Harley-Davidson (HOG) 10-K2021 FY Annual report

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.

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:

The Hardwire strategic priorities are as follows:

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.

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:

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.

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.

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

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.

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.

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.

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.

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.

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.

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.

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.

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.

An investment in Harley-Davidson, Inc. involves risks, including those discussed below. These risk factors should be considered carefully before deciding whether to invest in the Company.

The Company 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. 

None.

Not Applicable.

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:

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.

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.

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.

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.

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.

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.

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.

Retail unit sales of new Harley-Davidson and LiveWire motorcycles were as follows:

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).

Wholesale motorcycle unit shipments were as follows:

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.

Condensed statements of operations for the Motorcycles segment were as follows (in thousands):

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2020 to 2021:

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.

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.

There are no new accounting standards issued but not yet adopted that are material to the Company.

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.

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.

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.

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):

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.

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):

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:

Cash flow activities for the years ended December 31, were as follows (in thousands):

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

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.

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):

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.

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.

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

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.

The operating covenants limit the Company’s and Harley-Davidson Financial Services’ ability to:

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

At December 31, 2021 and 2020, Harley-Davidson Financial Services and the Company remained in compliance with all of the then existing covenants.

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,

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.

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

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.

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.