Edgar Filing: HARLEY DAVIDSON INC

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Smaller reporting company

HOG 12-31-2014 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, 2014



¨	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 check mark 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. ý

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).

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 29, 2014: $14,907,688,941

Number of shares of the registrant’s common stock outstanding at January 30, 2015: 211,524,478 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 25, 2015.

Harley-Davidson, Inc.

Form 10-K

For The Year Ended December 31, 2014




		Page
Part I

Item 1.	Business	3
Item 1A.	Risk Factors	11
Item 1B.	Unresolved Staff Comments	18
Item 2.	Properties	19
Item 3.	Legal Proceedings	19
Item 4.	Mine Safety Disclosures	20

Part II

Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	21
Item 6.	Selected Financial Data	23
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk	45
Item 8.	Consolidated Financial Statements and Supplementary Data	46
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	106
Item 9A.	Controls and Procedures	106

Part III

Item 10.	Directors, Executive Officers and Corporate Governance	108
Item 11.	Executive Compensation	108
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	108
Item 13.	Certain Relationships and Related Transactions, and Director Independence	109
Item 14.	Principal Accountant Fees and Services	109

Part IV

Item 15.	Exhibits and Financial Statements Schedules	110

Signatures		112

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 19, 2015), 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. Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two reportable segments: the Motorcycles & Related Products (Motorcycles) reportable segment and the Financial Services reportable segment. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations.

The Motorcycles reportable segment consists of HDMC which 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 the following regions: North America, Europe/Middle East/Africa (EMEA), Asia-Pacific and Latin America.

The Financial Services reportable segment consists of HDFS which provides wholesale and retail financing and 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 19 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 79%, 77% and 76% of the total net revenue in the Motorcycles segment during 2014, 2013 and 2012, 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. 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.

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 (emphasizes rider comfort and load capacity and incorporates features such as saddlebags, fairings, or large luggage compartments); and


•	Dual (designed with the capability for use on public roads as well as for some off-highway recreational use).

In 2014, the Company revealed Project LiveWire^TM, an electric motorcycle, and began offering demonstration rides in the U.S. which the Company plans to expand to Europe and Canada in 2015.⁽¹⁾ The Company is collecting the demonstration riders' feedback to gain insight into what customers are looking for in this type of motorcycle. The Company has made no commitment to launch Project LiveWire^TM commercially.

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 2014, the U.S. and European markets accounted for approximately 78% 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 for the Company, based on the Company's retail sales data, are Japan, Canada, 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 77%, of total 2014 601+cc retail unit registrations in the U.S. while the sportbike category accounted for approximately 10% of U.S. 601+cc motorcycle registrations. During 2014, the 601+cc portion of the market represented approximately 82% 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 601+cc motorcycles for the years 2012 through 2014:

U.S. Motorcycle Registration Data^(a)(b)

601+cc (Units in thousands)



	2014		2013		2012
Total new motorcycle registrations	313.6		305.9		299.4
Harley-Davidson new registrations	167.1		167.8		161.3
	53.3	%	54.9	%	53.9	%


(a)	Data includes on-road 601+cc models. On-road 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 will differ 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 retail sales data in Item 7 includes sales of Street 500 motorcycles which are excluded from the 601+cc units included in the retail registration data in this table. In addition, small differences may arise related to the timing of data submissions to the independent sources.

The European 601+cc motorcycle market is slightly larger than the U.S. market and customer preferences differ from those of U.S. customers. For example, the sportbike category represented nearly 38% of the European 601+cc market in 2014 while the touring category represented 26% of the European 601+cc motorcycle market.

The following chart includes European retail registration data for 601+cc motorcycles for the years 2012 through 2014:

European Motorcycle Registration Data^(a)(b)

601+cc (Units in thousands)



	2014		2013		2012
Total new motorcycle registrations	319.8		281.8		300.4
Harley-Davidson new registrations	38.5		36.1		36.2
	12.0	%	12.8	%	12.1	%


(a)	Data includes on-road 601+cc models. On-road 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 will differ 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 retail sales data in Item 7 includes sales of Street 500 motorcycles which are excluded from the 601+cc units included in the retail registration data in this table. In addition, small differences may arise related 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 15.7%, 16.6% and 17.4% of net revenue in the Motorcycles segment in 2014, 2013 and 2012, respectively.

General Merchandise – Worldwide General Merchandise net revenue, which includes revenue from MotorClothes^® apparel and riding gear, comprised 5.1%, 5.6% and 6.1% of net revenue in the Motorcycles segment in 2014, 2013 and 2012, 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, 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 $47.1 million, $58.9 million and $49.1 million in 2014, 2013 and 2012, 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^TM 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 $1.79 billion, $1.70 billion and $1.58 billion, or approximately 32%, 32% and 32% of net revenue of the Motorcycles segment, during 2014, 2013 and 2012, 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

parties. The Company diligently protects its intellectual property, including patents and trade secrets, and its rights to innovative and proprietary technology and designs. This protection, including enforcement, is important as the Company moves forward with investments in new products, designs and technologies. While the Company believes patents are important to its business operations and in the aggregate constitute a valuable asset, the success of the business is not dependent on any one patent or group of patents. The Company’s active patent portfolio has an average age for patents of approximately seven and a half 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, global 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 (Caucasian, age 35+), young adults (ages 18-34), African-American adults (age 35+), and Latino adults (age 35+). In 2013 (which is the most recent data available), for the sixth 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. 2013 motorcycle registration data from IHS Automotive)

In 2014, the average U.S. retail purchaser of a new Harley-Davidson motorcycle had a median household income of approximately $92,800. 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: 2014 Company Studies)

Outside of the U.S., the Company's definition of core and outreach customers varies depending on the profile of its customers in each market. In general, the Company defines it 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 various broadcast, print and electronic channels. 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 participates in motorcycle rallies around the world and also in major motorcycle consumer shows, racing activities, music festivals, mixed martial arts activities and other special promotional events.

The Company promotes 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.

The Company's Harley-Davidson^TM 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 400,000 riders. The courses are conducted by a network of select Harley-Davidson dealerships throughout the U.S., South Africa, China and Mexico, enabling students to experience the Harley-Davidson lifestyle, environment, people, and products as they learn.

The Company offers Harley-Davidson riders the opportunity to experience riding opportunities worldwide through its global Harley-Davidson Authorized Tours Program. Riders can also rent Harley-Davidson motorcycles worldwide from participating dealers through the Company’s Authorized Rentals Program.

Distribution – The Company’s products are retailed through a network of independent dealers, of which the majority sell 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 retail 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.

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 facilitates its independent dealers' sale of certain Parts and Accessories, General Merchandise and licensed products in the U.S. through its online eCommerce channel. The Company's eCommerce model provides an online storefront, product merchandising, digital marketing, inventory management and order fulfillment, returns processing, and customer care. Retail internet orders are fulfilled and shipped by the Company, which acts as an agent for participating authorized Harley-Davidson dealers who sell the products to customers. Dealers handle any after sale services that the customer may require.

The Company’s operations in the EMEA region are managed out of its Oxford, United Kingdom regional headquarters. In the EMEA region, the Company distributes its motorcycles and related products to a network of independent dealers located in approximately 49 countries in the region.

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 its motorcycles and related products to a network of independent dealers located in approximately 17 countries in the region.

The Company’s operations in the Latin America region are managed out of its Miami, Florida regional headquarters. In the Latin America region, the Company distributes its motorcycles and related products to a network of independent dealers located in approximately 26 countries in the region.

The following table includes the number of worldwide Harley-Davidson independent dealerships by geographic region as of December 31, 2014:



	North America Region		EMEA Region	Asia-Pacific Region	Latin America Region	Total
	United States	Canada	EMEA Region	Asia-Pacific Region	Latin America Region	Total
Full Service Dealerships and SRLs	694	69	369	273	55	1,460
Non-Traditional	96	4	11	12	29	152

In 2009, the Company announced a strategic goal to open 100 to 150 new international dealerships from the end of 2009 through the end of 2014. Through December 31, 2014, the Company added 136 new international dealers. This excludes international dealers closed in the normal course of business.

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 directly 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.

Seasonality – The timing of retail sales made by the Company’s independent dealers tracks closely with regional riding seasons.

The Company implemented surge manufacturing capabilities at its York, Pennsylvania facility in the first half of 2013 and at its Kansas City, Missouri facility in the first half of 2014. Surge manufacturing capabilities provide the Company the flexibility to increase production of motorcycles ahead of and during the peak selling season in the North America region. As a result of this flexible manufacturing capability, the Company's motorcycle production and wholesale shipments now correlate more closely to the retail selling season in the North America region. 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.

In markets outside of the North America region, the Company typically distributes motorcycles through regional warehouses. 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 based on the disciplined execution of the Company's Continuous Improvement System (CIS). The focus of CIS is to align people, process and technology to drive world-class manufacturing capability across its global facilities. The Company believes CIS provides the framework to drive the highest levels of safety and quality, increase efficiency and reduce costs, and more effectively respond to changing customer demands and expectations.⁽¹⁾

Critical aspects of this manufacturing strategy include flexible manufacturing processes and supply chains, coupled with cost-competitive and flexible labor agreements, which the Company believes will help ensure it is well positioned to meet customer demand in a timely and cost-effective manner.⁽¹⁾ The Company implemented surge manufacturing capabilities at its York, Pennsylvania facility in the first half of 2013 and at its Kansas City, Missouri facility in the first half of 2014. This provides the Company the flexibility to increase the production of motorcycles ahead of and during the peak retail selling season allowing the Company to more closely correlate the timing of production and wholesale shipments to the retail selling season.

The Company operates a CKD (Complete Knock Down) assembly facility in Brazil, which assembles motorcycles sold in Brazil from component kits sourced from the Company’s U.S. plants and its suppliers. The Company also operates a manufacturing facility in India, which includes both CKD assembly of certain motorcycles for sale in India, and, beginning in 2014, production of the Company’s Street motorcycles for distribution to markets outside of North America. Like its U.S. manufacturing facilities, the Company’s Brazil and India operations are focused on driving world-class performance through the execution of CIS, with flexible production processes to meet customer demands at reduced lead times.

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's principal raw materials that are purchased include 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 certain complex, high-finish wheels.

Research and Development – The objective of the Company's product development strategy is to ensure that the Company delivers relevant products for an increasingly diverse customer base while reducing cost and time to market. The strategy is supported by a product development methodology and organizational structure that support innovation, flexibility, capacity and a focus on consumer insights. The Company incurred research and development expenses of $138.3 million, $152.2 million and $137.3 million during 2014, 2013 and 2012, 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) and the California Air Resources Board (CARB) for compliance with applicable emissions and noise standards. Harley-Davidson motorcycle products are designed to comply with EPA and CARB standards and the Company believes it will comply with future requirements when they go into effect⁽¹⁾. Additionally, 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 24 voluntary recalls related to Harley-Davidson motorcycles at a total cost of $30.0 million. The Company reserves for all estimated costs associated with recalls in the period that the recalls are announced.

Employees – As of December 31, 2014, the Motorcycles segment had approximately 5,900 employees.

Approximately 2,600 unionized employees at the manufacturing facilities are represented as follows:


•	York, Pennsylvania - represented by International Association of Machinist and Aerospace Workers (IAM) and the collective bargaining agreement will expire on February 2, 2017


•	Kansas City, Missouri - represented by United Steelworkers of America (USW) and IAM and the respective collective bargaining agreements will expire on July 31, 2018


•	Menomonee Falls, Wisconsin - represented by USW and IAM and the respective collective bargaining agreements will expire on March 31, 2019


•	Tomahawk, Wisconsin - represented by USW and the collective bargaining agreement will expire on March 31, 2019

Please refer to the Note 3 of Item 8, “Consolidated Financial Statements and Supplementary Data” 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 , 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 17, 2014, which compensation relates to the Company’s named executive officers; (m) the California Transparency in Supply Chain Act Disclosure; (n) Statement on Conflict Minerals; (o) Political Engagement and Contributions 2012-2014; and (p) the Company's Clawback Policy. 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 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. 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 third-party financial institutions, some of which have licensing or branding agreements with the Company or HDFS.

Wholesale Financial Services – HDFS provides wholesale financial services to 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 2014, 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.

Licensing - HDFS has licensing arrangements with third-party financial institutions that issue credit cards bearing the Harley-Davidson brand. Internationally, HDFS licenses the Harley-Davidson brand to local third-party financial institutions that offer products to the Company’s retail customers such as financing and insurance.

Funding – The Company believes a diversified and cost effective funding strategy is important to meet HDFS’ goal of providing credit while delivering appropriate returns and profitability. Financial Services operations have 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 56.8% of the new Harley-Davidson motorcycles retailed by independent dealers during 2014, compared to 54.5% in 2013. In Canada, HDFS financed 34.0% of the new Harley-Davidson motorcycles retailed by independent dealers during 2014, compared to 31.8% in 2013. 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 retail financing activities based on the timing of regional riding seasons. In general, from mid-March through August, retail financing volume is greatest. HDFS wholesale financing volume is affected by inventory levels at Harley-Davidson dealers and distributors. As discussed under "Motorcycle and Related Products - Seasonality", the Company implemented flexible production capabilities in 2013 and 2014 which has reduced the seasonality of dealer inventory levels for new motorcycles. Although to a lesser extent than in years prior to the implementation of flexible production, dealers

generally have higher inventory levels of new and used motorcycles in the late fall and winter than during the spring and summer riding season. As a result, wholesale financing volume is higher during fall and winter as compared to the rest of the year.

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 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.

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 (ESB), is a Nevada state thrift chartered as an Industrial Loan Company (ILC). As such, the activities of this subsidiary are governed by federal laws and regulations as well as State of Nevada banking laws, and are subject to examination by the Federal Deposit Insurance Corporation (FDIC) and Nevada state bank examiners. The Dodd-Frank Wall Street Reform and Consumer Protection Act, which was passed into law in 2010, granted the federal Consumer Financial Protection Bureau (CFPB) 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. The CFPB staff recently proposed a rule that will expand the scope of its supervisory authority to include non-bank larger participants in the vehicle financing market. This proposed rule was published by the CFPB on October 8, 2014, and if this rule is finalized as proposed, the larger participant threshold set by the CFPB would include Harley-Davidson Credit Corp. or other Harley-Davidson entities, which would result in CFBP supervision and periodic examinations of those entities.

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, 2014, 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 its long-term business strategy and the Harley-Davidson brand or to enhance productivity and profitability to the extent desired through pricing and continuous improvement.

•

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. The motorcycle industry can also be affected by political conditions and other factors over which motorcycle manufacturers have little control.

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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 a portion of its exposure to foreign currency exchange rates and commodity prices, the Company does not attempt to manage its entire expected exposure, and 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.

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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 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.

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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, e-commerce, 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.

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Expanding international sales and operations subjects the Company to risks that may have a material adverse effect on its business. Expanding international sales and operations is a part of the Company’s long-term business strategy. 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.


•	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 or changing the timing for purchases of new Harley-Davidson motorcycles. Reduced demand for new Harley-Davidson motorcycles ultimately leads to reduced shipments by the Company.

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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.

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 and related changes in consumer preferences, 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 Consumer Financial Protection Bureau (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. The CFPB staff recently proposed a rule that would expand the scope of its supervisory authority to include non-bank larger participants in the vehicle financing market. The CFPB published this proposed rule on October 8, 2014, and if this rule is finalized as proposed, the larger participant threshold set by the CFPB would include Harley-Davidson Credit Corp. and other Harley-Davidson entities, which would result in CFBP supervision and periodic examinations of those entities.

U.S. Public Company - The Company is also subject to policies and actions of the SEC and New York Stock Exchange (NYSE). Many major competitors of the Company are not subject to the requirements of the SEC or the NYSE rules. As a result, the Company may be required to disclose certain information that may put the Company at a competitive disadvantage to its principal competitors.

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The Company relies on third party suppliers to obtain raw materials and provide component parts for use in the manufacture of its motorcycles. The Company may experience supply problems relating to raw materials and components such as unfavorable pricing, poor quality, or untimely delivery. In certain circumstances, the Company relies on a single supplier to provide the entire requirement of a specific part, and a change in this established supply relationship may cause disruption in the Company’s production schedule. In addition, the price and availability of raw materials and component parts from suppliers can be adversely affected by factors outside of the Company’s control such as the supply of a necessary raw material 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.

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The Company must prevent and detect issues with its products, components purchased from suppliers, and its and its suppliers’ manufacturing processes to reduce the risk of recall campaigns, increased warranty costs or litigation, increased product liability claims or litigation, delays in new model launches, and inquiries or investigations by regulatory agencies. The Company must also complete any recall campaigns within cost expectations. The Company must continually improve and adhere to product development and manufacturing processes, and ensure that its suppliers and their sub-tier suppliers adhere to product development and manufacturing processes, to ensure high quality products are sold to retail customers. If product designs or manufacturing processes are defective, the Company could experience delays in new model launches, product recalls, inquiries or investigations from regulatory agencies, warranty claims, and product liability claims, which may involve purported class actions. While the Company uses reasonable methods to estimate the cost of warranty, recall and product liability costs and appropriately reflects those in its financial statements, there is a risk the actual costs could exceed estimates. Further, selling products with poor quality and the announcement of recalls may also adversely affect the Company’s reputation and brand strength.

•

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.

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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.

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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’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.

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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.

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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.

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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 a global 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.

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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 execute this strategy, the Company must be successful in its continuous improvement efforts which are dependent on the involvement of management, production employees and suppliers. Any inability to achieve these objectives could adversely impact the profitability of the Company’s products and its ability to deliver the right product at the right time to the customer.

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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. 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. 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. As a result of this capability, the Company's motorcycle production and wholesale shipments now correlate more closely to the retail selling season in the North America region. Any difficulties in executing 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.

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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 can have 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 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.

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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.

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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.

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The ability of the Company to expand international sales may be impacted by existing or new laws and regulations that impose motorcycle licensing restrictions and limit access to roads and highways. Expanding international sales is a part of the Company’s long-term business strategy. A number of countries have tiered motorcycle licensing requirements that limit the ability of new and younger riders to obtain licenses to operate the Company’s motorcycles, and many countries are considering the implementation of such requirements. These requirements only allow new and/or younger riders to operate smaller motorcycles for certain periods of time. Riders typically are only permitted to obtain a license to ride larger motorcycles upon reaching certain ages and/or having been licensed to ride smaller motorcycles for a certain period of time, and only after passing additional tests and paying additional fees. These requirements pose obstacles to large displacement motorcycle ownership. Other countries have laws and regulations that prohibit motorcycles from being operated on certain roads and highways. These types of laws and regulations could adversely impact the Company’s plans to expand international sales.

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

•

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 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.

•

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 experienced

historically low levels of retail credit losses during 2013 and 2014, the Company believes HDFS' retail credit losses may continue to increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals in the sub-prime lending environment. Increases in the frequency of loss and decreases in the value of repossessed Harley-Davidson branded motorcycles also adversely impact credit losses. 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’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.

•

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 impose a requirement for public companies to make certain disclosures relating to activities with conflict minerals. Compliance with the disclosure requirements could affect the sourcing and availability of some of the minerals that the Company uses in the manufacturing 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, the Company could incur significant costs related to the compliance process, including potential difficulty or added costs in satisfying the disclosure requirements.

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, 2014:

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⁾	Menomonee Falls, WI	881,600	Owned
Manufacturing⁽²⁾	Wauwatosa, WI	430,000	Owned
Product Development Center	Wauwatosa, WI	409,000	Owned
Manufacturing⁽³⁾	Tomahawk, WI	226,000	Owned
Manufacturing⁽⁴⁾	York, PA	610,000	Owned
Manufacturing and Materials Velocity Center⁽⁵⁾	Kansas City, MO	456,000	Owned
Motorcycle Testing	Yucca, AZ	21,150	Owned
Motorcycle Testing	Yucca, AZ	48,000	Lease expiring 2019
Motorcycle Testing	Naples, FL	10,000	Lease expiring 2020
Regional Office	Miami, FL	12,700	Lease expiring 2017
Manufacturing⁽⁶⁾	Manaus, Brazil	100,000	Lease expiring 2016
Regional Office	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)	Motorcycle powertrain production.


(2)	Facility was idled during 2010 and production moved to Menomonee Falls, WI.


(3)	Plastic parts production and painting.


(4)	Motorcycle parts fabrication, painting and Softail^® and touring model assembly.


(5)	Motorcycle parts fabrication, painting and Dyna^®, Sportster^®, Softail^®, V-Rod^® and Street platform 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 for non-North American markets.


(8)	Motorcycle wheel production.

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 probable that a result of the EPA’s investigation will be some form of enforcement action by the EPA that will seek a fine and/or other relief. The Company has a reserve associated with this matter which is included in accrued liabilities in the Consolidated Balance Sheet. However, given the uncertainty that still exists concerning the resolution of this matter, there is a possibility that the actual loss incurred may be materially different than the Company’s current reserve. At this time, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter, if any.

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, and the parties amended the Agreement in 2013 to address ordnance and explosive waste.

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.

The Company has a reserve for its estimate of its share of the future Response Costs at the York facility 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 over the next several years.

Product Liability Matters:

The Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability suits will not have a material adverse effect on the Company’s 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:



2014	Low		High		2013	Low		High
First quarter	$	60.55	$	70.04	First quarter	$	48.40	$	55.51
Second quarter	$	63.74	$	74.13	Second quarter	$	49.15	$	59.84
Third quarter	$	60.24	$	70.65	Third quarter	$	53.35	$	65.15
Fourth quarter	$	54.22	$	70.41	Fourth quarter	$	62.76	$	69.75

The Company paid the following dividends per share:



	2014		2013		2012
First quarter	$	0.275	$	0.210	$	0.155
Second quarter	0.275		0.210		0.155
Third quarter	0.275		0.210		0.155
Fourth quarter	0.275		0.210		0.155
	$	1.100	$	0.840	$	0.620

As of January 30, 2015, there were 78,014 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, 2014:



2014 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
September 29 to November 2	667,546	$	62	667,546	23,364,308
November 3 to November 30	1,585,334	$	67	1,585,334	21,999,353
December 1 to December 31	1,084,727	$	69	1,084,727	20,942,189
Total	3,337,607	$	67	3,337,607

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. The company made discretionary share repurchases of 0.3 million shares during the fourth quarter ended December 31, 2014 under this authorization. As of December 31, 2014, there were no 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 3.1 million shares during the fourth quarter ended December 31, 2014 under this authorization. As of December 31, 2014, 0.9 million shares remained under this authorization.

In February 2014, the Company's Board 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. No shares were repurchased by the Company during the fourth quarter ended December 31, 2014 under this authorization. As of December 31, 2014, 20.0 million shares remained under this authorization.

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. 2014 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 2014, the Company acquired 581 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, 2009 and that all dividends are reinvested.



	2009 ($)	2010 ($)	2011 ($)	2012 ($)	2013 ($)	2014 ($)
Harley-Davidson, Inc.	100	140	158	202	290	281
Standard & Poor’s MidCap 400 Index	100	127	124	147	193	209
Standard & Poor’s 500 Index	100	115	118	136	180	205

Item 6. Selected Financial Data



(In thousands, except per share amounts)	2014		2013		2012		2011		2010⁽¹⁾
Statement of income data:
Revenue:
Motorcycles & Related Products	$	5,567,681	$	5,258,290	$	4,942,582	$	4,662,264	$	4,176,627
Financial Services	660,827		641,582		637,924		649,449		682,709
Total revenue	$	6,228,508	$	5,899,872	$	5,580,506	$	5,311,713	$	4,859,336
Income from continuing operations	$	844,611	$	733,993	$	623,925	$	548,078	$	259,669
Income (loss) from discontinued operations, net of tax	—		—		—		51,036		(113,124		)
Net income	$	844,611	$	733,993	$	623,925	$	599,114	$	146,545
Weighted-average common shares:
Basic	216,305		222,475		227,119		232,889		233,312
Diluted	217,706		224,071		229,229		234,918		234,787
Earnings per common share from continuing operations:
Basic	$	3.90	$	3.30	$	2.75	$	2.35	$	1.11
Diluted	$	3.88	$	3.28	$	2.72	$	2.33	$	1.11
Earnings (loss) per common share from discontinued operations:
Basic	$	—	$	—	$	—	$	0.22	$	(0.48	)
Diluted	$	—	$	—	$	—	$	0.22	$	(0.48	)
Earnings per common share:
Basic	$	3.90	$	3.30	$	2.75	$	2.57	$	0.63
Diluted	$	3.88	$	3.28	$	2.72	$	2.55	$	0.62
Dividends paid per common share	$	1.100	$	0.840	$	0.620	$	0.475	$	0.400
Balance sheet data:
Total assets	$	9,528,097	$	9,405,040	$	9,170,773	$	9,674,164	$	9,430,740
Total debt	$	5,504,629	$	5,259,170	$	5,102,649	$	5,722,619	$	5,752,356
Total equity	$	2,909,286	$	3,009,486	$	2,557,624	$	2,420,256	$	2,206,866


(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.

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). Unless the context otherwise requires, all references to the "Company" includes Harley-Davidson, Inc. and all its subsidiaries. The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations.

The Motorcycles segment consists of HDMC which 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.

The Financial Services segment consists of HDFS which provides wholesale and retail financing and provides insurance-related programs primarily to Harley-Davidson dealers and their retail customers. HDFS conducts business primarily in the United States and Canada.

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 2014, the Company generated strong financial results as it continued to execute against its strategic goals. During 2014, the Company introduced seven new Project Rushmore^TM models, including the reintroduction of Road Glide motorcycles, began distribution of its all-new Street 750 and 500 motorcycles, and completed its implementation of flexible surge production capabilities at its production facilities. The Company’s net income for 2014 was $844.6 million, or $3.88 per diluted share, compared to $734.0 million, or $3.28 per diluted share, in 2013. The increase in 2014 net income was driven by strong financial performance at the Motorcycles segment. Operating income from the Motorcycles segment was up $132.5 million over 2013 led by a 3.9% increase in wholesale shipments of Harley-Davidson motorcycles. In addition, Motorcycles operating income benefited during 2014 from model-year price increases, a stronger product mix and lower manufacturing costs. These positive impacts were partially offset by an adverse change in foreign currency exchange rates during 2014 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 $5.3 million, or 1.9%, due to a higher provision for credit losses partially offset by higher revenues.

Worldwide independent dealer retail sales of new Harley-Davidson motorcycles grew 2.7% compared to 2013 despite challenging U.S. weather conditions in the first half of 2014 and the absence of Road Glide models for most of 2014. Retail sales of new Harley-Davidson motorcycles increased 1.3% in the U.S. and 5.4% in international markets. As the Company looks forward to 2015, it believes the Harley-Davidson brand and core demand fundamentals remain strong.⁽¹⁾ In 2015, the Company expects continued momentum behind its model-year 2015 motorcycles including increased worldwide distribution of its Street motorcycles.⁽¹⁾

Please refer to the “Results of Operations 2014 Compared to 2013” for additional details concerning the results for 2014.


(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 19, 2015), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.

Outlook⁽¹⁾

On January 29, 2015 the Company announced the following expectations for 2015.

The Company expects to ship 282,000 to 287,000 Harley-Davidson motorcycles during 2015, up approximately 4% to 6% over 2014. This includes 79,000 to 84,000 Harley-Davidson motorcycles that it expects to ship in the first quarter of 2015, down approximately 2% at the low end of the range to up 4% at the high end of the range over the first quarter of 2014. The Company believes the underlying worldwide demand fundamentals for Harley-Davidson motorcycles are strong and expects that motorcycle shipment growth in 2015 will be driven by:


•	The strong appeal of the Harley-Davidson brand


•	Great model-year 2015 and 2016 motorcycles


•	Full-year Road Glide availability


•	Improving availability and expanding distribution of the new Street motorcycles


•	Continuing outreach momentum in the United States


•	International expansion

The Company expects the 2015 operating margin percent for the Motorcycles segment to be between 18% and 19% compared to 18% in 2014. The Company believes the operating margin percent will benefit from a modest increase in gross margin, as well as lower selling, administrative and engineering expenses as a percent of revenue. The Company expects that the 2015 gross margin percent will be up modestly, benefited by motorcycle pricing, incremental margin driven by higher motorcycle production and strong productivity gains. The Company also expects these positive impacts to be offset by unfavorable foreign currency exchange, increased pension expense and unfavorable product mix. If foreign currency exchange rates on January 28, 2015 remained constant throughout 2015, the Company estimates the adverse impact to its expected Motorcycle segment revenue from currency exchange in 2015 would be approximately 3.25%. Although the Company has a significant portion of its 2015 foreign currency exposure hedged at favorable rates, it expects that about half of the unfavorable revenue impact would translate into lower gross profit. The Company's 2015 pension expense will increase as a result of a lower discount rate and changes in mortality assumptions. The Company believes changes in product mix will adversely impact gross profit as Street continues to increase as a percent of total shipments. The Company expects selling, administrative and engineering expenses to increase in 2015 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 2015 as compared to 2014. Going forward, the Company continues to expect pressure on Financial Services operating income as a result of higher credit losses, and tightening net interest margins due to increasing competition and higher borrowing costs.

The Company’s capital expenditure estimates for 2015 are between $240 million and $260 million. The Company anticipates it will have the ability to fund all capital expenditures in 2015 with cash flows generated by operations.

The Company also announced on January 29, 2015 that it expects the full year 2015 effective income tax rate to be approximately 35.5%, which does not include the U.S. Federal Research and Development tax credits as it expired at the end of 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.

Results of Operations 2014 Compared to 2013

Consolidated Results



(in thousands, except earnings per share)	2014		2013		Increase (Decrease)			% Change
Operating income from Motorcycles & Related Products	$	1,003,147	$	870,609	$	132,538		15.2	%
Operating income from Financial Services	277,836		283,093		(5,257		)	(1.9	)%
Operating income	1,280,983		1,153,702		127,281			11.0	%
Investment income	6,499		5,859		640			10.9	%
Interest expense	4,162		45,256		(41,094		)	(90.8	)%
Income before income taxes	1,283,320		1,114,305		169,015			15.2	%
Provision for income taxes	438,709		380,312		58,397			15.4	%
Net income	$	844,611	$	733,993	$	110,618		15.1	%
Diluted earnings per share	$	3.88	$	3.28	$	0.60		18.3	%

Consolidated operating income was up 11.0% in 2014 led by an increase in operating income from the Motorcycles segment which improved by $132.5 million compared to 2013. Operating income for the Financial Services segment decreased by $5.3 million during 2014 as compared to 2013. 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.

Interest expense was lower in 2014 compared to 2013 due to the retirement of $303 million of senior unsecured long-term debt in February 2014.

The effective income tax rate for 2014 was 34.2% compared to 34.1% for 2013. The Company's 2014 and 2013 effective tax rate included U.S. Federal Research and Development tax credits that were reinstated by the American Taxpayer Relief Act. The effective tax rate for 2013 also included the full-impact of the 2012 U.S. Federal Research and Development tax credit due to the timing of the enactment of the American Taxpayer Relief Act.

Diluted earnings per share were $3.88 in 2014, up 18.3% over 2013. The increase in diluted earnings per share was driven primarily by the 15.1% increase in net income, but also benefited from lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 224.1 million in 2013 to 217.7 million in 2014 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 2.7% during 2014 compared to 2013. Retail sales of Harley-Davidson motorcycles increased 1.3% in the United States and 5.4% internationally in 2014.

The Company believes U.S. retail sales for 2014 benefited from strong sales of Rushmore and Street motorcycles that were partially offset by adverse impacts that resulted from the absence of Road Glide motorcycles for most of the year and very difficult weather conditions in the first half of the year.

International retail sales growth during 2014 in the Asia Pacific region, Latin America region and EMEA region was partially offset by a decline in Canada. 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 Mexico. The EMEA region retail sales growth was driven by growth in nearly all countries throughout the region. International retail sales as a percent of total retail sales in 2014 were 36.2% of total retail sales compared to 35.3% in 2013.

The Company is encouraged by the 2014 performance of retail sales in international markets, but remains concerned with ongoing economic challenges in several markets. Going forward, the Company will continue to focus on factors it can control which include building its brand experience across the world and expanding its distribution network in emerging markets.

Harley-Davidson Motorcycle Retail Sales^(a)

The following table includes retail unit sales of Harley-Davidson motorcycles:



	2014	2013	Increase (Decrease)		% Change
North America Region
United States	171,079	168,863	2,216		1.3	%
Canada	9,871	11,062	(1,191	)	(10.8	)
Total North America Region	180,950	179,925	1,025		0.6
Europe, Middle East and Africa Region (EMEA)
Europe^(b)	38,491	36,076	2,415		6.7
Other	6,832	6,533	299		4.6
Total EMEA Region	45,323	42,609	2,714		6.4
Asia Pacific Region
Japan	10,775	10,751	24		0.2
Other	19,299	16,139	3,160		19.6
Total Asia Pacific Region	30,074	26,890	3,184		11.8
Latin America Region	11,652	11,415	237		2.1
Total Worldwide Retail Sales	267,999	260,839	7,160		2.7	%
Total International Retail Sales	96,920	91,976	4,944		5.4	%


(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:



	2014	2013	Increase	% Change
United States^(b)	313,627	305,852	7,775	2.5	%
Europe^(c)	319,801	281,844	37,957	13.5	%


(a)	Data includes on-road 601+cc models. On-road 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.

Motorcycles and Related Products Segment

Motorcycle Unit Shipments

The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:



	2014			2013			Unit		Unit
	Units	Mix %		Units	Mix %		Increase (Decrease)		% Change
United States	173,994	64.3	%	167,016	64.1	%	6,978		4.2	%
International	96,732	35.7	%	93,455	35.9	%	3,277		3.5
Harley-Davidson motorcycle units	270,726	100.0	%	260,471	100.0	%	10,255		3.9	%
Touring motorcycle units	122,481	45.2	%	107,213	41.2	%	15,268		14.2	%
Custom motorcycle units^(a)	91,426	33.8	%	102,950	39.5	%	(11,524	)	(11.2	)
Sportster^® / Street motorcycle units^(b)	56,819	21.0	%	50,308	19.3	%	6,511		12.9
Harley-Davidson motorcycle units	270,726	100.0	%	260,471	100.0	%	10,255		3.9	%


(a)	Custom motorcycle units, as used in this table, include Dyna^®, Softail^®, V-Rod^® and CVO models.


(b)	Initial shipments of Street motorcycle units began during the first quarter of 2014.

During 2014, wholesale shipments of Harley-Davidson motorcycles were up 3.9% compared to the prior year and within the Company’s most recent expected shipment range of 270,000 to 275,000 motorcycles. International shipments as a percentage of the total were down slightly in 2014 as compared to 2013. 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⁽¹⁾. In addition, shipments of touring motorcycles and Sportster^®/ Street motorcycles as a percentage of total shipments increased in 2014 compared to the prior year while shipments of custom 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 continued demand for model-year 2014 Rushmore motorcycles and demand for model-year 2015 Rushmore motorcycles. Also, the shipment mix of Sportster^®/ Street increased as a result of Street shipments which began in 2014 and totaled approximately 9,900 motorcycles. The Company believes the shipment mix of Sportster^®/ Street will be higher in 2015 as a result of increased Street shipments⁽¹⁾. As expected, retail inventory in the U.S. at the end of 2014 was approximately 2,900 units higher than at the end of 2013 largely due to the initial dealer fill of Street models for retail. The Company believes the U.S. year-end 2014 dealer retail inventory level was appropriate going into 2015⁽¹⁾.

Segment Results

The following table includes the condensed statement of operations for the Motorcycles segment (in thousands):



	2014		2013			Increase (Decrease)			% Change
Revenue:
Motorcycles	$	4,385,863	$	4,067,510		$	318,353		7.8	%
Parts & Accessories	875,019		873,075			1,944			0.2
General Merchandise	284,826		295,854			(11,028		)	(3.7	)
Other	21,973		21,851			122			0.6
Total revenue	5,567,681		5,258,290			309,391			5.9
Cost of goods sold	3,542,601		3,395,918			146,683			4.3
Gross profit	2,025,080		1,862,372			162,708			8.7
Selling & administrative expense	887,333		847,927			39,406			4.6
Engineering expense	134,600		145,967			(11,367		)	(7.8	)
Restructuring benefit	—		(2,131		)	2,131			(100.0	)
Operating expense	1,021,933		991,763			30,170			3.0
Operating income from Motorcycles	$	1,003,147	$	870,609		$	132,538		15.2	%

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 2013 to 2014 (in millions):



	Net Revenue			Cost of Goods Sold			Gross Profit
2013	$	5,259		$	3,397		$	1,862
Volume	124			85			39
Price	166			119			47
Foreign currency exchange rates and hedging	(31		)	(19		)	(12		)
Shipment mix	50			(16		)	66
Raw material prices	—			1			(1		)
Manufacturing costs	—			(24		)	24
Total	309			146			163
2014	$	5,568		$	3,543		$	2,025

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2013 to 2014:


•	Volume increases were driven by the increase in wholesale motorcycle shipments and parts and accessories sales, partially offset by lower sales volumes for general merchandise. General merchandise revenue was adversely impacted in 2014 by a SKU reduction plan across the apparel offering focused on transforming the retail customer experience with a more targeted assortment of popular styles.


•	On average, wholesale prices on the Company’s 2014 and 2015 model-year motorcycles are higher than the preceding model-year resulting in the favorable impact on revenue during the period. The 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 and 2015 model-year motorcycles.


•	Net revenue and gross profit were negatively impacted by a devaluation in the Company's key foreign currencies compared to the U.S. dollar, primarily the Euro, Japanese yen, Brazilian real and Australian dollar, which together declined approximately 3% on a weighted-average basis in 2014 compared to 2013.

•

Shipment mix changes between motorcycle families positively impacted net revenue and gross profit as a result of a higher mix of Touring motorcycles which was partially offset by an increase in Street motorcycle shipments. Shipment mix also benefited from favorable model mix within motorcycle families, as well as, favorable mix within the parts and accessories and general merchandise product lines. For the first quarter of 2015, the Company expects mix to adversely impact margin driven by an expected increase in Street motorcycle shipments⁽¹⁾.


•	Raw material prices were slightly higher in 2014 relative to 2013.


•	Manufacturing costs for 2014 benefited from increased year-over-year production, restructuring savings, lower temporary inefficiencies and lower pension costs compared to 2013. The manufacturing cost benefits were partially offset by start-up costs of approximately $15.3 million associated with the launch of the Street platform of motorcycles.

The net increase in operating expense was primarily due to higher selling and administrative expenses and the absence of the restructuring benefit recorded in 2013, partially offset by lower engineering expense. The higher selling and administrative expenses were primarily due to higher spending in support of the Company's growth initiatives and higher recall costs. In 2013, the Company completed work related to its various restructuring activities that were initiated during 2009 through 2011. For further information regarding the Company’s previously announced restructuring activities, refer to Note 3 of Notes to Condensed Consolidated Financial Statements.

Financial Services Segment

Segment Results

The following table includes the condensed statements of operations for the Financial Services segment (in thousands):



	2014		2013		Increase (Decrease)			% Change
Interest income	$	594,990	$	583,174	$	11,816		2.0	%
Other income	65,837		58,408		7,429			12.7
Financial services revenue	660,827		641,582		19,245			3.0
Interest expense	164,476		165,491		(1,015		)	(0.6	)
Provision for credit losses	80,946		60,008		20,938			34.9
Operating expenses	137,569		132,990		4,579			3.4
Financial Services expense	382,991		358,489		24,502			6.8
Operating income from Financial Services	$	277,836	$	283,093	$	(5,257	)	(1.9	)%

Interest income was favorable due to higher retail and wholesale outstanding finance receivables, partially offset by lower yields primarily on retail finance receivables due to increased competition. Other income was favorable primarily due to increased credit card licensing and insurance revenue. Interest expense benefited from a more favorable cost of funds and a lower loss on the extinguishment of a portion of the Company's 6.80% medium-term notes than in 2013, partially offset by higher average outstanding debt.

The provision for credit losses increased $20.9 million compared to 2013 primarily due to an increase in the provision for retail credit losses. The retail motorcycle provision increased $20.0 million during 2014 as a result of higher credit losses, an increase in the retail motorcycle reserve rate, and portfolio growth. Credit losses were impacted by lower recovery values of repossessed motorcycles, the impact of changing consumer behavior, and lower recoveries as a result of fewer charge-offs in prior periods.

Annual losses on the Company's retail motorcycle loans were 1.22% during 2014 compared to 1.09% in 2013. The 30-day delinquency rate for retail motorcycle loans at December 31, 2014 decreased to 3.61% from 3.71% at December 31, 2013.

Changes in the allowance for credit losses on finance receivables were as follows (in thousands):



	2014			2013
Balance, beginning of period	$	110,693		$	107,667
Provision for credit losses	80,946			60,008
Charge-offs, net of recoveries	(64,275		)	(56,982		)
Balance, end of period	$	127,364		$	110,693

At December 31, 2014, the allowance for credit losses on finance receivables was $122.0 million for retail receivables and $5.3 million for wholesale receivables. 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.

The Company's periodic evaluation of the adequacy of the allowance for credit losses on finance receivables is generally based on the Company's past loan loss experience, known and inherent risks in the portfolio, current economic conditions and the estimated value of any underlying collateral. Please refer to Note 5 of Notes to Consolidated Financial Statements for further discussion regarding the Company’s allowance for credit losses on finance receivables.

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.

Motorcycles 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, and were reintroduced in the 2015 model-year with 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 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.

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)	36,076	37,027	(951	)	(2.6	)
Other	6,533	6,000	533		8.9
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 on-road 601+cc models. On-road 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)

Motorcycles and Related Products Segment

Motorcycle Unit Shipments

The following table includes wholesale motorcycle unit shipments for the Motorcycles & Related Products 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^(a)	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	%


(a)	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. International shipments as a percentage of the total were up slightly in 2013 as compared to 2012. 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.

Segment Results

The following table includes the condensed statement of operations for the Motorcycles & Related Products 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	%

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 were 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 benefited from savings related to restructuring initiatives, lower temporary inefficiencies and increased year-over-year production, partially offset by approximately $7 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.

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. In 2013, the Company completed work related to its various restructuring activities that were initiated during 2009 through 2011. For further information regarding the Company’s previously announced restructuring activities, refer to Note 3 of Notes to Condensed Consolidated Financial Statements.

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 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 the Company's 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.

Other Matters

New Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09 Revenue from Contracts with Customers (ASU No. 2014-09). ASU No. 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The Company is required to adopt ASU No. 2014-09 for fiscal years beginning after December 15, 2016 and for interim periods therein. The Company 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. The Company performs a periodic and systematic collective evaluation of the adequacy of the retail allowance. The Company utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates and current economic conditions including items such as unemployment rates.

The wholesale portfolio is primarily composed of large balance, non-homogeneous finance receivables. The Company's 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, mortality, long-term expected return on plan assets, future compensation and healthcare cost trend rates.

The Company determines its discount rate assumptions by referencing high-quality long-term bond rates that are matched to the duration of its own benefit obligations. Based on this analysis, the Company decreased the discount rate for pension and

SERPA obligations from 5.08% as of December 31, 2013 to 4.21% as of December 31, 2014. The Company decreased the discount rate for postretirement healthcare obligations from 4.70% to 3.99%. 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, 2014, the Company set its healthcare cost trend rate at 8.0% as of December 31, 2014. 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.

In the fourth quarter of 2014, the Society of Actuaries (SOA) issued new mortality tables (RP-2014 and MP-2014). The Company’s base mortality assumption, used in measuring the 2014 retirement plan benefit obligations, was developed using the RP 2014 table with weighted adjustments for the Company’s own credibility-adjusted mortality experience. In addition, after reviewing the SOA’s new MP-2014 table, the Company changed its long-term mortality projections to reflect longer anticipated life expectancies. The current assumptions represent the Company’s best estimate of mortality for its plan participants. The change in mortality assumptions at the end of 2014 resulted in an increase to the Company’s projected benefit obligation for pension plans of $64 million. The change did not have a meaningful impact on the accumulated benefit obligation for postretirement healthcare plans. These changes are considered actuarial losses and will be amortized to net periodic benefit cost along with other actuarial gains and losses. The Company will continue to review, and when necessary, adjust its mortality assumptions in connection with the measurement of its retirement program obligations.

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
2014 Net periodic benefit costs
Pension and SERPA	$	19,369	$	24,624	$	17,648	n/a
Postretirement healthcare	$	14,340	$	1,256	$	1,354	$	1,587
2014 Benefit obligations
Pension and SERPA	$	2,069,980	$	389,051	n/a		n/a
Postretirement healthcare	$	361,006	$	35,859	n/a		$	12,909

This information should not be viewed as predictive of future amounts. The calculation of pension, SERPA and postretirement healthcare obligations and costs is based on many factors in addition to those discussed here. This information should be considered in combination with the information provided in Note 13 of Notes to Consolidated Financial Statements.

Stock Compensation Costs – The total cost of the Company’s share-based equity awards is equal to the grant date fair value per award multiplied by the number of awards granted (adjusted for forfeitures). This cost is recognized as expense on a straight-line basis over the service periods of the awards. Forfeitures are initially estimated based on historical Company information and subsequently updated over the life of the awards to ultimately reflect actual forfeitures. As a result, changes in forfeiture activity can influence the amount of stock compensation cost recognized from period to period.

The Company estimates the fair value of option awards as of the grant date using a lattice-based option valuation model which utilizes ranges of assumptions over the expected term of the options, including stock price volatility, dividend yield and risk-free interest rate.

The valuation model uses historical data to estimate option exercise behavior and employee terminations. The expected term of options granted is derived from the output of the option valuation model and represents the average period of time that options granted are expected to be outstanding.

The Company uses implied volatility to determine the expected volatility of its stock. The implied volatility is derived from options that are actively traded and the market prices of both the traded options and underlying shares are measured at a similar point in time to each other and on a date reasonably close to the grant date of the employee stock options. In addition,

the traded options have exercise prices that are both (a) near-the-money and (b) close to the exercise price of the employee stock options. Finally, the remaining maturities of the traded options on which the estimate is based are at least one year.

Dividend yield was based on the Company’s expected dividend payments and the risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant.

Changes in the valuation assumptions could result in a significant change to the cost of an individual option. However, the total cost of an award is also a function of the number of awards granted, and as result, the Company has the ability to control the cost of its equity awards by adjusting the number of awards granted.

Income Taxes – The Company accounts for income taxes in accordance with ASC Topic 740, “Income Taxes.” Deferred tax assets and liabilities are recognized for the future tax consequences attribut