidated financial statements
(2) Financial Statement Schedule
Schedule II - Valuation and qualifying accounts
(3) Exhibits
Reference is made to the separate Index to Exhibits contained on pages 107 through 111 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.