HOG 12-31-2013 10-K


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2013
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to             
Commission file number 1-9183
Harley-Davidson, Inc.
(Exact name of registrant as specified in its charter)
Wisconsin
 
39-1382325
(State of organization)
 
(I.R.S. Employer Identification No.)
3700 West Juneau Avenue
Milwaukee, Wisconsin
 
53208
(Address of principal executive offices)
 
(Zip code)
Registrants telephone number: (414) 342-4680
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
COMMON STOCK, $.01 PAR VALUE PER SHARE
 
NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.     Yes  ¨    No  ý
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by checkmark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company as defined in Rule 12b-2 of the Exchange Act (check one).
Large accelerated filer
 
ý
 
Accelerated filer
 
¨
Non-accelerated filer
 
¨
 
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company, as defined in Rule 12b-2 of the Exchange Act.    Yes  ¨    No  ý
Aggregate market value of the voting stock held by non-affiliates of the registrant at June 30, 2013: $12,137,937,572
Number of shares of the registrant’s common stock outstanding at January 31, 2014: 220,051,960 shares
Documents Incorporated by Reference
Part III of this report incorporates information by reference from registrant’s Proxy Statement for the annual meeting of its shareholders to be held on April 26, 2014.
 




Harley-Davidson, Inc.
Form 10-K
For The Year Ended December 31, 2013
 
 
 
 
 
 
Page
Part I
 
 
 
 
 
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
 
 
 
Part II
 
 
 
 
 
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
 
 
 
Part III
 
 
 
 
 
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
 
 
 
Part IV
 
 
 
 
 
Item 15.
 
 


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PART I
Note regarding forward-looking statements(1) 
The Company intends that certain matters discussed by the Company 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 because the context statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” “estimates”, or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance 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 from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Risk Factors” in Item 1A of this report and under “Cautionary Statements” in Item 7 of this report. 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 this report are made as of the date indicated or, if a date is not indicated, as of the date of the filing of this report (February 20, 2014), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances. 
Item 1.        Business
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. 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: the Motorcycles & Related Products (Motorcycles) segment and the Financial Services (Financial Services) segment. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations.
The Motorcycles segment designs, manufactures and sells at wholesale street-legal Harley-Davidson motorcycles as well as a line of motorcycle parts, accessories, general merchandise and related services. The Company’s products are sold to retail customers through a network of independent dealers. The Company conducts business on a global basis, with sales in North America, Europe/Middle East/Africa (EMEA), Asia-Pacific and Latin America.
In 2010, the Company completed the sale of MV Agusta (MV). The results of MV have been presented as a discontinued operation for all periods.
The Motorcycles segment discussion that follows is specific to the Harley-Davidson brand unless otherwise specifically noted.
The Financial Services segment consists of Harley-Davidson Financial Services (HDFS). HDFS provides wholesale and retail financing and provides insurance and insurance-related programs primarily to Harley-Davidson dealers and their retail customers. HDFS conducts business principally in the United States and Canada.
See Note 20 of Notes to Consolidated Financial Statements for financial information related to the Company’s business segments. 
Motorcycles and Related Products
Motorcycles – The primary business of the Motorcycles segment is to design, manufacture and sell at wholesale street-legal Harley-Davidson motorcycles as well as a line of motorcycle parts, accessories, general merchandise and related services. The Company’s worldwide motorcycle sales generated approximately 77%, 76% and 76% of the total net revenue in the Motorcycles segment during 2013, 2012 and 2011, respectively.
Harley-Davidson motorcycles feature classic styling, innovative design, distinctive sound, and superior quality with the ability to customize. The Company manufactures six platforms of motorcycles: Touring, Dyna®, Softail®, Sportster®, V-Rod® and Street. The first four of these motorcycle platforms are powered by air-cooled, or combination air-and liquid-cooled, twin-cylinder engines with a 45-degree "V" configuration. The V-Rod® and Street platforms are powered by liquid-cooled, twin-cylinder engines with a 60-degree "V" configuration. Street platform motorcycles (the Harley-Davidson StreetTM 500 and Street 750) are expected to be available for sale at retail in select markets beginning in the second quarter of 2014. The Company primarily competes in the market segment consisting of street-legal motorcycles with engine displacements of 601cc and greater. The Company's engines currently range in displacement from 494cc to 1802cc.

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The street-legal motorcycle market is comprised of the following categories:
Standard (a basic motorcycle which usually features upright seating for one or two passengers);
Sportbike (incorporates racing technology, aerodynamic styling, low handlebars with a “sport” riding position and high performance tires);
Cruiser (emphasizes styling and owner customization);
Touring (incorporates features such as saddlebags, fairings, or large luggage compartments and emphasizes rider comfort and load capacity); and
Dual (designed with the capability for use on public roads as well as for some off-highway recreational use).
The Company competes in the touring and cruiser categories of the motorcycle market. The touring category of the market was pioneered by the Company and includes the Harley-Davidson Touring platform of motorcycles, including three-wheeled motorcycles, which are generally equipped with fairings, windshields, saddlebags and/or Tour Pak® luggage carriers. The cruiser category of the market includes motorcycles featuring the distinctive styling associated with classic Harley-Davidson motorcycles and includes the Company’s Dyna®, Softail®, V-Rod®, Sportster® and Street motorcycle platforms.
Competition in the motorcycle markets in which the Company competes is based upon a number of factors, including product capabilities and features, styling, price, quality, reliability, warranty, availability of financing, and quality of dealer network. The Company believes its motorcycle products continue to generally command a premium price at retail relative to competitors’ motorcycles. The Company emphasizes remarkable styling, customization, innovation, sound, quality, and reliability in its products and generally offers a two-year warranty for its motorcycles. The Company promotes a comprehensive motorcycling experience across a wide demographic range through events, rides, and rallies including those sponsored by Harley Owners Group® (H.O.G.®). The Company considers the availability of a line of motorcycle parts and accessories and general merchandise and the availability of financing through HDFS offered by a global network of premium dealers as competitive advantages.
In 2013, the U.S. and European regions accounted for approximately 79% of the total annual independent dealer retail sales of new Harley-Davidson motorcycles. The Company also competes in other markets around the world. The most significant other markets, based on the Company's retail sales data, are Canada, Japan, Australia and Brazil.
Harley-Davidson has been the historical market share leader in the U.S. 601+cc motorcycle market. Competitors in the U.S. 601+cc market offer motorcycles in all categories of the market including products that compete directly with the Company's offerings in the touring and cruiser categories.
According to the Motorcycle Industry Council (MIC), the touring and cruiser categories accounted for approximately 79%, 78% and 80% of total 601+cc retail unit registrations in the U.S. during 2013, 2012 and 2011, respectively. During 2013, the 601+cc portion of the market represented approximately 86% of the total U.S. motorcycle market (street-legal models including both on-highway and dual purpose models and three-wheeled vehicles) in terms of new units registered.
The following chart includes U.S. retail registration data for Harley-Davidson motorcycles for the years 2011 through 2013:
U.S. Motorcycle Registration Data(a)(b) 
601+cc (Units in thousands)
 
 
 
2013
 
2012
 
2011
Total new motorcycle registrations
 
305.9

 
299.4

 
289.9

Harley-Davidson new registrations
 
167.8

 
161.3

 
150.9

 
 
54.9
%
 
53.9
%
 
52.1
%

(a)
Data includes street-legal 601+cc models. Street-legal 601+cc models include on-highway and dual purpose models and three-wheeled vehicles.
(b)
U.S. industry data is derived from information provided by Motorcycle Industry Council (MIC). This third party data is subject to revision and update. The retail registration data for Harley-Davidson motorcycles presented in this table may differ slightly from the Harley-Davidson retail sales data presented in Item 7 of this report. The Company’s source for retail sales data in Item 7 of this report is sales and warranty registrations provided by Harley-Davidson dealers as compiled by the Company. The differences are not significant and generally relate to the timing of data submissions to the independent sources.

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The European 601+cc motorcycle market is slightly smaller than the U.S. market and customer preferences differ from those of U.S. customers. For example, in Europe, the sportbike category represented nearly 31% of the total 601+cc market in 2013 while the touring category represented 41% of the European 601+cc motorcycle market.
The following chart includes European retail registration data for Harley-Davidson for the years 2011 through 2013:
European Motorcycle Registration Data(a)(b) 
601+cc (Units in thousands)
 
 
 
2013
 
2012
 
2011
Total new motorcycle registrations
 
281.8

 
300.4

 
328.5

Harley-Davidson new registrations
 
36.1

 
36.2

 
39.9

 
 
12.8
%
 
12.1
%
 
12.1
%
 
(a)
Data includes street-legal 601+cc models. Street-legal 601+cc models include on-highway and dual purpose models and three-wheeled vehicles.
(b)
Europe data includes retail sales in Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data is derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. This third party data is subject to revision and update. The retail registration data for Harley-Davidson motorcycles presented in this table may differ slightly from the Harley-Davidson retail sales data presented in Item 7 of this report. The Company’s source for retail sales data in Item 7 of this report is sales and warranty registrations provided by Harley-Davidson dealers as compiled by the Company. The differences are not significant and generally relate to the timing of data submissions to the independent sources.
Parts & Accessories – Parts and Accessories (P&A) products are comprised of replacement parts (Genuine Motor Parts) and mechanical and cosmetic accessories (Genuine Motor Accessories). Worldwide P&A net revenue comprised 16.6%, 17.4% and 17.5% of net revenue in the Motorcycles segment in 2013, 2012 and 2011, respectively.
General Merchandise – Worldwide General Merchandise net revenue, which includes revenue from MotorClothes® apparel and riding gear, comprised 5.6%, 6.1% and 5.9% of net revenue in the Motorcycles segment in 2013, 2012 and 2011, respectively.
Licensing – The Company creates an awareness of the Harley-Davidson brand among its customers and the non-riding public through a wide range of products for enthusiasts by licensing the name “Harley-Davidson” and other trademarks owned by the Company. The Company’s licensed products include t-shirts, eyewear, vehicle accessories, jewelry, small leather goods, toys, footwear and numerous other products. The majority of licensing activity currently occurs in the U.S. Royalty revenues from licensing, included in Motorcycles segment net revenue, were $58.9 million, $49.1 million and $43.2 million in 2013, 2012 and 2011, respectively.
Harley-Davidson Museum – The Company operates the Harley-Davidson Museum (Museum) in Milwaukee, Wisconsin. The Museum is a unique destination that the Company believes builds and strengthens bonds between riders and the Company and enhances the brand among the public at large. The 130,000 square foot campus houses the Museum and archives, a restaurant, café, retail store and several special event spaces.
Other Services – The Company also provides a variety of services to its independent dealers including motorcycle service and business management training programs and customized dealer software packages. Motorcycle rentals are available through many of the Company’s independent dealers under the Company’s Authorized Rentals Program. Motorcycle rider training is available through the Company's Harley-Davidson Riding Academy.
International Sales – The Company’s revenue from the sale of motorcycles and related products to independent dealers and distributors located outside of the United States was approximately $1.70 billion, $1.58 billion and $1.51 billion, or approximately 32%, 32% and 32% of net revenue of the Motorcycles segment, during 2013, 2012 and 2011, respectively.
Patents and Trademarks – The Company strategically manages its portfolio of patents, trade secrets, copyrights, trademarks and other intellectual property.
The Company and its subsidiaries own, and continue 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

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parties. The Company diligently protects its intellectual property, including patents and trade secrets, and its rights to innovative and proprietary technology. 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 age for patents of approximately eight years. A patent review committee, which is comprised of a number of key executives, manages the patent strategy and portfolio of the Company.
Trademarks are important to the Company’s motorcycle business 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, HARLEY OWNERS GROUP, H.O.G., the H.O.G. Logo, SOFTAIL, SPORTSTER and V-ROD. 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 trademark strategy and portfolio.
Marketing – The Company is executing a multi-generational and multi-cultural marketing strategy. The Company measures the success of this strategy by monitoring market shares (where available) across its various customer definitions, as well as monitoring brand health in various markets.
U.S. retail purchasers of new Harley-Davidson motorcycles include both core and outreach customers and are diverse in terms of age, gender and ethnicity. The Company defines its U.S. core customer base as Caucasian men over the age of 35 and its U.S. outreach customers as women, young adults, African-American adults, and Latino adults. In 2012 (which is the most recent data available), for the fifth straight year the Company was the market share leader in U.S. new motorcycle registrations (all cc's) within the core-customer segment and in each outreach customer segment. (Source: R. L. Polk & Co. 2012 motorcycle registrations)
In 2013, the average U.S. retail purchaser of a new Harley-Davidson motorcycle had a median household income of approximately $90,800. More than three-quarters of the U.S. retail sales of new Harley-Davidson motorcycles were to purchasers with at least one year of education beyond high school, and 34% of the buyers had college/graduate degrees. (Sources: 2013 Company Studies)
The Company has a multi-generational and multi-cultural customer marketing strategy outside of the U.S. The Company's definition of core and outreach customers outside the U.S. varies depending on the profile of its customers in each market. In general, the Company defines its core customers outside the U.S. as men over the age of 35 and its outreach customers outside the U.S. as women and young adults.
The Company’s products are marketed to retail customers worldwide primarily through advertising and promotional activities via television, print, radio, direct mailings, as well as electronic advertising, including its website, and social media. Additionally, local marketing efforts are accomplished through a cooperative program with the Company’s independent dealers.
Customer experiences have traditionally been at the center of much of the Company’s marketing. To attract customers and achieve its goals, the Company not only participates in motorcycle rallies around the world, but also in major motorcycle consumer shows, racing activities, music festivals, mixed martial arts activities and other special promotional events.
Since 1983, the Company has promoted its Harley-Davidson products and the related lifestyle through the Harley Owners Group (H.O.G.®), which has approximately 1 million members worldwide and the Company believes is the industry’s largest company-sponsored motorcycle enthusiast organization. H.O.G.® also sponsors many motorcycle events, including rallies and rides for Harley-Davidson motorcycle enthusiasts throughout the world.
In 2000, the Company initiated Rider's Edge - the Harley-Davidson Academy of Motorcycling, and it is now known as the Harley-Davidson Riding Academy. The Harley-Davidson Riding Academy offers a series of rider education experiences that provide both new and experienced riders with deeper engagement in the sport of motorcycling by teaching basic and advanced motorcycling skills and knowledge. Since its inception, the program has trained more than 300,000 riders. The courses are conducted by a network of select Harley-Davidson dealerships throughout the U.S., enabling students to experience the Harley-Davidson lifestyle, environment, people, and products as they learn.

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In 2011, the Company launched a new global Harley-Davidson Authorized Tours Program that offers Harley-Davidson riders the opportunity to experience riding opportunities worldwide. Riders can also rent Harley-Davidson motorcycles worldwide from participating dealers through the Company’s Authorized Rentals Program.
Harley-Davidson Distribution – The Company’s products are retailed through an independent dealer network, of which the majority sells Harley-Davidson motorcycles exclusively. The Company’s independent dealerships stock and sell the Company’s motorcycles, P&A, general merchandise and licensed products, and perform service on Harley-Davidson motorcycles. The Company’s independent dealers may also have secondary retail locations (SRLs) to meet additional retail and service needs of the Company’s customers. SRLs also provide P&A, general merchandise and licensed products and are authorized to sell and service new motorcycles. The Company’s independent dealers also sell P&A, general merchandise and licensed products through “non-traditional” retail outlets. The “non-traditional” outlets, which are extensions of the main dealership, consist of Alternate Retail Outlets (AROs) and Seasonal Retail Outlets (SROs). AROs are located primarily in high traffic locations such as malls, airports or popular vacation destinations and focus on selling the Company’s general merchandise and licensed products. SROs are located in similar high traffic areas, but operate on a seasonal basis out of temporary locations such as vendor kiosks. AROs and SROs are not authorized to sell new motorcycles.
The Company’s North American region consists of the United States and Canada. In the United States, the Company distributes its motorcycles and related products to a network of independently-owned full-service Harley-Davidson dealerships and the Overseas Military Sales Corporation, an entity that retails the Company’s products to members of the U.S. military and government contractors. The Company distributes its motorcycles to its dealers in the U.S. based on dealer orders but subject to an allocation system that the Company designed to be forward-looking and market-driven to align the distribution of motorcycles with the demand in individual dealer markets. The allocation system can affect the number of units of particular models that dealers are able to order and the timing of shipments to dealers. In Canada, the Company sells its motorcycles and related products at wholesale to a single independent distributor, Deeley Harley-Davidson Canada/Fred Deeley Imports Ltd., which in turn sells to independent dealers in the Canadian market.
The Company’s operations in the EMEA region are managed out of its Oxford, England regional headquarters. In the EMEA region, the Company distributes all products sold to independent dealers through its subsidiaries located in Austria, Czech Republic, Dubai, France, Germany, Greece, Italy, Netherlands, Russia, South Africa, Spain, Switzerland and the United Kingdom and an independent distributor located in Sweden.
The Company’s operations in the Asia-Pacific region are managed out of its Singapore regional headquarters. In the Asia-Pacific region, the Company distributes all products sold to independent dealers in Australia, China, India and Japan through subsidiaries in those countries. The Company distributes all products sold to independent dealers for the remaining Asia-Pacific markets in which its motorcycles are shipped from its U.S. and Singapore operations.
The Company’s operations in the Latin America region are managed out of its Miami, Florida regional headquarters. The Company distributes all products sold to independent dealers in Mexico and Brazil through subsidiaries in those countries. The Company distributes all products sold to independent dealers for the remaining Latin American markets in which its motorcycles are sold from its U.S. operations.
The following table includes the number of worldwide Harley-Davidson independent dealerships by geographic region as of December 31, 2013:
 
 
 
North America Region
 
EMEA
Region
 
Asia-Pacific
Region
 
Latin America
Region
 
Total
 
 
United States
 
Canada
 
Full Service Dealerships and SRLs
 
696

 
69

 
371

 
271

 
51

 
1,458

Non-Traditional
 
92

 
5

 
20

 
8

 
29

 
154

The Company’s strategy calls for the international dealer network to open 100 to 150 new dealerships from the end of 2009 through the end of 2014. Through December 31, 2013, the Company added 118 new international dealers. This excludes international dealers closed in the normal course of business.
The Company launched a new eCommerce business model during 2013 for Parts and Accessories, General Merchandise, and related products and services to reach both outreach and core customers. The Company's new eCommerce model provides an online storefront, product merchandising, digital marketing, inventory management and order fulfillment, returns processing and customer care. Retail internet orders are sold by participating authorized Harley-Davidson dealers. Dealers also handle any after-sale services that the customer may require.

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Retail Customer and Dealer Financing – The Company believes that HDFS, as well as other financial services companies, provide adequate financing to Harley-Davidson independent distributors, dealers and their retail customers. HDFS provides financing to Harley-Davidson independent dealers and the retail customers of those dealers in the U.S. and Canada. HDFS also provides financing to the Company’s Canadian distributor. The Company’s independent distributors, dealers and their retail customers in the EMEA, Asia-Pacific and Latin America regions are not financed by HDFS, but have access to financing through other established financial services companies, some of which have licensing or branding agreements with the Company or HDFS.
Seasonality – The timing of retail sales made by the Company’s independent dealers tracks closely with regional riding seasons.
Prior to 2013, the Company historically produced and shipped motorcycles at wholesale to its North America region dealers at approximately the same level throughout the year. Consequently, the Company’s independent dealers in the North America region typically built their inventory levels in the late fall and winter in anticipation of the spring and summer retail selling season. However, the Company is in the process of implementing surge manufacturing capabilities that will provide the flexibility to increase the production of motorcycles ahead of and during the peak retail selling season. This capability will allow the Company to more closely correlate the timing of motorcycle production and wholesale shipments to the retail selling season to better meet retail demand. The Company implemented surge manufacturing capabilities at its York, Pennsylvania facility in the first half of 2013. The Company expects to implement these new manufacturing capabilities at its Kansas City, Missouri facility in the first half of 2014(1).
In markets outside of the North America region, the Company typically distributes motorcycles through regional warehouses. This allows the dealers in those markets to carry fewer motorcycles in stock as compared to dealers in the North America region. Consequently, independent dealers and distributors in markets outside of the North America region typically do not build significant inventory levels in the non-riding season, and as a result, the Company’s wholesale shipments to these markets are generally lower in the non-riding season than in the riding season.
Motorcycle Manufacturing – The Company’s manufacturing strategy is designed to continuously improve product quality and productivity while reducing costs and increasing flexibility to respond to continuously changing customer expectations and preferences.
The Company believes that flexible manufacturing processes and flexible supply chains combined with cost-competitive and flexible labor agreements are critical to enabling the Company to respond to customers in a cost effective manner. The restructuring of the Company’s U.S. manufacturing plants, which commenced in 2009 and ended in 2013, was instrumental in allowing the Company to become more flexible and cost competitive. In 2013, the Company implemented flexible production capabilities at its York, Pennsylvania facility by adding flexible workers thus enabling the Company to increase manufacturing production in the first half of 2013 to more closely match retail demand. In the first half of 2014, the Company began implementing flexible production capabilities at its motorcycle manufacturing facility in Kansas City, Missouri.
To support the Company’s international growth initiatives, the Company operates two CKD (Complete Knock Down) assembly plants. A CKD plant assembles motorcycles from component kits produced by the Company's U.S. plants and by the Company's suppliers. The Company's first CKD plant is in Brazil and has been in operation since 1999, and its second CKD plant is in India and has been in operation since 2011. In 2014, the Company's India facility also began the manufacture of Street platform motorcycles to be sold in international markets.
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. This strategy has generated improved product quality, technical integrity, application of new features and innovations and faster manufacturing ramp-up of new vehicle introductions. Through a continued focus on collaboration and strong supplier relationships, the Company believes it will be positioned to achieve strategic objectives and deliver cost and quality improvement over the long-term(1).
The Company purchases all of its raw materials, principally steel and aluminum castings, forgings, steel sheets and bars. The Company also purchases certain motorcycle components, including, but not limited to, electronic fuel injection systems, batteries, certain wheels, tires, seats, electrical components and instruments. The Company closely monitors the overall viability of its supply base. At this time, the Company does not anticipate difficulties in obtaining raw materials or components(1).
The Company operates a manufacturing facility in Australia for the purpose of producing cast motorcycle wheels. Since 2011, the Company has restructured these operations by transitioning a significant amount of wheel production to other existing

8



suppliers allowing it to focus on producing certain complex, high-finish wheels in what the Company believes is a cost-effective and competitive manner.
Research and Development – In 2011, Harley-Davidson commenced executing a strategy to transform product development, with the objective of ensuring that the Company delivers relevant products for an increasingly diverse customer base while reducing cost and time to market. The key objectives of the strategy include implementing a new product development methodology and organization structure that support greater innovation, flexibility, capacity and focus on consumer insights. The Company incurred research and development expenses of $152.2 million, $137.3 million and $145.4 million during 2013, 2012 and 2011, respectively.
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 that are sold in the United States are subject to certification by the U.S. Environmental Protection Agency (EPA) for compliance with applicable emissions and noise standards. Harley-Davidson motorcycle products are designed to comply with EPA standards and the Company believes it will comply with future requirements when they go into effect(1). Additionally, the Company’s motorcycle 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. Because the Company expects that environmental standards will 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 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 last three years, the Company has initiated 16 voluntary recalls related to Harley-Davidson motorcycles at a total cost of $22.0 million. The Company reserves for all estimated costs associated with recalls in the period that the recalls are announced.
Employees – As of December 31, 2013, the Motorcycles segment had approximately 5,800 employees. Unionized employees at the manufacturing facilities in Menomonee Falls and Tomahawk, Wisconsin and Kansas City, Missouri are represented by the United Steelworkers of America (USW). Alternatively, certain unionized employees at the manufacturing facilities in Menomonee Falls, Wisconsin and Kansas City, Missouri are represented by the International Association of Machinist and Aerospace Workers (IAM). Production workers at the motorcycle manufacturing facility in York, Pennsylvania are represented by the IAM. Unionized employees in Wisconsin are covered by seven-year labor agreements expiring on March 31, 2019. The seven-year collective bargaining agreements with the Kansas City USW and IAM unions expire July 31, 2018, and the seven-year collective bargaining agreement with the Pennsylvania-IAM will expire February 2, 2017. Please refer to the Overview section of Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for further discussion of the Company’s restructuring activities.
Internet Access – The Company’s internet website address is www.harley-davidson.com. The Company makes available free of charge (other than an investor’s own internet access charges) through its internet website the Company’s Annual Report on Form 10-K and related annual review, quarterly reports on Form 10-Q and current reports on Form 8-K, and any amendments to those reports, 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 website, the following corporate governance materials: (a) the Company’s Corporate Governance Policy; (b) Committee Charters approved by the Company’s Board of Directors for the Audit Committee, Human Resources Committee, Nominating and Corporate Governance Committee and Sustainability Committee; (c) the Company’s Financial Code of Ethics; (d) the Company’s Code of Business Conduct (the Code of Conduct) in nine languages including English; (e) the Conflict of Interest Process for Directors, Executive Officers and Other Employees (the Conflict Process); (f) a list of the Company’s Board of Directors; (g) the Company’s By-laws; (h) the Company’s Environmental Policy; (i) the Company’s Policy for Managing Disclosure of Material Information; (j) the Company’s Supplier Code of Conduct; (k) the Sustainability Strategy Report; (l) the list of compensation survey participants used as market reference points for various components of compensation as reported in the Company’s Notice of Annual Meeting and Proxy Statement filed with the SEC on March 15, 2013, which compensation relates to the Company’s named executive officers; (m) the California Transparency in Supply Chain Act Disclosure; (n) Statement on Conflict Minerals; and (o) Political Engagement and Contributions. This information is also available from the Company upon request. The Company satisfies the disclosure requirements under the Code of Conduct, the Conflict Process and applicable New York Stock Exchange listing requirements regarding waivers of the Code of Conduct or the Conflict Process by disclosing the information in the Company’s proxy statement for its annual meeting of shareholders or on the

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Company’s website. 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.


Financial Services
HDFS is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. HDFS is an agent for certain unaffiliated insurance companies providing motorcycle insurance and protection products to motorcycle owners. HDFS conducts business principally in the United States and Canada, and primarily through certain subsidiaries such as Harley-Davidson Credit Corp., Eaglemark Savings Bank (ESB), Harley-Davidson Insurance Services, Inc., and Harley-Davidson Financial Services Canada, Inc.
Wholesale Financial Services – HDFS provides wholesale financial services to Harley-Davidson dealers and distributors, including floorplan and open account financing of motorcycles and motorcycle parts and accessories. HDFS offers wholesale financial services to Harley-Davidson dealers in the United States and Canada, and during 2013 100% of such dealers utilized those services at some point during the year. HDFS also offers financial services to the Harley-Davidson distributor in Canada. The wholesale finance operations of HDFS are located in Plano, Texas.
Retail Financial Services – HDFS provides retail financing to consumers, consisting primarily of installment lending for the purchase of new and used Harley-Davidson motorcycles. HDFS’ retail financial services are available through most Harley-Davidson dealers in the United States and Canada. HDFS’ retail finance operations are principally located in Carson City, Nevada and Plano, Texas.
Insurance Services – HDFS operates as an agent for certain unaffiliated insurance companies offering point-of-sale protection products through most Harley-Davidson dealers in both the U.S. and Canada, including motorcycle insurance, extended service contracts, credit protection and motorcycle maintenance protection. HDFS also direct-markets motorcycle insurance and extended service contracts to owners of Harley-Davidson motorcycles. In addition, HDFS markets a comprehensive package of business insurance coverages and services to owners of Harley-Davidson dealerships. The HDFS insurance operations are located in Carson City, Nevada and Chicago, Illinois.
Funding – The Company believes a diversified and cost effective funding strategy is important to meet HDFS’ goal of providing credit while delivering appropriate returns and profitability. Financial Services operations have been funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, term asset-backed securitizations and intercompany borrowings.
Competition – The Company regards its ability to offer a package of wholesale and retail financial services in the U.S. and Canada as a significant competitive advantage. Competitors in the financial services industry compete for business based largely on price and, to a lesser extent, service. HDFS competes on convenience, service, brand association, dealer relations, industry experience, terms and price.
In the United States, HDFS financed 54.5% of the new Harley-Davidson motorcycles retailed by independent dealers during 2013, compared to 50.9% in 2012. In Canada, HDFS financed 31.8% of the new Harley-Davidson motorcycles retailed by independent dealers during 2013, compared to 28.6% in 2012. Competitors for retail motorcycle finance business are primarily banks, credit unions and other financial institutions. In the motorcycle insurance business, competition primarily comes from national insurance companies and from insurance agencies serving local or regional markets. For insurance-related products such as extended service contracts, HDFS faces competition from certain regional and national industry participants as well as dealer in-house programs. Competition for the wholesale motorcycle finance business primarily consists of banks and other financial institutions providing wholesale financing to Harley-Davidson dealers in their local markets.
Trademarks – HDFS uses various trademarks and trade names for its financial services and products which are licensed from H-D U.S.A., LLC, including HARLEY-DAVIDSON, H-D and the Bar & Shield logo.
Seasonality – In the U.S. and Canada, motorcycles are primarily used during warmer months. Accordingly, HDFS experiences seasonal variations in wholesale and retail financing activities. In general, from mid-March through August, retail financing volume is greater while wholesale financing volume is lower as dealer inventories decline. From September through mid-March, there is generally a decrease in retail financing volume while dealer inventories generally build and turn over more slowly, thereby increasing wholesale finance receivables. As discussed under "Motorcycle and Related Products - Seasonality", the Company is implementing flexible production capabilities which may reduce the seasonality of dealer inventory levels.
Regulation – The operations of HDFS (both U.S. and foreign) are subject, in certain instances, to supervision and regulation by state and federal administrative agencies and various foreign governmental authorities. Many of the statutory and

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regulatory requirements imposed by such entities are in place to provide consumer protection as it pertains to the selling and ongoing servicing of financial products and services. Therefore, operations may be subject to various regulations, laws and judicial and/or administrative decisions imposing requirements and restrictions, which among other things: (a) regulate credit granting activities, including establishing licensing requirements, in applicable jurisdictions; (b) establish maximum interest rates, finance charges and other charges; (c) regulate customers’ insurance coverage; (d) require disclosure of credit and insurance terms to customers; (e) govern secured transactions; (f) set collection, foreclosure, repossession and claims handling procedures and other trade practices; (g) prohibit discrimination in the extension of credit and administration of loans; (h) regulate the use and reporting of information related to a borrower; (i) require certain periodic reporting; (j) govern the use and protection of non-public personal information; (k) regulate the use of information reported to the credit reporting agencies; (l) regulate the reporting of information to the credit reporting agencies; and/or (m) regulate insurance solicitation and sales practices.
Depending on the provisions of the applicable laws and regulations, the interpretation of laws and regulations and the specific facts and circumstances involved, violations of or non-compliance with these laws may limit the ability of HDFS to collect all or part of the principal or interest on applicable loans. In addition, these violations or non-compliance may entitle the borrower to rescind the loan or to obtain a refund of amounts previously paid, could subject HDFS to the payment of damages or penalties and administrative sanctions, including “cease and desist” orders, and could limit the number of loans eligible for HDFS securitization programs.
Such regulatory requirements and associated supervision could limit the discretion of HDFS in operating its business. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any charter, license or registration at issue, as well as the imposition of civil fines, criminal penalties and administrative sanctions. The Company cannot assure that the applicable laws or regulations will not be amended or construed in ways that are adverse to HDFS, that new laws or regulations will not be adopted in the future, or that laws or regulations will not attempt to limit the interest rates charged by HDFS, any of which may adversely affect the business of HDFS or its results of operations.
A subsidiary of HDFS, Eaglemark Savings Bank, is a Nevada state thrift chartered as an Industrial Loan Company (ILC). As such, the activities of this subsidiary are governed by federal regulations and State of Nevada banking laws and are subject to examination by the Federal Deposit Insurance Corporation (FDIC) and Nevada state bank examiners. The Bureau of Consumer Financial Protection (CFPB) has been granted significant supervisory, enforcement, and rule-making authority in the area of consumer financial products and services. While direct supervision of ESB will remain with the FDIC and the State of Nevada, certain CFPB regulations, when finalized, will directly impact HDFS and its operations. ESB originates retail loans and sells the loans to a non-banking subsidiary of HDFS. This process allows HDFS to offer retail products with many common characteristics across the United States and to similarly service loans to U.S. retail customers.
Employees – As of December 31, 2013, the Financial Services segment had approximately 600 employees.
Item 1A.    Risk Factors
An investment in Harley-Davidson, Inc. involves risks, including those discussed below. These risk factors should be considered carefully before deciding whether to invest in the Company.

The Company may not be able to successfully execute its long-term business strategy. There is no assurance that the Company will be able to drive growth to the extent desired through its focus of efforts and resources on the Harley-Davidson brand or to enhance productivity and profitability to the extent desired through pricing and continuous improvement.

Expanding international sales subjects the Company to risks that may have a material adverse effect on its business. Expanding international sales is a part of the Company’s long-term business strategy. To support that strategy, the Company must increase its presence outside the U.S., including additional employees and investment in business infrastructure and operations. International operations and sales are subject to various risks, including political and economic instability, local labor market conditions, the imposition of foreign tariffs and other trade barriers, the impact of foreign government regulations and 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 or cash flows.

The Company sells its products at wholesale and must rely on a network of independent dealers and distributors to manage the retail distribution of its products. The Company depends on the capability of its

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independent dealers and distributors 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 and distributors purchase from the Company. If the Company’s independent dealers and distributors are not successful in these endeavors, then the Company will be unable to maintain or grow its revenues and meet its financial expectations. Further, independent dealers and distributors 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 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 dealerships. As a result, the Company could face additional adverse consequences related to the termination of dealer relationships. Additionally, liquidating a former dealer’s inventory of new and used motorcycles can add downward pressure on new and used motorcycle prices. Further, the unplanned loss of any of the Company’s independent dealers may lead to inadequate market coverage for retail sales of new motorcycles and for servicing previously sold motorcycles, create negative impressions of the Company with its retail customers, and adversely impact the Company’s ability to collect wholesale receivables that are associated with that dealer.

Changes in general economic conditions, tightening of credit, 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. 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 HDFS. Should general economic conditions or motorcycle industry demand decline, the Company’s results of operations and financial condition may be substantially adversely affected. For instance, the European region has faced an ongoing recession, which resulted in lower consumer confidence, high unemployment and constrained credit that negatively impacted retail motorcycle sales. The motorcycle industry can also be affected by political conditions and other factors over which motorcycle manufacturers have little control.

Retail sales of the Company's independent dealers may be impacted by weather. The Company has observed that abnormally cold and/or wet conditions in a region could have the effect of reducing demand for new Harley-Davidson motorcycles. Reduced demand for new Harley-Davidson motorcycles ultimately leads to reduced shipments by the Company.

The Company may not be able to successfully execute its manufacturing strategy. The Company’s manufacturing strategy is designed to continuously improve product quality and increase productivity, while reducing costs and increasing flexibility to respond to ongoing changes in the marketplace. The Company believes flexible manufacturing, including flexible supply chains and flexible labor agreements, is the key element to enable improvements in the Company’s ability to respond to customers in a cost effective manner. To implement this strategy, the Company must be successful in its continuous improvement efforts which are dependent on the involvement of management, production employees and suppliers. Any inability to achieve these objectives could adversely impact the profitability of the Company’s products and its ability to deliver the right product at the right time to the customer.

The Company’s ability to remain competitive is dependent upon its capability to develop and successfully introduce new, innovative and compliant products. The motorcycle market continues to change in terms of styling preferences and advances in new technology and, at the same time, be subject to increasing regulations related to safety and emissions. The Company must continue to distinguish its products from its competitors’ products with unique styling and new technologies. 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 while maintaining the classic look, sound and feel associated with Harley-Davidson products. The Company must also be able to design and manufacture these products and deliver them to the marketplace in an efficient and timely manner. 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.

Retail sales of the Company’s independent dealers may be adversely impacted by declining prices for used motorcycles and excess supplies of new motorcycles. The Company has observed that when prices for used Harley-Davidson motorcycles have declined, it has had the effect of reducing demand among retail purchasers for new Harley-Davidson motorcycles (at or near manufacturer’s suggested retail prices). Further, introduction of new motorcycle models with significantly different functionality, technology or other customer satisfiers can result in lower

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customer demand for used motorcycles, resulting in declining prices for those used motorcycles, and prior model year new motorcycles. Also, while the Company has taken steps designed to balance production volumes for its new motorcycles with demand, those steps may not be effective, or the Company’s competitors could choose to supply new motorcycles to the market in excess of demand at reduced prices which could also have the effect of reducing demand for new Harley-Davidson motorcycles (at or near manufacturer’s suggested retail prices). Ultimately, reduced demand among retail purchasers for new Harley-Davidson motorcycles leads to reduced shipments by the Company.

The Company must invest in and successfully implement new information systems and technology. The Company is continually modifying and enhancing its systems and technology to increase productivity and efficiency. The Company has several large, strategic information system projects in process. As new systems and technologies (and related strategies) are implemented, the Company could experience unanticipated difficulties resulting in unexpected costs and adverse impacts to its manufacturing and other business processes. When implemented, the systems and technology may not provide the benefits anticipated and could add costs and complications to ongoing operations, which may have a material adverse effect on the Company’s business and results of operations.

The Company and its independent dealers must successfully accommodate a seasonal retail motorcycle sales pattern. The Company records the wholesale sale of a motorcycle when it is shipped to the Company’s independent dealers and distributors. The Company implemented flexible production at its York, Pennsylvania facility in the first half of 2013 and began flexible production at its Kansas City, Missouri facility in the first half of 2014. Any difficulties in implementing flexible production could result in lost production or sales. The Company and its independent dealers and distributors must be able to successfully manage changes in production rates, inventory levels and other business processes associated with flexible production. Failure by the Company and its independent dealers to make such adjustments may have a material adverse effect on the Company’s business and results of operations.

The Company relies on third party suppliers to obtain raw materials and provide component parts for use in the manufacture of its motorcycles. The Company may experience supply problems such as unfavorable pricing or untimely delivery of raw materials and components. 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 or natural disasters. Further, Company 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. These supplier risks may have a material adverse effect on the Company’s business and results of operations.

The Company relies on third parties to perform certain operating and administrative functions for the Company. Similar to suppliers of raw materials and components, the Company may experience problems with outsourced services, such as unfavorable pricing, untimely delivery of services, or poor quality. Also, these suppliers may experience adverse economic conditions due to difficulties in the global economy that could lead to difficulties supporting the Company's operations. In light of the amount and types of functions that the Company has outsourced, these service provider risks may have a material adverse effect on the Company's business and results of operations.

The Company’s financial services operations rely on external sources to finance a significant portion of its 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 the 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, reduced funds available through its financial services operations to provide loans to independent dealers and their retail customers, and dilution to existing share value through the use of alternative sources of capital.

The Company’s financial services operations are highly dependent on accessing capital markets to fund their 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. 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, the Company’s cost of borrowing could increase, resulting in reduced earnings and interest margins, or the Company’s access to capital may be disrupted or impaired.

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The Company’s financial services operations are exposed to credit risk on its retail and wholesale receivables. Credit risk is the risk of loss arising from a failure by a customer, including the Company's independent dealers and distributors, 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, customer credit profiles and the new and used motorcycle market. 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. While HDFS continued to experience historically low levels of retail credit losses during 2013, the Company believes HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals in the sub-prime lending environment. Credit losses are also adversely impacted by increases in the frequency of loss and by decreases in the value of repossessed Harley-Davidson branded motorcycles. If there are adverse circumstances that involve a material decline in values of Harley-Davidson branded motorcycles, those circumstances or any related decline in resale values for Harley-Davidson branded motorcycles could contribute to increased delinquencies and credit losses.

The Company has a number of competitors, some of which have greater financial resources than the Company. 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 if price becomes a more important competitive factor for consumers in the markets in which the Company competes, the Company may be at a competitive disadvantage. 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’s marketing strategy of appealing to and growing sales to multi-generational and multi-cultural customers worldwide may not continue to be successful. The Company has been successful in marketing its products in large part by promoting the experience of Harley-Davidson motorcycling. To sustain and grow the business over the long-term, the Company must continue to be successful selling products and promoting the experience of motorcycling to both core customers and outreach customers such as women, young adults and ethnically diverse adults. The Company must also execute its multi-generational and multi-cultural strategy without adversely impacting the strength of the brand with core customers.

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 is exposed to market risk from changes in foreign exchange rates, commodity prices and interest rates. The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency. Shifting foreign exchange rates can adversely affect the Company's revenue and margin, and cause volatility in results of operations. The Company is also subject to risks associated with changes in prices of commodities. Earnings from the Company’s financial services business are affected by changes in interest rates. Although the Company uses derivative financial instruments to some extent to attempt to manage its exposure to foreign currency exchange rates, commodity price and interest rate risks, these instruments generally do not extend beyond one year and may expose the Company to credit risk in the event of counterparty default to the derivative financial instruments. There can be no assurance that in the future the Company will successfully manage these risks.

The Company’s operations are dependent upon attracting and retaining skilled employees, including skilled labor, executive officers and other senior leaders. The Company’s future success depends on its continuing ability to identify, hire, develop, motivate, retain and promote skilled personnel for all areas of its organization. The Company’s current and future total compensation arrangements, which include benefits and incentive awards, may not be successful in attracting new employees and retaining and motivating the Company’s existing employees. In addition, the Company must cultivate and sustain a work environment where employees are engaged and energized in their jobs to maximize their performance. If the Company does not succeed in attracting new personnel, retaining existing personnel, implementing effective succession plans and motivating and engaging personnel, including

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executive officers, the Company may be unable to develop and distribute products and services and effectively execute its plans and strategies.

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 liability, the rate of return on plan assets, current and projected healthcare costs, healthcare reform or legislation, retirement age and mortality. Changes in these factors can impact the expense, liabilities and cash requirements associated with these benefits which could have a material adverse effect on future results of operations, liquidity or shareholders’ equity. In addition, costs associated with these benefits put the Company under significant cost pressure as compared to its competitors that may not bear the costs of similar benefit plans. Furthermore, costs associated with complying with the Patient Protection and Affordable Care Act may produce additional cost pressure on the Company and its health care plans.

The Company manufactures products that create exposure to product liability claims and litigation. To the extent plaintiffs are successful in showing that personal injury or property damage result from defects in the design or manufacture of the Company’s products, the Company may be subject to claims for damages that are not covered by insurance. The costs associated with defending product liability claims, including frivolous lawsuits, and payment of damages could be substantial. The Company’s reputation may also be adversely affected by such claims, whether or not successful.

The Company must maintain stakeholder confidence in its operating ethics and corporate governance practices. The Company believes it has a history of good corporate governance. Prior to the enactment of the Sarbanes-Oxley Act of 2002, the Company had in place many of the corporate governance procedures and processes now mandated by the Sarbanes-Oxley Act and related rules and regulations, such as Board Committee Charters and a Corporate Governance Policy. In 1992, the Company established a Code of Business Conduct that defines how employees interact with various Company stakeholders and addresses issues such as confidentiality, conflict of interest and fair dealing. Failure to maintain its reputation for good corporate governance may have a material adverse effect on the Company’s business and results of operations.

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 the Company’s disclosures concerning legal proceedings in the periodic reports that the Company files with the Securities and Exchange Commission (SEC) for additional detail regarding lawsuits and other claims against the Company.

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. The Company’s international sales operations may also be adversely affected by U.S. laws affecting foreign trade and taxation.

The Company’s domestic sales and operations are subject to governmental policies and regulatory actions of agencies of the United States Government, including the Environmental Protection Agency (EPA), SEC, National Highway Traffic Safety Administration, Department of Labor and Federal Trade Commission. In addition, the Company’s sales and operations are also subject to laws and actions of state legislatures and other local regulators, including dealer statutes and licensing laws. Changes in regulations or the imposition of additional regulations may have a material adverse effect on the Company’s business and results of operations.

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Tax - The Company is subject to income and non-income based taxes in the U.S. and in various foreign jurisdictions. Significant judgment is required in determining the Company's worldwide income tax liabilities and other tax liabilities. The Company believes that it complies with applicable tax law. If the governing tax authorities have a different interpretation of the applicable law or if there is a change in tax law, the Company's financial condition and/or results of operations may be adversely affected.
Environmental - The Company’s motorcycle products use internal combustion engines. These motorcycle products are subject to statutory and regulatory requirements governing emissions and noise, including standards imposed by the EPA, state regulatory agencies, such as 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 sell certain products or may be subject to fines or penalties. Further, in response to concerns about global climate changes, the Company may face greater regulatory or customer pressure to develop products that generate less emissions. This may 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.
Financial Services - The Company’s financial services operations are governed by various foreign, federal and state laws that more specifically affect general financial and lending institutions. 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. Congress has previously considered and may in the future impose additional regulation and supervision over the financial services industry.
Depending on the provisions of the applicable laws and regulations, the interpretation of laws and regulations and the specific facts and circumstances involved, violations of or non-compliance with these laws may limit the ability of HDFS to collect all or part of the principal or interest on applicable loans, may entitle the borrower to rescind the loan or obtain a refund of amounts previously paid, could subject HDFS to payment of damages or penalties and administrative sanctions, including "cease and desist" orders, and could limit the number of loans eligible for HDFS securitizations programs. Such regulatory requirements and associated supervision could limit the discretion of HDFS in operating its business. Noncompliance with applicable statutes or regulations could result in the suspension or revocation of any charter, license or registration at issue, as well as the imposition of civil fines, criminal penalties and administrative sanctions. The Company cannot assure that the applicable laws or regulations will not be amended or construed in ways that are adverse to HDFS, that new laws and regulations will not be adopted in the future, or that laws and regulations will not attempt to limit the interest rates charged by HDFS, any of which may adversely affect the business of HDFS or its results of operations.
In 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was passed into law. The Dodd-Frank Act is a sweeping piece of legislation, and the financial services industry is still assessing the impacts. Congress detailed some significant changes, but the Dodd-Frank Act leaves many details to be determined by regulation and further study. The full impact will not be fully known for years, as regulations that are intended to implement the Dodd-Frank Act are adopted by the appropriate agencies, and the text of the Dodd-Frank Act is analyzed by impacted stakeholders and possibly the courts. The Dodd-Frank Act also created the Bureau of Consumer Financial Protection (CFPB), housed in the Federal Reserve. The CFPB has been granted significant enforcement and rule-making authority in the area of consumer financial products and services. The direction that the CFPB will take, the regulations it will adopt, and its interpretation of existing laws and regulations are all elements that are not yet known. Compliance with the law may be costly and could affect operating results as the implementation of new forms, processes, procedures and controls and infrastructure may be required to comply with the regulations. Compliance may create operational constraints and place limits on pricing. Failure to comply with these regulations, changes in these or other regulations, or the imposition of additional regulations, could affect HDFS’ earnings, limit its access to capital, limit the number of loans eligible for HDFS securitization programs and have a material adverse effect on HDFS’ business and results of operations.
U.S. Public Company - In addition, the Company is also subject to policies and actions of the SEC and New York Stock Exchange (NYSE). Many major competitors of the Company are not subject to the requirements of the SEC or the NYSE rules. As a result, the Company may be required to disclose certain information that may put the Company at a competitive disadvantage to its principal competitors.


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A cybersecurity breach involving digital consumer or employee personal data may adversely affect the Company’s reputation, revenue and earnings. The Company and certain of its third-party vendors receive and store digital personal information in connection with its human resources operations, financial services operations, the Harley Owners Group and other aspects of its business. Any system failure, accident or security breach could result in disruptions to the Company's operations. To the extent that any disruptions or security breach results in a loss or damage to the Company's data, or in inappropriate disclosure of confidential information, it could cause significant damage to the Company's reputation, affect its relationships with customers, lead to claims against the Company and ultimately harm the Company's business. In addition, the Company may be required to incur significant costs to protect against damage caused by these disruptions or security breaches in the future.

The Company’s Motorcycles segment is dependent upon unionized labor. Substantially all of the hourly production employees working in the Motorcycles segment are represented by unions and covered by collective bargaining agreements. Harley-Davidson Motor Company is currently a party to five 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 Pennsylvania, Missouri and Wisconsin will expire in 2017, 2018 and 2019, respectively. Collective bargaining agreements generally cover wages, healthcare benefits and retirement plans, seniority, job classes and work rules. 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. Failure to renew these 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 customer relationships and the Company’s business and results of operations.

The Company’s operations may be affected by greenhouse emissions and climate change and related regulations. Climate change is receiving increasing attention worldwide. Many scientists, legislators and others attribute climate change to increased levels of greenhouse gases, including carbon dioxide, which has led to significant legislative and regulatory efforts to limit greenhouse gas emissions. Congress has previously considered and may in the future implement restrictions on greenhouse gas emissions. In addition, several states, including states where the Company has manufacturing plants, 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 United States, including the Company’s supply chain. The Company’s manufacturing plants use energy, including electricity and natural gas, and certain of the Company’s plants 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.

New regulations related to conflict minerals will cause the Company to incur additional expenses and may have other adverse consequences. The SEC adopted inquiry, diligence and additional disclosure requirements related to certain minerals sourced from the Democratic Republic of Congo and surrounding countries, or "conflict minerals", that are necessary to the functionality of a product manufactured, or contracted to be manufactured, by an SEC reporting company. The minerals that the rules cover are commonly referred to as "3TG" and include tin, tantalum, tungsten and gold. These rules became effective in 2013, and they impose a requirement for public companies to make disclosures by May 2014 relating to 2013 activities. Implementation of the new disclosure requirements could affect the sourcing and availability of some of the minerals that the Company uses in the manufacture of its products. The Company's supply chain is complex, and if it is not able to determine the source and chain of custody for all conflict minerals used in its products that are sourced from the Democratic Republic of Congo and surrounding countries or determine that its products are "conflict free", then the Company may face reputational challenges with customers, investors or others. Additionally, as there may be only a limited number of suppliers offering "conflict free" minerals, if the Company chooses to use only conflict minerals that are "conflict free", the Company cannot be sure that it will be able to obtain necessary materials from such suppliers in sufficient quantities or at competitive prices. Accordingly,

17



the Company could incur significant costs related to the compliance process, including potential difficulty or added costs in satisfying the disclosure requirements.

The Company must detect issues with the Company’s motorcycles or manufacturing processes to avoid recall campaigns, increased warranty costs or litigation, and delays in new model launches. The Company must also complete any recall campaigns within cost expectations. The Company must continually improve and adhere to product development and manufacturing processes to ensure high quality products are shipped to dealers. If product designs or manufacturing processes are defective, the Company could experience delays in new model launches, product recalls, conventional warranty claims, and product liability or unconventional warranty claims, which may involve purported class actions. While the Company uses reasonable methods to estimate the cost of warranty, recall and product liability costs and appropriately reflect those in the financial statements, there is a risk the actual costs could exceed estimates. Further, shipping products with poor quality may also adversely affect the Company’s reputation.
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. 
Item 1B.     Unresolved Staff Comments
None.
Item 2.    Properties
The following is a summary of the principal operating properties of the Company as of December 31, 2013:
Motorcycles & Related Products Segment
 
Type of Facility
 
Location
 
Approximate
Square Feet
 
Status
Corporate Office
 
Milwaukee, WI
 
515,000

 
Owned
Museum
 
Milwaukee, WI
 
130,000

 
Owned
Manufacturing(1)
 
Wauwatosa, WI
 
430,000

 
Owned
Product Development Center
 
Wauwatosa, WI
 
409,000

 
Owned
Manufacturing(2)
 
Menomonee Falls, WI
 
881,600

 
Owned
Manufacturing(3)
 
Tomahawk, WI
 
226,000

 
Owned
Manufacturing and Materials Velocity Center(4)
 
Kansas City, MO
 
450,000

 
Owned
Manufacturing(5)
 
York, PA
 
610,000

 
Owned
Motorcycle Testing
 
Naples, FL
 
10,000

 
Lease expiring 2019
Regional Office
 
Miami, FL
 
12,700

 
Lease expiring 2017
Motorcycle Testing
 
Yucca, AZ
 
79,000

 
Lease expiring 2019
Manufacturing and Office(6)
 
Manaus, Brazil
 
100,000

 
Lease expiring 2015
Regional Office and Warehouse
 
Oxford, England
 
39,000

 
Lease expiring 2017
Manufacturing(7)
 
Bawal, India
 
68,200

 
Lease expiring 2016
Regional Office
 
Singapore
 
8,800

 
Lease expiring 2015
Manufacturing(8)
 
Adelaide, Australia
 
485,000

 
Lease expiring 2017

(1)
Facility was idled during 2010 and production moved to Menomonee Falls, WI.
(2)
Motorcycle powertrain production.
(3)
Fiberglass/plastic parts production and painting.
(4)
Motorcycle parts fabrication, painting and Dyna®, Sportster®, V-Rod® and Street platform assembly.
(5)
Motorcycle parts fabrication, painting and Softail® and touring model assembly.
(6)
Assembly of select models for the Brazilian market.
(7)
Assembly of select models for the Indian market and production of the Street platform.
(8)
Motorcycle wheel production.

18



Financial Services Segment 
Type of Facility
 
Location
 
Approximate
Square Feet
 
Status
Office
 
Chicago, IL
 
26,000

 
Lease expiring 2022
Office
 
Plano, TX
 
69,321

 
Lease expiring 2025
Office
 
Carson City, NV
 
100,000

 
Owned
The Financial Services segment has three office facilities: Chicago, Illinois (corporate headquarters); Plano, Texas (wholesale and retail operations); and Carson City, Nevada (retail and insurance operations). 
Item 3.    Legal Proceedings
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves 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 required reserves are monitored on an ongoing basis and are updated based on new developments or new information in each matter.
Environmental Protection Agency Notice
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in discussions with the EPA. Since that time, the EPA has delivered various additional requests for information to which the Company has responded. It is possible that a result of the EPA’s investigation will be some form of enforcement action by the EPA that will seek a fine or other relief. However, at this time the Company does not know and cannot reasonably estimate the impact of any remedies the EPA might seek.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including an ongoing site-wide remedial investigation/feasibility study (RI/FS). In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.

In February 2002, the Company was advised by the EPA that it considers some of the Company’s remediation activities at the York facility to be subject to the EPA’s corrective action program under the Resource Conservation and Recovery Act (RCRA) and offered the Company the option of addressing corrective action under a RCRA facility lead agreement. In July 2005, the York facility was designated as the first site in Pennsylvania to be addressed under the “One Cleanup Program.” The program provides a more streamlined and efficient oversight of voluntary remediation by both PADEP and EPA and will be carried out consistent with the Agreement with the Navy. As a result, the RCRA facility lead agreement has been superseded.
The Company estimates that its share of the future Response Costs at the York facility will be approximately $3.9 million and has established a reserve for this amount which is included in accrued liabilities in the Condensed Consolidated Balance Sheets. As noted above, the RI/FS is still underway and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS or otherwise at the York facility, the Company is unable to make a reasonable estimate of those additional costs, if any, that may result.
The estimate of the Company’s future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities. Response Costs are expected to be paid primarily over a period of several years ending in 2017 although certain Response Costs may continue for some time beyond 2017.

19



Product Liability Matters:
Additionally, the Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s consolidated financial statements. 
Item 4.    Mine Safety Disclosures    
Not Applicable
PART II 
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
Harley-Davidson, Inc. common stock is traded on the New York Stock Exchange, Inc. The high and low market prices for the common stock, reported as New York Stock Exchange, Inc. Composite Transactions, were as follows: 
2013
 
Low
 
High
 
2012
 
Low
 
High
First quarter
 
$
48.40

 
$
55.51

 
First quarter
 
$
38.93

 
$
50.96

Second quarter
 
$
49.15

 
$
59.84

 
Second quarter
 
$
43.79

 
$
54.32

Third quarter
 
$
53.35

 
$
65.15

 
Third quarter
 
$
37.84

 
$
47.62

Fourth quarter
 
$
62.76

 
$
69.75

 
Fourth quarter
 
$
40.59

 
$
49.76

The Company paid the following dividends per share: 
 
 
2013
 
2012
 
2011
First quarter
 
$
0.210

 
$
0.155

 
$
0.100

Second quarter
 
0.210

 
0.155

 
0.125

Third quarter
 
0.210

 
0.155

 
0.125

Fourth quarter
 
0.210

 
0.155

 
0.125

 
 
$
0.840

 
$
0.620

 
$
0.475

As of January 31, 2014 there were 80,896 shareholders of record of Harley-Davidson, Inc. common stock.
The following table contains detail related to the repurchase of common stock based on the date of trade during the quarter ended December 31, 2013:  
2013 Fiscal Period
 
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
October 1 to November 4
 
296,142

 
$
64

 
296,142

 
10,845,427

November 5 to December 2
 
1,152,888

 
$
65

 
1,152,888

 
9,795,346

December 3 to December 31
 
1,216,710

 
$
68

 
1,216,710

 
8,623,274

Total
 
2,665,740

 
$
66

 
2,665,740

 
 
The Company has an authorization (originally adopted in December 1997) by its Board of Directors to repurchase shares of its outstanding common stock under which the cumulative number of shares repurchased, at the time of any repurchase, shall not exceed the sum of (1) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 2004 plus (2) one percent of the issued and outstanding common stock of the Company on January 1 of the current year, adjusted for any stock split. No shares were repurchased by the Company during the fourth quarter ended December 31, 2013 under this authorization. As of December 31, 2013, there were 1.8 million shares available under this authorization.
In December 2007, the Company’s Board of Directors separately authorized the Company to buy back up to 20.0 million shares of its common stock with no dollar limit or expiration date. The Company repurchased 2.7 million shares during the fourth quarter ended December 31, 2013 under this authorization. As of December 31, 2013, 6.8 million shares remained under this authorization.

20



On February 5, 2014, the Company announced that the Company's Board had authorized the Company to repurchase up to 20.0 million shares of its common stock with no dollar limit or expiration date. This board authorization is in addition to existing share repurchase authorizations.
Under the share repurchase authorizations, 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. 2009 Incentive Stock Plan (exhibit 10.5) 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 2013, the Company acquired 10,475 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock awards.
Item 12 of this Annual Report on Form 10-K contains certain information relating to the Company’s equity compensation plans.
The following information in this Item 5 is not deemed to be “soliciting material” or to be “filed” with the SEC or subject to Regulation 14A or 14C under the Securities Exchange Act of 1934 or to the liabilities of Section 18 of the Securities Exchange Act of 1934, and will not be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates it by reference into such a filing: the SEC requires the Company to include a line graph presentation comparing cumulative five year Common 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 500 Index as the broad-based index and the Standard & Poor’s MidCap 400 Index as a more specific comparison. The Standard & Poor’s MidCap 400 Index was chosen because the Company does not believe that any other published industry or line-of-business index adequately represents the current operations of the Company. The graph assumes a beginning investment of $100 on December 31, 2008 and that all dividends are reinvested.


21



 
 
 
2008 ($)
 
2009 ($)
 
2010 ($)
 
2011 ($)
 
2012 ($)
 
2013 ($)
Harley-Davidson, Inc.
 
100

 
152

 
212

 
241

 
307

 
441

Standard & Poor’s MidCap 400 Index
 
100

 
137

 
174

 
171

 
202

 
265

Standard & Poor’s 500 Index
 
100

 
127

 
146

 
149

 
172

 
228



22



 Item 6.     Selected Financial Data
(In thousands, except per share amounts)
 
2013
 
2012
 
2011
 
2010(1)
 
2009(2)
Statement of operations data:
 
 
 
 
 
 
 
 
 
 
Revenue:
 
 
 
 
 
 
 
 
 
 
Motorcycles & Related Products
 
$
5,258,290

 
$
4,942,582

 
$
4,662,264

 
$
4,176,627

 
$
4,287,130

Financial Services
 
641,582

 
637,924

 
649,449

 
682,709

 
494,779

Total revenue
 
$
5,899,872

 
$
5,580,506

 
$
5,311,713

 
$
4,859,336

 
$
4,781,909

Income from continuing operations
 
$
733,993

 
$
623,925

 
$
548,078

 
$
259,669

 
$
70,641

Income (loss) from discontinued operations, net of tax
 

 

 
51,036

 
(113,124
)
 
(125,757
)
Net income (loss)
 
$
733,993

 
$
623,925

 
$
599,114

 
$
146,545

 
$
(55,116
)
Weighted-average common shares:
 
 
 
 
 
 
 
 
 
 
Basic
 
222,475

 
227,119

 
232,889

 
233,312

 
232,577

Diluted
 
224,071

 
229,229

 
234,918

 
234,787

 
233,573

Earnings per common share from continuing operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
3.30

 
$
2.75

 
$
2.35

 
$
1.11

 
$
0.30

Diluted
 
$
3.28

 
$
2.72

 
$
2.33

 
$
1.11

 
$
0.30

Earnings (loss) per common share from discontinued operations:
 
 
 
 
 
 
 
 
 
 
Basic
 
$

 
$

 
$
0.22

 
$
(0.48
)
 
$
(0.54
)
Diluted
 
$

 
$

 
$
0.22

 
$
(0.48
)
 
$
(0.54
)
Earnings (loss) per common share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
3.30

 
$
2.75

 
$
2.57

 
$
0.63

 
$
(0.24
)
Diluted
 
$
3.28

 
$
2.72

 
$
2.55

 
$
0.62

 
$
(0.24
)
Dividends paid per common share
 
$
0.840

 
$
0.620

 
$
0.475

 
$
0.400

 
$
0.400

Balance sheet data:
 
 
 
 
 
 
 
 
 
 
Total assets
 
$
9,405,040

 
$
9,170,773

 
$
9,674,164

 
$
9,430,740

 
$
9,155,518

Total debt
 
$
5,259,170

 
$
5,102,649

 
$
5,722,619

 
$
5,752,356

 
$
5,636,129

Total equity
 
$
3,009,486

 
$
2,557,624

 
$
2,420,256

 
$
2,206,866

 
$
2,108,118

 
(1)
The Company began consolidating formerly off-balance sheet qualifying special purpose entities as required by the new guidance within Accounting Standards Codification (ASC) Topic 810, “Consolidations” and ASC Topic 860, “Transfers and Servicing” in 2010.
(2)
2009 total assets include assets of discontinued operations of $181.2 million.

23



Item 7.    Management's Discussion and Analysis of Financial Condition and Results of Operations
Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). HDMC produces cruiser and touring motorcycles. HDMC manufactures six platforms of motorcycles: Touring, Dyna®, Softail®, Sportster®, V-Rod® and Street. HDFS provides wholesale and retail financing and insurance programs primarily to Harley-Davidson dealers and customers.
The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (Financial Services). The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations.
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. 
Overview
During 2013, the Company delivered strong financial results while it continued to make progress against its business objectives. During 2013, the Company introduced Project RushmoreTM, a completely new line of touring motorcycles, completed its multi-year restructuring program, implemented flexible surge production capabilities at its largest production facility and continued to make significant investments in future products and new markets. The Company’s net income for 2013 was $734.0 million, or $3.28 per diluted share compared to $623.9 million, or $2.72 per diluted share, in 2012. The increase in 2013 net income was driven by strong financial performance at the Motorcycles segment. Operating income from the Motorcycles segment was up $155.1 million over 2012 led by a 5.2% increase in wholesale shipments of Harley-Davidson motorcycles. In addition, Motorcycles operating income benefited during 2013 from model-year price increases, a stronger product mix and lower manufacturing and restructuring costs. These positive impacts were partially offset by an adverse change in foreign currency exchange rates during 2013 and higher selling, administrative and engineering expenses as the Company continued to invest in its strategic initiatives. Operating income from the Financial Services segment was down slightly from the prior year, falling $1.6 million, or 0.6%, due to a higher provision for credit losses which was mostly offset by a decrease in interest expense.
In 2013, worldwide independent dealer retail sales of new Harley-Davidson motorcycles grew 4.4% compared to 2012, including a 4.4% increase in the U.S. and a 4.3% increase in international markets. The Company believes the improvement in retail sales of new Harley-Davidson motorcycles reflects the strength of the Harley-Davidson brand, strong appeal for its products, including its 2014 model year motorcycles introduced in 2013, worldwide dealer efforts, and continued investment in growth opportunities around the world.
Please refer to the “Results of Operations 2013 Compared to 2012” for additional details concerning the results for 2013.




                        
(1)
Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” or “estimates” or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance 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 from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Risk Factors” in Item 1A and under “Cautionary Statements” in Item 7 of this report. 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 this report are made only as of the date of the filing of this report (February 20, 2014), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.


24



Outlook(1) 
On January 30, 2014 the Company announced the following expectations for 2014.
The Company expects to ship 279,000 to 284,000 Harley-Davidson motorcycles during 2014, up approximately 7% to 9% over 2013. This includes 76,500 to 81,500 Harley-Davidson motorcycles that it expects to ship in the first quarter of 2014, an increase of approximately 2% to 8% over the first quarter of 2013. The Company believes the underlying worldwide demand fundamentals for Harley-Davidson motorcycles are strong and expects that motorcycle shipment growth in 2014 will be driven by:
The strong appeal of the Harley-Davidson brand
Great model-year 2014 and 2015 motorcycles
The introduction of the new Street motorcycles, which represent 7,000 to 10,000 of the 2014 unit shipment estimate
Continuing outreach momentum in the United States
International expansion
During the last several years, the Company has provided guidance on Motorcycles segment gross margin. The gross margin guidance was provided given the Company's focus on restructuring which was largely aimed at improving gross margin profitability. Since 2009, the Company has significantly improved Motorcycles segment gross margin from 32.3% to 35.4% in 2013. However, as the Company exits its restructuring activities, it will shift its focus to operating margin as a key financial metric going forward. The Company believes Motorcycles segment operating margin will more appropriately capture the Company's opportunities to leverage both gross margin and its investment in selling, administrative and engineering expenses.
The Company expects 2014 operating margin percent for the Motorcycles segment to be between 17.5% and 18.5% compared to 16.6% in 2013. The Company believes operating margin percent improvement will be driven by a modest increase in gross margin, as well as lower selling, administrative and engineering expenses as a percent of revenue. The Company expects that 2014 gross margin percent will be positively impacted by additional restructuring savings of approximately $10 million, lower temporary inefficiencies of approximately $8 million, incremental margin behind higher production and lower retirement plan expenses. The Company also expects these positive impacts to be partially offset by unfavorable product mix, the impact of pricing net of higher cost related to the significant content added to the 2014 model year motorcycles and foreign currency exchange. While the Company anticipates pressure on gross margin percent from product mix and pricing, the Company expects that both product mix and pricing will positively impact gross profit dollars in 2014. The Company expects that changes in foreign currency exchange rates in 2014 will adversely impact both gross margin percent and gross profit dollars. With respect to the first quarter of 2014, the Company expects gross margin to be down slightly from 2013 due to start-up costs associated with Street motorcycles which the Company expects to recognize during the first half of 2014. The Company expects selling, administrative and engineering expenses to grow in 2014 as it continues to invest in future growth opportunities, but will decrease as a percent of revenue as the Company leverages its current spending.
The Company expects operating income for the Financial Services segment to be down modestly in 2014 as compared to 2013. Going forward, the Company continues to expect pressure on Financial Services operating income as a result of modestly higher credit losses and tightening net interest margins due to increasing competition and higher year-over-year borrowing costs.
The Company’s capital expenditure estimates for 2014 are between $215 million and $235 million. The Company anticipates it will have the ability to fund all capital expenditures in 2014 with cash flows generated by operations.
The Company also announced on January 30, 2014 that it expects the full year 2014 effective income tax rate to be approximately 35.5%. The increase over 2013 is primarily due to the absence of the U.S. Federal Research and Development tax credit in 2014. This guidance excludes the effect of any potential future adjustments such as changes in tax legislation or audit settlements which are recorded as discrete items in the period in which they are settled.

25



Restructuring Activities(1) 
Restructuring Costs and Savings
In 2013, the Company completed work related to its various restructuring activities that were initiated during 2009 through 2011, as described below. During 2013, the Company incurred a restructuring benefit of $2.1 million related to combined restructuring plan activities. This included approximately $5 million of benefit related to restructuring reserves released in the second quarter of 2013 in connection with the decision to retain a limited operation at the New Castalloy facility, as described below. On a cumulative basis the Company has recognized $482.2 million in restructuring and impairment expense since its restructuring activities were initiated in 2009. The Company has realized or estimates that it will realize cumulative savings from these restructuring activities, measured against 2008, as follows:
2009 - $91 million (91% operating expense and 9% cost of sales) (actual);
2010 - $172 million (64% operating expense and 36% cost of sales) (actual);
2011 - $217 (51% operating expense and 49% cost of sales) (actual);
2012 - $280 million (42% operating expense and 58% cost of sales) (actual);
2013 - $310 million (39% operating expense and 61% cost of sales) (actual);
Ongoing annual - $320 million (approximately 37% operating expense and approximately 63% cost of sales) (estimated)(1).
2011 Restructuring Plans
In December 2011, the Company made a decision to cease operations at New Castalloy, its Australian subsidiary and producer of cast motorcycle wheels and wheel hubs, and source those components through other existing suppliers by the end of 2013. Since 2011, the Company has successfully transitioned a significant amount of wheel production to other existing suppliers. However, during 2013, the Company made a decision to retain limited operations at New Castalloy focused on the production of certain complex, high-finish wheels in a cost-effective and competitive manner. The Company also entered into a new agreement with the unionized labor force at New Castalloy.
In connection with the modified 2011 New Castalloy Restructuring Plan, the New Castalloy workforce was reduced by approximately 100 employees, leaving approximately 100 remaining employees to support the ongoing operations. The original plan would have resulted in a workforce reduction of approximately 200 employees.
In February 2011, the Company’s unionized employees at its facility in Kansas City, Missouri ratified a new seven-year labor agreement. The new agreement took effect on August 1, 2011. The new contract is similar to the labor agreements ratified at the Company’s Wisconsin facilities in September 2010 and its York, Pennsylvania production facility in December 2009, and allows for similar flexibility, increased production efficiency and the addition of a flexible workforce component.
The 2011 Kansas City restructuring plan resulted in approximately 145 fewer full-time hourly unionized employees in its Kansas City facility than would have been required under the previous contract.
2010 Restructuring Plan
In September 2010, the Company’s unionized employees in Wisconsin ratified three separate new seven-year labor agreements which took effect in April 2012 when the prior contracts expired. The new contracts are similar to the labor agreement ratified at the Company's York, Pennsylvania production facility in December 2009 and allow for similar flexibility, increased production efficiency and the addition of a flexible workforce component.
The 2010 restructuring plan resulted in approximately 250 fewer full-time hourly unionized employees in its Milwaukee-area facilities than would have been required under the previous contract and approximately 75 fewer full-time hourly unionized employees in its Tomahawk facility than would have been required under the previous contract.
2009 Restructuring Plan
During 2009, in response to the U.S. economic recession and worldwide slowdown in consumer demand, the Company committed to a volume reduction and a combination of restructuring actions that were completed at various dates between 2009 and 2013. The actions were designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. The Company’s actions included the restructuring and transformation of its York, Pennsylvania production facility including the implementation of a new more flexible unionized labor agreement which allows for the addition of a flexible workforce component; consolidation of facilities related to engine and transmission production; outsourcing of certain distribution and transportation activities and exiting the Buell product line. In addition, the Company completed projects under

26



this plan involving the outsourcing of select information technology activities and the consolidation of an administrative office in Michigan into its corporate headquarters in Milwaukee, Wisconsin.
The 2009 restructuring plan resulted in a reduction of approximately 2,900 hourly production positions and approximately 800 non-production, primarily salaried positions within the Motorcycles segment and approximately 100 salaried positions in the Financial Services segment.

Results of Operations 2013 Compared to 2012
Consolidated Results 
(in thousands, except earnings per share)
 
2013
 
2012
 
Increase
(Decrease)
 
%
Change
Operating income from motorcycles & related products
 
$
870,609

 
$
715,489

 
$
155,120

 
21.7
 %
Operating income from financial services
 
283,093

 
284,687

 
(1,594
)
 
(0.6
)%
Operating income
 
1,153,702

 
1,000,176

 
153,526

 
15.3
 %
Investment income
 
5,859

 
7,369

 
(1,510
)
 
(20.5
)%
Interest expense
 
45,256

 
46,033

 
(777
)
 
(1.7
)%
Income before income taxes
 
1,114,305

 
961,512

 
152,793

 
15.9
 %
Provision for income taxes
 
380,312

 
337,587

 
42,725

 
12.7
 %
Net income
 
$
733,993

 
$
623,925

 
$
110,068

 
17.6
 %
Diluted earnings per share
 
$
3.28

 
$
2.72

 
$
0.56

 
20.6
 %
Consolidated operating income was up 15.3% in 2013 led by an increase in operating income from the Motorcycles segment which improved by $155.1 million compared to 2012. Operating income for the Financial Services segment decreased by $1.6 million during 2013 as compared to 2012. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
The effective income tax rate for 2013 was 34.1% compared to 35.1% for 2012. The Company's 2013 effective tax rate was favorably impacted by the reinstatement of the U.S. Federal Research and Development tax credit with the enactment of the American Taxpayer Relief Act of 2012 at the beginning of 2013. During 2013, the Company recorded the benefits of the Research and Development tax credit for the full year of 2012, as well as, the full year of 2013.  
Diluted earnings per share were $3.28 in 2013, up 20.6% over 2012. The increase in diluted earnings per share was driven primarily by the 17.6% increase in net income, but also benefited from lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 229.2 million in 2012 to 224.1 million in 2013 driven by the Company's repurchases of common stock. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
Motorcycle Retail Sales and Registration Data
Worldwide independent dealer retail sales of Harley-Davidson motorcycles increased 4.4% during 2013 compared to 2012. Retail sales of Harley-Davidson motorcycles increased 4.4% in the United States and 4.3% internationally in 2013. The Company believes U.S. retail sales for 2013 were positively impacted by the launch of its 2014 model year motorcycles and improved availability of motorcycles which more than offset the adverse impact of weather experienced in the first half of 2013. The Company also believes that the U.S. retail sales in 2013 were adversely impacted in the fourth quarter by the absence of its popular Road Glide models from the 2014 model year. Road Glide models were discontinued for the 2014 model year, but the Company expects the model will be reintroduced when it is upgraded with Rushmore features. International retail sales growth during 2013 in the Asia Pacific region, Latin America region and Canada were offset by a decline in the EMEA region. Retail sales in the Asia Pacific region were driven by growth in emerging markets, especially India and China. The retail sales growth in the Latin America region was driven by Brazil and Mexico. The EMEA region was adversely impacted by that region's ongoing difficult economic environment. The International retail sales as a percent of total retail sales were consistent compared to 2012 with international retail sales representing 35.3% of total retail sales in both 2013 and 2012, respectively.

27



Harley-Davidson Motorcycle Retail Sales(a) 
The following table includes retail unit sales of Harley-Davidson motorcycles:
 
 
2013
 
2012
 
Increase
(Decrease)
 
%
Change
North America Region
 
 
 
 
 
 
 
 
United States
 
168,863

 
161,678

 
7,185

 
4.4
 %
Canada
 
11,062

 
10,573

 
489

 
4.6

Total North America Region
 
179,925

 
172,251

 
7,674

 
4.5

Europe, Middle East and Africa Region (EMEA)
 
 
 
 
 
 
 
 
Europe(b)
 
35,927

 
37,027

 
(1,100
)
 
(3.0
)
Other
 
6,682

 
6,000

 
682

 
11.4

Total EMEA Region
 
42,609

 
43,027

 
(418
)
 
(1.0
)
Asia Pacific Region
 
 
 
 
 
 
 
 
Japan
 
10,751

 
10,642

 
109

 
1.0

Other
 
16,139

 
13,839

 
2,300

 
16.6

Total Asia Pacific Region
 
26,890

 
24,481

 
2,409

 
9.8

Latin America Region
 
11,415

 
10,090

 
1,325

 
13.1

Total Worldwide Retail Sales
 
260,839

 
249,849

 
10,990

 
4.4
 %
Total International Retail Sales
 
91,976

 
88,171

 
3,805

 
4.3
 %
 
(a)
Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning retail sales and this information is subject to revision.
(b)
Data for Europe include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Motorcycle Registration Data - 601+cc(a) 
The following table includes industry retail motorcycle registration data: 
 
 
2013
 
2012
 
Increase
(Decrease)
 
%
Change
United States(b)
 
305,852

 
299,384

 
6,468

 
2.2
 %
Europe(c)
 
281,844

 
300,415

 
(18,571
)
 
(6.2
)%
 
(a)
Data includes street-legal 601+cc models. Street-legal 601+cc models include on-highway and dual purpose models and three-wheeled vehicles.
(b)
United States industry data is derived from information provided by Motorcycle Industry Council (MIC). This third party data is subject to revision and update. Prior periods have been adjusted to include all dual purpose models that were previously excluded.
(c)
Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 601+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. This third-party data is subject to revision and update.


28



Motorcycles and Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment: 
 
 
2013
 
2012
 
Unit
 
Unit
 
 
Units
 
Mix %
 
Units
 
Mix %
 
Increase (Decrease)
 
%
Change
United States
 
167,016

 
64.1
%
 
160,477

 
64.8
%
 
6,539

 
4.1
 %
International
 
93,455

 
35.9
%
 
87,148

 
35.2
%
 
6,307

 
7.2

Harley-Davidson motorcycle units
 
260,471

 
100.0
%
 
247,625

 
100.0
%
 
12,846

 
5.2
 %
Touring motorcycle units
 
107,213

 
41.2
%
 
99,496

 
40.2
%
 
7,717

 
7.8
 %
Custom motorcycle units*
 
102,950

 
39.5
%
 
96,425

 
38.9
%
 
6,525

 
6.8

Sportster motorcycle units
 
50,308

 
19.3
%
 
51,704

 
20.9
%
 
(1,396
)
 
(2.7
)
Harley-Davidson motorcycle units
 
260,471

 
100.0
%
 
247,625

 
100.0
%
 
12,846

 
5.2
 %
 
*
Custom motorcycle units, as used in this table, include Dyna®, Softail®, V-Rod® and CVO models.
During 2013, wholesale shipments of Harley-Davidson motorcycles were up 5.2% compared to the prior year and within the Company’s expected shipment range of 259,000 to 264,000 motorcycles. International shipments as a percentage of the total were up slightly in 2013 as compared to 2012. The Company remains committed to investing in international growth and continues to believe that international retail sales will grow at a faster rate than the rate of growth of domestic retail sales over the next three to five years(1). In addition, shipments of touring motorcycles and custom motorcycles as a percentage of total shipments increased in 2013 compared to the prior year while shipments of Sportster motorcycles as a percentage of total shipments declined. The Company believes the increase in touring motorcycle shipments, as a percentage of total shipments, was driven by demand for model-year 2014 motorcycles. Also, as expected, wholesale motorcycle shipments in the fourth quarter of 2013 were down compared to the fourth quarter of 2012 in advance of the launch of seasonal surge manufacturing at the Company's Kansas City facility in early 2014. Consequently, retail inventory in the U.S. was approximately 1,850 units lower than at the end of 2012. The Company expects U.S. retail inventory at the end of 2014 to be up from the end of 2013 primarily driven by the addition of the Company's new Street models(1).
Segment Results
The following table includes the condensed statement of operations for the Motorcycles segment (in thousands): 
 
 
2013
 
2012
 
Increase
(Decrease)
 
%
Change
Revenue:
 
 
 
 
 
 
 
 
Motorcycles
 
$
4,067,510

 
$
3,764,794

 
$
302,716

 
8.0
 %
Parts & Accessories
 
873,075

 
859,945

 
13,130

 
1.5

General Merchandise
 
295,854

 
299,403

 
(3,549
)
 
(1.2
)
Other
 
21,851

 
18,440

 
3,411

 
18.5

Total revenue
 
5,258,290

 
4,942,582

 
315,708

 
6.4

Cost of goods sold
 
3,395,918

 
3,222,394

 
173,524

 
5.4

Gross profit
 
1,862,372

 
1,720,188

 
142,184

 
8.3

Selling & administrative expense
 
847,927

 
846,894

 
1,033

 
0.1

Engineering expense
 
145,967

 
129,330

 
16,637

 
12.9

Restructuring (benefit) expense
 
(2,131
)
 
28,475

 
(30,606
)
 
(107.5
)
Operating expense
 
991,763

 
1,004,699

 
(12,936
)
 
(1.3
)
Operating income from motorcycles
 
$
870,609

 
$
715,489

 
$
155,120

 
21.7
 %

29




The following table includes the estimated impact of the significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from 2012 to 2013 (in millions):
 
 
Net
Revenue
 
Cost of
Goods
Sold
 
Gross
Profit
2012
 
$
4,943

 
$
3,223

 
$
1,720

Volume
 
230

 
159

 
71

Price
 
88

 
44

 
44

Foreign currency exchange rates and hedging
 
(56
)
 
(17
)
 
(39
)
Shipment mix
 
54

 
32

 
22

Raw material prices
 

 
(8
)
 
8

Manufacturing costs
 

 
(36
)
 
36

Total
 
316

 
174

 
142

2013
 
$
5,259

 
$
3,397

 
$
1,862

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2012 to 2013:
Volume increases were driven by the increase in wholesale shipments of motorcycle units as well as higher sales volumes for Parts & Accessories partially offset by lower General Merchandise sales volumes.
On average, wholesale prices on the Company’s 2013 and 2014 model year motorcycles are higher than the preceding model years resulting in the favorable impact on revenue and gross profit during the period. The impact of revenue favorability resulting from model year price increases was partially offset by an increase in cost related to the significant additional content added to the 2014 model year motorcycles.
Foreign currency exchange rates during 2013 resulted in a negative impact on net revenue and gross profit primarily as a result of devaluation in the Japanese yen, Australian dollar and Brazilian real.
Shipment mix changes resulted primarily from favorable product mix changes between motorcycle platforms.
Raw material prices were lower in 2013 relative to 2012 primarily due to lower metal costs.
Manufacturing costs for 2013 were favorably impacted by savings related to restructuring initiatives, lower temporary inefficiencies and a lower fixed cost per unit as a result of higher production volumes compared to 2012, partially offset by approximately $7.0 million of higher start-up costs for the new model year driven by the significant level of content added to the new models. Temporary inefficiencies associated with the Company’s restructuring activities were $15 million in 2013 compared to $33 million in 2012. With the completion of the restructuring activities, the Company has significantly reduced its fixed cost structure, and therefore improved the overall profitability of the Company. At the start of restructuring, motorcycle fixed costs were in the range of 20% to 25% of total motorcycle manufacturing costs. Beginning in 2014, the Company expects motorcycle fixed costs to be approximately 15% to 20% of total motorcycle manufacturing costs, resulting in gross margin on incremental motorcycle volume of approximately 47%.(1) 
The net decrease in operating expense was primarily due to lower restructuring charges and variable employee compensation costs, partially offset by incremental investments to support the Company’s international growth and product development initiatives and increases in the Company's global information systems costs. For further information regarding the Company’s previously announced restructuring activities, refer to Note 4 of Notes to Condensed Consolidated Financial Statements.

30



Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands): 
 
 
2013
 
2012
 
(Decrease)
Increase
 
%
Change
Interest income
 
$
583,174

 
$
583,700

 
$
(526
)
 
(0.1
)%
Other income
 
58,408

 
54,224

 
4,184

 
7.7

Financial services revenue
 
641,582

 
637,924

 
3,658

 
0.6

Interest expense
 
165,491

 
195,990

 
(30,499
)
 
(15.6
)
Provision for credit losses
 
60,008

 
22,239

 
37,769

 
169.8

Operating expenses
 
132,990

 
135,008

 
(2,018
)
 
(1.5
)
Financial services expense
 
358,489

 
353,237

 
5,252

 
1.5

Operating income from financial services
 
$
283,093

 
$
284,687

 
$
(1,594
)
 
(0.6
)%

Other income was favorable primarily due to higher fee income, increased credit card licensing revenue and increased insurance commission revenue. Interest expense benefited from a more favorable cost of funds, partially offset by higher debt levels related to higher average finance receivables outstanding.

The provision for credit losses was unfavorable compared to 2012 due to an increase in the provision for retail credit losses. Retail motorcycle credit losses increased $15.8 million in 2013 as compared to 2012 due to lower year-over-year recoveries as well as a higher frequency of loss. As a result, the 2013 retail motorcycle provision increased $36.8 million. Additionally, 2012 benefited from approximately $17.0 million in allowance releases.
Annual losses on HDFS’ retail motorcycle loans were 1.09% during 2013 compared to 0.79% in 2012. The 30-day delinquency rate for retail motorcycle loans at December 31, 2013 decreased to 3.71% from 3.94% at December 31, 2012.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands): 
 
 
2013
 
2012
Balance, beginning of period
 
$
107,667

 
$
125,449

Provision for credit losses
 
60,008

 
22,239

Charge-offs, net of recoveries
 
(56,982
)
 
(40,021
)
Balance, end of period
 
$
110,693

 
$
107,667

At December 31, 2013, the allowance for credit losses on finance receivables was $106.1 million for retail receivables and $4.6 million for wholesale receivables. At December 31, 2012, the allowance for credit losses on finance receivables was $101.4 million for retail receivables and $6.2 million for wholesale receivables.
HDFS’ periodic evaluation of the adequacy of the allowance for credit losses on finance receivables is generally based on HDFS’ past loan loss experience, known and inherent risks in the portfolio, current economic conditions and the estimated value of any underlying collateral. Please refer to Note 6 of Notes to Consolidated Financial Statements for further discussion regarding the Company’s allowance for credit losses on finance receivables.


31



Results of Operations 2012 Compared to 2011
Consolidated Results 
(in thousands, except earnings per share)
 
2012
 
2011
 
Increase
(Decrease)
 
%
Change
Operating income from motorcycles & related products
 
$
715,489

 
$
561,176

 
$
154,313

 
27.5
 %
Operating income from financial services
 
284,687

 
268,791

 
15,896

 
5.9
 %
Operating income
 
1,000,176

 
829,967

 
170,209

 
20.5
 %
Investment income
 
7,369

 
7,963

 
(594
)
 
(7.5
)%
Interest expense
 
46,033

 
45,266

 
767

 
1.7
 %
Income before income taxes
 
961,512

 
792,664

 
168,848

 
21.3
 %
Provision for income taxes
 
337,587

 
244,586

 
93,001

 
38.0
 %
Income from continuing operations
 
623,925

 
548,078

 
75,847

 
13.8
 %
Income from discontinued operations, net of taxes
 

 
51,036

 
(51,036
)
 
NM

Net income
 
$
623,925

 
$
599,114

 
$
24,811

 
4.1
 %
Diluted earnings per share from continuing operations
 
$
2.72

 
$
2.33

 
$
0.39

 
16.7
 %
Diluted earnings per share from discontinued operations
 
$

 
$
0.22

 
$
(0.22
)
 
NM

Diluted earnings per share
 
$
2.72

 
$
2.55

 
$
0.17

 
6.7
 %
Operating income for the Motorcycles segment during 2012 improved by $154.3 million compared to 2011 driven by a 6.2% increase in motorcycle shipments, price increases, decreases in manufacturing costs and lower restructuring expenses compared to 2011. Operating income for the Financial Services segment improved by $15.9 million during 2012 primarily due to lower interest expense. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
The effective income tax rate for 2012 was 35.1% compared to 30.9% for 2011. The lower 2011 effective tax rate was mainly driven by a change in the 2011 Wisconsin income tax law associated with certain net operating losses, the favorable settlement of an IRS audit and the impact of the federal Research and Development Tax Credit.  
In 2011, the Company recognized a $51.0 million benefit on income from discontinued operations, driven by the reversal of tax amounts reserved in prior years related to the divestiture of the Company’s MV Agusta subsidiaries. The amounts had been reserved pending an agreement that the Company and the IRS reached on the tax treatment of the transaction in December 2011.
Diluted earnings per share from continuing operations were $2.72 in 2012, up 16.7% over 2011. The increase in diluted earnings per share was driven primarily by the 13.8% increase in income from continuing operations, but also benefited from lower diluted weighted average shares outstanding. Diluted weighted average share outstanding decreased from 234.9 million in 2011 to 229.2 million in 2012 driven by the Company's repurchase of common stock. Please refer to "Liquidity and Capital Resources" for additional information concerning the Company's share repurchase activity.
Motorcycles Retail Sales and Registration Data
Worldwide independent dealer retail sales of Harley-Davidson motorcycles increased 6.2% during 2012 compared to 2011. Retail sales of Harley-Davidson motorcycles increased 6.6% in the United States and 5.6% internationally in 2012. International retail sales as a percent of total retail sales were down slightly compared to 2011 reflecting the tough market conditions in Europe. International retail sales represented 35.3% and 35.5% of total retail sales in 2012 and 2011, respectively.

32



Harley-Davidson Motorcycle Retail Sales(a) 
The following table includes retail unit sales of Harley-Davidson motorcycles: 
 
 
2012
 
2011
 
Increase
(Decrease)
 
%
Change
North America Region
 
 
 
 
 
 
 
 
United States
 
161,678

 
151,683

 
9,995

 
6.6
 %
Canada
 
10,573

 
10,502

 
71

 
0.7

Total North America Region
 
172,251

 
162,185

 
10,066

 
6.2

Europe, Middle East and Africa Region (EMEA)
 
 
 
 
 
 
 
 
Europe(b)
 
37,027

 
39,334

 
(2,307
)
 
(5.9
)
Other
 
6,000

 
5,006

 
994

 
19.9

Total EMEA Region
 
43,027

 
44,340

 
(1,313
)
 
(3.0
)
Asia Pacific Region
 
 
 
 
 
 
 
 
Japan
 
10,642

 
10,401

 
241

 
2.3

Other
 
13,839

 
11,015

 
2,824

 
25.6

Total Asia Pacific Region
 
24,481

 
21,416

 
3,065

 
14.3

Latin America Region
 
10,090

 
7,247

 
2,843

 
39.2

Total Worldwide Retail Sales
 
249,849

 
235,188

 
14,661

 
6.2
 %
Total International Retail Sales
 
88,171

 
83,505


4,666

 
5.6
 %
 
(a)
Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning retail sales and this information is subject to revision.
(b)
Data for Europe include Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
Motorcycle Registration Data - 601+cc(a) 
     The following table includes industry retail motorcycle registration data:
 
 
2012
 
2011
 
Increase
(Decrease)
 
%
Change
United States(b)
 
299,384

 
289,875

 
9,509

 
3.3
 %
Europe(c)
 
300,415

 
328,493

 
(28,078
)
 
(8.5
)%
 
(a)
Data includes street-legal 601+cc models. Street-legal 601+cc models include on-highway and dual purpose models and three-wheeled vehicles.
(b)
United States industry data is derived from information provided by Motorcycle Industry Council (MIC). This third party data is subject to revision and update. Prior periods have been adjusted to include all dual purpose models that were previously excluded.
(c)
Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 601+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. This third-party data is subject to revision and update.


33



Motorcycles and Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment: 
 
 
2012
 
2011
 
Unit
 
Unit
 
 
Units
 
Mix %
 
Units
 
Mix %
 
Increase
 
%
Change
United States
 
160,477

 
64.8
%
 
152,180

 
65.3
%
 
8,297

 
5.5
%
International
 
87,148

 
35.2
%
 
80,937

 
34.7
%
 
6,211

 
7.7

Harley-Davidson motorcycle units
 
247,625

 
100.0
%
 
233,117

 
100.0
%
 
14,508

 
6.2
%
Touring motorcycle units
 
99,496

 
40.2
%
 
92,002

 
39.5
%
 
7,494

 
8.1
%
Custom motorcycle units*
 
96,425

 
38.9
%
 
91,459

 
39.2
%
 
4,966

 
5.4

Sportster motorcycle units
 
51,704

 
20.9
%
 
49,656

 
21.3
%
 
2,048

 
4.1

Harley-Davidson motorcycle units
 
247,625

 
100.0
%
 
233,117

 
100.0
%
 
14,508

 
6.2
%
 
*
Custom motorcycle units, as used in this table, include Dyna®, Softail®, V-Rod® and CVO models.
During 2012, wholesale shipments of Harley-Davidson motorcycles were up 6.2% compared to the prior year and within the Company’s expected shipment range of 245,000 to 250,000 motorcycles. As expected, wholesale motorcycle shipments in the fourth quarter of 2012 were down compared to the fourth quarter of 2011 in advance of the launch of surge manufacturing at the Company's York facility in early 2013. Consequently, retail inventory in the U.S. was approximately 1,200 units lower than at the end of 2011.

34



Segment Results
The following table includes the condensed statement of operations for the Motorcycles segment (in thousands): 
 
 
2012
 
2011
 
Increase
(Decrease)
 
%
Change
Revenue:
 
 
 
 
 
 
 
 
Motorcycles
 
$
3,764,794

 
$
3,554,547

 
$
210,247

 
5.9
 %
Parts & Accessories
 
859,945

 
816,569

 
43,376

 
5.3

General Merchandise
 
299,403

 
274,124

 
25,279

 
9.2

Other
 
18,440

 
17,024

 
1,416

 
8.3

Total revenue
 
4,942,582

 
4,662,264

 
280,318

 
6.0

Cost of goods sold
 
3,222,394

 
3,106,288

 
116,106

 
3.7

Gross profit
 
1,720,188

 
1,555,976

 
164,212

 
10.6

Selling & administrative expense
 
846,894

 
788,565

 
58,329

 
7.4

Engineering expense
 
129,330

 
138,243

 
(8,913
)
 
(6.4
)
Restructuring expense
 
28,475

 
67,992

 
(39,517
)
 
(58.1
)
Operating expense
 
1,004,699

 
994,800

 
9,899

 
1.0

Operating income from motorcycles
 
$
715,489

 
$
561,176

 
$
154,313

 
27.5
 %

The following table includes the estimated impact of the significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from 2011 to 2012 (in millions): 
 
 
Net
Revenue
 
Cost of
Goods
Sold
 
Gross
Profit
2011
 
$
4,662

 
$
3,106

 
$
1,556

Volume
 
293

 
197

 
96

Price
 
30

 

 
30

Foreign currency exchange rates and hedging
 
(76
)
 
(59
)
 
(17
)
Shipment mix
 
34

 
29

 
5

Raw material prices
 

 
(7
)
 
7

Manufacturing costs
 

 
(43
)
 
43

Total
 
281

 
117

 
164

2012
 
$
4,943

 
$
3,223

 
$
1,720

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2011 to 2012:
Volume increases were driven by the increase in wholesale shipments of motorcycle units as well as higher sales volumes for Parts & Accessories and General Merchandise.
On average, wholesale prices on the Company’s 2012 and 2013 model year motorcycles are higher than the preceding model years resulting in the favorable impact on revenue and gross profit during the period.
Foreign currency exchange rates during 2012 resulted in a negative impact on net revenue, which was partially offset by the favorable impact of gains associated with foreign currency hedging included in cost of goods sold.
Shipment mix changes resulted primarily from favorable product mix changes between motorcycle platforms.
Raw material prices were lower in 2012 relative to 2011 primarily due to lower metal costs.
Manufacturing costs were favorably impacted by savings related to restructuring initiatives. Temporary inefficiencies associated with the Company’s restructuring and transformation at its York facility were $33 million in 2012 compared to $32 million in 2011.
The net increase in operating expense was primarily due to incremental investments to support the Company’s growth initiatives and increases in employee costs including pension. These cost increases were partially offset by lower restructuring expense related to the Company’s previously announced restructuring activities as well as lower engineering expense. For further information regarding the Company’s previously announced restructuring activities, refer to Note 4 of Notes to Condensed Consolidated Financial Statements.

35



Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands): 
 
 
2012
 
2011
 
(Decrease)
Increase
 
%
Change
Interest income
 
$
583,700

 
$
598,675

 
$
(14,975
)
 
(2.5
)%
Other income
 
54,224

 
50,774

 
3,450

 
6.8

Financial services revenue
 
637,924

 
649,449

 
(11,525
)
 
(1.8
)
Interest expense
 
195,990

 
229,492

 
(33,502
)
 
(14.6
)
Provision for credit losses
 
22,239

 
17,031

 
5,208

 
30.6

Operating expenses
 
135,008

 
134,135

 
873

 
0.7

Financial services expense
 
353,237

 
380,658

 
(27,421
)
 
(7.2
)
Operating income from financial services
 
$
284,687

 
$
268,791

 
$
15,896

 
5.9
 %
Interest income decreased during 2012 primarily due to lower average retail finance receivables outstanding. Interest expense benefited from lower debt levels related to lower average retail finance receivables outstanding, a more favorable cost of funds, and a $5.3 million lower loss on the extinguishment of medium-term notes as compared to 2011.
The provision for credit losses was unfavorable by $5.2 million in 2012 as compared to 2011. The retail motorcycle provision increased by $6.6 million on smaller allowance releases during 2012 as compared to 2011, although both years experienced favorable credit performance. The provision for credit losses related to wholesale motorcycle finance receivables increased by $3.0 million in 2012 primarily due to larger dealer performance-related allowance releases in 2011 as compared to 2012. The wholesale and retail motorcycle provision increases were offset by decreases in the provision for credit losses related to other retail receivables.
Annual losses on HDFS’ retail motorcycle loans were 0.79% during 2012 compared to 1.20% in 2011. The decrease in credit losses from 2011 resulted from changes in underwriting and collections, as well as a lower frequency of loss. The 30-day delinquency rate for retail motorcycle loans at December 31, 2012 increased to 3.94% from 3.85% at December 31, 2011.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands): 
 
 
2012
 
2011
Balance, beginning of period
 
$
125,449

 
$
173,589

Provision for credit losses
 
22,239

 
17,031

Charge-offs, net of recoveries
 
(40,021
)
 
(65,171
)
Balance, end of period
 
$
107,667

 
$
125,449

At December 31, 2012, the allowance for credit losses on finance receivables was $101.4 million for retail receivables and $6.2 million for wholesale receivables. At December 31, 2011, the allowance for credit losses on finance receivables was $116.1 million for retail receivables and $9.3 million for wholesale receivables.
HDFS’ periodic evaluation of the adequacy of the allowance for credit losses on finance receivables is generally based on HDFS’ past loan loss experience, known and inherent risks in the portfolio, current economic conditions and the estimated value of any underlying collateral. Please refer to Note 6 of Notes to Consolidated Financial Statements for further discussion regarding the Company’s allowance for credit losses on finance receivables.

36



Other Matters
New Accounting Standards Not Yet Adopted
In July 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-11 Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (ASU No. 2013-11). ASU No. 2013-11 amends the guidance within Accounting Standards Codification (ASC) Topic 740, "Income Taxes", to require entities to present an unrecognized tax benefit, or a portion of an unrecognized tax benefit in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward. The Company is required to adopt ASU No. 2013-11 beginning in the first quarter of 2014 and is currently evaluating the impact of adoption.
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 Committee of the Board of Directors.
Allowance for Credit Losses on Finance Receivables – The allowance for uncollectible accounts is maintained at a level management believes is adequate to cover the losses of principal in the existing finance receivables portfolio. HDFS performs a periodic and systematic collective evaluation of the adequacy of the retail allowance. HDFS utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates and current economic conditions including items such as unemployment rates.
The wholesale portfolio is primarily composed of large balance, non-homogeneous finance receivables. HDFS’ wholesale allowance evaluation is first based on a loan-by-loan review. A specific allowance is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. In establishing the allowance, management considers a number of factors including the specific borrower’s financial performance as well as ability to repay. Finance receivables in the wholesale portfolio that are not individually evaluated for impairment are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance is based on factors such as the Company’s past loan loss experience, current economic conditions as well as the value of the underlying collateral.
Product Warranty – Estimated warranty costs are reserved for motorcycles, motorcycle parts and motorcycle accessories at the time of sale. The warranty reserve is based upon historical Company claim data used in combination with other known factors that may affect future warranty claims. The Company updates its warranty estimates quarterly to ensure that the warranty reserves are based on the most current information available.
The Company believes that past claim experience is indicative of future claims; however, the factors affecting actual claims can be volatile. As a result, actual claims experience may differ from estimated which could lead to material changes in the Company’s warranty provision and related reserves. The Company’s warranty liability is discussed further in Note 1 of Notes to Consolidated Financial Statements.
Pensions and Other Postretirement Healthcare Benefits – The Company has a defined benefit pension plan and several postretirement healthcare benefit plans, which cover employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993.
U.S. GAAP requires that companies recognize in their statement of financial position a liability for defined benefit pension and postretirement plans that are underfunded or an asset for defined benefit pension and postretirement benefit plans that are overfunded.
Pension, SERPA and postretirement healthcare obligations and costs are calculated through actuarial valuations. The valuation of benefit obligations and net periodic benefit costs relies on key assumptions including discount rates, long-term expected return on plan assets, future compensation and healthcare cost trend rates.

37



The Company determines its discount rate assumptions by referencing high-quality long-term bond rates that are matched to the duration of its own benefit obligations. Based on this analysis, the Company increased the discount rate for pension and SERPA obligations from 4.23% as of December 31, 2012 to 5.08% as of December 31, 2013. The Company increased the discount rate for postretirement healthcare obligations from 3.93% to 4.70%. 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, 2013, the Company set its healthcare cost trend rate at 8.0% as of December 31, 2013. The Company expects the healthcare cost trend rate to reach its ultimate rate of 5.0% by 2021.(1) These assumption changes were reflected immediately in the benefit obligation and will be amortized into net periodic benefit costs over future periods.
Plan assets are measured at fair value and are subject to market volatility. In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted to reflect the current view of the long-term investment market.
Changes in the funded status of defined benefit pension and postretirement benefit plans resulting from the difference between assumptions and actual results are initially recognized in other comprehensive income and amortized to expense over future periods. The following information is provided to illustrate the sensitivity of pension and postretirement healthcare obligations and costs to changes in these major assumptions (in thousands): 
 
 
Amounts based
on current
assumptions
 
Impact of a 1%
decrease in the
discount rate
 
Impact of a 1%
decrease in the
expected
return on assets
 
Impact of a 1%
increase in the
healthcare
cost trend rate
2013 Net periodic benefit costs
 
 
 
 
 
 
 
 
Pension and SERPA
 
$
48,262

 
$
22,418

 
$
16,431

 
n/a

Postretirement healthcare
 
$
18,616

 
$
1,374

 
$
1,193

 
$
1,766

2013 Benefit obligations