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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2019
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)
Registrant's telephone number, including area code: (414342-4680
None
(Former name, former address and former fiscal year, if changed since last report)
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock Par Value $.01 PER SHARE
HOG
New York Stock Exchange
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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes     No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
 

Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No  
The registrant had outstanding 156,731,690 shares of common stock as of August 2, 2019.




Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended June 30, 2019
 
Part I
3
 
 
 
Item 1.
3
 
3
 
4
 
5
 
7
 
8
 
9
 
 
 
Item 2.
46
 
 
 
Item 3.
66
 
 
 
Item 4.
67
 
 
 
Part II
68
 
 
 
Item 1.
68
 
 
 
Item 2.
68
 
 
 
Item 6.
68
 
 
 
70


Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share amounts)
(Unaudited)
 
 
Three months ended
 
Six months ended
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,434,004

 
$
1,525,121

 
$
2,629,641

 
$
2,889,068

Financial Services
198,615

 
188,102

 
387,358

 
366,276

Total revenue
1,632,619

 
1,713,223

 
3,016,999

 
3,255,344

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
979,266

 
993,036

 
1,827,464

 
1,883,210

Financial Services interest expense
52,673

 
51,943

 
104,997

 
100,393

Financial Services provision for credit losses
26,383

 
18,880

 
60,874

 
48,932

Selling, administrative and engineering expense
307,617

 
313,047

 
576,242

 
603,233

Restructuring expense
10,423

 
12,370

 
24,053

 
59,212

Total costs and expenses
1,376,362

 
1,389,276

 
2,593,630

 
2,694,980

Operating income
256,257

 
323,947

 
423,369

 
560,364

Other income (expense), net
4,037

 
645

 
8,697

 
865

Investment income
3,571

 
2,533

 
9,929

 
3,736

Interest expense
7,784

 
7,728

 
15,515

 
15,418

Income before provision for income taxes
256,081

 
319,397

 
426,480

 
549,547

Provision for income taxes
60,450

 
77,059

 
102,904

 
132,446

Net income
$
195,631

 
$
242,338

 
$
323,576

 
$
417,101

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.23

 
$
1.45

 
$
2.03

 
$
2.49

Diluted
$
1.23

 
$
1.45

 
$
2.03

 
$
2.48

Cash dividends per common share
$
0.375

 
$
0.370

 
$
0.750

 
$
0.740

The accompanying notes are an integral part of the consolidated financial statements.


3

Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
Six months ended
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
Net income
$
195,631

 
$
242,338

 
$
323,576

 
$
417,101

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Foreign currency translation adjustments
11,270

 
(26,482
)
 
11,601

 
(19,567
)
Derivative financial instruments
(11,923
)
 
23,920

 
(12,364
)
 
24,685

Pension and postretirement benefit plans
7,743

 
12,402

 
15,486

 
98,167

Total other comprehensive income, net of tax
7,090

 
9,840

 
14,723

 
103,285

Comprehensive income
$
202,721

 
$
252,178

 
$
338,299

 
$
520,386

The accompanying notes are an integral part of the consolidated financial statements.



4

Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
924,638

 
$
1,203,766

 
$
978,749

Marketable securities

 
10,007

 

Accounts receivable, net
325,306

 
306,474

 
335,594

Finance receivables, net
2,362,125

 
2,214,424

 
2,252,956

Inventories
470,610

 
556,128

 
465,373

Restricted cash
82,248

 
49,275

 
44,386

Other current assets
147,234

 
144,368

 
166,362

Total current assets
4,312,161

 
4,484,442

 
4,243,420

Finance receivables, net
5,232,280

 
5,007,507

 
5,060,246

Property, plant and equipment, net
855,998

 
904,132

 
904,113

Prepaid pension costs

 

 
131,497

Goodwill
64,449

 
55,048

 
55,451

Deferred income taxes
134,639

 
141,464

 
67,505

Lease assets
54,913

 

 

Other long-term assets
85,876

 
73,071

 
83,790

 
$
10,740,316

 
$
10,665,664

 
$
10,546,022

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
324,464

 
$
284,861

 
$
287,214

Accrued liabilities
615,905

 
601,130

 
572,440

Short-term debt
405,695

 
1,135,810

 
1,327,307

Current portion of long-term debt, net
2,396,188

 
1,575,799

 
945,463

Total current liabilities
3,742,252

 
3,597,600

 
3,132,424

Long-term debt, net
4,650,176

 
4,887,667

 
4,868,346

Lease liabilities
38,365

 

 

Pension liabilities
92,750

 
107,776

 
55,819

Postretirement healthcare liabilities
92,539

 
94,453

 
113,464

Other long-term liabilities
213,593

 
204,219

 
214,443

Commitments and contingencies (Note 17)

 

 

Shareholders’ equity:
 
 
 
 
 
Preferred stock, none issued

 

 

Common stock
1,827

 
1,819

 
1,818

Additional paid-in-capital
1,474,819

 
1,459,620

 
1,442,580

Retained earnings
2,210,318

 
2,007,583

 
1,906,015

Accumulated other comprehensive loss
(614,961
)
 
(629,684
)
 
(396,764
)
Treasury stock, at cost
(1,161,362
)
 
(1,065,389
)
 
(792,123
)
Total shareholders’ equity
1,910,641

 
1,773,949

 
2,161,526

 
$
10,740,316

 
$
10,665,664

 
$
10,546,022



5

Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED BALANCE SHEETS (continued)
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
Balances held by consolidated variable interest entities (Note 13)
 
 
 
 
 
Current finance receivables, net
$
320,710

 
$
175,043

 
$
139,405

Other assets
$
1,533

 
$
1,563

 
$
1,280

Non-current finance receivables, net
$
1,240,081

 
$
591,839

 
$
392,901

Restricted cash - current and non-current
$
79,436

 
$
47,203

 
$
39,757

Current portion of long-term debt, net
$
360,269

 
$
189,693

 
$
155,631

Long-term debt, net
$
1,106,736

 
$
488,191

 
$
313,799

The accompanying notes are an integral part of the consolidated financial statements.

6

Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Six months ended
 
June 30,
2019
 
July 1,
2018
Net cash provided by operating activities (Note 8)
$
496,232

 
$
735,859

Cash flows from investing activities:
 
 
 
Capital expenditures
(83,229
)
 
(69,293
)
Origination of finance receivables
(2,064,899
)
 
(1,999,786
)
Collections on finance receivables
1,768,829

 
1,712,884

Sales and redemptions of marketable securities
10,007

 

Acquisition of business
(7,000
)
 

Other
11,717

 
(11,758
)
Net cash used by investing activities
(364,575
)
 
(367,953
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of medium-term notes
546,655

 
1,144,018

Repayments of medium-term notes
(750,000
)
 
(877,488
)
Proceeds from securitization debt
1,021,353

 

Repayments of securitization debt
(113,806
)
 
(183,453
)
Borrowings of asset-backed commercial paper
23,373

 
120,903

Repayments of asset-backed commercial paper
(155,286
)
 
(100,660
)
Net (decrease) increase in credit facilities and unsecured commercial paper
(728,606
)
 
56,280

Dividends paid
(120,841
)
 
(124,680
)
Purchase of common stock for treasury
(104,621
)
 
(111,227
)
Issuance of common stock under employee stock option plans
833

 
1,965

Net cash used by financing activities
(380,946
)
 
(74,342
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
3,439

 
(10,091
)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(245,850
)
 
$
283,473

Cash, cash equivalents and restricted cash:
 
 
 
Cash, cash equivalents and restricted cash—beginning of period
$
1,259,748

 
$
746,210

Net (decrease) increase in cash, cash equivalents and restricted cash
(245,850
)
 
283,473

Cash, cash equivalents and restricted cash—end of period
$
1,013,898

 
$
1,029,683

 
 
 
 
Reconciliation of cash, cash equivalents and restricted cash to the Consolidated Balance Sheet:
 
 
 
Cash and cash equivalents
$
924,638

 
$
978,749

Restricted cash
82,248

 
44,386

Restricted cash included in other long-term assets
7,012

 
6,548

Total cash, cash equivalents and restricted cash shown in the Statement of Cash Flows
$
1,013,898

 
$
1,029,683

The accompanying notes are an integral part of the consolidated financial statements.


7

Table of Contents

HARLEY-DAVIDSON, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands, except share amounts)
(Unaudited)
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Balance
 
Total
 
 
Issued
Shares
 
Balance
 
Balance, December 31, 2018
 
181,931,225

 
$
1,819

 
$
1,459,620

 
$
2,007,583

 
$
(629,684
)
 
$
(1,065,389
)
 
$
1,773,949

Net income
 

 

 

 
127,945

 

 

 
127,945

Total other comprehensive income, net of tax (Note 18)
 

 

 

 

 
7,633

 

 
7,633

Dividends
 

 

 

 
(60,859
)
 

 

 
(60,859
)
Repurchase of common stock
 

 

 

 

 

 
(61,712
)
 
(61,712
)
Share-based compensation
 
702,687

 
7

 
5,961

 

 

 
4,687

 
10,655

Balance, March 31, 2019
 
182,633,912

 
$
1,826

 
$
1,465,581

 
$
2,074,669

 
$
(622,051
)
 
$
(1,122,414
)
 
$
1,797,611

Net income
 

 

 

 
195,631

 

 

 
195,631

Total other comprehensive income, net of tax (Note 18)
 

 

 

 

 
7,090

 

 
7,090

Dividends
 

 

 

 
(59,982
)
 

 

 
(59,982
)
Repurchase of common stock
 

 

 

 

 

 
(42,908
)
 
(42,908
)
Share-based compensation
 
9,338

 
1

 
9,238

 

 

 
3,960

 
13,199

Balance, June 30, 2019
 
182,643,250

 
$
1,827

 
$
1,474,819

 
$
2,210,318

 
$
(614,961
)
 
$
(1,161,362
)
 
$
1,910,641

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
Treasury
Balance
 
Total
 
 
Issued
Shares
 
Balance
 
Balance, December 31, 2017
 
181,286,547

 
$
1,813

 
$
1,422,808

 
$
1,607,570

 
$
(500,049
)
 
$
(687,865
)
 
$
1,844,277

Net income
 

 

 

 
174,763

 

 

 
174,763

Total other comprehensive income, net of tax (Note 18)
 

 

 

 

 
93,445

 

 
93,445

Dividends
 

 

 

 
(62,731
)
 

 

 
(62,731
)
Repurchase of common stock
 

 

 

 

 

 
(72,968
)
 
(72,968
)
Share-based compensation
 
489,896

 
5

 
9,884

 

 

 
3,250

 
13,139

Cumulative effect of change in accounting
 

 

 

 
6,024

 

 

 
6,024

Balance, April 1, 2018
 
181,776,443

 
$
1,818

 
$
1,432,692

 
$
1,725,626

 
$
(406,604
)
 
$
(757,583
)
 
$
1,995,949

Net income
 

 

 

 
242,338

 

 

 
242,338

Total other comprehensive income, net of tax (Note 18)
 

 

 

 

 
9,840

 

 
9,840

Dividends
 

 

 

 
(61,949
)
 

 

 
(61,949
)
Repurchase of common stock
 

 

 

 

 

 
(38,259
)
 
(38,259
)
Share-based compensation
 
13,644

 

 
9,888

 

 

 
3,719

 
13,607

Balance, July 1, 2018
 
181,790,087

 
$
1,818

 
$
1,442,580

 
$
1,906,015

 
$
(396,764
)
 
$
(792,123
)
 
$
2,161,526



8

Table of Contents

HARLEY-DAVIDSON, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material intercompany transactions are eliminated.
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the consolidated balance sheets as of June 30, 2019 and July 1, 2018, the consolidated statements of income for the three and six month periods then ended, the consolidated statements of comprehensive income for the three and six month periods then ended, the consolidated statements of cash flows for the six month periods then ended, and the consolidated statements of shareholders' equity for the three and six month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.
The Company operates in two reportable segments: Motorcycles and Related Products (Motorcycles) and Financial Services.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
2. New Accounting Standards
Accounting Standards Recently Adopted
In February 2016, the FASB issued ASU No. 2016-02 Leases (Topic 842) (ASU 2016-02). ASU 2016-02 amends the lease accounting model by requiring a lessee to recognize the rights and obligations resulting from certain leases as assets and liabilities on the balance sheet. ASU 2016-02 also requires a company to disclose key information about their leasing arrangements. The Company adopted ASU 2016-02 on January 1, 2019 using a modified retrospective approach. Pursuant to ASU 2018-11, Leases (Topic 842): Targeted Improvements, the Company applied the new leases standard at the adoption date and recognized a cumulative effect adjustment to the opening balance sheet on January 1, 2019.
The Company elected the package of practical expedients upon transition that allows entities not to reassess lease identification, classification and initial direct costs for leases that existed prior to adoption. The Company also elected the short-term lease practical expedient that allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company has elected the practical expedient allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets operated by a third-party.
The adoption of ASU 2016-02 resulted in the initial recognition of right of use assets and lease liabilities related to the Company's leasing arrangements totaling approximately $60 million on January 1, 2019. The adoption of ASU 2016-02 had no impact on opening retained earnings on January 1, 2019 and is not expected to materially impact consolidated net income or cash flows on an on-going basis.
In August 2017, the FASB issued ASU No. 2017-12 Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities (ASU 2017-12). ASU 2017-12 amends ASC 815, Derivatives and Hedging to improve the financial reporting of hedging relationships and to simplify the application of the hedge accounting guidance. The ASU makes various updates to the hedge accounting model, including changing the recognition and presentation of changes in the fair value of the hedging instrument and amending disclosure requirements, among other things. The Company adopted ASU 2017-12 on January 1, 2019. The adoption of ASU 2017-12 did not have a material impact on its financial statements.

9


Accounting Standards Not Yet Adopted
In July 2016, the FASB issued ASU No. 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). ASU 2016-13 changes how to recognize expected credit losses on financial assets. The standard requires a more timely recognition of credit losses on loans and other financial assets and also provides additional transparency about credit risk. The current credit loss standard generally requires that a loss actually be incurred before it is recognized, while the new standard will require recognition of full lifetime expected losses upon initial recognition of the financial instrument. The Company is required to adopt ASU 2016-13 for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2019 on a modified retrospective basis. Early adoption is permitted for fiscal years beginning after December 15, 2018. An entity should apply the standard by recording a cumulative effect adjustment to retained earnings upon adoption. Adoption of this standard will impact how the Company recognizes credit losses on its financial instruments. The Company is currently evaluating the impact of adoption of ASU 2016-13 but anticipates the adoption will result in an initial increase in the allowance for credit losses, with a decrease in retained earnings. The initial change in the allowance for credit losses at adoption and the ongoing effect of ASU 2016-13 on the provision for credit losses will be impacted by the size and composition of the Company's finance receivables portfolio at each reporting period, as well as other items including economic conditions and forecasts at that time. 
In January 2017, the FASB issued ASU No. 2017-04 Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating the requirement to calculate the implied fair value of goodwill. Rather, the goodwill impairment is calculated by comparing the fair value of a reporting unit to its carrying value, and an impairment loss is recognized for the amount by which the carrying amount exceeds the fair value, limited to the total goodwill allocated to the reporting unit. All reporting units apply the same impairment test under the new standard. The Company is required to adopt ASU 2017-04 for its annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019 on a prospective basis. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). ASU 2018-13 amends ASC 820 to eliminate, modify, and add certain disclosure requirements for fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019 and for interim periods within those fiscal years. Early adoption is permitted in any period, for either the whole standard or only the provisions that eliminate or modify requirements. The amendments are required to be applied retrospectively, with the exception of a few disclosure additions, which are to be applied on a prospective basis. The Company is currently evaluating the impact of adopting ASU 2018-13, but does not believe that it will have a significant impact on its disclosures.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40) (ASU 2018-15). The new guidance requires a customer in a cloud computing arrangement that is a service contract to follow the existing internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. The guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently evaluating the impact of adopting ASU 2018-15.

10


3. Revenue

The following table includes revenue disaggregated by major source (in thousands):
 
 
Three months ended
 
Six months ended
 
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
Motorcycles and Related Products:
 
 
 
 
 
 
 
 
Motorcycles
 
$
1,128,063

 
$
1,201,453

 
$
2,092,638

 
$
2,323,126

Parts & Accessories
 
221,258

 
231,014

 
380,961

 
400,089

General Merchandise
 
64,644

 
68,653

 
120,045

 
125,254

Licensing
 
9,911

 
10,407

 
18,488

 
18,765

Other
 
10,128

 
13,594

 
17,509

 
21,834

Revenue from Motorcycles and Related Products
 
1,434,004

 
1,525,121

 
2,629,641

 
2,889,068

Financial Services:
 
 
 
 
 
 
 
 
Interest income
 
167,077

 
158,639

 
326,881

 
312,680

Securitization and servicing fee income
 
163

 
304

 
352

 
656

Other income
 
31,375

 
29,159

 
60,125

 
52,940

Revenue from Financial Services
 
198,615

 
188,102

 
387,358

 
366,276

Total revenue
 
$
1,632,619

 
$
1,713,223

 
$
3,016,999

 
$
3,255,344


Deferred revenue relates to payments received at contract inception in advance of the Company’s performance under the contract and generally relates to the sale of Harley Ownership Group memberships and extended service plan contracts. Deferred revenue is recognized as revenue as the Company performs under the contract. Deferred revenue, included in Accrued liabilities and Other long-term liabilities on the consolidated balance sheet, was as follows (in thousands):
 
 
June 30,
2019
 
July 1,
2018
Balance, beginning of year
 
$
29,055

 
$
23,441

Balance, end of period
 
32,568

 
30,753


Previously deferred revenue recognized as revenue in the three months ended June 30, 2019 and July 1, 2018 was $6.2 million and $5.1 million, respectively, and $12.3 million and $9.1 million in the six months ended June 30, 2019 and July 1, 2018. The Company expects to recognize approximately $17.6 million of the remaining unearned revenue over the next 12 months and $15.0 million thereafter.
4. Restructuring Expenses
In January 2018, the Company initiated a plan to further improve its manufacturing operations and cost structure by commencing a multi-year manufacturing optimization plan which included the consolidation of its motorcycle assembly plant in Kansas City, Missouri, into its plant in York, Pennsylvania, and the closure of its wheel operations in Adelaide, Australia (Manufacturing Optimization Plan). The consolidation of operations included the elimination approximately 800 jobs at the Kansas City facility and the addition of approximately 450 jobs at the York facility through 2019. The Adelaide facility closure included the elimination of approximately 90 jobs.
Through June 30, 2019, the Motorcycles segment incurred $134.4 million of restructuring expenses and other consolidation costs for the Manufacturing Optimization Plan since its inception in 2018. The Company expects total restructuring expenses and other consolidation costs of $142 million to $152 million related to the Manufacturing Optimization Plan through 2019, of which approximately 70% will be cash charges.
The current estimate includes $119 million to $124 million of restructuring expense and $23 million to $28 million of costs related to temporary inefficiencies. The Company expects restructuring expenses to include the cost of employee termination benefits, accelerated depreciation, and other project implementation costs of $38 million to $40 million, $48 million to $49 million, and $33 million to $35 million, respectively.
In November 2018, the Company implemented a reorganization of its workforce (Reorganization Plan). As a result, approximately 70 employees left the Company on an involuntary basis.

11


Restructuring expense related to these plans is recorded in a separate line item in the consolidated statements of income and the accrued restructuring liability is recorded in Accrued liabilities on the consolidated balance sheet. Changes in the accrued restructuring liability (in thousands) were as follows:
 
Three months ended June 30, 2019
 
Manufacturing Optimization Plan
 
Reorganization Plan
 
 
 
Employee Termination Benefits
 
Accelerated Depreciation
 
Other
 
Total
 
Employee Termination Benefits
 
Total
Balance, beginning of period
$
22,401

 
$

 
$
187

 
$
22,588

 
$
1,051

 
$
23,639

Restructuring expense (benefit)
8

 
5,586

 
4,830

 
10,424

 
(1
)
 
10,423

Utilized - cash
(12,734
)
 

 
(4,294
)
 
(17,028
)
 
(882
)
 
(17,910
)
Utilized - non cash

 
(5,586
)
 
(696
)
 
(6,282
)
 

 
(6,282
)
Foreign currency changes
(14
)
 

 
(4
)
 
(18
)
 
(24
)
 
(42
)
Balance, end of period
$
9,661

 
$

 
$
23

 
$
9,684

 
$
144

 
$
9,828

 
Three months ended July 1, 2018
 
Manufacturing Optimization Plan
 
Reorganization Plan
 
 
 
Employee Termination Benefits
 
Accelerated Depreciation
 
Other
 
Total
 
Employee Termination Benefits
 
Total
Balance, beginning of period
$
38,287

 
$

 
$
63

 
$
38,350

 
$

 
$
38,350

Restructuring expense
(1,186
)
 
9,746

 
3,810

 
12,370

 

 
12,370

Utilized - cash
(133
)
 

 
(3,793
)
 
(3,926
)
 

 
(3,926
)
Utilized - non cash

 
(9,746
)
 

 
(9,746
)
 

 
(9,746
)
Foreign currency changes
(210
)
 

 
(3
)
 
(213
)
 

 
(213
)
Balance, end of period
$
36,758

 
$

 
$
77

 
$
36,835

 
$

 
$
36,835


 
Six months ended June 30, 2019
 
Manufacturing Optimization Plan
 
Reorganization Plan
 
 
 
Employee Termination Benefits
 
Accelerated Depreciation
 
Other
 
Total
 
Employee Termination Benefits
 
Total
Balance, beginning of period
$
24,958

 
$

 
$
79

 
$
25,037

 
$
3,461

 
$
28,498

Restructuring expense
17

 
13,965

 
10,466

 
24,448

 
(395
)
 
24,053

Utilized - cash
(15,334
)
 

 
(9,822
)
 
(25,156
)
 
(2,896
)
 
(28,052
)
Utilized - non cash

 
(13,965
)
 
(696
)
 
(14,661
)
 

 
(14,661
)
Foreign currency changes
20

 

 
(4
)
 
16

 
(26
)
 
(10
)
Balance, end of period
$
9,661

 
$

 
$
23

 
$
9,684

 
$
144

 
$
9,828

 
Six months ended July 1, 2018
 
Manufacturing Optimization Plan
 
Reorganization Plan
 
 
 
Employee Termination Benefits
 
Accelerated Depreciation
 
Other
 
Total
 
Employee Termination Benefits
 
Total
Balance, beginning of period
$

 
$

 
$

 
$

 
$

 
$

Restructuring expense
39,605

 
15,359

 
4,248

 
59,212

 

 
59,212

Utilized - cash
(2,433
)
 

 
(4,167
)
 
(6,600
)
 

 
(6,600
)
Utilized - non cash

 
(15,359
)
 

 
(15,359
)
 

 
(15,359
)
Foreign currency changes
(414
)
 

 
(4
)
 
(418
)
 

 
(418
)
Balance, end of period
$
36,758

 
$

 
$
77

 
$
36,835

 
$

 
$
36,835



12


The Company incurred incremental Motorcycles and Related Products cost of goods sold due to temporary inefficiencies resulting from implementing the Manufacturing Optimization Plan during the three months ended June 30, 2019 and July 1, 2018 of $4.0 million and $2.4 million, respectively, and $7.6 million and $3.1 million, respectively, during the six months ended June 30, 2019 and July 1, 2018.
During the three months ended July 1, 2018, the restructuring liability was adjusted to reflect updated assumptions resulting in a reversal of approximately $1.7 million of previously recognized restructuring expense.
5. Income Taxes
The Company’s effective income tax rate for the six months ended June 30, 2019 and July 1, 2018 was 24.1%.
6. Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share amounts):
 
Three months ended
 
Six months ended
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
Net income
$
195,631

 
$
242,338

 
$
323,576

 
$
417,101

 
 
 
 
 
 
 
 
Basic weighted-average shares outstanding
158,813

 
166,589

 
159,061

 
167,364

Effect of dilutive securities - employee stock compensation plan
612

 
615

 
664

 
825

Diluted weighted-average shares outstanding
159,425

 
167,204

 
159,725

 
168,189

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
1.23

 
$
1.45

 
$
2.03

 
$
2.49

Diluted
$
1.23

 
$
1.45

 
$
2.03

 
$
2.48


Outstanding options to purchase 1.2 million and 1.5 million shares of common stock for the three months ended June 30, 2019 and July 1, 2018, respectively, and 1.2 million and 1.3 million shares of common stock for the six months ended June 30, 2019 and July 1, 2018, respectively, were not included in the Company’s computation of dilutive securities because the exercise price was greater than the market price, and therefore, the effect would have been anti-dilutive.
The Company has a share-based compensation plan under which employees may be granted share-based awards including restricted stock units (RSUs). Non-forfeitable dividend equivalents are paid on unvested RSUs. As such, RSUs are considered participating securities under the two-class method of calculating earnings per share as described in ASC Topic 260, “Earnings per Share.” The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation for the three and six month periods ended June 30, 2019 and July 1, 2018.
7. Acquisition
On March 4, 2019, the Company purchased certain assets and liabilities of StaCyc, Inc. for total consideration of $14.9 million including cash paid at acquisition of $7.0 million. StaCyc produces electric-powered two-wheelers specifically designed for children and supports the Company’s plans to expand its portfolio of electric two-wheeled vehicles.
The Company has completed an allocation of the purchase consideration and valuation of acquired assets and liabilities. The primary assets acquired and included in the Motorcycles segment were goodwill of $9.5 million, which is tax deductible, and intangible assets of $5.3 million.

13


8. Additional Balance Sheet and Cash Flow Information
Investments in Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
Debt securities
$

 
$
10,007

 
$

Mutual funds
51,543

 
44,243

 
49,537

Total marketable securities
$
51,543

 
$
54,250

 
$
49,537


Debt securities, which were included in Marketable securities on the consolidated balance sheets, were carried at fair value with unrealized gains or losses reported in other comprehensive income. Mutual fund investments, which are included in Other long-term assets on the consolidated balance sheets, are carried at fair value with gains and losses recorded in net income. The mutual fund investments are held to support certain deferred compensation obligations.
Inventories
Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories are valued at the lower of cost or net realizable value using the first-in, first-out (FIFO) method. Inventories consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
Raw materials and work in process
$
161,828

 
$
177,110

 
$
154,921

Motorcycle finished goods
218,069

 
301,630

 
222,711

Parts & accessories and general merchandise
149,352

 
136,027

 
140,096

Inventory at lower of FIFO cost or net realizable value
529,249

 
614,767

 
517,728

Excess of FIFO over LIFO cost
(58,639
)
 
(58,639
)
 
(52,355
)
Total inventories, net
$
470,610

 
$
556,128

 
$
465,373



14


Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Six months ended
 
June 30,
2019
 
July 1,
2018
Cash flows from operating activities:
 
 
 
Net income
$
323,576

 
$
417,101

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization of intangibles
125,386

 
130,061

Amortization of deferred loan origination costs
38,036

 
39,396

Amortization of financing origination fees
4,522

 
4,133

Provision for long-term employee benefits
6,936

 
18,954

Employee benefit plan contributions and payments
(3,637
)
 
(6,422
)
Stock compensation expense
17,285

 
19,081

Net change in wholesale finance receivables related to sales
(167,594
)
 
(171,195
)
Provision for credit losses
60,874

 
48,932

Deferred income taxes
5,368

 
1,515

Other, net
(10,477
)
 
20,894

Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(17,592
)
 
(14,882
)
Finance receivables - accrued interest and other
(4,963
)
 
4,228

Inventories
88,146

 
63,957

Accounts payable and accrued liabilities
34,370

 
161,101

Derivative instruments
4,352

 
(136
)
Other
(8,356
)
 
(859
)
Total adjustments
172,656

 
318,758

Net cash provided by operating activities
$
496,232

 
$
735,859


9. Finance Receivables
The Company provides retail financial services to customers of the Company’s independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts and are primarily related to sales of motorcycles to the dealers' customers. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.
The Company offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada. Wholesale finance receivables are related primarily to sales of motorcycles and related parts and accessories to dealers.
Finance receivables, net, consisted of the following (in thousands):
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
Retail
$
6,549,707

 
$
6,328,201

 
$
6,373,926

Wholesale
1,239,694

 
1,083,615

 
1,133,206

Total finance receivables
7,789,401

 
7,411,816

 
7,507,132

Allowance for credit losses
(194,996
)
 
(189,885
)
 
(193,930
)
Finance receivables, net
$
7,594,405

 
$
7,221,931

 
$
7,313,202



15


A provision for credit losses on finance receivables is charged or credited to earnings in amounts that the Company believes are sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses inherent in the existing portfolio. The allowance for credit losses represents management’s estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company could differ from the amounts estimated.
Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended June 30, 2019
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
181,426

 
$
9,446

 
$
190,872

Provision for credit losses
27,555

 
(1,172
)
 
26,383

Charge-offs
(35,741
)
 

 
(35,741
)
Recoveries
13,482

 

 
13,482

Balance, end of period
$
186,722

 
$
8,274

 
$
194,996

 
 
 
 
 
 
 
Three months ended July 1, 2018
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
182,150

 
$
8,200

 
$
190,350

Provision for credit losses
20,652

 
(1,772
)
 
18,880

Charge-offs
(28,947
)
 

 
(28,947
)
Recoveries
13,647

 

 
13,647

Balance, end of period
$
187,502

 
$
6,428

 
$
193,930

 
 
 
 
 
 
 
Six months ended June 30, 2019
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
182,098

 
$
7,787

 
$
189,885

Provision for credit losses
60,387

 
487

 
60,874

Charge-offs
(80,462
)
 

 
(80,462
)
Recoveries
24,699

 

 
24,699

Balance, end of period
$
186,722

 
$
8,274

 
$
194,996

 
 
 
 
 
 
 
Six months ended July 1, 2018
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
186,254

 
$
6,217

 
$
192,471

Provision for credit losses
48,721

 
211

 
48,932

Charge-offs
(74,028
)
 

 
(74,028
)
Recoveries
26,555

 

 
26,555

Balance, end of period
$
187,502

 
$
6,428

 
$
193,930


Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement. Portions of the allowance for credit losses are established to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covers estimated losses on finance receivables which are collectively reviewed for impairment.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates, and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and, therefore, are not reported as impaired loans.

16


The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
 
June 30, 2019
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
186,722

 
8,274

 
194,996

Total allowance for credit losses
$
186,722

 
$
8,274

 
$
194,996

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,549,707

 
1,239,694

 
7,789,401

Total finance receivables
$
6,549,707

 
$
1,239,694

 
$
7,789,401

 
 
 
 
 
 
 
December 31, 2018
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
182,098

 
7,787

 
189,885

Total allowance for credit losses
$
182,098

 
$
7,787

 
$
189,885

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
6,328,201

 
1,083,615

 
7,411,816

Total finance receivables
$
6,328,201

 
$
1,083,615

 
$
7,411,816

 
 
 
 
 
 
 
July 1, 2018
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$
184

 
$
184

Collectively evaluated for impairment
187,502

 
6,244

 
193,746

Total allowance for credit losses
$
187,502

 
$
6,428

 
$
193,930

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$
220

 
$
220

Collectively evaluated for impairment
6,373,926

 
1,132,986

 
7,506,912

Total finance receivables
$
6,373,926

 
$
1,133,206

 
$
7,507,132



17


There were no wholesale finance receivables at June 30, 2019 or December 31, 2018 that were individually deemed to be impaired under ASC Topic 310, "Receivables". Additional information related to the wholesale finance receivables that were individually deemed to be impaired at July 1, 2018 includes (in thousands):
 
July 1, 2018
 
Three months ended
July 1, 2018
 
Six months ended
July 1, 2018
 
Recorded
Investment
 
Unpaid
Principal
Balance
 
Related
Allowance
 
Average
Recorded
Investment
 
Interest
Income
Recognized
 
Average
Recorded
Investment
 
Interest
Income
Recognized
Wholesale:
 
 
 
 
 
 
 
 
 
 
 
 
 
No related allowance recorded
$

 
$

 
$

 
$

 
$

 
$

 
$

Related allowance recorded
251

 
220

 
184

 
251

 

 
251

 

Total
$
251

 
$
220

 
$
184

 
$
251

 
$

 
$
251

 
$

Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed, or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of June 30, 2019December 31, 2018 and July 1, 2018, all retail finance receivables were accounted for as interest-earning receivables, of which $30.4 million, $41.2 million and $22.4 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. There were no wholesale receivables on non-accrual status at June 30, 2019 or December 31, 2018. The recorded investment in non-accrual status wholesale finance receivables at July 1, 2018 was $0.2 million. At June 30, 2019December 31, 2018 and July 1, 2018, $2.1 million, $1.1 million, and $0.1 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.
An analysis of the aging of past due finance receivables was as follows (in thousands):
 
June 30, 2019
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
6,359,499

 
$
119,770

 
$
40,015

 
$
30,423

 
$
190,208

 
$
6,549,707

Wholesale
1,236,747

 
577

 
320

 
2,050

 
2,947

 
1,239,694

Total
$
7,596,246

 
$
120,347

 
$
40,335

 
$
32,473

 
$
193,155

 
$
7,789,401

 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
6,100,186

 
$
136,945

 
$
49,825

 
$
41,245

 
$
228,015

 
$
6,328,201

Wholesale
1,081,729

 
522

 
273

 
1,091

 
1,886

 
1,083,615

Total
$
7,181,915

 
$
137,467

 
$
50,098

 
$
42,336

 
$
229,901

 
$
7,411,816

 
 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2018
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
6,198,906

 
$
116,828

 
$
35,763

 
$
22,429

 
$
175,020

 
$
6,373,926

Wholesale
1,132,472

 
516

 
134

 
84

 
734

 
1,133,206

Total
$
7,331,378

 
$
117,344

 
$
35,897

 
$
22,513

 
$
175,754

 
$
7,507,132


18


A significant part of managing the Company's finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit risk indicators for each portfolio.
The Company manages retail credit risk through its credit approval policy and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants, enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are generally considered prime, and loans with a FICO score below 640 are generally considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment in retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
Prime
$
5,372,712

 
$
5,183,754

 
$
5,193,641

Sub-prime
1,176,995

 
1,144,447

 
1,180,285

Total
$
6,549,707

 
$
6,328,201

 
$
6,373,926

The Company's credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. The Company utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower. The Company uses the following internal credit quality indicators, based on an internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged-off, while the dealers classified as Low Risk are least likely to be charged-off. The internal rating system considers factors such as the specific borrower's ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The recorded investment in wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
Doubtful
$
6,850

 
$
2,210

 
$
251

Substandard
7,643

 
9,660

 
803

Special Mention
12,642

 
10,299

 
2,154

Medium Risk
6,170

 
25,802

 
37,045

Low Risk
1,206,389

 
1,035,644

 
1,092,953

Total
$
1,239,694

 
$
1,083,615

 
$
1,133,206


10. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures which prohibit the use of financial instruments for speculative trading purposes.
The Company sells products in foreign currencies and utilizes foreign currency exchange contracts to mitigate the effects of foreign currency exchange rate fluctuations related to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Indian rupee, and Pound sterling. The foreign currency exchange contracts generally have maturities of less than one year.
The Company utilizes commodity contracts to mitigate the effects of commodity price fluctuations related to metals and fuel consumed in the Company’s motorcycle production and distribution processes. The commodity contracts generally have maturities of less than one year.

19


The Company periodically utilizes treasury rate lock contracts to fix the interest rate on a portion of the principal related to the anticipated issuance of long-term debt as well as interest rate swaps to reduce the impact of fluctuations in interest rates on floating rate medium-term notes. The Company also utilizes interest rate caps to facilitate certain asset-backed securitization transactions.
All derivative instruments are recognized on the balance sheet at fair value. In accordance with ASC Topic 815, Derivatives and Hedging, the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.
Changes in the fair value of derivatives that are designated as cash flow hedges are initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in cash flow hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign currency, commodity risks, and interest rate risks. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings.
The following tables summarize the notional and recorded fair values of the Company’s derivative financial instruments (in thousands):
 
 
Derivatives Designated as Cash Flow Hedging
Instruments Under ASC Topic 815
 
 
June 30, 2019
 
December 31, 2018
 
July 1, 2018
Derivative
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
Foreign currency contracts
 
$
495,736

 
$
6,638

 
$
3,490

 
$
442,976

 
$
15,071

 
$
313

 
$
591,901

 
$
13,238

 
$

Commodity contracts
 
627

 

 
69

 
827

 

 
46

 
803

 
4

 

Interest rate swaps
 
900,000

 

 
11,920

 
900,000

 

 
4,494

 
450,000

 

 
597

Total
 
$
1,396,363

 
$
6,638

 
$
15,479


$
1,343,803

 
$
15,071

 
$
4,853


$
1,042,704

 
$
13,242

 
$
597

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivatives Not Designated as Hedging
Instruments Under ASC Topic 815
 
 
June 30, 2019
 
December 31, 2018
 
July 1, 2018
Derivative
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
 
Notional
Value
 
Other Current Assets
 
Accrued Liabil-ities
Foreign currency contracts
 
$
317,344

 
$
273

 
$
1,816

 
$

 
$

 
$

 
$

 
$

 
$

Commodity contracts
 
7,710

 
5

 
260

 
5,239

 

 
463

 
4,421

 
204

 
28

Interest rate cap
 
481,509

 
4

 

 

 

 

 

 

 

Total
 
$
806,563


$
282

 
$
2,076

 
$
5,239

 
$

 
$
463

 
$
4,421

 
$
204

 
$
28

 

20


The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
Location of Gain/(Loss) Reclassified from AOCL into Income
 
Total Statement of Income Amount for Line Items in which the Effects of Cash Flow Hedges are Recorded
 
 
Three months ended
 
 
 
Three months ended
Cash Flow Hedges
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
 
Statement of Income
line item
 
June 30,
2019
 
July 1,
2018
Foreign currency contracts
 
$
(2,865
)
 
$
32,635

 
$
7,668

 
$
956

 
Motorcycles cost of goods sold
 
$
979,266

 
$
993,036

Commodity contracts
 
(70
)
 
4

 
(7
)
 
(12
)
 
Motorcycles cost of goods sold
 
$
979,266

 
$
993,036

Treasury rate locks
 

 

 
(91
)
 
(91
)
 
Interest expense
 
$
7,784

 
$
7,728

Treasury rate locks
 

 
41

 
(32
)
 
(34
)
 
Financial Services interest expense
 
$
52,673

 
$
51,943

Interest rate swaps
 
(5,856
)
 
(886
)
 
(830
)
 
(289
)
 
Financial Services interest expense
 
$
52,673

 
$
51,943

Total
 
$
(8,791
)
 
$
31,794

 
$
6,708

 
$
530

 
 
 
 
 
 

 
 
Amount of Gain/(Loss) Recognized in OCI, before tax
 
Amount of Gain/(Loss) Reclassified from AOCL into Income
 
Location of Gain/(Loss) Reclassified from AOCL into Income
 
Total Statement of Income Amount for Line Items in which the Effects of Cash Flow Hedges are Recorded
 
 
Six months ended
 
 
 
Six months ended
Cash Flow Hedges
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
 
Statement of Income
line item
 
June 30,
2019
 
July 1,
2018
Foreign currency contracts
 
$
1,287

 
$
26,745

 
$
10,121

 
$
(5,753
)
 
Motorcycles cost of goods sold
 
$
1,827,464

 
$
1,883,210

Commodity contracts
 
(40
)
 
(12
)
 
(17
)
 
(85
)
 
Motorcycles cost of goods sold
 
$
1,827,464

 
$
1,883,210

Treasury rate locks
 

 

 
(181
)
 
(181
)
 
Interest expense
 
$
15,515

 
$
15,418

Treasury rate locks
 

 
41

 
(64
)
 
(70
)
 
Financial Services interest expense
 
$
104,997

 
$
100,393

Interest rate swaps
 
(8,861
)
 
(886
)
 
(1,436
)
 
(289
)
 
Financial Services Interest expense
 
$
104,997

 
$
100,393

Total
 
$
(7,614
)
 
$
25,888


$
8,423


$
(6,378
)
 
 
 
 
 
 

The amount of net loss included in Accumulated other comprehensive loss (AOCL) at June 30, 2019, estimated to be reclassified into income over the next twelve months was $3.2 million.
The following table summarizes the amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments (in thousands). Foreign currency contracts and commodity contracts were recorded in Motorcycles cost of goods sold and the interest rate cap was recorded in Financial services interest expense.
 
 
Amount of Gain (Loss) Recognized in Income on Derivative
 
 
Three months ended
 
Six months ended
Derivatives Not Designated as Hedges
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
Foreign currency contracts
 
$
(1,004
)
 
$

 
$
(117
)
 
$

Commodity contracts
 
(310
)
 
195

 
7

 
201

Interest rate cap
 
(141
)
 

 
(141
)
 

Total
 
$
(1,455
)
 
$
195

 
$
(251
)
 
$
201


The Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company evaluates counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover its position.

21


11. Leases
The Company determines if an arrangement is or contains a lease at contract inception. Right-of-use (ROU) assets related to leases are recorded in Lease assets and lease liabilities are recorded in Accrued liabilities and Lease liabilities on the consolidated balance sheet. 
ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at lease commencement date based on the present value of future lease payments over the lease term. The ROU asset also includes prepaid lease payments and initial direct costs and is reduced for lease incentives paid by the lessor. The discount rate used to determine the present value is generally the Company's incremental borrowing rate because the implicit rate in the lease is not readily determinable. The lease term used to calculate the ROU asset and lease liability includes periods covered by options to extend or terminate when the Company is reasonably certain the lease term will include these optional periods.
The Company has lease arrangements for sales and administrative offices, manufacturing and distribution facilities, product testing facilities, equipment and vehicles. All of the Company’s lease arrangements are accounted for as operating leases. The Company’s leases have remaining lease terms ranging from 1 to 13 years, some of which include options to extend the leases for periods generally not greater than 5 years and some of which include options to terminate the leases within 1 year. Certain leases also include options to purchase the leased asset. Leases do not contain any material residual value guarantees or material restrictive covenants.
Operating lease expense for the three and six months ended June 30, 2019 was $6.4 million and $12.7 million, respectively. This includes variable lease costs related to leases involving assets operated by a third-party of approximately $2.0 million and $3.2 million for the three and six months ended June 30, 2019, respectively. Other variable and short-term lease costs were not material.
Balance sheet information related to leases was as follows (in thousands):
 
June 30,
2019
Lease assets
$
54,913

 
 
Accrued liabilities
$
18,133

Lease liabilities
38,365

 
$
56,498


Future maturities of lease liabilities were as follows as of June 30, 2019 (in thousands):
 
Operating Leases
2019
$
10,474

2020
16,509

2021
13,167

2022
9,326

2023
3,770

Thereafter
6,899

Total present value of lease payments
60,145

Less present value discount
3,647

Total lease liability
$
56,498


Other lease information is as follows (dollars in thousands):
 
Three months ended
 
Six months ended
 
June 30, 2019
 
June 30, 2019
Operating cash outflows for amounts included in the measurement of lease liabilities
$
4,510

 
$
9,871

Right-of-use assets obtained in exchange for lease obligations
$
3,964

 
$
4,262



22


 
June 30,
2019
Weighted average remaining lease term (in years)
4.44

Weighted average discount rate
3.2
%

12. Debt
Debt with a contractual term of one year or less is generally classified as short-term debt and consisted of the following (in thousands):
 
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
Unsecured commercial paper
 
$
405,695

 
$
1,135,810

 
$
1,327,307


Debt with a contractual term greater than one year is generally classified as long-term debt and consisted of the following (in thousands): 
 
 
 
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
Secured debt (Note 13)
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
 
 
 
$
148,740

 
$
155,951

 
$
166,638

Asset-backed U.S. commercial paper conduit facilities
 
 
 
464,136

 
582,717

 
300,000

Asset-backed securitization debt
 
 
 
1,006,410

 
95,216

 
169,632

Less: unamortized discount and debt issuance costs
 
 
 
(3,541
)
 
(49
)
 
(202
)
Total secured debt
 
 
 
1,615,745

 
833,835

 
636,068

Unsecured debt (at par value)
 
 
 
 
 
 
 
 
Medium-term notes
 
 
 
 
 
 
 
 
Due in 2019, issued January 2016
 
2.25
%
 

 
600,000

 
600,000

Due in 2019, issued March 2017
 
LIBOR + 0.35%

 

 
150,000

 
150,000

Due in 2019, issued September 2014
 
2.40
%
 
600,000

 
600,000

 
600,000

Due in 2020, issued February 2015
 
2.15
%
 
600,000

 
600,000

 
600,000

Due in 2020, issued May 2018
 
LIBOR + 0.50%

 
450,000

 
450,000

 
450,000

Due in 2020, issued March 2017
 
2.40
%
 
350,000

 
350,000

 
350,000

Due in 2021, issued January 2016
 
2.85
%
 
600,000

 
600,000

 
600,000

Due in 2021, issued November 2018
 
LIBOR + 0.94%

 
450,000

 
450,000

 

Due in 2021, issued May 2018
 
3.55
%
 
350,000

 
350,000

 
350,000

Due in 2022, issued February 2019
 
4.05
%
 
550,000

 

 

Due in 2022, issued June 2017
 
2.55
%
 
400,000

 
400,000

 
400,000

Due in 2023, issued February 2018
 
3.35
%
 
350,000

 
350,000

 
350,000

Less: unamortized discount and debt issuance costs
 
 
 
(12,340
)
 
(12,993
)
 
(14,551
)
Total medium-term notes
 
 
 
4,687,660

 
4,887,007

 
4,435,449

Senior notes
 
 
 
 
 
 
 
 
Due in 2025, issued July 2015
 
3.50
%
 
450,000

 
450,000

 
450,000

Due in 2045, issued July 2015
 
4.625
%
 
300,000

 
300,000

 
300,000

Less: unamortized discount and debt issuance costs
 
 
 
(7,041
)
 
(7,376
)
 
(7,708
)
Total senior notes
 
 
 
742,959

 
742,624

 
742,292

Total unsecured debt
 
 
 
5,430,619

 
5,629,631

 
5,177,741

Gross long-term debt
 
 
 
7,046,364

 
6,463,466

 
5,813,809

Less: current portion of long-term debt, net of unamortized discount and debt issuance costs
 
 
 
(2,396,188
)
 
(1,575,799
)
 
(945,463
)
Total long-term debt
 
 
 
$
4,650,176

 
$
4,887,667

 
$
4,868,346



23


In May 2019, the Company entered into a $195.0 million 364-day credit facility which bears interest at variable rates and matures on May 11, 2020.
13. Asset-Backed Financing
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPEs), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing. The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE.
In transactions where the Company has power over the significant activities of the VIE and has an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE, the Company is the primary beneficiary of the VIE and consolidates the VIE within its consolidated financial statements. On a consolidated basis, the asset-backed financing is treated as a secured borrowing in this type of transaction and is referred to as an on-balance sheet asset-backed financing.
In transactions where the Company is not the primary beneficiary of the VIE, the Company must determine whether it can achieve a sale for accounting purposes under ASC Topic 860, Transfers and Servicing. To achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond the Company’s control. If the Company does not meet all of these criteria for sale accounting, then the transaction is accounted for as a secured borrowing and is referred to as an on-balance sheet asset-backed financing.
If the Company meets all three of the sale criteria above, the transaction is recorded as a sale for accounting purposes and is referred to as an off-balance sheet asset-backed financing. Upon sale, the retail motorcycle finance receivables are removed from the Company’s balance sheet and a gain or loss is recognized for the difference between the cash proceeds received, the assets derecognized, and the liabilities recognized as part of the transaction. The gain or loss on sale is included in Financial Services revenue in the consolidated statements of income.
The Company is not required, and does not currently intend, to provide any additional financial support to the on- or off-balance sheet VIEs associated with these transactions. Investors and creditors in these transactions only have recourse to the assets held by the VIEs.
The following tables show the assets and liabilities related to the on-balance sheet asset-backed financings included in the financial statements (in thousands):
 
June 30, 2019
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securitizations
$
1,106,973

 
$
(32,426
)
 
$
52,593

 
$
277

 
$
1,127,417

 
$
1,002,869

Asset-backed U.S. commercial paper conduit facilities
500,895

 
(14,651
)
 
26,843

 
1,256

 
514,343

 
464,136

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
171,944

 
(3,058
)
 
9,824

 
272

 
178,982

 
148,740

Total on-balance sheet assets and liabilities
$
1,779,812

 
$
(50,135
)
 
$
89,260

 
$
1,805

 
$
1,820,742

 
$
1,615,745

 
 
 
 
 
 
 
 
 
 
 
 


24


 
December 31, 2018
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securitizations
$
158,718

 
$
(4,691
)
 
$
17,191

 
$
329

 
$
171,547

 
$
95,167

Asset-backed U.S. commercial paper conduit facilities
631,588

 
(18,733
)
 
30,012

 
1,234

 
644,101

 
582,717

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
181,774

 
(3,130
)
 
8,779

 
343

 
187,766

 
155,951

Total on-balance sheet assets and liabilities
$
972,080

 
$
(26,554
)
 
$
55,982

 
$
1,906

 
$
1,003,414

 
$
833,835

 
 
 
 
 
 
 
 
 
 
 
 
 
July 1, 2018
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed securitizations
$
229,201

 
$
(6,943
)
 
$
21,912

 
$
465

 
$
244,635

 
$
169,430

Asset-backed U.S. commercial paper conduit facilities
319,758

 
(9,710
)
 
17,845

 
815

 
328,708

 
300,000

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
192,979

 
(3,405
)
 
11,176

 
274

 
201,024

 
166,638

Total on-balance sheet assets and liabilities
$
741,938

 
$
(20,058
)
 
$
50,933

 
$
1,554

 
$
774,367

 
$
636,068


On-Balance Sheet Asset-Backed Securitization VIEs
The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each on-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes have various contractual maturities ranging from 2020 to 2026.
The Company is the primary beneficiary of its on-balance sheet asset-backed securitization VIEs because it retains servicing rights and a residual interest in the VIEs in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
During the second quarter of 2019, the Company issued $500.0 million and $525.0 million, or $498.7 million and $522.6 million net of discount and issuance costs, respectively, of secured notes through on-balance sheet asset-backed securitization transactions. There were no on-balance sheet asset-backed securitization transactions during the first quarter of 2019 or the first half of 2018.
On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE
The Company has two separate agreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits under which it may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In November 2018, the Company renewed its existing $600.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits. Also at that time, the Company amended its existing $300.0 million revolving facility agreement with third-party

25


bank-sponsored asset-backed U.S. commercial paper conduits, increasing the aggregate commitment to $600.0 million. The aggregate commitment under this agreement is reduced monthly as collections on the related finance receivables are applied to the outstanding principal until the outstanding principal balance is less than or equal to $300.0 million, at which point the aggregate commitment will equal $300.0 million. In May 2019, the Company further amended this revolving facility agreement to allow for incremental borrowings, at the lenders' discretion, of up to an additional $300.0 million in excess of the $300.0 million commitment. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.
Under the U.S. Conduit Facilities, the assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of June 30, 2019, the U.S. Conduit Facilities have an expiration date of November 29, 2019.

The Company is the primary beneficiary of its U.S. Conduit Facilities VIE because it retains servicing rights and a residual interest in the VIE in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.
The following table includes quarterly transfers of U.S. retail motorcycle finance receivables to the U.S. Conduit Facilities and the respective proceeds (in thousands):
 
2019
 
2018
 
Transfers
 
Proceeds
 
Transfers
 
Proceeds
First quarter
$

 
$

 
$
32,900

 
$
29,300

Second quarter

 

 
59,100

 
53,300

 
$

 
$

 
$
92,000

 
$
82,600


On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility
In June 2019, the Company renewed its facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase eligible Canadian retail motorcycle finance receivables for proceeds up to C$220.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$220.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of June 30, 2019, the Canadian Conduit has an expiration date of June 26, 2020.
The Company is not the primary beneficiary of the Canadian bank-sponsored, multi-seller conduit VIE; therefore, the Company does not consolidate the VIE. However, the Company treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and, therefore, does not meet the requirements for sale accounting.
As the Company participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, was $30.2 million at June 30, 2019. The maximum exposure is not an indication of the Company's expected loss exposure.

26


The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
 
2019
 
2018
 
Transfers
 
Proceeds
 
Transfers
 
Proceeds
First quarter
$

 
$

 
$
7,600

 
$
6,200

Second quarter
28,200

 
23,400

 
38,900

 
32,200

 
$
28,200

 
$
23,400

 
$
46,500

 
$
38,400


Off-Balance Sheet Asset-Backed Securitization VIE
There were no off-balance sheet asset-backed securitization transactions during the first half of 2019 or 2018. During the second quarter of 2016, the Company sold retail motorcycle finance receivables with a principal balance of $301.8 million into a securitization VIE that was not consolidated, recognized a gain of $9.3 million and received cash proceeds of $312.6 million. Similar to an on-balance sheet asset-backed securitization, the Company transferred U.S. retail motorcycle finance receivables to an SPE which in turn issued secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitization are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors. In an on-balance sheet asset-backed securitization, the Company retains a financial interest in the VIE in the form of a debt security. As part of this off-balance sheet securitization, the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants.
The Company is not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and does not have the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. Accordingly, this transaction met the accounting sale requirements under ASC Topic 860 and was recorded as a sale for accounting purposes. Upon the sale, the retail motorcycle finance receivables were removed from the Company’s balance sheet and a gain was recognized for the difference between the cash proceeds received, the assets derecognized and the liabilities recognized as part of the transaction. The gain on sale was included in Financial Services revenue in the consolidated statements of income.
At June 30, 2019, the assets of this off-balance sheet asset-backed securitization VIE were $54.7 million and represented the current unpaid principal balance of the retail motorcycle finance receivables, which was the Company’s maximum exposure to loss in the off-balance sheet VIE at June 30, 2019. This is based on the unlikely event that all the receivables have underwriting defects or other defects that trigger a violation of certain covenants and that the underlying collateral has no residual value. This maximum exposure is not an indication of expected losses.
Servicing Activities
The Company services all retail motorcycle finance receivables that it originates. When the Company transfers retail motorcycle finance receivables to SPEs through asset-backed financings, the Company retains the right to service the finance receivables and receives servicing fees based on the securitized finance receivables balance and certain ancillary fees. In on-balance sheet asset-backed financings, servicing fees are eliminated in consolidation and therefore are not recorded on a consolidated basis. In off-balance sheet asset-backed financings, servicing fees and ancillary fees are recorded in Financial Services revenue in the consolidated statements of income. The fees the Company is paid for servicing represent adequate compensation, and consequently, the Company does not recognize a servicing asset or liability. The Company recognized servicing fee income of $0.3 million and $0.7 million during the first half of 2019 and 2018, respectively.
The unpaid principal balance of retail motorcycle finance receivables serviced by the Company was as follows (in thousands):
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
On-balance sheet retail motorcycle finance receivables
$
6,441,261

 
$
6,185,350

 
$
6,227,634

Off-balance sheet retail motorcycle finance receivables
54,699

 
79,613

 
109,578

Total serviced retail motorcycle finance receivables
$
6,495,960

 
$
6,264,963

 
$
6,337,212


27


The unpaid principal balance of retail motorcycle finance receivables serviced by the Company 30 days or more delinquent was as follows (in thousands):
 
June 30,
2019
 
December 31,
2018
 
July 1,
2018
On-balance sheet retail motorcycle finance receivables
$
190,208

 
$
228,015

 
$
175,020

Off-balance sheet retail motorcycle finance receivables
1,065

 
1,658

 
1,591

Total serviced retail motorcycle finance receivables
$
191,273

 
$
229,673

 
$
176,611

Credit losses, net of recoveries for the retail motorcycle finance receivables serviced by the Company were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
On-balance sheet retail motorcycle finance receivables
$
22,259

 
$
15,300

 
$
55,763

 
$
47,473

Off-balance sheet retail motorcycle finance receivables
161

 
137

 
392

 
498

Total serviced retail motorcycle finance receivables
$
22,420

 
$
15,437

 
$
56,155

 
$
47,971


14. Fair Value
The Company assesses the inputs used to measure fair value using a three-tier hierarchy.
Level 1 inputs include quoted prices for identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity prices, and yield curves. The Company uses the market approach to derive the fair value for its Level 2 fair value measurements. Forward contracts for foreign currency, commodities, and treasury rate locks are valued using quoted forward rates and prices; interest rate swaps and caps are valued using quoted interest rates and yield curves; investments in marketable securities and cash equivalents are valued using quoted prices.
Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability.
Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
 
June 30, 2019
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Assets:
 
 
 
 
 
Cash equivalents
$
619,600

 
$
619,600

 
$

Marketable securities
51,543

 
51,543

 

Derivatives
6,920

 

 
6,920

Total
$
678,063

 
$
671,143

 
$
6,920

Liabilities:
 
 
 
 
 
Derivatives
$
17,555

 
$

 
$
17,555

 
 
 
 
 
 


28


 
December 31, 2018
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Assets:
 
 
 
 
 
Cash equivalents
$
998,601

 
$
728,800

 
$
269,801

Marketable securities
54,250

 
44,243

 
10,007

Derivatives
15,071

 

 
15,071

Total
$
1,067,922

 
$
773,043

 
$
294,879

Liabilities:
 
 
 
 
 
Derivatives
$
5,316

 
$

 
$
5,316

 
 
 
 
 
 
 
July 1, 2018
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
Assets:
 
 
 
 
 
Cash equivalents
$
691,983

 
$
446,454

 
$
245,529

Marketable securities
49,537

 
49,537

 

Derivatives
13,446

 

 
13,446

Total
$
754,966

 
$
495,991

 
$
258,975

Liabilities:
 
 
 
 
 
Derivatives
$
625

 
$

 
$
625


Nonrecurring Fair Value Measurements
Repossessed inventory is recorded at the lower of cost or net realizable value through a nonrecurring fair value measurement. Repossessed inventory was $19.4 million, $20.2 million and $16.4 million at June 30, 2019, December 31, 2018 and July 1, 2018, respectively, for which the fair value adjustment was $5.9 million, $9.7 million and $2.8 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.

29


Fair Value of Financial Instruments Measured at Cost
The carrying value of the Company's cash and cash equivalents and restricted cash approximates their fair values.
The following table summarizes the fair value and carrying value of the Company’s remaining financial instruments that are measured at cost or amortized cost (in thousands):
 
June 30, 2019
 
December 31, 2018
 
July 1, 2018
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Finance receivables, net
$
7,672,939

 
$
7,594,405

 
$
7,304,334

 
$
7,221,931

 
$
7,375,644

 
$
7,313,202

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Unsecured commercial paper
$
405,695

 
$
405,695

 
$
1,135,810

 
$
1,135,810

 
$
1,327,307

 
$
1,327,307

Asset-backed U.S. commercial paper conduit facilities
$
464,136

 
$
464,136

 
$
582,717

 
$
582,717

 
$
300,000

 
$
300,000

Asset-backed Canadian commercial paper conduit facility
$
148,740

 
$
148,740

 
$
155,951

 
$
155,951

 
$
166,638

 
$
166,638

Medium-term notes
$
4,719,053

 
$
4,687,660

 
$
4,829,671

 
$
4,887,007

 
$
4,398,478

 
$
4,435,449

Senior unsecured notes
$
756,243

 
$
742,959

 
$
707,198

 
$
742,624

 
$
719,152

 
$
742,292

Asset-backed securitization debt
$
1,007,205

 
$
1,002,869

 
$
94,974

 
$
95,167

 
$
168,941

 
$
169,430


Finance Receivables, Net – The carrying value of retail and wholesale finance receivables in the financial statements is amortized cost less an allowance for credit losses. The fair value of retail finance receivables is generally calculated by discounting future cash flows using an estimated discount rate that reflects current credit, interest rate and prepayment risks associated with similar types of instruments. Fair value is determined based on Level 3 inputs. The amortized cost basis of wholesale finance receivables approximates fair value because they either are short-term or have interest rates that adjust with changes in market interest rates.
Debt – The carrying value of debt in the financial statements is generally amortized cost, net of discounts and debt issuance costs. The carrying value of unsecured commercial paper calculated using Level 2 inputs approximates fair value due to its short maturity. The carrying value of debt provided under the U.S. Conduit Facilities and Canadian Conduit Facility calculated using Level 2 inputs approximates fair value since the interest rates charged under the facility are tied directly to market rates and fluctuate as market rates change. The fair values of the medium-term notes and senior unsecured notes are estimated based upon rates currently available for debt with similar terms and remaining maturities (Level 2 inputs). The fair value of the debt related to on-balance sheet asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities (Level 2 inputs).

30


15. Product Warranty and Recall Campaigns
The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except for Japan, where the Company currently provides a standard three-year limited warranty on all new motorcycles sold. In addition, the Company provides a one-year warranty for Parts & Accessories (P&A). The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company accrues for future warranty claims using an estimated cost based primarily on historical Company claim information. Additionally, the Company has from time to time initiated certain voluntary recall campaigns. The Company accrues for the estimated cost associated with voluntary recalls in the period that management approves and commits to the recall. Changes in the Company’s warranty and recall liability were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
Balance, beginning of period
$
122,387

 
$
95,075

 
$
131,740

 
$
94,202

Warranties issued during the period
17,350

 
16,904

 
28,967

 
31,510

Settlements made during the period
(26,768
)
 
(21,777
)
 
(46,385
)
 
(38,415
)
Recalls and changes to pre-existing warranty liabilities
(4,165
)
 
(259
)
 
(5,518
)
 
2,646

Balance, end of period
$
108,804

 
$
89,943

 
$
108,804

 
$
89,943


The liability for recall campaigns was $47.6 million, $73.3 million and $27.4 million as of June 30, 2019, December 31, 2018 and July 1, 2018, respectively. The Company recorded supplier recoveries within operating expenses separate from the amounts disclosed above of $28.0 million for the six months ended June 30, 2019.

31


16. Employee Benefit Plans
The Company has a defined benefit qualified pension plan and postretirement healthcare benefit plans that cover certain 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. Service cost is allocated among Selling, administrative and engineering expense, Cost of goods sold and Inventory. Amounts capitalized in inventory are not significant. Non-service cost components of net periodic benefit cost are presented in Other income (expense), net. Components of net periodic benefit cost were as follows (in thousands):
 
Three months ended
 
Six months ended
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
Pension and SERPA Benefits:
 
 
 
 
 
 
 
Service cost
$
6,632

 
$
8,063

 
$
13,264

 
$
16,218

Interest cost
21,371

 
20,729

 
42,742

 
41,319

Expected return on plan assets
(35,581
)
 
(36,926
)
 
(71,162
)
 
(73,817
)
Amortization of unrecognized:
 
 
 
 
 
 
 
Prior service credit
(483
)
 
(105
)
 
(966
)
 
(211
)
Net loss
11,128

 
16,318

 
22,256

 
32,137

Curtailment loss

 

 

 
1,018

Net periodic benefit cost
$
3,067

 
$
8,079

 
$
6,134

 
$
16,664

Postretirement Healthcare Benefits:
 
 
 
 
 
 
 
Service cost
$
1,185

 
$
1,789

 
$
2,369

 
$
3,601

Interest cost
2,938

 
2,886

 
5,876

 
5,783

Expected return on plan assets
(3,507
)
 
(3,541
)
 
(7,014
)
 
(7,082
)
Amortization of unrecognized:
 
 
 
 
 
 
 
Prior service credit
(595
)
 
(460
)
 
(1,190
)
 
(920
)
Net loss
69

 
454

 
138

 
908

Special retirement benefits
1,583

 

 
1,583

 

Curtailment gain
(960
)
 

 
(960
)
 

Net periodic benefit cost
$
713

 
$
1,128

 
$
802

 
$
2,290


During the six months ended July 1, 2018, the qualified pension plan and certain postretirement healthcare plan assets and obligations were remeasured as a result of a curtailment of benefits related to the planned closure of the Company's motorcycle assembly plant in Kansas City, Missouri, discussed further in Note 4. As a result of the remeasurement, the Company recorded a benefit of $96.4 million before income taxes in other comprehensive income during the six months ended July 1, 2018.
There are no required or planned qualified pension plan contributions for 2019. The Company expects it will continue to make ongoing benefit payments under the SERPA and postretirement healthcare plans.
17. Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter.

32


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 information exchanges and discussions with the EPA. In August 2016, the Company entered into a consent decree with the EPA regarding these issues, and the consent decree was subsequently revised in July 2017 (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. In December 2017, the Department of Justice (DOJ), on behalf of the EPA, filed the Settlement with the U.S. District Court for the District of Columbia for the purpose of obtaining court approval of the Settlement. Three amicus briefs opposing portions of the Settlement were filed with the court by the deadline of January 31, 2018. On March 1, 2018, the Company and the DOJ each filed separate response briefs. The Company is awaiting the court's decision on whether or not to finalize the Settlement, and on February 8, 2019 the DOJ filed a status update reminding the court of the current status of the outstanding matter. The Company has an accrual associated with this matter which is included in Accrued liabilities on the consolidated balance sheets, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties related to a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. The Company has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 and with the U.S. Environmental Protection Agency (EPA) in undertaking environmental investigation and remediation activities, including a 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 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 an accrual for its estimate of its share of the future Response Costs at the York facility which is included in Other long-term liabilities on the consolidated balance sheets. While the work on the RI/FS is now complete and the final remedy was proposed in late 2018, it has not yet been approved, and given the uncertainty that exists concerning the nature and scope of additional environmental remediation that may ultimately be required under the approved final remedy, 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.
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.


33


18. Accumulated Other Comprehensive Loss
The following tables set forth the changes in Accumulated other comprehensive loss (AOCL) (in thousands):
 
 
Three months ended June 30, 2019
 
 
Foreign currency translation adjustments
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(49,277
)
 
$
1,344

 
$
(574,118
)
 
$
(622,051
)
Other comprehensive income (loss) before reclassifications
 
11,152

 
(8,791
)
 

 
2,361

Income tax benefit
 
118

 
1,990

 

 
2,108

Net other comprehensive income (loss) before reclassifications
 
11,270

 
(6,801
)
 

 
4,469

Reclassifications:
 
 
 
 
 
 
 
 
Net (gains) losses on derivative instruments
 

 
(6,708
)
 

 
(6,708
)
Prior service credits(a)
 

 

 
(1,078
)
 
(1,078
)
Actuarial losses(a)
 

 

 
11,197

 
11,197

Total reclassifications before tax
 

 
(6,708
)
 
10,119

 
3,411

Income tax benefit (expense)
 

 
1,586

 
(2,376
)
 
(790
)
Net reclassifications
 

 
(5,122
)
 
7,743

 
2,621

Other comprehensive income (loss)
 
11,270

 
(11,923
)
 
7,743

 
7,090

Balance, end of period
 
$
(38,007
)
 
$
(10,579
)
 
$
(566,375
)
 
$
(614,961
)
 
 
 
 
 
 
 
 
 
 
 
Three months ended July 1, 2018
 
 
Foreign currency translation adjustments
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(14,937
)
 
$
(16,489
)
 
$
(375,178
)
 
$
(406,604
)
Other comprehensive (loss) income before reclassifications
 
(26,482
)
 
31,794

 

 
5,312

Income tax expense
 

 
(7,476
)
 

 
(7,476
)
Net other comprehensive (loss) income before reclassifications
 
(26,482
)
 
24,318

 

 
(2,164
)
Reclassifications:
 
 
 
 
 
 
 
 
Net (gains) losses on derivative instruments
 

 
(530
)
 

 
(530
)
Prior service credits(a)
 

 

 
(565
)
 
(565
)
Actuarial losses(a)
 

 

 
16,772

 
16,772

Total reclassifications before tax
 

 
(530
)
 
16,207

 
15,677

Income tax benefit (expense)
 

 
132

 
(3,805
)
 
(3,673
)
Net reclassifications
 

 
(398
)
 
12,402

 
12,004

Other comprehensive (loss) income
 
(26,482
)
 
23,920

 
12,402

 
9,840

Balance, end of period
 
$
(41,419
)
 
$
7,431

 
$
(362,776
)
 
$
(396,764
)


34


 
 
Six months ended June 30, 2019
 
 
Foreign currency translation adjustments
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(49,608
)
 
$
1,785

 
$
(581,861
)
 
$
(629,684
)
Other comprehensive income (loss) before reclassifications
 
11,758

 
(7,614
)
 

 
4,144

Income tax (expense) benefit
 
(157
)
 
1,676

 

 
1,519

Net other comprehensive income (loss) before reclassifications
 
11,601

 
(5,938
)
 

 
5,663

Reclassifications:
 
 
 
 
 
 
 
 
Net (gains) losses on derivative instruments
 

 
(8,423
)
 

 
(8,423
)
Prior service credits(a)
 

 

 
(2,156
)
 
(2,156
)
Actuarial losses(a)
 

 

 
22,394

 
22,394

Total reclassifications before tax
 

 
(8,423
)
 
20,238

 
11,815

Income tax benefit (expense)
 

 
1,997

 
(4,752
)
 
(2,755
)
Net reclassifications
 

 
(6,426
)
 
15,486

 
9,060

Other comprehensive income (loss)
 
11,601

 
(12,364
)
 
15,486

 
14,723

Balance, end of period
 
$
(38,007
)
 
$
(10,579
)
 
$
(566,375
)
 
$
(614,961
)
 
 
Six months ended July 1, 2018
 
 
Foreign currency translation adjustments
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Balance, beginning of period
 
$
(21,852
)
 
$
(17,254
)
 
$
(460,943
)
 
$
(500,049
)
Other comprehensive (loss) income before reclassifications
 
(19,567
)
 
25,888

 
96,374

 
102,695

Income tax expense
 

 
(6,089
)
 
(22,629
)
 
(28,718
)
Net other comprehensive (loss) income before reclassifications
 
(19,567
)
 
19,799

 
73,745

 
73,977

Reclassifications:
 
 
 
 
 
 
 
 
Net (gains) losses on derivative instruments
 

 
6,378

 

 
6,378

Prior service credits(a)
 

 

 
(1,131
)
 
(1,131
)
Actuarial losses(a)
 

 

 
33,045

 
33,045

Total reclassifications before tax
 

 
6,378

 
31,914

 
38,292

Income tax expense
 

 
(1,492
)
 
(7,492
)
 
(8,984
)
Net reclassifications
 

 
4,886

 
24,422

 
29,308

Other comprehensive (loss) income
 
(19,567
)
 
24,685

 
98,167

 
103,285

Balance, end of period
 
$
(41,419
)
 
$
7,431

 
$
(362,776
)
 
$
(396,764
)
(a)
Amounts reclassified are included in the computation of net periodic benefit cost; refer to Note 16 for information related to pension and postretirement benefit plans

35


19. Business Segments
Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two segments: the Motorcycles and Related Products (Motorcycles) segment and the Financial Services 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. Selected segment information is set forth below (in thousands):
 
Three months ended
 
Six months ended
 
June 30,
2019
 
July 1,
2018
 
June 30,
2019
 
July 1,
2018
Motorcycles and Related Products:
 
 
 
 
 
 
 
Motorcycles revenue
$
1,434,004

 
$
1,525,121

 
$
2,629,641

 
$
2,889,068

Gross profit
454,738

 
532,085

 
802,177

 
1,005,858

Selling, administrative and engineering expense
263,587

 
276,309

 
489,015

 
530,402

Restructuring expense
10,423

 
12,370

 
24,053

 
59,212

Operating income from Motorcycles
180,728

 
243,406

 
289,109

 
416,244

Financial Services:
 
 
 
 
 
 
 
Financial Services revenue
198,615

 
188,102

 
387,358

 
366,276

Financial Services expense
123,086

 
107,561

 
253,098

 
222,156

Operating income from Financial Services
75,529

 
80,541

 
134,260

 
144,120

Operating income
$
256,257

 
$
323,947

 
$
423,369

 
$
560,364


20. Supplemental Consolidating Data
The supplemental consolidating data for the periods noted is presented for informational purposes. The supplemental consolidating data may be different than segment information presented elsewhere due to the allocation of intercompany eliminations to the reportable segments. All supplemental data is presented in thousands.
 
Three months ended June 30, 2019
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,439,685

 
$

 
$
(5,681
)
 
$
1,434,004

Financial Services

 
196,197

 
2,418

 
198,615

Total revenue
1,439,685

 
196,197

 
(3,263
)
 
1,632,619

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
978,761

 

 
505

 
979,266

Financial Services interest expense

 
52,673

 

 
52,673

Financial Services provision for credit losses

 
26,383

 

 
26,383

Selling, administrative and engineering expense
267,777

 
43,586

 
(3,746
)
 
307,617

Restructuring expense
10,423

 

 

 
10,423

Total costs and expenses
1,256,961

 
122,642

 
(3,241
)
 
1,376,362

Operating income
182,724

 
73,555

 
(22
)
 
256,257

Other income (expense), net
4,037

 

 

 
4,037

Investment income
48,571

 

 
(45,000
)
 
3,571

Interest expense
7,784

 

 

 
7,784

Income before provision for income taxes
227,548

 
73,555

 
(45,022
)
 
256,081

Provision for income taxes
43,348

 
17,102

 

 
60,450

Net income
$
184,200

 
$
56,453

 
$
(45,022
)
 
$
195,631

 
 
 
 
 
 
 
 

36


 
Six months ended June 30, 2019
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
2,639,694

 
$

 
$
(10,053
)
 
$
2,629,641

Financial Services

 
382,950

 
4,408

 
387,358

Total revenue
2,639,694

 
382,950

 
(5,645
)
 
3,016,999

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
1,827,464

 

 

 
1,827,464

Financial Services interest expense

 
104,997

 

 
104,997

Financial Services provision for credit losses

 
60,874

 

 
60,874

Selling, administrative and engineering expense
495,769

 
86,174

 
(5,701
)
 
576,242

Restructuring expense
24,053

 

 

 
24,053

Total costs and expenses
2,347,286

 
252,045

 
(5,701
)
 
2,593,630

Operating income
292,408

 
130,905

 
56

 
423,369

Other income (expense), net
8,697

 

 

 
8,697

Investment income
99,929

 

 
(90,000
)
 
9,929

Interest expense
15,515

 

 

 
15,515

Income before provision for income taxes
385,519

 
130,905

 
(89,944
)
 
426,480

Provision for income taxes
71,905

 
30,999

 

 
102,904

Net income
$
313,614

 
$
99,906

 
$
(89,944
)
 
$
323,576


37


 
Three months ended July 1, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
1,528,045

 
$

 
$
(2,924
)
 
$
1,525,121

Financial Services

 
188,788

 
(686
)
 
188,102

Total revenue
1,528,045

 
188,788

 
(3,610
)
 
1,713,223

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
993,036

 

 

 
993,036

Financial Services interest expense

 
51,943

 

 
51,943

Financial Services provision for credit losses

 
18,880

 

 
18,880

Selling, administrative and engineering expense
276,827

 
39,663

 
(3,443
)
 
313,047

Restructuring expense
12,370

 

 

 
12,370

Total costs and expenses
1,282,233

 
110,486

 
(3,443
)
 
1,389,276

Operating income
245,812

 
78,302

 
(167
)
 
323,947

Other income (expense), net
645

 

 

 
645

Investment income
2,533

 

 

 
2,533

Interest expense
7,728

 

 

 
7,728

Income before provision for income taxes
241,262

 
78,302

 
(167
)
 
319,397

Provision for income taxes
59,683

 
17,376

 

 
77,059

Net income
$
181,579

 
$
60,926

 
$
(167
)
 
$
242,338

 
 
 
 
 
 
 
 
 
Six months ended July 1, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and Related Products
$
2,894,291

 
$

 
$
(5,223
)
 
$
2,889,068

Financial Services

 
367,248

 
(972
)
 
366,276

Total revenue
2,894,291

 
367,248

 
(6,195
)
 
3,255,344

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and Related Products cost of goods sold
1,883,210

 

 

 
1,883,210

Financial Services interest expense

 
100,393

 

 
100,393

Financial Services provision for credit losses

 
48,932

 

 
48,932

Selling, administrative and engineering expense
531,228

 
78,054

 
(6,049
)
 
603,233

Restructuring expense
59,212

 

 

 
59,212

Total costs and expenses
2,473,650

 
227,379

 
(6,049
)
 
2,694,980

Operating income
420,641

 
139,869

 
(146
)
 
560,364

Other income (expense), net
865

 

 

 
865

Investment income
113,736

 

 
(110,000
)
 
3,736

Interest expense
15,418

 

 

 
15,418

Income before provision for income taxes
519,824

 
139,869

 
(110,146
)
 
549,547

Provision for income taxes
99,916

 
32,530

 

 
132,446

Net income
$
419,908

 
$
107,339

 
$
(110,146
)
 
$
417,101



38


 
June 30, 2019
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
560,446

 
$
364,192

 
$

 
$
924,638

Accounts receivable, net
671,719

 

 
(346,413
)
 
325,306

Finance receivables, net

 
2,362,125

 

 
2,362,125

Inventories
470,610

 

 

 
470,610

Restricted cash

 
82,248

 

 
82,248

Other current assets
102,956

 
44,278

 

 
147,234

Total current assets
1,805,731

 
2,852,843

 
(346,413
)
 
4,312,161

Finance receivables, net

 
5,232,280

 

 
5,232,280

Property, plant and equipment, net
801,871

 
54,127

 

 
855,998

Goodwill
64,449

 

 

 
64,449

Deferred income taxes
96,914

 
38,928

 
(1,203
)
 
134,639

Lease assets
48,415

 
6,498

 

 
54,913

Other long-term assets
157,061

 
20,159

 
(91,344
)
 
85,876

 
$
2,974,441

 
$
8,204,835

 
$
(438,960
)
 
$
10,740,316

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
302,137

 
$
368,740

 
$
(346,413
)
 
$
324,464

Accrued liabilities
497,019

 
118,256

 
630

 
615,905

Short-term debt

 
405,695

 

 
405,695

Current portion of long-term debt, net

 
2,396,188

 

 
2,396,188

Total current liabilities
799,156

 
3,288,879

 
(345,783
)
 
3,742,252

Long-term debt, net
742,959

 
3,907,217

 

 
4,650,176

Lease liabilities
31,809

 
6,556

 

 
38,365

Pension liability
92,750

 

 

 
92,750

Postretirement healthcare liability
92,539

 

 

 
92,539

Other long-term liabilities
171,509

 
39,314

 
2,770

 
213,593

Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Shareholders’ equity
1,043,719

 
962,869

 
(95,947
)
 
1,910,641

 
$
2,974,441

 
$
8,204,835

 
$
(438,960
)
 
$
10,740,316


39


 
December 31, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
544,548

 
$
659,218

 
$

 
$
1,203,766

Marketable securities
10,007

 

 

 
10,007

Accounts receivable, net
425,727

 

 
(119,253
)
 
306,474

Finance receivables, net

 
2,214,424

 

 
2,214,424

Inventories
556,128

 

 

 
556,128

Restricted cash

 
49,275

 

 
49,275

Other current assets
91,172

 
59,070

 
(5,874
)
 
144,368

Total current assets
1,627,582

 
2,981,987

 
(125,127
)
 
4,484,442

Finance receivables, net

 
5,007,507

 

 
5,007,507

Property, plant and equipment, net
847,176

 
56,956

 

 
904,132

Goodwill
55,048

 

 

 
55,048

Deferred income taxes
105,388

 
37,603

 
(1,527
)
 
141,464

Other long-term assets
144,122

 
18,680

 
(89,731
)
 
73,071

 
$
2,779,316

 
$
8,102,733

 
$
(216,385
)
 
$
10,665,664

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
258,587

 
$
145,527

 
$
(119,253
)
 
$
284,861

Accrued liabilities
496,643

 
110,063

 
(5,576
)
 
601,130

Short-term debt

 
1,135,810

 

 
1,135,810

Current portion of long-term debt, net

 
1,575,799

 

 
1,575,799

Total current liabilities
755,230

 
2,967,199

 
(124,829
)
 
3,597,600

Long-term debt, net
742,624

 
4,145,043

 

 
4,887,667

Pension liability
107,776

 

 

 
107,776

Postretirement healthcare liability
94,453

 

 

 
94,453

Other long-term liabilities
164,243

 
37,142

 
2,834

 
204,219

Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Shareholders’ equity
914,990

 
953,349

 
(94,390
)
 
1,773,949

 
$
2,779,316

 
$
8,102,733

 
$
(216,385
)
 
$
10,665,664


40


 
July 1, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
627,783

 
$
350,966

 
$

 
$
978,749

Accounts receivable, net
669,266

 

 
(333,672
)
 
335,594

Finance receivables, net

 
2,252,956

 

 
2,252,956

Inventories
465,373

 

 

 
465,373

Restricted cash

 
44,386

 

 
44,386

Other current assets
124,521

 
41,841

 

 
166,362

Total current assets
1,886,943

 
2,690,149

 
(333,672
)
 
4,243,420

Finance receivables, net

 
5,060,246

 

 
5,060,246

Property, plant and equipment, net
854,681

 
49,432

 

 
904,113

Prepaid pension costs
131,497

 

 

 
131,497

Goodwill
55,451

 

 

 
55,451

Deferred income taxes
27,043

 
41,696

 
(1,234
)
 
67,505

Other long-term assets
151,691

 
19,999

 
(87,900
)
 
83,790

 
$
3,107,306

 
$
7,861,522

 
$
(422,806
)
 
$
10,546,022

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
262,562

 
$
358,324

 
$
(333,672
)
 
$
287,214

Accrued liabilities
481,402

 
90,416

 
622

 
572,440

Short-term debt

 
1,327,307

 

 
1,327,307

Current portion of long-term debt, net

 
945,463

 

 
945,463

Total current liabilities
743,964

 
2,721,510

 
(333,050
)
 
3,132,424

Long-term debt, net
742,292

 
4,126,054

 

 
4,868,346

Pension liability
55,819

 

 

 
55,819

Postretirement healthcare liability
113,464

 

 

 
113,464

Other long-term liabilities
174,412

 
36,997

 
3,034

 
214,443

Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Shareholders’ equity
1,277,355

 
976,961

 
(92,790
)
 
2,161,526

 
$
3,107,306

 
$
7,861,522

 
$
(422,806
)
 
$
10,546,022



41


 
Six months ended June 30, 2019
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
313,614

 
$
99,906

 
$
(89,944
)
 
$
323,576

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization of intangibles
121,026

 
4,360

 

 
125,386

Amortization of deferred loan origination costs

 
38,036

 

 
38,036

Amortization of financing origination fees
335

 
4,187

 

 
4,522

Provision for long-term employee benefits
6,936

 

 

 
6,936

Employee benefit plan contributions and payments
(3,637
)
 

 

 
(3,637
)
Stock compensation expense
15,672

 
1,613

 

 
17,285

Net change in wholesale finance receivables related to sales

 

 
(167,594
)
 
(167,594
)
Provision for credit losses

 
60,874

 

 
60,874

Deferred income taxes
5,928

 
(236
)
 
(324
)
 
5,368

Other, net
(8,545
)
 
(1,876
)
 
(56
)
 
(10,477
)
Changes in current assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
(244,752
)
 

 
227,160

 
(17,592
)
Finance receivables - accrued interest and other

 
(4,963
)
 

 
(4,963
)
Inventories
88,146

 

 

 
88,146

Accounts payable and accrued liabilities
21,336

 
221,959

 
(208,925
)
 
34,370

Derivative instruments
4,291

 
61

 

 
4,352

Other
(15,573
)
 
13,091

 
(5,874
)
 
(8,356
)
Total adjustments
(8,837
)
 
337,106

 
(155,613
)
 
172,656

Net cash provided by operating activities
304,777

 
437,012

 
(245,557
)
 
496,232



42


 
Six months ended June 30, 2019
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
(81,698
)
 
(1,531
)
 

 
(83,229
)
Origination of finance receivables

 
(3,936,208
)
 
1,871,309

 
(2,064,899
)
Collections on finance receivables

 
3,484,581

 
(1,715,752
)
 
1,768,829

Sales and redemptions of marketable securities
10,007

 

 

 
10,007

Acquisition of business
(7,000
)
 

 

 
(7,000
)
Other
11,717

 

 

 
11,717

Net cash used by investing activities
(66,974
)
 
(453,158
)
 
155,557

 
(364,575
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of medium-term notes

 
546,655

 

 
546,655

Repayments of medium-term notes

 
(750,000
)
 

 
(750,000
)
Proceeds from securitization debt

 
1,021,353

 

 
1,021,353

Repayments of securitization debt

 
(113,806
)
 

 
(113,806
)
Borrowings of asset-backed commercial paper

 
23,373

 

 
23,373

Repayments of asset-backed commercial paper

 
(155,286
)
 

 
(155,286
)
Net decrease in credit facilities and unsecured commercial paper

 
(728,606
)
 

 
(728,606
)
Dividends paid
(120,841
)
 
(90,000
)
 
90,000

 
(120,841
)
Purchase of common stock for treasury
(104,621
)
 

 

 
(104,621
)
Issuance of common stock under employee stock option plans
833

 

 

 
833

Net cash used by financing activities
(224,629
)
 
(246,317
)
 
90,000

 
(380,946
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
2,724

 
715

 

 
3,439

Net increase (decrease) in cash, cash equivalents and restricted cash
$
15,898

 
$
(261,748
)
 
$

 
$
(245,850
)
Cash, cash equivalents and restricted cash:
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash—beginning of period
$
544,548

 
$
715,200

 
$

 
$
1,259,748

Net increase (decrease) in cash, cash equivalents and restricted cash
15,898

 
(261,748
)
 

 
(245,850
)
Cash, cash equivalents and restricted cash—end of period
$
560,446

 
$
453,452

 
$

 
$
1,013,898



43


 
Six months ended July 1, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
419,908

 
$
107,339

 
$
(110,146
)
 
$
417,101

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation and amortization of intangibles
127,935

 
2,126

 

 
130,061

Amortization of deferred loan origination costs

 
39,396

 

 
39,396

Amortization of financing origination fees
331

 
3,802

 

 
4,133

Provision for long-term employee benefits
18,954

 

 

 
18,954

Employee benefit plan contributions and payments
(6,422
)
 

 

 
(6,422
)
Stock compensation expense
17,229

 
1,852

 

 
19,081

Net change in wholesale finance receivables related to sales

 

 
(171,195
)
 
(171,195
)
Provision for credit losses

 
48,932

 

 
48,932

Deferred income taxes
(443
)
 
2,043

 
(85
)
 
1,515

Other, net
20,993

 
(245
)
 
146

 
20,894

Changes in current assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net
(194,831
)
 

 
179,949

 
(14,882
)
Finance receivables - accrued interest and other

 
4,228

 

 
4,228

Inventories
63,957

 

 

 
63,957

Accounts payable and accrued liabilities
137,644

 
192,410

 
(168,953
)
 
161,101

Derivative instruments
(205
)
 
69

 

 
(136
)
Other
2,924

 
1,884

 
(5,667
)
 
(859
)
Total adjustments
188,066

 
296,497

 
(165,805
)
 
318,758

Net cash provided by operating activities
607,974

 
403,836

 
(275,951
)
 
735,859



44


 
Six months ended July 1, 2018
 
HDMC Entities
 
HDFS Entities
 
Eliminations
 
Consolidated
Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures
(63,236
)
 
(6,057
)
 

 
(69,293
)
Origination of finance receivables

 
(4,046,125
)
 
2,046,339

 
(1,999,786
)
Collections on finance receivables

 
3,593,272

 
(1,880,388
)
 
1,712,884

Other
(11,758
)
 

 

 
(11,758
)
Net cash used by investing activities
(74,994
)
 
(458,910
)
 
165,951

 
(367,953
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Proceeds from issuance of medium-term notes

 
1,144,018

 

 
1,144,018

Repayments of medium-term notes

 
(877,488
)
 

 
(877,488
)
Repayments of securitization debt

 
(183,453
)
 

 
(183,453
)
Borrowings of asset-backed commercial paper

 
120,903

 

 
120,903

Repayments of asset-backed commercial paper

 
(100,660
)
 

 
(100,660
)
Net increase in credit facilities and unsecured commercial paper

 
56,280

 

 
56,280

Dividends paid
(124,680
)
 
(110,000
)
 
110,000

 
(124,680
)
Purchase of common stock for treasury
(111,227
)
 

 

 
(111,227
)
Issuance of common stock under employee stock option plans
1,965

 

 

 
1,965

Net cash (used by) provided by financing activities
(233,942
)
 
49,600

 
110,000

 
(74,342
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(9,441
)
 
(650
)
 

 
(10,091
)
Net increase (decrease) in cash, cash equivalents and restricted cash
$
289,597

 
$
(6,124
)
 
$

 
$
283,473

Cash, cash equivalents and restricted cash:
 
 
 
 
 
 
 
Cash, cash equivalents and restricted cash—beginning of period
$
338,186

 
$
408,024

 
$

 
$
746,210

Net increase (decrease) in cash, cash equivalents and restricted cash
289,597

 
(6,124
)
 

 
283,473

Cash, cash equivalents and restricted cash—end of period
$
627,783

 
$
401,900

 
$

 
$
1,029,683



45


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Harley-Davidson, Inc. is the parent company of Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). Unless the context otherwise requires, all references to the "Company" include Harley-Davidson, Inc. and all its subsidiaries. The Company operates in two segments: Motorcycles and Related Products (Motorcycles) and Financial Services. The Company’s reportable segments are strategic business units that offer different products and services and are managed separately based on the fundamental differences in their operations.
The Motorcycles segment consists of HDMC which designs, manufactures and sells at wholesale on-road 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 primarily through a network of independent dealers. The Company conducts business on a global basis, with sales in the United States, Canada, Latin America, Europe/Middle East/Africa (EMEA) and the Asia Pacific region.
The Financial Services segment consists of HDFS which is engaged in the business of financing and servicing wholesale inventory receivables and retail consumer loans, primarily for the purchase of Harley-Davidson motorcycles. HDFS also works with certain unaffiliated insurance companies to provide motorcycle insurance and protection products to motorcycle owners. HDFS conducts business principally in the 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.
(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 “Cautionary Statements” and in Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and are cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in the Overview and Outlook sections are only made as of July 23, 2019 and the remaining forward-looking statements in this report are made as of the date of the filing of this report (August 8, 2019), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.
Overview(1) 
The Company’s net income was $195.6 million, or $1.23 per diluted share, for the second quarter of 2019 compared to $242.3 million, or $1.45 per diluted share, in the second quarter of 2018. Operating income from the Motorcycles segment decreased $62.7 million compared to the prior year second quarter and was impacted by lower shipments, unfavorable mix and incremental tariffs, partially offset by lower operating expenses. Operating income from the Financial Services segment in the second quarter of 2019 was $75.5 million, down 6.2% compared to the year-ago quarter on a higher provision for credit losses and higher operating expenses.
Worldwide dealer retail sales of new Harley-Davidson motorcycles in the second quarter of 2019 were down 8.4% compared to the second quarter of 2018. Retail sales were down 8.0% in the U.S. and down 8.9% in international markets compared to the prior year second quarter. U.S. retail sales in the first half of 2019 continued to be impacted by weak industry results, but remained in line with the Company's expectations. International retail sales during the second quarter of 2019 were adversely impacted by weak performance in the Company's developed markets, and through the first six months of 2019, were below the Company's expectations.
In the near term, the Company is addressing the softness it is experiencing in the U.S. and its developed international markets by continuing to aggressively manage supply in line with demand and increasing marketing investments to encourage trial and increase conversion to sale. In addition, the Company expects to launch its new model-year 2020 motorcycles in the third quarter of 2019, including LiveWireTM, the Company's first electric motorcycle.

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The Company also continues to invest in its strategy to build the next generation of Harley-Davidson riders. Through 2022, the More Roads to Harley-Davidson (More Roads) plan is aimed at stabilizing the Company's core business in the U.S. as it grows ridership globally. The Company believes the More Roads plan is building the proper foundation and driving the fundamentals to help steer the U.S. industry back to growth and drive Company growth across its international markets. The More Roads plan through 2022 includes three growth catalysts:
New Products - keep current riders engaged and inspire new riders by extending heavyweight leadership and expanding into new markets and segments
Broader Access - meet customers where they are and how they want to engage with a multi-channel retail experience
Stronger Dealers - drive a performance framework to improve dealer financial strength and the Harley-Davidson customer experience
Outlook(1) 
On July 23, 2019, the Company provided the following information concerning its expectations for the remainder of 2019:
Motorcycles and Related Products Segment - Full Year
In the second quarter of 2019, the Company obtained regulatory approvals that allow it to supply its European Union (EU) markets with Softail® and Sportster® motorcycles produced at its Thailand operations at reduced tariff rates. This will result in a reduction in tariffs on these motorcycles, from the rate of 31% currently levied on motorcycles sourced from the Company's U.S. facilities to 6%. The Company expects to obtain similar approvals for its non-Trike Touring motorcycles later this year.
The regulatory approval process took considerably longer than the Company expected, and the delay is among the factors that will adversely impact the Company's 2019 shipment plans and operating income expectations. The Company expects to begin production of lower-tariff motorcycles for the EU markets at its Thailand facility in late October 2019. The transition to Thailand-sourced product for the EU will result in a temporary supply constraint as higher-tariff motorcycle inventory is reduced and subsequently replenished with lower-tariff motorcycle inventory. This inventory transition was originally expected to occur in the third quarter of 2019 allowing the Company to begin wholesaling lower-tariff motorcycles in the EU in the fourth quarter of 2019. However, given the delay in obtaining regulatory approvals, this transition and related supply constraint are now planned for the end of 2019. As a result, the Company expects to ship fewer motorcycles to its European dealers in the fourth quarter of 2019 than originally planned. The Company expects Company inventory and dealer inventory in Europe to be down approximately 1,200 and 2,000 motorcycles, respectively, at the end of 2019 compared to its original plan. The Company expects wholesale shipments of lower-tariff motorcycles in the EU to begin early in the second quarter of 2020.
Given the delay in obtaining regulatory approvals and softer than expected European retail sales, the Company has lowered its 2019 full year shipment guidance range to 212,000 to 217,000 units, down from its previous expectation of 217,000 to 222,000 units. The Company continues to expect the U.S. industry to decline in 2019, but at a more tempered pace than in 2018. However, the Company now expects international retail sales to decline during 2019. The Company continues to expect year-end U.S. dealer inventory of new motorcycles to be down compared to 2018.
Full year 2019 incremental tariff costs are now expected to be approximately $100 million, down compared to the Company's previous estimate of $100 to $120 million. Incremental tariff costs include incremental EU and China tariffs imposed on the Company's products shipped from the U.S., as well as incremental U.S. tariffs on certain items imported from certain international markets. Incremental tariff costs exclude higher metals cost resulting from the U.S. steel and aluminum tariffs. The lower expected incremental tariff cost is due to lower planned wholesale shipments in the EU resulting from constrained supply and lower demand in Europe.
The Company continues to expect 2019 Motorcycles segment gross margin as a percent of revenue to be lower than 2018 driven by the significant increase in incremental tariff costs, lower shipment volumes and unfavorable product mix, partially offset by aggressive cost management, including the benefit of $25 million to $30 million of savings from the Company's Manufacturing Optimization Plan. Refer to "Restructuring Plan Costs and Savings" below for further information regarding the Manufacturing Optimization Plan.
The Company expects selling, administrative and engineering expenses for the Motorcycles segment to be lower in 2019 behind aggressive cost management and lower recall costs.
The Company's previous estimate of Motorcycles segment operating income anticipated that a portion of the incremental tariff costs noted above would be mitigated in late 2019. However, given the delay in obtaining regulatory approvals, the Company does not expect to benefit from reduced tariff rates until early in the second quarter of 2020. In addition, the

47

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Company incurred costs associated with idle manufacturing capacity in Thailand as it awaited regulatory approvals, as well as costs to prepare alternative tariff mitigation plans in the event regulatory approvals allowing it to supply its EU markets with motorcycles produced at its Thailand operations were not obtained. Given the impact of these additional costs combined with the lower expectation for wholesale shipments, the Company has reduced its 2019 full year Motorcycles segment operating margin guidance to 6% to 7% from its previous guidance of 8% to 9%.
Motorcycles and Related Products Segment - Third Quarter
In the third quarter of 2019, the Company expects to ship between 43,000 and 48,000 motorcycles. Motorcycles segment operating margin as a percent of revenue is expected to be down approximately 3 percentage points compared to the third quarter of 2018 driven by lower planned shipments, higher incremental tariff costs and higher selling, administrative and engineering expenses behind increased marketing costs. The Company expects to incur restructuring expenses and temporary inefficiencies associated with the Manufacturing Optimization Plan of $10 million in the third quarter of 2019. Refer to "Restructuring Plan Costs and Savings" below for further information regarding the Manufacturing Optimization Plan.
Financial Services Segment
The Company expects Financial Services segment operating income in 2019 to be down compared to 2018 driven by higher credit losses and higher depreciation associated with its new loan management system which went into service in January 2019.
Harley-Davidson, Inc.
Capital expenditures in 2019 are expected to be $225 million to $245 million, which includes approximately $20 million to support the Manufacturing Optimization Plan. The Company anticipates it will have the ability to fund all capital expenditures in 2019 with cash flows generated by operations.
The Company expects its 2019 full year effective tax rate will be approximately 24% to 25%. This guidance excludes the effect of potential future adjustments, including items associated with any potential new tax legislation or audit settlements.
Restructuring Plan Costs and Savings(1) 
In January 2018, the Company commenced a significant, multi-year Manufacturing Optimization Plan anchored by the consolidation of its final assembly plant in Kansas City, Missouri into its plant in York, Pennsylvania. The consolidation of operations included the elimination of approximately 800 jobs at the Kansas City facility and the addition of approximately 450 jobs at the York facility through 2019 (Manufacturing Optimization Plan). The Manufacturing Optimization Plan also included the closure of the Company's wheel operations in Adelaide, Australia, resulting in the elimination of approximately 90 jobs.
In November 2018, the Company implemented a workforce reorganization plan (Reorganization Plan). As a result, approximately 70 employees left the Company on an involuntary basis.

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The following table summarizes the 2018 actual costs and the expected costs and savings associated with these plans as of July 23, 2019 (dollars in millions):
 
2018
Actual
 
2019
Estimated
 
2020
Estimated
 
Total
Manufacturing Optimization Plan
 
 
 
 
 
 
 
Cost related to temporary inefficiencies
$12.9
 
$10 - $15
 
n/a
 
$23 - $28
Restructuring expenses
$89.5
 
$30 - $35
 
n/a
 
$119 - $124
 
$102.4
 
$40 - $50
 
 
 
$142 - $152
% cash
70%
 
70%
 
 
 
70%
Reorganization Plan
 
 
 
 
 
 
 
Restructuring expenses
$3.9
 
$-
 
 
 
$4
% cash
100%
 
100%
 
 
 
100%
 
 
 
 
 
 
 
 
Annual cash savings
 
 
2019
Estimated
 
2020
Estimated
 
Annual
Ongoing
Manufacturing Optimization Plan
 
 
$25 - $30
 
$45 - $50
 
$65 - $75
Reorganization Plan
 
 
$7
 
$7
 
$7
Through the six months ended June 30, 2019, the Motorcycles segment incurred restructuring expenses and other costs related to temporary inefficiencies of $24.4 million and $7.6 million, respectively relating to the Manufacturing Optimization Plan.
The current estimated cost of the Manufacturing Optimization Plan of $142 million to $152 million reflects a $10 million decrease from the Company's previous estimate. The total expected restructuring expenses for the Manufacturing Optimization Plan include the estimated cost of employee termination benefits, accelerated depreciation, and other project implementation costs of $38 million to $40 million, $48 million to $49 million and $33 million to $35 million, respectively. The timing of cash payments for restructuring costs may not occur in the same fiscal period that the Company records the expense.
Refer to Note 4 of the Notes to Consolidated Financial Statements for additional information concerning restructuring expenses. The Company expects total capital expenditures of $65 million associated with the Manufacturing Optimization Plan through 2019, including $20 million in 2019.
Results of Operations for the Three Months Ended June 30, 2019
Compared to the Three Months Ended July 1, 2018
Consolidated Results
 
Three months ended
 
 
 
 
(in thousands, except earnings per share)
June 30,
2019
 
July 1,
2018
 
(Decrease)
Increase
 
% Change
Operating income from Motorcycles and Related Products
$
180,728

 
$
243,406

 
$
(62,678
)
 
(25.8
)%
Operating income from Financial Services
75,529

 
80,541

 
(5,012
)
 
(6.2
)
Operating income
256,257

 
323,947

 
(67,690
)
 
(20.9
)
Other income (expense), net
4,037

 
645

 
3,392

 
525.9

Investment income
3,571

 
2,533

 
1,038

 
41.0

Interest expense
7,784

 
7,728

 
56

 
0.7

Income before provision for income taxes
256,081

 
319,397

 
(63,316
)
 
(19.8
)
Provision for income taxes
60,450

 
77,059

 
(16,609
)
 
(21.6
)
Net income
$
195,631

 
$
242,338

 
$
(46,707
)
 
(19.3
)%
Diluted earnings per share
$
1.23

 
$
1.45

 
$
(0.22
)
 
(15.2
)%
Consolidated operating income was down $67.7 million in the second quarter of 2019, or 20.9%, compared to the same period last year. Operating income from the Motorcycles segment declined $62.7 million, or 25.8%, compared to the second quarter of 2018, and operating income from the Financial Services segment decreased $5.0 million, or 6.2%, compared to the second quarter of 2018. 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.

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Other income in the second quarter was favorably impacted by lower amortization of actuarial losses related to the Company's defined benefit plans.
The effective income tax rate for the second quarter of 2019 was 23.6% compared to 24.1% for the second quarter of 2018. The lower effective income tax rate was primarily due to favorable discrete income tax adjustments recorded in the second quarter of 2019.
Diluted earnings per share were $1.23 in the second quarter of 2019, down 15.2% from the same period in the prior year. The decrease in diluted earnings per share was driven by a 19.3% decrease in net income offsetting the benefit of lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 167.2 million in the second quarter of 2018 to 159.4 million in the second quarter of 2019, 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.
Harley-Davidson Motorcycle Retail Sales(a) 
The following table includes retail unit sales of Harley-Davidson motorcycles:
 
Three months ended
 
 
 
 
 
June 30,
2019
 
June 30,
2018
 
(Decrease)
Increase
 
%
Change
United States
42,762

 
46,490

 
(3,728
)
 
(8.0
)%
 
 
 
 
 
 
 
 
Europe(b)
13,703

 
16,012

 
(2,309
)
 
(14.4
)
EMEA - Other
1,916

 
1,832

 
84

 
4.6

Total EMEA
15,619

 
17,844

 
(2,225
)
 
(12.5
)
 
 
 
 
 
 
 


Asia Pacific(c)
4,544

 
5,096

 
(552
)
 
(10.8
)
Asia Pacific - Other
3,126

 
2,622

 
504

 
19.2

Total Asia Pacific
7,670

 
7,718

 
(48
)
 
(0.6
)
 
 
 
 
 
 
 


Latin America
2,516

 
2,569

 
(53
)
 
(2.1
)
Canada
3,279

 
3,807

 
(528
)
 
(13.9
)
Total International Retail Sales
29,084

 
31,938

 
(2,854
)
 
(8.9
)
Total Worldwide Retail Sales
71,846

 
78,428

 
(6,582
)
 
(8.4
)%
(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 new retail sales, and the Company does not regularly verify the information that its dealers supply. This information is subject to revision.
(b)
Includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
(c)
Includes Japan, Australia, New Zealand and Korea.
Retail sales of new Harley-Davidson motorcycles in the U.S. were down 8.0% in the second quarter of 2019. Overall, U.S. retail sales of new Harley-Davidson motorcycles were adversely impacted by the continued weak U.S. industry. The 2019 second quarter U.S. industry decline of 4.9% was an improvement over the 6.3% decline experienced in the second quarter of 2018 and was sequentially in line with the 2019 first quarter rate of decline which also improved over the prior year quarter. While the Company is encouraged by the tempering rate of decline for the industry over the last two quarters, it believes the U.S. industry for new motorcycles continues to be challenged by soft used motorcycle prices and a shift towards other styles of motorcycles including smaller displacement motorcycles(1).
Prices for used Harley-Davidson motorcycles in the U.S. remained at near historical low levels compared to new; however, the Company is encouraged by the firming of used motorcycle prices over recent quarters. During the second quarter of 2019, prices of Harley-Davidson used motorcycles in the Harley-Davidson U.S. dealer network rose for the eighth consecutive quarter.

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U.S. retail sales of new Harley-Davidson motorcycles declined 8.0% during the second quarter which was higher than the improved 4.2% decline experienced in the first quarter of 2019. During the first quarter of 2019, retail sales were positively impacted by increased sales incentives and the execution of Stronger Dealer growth initiatives, under the More Roads plan, as the Company moved to accelerate a slow start to the selling season. In the second quarter of 2019, the Company increased the execution of its longer-term focused Stronger Dealer efforts and increased brand equity marketing, while reducing shorter-term sales incentives compared to the first quarter. The Company believes the incentives offered in the first quarter were effective and will play a role moving forward, but expects its focus to be on more strategic and sustainable investments.
The Company's U.S. market share of new 601+cc motorcycles for the second quarter of 2019 was 46.6%, down 1.8 percentage points from the same period last year. The Company's U.S. market share reflects the adverse impact of relatively strong growth in segments in which the Company does not currently compete. The Company plans to enter these segments starting next year under the More Roads plan. In the Touring and Cruiser segments, which represent approximately 70% of the 601+cc market, where the Company does currently compete, its market share was up 2.0 percentage points during the second quarter of 2019 compared to the same period last year (Source: Motorcycle Industry Council).
International retail sales of new Harley-Davidson motorcycles were down 8.9% in the second quarter of 2019. Retail sales in developed markets were down 13.6% during the second quarter partially offset by higher retail sales in emerging markets, which increased 7.6% during the second quarter. Retail sales increases in emerging markets during the second quarter of 2019 were driven by growth in various markets, including China and the Company's Association of South East Asian Nations (ASEAN) markets. The Company's new Thailand operations, which enable lower tariffs, were a key factor supporting growth in the Company's ASEAN markets during the second quarter of 2019.
In developed international markets, retail sales across most markets in western Europe were lower following last year's strong initial retail sales of the Company's new Softail motorcycle. Additionally, retail sales in Japan and Australia continued to be weak in the second quarter behind contracting industry sales and competitive new product introductions in segments outside of the Touring and Cruiser segments.
The Company remains confident in, and committed to, the potential that international markets offer Harley-Davidson. The Company is expanding its Stronger Dealer efforts internationally and continues efforts to drive demand in these markets through marketing programs with a significant focus on national test ride campaigns. The Company also continued to expand its international dealer network, adding 9 new dealers during the second quarter of 2019. In addition, during the second quarter of 2019, the Company announced a collaboration with Zhejiang Qianjiang Motorcycle Co., Ltd. that will support the launch of a smaller, more accessible Harley-Davidson motorcycle planned for China in 2020 with additional Asian markets to follow.(1) 
    
Motorcycles and Related Products Segment
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
 
Three months ended
 
 
 
 
 
June 30, 2019
 
July 1, 2018
 
Unit
 
Unit
 
Units
 
Mix %
 
Units
 
Mix %
 
Decrease
 
% Change
United States
41,404

 
60.2
%
 
43,047

 
59.3
%
 
(1,643
)
 
(3.8
)%
International
27,353

 
39.8
%
 
29,546

 
40.7
%
 
(2,193
)
 
(7.4
)
Harley-Davidson motorcycle units
68,757

 
100.0
%
 
72,593

 
100.0
%
 
(3,836
)
 
(5.3
)%
Touring motorcycle units
30,923

 
45.0
%
 
31,064

 
42.8
%
 
(141
)
 
(0.5
)%
Cruiser motorcycle units
22,691

 
33.0
%
 
24,348

 
33.5
%
 
(1,657
)
 
(6.8
)
Sportster® / Street motorcycle units
15,143

 
22.0
%
 
17,181

 
23.7
%
 
(2,038
)
 
(11.9
)
Harley-Davidson motorcycle units
68,757

 
100.0
%
 
72,593

 
100.0
%
 
(3,836
)
 
(5.3
)%
The Company shipped 68,757 Harley-Davidson motorcycles worldwide during the second quarter of 2019, which was 5.3% lower than the second quarter of 2018 and in line with the Company's expectations. The mix of Cruiser and Sportster®/Street motorcycles decreased slightly while the mix of Touring motorcycles increased.
At the end of the second quarter of 2019, U.S. retail inventory of new Harley-Davidson motorcycles was down approximately 1,350 motorcycles compared to the end of the prior year second quarter. The Company was pleased with the U.S. dealer inventory levels in preparation for the new model-year.

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Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
 
Three months ended
 
 
 
 
 
June 30, 2019
 
July 1, 2018
 
(Decrease)
Increase
 
%
Change
Revenue:
 
 
 
 
 
 
 
Motorcycles
$
1,128,063

 
$
1,201,453

 
$
(73,390
)
 
(6.1
)%
Parts & Accessories
221,258

 
231,014

 
(9,756
)
 
(4.2
)
General Merchandise
64,644

 
68,653

 
(4,009
)
 
(5.8
)
Licensing
9,911

 
10,407

 
(496
)
 
(4.8
)
Other
10,128

 
13,594

 
(3,466
)
 
(25.5
)
Total revenue
1,434,004

 
1,525,121

 
(91,117
)
 
(6.0
)
Cost of goods sold
979,266

 
993,036

 
(13,770
)
 
(1.4
)
Gross profit
454,738

 
532,085

 
(77,347
)
 
(14.5
)
Operating expenses:
 
 
 
 
 
 
 
Selling & administrative expense
208,925

 
224,310

 
(15,385
)
 
(6.9
)
Engineering expense
54,662

 
51,999

 
2,663

 
5.1

Restructuring expense
10,423

 
12,370

 
(1,947
)
 
(15.7
)
Operating expense
274,010

 
288,679

 
(14,669
)
 
(5.1
)
Operating income from Motorcycles
$
180,728

 
$
243,406

 
$
(62,678
)
 
(25.8
)%
The following table includes the estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the second quarter of 2018 to the second quarter of 2019 (in millions):
 
Net
Revenue
 
Cost of
Goods Sold
 
Gross
Profit
Three months ended July 1, 2018
$
1,525.1

 
$
993.0

 
$
532.1

Volume
(73.4
)
 
(48.7
)
 
(24.7
)
Price, net of related cost
22.1

 
8.0

 
14.1

Foreign currency exchange rates and hedging
(23.9
)
 
(24.7
)
 
0.8

Shipment mix
(15.9
)
 
(1.6
)
 
(14.3
)
Raw material prices

 
(1.2
)
 
1.2

Manufacturing and other costs

 
54.5

 
(54.5
)
Total
(91.1
)
 
(13.7
)
 
(77.4
)
Three months ended June 30, 2019
$
1,434.0

 
$
979.3

 
$
454.7

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the second quarter of 2018 to the second quarter of 2019:
The decrease in volume was due to lower wholesale motorcycle shipments and lower P&A and General Merchandise sales.
On average, wholesale prices for motorcycles shipped in the current period were higher than in the same period last year resulting in a favorable impact on revenue. The positive impact on revenue was partially offset by increased costs related to the additional content added to motorcycles shipped in the current period as compared to the same period last year.
Revenue was adversely impacted by weaker weighted-average foreign currency exchange rates, relative to the U.S. dollar, as compared to the same period last year. The unfavorable revenue impact was more than offset by favorable net foreign currency gains related to foreign currency hedging and balance sheet remeasurements, as compared to the prior year second quarter.
Revenue and gross profit were negatively impacted by a shift in the mix of models within motorcycle families. Additionally, unfavorable mix within P&A and General Merchandise contributed to negative impact.
Raw material prices were favorable primarily due to decreased metal costs.
Manufacturing and other costs were negatively impacted by incremental tariff costs, lower fixed cost absorption and temporary inefficiencies associated with the Manufacturing Optimization Plan. The Company incurred incremental tariff

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costs of $34.4 million in the second quarter of 2019 related to tariffs enacted in the European Union and China. Temporary inefficiencies associated with the Manufacturing Optimization Plan in the second quarter of 2019 were $1.6 million higher than in the prior year second quarter.
The decrease in operating expenses during the second quarter of 2019 compared to the same period in 2018 was driven by lower spending as the Company aggressively manages cost, lower warranty and recall costs and lower restructuring expense related to the Manufacturing Optimization Plan.
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
 
Three months ended
 
 
 
 
 
June 30, 2019
 
July 1, 2018
 
Increase
(Decrease)
 
%
Change
Revenue:
 
 
 
 
 
 
 
Interest income
$
167,077

 
$
158,639

 
$
8,438

 
5.3
 %
Other income
31,375

 
29,159

 
2,216

 
7.6

Securitization and servicing fee income
163

 
304

 
(141
)
 
(46.4
)
Total revenue
198,615

 
188,102

 
10,513

 
5.6

Interest expense
52,673

 
51,943

 
730

 
1.4

Provision for credit losses
26,383

 
18,880

 
7,503

 
39.7

Operating expense
44,030

 
36,738

 
7,292

 
19.8

Financial Services expense
123,086

 
107,561

 
15,525

 
14.4

Operating income from Financial Services
$
75,529

 
$
80,541

 
$
(5,012
)
 
(6.2
)%
Interest income was favorable in the second quarter of 2019 due to higher average retail and wholesale receivables at higher average yields.
Interest expense slightly increased due to higher average outstanding debt.
The provision for credit losses increased $7.5 million compared to the second quarter of 2018. The retail motorcycle provision increased $6.9 million largely driven by higher retail credit losses which the Company believes was due in part to inefficiencies resulting from the implementation of a new loan management system.
Operating expenses increased $7.3 million compared to the second quarter of 2018 including higher depreciation associated with the implementation of a new loan management system.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
 
Three months ended
 
June 30,
2019
 
July 1,
2018
Balance, beginning of period
$
190,872

 
$
190,350

Provision for credit losses
26,383

 
18,880

Charge-offs, net of recoveries
(22,259
)
 
(15,300
)
Balance, end of period
$
194,996

 
$
193,930


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Results of Operations for the Six Months Ended June 30, 2019
Compared to the Six Months Ended July 1, 2018
Consolidated Results
 
Six months ended
 
 
 
 
(in thousands, except earnings per share)
June 30,
2019
 
July 1,
2018
 
(Decrease)
Increase
 
%
Change
Operating income from Motorcycles and Related Products
$
289,109

 
$
416,244

 
$
(127,135
)
 
(30.5
)%
Operating income from Financial Services
134,260

 
144,120

 
(9,860
)
 
(6.8
)
Operating income
423,369

 
560,364

 
(136,995
)
 
(24.4
)
Other income (expense), net
8,697

 
865

 
7,832

 
905.4

Investment income
9,929

 
3,736

 
6,193

 
165.8

Interest expense
15,515

 
15,418

 
97

 
0.6

Income before provision for income taxes
426,480

 
549,547

 
(123,067
)
 
(22.4
)
Provision for income taxes
102,904

 
132,446

 
(29,542
)
 
(22.3
)
Net income
$
323,576

 
$
417,101

 
$
(93,525
)
 
(22.4
)%
Diluted earnings per share
$
2.03

 
$
2.48

 
$
(0.45
)
 
(18.1
)%
Consolidated operating income was down 24.4% in the first six months of 2019 due to a decrease in operating income from the Motorcycles segment of $127.1 million and a $9.9 million decrease in operating income from Financial Services, compared to the same period last year. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed analysis of the factors affecting operating income.
Other income in the first half of 2019 was favorably impacted by lower amortization of actuarial losses related to the Company's defined benefit plans. Investment income was up in the first half of 2019 compared to the same period last year driven by higher income from investments in marketable securities and cash equivalents.
The Company's effective income tax rate for the first six months of 2019 was 24.1%, which was flat from the same period in 2018.
Diluted earnings per share were $2.03 in the first half of 2019, down 18.1% from the same period last year on lower net income offsetting the benefit of lower diluted weighted average shares outstanding. Diluted weighted average shares outstanding decreased from 168.2 million in the first half of 2018 to 159.7 million in the first half of 2019, 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.

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Table of Contents

Motorcycles Retail Sales and Registration Data
Harley-Davidson Motorcycle Retail Sales(a) 
The following table includes retail unit sales of Harley-Davidson motorcycles:
 
Six months ended
 
 
 
 
 
June 30,
2019
 
June 30,
2018
 
(Decrease)
Increase
 
%
Change
United States
70,853

 
75,799

 
(4,946
)
 
(6.5
)%
 
 
 
 
 
 
 
 
Europe(b)
23,211

 
25,728

 
(2,517
)
 
(9.8
)
EMEA - Other
3,205

 
2,978

 
227

 
7.6

Total EMEA
26,416

 
28,706

 
(2,290
)
 
(8.0
)
 
 
 
 
 
 
 
 
Asia Pacific(c)
8,330

 
9,548

 
(1,218
)
 
(12.8
)
Asia Pacific - Other
5,414

 
4,499

 
915

 
20.3

Total Asia Pacific
13,744

 
14,047

 
(303
)
 
(2.2
)
 
 
 
 
 
 
 
 
Latin America
4,757

 
5,075

 
(318
)
 
(6.3
)
Canada
5,227

 
5,887

 
(660
)
 
(11.2
)
Total International Retail Sales
50,144

 
53,715

 
(3,571
)
 
(6.6
)
Total Worldwide Retail Sales
120,997

 
129,514

 
(8,517
)
 
(6.6
)%
 
(a)
Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning new retail sales, and the Company does not regularly verify the information that its dealers supply. This information is subject to revision.
(b)
Includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Luxembourg, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
(c)
Includes Japan, Australia, New Zealand and Korea.
Retail sales of new Harley-Davidson motorcycles in the U.S. were down 6.5% in the first half of 2019 on a continued weak U.S. industry and a decrease in market share. Overall, the U.S. industry was down 4.8% percent in the first half of 2019, but declined at a slower rate than in the first half 2018, when it fell 8.2%. Similarly, the retail sales decline for new Harley-Davidson motorcycles in the first half of 2019 moderated from last year's first-half year over year decline of 8.7%. While the Company is encouraged by the tempering rates of decline in the first half of 2019, it believes the U.S. industry for new motorcycles continues to be challenged by soft used motorcycle prices and a shift towards other styles of motorcycles including smaller displacement motorcycles(1).
The Company's U.S. market share of new 601+cc motorcycles for the first half of 2019 was 48.3%, down 0.9 percentage points compared to the same period last year. The Company's U.S. market share reflects the adverse impact of relatively strong growth in segments in which it does not currently compete. The Company plans to enter these segments starting next year under the More Roads plan. In the Touring and Cruiser segments, which represent approximately 70% of the 601+cc market, where the Company does compete, its market share was up 2.2 percentage points during the first half of 2019 from the same period last year (Source: Motorcycle Industry Council).
International retail sales of new Harley-Davidson motorcycles were down 6.6% in the first half of 2019. Retail sales in developed markets were down 10.7% during the first half of 2019 partially offset by higher retail sales in emerging markets, which increased 6.6% during the same period. Retail sales increases in emerging markets during the first half of 2019 were driven by double-digit growth in various markets, including China and the Company's ASEAN markets.
In developed international markets, retail sales across most markets in western Europe were lower following last year's strong initial retail sales of the Company's new Softail motorcycle and lower Street sales which were adversely impacted in 2019 by a recall initiated in early 2019. Additionally, retail sales in Japan and Australia continued to be weak in the second quarter behind contracting industry sales and competitive new product introductions in segments outside of the Touring and Cruiser segments.

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Table of Contents

The Company's 2019 market share of new 601+cc motorcycles in Europe was 8.8% through June, compared to 10.4% for the same period last year (Source: Association des Constructeurs Europeens de Motocycles). The European market share was adversely impacted by lower retail sales of Softail and Street motorcycles.
Motorcycle Registration Data(a) 
The following table includes industry retail motorcycle registration data:
 
Six months ended
 
 
 
 
 
June 30,
2019
 
June 30,
2018
 
(Decrease)
Increase
 
%
Change
United States(b)
144,623

 
151,989

 
(7,366
)
 
(4.8
)%
Europe(c)
267,212

 
252,656

 
14,556

 
5.8
 %
 
(a)
Data includes on-road 601+cc models. On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table.
(b)
United States industry data is derived from information provided by Motorcycle Industry Council (MIC). This third-party data is subject to revision and update.
(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:
 
Six months ended
 
 
 
 
 
June 30, 2019
 
July 1, 2018
 
 
 
 
 
Units
 
Mix %
 
Units
 
Mix %
 
Unit
Decrease
 
Unit
% Change
United States
75,909

 
59.5
%
 
81,844

 
59.9
%
 
(5,935
)
 
(7.3
)%
International
51,739

 
40.5
%
 
54,693

 
40.1
%
 
(2,954
)
 
(5.4
)
Harley-Davidson motorcycle units
127,648

 
100.0
%
 
136,537

 
100.0
%
 
(8,889
)
 
(6.5
)%
Touring motorcycle units
55,966

 
43.8
%
 
61,921

 
45.4
%
 
(5,955
)
 
(9.6
)%
Cruiser motorcycle units
43,142

 
33.8
%
 
45,902

 
33.6
%
 
(2,760
)
 
(6.0
)
Sportster® / Street motorcycle units
28,540

 
22.4
%
 
28,714

 
21.0
%
 
(174
)
 
(0.6
)
Harley-Davidson motorcycle units
127,648

 
100.0
%
 
136,537

 
100.0
%
 
(8,889
)
 
(6.5
)%
 
 The Company shipped 127,648 Harley-Davidson motorcycles worldwide during the first half of 2019, which was 6.5% lower than the same period in 2018. The mix of Touring motorcycles decreased as a percent of total shipments while the mix of Cruiser and Sportster®/Street motorcycles increased compared to the same period last year.

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Table of Contents

Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
 
Six months ended
 
 
 
 
 
June 30, 2019
 
July 1, 2018
 
(Decrease)
Increase
 
%
Change
Revenue:
 
 
 
 
 
 
 
Motorcycles
$
2,092,638

 
$
2,323,126

 
$
(230,488
)
 
(9.9
)%
Parts & Accessories
380,961

 
400,089

 
(19,128
)
 
(4.8
)
General Merchandise
120,045

 
125,254

 
(5,209
)
 
(4.2
)
Licensing
18,488

 
18,765

 
(277
)
 
(1.5
)
Other
17,509

 
21,834

 
(4,325
)
 
(19.8
)
Total revenue
2,629,641

 
2,889,068

 
(259,427
)
 
(9.0
)
Cost of goods sold
1,827,464

 
1,883,210

 
(55,746
)
 
(3.0
)
Gross profit
802,177

 
1,005,858

 
(203,681
)
 
(20.2
)
Operating expenses:
 
 
 
 
 
 
 
Selling & administrative expense
385,469

 
431,854

 
(46,385
)
 
(10.7
)
Engineering expense
103,546

 
98,548

 
4,998

 
5.1

Restructuring expense
24,053

 
59,212

 
(35,159
)
 
(59.4
)
Operating expense
513,068

 
589,614

 
(76,546
)
 
(13.0
)
Operating income from Motorcycles
$
289,109

 
$
416,244

 
$
(127,135
)
 
(30.5
)%
The following table includes the estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first half of 2018 to the first half of 2019 (in millions):
 
Net
Revenue
 
Cost of
Goods Sold
 
Gross
Profit
Six months ended July 1, 2018
$
2,889.1

 
$
1,883.2

 
$
1,005.9

Volume
(181.6
)
 
(115.5
)
 
(66.1
)
Price, net of related costs
45.3

 
14.8

 
30.5

Foreign currency exchange rates and hedging
(53.7
)
 
(39.4
)
 
(14.3
)
Shipment mix
(69.5
)
 
(16.0
)
 
(53.5
)
Raw material prices

 
1.9

 
(1.9
)
Manufacturing and other costs

 
98.5

 
(98.5
)
Total
(259.5
)
 
(55.7
)
 
(203.8
)
Six months ended June 30, 2019
$
2,629.6

 
$
1,827.5

 
$
802.1

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the first half of 2018 to the first half of 2019:
The decrease in volume was due to lower wholesale motorcycle shipments and lower P&A and General Merchandise sales.
On average, wholesale prices for motorcycles shipped in the current period were higher than in the same period last year resulting in a favorable impact on revenue. The positive impact on revenue was partially offset by increased costs related to the additional content added to motorcycles shipped in the current period as compared to the same period last year.
Revenue was adversely impacted by weaker foreign currency exchange rates, relative to the U.S. dollar, as compared to the same period last year. The unfavorable revenue impact was partially offset by favorable net foreign currency gains related to foreign currency hedging and balance sheet remeasurements, as compared to the first half of the prior year.
Changes in the shipment mix of motorcycle families, as well as the mix of models within motorcycle families, had an adverse impact on revenue and gross profit during the first half of 2019.
Raw material prices were higher primarily due to increased metal costs.
Manufacturing and other costs were negatively impacted by incremental tariff costs, lower fixed cost absorption and higher temporary inefficiencies. Costs associated with incremental tariffs implemented in mid-2018 were $55.4 million

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during the first half of 2019. Temporary inefficiencies associated with the Manufacturing Optimization Plan were $4.5 million higher than in the same period last year.
Operating expenses were lower in the first half of 2019 compared to the first half of the prior year driven by favorable net warranty and recall costs and lower restructuring expenses. In the first half of 2019, net warranty and recall costs were approximately $40 million lower than the first half of the prior year driven by higher than normal recoveries and lower warranty costs. Operating expenses also benefited in the first half of 2019 from lower spending as the Company aggressively managed cost. However, these decreases were mostly offset as the Company increased its investments in marketing and the More Roads plan.
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
 
Six months ended
 
 
 
 
 
June 30, 2019
 
July 1, 2018
 
Increase
(Decrease)
 
%
Change
Revenue:
 
 
 
 
 
 
 
Interest income
$
326,881

 
$
312,680

 
$
14,201

 
4.5
 %
Other income
60,125

 
52,940

 
7,185

 
13.6

Securitization and servicing fee income
352

 
656

 
(304
)
 
(46.3
)
Total revenue
387,358

 
366,276

 
21,082

 
5.8

Interest expense
104,997

 
100,393

 
4,604

 
4.6

Provision for credit losses
60,874

 
48,932

 
11,942

 
24.4

Operating expense
87,227

 
72,831

 
14,396

 
19.8

Financial Services expense
253,098

 
222,156

 
30,942

 
13.9

Operating income from Financial Services
$
134,260

 
$
144,120

 
$
(9,860
)
 
(6.8
)%
Interest income was higher for the first six months of 2019 due to higher average retail and wholesale receivables at higher average yields. Other income was favorable due to higher insurance related revenue, partially offset by lower licensing revenue.
Interest expense increased due to higher average outstanding debt at a slightly higher cost of funds.
The provision for credit losses increased $11.9 million compared to the first half of 2018. The retail motorcycle provision increased $11.8 million largely driven by higher retail credit losses which the Company believes was due in part to inefficiencies resulting from the implementation of a new loan management system. The provision for credit losses was also adversely impacted by an unfavorable change in the reserve rate compared to the first half of 2018.
Annualized credit losses for the Company's retail motorcycle loans were 1.82% through June 30, 2019 compared to 1.56% through July 1, 2018. The 30-day delinquency rate for retail motorcycle loans at June 30, 2019 was 3.33% compared to 3.09% at July 1, 2018.
Operating expenses increased $14.4 million compared to the first half of 2018 including higher depreciation associated with the implementation of a new loan management system.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):
 
Six months ended
 
June 30,
2019
 
July 1,
2018
Balance, beginning of period
$
189,885

 
$
192,471

Provision for credit losses
60,874

 
48,932

Charge-offs, net of recoveries
(55,763
)
 
(47,473
)
Balance, end of period
$
194,996

 
$
193,930


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Other Matters
Contractual Obligations
As of June 30, 2019, the Company has updated the contractual obligations table under the caption “Contractual Obligations” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 to reflect the new projected principal and interest payments for the remainder of 2019 and beyond as follows (in thousands):
 
2019
 
2020-2021
 
2022-2023
 
Thereafter
 
Total
Principal payments on debt
$
1,160,128

 
$
3,578,261

 
$
1,967,892

 
$
768,700

 
$
7,474,981

Interest payments on debt
107,733

 
295,706

 
113,011

 
336,802

 
853,252

 
$
1,267,861

 
$
3,873,967

 
$
2,080,903

 
$
1,105,502

 
$
8,328,233

Interest obligations for floating rate instruments, as calculated above, assume rates in effect at June 30, 2019 remain constant. For purposes of the above, the principal payment balances for medium-term notes, on-balance sheet asset-backed securitizations, and senior unsecured notes are shown without reduction for debt issuance costs. Refer to Note 12 for a breakout of the finance costs consistent with ASU No. 2015-03.
As of June 30, 2019, there have been no other material changes to the Company’s summary of expected payments for significant contractual obligations in the contractual obligations table in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.
Commitments and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining costs to accrue related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. Any amounts accrued for these matters are monitored on an ongoing basis and are updated based on new developments or new information as it becomes available for each matter.
Environmental Protection Agency Notice:
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and has engaged in information exchanges and discussions with the EPA. In August 2016, the Company entered into a consent decree with the EPA regarding these issues, and the consent decree was subsequently revised in July 2017 (the Settlement). In the Settlement, the Company agreed to, among other things, pay a fine, and not sell tuning products unless they are approved by the EPA or California Air Resources Board. In December 2017, the Department of Justice (DOJ), on behalf of the EPA, filed the Settlement with the U.S. District Court for the District of Columbia for the purpose of obtaining court approval of the Settlement. Three amicus briefs opposing portions of the Settlement were filed with the court by the deadline of January 31, 2018. On March 1, 2018, the Company and the DOJ each filed separate response briefs. The Company is awaiting the court's decision on whether or not to finalize the Settlement, and on February 8, 2019, the DOJ filed a status update reminding the court of the current status of the outstanding matter. The Company has an accrual associated with this matter which is included in Accrued liabilities on the consolidated balance sheets, and as a result, if it is finalized, the Settlement would not have a material adverse effect on the Company's financial condition or results of operations. The Settlement is not final until it is approved by the court, and if it is not approved by the court, the Company cannot reasonably estimate the impact of any remedies the EPA might seek beyond the Company's current reserve for this matter.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties related to a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. The Company has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 and with the U.S. Environmental Protection Agency (EPA) in undertaking environmental investigation and remediation activities, including a site-wide remedial investigation/feasibility study (RI/FS).

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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 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 an accrual for its estimate of its share of the future Response Costs at the York facility which is included in Other long-term liabilities on the consolidated balance sheets. While the work on the RI/FS is now complete and the final remedy was proposed in late 2018, it has not yet been approved, and given the uncertainty that exists concerning the nature and scope of additional environmental remediation that may ultimately be required under the approved final remedy, 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.
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.
Off-Balance Sheet Arrangements
The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPEs), which are considered variable interest entities (VIEs) under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing.
The SPEs are separate legal entities that assume the risks and rewards of ownership of the retail motorcycle finance receivables they hold. The assets of the VIEs are not available to pay other obligations or claims of the Company’s creditors. The Company’s economic exposure related to the VIEs is generally limited to restricted cash reserve accounts, retained interests and ordinary representations and warranties and related covenants. The VIEs have a limited life and generally terminate upon final distribution of amounts owed to investors.
The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. Most of the Company’s asset-backed financings do not meet the criteria to be treated as a sale for accounting purposes because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt.
During the second quarter of 2016, the Company sold finance receivables with a principal balance of $301.8 million into a securitization VIE. The transaction met the criteria to be treated as a sale for accounting purposes and resulted in an off-balance sheet arrangement because the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants. For more information, refer to Note 13 of the Notes to the Consolidated Financial Statements.
Liquidity and Capital Resources as of June 30, 2019(1) 
Over the long-term, the Company expects that its business model will continue to generate cash that will allow it to invest in the business, fund future growth opportunities, and return value to shareholders.(1) The Company will evaluate opportunities to return cash to its shareholders through increasing dividends and repurchasing shares. The Company believes the Motorcycles operations will continue to be primarily funded through cash flows generated by operations.(1) The Company expects the Financial Services operations to continue to be funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, and asset-backed securitizations.

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The Company’s strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and cash equivalents and availability under credit facilities. The following table summarizes the Company’s cash and availability under credit and conduit facilities (in thousands):
 
June 30, 2019
Cash and cash equivalents
$
924,638

 
 
Credit facilities
1,334,305

Asset-backed U.S. commercial paper conduit facilities(a)
600,000

Asset-backed Canadian commercial paper conduit facility(a)
19,309

Total availability under credit and conduit facilities
1,953,614

Total
$
2,878,252

(a)
Includes facilities expiring in the next twelve months which the Company expects to renew prior to expiration.(1) 
The Company recognizes that it must continue to monitor and adjust its business to changes in the lending environment. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding. The Financial Services operations could be negatively affected by higher costs of funding and increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds available through its Financial Services operations to provide loans to independent dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital.
Cash Flow Activity
The following table summarizes the cash flow activity for the periods indicated (in thousands):
 
Six months ended
 
June 30, 2019
 
July 1, 2018
Net cash provided by operating activities
$
496,232

 
$
735,859

Net cash used by investing activities
(364,575
)
 
(367,953
)
Net cash used by financing activities
(380,946
)
 
(74,342
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
3,439

 
(10,091
)
Net (decrease) increase in cash, cash equivalents and restricted cash
$
(245,850
)
 
$
283,473

Operating Activities
The decrease in cash provided by operating activities for the first half of 2019 compared to the same period in 2018 was primarily due to lower sales and unfavorable changes in working capital which includes the impact of restructuring liabilities. There were no voluntary qualified pension plan contributions in the first half of 2018 or 2019 and no contributions are planned for the remainder of 2019.(1) 
Investing Activities
The Company’s most significant investing activities consist of capital expenditures and retail finance originations and collections. Capital expenditures were $83.2 million in the first six months of 2019 compared to $69.3 million in the same period last year. Net cash outflows for finance receivables for the first half of 2019 were $9.2 million higher than the same period last year. Other investing cash inflows, including the redemptions of marketable securities, were $26.5 million higher in the first six months of 2019 compared to the same period last year.

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Financing Activities
The Company’s financing activities consist primarily of share repurchases, dividend payments, and debt activity. Cash outflows for share repurchases were $104.6 million in the first half of 2019 compared to $111.2 million in the same period last year. Share repurchases during the first six months of 2019 included $95.5 million or 2.7 million shares of common stock related to discretionary share repurchases and $9.1 million or 0.2 million shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units. As of June 30, 2019, there were 13.7 million shares remaining on a board-approved share repurchase authorization. The Company paid dividends of $0.75 and $0.74 per share totaling $120.8 million and $124.7 million during the first half of 2019 and 2018, respectively.
Financing cash flows related to debt activity resulted in net cash outflows of $156.3 million in the first six months of 2019 compared to net cash inflows of $159.6 million in the first six months of 2018. The Company’s total outstanding debt consisted of the following (in thousands):
 
June 30,
2019
 
July 1,
2018
Unsecured commercial paper
$
405,695

 
$
1,327,307

Asset-backed Canadian commercial paper conduit facility
148,740

 
166,638

Asset-backed U.S. commercial paper conduit facilities
464,136

 
300,000

Medium-term notes, net
4,687,660

 
4,435,449

Senior unsecured notes, net
742,959

 
742,292

Asset-backed securitization debt, net
1,002,869

 
169,430

Total debt
$
7,452,059

 
$
7,141,116

To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit rating agency may change or withdraw the Company’s ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. The Company’s short- and long-term debt ratings as of June 30, 2019 were as follows:
 
Short-Term
 
Long-Term
 
Outlook
Moody’s
P2
 
A3
 
Stable
Standard & Poor’s
A2
 
BBB+
 
Negative
Fitch
F1
 
A
 
Negative
Credit Facilities – In May 2019, the Company entered into a $195.0 million 364-day credit facility which matures on May 11, 2020. The Company also has a $780.0 million five-year credit facility which matures in April 2023 and a $765.0 million five-year credit facility which matures in April 2021. The new 364-day credit facility and the five-year credit facilities (together, the Global Credit Facilities) bear interest at variable rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments under the Global Credit Facilities. The Global Credit Facilities are committed facilities primarily used to support the Company's unsecured commercial paper program.
Unsecured Commercial Paper – Subject to limitations, the Company could issue unsecured commercial paper of up to $1.74 billion as of June 30, 2019 supported by the Global Credit Facilities, as discussed above. Outstanding unsecured commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. The Company intends to repay unsecured commercial paper as it matures with additional unsecured commercial paper or through other means, such as borrowing under the Global Credit Facilities, borrowing under its asset-backed U.S. commercial paper conduit facilities or through the use of operating cash flow and cash on hand.(1) 

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Medium-Term Notes – The Company had the following medium-term notes (collectively, the Notes) issued and outstanding at June 30, 2019 (in thousands):
Principal Amount
 
Rate
 
Issue Date
 
Maturity Date
$600,000
 
2.40%
 
September 2014
 
September 2019
$600,000
 
2.15%
 
February 2015
 
February 2020
$450,000
 
LIBOR + 0.50%
 
May 2018
 
May 2020
$350,000
 
2.40%
 
March 2017
 
June 2020
$600,000
 
2.85%
 
January 2016
 
January 2021
$450,000
 
LIBOR + 0.94%
 
November 2018
 
March 2021
$350,000
 
3.55%
 
May 2018
 
May 2021
$550,000
 
4.05%
 
February 2019
 
February 2022
$400,000
 
2.55%
 
June 2017
 
June 2022
$350,000
 
3.35%
 
February 2018
 
February 2023
The fixed-rate Notes provide for semi-annual interest payments and the floating-rate Notes provide for quarterly interest payments. Principal on the Notes is due at maturity. Unamortized discount and debt issuance costs on the Notes reduced the outstanding balance by $12.3 million and $14.6 million at June 30, 2019 and July 1, 2018, respectively. There were no medium-term note maturities during the second quarter of 2019. During the first quarter of 2019, $600.0 million of 2.25% and $150.0 million of floating-rate medium-term notes matured, and the principal and accrued interest were paid in full. During the second quarter of 2018, $877.5 million of 6.80% medium-term notes matured, and the principal and accrued interest were paid in full. There were no medium-term note maturities during the first quarter of 2018.
Senior Unsecured Notes – In July 2015, the Company issued $750.0 million of senior unsecured notes in an underwritten offering. The senior unsecured notes provide for semi-annual interest payments and principal due at maturity. $450.0 million of the senior unsecured notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million of the senior unsecured notes mature in July 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015.
On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – The Company has a revolving facility agreement (Canadian Conduit) with a Canadian bank-sponsored asset-backed commercial paper conduit. Under the agreement, the Canadian Conduit is contractually committed, at the Company's option, to purchase from the Company eligible Canadian retail motorcycle finance receivables for proceeds up to C$220.0 million. The transferred assets are restricted as collateral for the payment of the debt. The terms for this facility provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$220.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. The Canadian Conduit was renewed on June 28, 2019 with similar terms and a borrowing amount of up to C$220.0 million. The expected remaining term of the related receivables is approximately 5 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of June 30, 2019, the Canadian Conduit has an expiration date of June 26, 2020.
The following table includes quarterly transfers of Canadian retail motorcycle finance receivables to the Canadian Conduit and the respective proceeds (in thousands):
 
2019
 
2018
 
Transfers
 
Proceeds
 
Transfers
 
Proceeds
First quarter
$

 
$

 
$
7,600

 
$
6,200

Second quarter
28,200

 
23,400

 
38,900

 
32,200

 
$
28,200

 
$
23,400

 
$
46,500

 
$
38,400

On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE – The Company has two separate agreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits under which it may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In November 2018, the Company renewed its existing $600.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits. Also at that time, the Company

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amended its existing $300.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits, increasing the aggregate commitment to $600.0 million. The aggregate commitment under this agreement is reduced monthly as collections on the related finance receivables are applied to the outstanding principal until the outstanding principal balance is less than or equal to $300.0 million, at which point the aggregate commitment will equal $300.0 million. In May 2019, the Company further amended this revolving facility agreement to allow for incremental borrowings, at the lenders’ discretion, of up to an additional $300.0 million in excess of the $300.0 million commitment. Availability under the revolving facilities (together, the U.S. Conduit Facilities) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.
The following table includes quarterly transfers of U.S. retail motorcycle finance receivables to the U.S. Conduit Facilities and the respective proceeds (in thousands):
 
2019
 
2018
 
Transfers
 
Proceeds
 
Transfers
 
Proceeds
First quarter
$

 
$

 
$
32,900

 
$
29,300

Second quarter

 

 
59,100

 
53,300

 
$

 
$

 
$
92,000

 
$
82,600

The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates or LIBOR to the extent the advance is not funded by a conduit lender through the issuance of commercial paper plus, in each case, a program fee based on outstanding principal. The U.S. Conduit Facilities also provide for an unused commitment fee based on the unused portion of the total aggregate commitment. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facilities, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 5 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of June 30, 2019, the U.S. Conduit Facilities have an expiration date of November 29, 2019.
Asset-Backed Securitization VIEs – For all of its asset-backed securitization transactions, the Company transfers U.S. retail motorcycle finance receivables to separate VIEs, which in turn issue secured notes with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchased U.S. retail motorcycle finance receivables. The U.S. retail motorcycle finance receivables included in the asset-backed securitization transactions are not available to pay other obligations or claims of the Company's creditors until the associated debt and other obligations are satisfied. Restricted cash balances held by the VIEs are used only to support the securitizations.
The accounting treatment for asset-backed securitizations depends on the terms of the related transaction and the Company’s continuing involvement with the VIE. Most of the Company’s asset-backed securitizations do not meet the criteria to be accounted for as a sale because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. As secured borrowings, the retail motorcycle finance receivables remain on the balance sheet with a corresponding obligation reflected as debt. There is no amortization schedule for the secured notes; however, the debt is reduced monthly as available collections on the related retail motorcycle finance receivables are applied to outstanding principal. The secured notes have various contractual maturities ranging from 2020 to 2026.
During the second quarter of 2019, the Company issued $500.0 million and $525.0 million, or $498.7 million and $522.6 million net of discount and issuance costs, respectively, of secured notes through on-balance sheet asset-backed securitization transactions. There were no on-balance sheet asset-backed securitization transactions during the first quarter of 2019 or the first half of 2018. There were no off-balance sheet asset-backed securitization transactions during the first half of 2019 or 2018.
Support Agreement - The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support to maintain HDFS’ fixed-charge coverage at 1.25 and minimum net worth of $40.0 million. Support may be provided at the Company’s option as capital contributions or loans. Accordingly, certain debt covenants may restrict the Company’s ability to withdraw funds from HDFS outside the normal course of business. No amount has ever been provided to HDFS under the support agreement.
Operating and Financial Covenants – HDFS and the Company are subject to various operating and financial covenants related to the credit facilities and various operating covenants under the Notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.

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The operating covenants limit the Company’s and HDFS’ ability to:
Assume or incur certain liens;
Participate in certain mergers or consolidations; and
Purchase or hold margin stock.
Under the current financial covenants of the Global Credit Facilities, the ratio of HDFS’ consolidated debt, excluding secured debt, to HDFS’ consolidated shareholders' equity, excluding accumulated other comprehensive income (loss), cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and consolidated shareholders’ equity (where the Company's consolidated debt in each case excludes that of HDFS and its subsidiaries, and the Company's consolidated shareholders’ equity excludes accumulated other comprehensive income (loss)), cannot exceed 0.7 to 1.0 as of the end of any fiscal quarter. No financial covenants are required under the Notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.
At June 30, 2019, HDFS and the Company remained in compliance with all of the then existing covenants.
Cautionary Statements
The Company's ability to meet the targets and expectations noted above depends upon, among other factors, the Company's ability to (i) execute its business plans and strategies, including the elements of the More Roads to Harley-Davidson plan for growth that the Company disclosed on July 30, 2018, and strengthen its existing business while enabling growth, (ii) manage and predict the impact that new or adjusted tariffs may have on our ability to sell product internationally, and the cost of raw materials and components, (iii) execute its strategy of growing ridership, globally, (iv) effectively execute the Company’s Manufacturing Optimization Plan within expected costs and timing and successfully carry out its global manufacturing and assembly operations, (v) accurately analyze, predict and react to changing market conditions and successfully adjust to shifting global consumer needs and interests, (vi) successfully launch a smaller displacement motorcycle in India, (vii) develop and introduce products, services and experiences on a timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, (viii) perform in a manner that enables the Company to benefit from market opportunities while competing against existing and new competitors, (ix) realize expectations concerning market demand for electric models, which may depend in part on the building of necessary infrastructure, (x) prevent, detect, and remediate any issues with its motorcycles or any issues associated with the manufacturing processes to avoid delays in new model launches, recall campaigns, regulatory agency investigations, increased warranty costs or litigation and adverse effects on its reputation and brand strength, and carry out any product programs or recalls within expected costs and timing, (xi) manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters, (xii) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles, (xiii) reduce other costs to offset costs of the More Roads to Harley-Davidson plan and redirect capital without adversely affecting its existing business, (xiv) balance production volumes for its new motorcycles with consumer demand, (xv) manage risks that arise through expanding international manufacturing, operations and sales, (xvi) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing political environment, (xvii) successfully determine, implement on a timely basis, and maintain a manner in which to sell motorcycles in the European Union, China, and ASEAN countries that does not subject its motorcycles to incremental tariffs, (xviii) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices, (xix) continue to develop the capabilities of its distributors and dealers, effectively implement changes relating to its dealers and distribution methods and manage the risks that its independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand, (xx) retain and attract talented employees, (xxi) prevent a cybersecurity breach involving consumer, employee, dealer, supplier, or Company data and respond to evolving regulatory requirements regarding data security, (xxii) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio, (xxiii) adjust to tax reform, healthcare inflation and reform and pension reform, and successfully estimate the impact of any such reform on the Company’s business, (xxiv) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles, (xxv) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities, (xxvi) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations, (xxvii) manage its exposure to product liability claims and commercial or contractual disputes, (xxviii) successfully access the capital and/or credit markets on terms (including interest rates) that are acceptable to the Company and within its expectations, (xxix) conduct its corporate and manufacturing operations in Thailand in a manner that allows the Company to avail itself of preferential free trade agreements and duty rates, and sufficiently lower prices of its motorcycles in certain markets, (xxx) continue to manage the relationships and agreements that the Company has with its labor unions to help drive long-term competitiveness, (xxxi) accurately predict the margins of its Motorcycles and Related Products segment in light of, among other things, tariffs, the cost associated with the More Roads to Harley-Davidson plan, the Company's Manufacturing Optimization Plan, and its complex supply chain, and (xxxii) develop and maintain a productive relationship with Zhejiang Qianjiang Motorcycle Co., Ltd. and launch related products in a timely manner.

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The Company could experience delays or disruptions in its operations as a result of work stoppages, strikes, natural causes, terrorism or other factors. Further, actual foreign currency exchange rates may vary from underlying assumptions. Other factors are described in risk factors that the Company has disclosed in documents previously filed with the Securities and Exchange Commission. Many of these risk factors are impacted by the current changing capital, credit and retail markets and the Company's ability to manage through inconsistent economic conditions.
The Company’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company’s independent dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent dealers to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company. In addition, the Company’s independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors.
In recent years, HDFS has experienced historically low levels of retail credit losses, but there is no assurance that this will continue. The Company believes that HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals to sub-prime borrowers, as well as actions that the Company has taken and could take that impact motorcycle values.
Refer to Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018 for a discussion of additional risk factors and a more complete discussion of some of the cautionary statements noted above.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in foreign exchange rates, commodity prices and interest rates. To reduce such risks, the Company selectively uses derivative financial instruments. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes. Sensitivity analysis is used to manage and monitor foreign exchange and interest rate risk.
The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency. As a result, the Company’s earnings are affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company’s most significant foreign currency risk relates to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Indian rupee, and Pound sterling. The Company utilizes foreign currency contracts to mitigate the effect of certain currencies' fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.
The Company's earnings are affected by changes in the prices of commodities used in the production of motorcycles. The Company uses derivative instruments on a limited basis to hedge the prices of certain commodities.
HDFS’ earnings are affected by changes in interest rates. HDFS’ interest-rate sensitive financial instruments include finance receivables, debt and interest rate derivatives. HDFS utilizes interest rate swaps and caps to reduce the impact of fluctuations in interest rates on its debt.
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2018 for further information concerning the Company's market risk. There have been no material changes to the market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

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Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.
Changes in Internal Controls
There were no changes in the Company's internal control over financial reporting during the quarter ended June 30, 2019 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Table of Contents

PART II – OTHER INFORMATION
Item 1. Legal Proceedings
The information required under this Item 1 of Part II is contained in Item 1 of Part I of this Quarterly Report on Form 10-Q in Note 17 of the Notes to Consolidated Financial Statements, and such information is incorporated herein by reference in this Item 1 of Part II.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains detail related to the Company's repurchase of its common stock based on the date of trade during the quarter ended June 30, 2019:
2019 Fiscal Month
 
Total Number of
Shares Purchased
(a)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
April 1 to May 5
 

 
$

 

 
14,943,706

May 6 to June 2
 
416,173

 
$
34

 
416,173

 
14,528,706

June 3 to June 30
 
824,692

 
$
35

 
824,692

 
13,704,306

Total
 
1,240,865

 
$
35

 
1,240,865

 
 
 
(a)
Includes discretionary share repurchases and shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units
In February 2018, the Company's Board of Directors authorized the Company to repurchase up to 15.0 million shares of its common stock with no dollar limit or expiration date. The Company repurchased 1.2 million shares on a discretionary basis during the quarter ended June 30, 2019 under this authorization. As of June 30, 2019, 13.7 million shares remained under this authorization.
Under the share repurchase authorization, the Company’s common stock may be purchased through any one or more of a Rule 10b5-1 trading plan and discretionary purchases on the open market, block trades, accelerated share repurchases, or privately negotiated transactions. The number of shares repurchased, if any, and the timing of repurchases will depend on a number of factors, including share price, trading volume, and general market conditions, as well as on working capital requirements, general business conditions, and other factors. The repurchase authority has no expiration date but may be suspended, modified, or discontinued at any time.
The Harley-Davidson, Inc. 2014 Incentive Stock Plan and predecessor stock plans permit participants to satisfy all or a portion of the statutory federal, state, and local withholding tax obligations arising in connection with plan awards by electing to (a) 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 second quarter of 2019, the Company acquired 1,465 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock units.
Item 6. Exhibits
Refer to the Exhibit Index immediately following this page.


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Table of Contents

Harley-Davidson, Inc.
Exhibit Index to Form 10-Q

Exhibit No.
 
Description
10.1*
 
Form of Aircraft Time Sharing Agreement between the Registrant and each of Messrs. Levatich, Olin, Jones, Mansfield, Grimmer and Hund and Mses. Kumbier and Anding (supersedes form of Aircraft Time Sharing Agreement originally filed as Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarter ended September 30, 2012).
10.2*
 
Form of Transition Agreement between the Registrant and each of Messrs. Mansfield and Grimmer and Ms. Anding (incorporated herein by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the period ended April 1, 2018 (File No. 1-9183))
10.3*
 
Amended and Restated Harley-Davidson, Inc. 2014 Incentive Stock Plan as amended effective January 25, 2019
 
Chief Executive Officer Certification pursuant to Rule 13a-14(a)
 
Chief Financial Officer Certification pursuant to Rule 13a-14(a)
 
Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. §1350
101.INS
 
XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
101.SCH
 
XBRL Taxonomy Extension Schema Document
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document






























*
Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated.

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Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HARLEY-DAVIDSON, INC.
 
 
Date: August 8, 2019
/s/ John A. Olin
 
John A. Olin
 
Senior Vice President and
 
Chief Financial Officer
 
(Principal financial officer)
 
Date: August 8, 2019
/s/ Mark R. Kornetzke
 
Mark R. Kornetzke
 
Chief Accounting Officer
 
(Principal accounting officer)


70


AIRCRAFT TIME SHARING AGREEMENT
Dated as of the _____ of ______, ______.

between
______________
__________________________________
as Executive,

and

Harley-Davidson Motor Company Group, LLC,
as Provider,



* * *

INSTRUCTIONS FOR COMPLIANCE WITH
“TRUTH IN LEASING” REQUIREMENTS UNDER FAR § 91.23
Within 24 hours after execution of this Aircraft Time Sharing Agreement:

mail a copy of the executed document to the following address via certified mail,
return receipt requested:

Federal Aviation Administration
Aircraft Registration Branch
ATTN: Technical Section
P.O. Box 25724
Oklahoma City, Oklahoma 73125

At least 48 hours prior to the first flight to be conducted under this Agreement:
provide notice of the departure airport and proposed time of departure
of said first flight, by telephone or facsimile, to the Flight Standards
District Office located nearest the departure airport.

Carry a copy of this Aircraft Time Sharing Agreement in the aircraft at all times when the aircraft is operated under this Agreement.

* * *
AIRCRAFT TIME SHARING AGREEMENT
THIS AIRCRAFT TIME SHARING AGREEMENT (the “Agreement”) is made and entered into as of __________, ________, by and between Harley-Davidson Motor Company Group, LLC (“Provider”), and ___________ (“Executive”).
WHEREAS, Harley-Davidson, Inc. (the “Company”) historically has made corporate aircraft available on a limited basis for the personal use of certain executive officers, with the value of such benefit being calculated for each personal use flight based on the standard industry fare level (SIFL) valuation used to impute income for tax purposes and subsequently charged to the applicable executive officer as imputed income.
WHEREAS, the Company has determined that it is in the best interests of the Company and its shareholders that such benefit, if utilized by certain executive officers, be conditioned upon each such executive officer executing this Agreement setting forth the terms, limitations, conditions and rental cost associated with utilizing corporate aircraft for personal use, with the rental cost paid by the executive officer for each personal use flight determined by the greater of the SIFL rate and the aggregate incremental cost to the Company for such flight.
In consideration of the mutual promises, agreements, covenants, warranties, representations and provisions contained herein, the parties agree as follows:
1.Time Sharing of the Aircraft. Subject to the terms and conditions of this Agreement, Provider shall provide Executive with transportation services on a non-exclusive basis for the Term (as defined below) using Provider’s leasehold interest, or in the event Provider acquires title, its ownership interest, in the aircraft identified on Schedule A, as may be amended by Provider from time-to-time to reflect the composition of Provider’s corporate aircraft fleet (the “Aircraft”). This Agreement is intended to be a time sharing agreement within the meaning of 14 C.F.R. Section 91.501(c)(1).
2.    Term. The term of this Agreement (the “Term”) shall commence on the date of this Agreement and be effective until terminated by either party, with or without cause on thirty (30) days written notice to the other party. Notwithstanding anything to the contrary in this Section 2, this Agreement shall terminate automatically (i) on the termination of employment of Executive with the Company and its subsidiaries; (ii) on expiration of Provider’s leasehold interest in the Aircraft other than pursuant to a transaction where Provider acquires title to the Aircraft; or (iii) if Provider determines that the time-sharing activities contemplated by this Agreement do not comport with any applicable legal requirements, including, without limitation, the rules and regulations of the Federal Aviation Administration.
3.    Delivery to Executive; Scheduling.
(a)    Upon the request of Executive, which shall include information indicated in Section 3(b), subject to the Provider not already having a conflicting business purpose for the Aircraft as determined by Provider and approval of the Chief Executive Officer of the Company, Provider shall make any of the Aircraft listed on Exhibit A, as determined by Provider in its sole discretion, available to Executive at such location as Executive may reasonably request.
(b)    All scheduling requests of Executive shall be submitted in writing to Provider’s Corporate Aircraft Travel Coordinator and include the following information: (i) proposed departure airport and destination airport; (ii) date and time of departure or arrival time requested; (iii) number of passengers; (iv) the nature and extent of luggage and/or cargo to be carried; (v) the date and time of the requested return flight, if any; (vi) catering and/or ground transportation requested; and (vi) any other information that is reasonably requested by the flight crew.
4.    Rent.
(a)    For Executive’s use of the Aircraft, Executive shall pay to Provider the Rent for any flight.
(b)    For purposes of this Agreement, “Rent” shall equal the greater of the SIFL Rate and the Company’s Aggregate Incremental Cost, with such terms defined as follows:
(i)    SIFL Rate” shall mean the standard industry fare level (SIFL) valuation used to impute income for tax purposes for such flight; and
(ii)    Company’s Aggregate Incremental Cost” shall mean the sum of the following amounts as they relate to such flight:
(1)
the cost of the fuel, oil and other additives consumed;
(2)
all travel expenses for pilots, flight attendants and other flight support personnel, including food, lodging and ground transportation;
(3)
all hangar and tie-down costs away from the Aircraft’s base of operation;
(4)
costs of any insurance obtained for a specific flight;
(5)
all landing fees, airport taxes and similar assessments;
(6)
Customs, foreign permit, and similar fees directly related to a specific flight;
(7)
all expenses for catering and in-flight entertainment materials;
(8)
all passenger ground transportation expenses; and
(9)
all expenses for flight planning and weather contract services;
provided, however, in no event shall the Rent for any flight exceed the sum of: twice the amount from Section 4(b)(ii)(1) plus the amounts from Sections 4(b)(ii)(2) through 4(b)(ii)(9).
(c)    For purposes of this Agreement, “flight” shall mean each leg of a trip that commences upon takeoff of the Aircraft and ends upon landing of the Aircraft regardless of whether a passenger deplanes and shall include any ‘dead head’ flights (i.e., flights necessary to position the Aircraft to a delivery location requested by Executive or reposition the Aircraft after use of the Aircraft by Executive for any flight).
(d)    Provider shall invoice Executive on the 15th day of each month for the amount of Rent due for the prior month. Such Rent shall be due within 5 days of receipt of the invoice in immediately available U.S. funds.
(e)    Executive shall be responsible for arranging and paying for all passenger ground transportation and accommodations in connection with Executive’s use of the Aircraft.
5.    Use of Aircraft.
(a)    Executive shall use the Aircraft only for the transportation of Executive and his/her guests and shall not obtain compensation for such transportation from any person.
(b)    Executive shall not violate, and shall not permit any of his/her guests to violate, any applicable law, regulation or rule of the United States, any state, territory or local authority, or any foreign government or subdivision thereof, and shall not bring or cause to be brought or carried on board the Aircraft, or permit any guest to bring or cause to be brought or carried on board the Aircraft, any contraband or unlawful articles or substances, or anything that is contraband or is an unlawful article of substance in any jurisdiction into or over which the Aircraft is to operate on behalf of Executive.
(c)    Executive shall, and shall cause his/her guests to, comply with all lawful instructions and procedures of Provider and its agents and employees regarding the Aircraft, its operation or flight safety.
(d)    Executive acknowledges that the routes to reach Executive’s requested destination shall not be within or over (i) an area of hostilities, or (ii) an area excluded from coverage under the insurance policies maintained by Provider with respect to the Aircraft.
(e)    Executive further acknowledges that if, in the view of Provider (including its pilot-in-command), flight safety may be jeopardized, Provider may terminate a flight or refuse to commence it without liability for loss, injury or damage occasioned by such termination or refusal. Executive acknowledges that Provider shall not be liable for any loss, damage, cost or expense arising from any delay, cancellation or failure to furnish any transportation pursuant to this Agreement when caused by government regulation, law or authority, mechanical difficulty or breakdown, war, civil commotion, strikes or other labor disputes, weather conditions, acts of God, public enemies or any other cause beyond Provider’s control.
6.    Pilots. For all flights of the Aircraft for Executive pursuant to this Agreement, as between Provider and Executive, Provider shall cause the Aircraft to be operated by pilots who are duly qualified under the Federal Aviation Regulations, including without limitation with respect to currency and type-rating, and who meet all other requirements established and specified by the FAA and the insurance policies required hereunder.
7.    Operation and Maintenance Responsibilities of Provider. Provider shall be in operational control of the Aircraft at all times during the Term. As between Provider and Executive, Provider shall be solely responsible for the operation and maintenance of the Aircraft.
8.    Liens. Executive shall not directly or indirectly create or incur any liens on or with respect to (i) the Aircraft or any part thereof, (ii) Provider’s interest therein (and Executive will promptly, at his/her own expense, take such action as may be necessary to discharge any such lien), except (a) the respective rights of Provider and Executive as herein provided and (b) liens created by or caused to be created by Provider.
9.    Taxes. Executive shall be responsible for all sales taxes, use taxes, personal income taxes, retailer taxes, duties, fees, federal excise taxes (“FET”), or other taxes of any kind which may be assessed or levied by any taxing jurisdiction as a result of Executive’s use of the Aircraft pursuant to this Agreement. Executive shall pay to Provider any FET applicable to Executive’s use, or Executive’s payment for Executive’s use, of the Aircraft, which shall be included in each invoice for Rent. Provider shall be responsible for collecting, reporting and remitting FET to the U.S. Internal Revenue Service.
10.    Insurance. As between Provider and Executive, Provider shall be responsible for all costs to maintain in effect, throughout the Term, insurance policies containing such provisions and providing such coverages as Provider deems appropriate. Without limiting the generality of the foregoing, Provider shall maintain in effect (a) aircraft hull insurance in such amount as reasonably determined by Provider from time to time taking into account amounts required under any Aircraft lease agreement and (b) third party liability coverage with a limit of coverage that shall be reasonably determined by Provider from time to time.
11.    Loss or Damage.
(a)    Provider assumes and shall bear the entire risk of loss, theft, confiscation, damage to, or destruction of the Aircraft. Provider shall release, indemnify, defend and hold harmless Executive and his/her heirs, executors and personal representatives from and against any and all losses, liabilities, claims, judgments, damages, fines, penalties, deficiencies and expenses (including, without limitation, reasonable attorneys fees and expenses) incurred or suffered by Executive on account of a claim or action made or instituted by a third person arising out of or resulting from operations of the Aircraft hereunder and/or any services provided by Provider to Executive hereunder, except to the extent attributable to the gross negligence or willful misconduct of Executive or his/her guests on the Aircraft.
(b)    In the event of loss, theft, confiscation, damage to or destruction of the Aircraft, or any engine or part thereof, from any cause whatsoever (a “Casualty Occurrence”) occurring at any time when Executive is using the Aircraft under this Agreement, Executive shall furnish such information and execute such documents as may be necessary or required by Provider or applicable law. Executive shall cooperate fully in any investigation of any claim or loss processed by Provider under the Aircraft insurance policy/policies and in seeking to compel the relevant insurance company or companies to pay any such claims.
(c)    In the event of total loss or destruction of all or substantially all of the Aircraft, or damage to the Aircraft that causes it to be irreparable in the opinion of Provider or any insurance carrier providing full coverage with respect to the Aircraft, or in the event of confiscation or seizure of the Aircraft, this Agreement shall automatically terminate; provided, however, that such termination of this Agreement shall not terminate the obligation of Executive to cooperate with Provider in seeking to compel the relevant insurance company or companies to pay claims arising from such loss, destruction, damage, confiscation or seizure; provided, further, that the termination of this Agreement shall not affect the obligation of Executive to pay Provider all accrued and unpaid Rent and all other accrued and unpaid amounts due hereunder.
(d)    For the sake of clarification, the Aircraft shall be deemed not available to Executive after any Casualty Occurrence until such time thereafter as Provider has returned the Aircraft to service. Provider shall have no obligation to return the Aircraft to service after any Casualty Occurrence.
12.    Representations, Warranties and Agreements of Executive. Executive represents, warrants and agrees as follows:
(a)    Authorization. Executive has all necessary powers to enter into the transactions contemplated in this Agreement and has taken all actions required to authorize and approve this Agreement.
(b)    As-Is Condition. Executive acknowledges that Provider has not made any warranty or representation, either express or implied, as to the design, compliance with specifications, operation, or condition of, or as to the quality of the material, aircraft, or workmanship in, the Aircraft or any component thereof, and Provider makes no warranty of merchantability or fitness of the Aircraft or any component thereof for any particular purpose or as to title to the Aircraft or component thereof, or any other representation or warranty, express or implied, with respect to the Aircraft or component thereof.
13.    Representations, Warranties and Agreements of Provider. Provider represents, warrants and agrees as follows:
(a)    Authorization. Provider has all necessary powers to enter into the transaction contemplated in this Agreement and has taken all action necessary to authorize and approve this Agreement.
(b)    FAA Registration. The registration of the Aircraft with the FAA is currently valid.
14.    Event of Default. The following shall constitute an Event of Default (each an “Event of Default”):
(a)    Executive shall not have made payment of any amount due under Section 4 within ten (10) days after the same shall become due; or
(b)    Executive shall have failed to perform or observe (or cause to be performed or observed) any other covenant or agreement required to be performed under this Agreement, and such failure shall continue for thirty (30) days after written notice thereof from Provider to Executive; or
(c)    Executive (i) seeks relief under any bankruptcy law or similar law for the protection of debtors or (ii) suffers a petition of bankruptcy filed against him that is not dismissed within thirty (30) days.
15.    Provider’s Remedies.
(a)    Upon the occurrence of any Event of Default, Provider may, at its option, exercise any or all remedies available at law or in equity, including, without limitation, any or all of the following remedies, as Provider in its sole discretion shall elect:
(i)    By notice in writing, terminate this Agreement, whereupon all rights of Executive to the use of the Aircraft or any part thereof shall absolutely cease and terminate, but Executive shall remain liable as provided in this Agreement; and upon such notice of termination, Provider, at its option, may enter upon the premises where the Aircraft is located and take immediate possession of and remove the same by summary proceedings or otherwise. Executive specifically authorizes Provider’s entry upon any premises where the Aircraft may be located for the purpose of, and waives any cause of action it may have arising from, a peaceful retaking of the Aircraft. Executive shall forthwith pay to Provider an amount equal to the total accrued and unpaid Rent and all other accrued and unpaid amounts due hereunder, plus any and all losses and damages incurred or sustained by Provider by reason of any default by Executive under this Agreement.
(ii)    Perform or cause to be performed any obligation, covenant or agreement of Executive hereunder. Executive agrees to pay all costs and expenses incurred by Provider for such performance as additional Rent hereunder and acknowledges that such performance by Provider shall not be deemed to cure said Event of Default.
(b)    Executive shall be liable for all costs, charges and expenses, including reasonable attorneys’ fees and expenses described in Section 16(i).
16.    General Provisions.
(a)    Headings. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the construction or interpretation of this Agreement.
(b)    Partial Invalidity. If any provision of this Agreement, or the application thereof to any person, place or circumstance, shall be held by a court of competent jurisdiction to be illegal, invalid, unenforceable or void, then such provision shall be enforced to the extent that it is not illegal, invalid, unenforceable or void, and the remainder of this Agreement, as well as such provision as applied to other persons, shall remain in full force and effect.
(c)    Waiver. With regard to any power, remedy or right provided in this Agreement or otherwise available to any party, (i) no waiver or extension of time shall be effective unless expressly contained in a writing signed by the waiving party, (ii) no alteration, modification or impairment shall be implied by reason of any previous waiver, extension of time, delay or omission in exercise or other indulgence, and (iii) waiver by any party of the time for performance of any act or condition hereunder does not constitute waiver of the act or condition itself.
(d)    Notices. Any notice or other communication required or permitted under this Agreement shall be in writing and shall be deemed duly given upon actual receipt, if delivered personally or by telecopy; or three (3) days following deposit in the United States mail, if deposited with postage pre-paid, return receipt requested, and addressed to such address as may be specified in writing by the relevant party from time to time, and which shall initially be as follows:
To Executive at:    _____________________________
__________________
Harley-Davidson Motor Company, Inc.
3700 W. Juneau Ave.
Milwaukee, WI 53208

To Provider at:    Harley-Davidson Motor Company Group, LLC
3700 W. Juneau Ave.
Milwaukee, WI 53201
Attn: Chief Legal Officer

No objection may be made to the manner of delivery of any notice or other communication in writing actually received by a party.
(e)    Wisconsin Law. This Agreement shall be governed by and construed in accordance with the laws of the State of Wisconsin, regardless of the choice of law provisions of Wisconsin or any other jurisdiction.
(f)    Entire Agreement. This Agreement constitutes the entire agreement between the parties pertaining to the subject matter contained in this Agreement and supersedes any prior or contemporaneous agreements, representations and understandings, whether written or oral, of or between the parties with respect to the subject matter of this Agreement. There are no representations, warranties, covenants, promises or undertakings, other than those expressly set forth or referred to herein.
(g)    Amendment. This Agreement may be amended only by a written agreement signed by all of the parties, subject to Provider’s ability to amend Schedule A pursuant to Section 1 above, which shall be effective upon notice to Executive.
(h)    Binding Effect; Assignment. This Agreement shall be binding on, and shall inure to the benefit of, the parties to it and their respective successors and assigns; provided, however, that Executive may not assign any of his rights under this Agreement, and any such purported assignment shall be null, void and of no effect.
(i)    Attorneys’ Fees. Should any action (including any proceedings in a bankruptcy court) be commenced between any of the parties to this Agreement or their representatives concerning any provision of this Agreement or the rights of any person or entity thereunder, solely as between the parties or their successors, the party or parties prevailing in such action shall be entitled to recover from the other party all of its costs and expenses incurred in connection with such action (including, without limitation, fees, disbursements and expenses of attorneys and costs of investigation).
(j)    Remedies Not Exclusive. No remedy conferred by any of the specific provisions of this Agreement is intended to be exclusive of any other remedy, and each and every remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity by statute or otherwise. The election of any one or more remedies shall not constitute a waiver of the right to pursue other remedies.
(k)    No Third Party Rights. Nothing in this Agreement, whether express or implied, is intended to confer any rights or remedies under or by reason of this Agreement on any person other than the parties to this Agreement and their respective successors and assigns, nor is anything in this Agreement intended to relieve or discharge the obligation or liability of any third persons to any party to this Agreement, nor shall any provision give any third person any right of subrogation or action over or against any party to this Agreement.
(l)    Counterparts. This Agreement may be executed in one or more counterparts, each of which independently shall be deemed to be an original, and all of which together shall constitute one instrument. The parties may exchange executed copies transmitted by facsimile, provided the originals are forwarded in accordance with Section 16(d).
(m)    Expenses. Each party shall bear all of its own expenses in connection with the negotiation, execution and delivery of this Agreement.
(n)    Broker/Finder Fees. Each party represents that it has dealt with no broker or finder in connection with the transaction contemplated by this Agreement and that no broker or other person is entitled to any commission or finder’s fee in connection therewith. Provider and Executive each agree to indemnify and hold harmless one another against any loss, liability, damage, cost, claim or expense incurred by reason of any brokerage commission or finder’s fee alleged to be payable because of any act, omission or statement of the indemnifying party.
(o)    Relationship of the Parties. Nothing contained in this Agreement shall in any way create any association, partnership, joint venture, or principal-and-agent relationship between the parties hereto or be construed to evidence the intention of the parties to constitute such.
(p)    Survival. All representations, warranties, covenants and agreements set forth in Sections 4, 5(a), 5(e), 8, 9,11,12,13, 15, and 16 shall survive the expiration or termination of this Agreement.
17.    Truth-In-Leasing.
(a)    DURING THE TWELVE (12) MONTHS PRECEDING THE DATE OF THIS AGREEMENT, THE AIRCRAFT HAS BEEN MAINTAINED AND INSPECTED UNDER PART 91 OF THE FEDERAL AVIATION REGULATIONS (“FAR”), AS APPLICABLE, EXECUTIVE ACKNOWLEDGES THAT THE AIRCRAFT WILL BE MAINTAINED AND INSPECTED UNDER FAR PART 91, AS MAY BE OTHERWISE REQUIRED, FOR OPERATIONS TO BE CONDUCTED UNDER THIS AGREEMENT.
(b)    EXECUTIVE ACKNOWLEDGES THAT PROVIDER IS RESPONSIBLE FOR OPERATIONAL CONTROL OF THE AIRCRAFT FOR FLIGHTS UNDER THIS AGREEMENT. PROVIDER AND EXECUTIVE EACH CERTIFIES THAT IT UNDERSTANDS ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.
(c)    EXECUTIVE UNDERSTANDS THAT AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL AND THE PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FAA FLIGHT STANDARDS DISTRICT OFFICE.
IN WITNESS WHEREOF, the parties hereto have each caused this Agreement to be duly executed as of the day and year first written above.
PROVIDER:
 
EXECUTIVE:
HARLEY-DAVIDSON MOTOR GROUP, LLC
 
 
 
 
 
________________________________
 
________________________________
 
 
 
By:
 
By:
 
 
 
Title:
 
 

SCHEDULE A
Make
Model
Serial Number
Registration Number
Bombardier
BD-100-1A10
20344
N88HD






HARLEY-DAVIDSON, INC.
2014 INCENTIVE STOCK PLAN
AS AMENDED AND RESTATED
EFFECTIVE AS OF JANUARY 25, 2019
 
1. Purposes, History and Effective Date.
 
(a) Purpose. The Harley-Davidson, Inc. 2014 Incentive Stock Plan has two complementary purposes: (i) to attract and retain outstanding individuals to serve as officers and other employees and (ii) to increase shareholder value. This Plan will provide participants incentives to increase shareholder value by offering the opportunity to acquire shares of the Company’s common stock or receive monetary payments based on the value of such common stock on the potentially favorable terms that this Plan provides.
 
(b) History. Prior to the effective date of this Plan, the Company had in effect the 2009 Plan, which was originally effective April 5, 2009, and the 2004 Plan, which was originally effective April 24, 2004. The 2004 Plan terminated upon shareholder approval of the 2009 Plan on April 25, 2009, and no new awards have been granted under the 2004 Plan since such date. The 2009 Plan terminated upon shareholder approval of this Plan on April 26, 2014 and no new awards have been granted under the 2009 Plan since such date, although awards granted under the 2009 Plan or the 2004 Plan and still outstanding continue to be subject to all terms and conditions of the 2009 Plan or the 2004 Plan, as applicable, subject to Section 15(c) of this Plan. The Board is amending and restating this Plan effective as of January 25, 2019.
 
(c) Effective Date. This Plan became effective on, and Awards may be granted under this Plan on and after, the Effective Date. This Plan will terminate as provided in Section 15.
 
2. Definitions. Capitalized terms used in this Plan have the following meanings:
 
(a)
“2004 Plan” means the Harley-Davidson, Inc. 2004 Incentive Stock Plan, as amended.
 
(b)
“2009 Plan” means the Harley-Davidson, Inc. 2009 Incentive Stock Plan, as amended.
 
(c) “Affiliate” has the meaning ascribed to such term in Rule 12b-2 promulgated under the Exchange Act or any successor rule or regulation thereto. Notwithstanding the foregoing, for purposes of determining those individuals to whom may be granted a non-qualified Option or a Stock Appreciation Right that is intended to be exempt from Code Section 409A, the term “Affiliate” means any entity that, directly or through one or more intermediaries, is controlled by, controls, or is under common control with the Company within the meaning of Code Sections 414(b) or (c); provided that, in applying such provisions, the phrase “at least 20 percent” shall be used in place of “at least 80 percent” each place it appears therein.
 
(d) “Award” means a grant of Options, Stock Appreciation Rights, Performance Shares, Performance Units, Shares, Restricted Stock, Restricted Stock Units, EIP Shares or Dividend Equivalent Units. Any Award granted under this Plan shall be provided or made in such manner and at such time as complies with the applicable requirements of Code Section 409A to avoid a plan failure described in Code Section 409A(a)(1), including, without limitation, deferring payment to a specified employee or until a specified distribution event, as provided in Code Section 409A(a)(2).
 
(e) “Award Agreement” means any written agreement, contract, or other instrument or document evidencing the grant of an Award in such form as the Committee determines.
 
(f) “Board” means the Board of Directors of the Company.  
(g) “Cause” means, except as otherwise determined by the Committee upon the grant of an Award, (i) the Participant’s conviction of a felony or a plea by the Participant of no contest to a felony, (ii) willful misconduct on the part of the Participant that is materially and demonstrably detrimental to the Company or an Affiliate, (iii) the Participant’s willful refusal to perform requested duties consistent with





the Participant’s office, position or status with the Company or an Affiliate (other than as a result of his or her physical or mental disability) or (iv) other conduct or inaction that the Company determines in its discretion constitutes Cause. With respect to clauses (ii), (iii) and (iv) of this definition, Cause shall be determined by the senior human resources officer of the Company. All determinations of such officer under this definition shall be final.
 
(h) “Change of Control” means the occurrence of any one of the following events:
 
(i) the Continuing Directors no longer constitute at least two-thirds of the Directors constituting the Board;
 
(ii) any person or group (as defined in Rule 13d-5 under the Exchange Act), together with its affiliates, becomes the beneficial owner, directly or indirectly, of 20% or more of the Company’s then outstanding Stock or 20% or more of the voting power of the Company’s then outstanding Stock;
 
(iii) the consummation of the merger or consolidation of the Company with any other corporation, the sale of substantially all of the Company’s assets or the liquidation or dissolution of the Company, unless, in the case of a merger or consolidation, the Continuing Directors in office immediately prior to such merger or consolidation constitute at least two-thirds of the directors constituting the board of directors of the surviving corporation of such merger or consolidation and any parent (as defined in Rule 12b-2 under the Exchange Act) of such corporation; or
 
(iv) at least two-thirds of the then Continuing Directors in office immediately prior to any other action proposed to be taken by the Company’s shareholders or by the Board determine that such proposed action, if taken, would constitute a change of control of the Company and such action is taken.
 
Notwithstanding the foregoing, with respect to an Award that is deferred compensation subject to Code Section 409A, then solely for purposes of determining the timing of payment of such Award, the term “Change of Control” as defined above shall be deemed amended to the extent necessary to satisfy the definition of “change in control event” under Code Section 409A.
 
(i) “Change of Control Price” means the highest Fair Market Value price per Share during the sixty (60)-day period preceding the date of a Change of Control.
 
(j) “Code” means the Internal Revenue Code of 1986, as amended. Any reference to a specific provision of the Code includes any successor provision and the regulations promulgated under such provision.
 
(k) “Committee” means the Human Resources Committee of the Board (or a successor committee with the same or similar authority).
 
(l) “Company” means Harley-Davidson, Inc., a Wisconsin corporation, or any successor thereto.
 
(m) “Continuing Director” means any individual who is either (i) a member of the Board on the Effective Date or (ii) a member of the Board whose election or nomination to the Board was approved by a vote of at least two-thirds (2/3) of the Continuing Directors (other than a person whose election was as a result of an actual or threatened proxy or other control contest).
 
(n) “Director” means a member of the Board, and “Non-Employee Director” means a Director who is not also an employee of the Company or its Subsidiaries.
 
(o) “Disability” has the meaning ascribed to the term in Code Section 22(e)(3), as determined by the Committee.

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(p) “Disinterested Persons” means the non-employee directors of the Company within the meaning of Rule 16b-3 as promulgated under the Exchange Act.
 
(q) “Dividend Equivalent Unit” means the right to receive a payment equal to the cash dividends paid with respect to a Share.
 
(r) “Effective Date” means the date the Company’s shareholders approve this Plan.
 
(s) “EIP Shares” means Shares that the Company delivers in payment or partial payment of an award under the Harley-Davidson, Inc. Employee Incentive Plan (or any successor thereto), the Harley-Davidson, Inc. Short-Term Incentive Plan for Senior Executives (or any successor thereto) or other incentive plans of the Company or its affiliates that the Committee designates from time to time.

(t) “Exchange Act” means the Securities Exchange Act of 1934, as amended. Any reference to a specific provision of the Exchange Act includes any successor provision and the regulations and rules promulgated under such provision.
 
(u) “Excluded Items” means any (i) charges for reorganizing and restructuring, (ii) discontinued operations, (iii) asset write-downs, (iv) gains or losses on the disposition of a business or business segment or arising from the sale of assets outside the ordinary course of business, (v) changes in tax or accounting principles, regulations or laws, (vi) extraordinary, unusual, transition, one-time and/or non-recurring items of gain or loss, and (vii) mergers, acquisitions or dispositions, that in each case the Company identifies in its audited financial statements, including footnotes, or the Management’s Discussion and Analysis section of the Company’s annual report.

(v) “Fair Market Value” means, per Share on the date as of which Fair Market Value is being determined, if the Stock is listed for trading on the New York Stock Exchange, the closing sales price on the date in question as reported in The Wall Street Journal, or if no sales of Stock occur on the date in question, on the last preceding date on which there was a sale on such exchange. If the Stock is not listed or admitted to trading on the New York Stock Exchange on the date in question, then “Fair Market Value” means, per Share on the date as of which Fair Market Value is being determined, (i) the closing sales price on the date in question on the principal national securities exchange on which the Stock is listed or admitted to trading, or if no sales of Stock occur on the date in question, on the last preceding date on which there was a sale on such exchange; or (ii) if the Stock is not listed or admitted to trading on any national securities exchange, the closing quoted sale price on the date in question, or if no sales of Stock occur on the date in question, on the last preceding date on which there was a sale; or (iii) if not so quoted, the mean of the closing bid and asked prices on the date in question in the over-the-counter market, as reported by such reporting system then in use, or if no sales of Stock occur on the date in question, on the last preceding date on which there was a sale; or (iv) if on any such date the Stock is not quoted by any such system, the mean of the closing bid and asked prices on the date in question as furnished by a professional market maker making a market in the Stock selected by the Board for the date in question, or if no sales of Stock occur on the date in question, on the last preceding date on which there was a sale; or (v) if on any such date no market maker is making a market in the Stock, the price as determined in good faith by the Committee; provided that if Fair Market Value is being determined under clause (v) for purposes of determining the Change of Control Price, the value will be determined by the Continuing Directors.
 
(w) “Option” means the right to purchase Shares at a specified price for a specified period of time. An incentive stock option may be granted, in accordance with Section 7, to a Participant who is an employee of the Company or a subsidiary (as defined for purposes of the incentive stock option rules).
      (x) “Participant” means an individual selected by the Committee to receive an Award, and includes any individual who holds an Award after the death of the original recipient.
 

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(y) “Performance Goals” means any goals the Committee establishes that relate to one or more of the following for such period as the Committee specifies (in all cases before Excluded Items, except as otherwise determined by the Committee upon the grant of an Award):
 
(i) Any one or more of the following as determined for the Company on a consolidated basis, for any one or more Affiliates or divisions of the Company and/or for any other business unit or units of the Company, as determined by the Committee at the time an Award is made:
 
(1) Sales or other revenues;
 
(2) Cost of goods sold;
 
(3) Gross profit;
 
(4) Expenses or expense or cost reductions;
 
(5) Income or earnings, including net income, income from operations;
 
(6) Income before interest and the provision for income taxes;
 
(7) Income before provision for income taxes;
 
(8) Margins;
 
(9) Working capital or any of its components, including accounts receivable, inventories or accounts payable;
 
(10) Assets or productivity of assets;
 
(11) Return on shareholders equity, capital, assets or other financial measure that appears on the Company’s financial statements or is derived from one or more amounts that appear on the Company’s financial statements;
 
(12) Stock price;
 
(13) Dividend payments;
 
(14) Economic value added, or other measure of profitability that considers the cost of capital employed.
 
(15) Cash flow;
 
(16) Debt or ratio of debt to equity or other financial measure that appears on the Company’s financial statements or is derived from one or more amounts that appear on the Company’s financial statements;
 
(17) Net increase (decrease) in cash and cash equivalents;
 
(18) Customer satisfaction;
 
(19) Market share; 
(20) Product quality;
 
(21) New product introductions or launches;
 
(22) Sustainability, including energy or materials utilization;
 
(23) Business efficiency measures;
 

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(24) Retail sales;

(25) Safety.
 
(ii)
Earnings per Share for the Company on a consolidated basis.
 
(iii)
Total shareholder return.

In the case of Awards that the Committee determines will not be considered “performance-based compensation” under Code Section 162(m), the Committee may establish other Performance Goals not listed in this Plan.
 
(z) “Performance Shares” means the right to receive Shares to the extent Performance Goals are achieved.
 
(aa) “Performance Units” means the right to receive a payment valued in relation to a unit the value of which is equal to the Fair Market Value of one or more Shares, to the extent Performance Goals are achieved.
 
(bb) “Person” has the meaning given in Section 3(a)(9) of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof.
 
(cc) “Plan” means this Harley-Davidson, Inc. 2014 Incentive Stock Plan, as may be amended from time to time.
 
(dd) “Restricted Stock” means Shares that are subject to a risk of forfeiture and/or restrictions on transfer, which may lapse upon the achievement or partial achievement of Performance Goals and/or upon the completion of a period of service.
 
(ee) “Restricted Stock Unit” means the right to receive cash, and/or Shares with a Fair Market Value, valued in relation to a unit that has a value equal to the Fair Market Value of a Share, which right may vest upon the achievement or partial achievement of Performance Goals and/or upon the completion of a period of service.
 
(ff) “Retirement” means, except as otherwise determined by the Committee and set forth in an Award Agreement, termination of employment from the Company and its Affiliates (i) for reasons other than Cause, on or after age fifty-five (55); or (ii) with the consent of the Committee, under other circumstances; provided that with respect to an Award that is subject to Code Section 409A, the Committee shall not exercise such authority to the extent that exercise of such authority would cause the Award to fail to satisfy the requirements of Code Section 409A. For purposes of this definition, a Participant’s years of service with the Company shall be determined in the same manner as is specified in the Retirement Annuity Plan for Salaried Employees of Harley-Davidson (as it may be amended), whether or not the Participant is covered under such plan.
 
(gg) “Rule 16b-3” means Rule 16b-3 as promulgated by the United States Securities and Exchange Commission under the Exchange Act. 
(hh) “Section 16 Participants” means Participants who are subject to the provisions of Section 16 of the Exchange Act.
 
(ii) “Share” means a share of Stock.
 
(jj) “Stock” means the common stock of the Company.
 

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(kk) “Stock Appreciation Right” or “SAR” means the right of a Participant who provides services to the Company or an Affiliate to receive cash, and/or Shares with a Fair Market Value, equal to the appreciation of the Fair Market Value of a Share during a specified period of time.
 
(ll) “Subsidiary” means any corporation, limited liability company or other limited liability entity in an unbroken chain of entities beginning with the Company if each of the entities (other than the last entity in the chain) owns the stock or equity interest possessing more than fifty percent (50%) of the total combined voting power of all classes of stock or other equity interests in one of the other entities in the chain.
 
3. Administration.
 
(a) Committee Administration. In addition to the authority specifically granted to the Committee in this Plan, the Committee has full discretionary authority to administer this Plan, including but not limited to the authority to (i) interpret the provisions of this Plan, (ii) prescribe, amend and rescind rules and regulations relating to this Plan, (iii) correct any defect, supply any omission, or reconcile any inconsistency in any Award or Award Agreement in the manner and to the extent it deems desirable to carry this Plan into effect and (iv) make all other determinations necessary or advisable for the administration of this Plan.
 
(b) Delegation to Other Committees or CEO. To the extent applicable law permits, the Board or the Committee may delegate to another committee of the Board, or the Committee may delegate to the Chief Executive Officer of the Company, any or all of the authority and responsibility of the Committee. However, no such delegation is permitted with respect to Awards made to Section 16 Participants at the time any such delegated authority or responsibility is exercised. To the extent applicable law permits, the Board or the Committee also may delegate to another committee of the Board consisting entirely of Non-Employee Directors any or all of the authority and responsibility of the Committee with respect to individuals who are Section 16 Participants. If the Board or Committee has made such a delegation, then all references to the Committee in this Plan include such other committee or the Chief Executive Officer to the extent of such delegation.
 
(c) Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Committee, the members of the Committee and the Board shall be indemnified by the Company against all costs and expenses reasonably incurred by them in connection with any action, suit or proceeding to which they or any of them may be party by reason of any action taken or failure to act under or in connection with this Plan or any Award, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except a judgment based upon a finding of bad faith; provided that upon the institution of any such action, suit or proceeding a Committee or Board member shall, in writing, give the Company notice thereof and an opportunity, at its own expense, to handle and defend the same before such Committee or Board member undertakes to handle and defend it on such member’s own behalf.
 
4. Eligibility. The Committee may designate any of the following as a Participant from time to time: any officer or other employee of the Company or any of its Affiliates or an individual that the Company or an Affiliate has engaged to become an officer or other employee. The Committee’s designation of a Participant in any year will not require the Committee to designate such person to receive an Award in any other year. The Committee’s granting of a particular type of Award to a Participant will not require the Committee to grant the same or any other type of Award to such individual.
 
5. Types of Awards. Subject to the terms of this Plan, the Committee may grant any type of Award to any Participant it selects. Awards may be granted alone or in addition to, in tandem with, or (subject to the prohibition on repricing contained in Section 15(e)) in substitution for any other Award (or any other award granted under another plan of the Company or any Affiliate of the Company). Awards granted under this Plan shall be evidenced by an Award Agreement except to the extent the Committee provides otherwise.
 

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6. Shares Reserved under this Plan.
 
(a) Plan Reserve . Subject to adjustment as provided in Section 17, an aggregate of 8,000,000 Shares, plus the number of Shares described in Section 6(c), are reserved for issuance under this Plan. The aggregate number of Shares reserved under this Plan under this Section 6(a) shall be depleted by the maximum number of Shares, if any, that may be payable under an Award as determined at the time of grant; provided that the aggregate number of Shares reserved under this Section 6(a) shall be depleted by two and ninety-three one hundredths (2.93) Shares for each Share, if any, with respect to which a full-value Award may be payable as determined at the time of grant. For this purpose, a full-value award includes Shares, Restricted Stock, Restricted Stock Units payable in Shares, Performance Shares, Performance Units payable in Shares, EIP Shares, Dividend Equivalent Units payable in Shares and any other similar Award payable in Shares under which the value of the Award is measured as the full value of a Share, rather than the increase in the value of a Share. Notwithstanding the foregoing, the Company may issue only such number of Shares as is described in the first sentence of this Section 6(a) upon the exercise of incentive stock options. For purposes of determining the aggregate number of Shares reserved for issuance under this Plan, any fractional Share shall be rounded to the next highest full Share.
 
(b) Replenishment of Shares Under this Plan. If (i) an Award lapses, expires, terminates or is cancelled without the issuance of Shares under the Award (whether due currently or on a deferred basis), (ii) the Committee determines during or at the conclusion of the term of an Award that all or some portion of the Shares with respect to which the Award was granted will not be issued on the basis that the conditions for such issuance will not be satisfied, (iii) Shares are forfeited under an Award or (iv) Shares are issued under any Award and the Company subsequently reacquires them pursuant to rights reserved upon the issuance of the Shares, then such Shares shall be recredited to this Plan’s reserve (in the same number as they depleted the reserve) and may again be used for new Awards under this Plan, but such Shares may not be issued pursuant to incentive stock options. Notwithstanding the foregoing, in no event shall the following Shares be recredited to this Plan’s reserve: Shares tendered or withheld in payment of the exercise price of an outstanding Option or as a result of the net settlement of an outstanding Stock Appreciation Right; Shares tendered or withheld to satisfy federal, state or local tax withholding obligations; and Shares purchased by the Company using proceeds from Option exercises.
     (c) Addition of Shares from Predecessor Plans. In addition to the Shares reserved for issuance under Section 6(a), the number of Shares which were reserved for issuance under the 2009 Plan but which are not subject to any outstanding awards under such plan as of the Effective Date shall be available for issuance under Awards granted under this Plan. Further, after the Effective Date, if any Shares subject to or underlying awards granted under the 2004 Plan or the 2009 Plan would again become available for new grants under the terms of such plan if such plan were still in effect, then those Shares will be available for the purpose of granting Awards under this Plan, thereby increasing the number of Shares available for issuance under this Plan as determined under the first sentence of Section 6(a). Any such Shares will not be available for future awards under the terms of the 2004 Plan or the 2009 Plan after the Effective Date.
 
(d) Participant Limitations. Subject to adjustment as provided in Section 17, no Participant may be granted Awards that could result in such Participant:
 
(i) receiving in any calendar year Options for, and/or Stock Appreciation Rights with respect to, more than 1,500,000 Shares;
 
(ii) receiving in any calendar year Awards of Shares, Restricted Stock and/or Restricted Stock Units relating to more than 500,000 Shares; or
 
(iii) receiving in any calendar year Awards of Performance Shares and/or Awards of Performance Units relating to more than 500,000 Shares.
 
In all cases, determinations under this Section 6(d) should be made in a manner that is consistent with the exemption for performance-based compensation that Code Section 162(m) provides.
 

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7. Options. Subject to the terms of this Plan, the Committee will determine all terms and conditions of each Option, including but not limited to:
 
(a) Whether the Option is an “incentive stock option” which meets the requirements of Code Section 422, or a “nonqualified stock option” which does not meet the requirements of Code Section 422; provided that in the case of an incentive stock option, if the aggregate Fair Market Value (determined on the date of grant) of the Shares with respect to which all “incentive stock options” (within the meaning of Code Section 422) are first exercisable by the Participant during any calendar year (under this Plan and under all other incentive stock option plans of the Company or any Affiliate that is required to be included under Code Section 422) exceeds $100,000, such Option automatically shall be treated as a nonqualified stock option to the extent this limit is exceeded.
 
(b) The grant date, which may not be any day prior to the date that the Committee approves the grant.
 
(c) The number of Shares subject to the Option.
 
(d) The exercise price, which may never be less than the Fair Market Value of the Shares subject to the Option as determined on the date of grant; provided that (i) no incentive stock option shall be granted to any employee who, at the time the Option is granted, owns (directly or indirectly, within the meaning of Code Section 424(d)) more than ten percent of the total combined voting power of all classes of stock of the Company or of any Subsidiary unless the exercise price is at least 110 percent of the Fair Market Value of a Share on the date of grant; and (ii) the exercise price may vary during the term of the Option if the Committee determines that there should be adjustments to the exercise price relating to achievement of Performance Goals and/or to changes in an index or indices that the Committee determines is appropriate (but in no event may the exercise price be less than the Fair Market Value of the Shares subject to the Option as determined on the date of grant).
 
(e) The terms and conditions of exercise, which may include a requirement that exercise of the Option is conditioned upon achievement of one or more Performance Goals; provided that, unless the Committee provides otherwise in an Award Agreement or in rules and regulations relating to this Plan, an Option, or portion thereof, shall be exercised by delivery of a written notice of exercise to the Company (or its designee) and provision (in a manner acceptable to the Committee) for payment of the full exercise price of the Shares being purchased pursuant to the Option and any withholding taxes due thereon.
 
(f) The termination date, except that each Option must terminate no later than ten (10) years after the date of grant, and each incentive stock option granted to any employee who, at the time the Option is granted, owns (directly or indirectly, within the meaning of Code Section 424(d)) more than ten percent of the total combined voting power of all classes of stock of the Company or of any Subsidiary must terminate no later than five (5) years after the date of grant.
 
(g) The exercise period following a Participant’s termination of employment, provided that:
 
(i) Unless the Committee provides otherwise, if a Participant shall cease to be employed by the Company or any of its Affiliates other than by reason of Retirement, Disability, or death, (A) the portion of the Option that is not vested shall terminate on the date of such cessation of employment and (B) the Participant shall have a period ending on the earlier of the Option’s termination date or 90 days from the date of cessation of employment to exercise the vested portion of the Option to the extent not previously exercised. At the end of such period, the Option shall terminate.
 
(ii) Unless the Committee provides otherwise, if a Participant shall cease to be employed by the Company or any of its Affiliates by reason of Retirement or Disability, the Option shall remain exercisable, to the extent it was exercisable at the time of cessation of employment, until the earliest of: the Option’s termination date; the death of the Participant, or such later date not more than one year after the death of the Participant as the Committee, in

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its discretion, may provide; the third anniversary of the date of the cessation of the Participant’s employment, if employment ceased by reason of Retirement; or the first anniversary of the date of the cessation of the Participant’s employment by reason of Disability. At the end of such period, the Option shall terminate.
 
(iii) In the event of the death of the Participant while employed by the Company or any of its Affiliates, the Option may be exercised at any time prior to the earlier of the Option’s termination date or the first anniversary of the date of the Participant’s death to the extent that the Participant was entitled to exercise such Option on the Participant’s date of death. In the event of the death of the Participant while entitled to exercise an Option pursuant to Section 7(g)(ii), the Committee, in its discretion, may permit such Option to be exercised prior to the Option’s termination date during a period of up to one year from the death of the Participant, as determined by the Committee to the extent that the Option was exercisable at the time of cessation of the Participant’s employment.
 
Extension of the Option exercise period beyond 90 days from the date of cessation of employment shall result in conversion of an incentive stock option to a non-qualified stock option to the extent required under the Code
 
Any Participant who disposes of Shares acquired upon the exercise of an incentive stock option either (1) within two years after the date of the grant of such Option or (2) within one year after the transfer of such Shares to the Participant shall notify the Company of such disposition and of the amount realized upon such disposition.
 
In all other respects, the terms of any incentive stock option should comply with the provisions of Code Section 422 except to the extent the Committee determines otherwise.
 
8. Stock Appreciation Rights. Subject to the terms of this Plan, the Committee will determine all terms and conditions of each SAR, including but not limited to:
 
(a) Whether the SAR is granted independently of an Option or relates to an Option; provided that if an SAR is granted in relation to an Option, then unless otherwise determined by the Committee, the SAR shall be exercisable or shall mature at the same time or times, on the same conditions and to the extent and in the proportion, that the related Option is exercisable and may be exercised or mature for all or part of the Shares subject to the related Option. Upon exercise of any number of SARs, the number of Shares subject to the related Option shall be reduced accordingly and such Option may not be exercised with respect to that number of Shares. The exercise of any number of Options that relate to an SAR shall likewise result in an equivalent reduction in the number of Shares covered by the related SAR.
 
(b) The grant date, which may not be any day prior to the date that the Committee approves the grant.
 
(c) The number of Shares to which the SAR relates.
 
(d) The grant price, provided that (i) the grant price shall never be less than the Fair Market Value of the Shares subject to the SAR as determined on the date of grant and (ii) the grant price may vary during the term of the SAR if the Committee determines that there should be adjustments to the grant price relating to achievement of Performance Goals and/or to changes in an index or indices that the Committee determines is appropriate (but in no event may the grant price be less than the Fair Market Value of the Shares subject to the SAR as determined on the date of grant).
 
(e) The terms and conditions of exercise or maturity.
 
(f) The term, provided that an SAR must terminate no later than 10 years after the date of grant.
 
(g) The exercise period following a Participant’s termination of employment.

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(h) Whether the SAR will be settled in cash, Shares or a combination thereof.
 
9. Performance Awards. Subject to the terms of this Plan, the Committee will determine all terms and conditions of each Award of Performance Shares or Performance Units, including but not limited to:
 
(a) The number of Shares and/or units to which such Award relates. 
(b) One or more Performance Goals that must be achieved during such period as the Committee specifies in order for the Participant to realize the benefit of such Award. With respect to an Award that is intended to constitute performance-based compensation with respect to a Participant who is subject to the requirements of Code Section 162(m), once the Performance Goals have been established with respect to an Award, the Committee shall have no discretion to increase the amount of compensation payable under the Award, although the Committee may decrease the amount of compensation that a Participant may earn under such an Award.
 
(c) Whether all or a portion of the Performance Goals subject to an Award are deemed achieved upon a Participant’s death, Disability or Retirement.
 
(d) With respect to Performance Units, whether to settle such Award in cash, Shares, or a combination of cash and Shares.

(e) Whether dividends paid with respect to the Shares subject to or underlying an Award of Performance Shares or Performance Units will be credited to the Award holder; provided that any such dividends must be held in escrow or otherwise deferred until the end of the applicable performance period; and provided further that no such dividends may be credited or paid with respect the Award to the extent the Performance Goals for the Award are not achieved or the Award is otherwise not earned.
 
10. Restricted Stock, Restricted Stock Unit and Share Awards. Subject to the terms of this Plan, the Committee will determine all terms and conditions of each Award of Restricted Stock, Restricted Stock Units or Shares, including but not limited to:
 
(a) The number of Shares and/or units to which such Award relates.
 
(b) The period of time, if any, over which, with respect to Restricted Stock or Restricted Stock Units, the risk of forfeiture or restrictions imposed on the Award will lapse, or over which the Award will vest, and whether, as a condition for the Participant to realize all or a portion of the benefit provided under the Award, one or more Performance Goals must be achieved during such period, if any, as the Committee specifies; provided that, subject to the provisions of Section 10(c), if an Award requires the achievement of Performance Goals, then the period to which such Performance Goals relate must be at least one year in length, and if an Award of Restricted Stock or Restricted Stock Units is not subject to Performance Goals, then such Award must have a restriction period of at least one year.
 
(c) Whether, with respect to Restricted Stock and Restricted Stock Units, all or any portion of the period of forfeiture or restrictions imposed on the Award will lapse, or whether the vesting of the Award will be accelerated, upon a Participant’s death, Disability or Retirement.
 
(d) With respect to Restricted Stock Units, whether to settle such Awards in cash, Shares, or a combination of cash and Shares.
 
(e) With respect to Restricted Stock, the manner of registration of certificates or book entry for such Shares, and whether to hold such Shares in escrow pending lapse of the period of forfeiture or restrictions or to issue such Shares with an appropriate legend or stop-transfer order referring to such restrictions.
 
(f) Whether dividends paid with respect to the Shares subject to or underlying an Award of Restricted Stock or Restricted Stock Units will be immediately paid or held in escrow or otherwise deferred

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and whether such dividends shall be subject to the same terms and conditions as the Award to which they relate; provided that, to the extent any Award of Restricted Stock or Restricted Stock Units is subject to a Performance Goal, any dividends paid with respect to the Shares subject to or underlying such Award must be held in escrow or otherwise deferred until the end of the applicable performance period; and provided further that no such dividends may be credited or paid with respect such Award to the extent the Performance Goals for the Award are not achieved or the Award is otherwise not earned.
 
11. EIP Shares. Subject to the terms and conditions of this Plan, the Committee may elect to have the Company deliver EIP Shares in payment or partial payment of awards under the Harley-Davidson, Inc. Employee Short Term Incentive Plan (or any successor thereto) or other incentive plans of the Company or its Affiliates that the Committee designates from time to time.
 12. Dividend Equivalent Units. Subject to the terms and conditions of this Plan, the Committee will determine all terms and conditions of each Award of Dividend Equivalent Units, including but not limited to whether such Award will be granted in tandem with another Award, and the form, timing and conditions of payment. However, any Dividend Equivalent Units granted in connection with any “stock right” within the meaning of Code Section 409A shall be set forth in a written arrangement that is separate from such Award, and to the extent such Dividend Equivalent Units are considered deferred compensation, such written arrangement shall comply with the provisions of Code Section 409A. In addition, Dividend Equivalent Units may not be granted in tandem with Awards providing Options or SARs.
 
13. Amendment of Minimum Vesting and Performance Periods. Notwithstanding any provision of this Plan that requires a minimum vesting and/or performance period for an Award, the Committee, at the time an Award is granted or any later date, may subject an Award to a shorter vesting and/or performance period to take into account a Participant’s hire or promotion, or may accelerate the vesting or deem an Award to be earned, in whole or in part, in the event of a Participant’s death, Disability or Retirement provided that with respect to an Award that is subject to Code Section 409A, the Committee shall not exercise such authority to the extent that exercise of such authority would cause the Award to fail to satisfy the requirements of Code Section 409A.
 
14. Transferability. Awards are not transferable other than by will or the laws of descent and distribution, unless and to the extent the Committee allows a Participant to: (a) designate in writing a beneficiary to exercise the Award after the Participant’s death; or (b) transfer an Award, provided that EIP Shares and other Shares that a Participant receives upon final payment of an Award shall be transferable unless the Committee designates otherwise at the time of the Award.
 
15. Termination and Amendment of Plan; Amendment, Modification or Cancellation of Awards.
 
(a) Term of Plan. Unless the Board or the Committee earlier terminates this Plan pursuant to Section 15(b), this Plan will terminate on the earlier of (i) the date that is 10 years from the Effective Date and (ii) the date when all Shares reserved for issuance have been issued.
 
(b) Termination and Amendment. The Board or the Committee may amend, alter, suspend, discontinue or terminate this Plan at any time, subject to the following limitations:
 
(i) the Board must approve any amendment of this Plan to the extent the Company determines such approval is required by: (A) action of the Board, (B) applicable corporate law or (C) any other applicable law;
 
(ii) shareholders must approve any amendment of this Plan to the extent the Company determines such approval is required by: (A) Section 16 of the Exchange Act, (B) the Code, (C) the listing requirements of any principal securities exchange or market on which the Shares are then traded or (D) any other applicable law; and
 
(iii) shareholders must approve any of the following Plan amendments: (A) an amendment to materially increase any number of Shares specified in Section 6(a) or 6(d) (except as permitted by Section 17); or (B) an amendment to the provisions of Section 15(e).

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(c) Amendment, Modification , Cancellation or Recoupment of Awards. Except as provided in Section 15(e) and subject to the requirements of this Plan, the Committee may modify or amend any Award or waive any restrictions or conditions applicable to any Award or the exercise of the Award, and the terms and conditions applicable to any Awards may at any time be amended, modified or canceled by mutual agreement between the Committee and the Participant or any other person(s) as may then have an interest in the Award, so long as any amendment or modification does not increase the number of Shares issuable under this Plan (except as permitted by Section 17), but the Committee need not obtain Participant (or other interested party) consent for the cancellation of an Award pursuant to the provisions of Section 17(a) or for the modification or amendment of an Award: (i) to the extent the modification or amendment is deemed necessary by the Committee to comply with any applicable law (including Code Section 409A) or the listing requirements of any principal securities exchange or market on which the Shares are then traded; (ii) to the extent the modification or amendment is deemed necessary by the Committee to preserve favorable accounting treatment of any Award for the Company; or (iii) to the extent the Committee determines that such modification or amendment does not materially and adversely affect the value of an Award or that such modification or amendment is in the best interest of the affected Participant or any other person(s) as may then have an interest in the Award. In addition, except as provided in Section 15(e) and subject to the requirements of this Plan, the Committee may modify or amend any Award granted to a Participant under the 2004 Plan, or waive any restrictions or conditions applicable to any such Award, to include Award terms consistent with the permitted terms of Awards granted under this Plan. Notwithstanding the foregoing, unless determined otherwise by the Administrator, any such amendment shall be made in a manner that will enable an Award intended to be exempt from Code Section 409A to continue to be so exempt, or to enable an Award intended to comply with Code Section 409A to continue to so comply. Any Awards granted pursuant to this Plan, and any Stock issued or cash paid pursuant to such an Award, shall be subject to any recoupment or clawback policy that may be adopted by the Company from time to time and to any requirement of applicable law, regulation or listing standard that requires the Company to recoup or claw back compensation paid pursuant to such an Award.
 
(d) Survival of Authority and Awards. Notwithstanding the foregoing, the authority of the Board and the Committee under this Section 15 will extend beyond the date of this Plan’s termination. In addition, termination of this Plan will not affect the rights of Participants with respect to Awards previously granted to them, and all unexpired Awards will continue in full force and effect after termination of this Plan except as they may lapse or be terminated by their own terms and conditions.
 
(e) Repricing Prohibited. Except in connection with a corporate transaction involving the Company (including, without limitation, any stock dividend, distribution (whether in the form of cash, Shares, other securities or other property), stock split, extraordinary cash dividend, recapitalization, change in control, reorganization, merger, consolidation, split-up, spin-off, combination, repurchase or exchange of Shares or other securities, or similar transaction(s)), the Company may not, without obtaining shareholder approval: (i) amend the terms of outstanding Options or SARs to reduce the exercise price of such outstanding Options or SARs, (ii) cancel outstanding Options or SARs in exchange for Options or SARs with an exercise price that is less than the exercise price of the original Options or SARs, or (iii) cancel outstanding Options or SARs with an exercise price above the current Stock price in exchange for cash or other securities.
 
(f) Foreign Participation. To assure the viability of Awards granted to Participants employed in foreign countries, the Committee may provide for such special terms as it may consider necessary or appropriate to accommodate differences in local law, tax policy or custom. Moreover, the Committee may approve such supplements to, or amendments, restatements or alternative versions of, this Plan as it determines is necessary or appropriate for such purposes. Any such amendment, restatement or alternative versions that the Committee approves for purposes of using this Plan in a foreign country will not affect the terms of this Plan for any other country. In addition, all such supplements, amendments, restatements or alternative versions must comply with the provisions of Section 15(b)(ii).
 

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(g) Code Section 409A. The provisions of Code Section 409A are incorporated herein by reference to the extent necessary for any Award that is subject to Code Section 409A to comply therewith.
 
16. Taxes.
 
(a) Withholding. The Company is entitled to withhold the amount of any tax attributable to any amount payable or Shares delivered or deliverable under this Plan, and the Company may defer making payment or delivery if any such tax may be pending unless and until indemnified to its satisfaction. A Participant shall satisfy the federal, state and local withholding tax obligations arising in connection with an Award in a manner acceptable to the Committee. If Shares are deliverable upon exercise or payment of an Award, the Committee may permit a Participant to satisfy all or a portion of the federal, state and local withholding tax obligations arising in connection with such Award by electing to (i) have the Company withhold Shares otherwise issuable under the Award, (ii) tender back Shares received in connection with such Award or (iii) deliver other previously owned Shares, in each case having a Fair Market Value equal to the amount to be withheld. However, the amount to be withheld may not exceed the total minimum federal, state and local tax withholding obligations associated with the transaction to the extent needed for the Company to avoid adverse accounting consequences. The election must be made on or before the date as of which the amount of tax to be withheld is determined and otherwise as the Committee requires.
 
(b) No Guarantee of Tax Treatment. Notwithstanding any provision of this Plan to the contrary, the Company does not guarantee to any Participant or any other Person(s) with an interest in an Award that (i) any Award intended to be exempt from Code Section 409A shall be so exempt, (ii) any Award intended to comply with Code Section 409A or Code Section 422 shall so comply, or (iii) any Award shall otherwise receive a specific tax treatment under any other applicable tax law, nor in any such case will the Company or any Affiliate be required to indemnify, defend or hold harmless any individual with respect to the tax consequences of any Award.
 
17. Adjustment Provisions; Change of Control.
 
(a) Adjustment of Shares. If (i) the Company shall at any time be involved in a merger or other transaction in which the Shares are changed or exchanged; or (ii) the Company shall subdivide or combine the Shares or the Company shall declare a dividend payable in Shares, other securities (other than any stock purchase rights associated with the Shares that the Company might authorize and issue in the future) or other property; or (iii) the Company shall effect a cash dividend the amount of which exceeds 15% of the trading price of the Shares at the time the dividend is declared or any other dividend or other distribution on the Shares in the form of cash, or a repurchase of Shares, that the Board determines by resolution is special or extraordinary in nature or that is in connection with a transaction that the Company characterizes publicly as a recapitalization or reorganization involving the Shares; or (iv) any other event shall occur which, in the case of this clause (iv), in the judgment of the Committee necessitates an adjustment to prevent dilution or enlargement of the benefits or potential benefits intended to be made available under this Plan, then, subject to Participants’ rights under Section 17(c), the Committee shall, in such manner as it may deem equitable, adjust any or all of: (A) the number and type of Shares subject to this Plan (including the number and type of Shares described in Sections 6(a) and 6(d)) and which may after the event be made the subject of Awards under this Plan, (B) the number and type of Shares subject to or underlying outstanding Awards, (C) the grant, purchase, or exercise price with respect to any Award, and (D) to the extent that such discretion will not cause an Award that is intended to qualify as performance-based compensation under Code Section 162(m) to lose its status as such, the Performance Goals with respect to an Award. In any such case, the Committee may also (or in lieu of the foregoing) make provision for a cash payment to the holder of an outstanding Award in exchange for the cancellation of all or a portion of the Award (without the consent of the holder of an Award) in an amount determined by the Committee and provide that Options or SARs the exercise or grant price of which does not exceed the Fair Market Value be cancelled without consideration therefor effective at such time as the Committee specifies (which may be the time such transaction or event is effective), but if such transaction or event constitutes a Change of Control, then (1) any such payment shall be at least as favorable to the holder as the greatest amount the holder could have received in respect of such Award under Section 17(c) and (2) from and after the Change

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of Control, the Committee may make provision for a cash payment only if the Committee determines that doing so is necessary to substitute, for each Share then subject to or underlying an Award, the number and kind of shares of stock, other securities, cash or other property to which holders of Stock are or will be entitled in respect of each Share pursuant to the transaction or event in accordance with the last sentence of this Section 17(a). However, in each case, with respect to Awards of incentive stock options, no such adjustment may be authorized to the extent that such authority would cause this Plan to violate Code Section 422(b). Further, the number of Shares subject to or underlying any Award payable or denominated in Shares must always be a whole number. Unless the Committee determines otherwise, any such adjustment to an Award that is exempt from Code Section 409A shall be made in manner that permits the Award to continue to be so exempt, and any adjustment to an Award that is subject to Code Section 409A shall be made in a manner that complies with the provisions thereof. Without limitation, subject to Participants’ rights under Section 17(c), in the event of any such merger or similar transaction, subdivision or combination of Shares, dividend or other event described above, whether or not constituting a Change of Control (other than any such transaction in which the Company is the continuing corporation and in which the outstanding Stock is not being converted into or exchanged for different securities, cash or other property, or any combination thereof), the Committee shall substitute, on an equitable basis as the Committee determines, for each Share then subject to or underlying an Award, the number and kind of shares of stock, other securities, cash or other property to which holders of Stock are or will be entitled in respect of each Share pursuant to the transaction. Notwithstanding the foregoing, if the Company shall subdivide the Shares or the Company shall declare a dividend payable in Shares, and if no action is taken by the Board or the Committee, then the adjustments contemplated by this Section 17(a) that are proportionate shall nevertheless automatically be made as of the date of such subdivision of the Shares or dividend in Shares.
 
(b) Issuance or Assumption. Notwithstanding any other provision of this Plan, and without affecting the number of Shares otherwise reserved or available under this Plan, in connection with any merger, consolidation, acquisition of property or stock, or reorganization, the Committee may authorize the issuance or assumption of Awards upon such terms and conditions as it may deem appropriate.
 
(c) Change of Control.

(i) For Awards made prior to January 25, 2019, subject to Section 17(c)(iv), unless the Committee provides a result less favorable to holders of Awards at the time the affected Awards are made (as reflected in an Award Agreement), and except to the extent the Committee provides a result more favorable to holders of Awards (either in an Award Agreement or at the time of a Change of Control), in the event of a Change of Control and with respect to each Award the holder of which is employed by the Company or an Affiliate on the date of the Change of Control:
 
(A) each holder of an Option or SAR shall have the right at any time thereafter to exercise the Option or SAR in full whether or not the Option or SAR was theretofore exercisable;
 
(B) Restricted Stock and Restricted Stock Units (that are not subject to Performance Goals and) that are not then vested shall vest, and any period of forfeiture or restrictions to which Restricted Stock and Restricted Stock Units are subject shall lapse, upon the date of the Change of Control;
 
(C) each holder of a Performance Share and/or Performance Unit (and/or any Restricted Stock and Restricted Stock Units that are subject to Performance Goals) for which the performance period has not expired shall become vested in an amount equal to the value of the Performance Share and/or Performance Unit assuming achievement of the applicable Performance Goal at the target performance level; and
 

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(D) all Dividend Equivalent Units that were awarded in connection with another Award shall vest.
 
 
The rules of this Section 17(c)(i) shall not prevent the Committee, in connection with a Change of Control transaction, from exercising the authority provided to the Committee under the penultimate sentence of Section 17(a) to substitute, for each vested (taking into account the vesting rules of this Section 17(c)(i)) and previously unexercised or undistributed Share then subject to or underlying an Award, the number and kind of shares of stock, other securities, cash or other property to which holders of Stock are or will be entitled in respect to each Share pursuant to the transaction.

(ii) For Awards made on or after January 25, 2019, subject to Section 17(c)(iv), the following provisions will apply:

(A) Subject to Section 17(c)(ii)(B), except to the extent the Committee provides a result more favorable to holders of Awards (either in an Award Agreement or at the time of a Change of Control), or to the extent another agreement between the Company and a Participant provides a more favorable result to the Participant, in the event of a Change of Control and with respect to each Award the holder of which is employed by the Company or an Affiliate on the date of the Change of Control:

(1) each holder of an Option or SAR shall have the right at any time thereafter to exercise the Option or SAR in full whether or not the Option or SAR was theretofore exercisable;
 
(2) Restricted Stock and Restricted Stock Units (that are not subject to Performance Goals and) that are not then vested shall vest, and any period of forfeiture or restrictions to which Restricted Stock and Restricted Stock Units are subject shall lapse, upon the date of the Change of Control;
 
(3) each holder of a Performance Share and/or Performance Unit (and/or any Restricted Stock and Restricted Stock Units that are subject to Performance Goals) for which the performance period has not expired shall become vested in an amount equal to the product of the value of the Performance Share and/or Performance Unit assuming achievement of the applicable Performance Goal at the greater of the target performance level or the rate of actual performance through the date of the Change of Control projected through the end of the performance period and a fraction the numerator of which is the number of whole months that have elapsed from the beginning of the performance period to which the Award is subject to the date of the Change of Control and the denominator of which is the number of whole months in the performance period; and
 
(4) all Dividend Equivalent Units that were awarded in connection with another Award shall vest.
 
The rules of this Section 17(c)(ii)(A) shall not prevent the Committee, in connection with a Change of Control transaction, from exercising the authority provided to the Committee under the penultimate sentence of Section 17(a) to substitute, for each vested (taking into account the vesting rules of this Section 17(c)(ii)(A)) and previously unexercised or undistributed Share then subject to or underlying an Award, the number and kind of shares of stock, other securities, cash or other property to which holders of Stock are or will be entitled in respect to each Share pursuant to the transaction.


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(B) The provisions of Section 17(c)(ii)(A) notwithstanding, no acceleration of exercisability, vesting, issuance of shares or other payment shall occur under Section 17(c)(ii)(A) with respect to Options, SARs, Restricted Stock, Restricted Stock Units, Performance Shares, Performance Units the value of which is based on the Fair Market Value of a Share or Dividend Equivalents that were awarded in connection with another Award (collectively, “Equity Awards”) held by Participants to the extent the Committee reasonably determines in good faith prior to the occurrence of a Change of Control that such Equity Awards shall be honored or assumed, or new rights substituted therefor (each such honored, assumed or substituted award hereinafter called an "Alternative Award"), by the Participant's employer (or the parent or a subsidiary of such employer) immediately following the Change of Control, provided that any such Alternative Award must:

(1) relate to a class of equity that is (or will be within 5 business days following the Change of Control) listed to trade on a recognized securities market;

(2) provide the Participant with rights and entitlements substantially equivalent to or better than the rights and entitlements applicable under such Equity Award, including, but not limited to, an identical or better exercise or vesting schedule and identical or better timing and methods of payment, including all provisions applicable in respect of such Equity Award that provide for accelerated vesting (with respect to Equity Awards that vest upon the attainment of one or more Performance Goals, if the Change of Control occurs during the course of a performance period applicable to the Equity Award, then (x) the Performance Goals shall be deemed to have been satisfied at the target level specified in the Participant's Award Agreement or, if greater, otherwise specified by the Committee at or after grant, and (y) any Alternative Award shall not include a performance objective, unless otherwise determined by the Committee as constituted immediately prior to the Change of Control);

(3) have substantially equivalent economic value to the Equity Award (as determined by the Committee as constituted immediately prior to the Change of Control); and

(4) have terms and conditions providing that if the Participant's employment is terminated upon or within [two] years following such Change of Control by the Participant's employer other than for Cause or by the Participant for Good Reason, the Participant's rights under each such Alternative Award shall become fully vested and exercisable (for purposes of this clause (4), Good Reason and Cause shall be as defined in the Company's Transition Agreement ("Transition Agreement") applicable to the Participant prior to the occurrence of the Change of Control and, if no Transition Agreement is applicable to the Participant, then as such terms are defined in the form of Transition Agreement filed as Exhibit 10.31 to the Company's Annual Report on Form 10-K for the year ended December 31, 2017; provided, however, that with respect to any Equity Award that does not qualify for any applicable exemption from the application of Section 409A of the Code, the payment or distribution of the Alternative Award shall only be made at the time otherwise specified under the Plan or the Award Agreement without regard to the occurrence of the Change of Control (including any six month delay in payment applicable to a "specified employee," as determined in accordance with Section 409A of the Code).
 
(iii) For purposes of this Section 17(c), the “value” of a Performance Share shall be equal to, and the “value” of a Performance Unit the value of which is equal to the Fair Market Value of one or more Shares shall be based on, the Change of Control Price.


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(iv) Unless any agreement between the Participant and the Company provides for a payment by the Company to the Participant to cover the excise taxes due by the Participant upon receipt of an excess parachute payment within the meaning of Code Section 280G, if the receipt of any payment by a Participant under the circumstances described in this Section 17(c) would result in the payment by the Participant of any excise tax provided for in Section 280G and Section 4999 of the Code, then the amount of such payment shall be reduced to the extent required to prevent the imposition of such excise tax.
 
18. Miscellaneous.
 
(a) Other Terms and Conditions. The grant of any Award may also be subject to other provisions (whether or not applicable to the Award granted to any other Participant) as the Committee determines appropriate, including, without limitation, provisions for:
 
(i) one or more means to enable Participants to defer the delivery of Shares or recognition of taxable income relating to Awards or cash payments derived from the Awards on such terms and conditions as the Committee determines, including, by way of example, the form and manner of the deferral election, the treatment of dividends paid on the Shares during the deferral period or a means for providing a return to a Participant on amounts deferred, and the permitted distribution dates or events (provided that no such deferral means may result in an increase in the number of Shares issuable under this Plan);
 
(ii) conditioning the grant or benefit of an Award on the Participant’s agreement to comply with covenants not to compete, not to solicit employees and customers and not to disclose confidential information that may be effective during or after the Participant’s employment, and/or provisions requiring the Participant to disgorge any profit, gain or other benefit received in connection with an Award as a result of the breach of such covenant;
 
(iii) the payment of the purchase price of Options (A) by delivery of cash or other Shares or other securities of the Company (including by attestation) having a then Fair Market Value equal to the purchase price of such Shares, (B) by delivery (including by fax) to the Company or its designated agent of an executed irrevocable option exercise form together with irrevocable instructions to a broker-dealer to sell or margin a sufficient portion of the Shares and deliver the sale or margin loan proceeds directly to the Company to pay for the exercise price, (C) by surrendering the right to receive Shares otherwise deliverable to the Participant upon exercise of the Award having a Fair Market Value at the time of exercise equal to the total exercise price, or (D) by any combination of (A), (B) and/or (C);
 
(iv) except in connection with the grant of Awards providing Options or SARs, for which Awards this subsection is not applicable, provisions giving the Participant the right to receive dividend payments or dividend equivalent payments with respect to the Shares subject to or underlying the Award (but only after the Shares subject to or underlying the Award are earned, vested or acquired), which payments may be either made currently or credited to a nonqualified deferred compensation account for the Participant that complies with the applicable requirements of Code Section 409A, provides for the deferral of payment of such amounts to a specified employee or until a specified event described in Code Section 409A(a)(2), and may be settled in cash or Shares, as the Committee determines;
 
(v) restrictions on resale or other disposition of Shares, including imposition of a retention period;
 
(vi) compliance with federal or state securities laws and stock exchange requirements; and
 
(vii) provisions requiring the Participant to disgorge any profit, gain or other benefit received in connection with an Award under other circumstances.

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(b) Employment. The issuance of an Award shall not confer upon a Participant any right with respect to continued employment with the Company or any Affiliate. Unless determined otherwise by the Committee, for purposes of this Plan and all Awards, the following rules shall apply:
 
(i) a Participant who transfers employment between the Corporation and any Affiliate of the Company, or between the Company’s Affiliates, will not be considered to have terminated employment;
 
(ii) a Participant who ceases to be employed by the Company or an Affiliate of the Company and immediately thereafter becomes a Non-Employee Director, a non-employee director of any of its Affiliates, or a consultant to the Company or any of its Affiliates shall not be considered to have terminated employment until such Participant’s service as a director of, or consultant to, the Company and its Affiliates has ceased; and
 
(iii) a Participant employed by an Affiliate of the Company will be considered to have terminated employment when such entity ceases to be an Affiliate of the Company.
 
Notwithstanding the foregoing, for purposes of an Award that is subject to Code Section 409A, if a Participant’s termination of employment or service triggers the payment of compensation under such Award, then the Participant will be deemed to have terminated employment or service upon a “separation from service” within the meaning of Code Section 409A. Notwithstanding any other provision in this Plan or an Award to the contrary, if any Participant is a “specified employee” within the meaning of Code Section 409A as of the date of his or her “separation from service” within the meaning of Code Section 409A, then, to the extent required to avoid the income inclusion, interest and additional tax imposed by Code Section 409A, any payment made to the Participant on account of such separation from service shall not be made before a date that is six months after the date of the separation from service.
 
(c) No Fractional Shares. No fractional Shares or other securities may be issued or delivered pursuant to this Plan, and the Committee may determine whether cash, other securities or other property will be paid or transferred in lieu of any fractional Shares or other securities, or whether such fractional Shares or other securities or any rights to fractional Shares or other securities will be canceled, terminated or otherwise eliminated.
 
(d) Unfunded Plan. This Plan is unfunded and does not create, and should not be construed to create, a trust or separate fund with respect to this Plan’s benefits. This Plan does not establish any fiduciary relationship between the Company and any Participant or other person. To the extent any person holds any rights by virtue of an Award granted under this Plan, such rights are no greater than the rights of the Company’s general unsecured creditors.
 
(e) Requirements of Law and Securities Exchange. The granting of Awards and the issuance of Shares in connection with an Award are subject to all applicable laws, rules and regulations and to such approvals by any governmental agencies or national securities exchanges as may be required. Notwithstanding any other provision of this Plan or any Award Agreement, the Company has no liability to deliver any Shares under this Plan or make any payment unless such delivery or payment would comply with all applicable laws and the applicable requirements of any securities exchange or similar entity, and unless and until the Participant has taken all actions required by the Company in connection therewith. The Company may impose such restrictions on any Shares issued under this Plan as the Company determines necessary or desirable to comply with all applicable laws, rules and regulations or the requirements of any national securities exchanges. Notwithstanding any provision of this Plan or any document pertaining to Awards granted hereunder to the contrary, this Plan shall be so construed, interpreted and administered to meet the applicable requirements of Code Section 409A to avoid a plan failure described in Code Section 409A(a)(1).
 

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(f) Governing Law. This Plan, and all agreements under this Plan, will be construed in accordance with and governed by the laws of the State of Wisconsin, without reference to any conflict of law principles. The exclusive venue for any legal action or proceeding with respect to this Plan, any Award or any Award Agreement, or for recognition and enforcement of any judgment in respect of this Plan, shall be a court sitting in the County of Milwaukee, or the Federal District Court for the Eastern District of Wisconsin sitting in the County of Milwaukee, in the State of Wisconsin, and any such action may be heard only in a “bench” trial, and any party to such action or proceeding shall agree to waive its right to a jury trial.
 
(g) Limitations on Actions. Any legal action or proceeding with respect to this Plan, any Award or any Award Agreement must be brought within one year (365 days) after the day the complaining party first knew or should have known of the events giving rise to the complaint.
 
(h) Construction. Whenever any words are used herein in the masculine, they shall be construed as though they were used in the feminine in all cases where they would so apply; and wherever any words are used in the singular or plural, they shall be construed as though they were used in the plural or singular, as the case may be, in all cases where they would so apply. Titles of sections are for general information only, and this Plan is not to be construed with reference to such titles.
 
(i) Severability. If any provision of this Plan or any Award Agreement or any Award (i) is or becomes or is deemed to be invalid, illegal or unenforceable in any jurisdiction, or as to any person or Award, or (ii) would disqualify this Plan, any Award Agreement or any Award under any law the Committee deems applicable, then such provision should be construed or deemed amended to conform to applicable laws, or if it cannot be so construed or deemed amended without, in the determination of the Committee, materially altering the intent of this Plan, such Award Agreement or such Award, then such provision should be stricken as to such jurisdiction, person or Award, and the remainder of this Plan, such Award Agreement and such Award will remain in full force and effect.
 


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Exhibit 31.1
Chief Executive Officer Certification
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934

I, Matthew S. Levatich, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Harley-Davidson, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: August 8, 2019
/s/ Matthew S. Levatich
 
Matthew S. Levatich
 
President and Chief Executive Officer




Exhibit 31.2
Chief Financial Officer Certification
Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934
I, John A. Olin, certify that:
1.
I have reviewed this quarterly report on Form 10-Q of Harley-Davidson, Inc.;
2.
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.
The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)
Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)
Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth quarter in case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.
The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors:
a)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b)
Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
 
Date: August 8, 2019
/s/ John A. Olin
 
John A. Olin
 
Senior Vice President and
 
Chief Financial Officer




Exhibit 32.1
Written Statement of the Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. sec. 1350
Solely for the purpose of complying with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, we, the undersigned President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer of Harley-Davidson, Inc. (the “Company”), hereby certify, based on our knowledge, that the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2019 (the “Report”) fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
 
Date: August 8, 2019
/s/ Matthew S. Levatich
 
Matthew S. Levatich
 
President and Chief Executive Officer
 
 
  
/s/ John A. Olin
 
John A. Olin
 
Senior Vice President and
 
Chief Financial Officer