Harley-Davidson - 10-Q quarterly report FY2021 Q1

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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 March 28, 2021


☐			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: (414) 342-4680

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 153,665,546 shares of common stock as of April 30, 2021.

HARLEY-DAVIDSON, INC.

Form 10-Q

For The Quarter Ended March 28, 2021


Part I	Financial Information	3
Item 1.	Financial Statements	3
	Consolidated Statements of Operations	3
	Consolidated Statements of Comprehensive Income	4
	Consolidated Balance Sheets	5
	Consolidated Statements of Cash Flows	7
	Consolidated Statements of Shareholders' Equity	8
	Notes to Consolidated Financial Statements	9
	1. Basis of Presentation and Use of Estimates	9
	2. New Accounting Standards	9
	3. Revenue	10
	4. Restructuring Activities	10
	5. Income Taxes	11
	6. Earnings Per Share	11
	7. Additional Balance Sheet and Cash Flow Information	12
	8. Finance Receivables	13

	9. Derivative Financial Instruments and Hedging Activities	18
	10. Leases	21
	11. Debt	22
	12. Asset-Backed Financing	24
	13. Fair Value	27
	14. Product Warranty and Recall Campaigns	29
	15. Employee Benefit Plans	30
	16. Commitments and Contingencies	31
	17. Accumulated Other Comprehensive Loss	31
	18. Business Segments	32
	19. Supplemental Consolidating Data	33
	20. Subsequent Event	36
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	50
Item 4.	Controls and Procedures	51
Part II	Other Information	52
Item 1.	Legal Proceedings	52
Item 1A.	Risk Factors	52
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53

Item 6.	Exhibits	53
Signatures		54

Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

HARLEY-DAVIDSON, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)


	Three months ended
	March 28, 2021		March 29, 2020
Revenue:
Motorcycles and Related Products	$	1,232,107	$	1,099,788
Financial Services	190,400		198,456
	1,422,507		1,298,244
Costs and expenses:
Motorcycles and Related Products cost of goods sold	811,622		780,868
Financial Services interest expense	55,707		52,473
Financial Services provision for credit losses	(22,474)		79,419
Selling, administrative and engineering expense	231,844		277,971
Restructuring benefit	(366)		—
	1,076,333		1,190,731
Operating income	346,174		107,513
Other income, net	277		155
Investment income (loss)	1,402		(5,347)
Interest expense	7,708		7,755
Income before provision for income taxes	340,145		94,566
Provision for income taxes	81,001		24,871
Net income	$	259,144	$	69,695
Earnings per share:
Basic	$	1.69	$	0.46
Diluted	$	1.68	$	0.45
Cash dividends per share	$	0.15	$	0.38

The accompanying notes are integral to the consolidated financial statements.

Table of Contents

HARLEY-DAVIDSON, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three months ended
	March 28, 2021		March 29, 2020
Net income	$	259,144	$	69,695
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments	(17,338)		(34,455)
Derivative financial instruments	17,530		(19,845)

Pension and postretirement benefit plans	13,588		11,959
	13,780		(42,341)
Comprehensive income	$	272,924	$	27,354

The accompanying notes are integral to the consolidated financial statements.

Table of Contents

HARLEY-DAVIDSON, INC.

CONSOLIDATED BALANCE SHEETS

(In thousands)


	(Unaudited)				(Unaudited)
	March 28, 2021		December 31, 2020		March 29, 2020
ASSETS
Current assets:
Cash and cash equivalents	$	2,320,645	$	3,257,203	$	1,465,061

Accounts receivable, net	216,569		143,082		299,148
Finance receivables, net of allowance of $64,139, $72,632, and $63,881	1,798,194		1,509,539		2,358,989
Inventories, net	470,997		523,497		610,924
Restricted cash	185,374		131,642		99,903
Other current assets	195,356		280,470		142,357
	5,187,135		5,845,433		4,976,382
Finance receivables, net of allowance of $282,094, $318,304, and $271,615	4,958,583		4,933,469		4,933,418
Property, plant and equipment, net	718,968		743,784		826,845
Pension and postretirement assets	105,910		95,711		64,802
Goodwill	65,157		65,976		64,063
Deferred income taxes	135,387		158,538		127,856
Lease assets	44,765		45,203		56,496
Other long-term assets	123,083		122,487		90,085
	$	11,338,988	$	12,010,601	$	11,139,947
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	402,764	$	290,904	$	333,411
Accrued liabilities	570,440		557,214		584,535
Short-term deposits, net	93,887		79,965		—
Short-term debt	765,263		1,014,274		1,335,664
Current portion of long-term debt, net	1,622,243		2,039,597		2,326,460
	3,454,597		3,981,954		4,580,070
Long-term deposits, net	58,766		—		—
Long-term debt, net	5,478,091		5,932,933		4,478,078
Lease liabilities	30,061		30,115		40,053
Pension and postretirement liabilities	103,854		114,206		128,054
Deferred income taxes	8,682		8,607		6,219
Other long-term liabilities	228,551		220,001		215,490
Commitments and contingencies (Note 16)
Shareholders’ equity:

Common stock	1,690		1,685		1,834
Additional paid-in-capital	1,517,129		1,507,706		1,495,141
Retained earnings	1,520,862		1,284,823		2,126,646
Accumulated other comprehensive loss	(469,637)		(483,417)		(579,290)
Treasury stock, at cost	(593,658)		(588,012)		(1,352,348)
	1,976,386		1,722,785		1,691,983
	$	11,338,988	$	12,010,601	$	11,139,947

Table of Contents

HARLEY-DAVIDSON, INC.

CONSOLIDATED BALANCE SHEETS (continued)

(In thousands)


	(Unaudited)				(Unaudited)
	March 28, 2021		December 31, 2020		March 29, 2020
Balances held by consolidated variable interest entities (Note 12):
Finance receivables, net - current	$	567,887	$	530,882	$	381,904
Other assets	$	4,027	$	3,753	$	2,262
Finance receivables, net - non-current	$	2,113,344	$	1,889,472	$	1,435,832
Restricted cash - current and non-current	$	196,946	$	142,892	$	99,235
Current portion of long-term debt, net	$	692,903	$	608,987	$	437,488
Long-term debt, net	$	1,757,003	$	1,585,174	$	1,319,357

The accompanying notes are integral to the consolidated financial statements.

Table of Contents

HARLEY-DAVIDSON, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three months ended
	March 28, 2021		March 29, 2020
Net cash provided (used) by operating activities (Note 7)	$	162,781	$	(8,582)
Cash flows from investing activities:
Capital expenditures	(18,813)		(32,928)
Origination of finance receivables	(909,138)		(780,061)
Collections on finance receivables	900,485		841,261




Other investing activities	733		16
Net cash (used) provided by investing activities	(26,733)		28,288
Cash flows from financing activities:

Repayments of medium-term notes	(1,050,000)		(600,000)


Proceeds from securitization debt	597,411		522,694
Repayments of securitization debt	(291,346)		(130,918)
Borrowings of asset-backed commercial paper	—		225,187
Repayments of asset-backed commercial paper	(66,894)		(67,809)
Net (decrease) increase in unsecured commercial paper	(262,517)		772,208
Net increase in credit facilities	15,629		—
Net increase in deposits	72,664		—
Dividends paid	(23,105)		(58,817)
Repurchase of common stock	(5,646)		(7,071)

Issuance of common stock under share-based plans	1,085		34
Net cash (used) provided by financing activities	(1,012,719)		655,508
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(5,163)		(5,732)
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(881,834)	$	669,482

Cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash, beginning of period	$	3,409,168	$	905,366
Net (decrease) increase in cash, cash equivalents and restricted cash	(881,834)		669,482
Cash, cash equivalents and restricted cash, end of period	$	2,527,334	$	1,574,848

Reconciliation of cash, cash equivalents and restricted cash on the Consolidated balance sheets to the Consolidated statements of cash flows:
Cash and cash equivalents	$	2,320,645	$	1,465,061
Restricted cash	185,374		99,903
Restricted cash included in Other long-term assets	21,315		9,884
Cash, cash equivalents and restricted cash per the Consolidated statements of cash flows	$	2,527,334	$	1,574,848

The accompanying notes are integral to the consolidated financial statements.

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 Stock		Total
	Issued Shares	Balance
Balance, December 31, 2020	168,503,526	$	1,685	$	1,507,706	$	1,284,823	$	(483,417)	$	(588,012)	$	1,722,785
Net income	—	—		—		259,144		—		—		259,144
Other comprehensive income, net of tax (Note 17)	—	—		—		—		13,780		—		13,780
Dividends ($0.15 per share)	—	—		—		(23,105)		—		—		(23,105)
Repurchase of common stock	—	—		—		—		—		(5,646)		(5,646)
Share-based compensation	483,326	5		9,423		—		—		—		9,428

Balance, March 28, 2021	168,986,852	$	1,690	$	1,517,129	$	1,520,862	$	(469,637)	$	(593,658)	$	1,976,386












	Common Stock			Additional Paid-in Capital		Retained Earnings		Accumulated Other Comprehensive Loss		Treasury Stock		Total
	Issued Shares	Balance
Balance, December 31, 2019	182,816,536	$	1,828	$	1,491,004	$	2,193,997	$	(536,949)	$	(1,345,881)	$	1,803,999
Net income	—	—		—		69,695		—		—		69,695
Other comprehensive loss, net of tax (Note 17)	—	—		—		—		(42,341)		—		(42,341)
Dividends ($0.38 per share)	—	—		—		(58,817)		—		—		(58,817)
Repurchase of common stock	—	—		—		—		—		(7,071)		(7,071)
Share-based compensation	585,053	6		4,137		—		—		604		4,747
Cumulative effect of change in accounting	—	—		—		(78,229)		—		—		(78,229)
Balance, March 29, 2020	183,401,589	$	1,834	$	1,495,141	$	2,126,646	$	(579,290)	$	(1,352,348)	$	1,691,983

The accompanying notes are integral to the consolidated financial statements.

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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 subsidiaries, all of which are wholly-owned (the Company), including the accounts of the groups of companies referred to 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 have been eliminated.

The Company operates in two reportable segments: Motorcycles and Related Products (Motorcycles) and Financial Services.

In the opinion of the Company's 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 March 28, 2021 and March 29, 2020, the Consolidated statements of operations for the three month periods then ended, the Consolidated statements of comprehensive income for the three month periods then ended, the Consolidated statements of cash flows for the three month periods then ended, and the Consolidated statements of shareholders' equity for the three month periods then ended.

Certain information and 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. The consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020.

The preparation of consolidated financial statements in conformity with U.S. GAAP requires the Company's management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the accompanying notes. Actual results could differ from those estimates.

During the first quarter of 2020, the outbreak of a novel strain of coronavirus (COVID-19) spread throughout the world, and it was recognized as a pandemic in March 2020. The COVID-19 pandemic has restricted the level of economic activity in the U.S. and around the world and the full extent of its impact is not yet known. Certain estimates used in the preparation of financial results for the period ending March 28, 2021 could be impacted in future periods as a result of the COVID-19 pandemic.

2. New Accounting Standards

Accounting Standards Recently Adopted

In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2019-12, Simplifying the Accounting for Income Taxes (ASU No. 2019-12). The new guidance eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new guidance also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The Company adopted ASU 2019-12 on January 1, 2021 on a prospective basis. The adoption of ASU 2019-12 did not have a material impact on the Company's consolidated financial statements.

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3. Revenue

The Company recognizes revenue when it satisfies a performance obligation by transferring control of a good or service to a customer. Revenue is measured based on the consideration that the Company expects to be entitled to in exchange for the goods or services transferred. Taxes that are collected from a customer concurrent with revenue-producing activities are excluded from revenue.

Disaggregated revenue by major source was as follows (in thousands):


	Three months ended
	March 28, 2021		March 29, 2020
Motorcycles and Related Products Revenue:
Motorcycles	$	1,016,334	$	899,365
Parts & Accessories	149,859		134,685
General Merchandise	50,323		49,160
Licensing	5,512		8,029
Other	10,079		8,549
	1,232,107		1,099,788
Financial Services Revenue:
Interest income	159,814		170,001
Other	30,586		28,455
	190,400		198,456
	$	1,422,507	$	1,298,244

The Company maintains certain deferred revenue balances related to payments received at contract inception in advance of the Company’s performance under the contract and generally relates to the sale of Harley Owners 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 sheets, was as follows (in thousands):


	March 28, 2021		March 29, 2020
Balance, beginning of period	$	36,614	$	29,745
Balance, end of period	$	36,266	$	29,434

Previously deferred revenue recognized as revenue in the three months ended March 28, 2021 and March 29, 2020 was $6.2 million and $6.9 million, respectively. The Company expects to recognize approximately $14.9 million of the remaining unearned revenue over the next 12 months and $21.4 million thereafter.

4. Restructuring Activities

The Company's restructuring activities are included in Restructuring benefit on the Consolidated statements of operations.

In 2020, the Company initiated restructuring activities including a workforce reduction, the termination of certain current and future products, facility changes, optimizing its global independent dealer network, exiting certain international markets, and discontinuing its sales and manufacturing operations in India. The workforce reduction resulted in the termination of approximately 500 employees. In addition, the India action resulted in the termination of approximately 70 employees.

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Since the inception of these restructuring activities in 2020 through the three months ended March 28, 2021, the Company has incurred cumulative restructuring expenses of $129.6 million. This includes a restructuring benefit during the three months ended March 28, 2021 of $0.4 million, consisting of a $0.6 million benefit in the Motorcycles segment and expense of $0.2 million in the Financial Services segment. The Company expects total estimated restructuring expenses of approximately $150 million, including approximately $139 million and $11 million expected to be in incurred in the Motorcycles and Financial Services segments, respectively. Total expected restructuring expenses include approximately $30 million related to employee termination benefits, $90 million related to contract termination and other costs and $30 million related to non-current asset adjustments, including accelerated depreciation and other adjustments to the carrying value of non-current assets. The Company expects to incur the remaining estimated restructuring expenses of approximately $20 million in 2021.

Changes in accrued restructuring expenses, which are included in Accrued liabilities on the Consolidated balance sheets, were as follows (in thousands). There were no restructuring activities during the three months ended March 29, 2020.


	Three months ended March 28, 2021
	Employee Termination Benefits		Contract Terminations & Other		Non-Current Asset Adjustments		Total
Balance, beginning of period	$	7,724	$	16,196	$	—	$	23,920
Restructuring (benefit) expense	(944)		1,106		(528)		(366)
Utilized – cash	(3,661)		(12,781)		—		(16,442)
Utilized – non cash	—		—		528		528
Foreign currency changes	(112)		(54)		—		(166)
Balance, end of period	$	3,007	$	4,467	$	—	$	7,474

5. Income Taxes

The Company’s effective income tax rate for the three months ended March 28, 2021 was 23.8% compared to 26.3% for the three months ended March 29, 2020. The decrease in the first quarter 2021 effective income tax rate from 2020 was due to the increase in Income before provision for income taxes, resulting in discrete income tax adjustments having a reduced impact on the effective income tax rate for the quarter. The effective income tax rate for the three months ended March 28, 2021 was determined based on the Company's current projections for full-year 2021 financial results.

6. Earnings Per Share

The computation of basic and diluted earnings per share was as follows (in thousands, except per share amounts):


	Three months ended
	March 28, 2021		March 29, 2020
Net income	$	259,144	$	69,695

Basic weighted-average shares outstanding	153,478		153,004
Effect of dilutive securities – employee stock compensation plan	1,012		740
Diluted weighted-average shares outstanding	154,490		153,744
Net earnings per share:
Basic	$	1.69	$	0.46
Diluted	$	1.68	$	0.45

Shares of common stock related to share-based compensation that were not included in the effect of dilutive securities because the effect would have been anti-dilutive include 0.6 million and 1.7 million shares for the three months ended March 28, 2021 and March 29, 2020, respectively.

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7. Additional Balance Sheet and Cash Flow Information

Investments in Marketable Securities – The Company’s investments in marketable securities consisted of the following (in thousands):


	March 28, 2021		December 31, 2020		March 29, 2020

Mutual funds	$	50,239	$	52,061	$	44,144

Mutual funds, included in Other long-term assets on the Consolidated balance sheets, are carried at fair value with gains and losses recorded in income. Mutual funds are held to support certain deferred compensation obligations.

Inventories, net – Substantially all inventories located in the U.S. 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, net consisted of the following (in thousands):


	March 28, 2021		December 31, 2020		March 29, 2020
Raw materials and work in process	$	251,199	$	211,979	$	245,384
Motorcycle finished goods	185,590		281,132		272,648
Parts & Accessories and General Merchandise	88,291		84,469		149,318
Inventory at lower of FIFO cost or net realizable value	525,080		577,580		667,350
Excess of FIFO over LIFO cost	(54,083)		(54,083)		(56,426)
	$	470,997	$	523,497	$	610,924

Deposits – Beginning in 2020, HDFS began offering brokered certificates of deposit to customers indirectly through contractual arrangements with third-party banks and/or securities brokerage firms through its bank subsidiary. The Company had $152.7 million and $80.0 million, net of fees, of interest-bearing brokered certificates of deposit outstanding as of March 28, 2021 and December 31, 2020, respectively. There were no deposits as of March 29, 2020. The liabilities for deposits are included in Short-term deposits, net or Long-term deposits, net on the Consolidated balance sheets based upon the term of each brokered certificate of deposit issued. Each separate brokered certificate of deposit is issued under a master certificate, and as such, all outstanding brokered certificates of deposit are considered below the Federal Deposit Insurance Corporation insurance coverage limits.

Future maturities of the Company's certificates of deposit as of March 28, 2021 were as follows (in thousands):


2021	$	80,000
2022	14,000
2023	7,000
2024	22,000
2025	—
Thereafter	30,000
Unamortized fees	(347)
	$	152,653

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Operating Cash Flow – The reconciliation of Net income to Net cash provided (used) by operating activities was as follows (in thousands):


	Three months ended
	March 28, 2021		March 29, 2020
Cash flows from operating activities:
Net income	$	259,144	$	69,695
Adjustments to reconcile Net income to Net cash provided (used) by operating activities:
Depreciation and amortization	40,221		47,427
Amortization of deferred loan origination costs	19,200		16,739
Amortization of financing origination fees	3,614		2,999
Provision for long-term employee benefits	7,090		7,852
Employee benefit plan contributions and payments	(9,885)		(1,608)
Stock compensation expense	8,968		3,896
Net change in wholesale finance receivables related to sales	(308,532)		(208,183)
Provision for credit losses	(22,474)		79,419



Deferred income taxes	13,192		(3,803)

Other, net	1,171		3,579
Changes in current assets and liabilities:
Accounts receivable, net	(79,012)		(47,272)
Finance receivables – accrued interest and other	8,947		4,007
Inventories, net	45,086		(23,943)
Accounts payable and accrued liabilities	153,597		10,562
Derivative financial instruments	(3,309)		2,812
Other	25,763		27,240
	(96,363)		(78,277)
Net cash provided (used) by operating activities	$	162,781	$	(8,582)

8. Finance Receivables

The Company provides retail financial services to customers of its independent dealers in the U.S. and Canada. The origination of retail loans is a separate and distinct transaction between the Company and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and secured installment sales contracts and are primarily related to independent dealer sales of motorcycles to retail customers. The Company holds either titles or liens on titles to vehicles financed by promissory notes and installment sales contracts.

The Company offers wholesale financing to its independent dealers in the U.S. and Canada. Wholesale finance receivables are related primarily to the Company's sale of motorcycles and related parts and accessories to dealers. Wholesale loans to dealers are generally secured by financed inventory or property.

Finance receivables, net were as follows (in thousands):


	March 28, 2021		December 31, 2020		March 29, 2020
Retail finance receivables	$	6,310,982	$	6,344,195	$	6,269,247
Wholesale finance receivables	792,028		489,749		1,358,656
	7,103,010		6,833,944		7,627,903
Allowance for credit losses	(346,233)		(390,936)		(335,496)
	$	6,756,777	$	6,443,008	$	7,292,407

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On January 1, 2020, the Company adopted ASU 2016-13 Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13), which requires an entity to recognize expected lifetime losses on finance receivables upon origination. Under ASU 2016-13, the Company’s finance receivables are reported at amortized cost, net of the allowance for credit losses. Amortized cost includes the principal outstanding, accrued interest, and deferred loan fees and costs. Based on differences in the nature of the finance receivables and the underlying methodology for calculating the allowance for loan losses, the Company segments its finance receivables into the retail and wholesale portfolios. The Company further disaggregates each portfolio by credit quality indicators. As the credit risk varies between the retail and wholesale portfolios, the Company utilizes different credit quality indicators for each portfolio.

The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. The Company performs a collective evaluation of the adequacy of the retail allowance for credit losses. The Company utilizes a vintage-based loss forecast methodology that includes decompositions for probability of default, exposure at default, attrition rate, and recovery balance rate. Reasonable and supportable economic forecasts for a two-year period are incorporated into the methodology to reflect the estimated impact of changes in future economic conditions, such as unemployment rates, household obligations or other relevant factors, over the two-year reasonable and supportable period. For periods beyond the Company’s reasonable and supportable forecasts, the Company reverts to its average historical loss experience using a mean-reversion process over a three-year period. Adjustments to historical loss information are made for differences in current loan-specific risk characteristics such as differences in underwriting standards, portfolio mix, or term as well as other relevant factors.

The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review to determine whether the loans share similar risk characteristics. The Company individually evaluates loans that do not share risk characteristics. Loans identified as those for which foreclosure is probable are classified as Non-Performing, and a specific allowance for credit losses is established when appropriate. The specific allowance is determined based on the amortized cost of the related finance receivable and the estimated fair value of the collateral, less selling costs and the cash that the Company expects to receive. Finance receivables in the wholesale portfolio not individually assessed are aggregated, based on similar risk characteristics, according to the Company’s internal risk rating system and measured collectively. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, reasonable and supportable economic forecasts, and the value of the underlying collateral and expected recoveries.

The Company considers various economic forecast scenarios as part of estimating the allowance for expected credit losses and applies a probability-weighting to those economic forecast scenarios. Changes in the Company’s outlook on economic conditions impacted the retail and wholesale estimates for expected credit losses at March 28, 2021. During the first quarter of 2021, the U.S. economy and the Company’s outlook on economic conditions improved from the fourth quarter of 2020; however, there is uncertainty surrounding the pace of economic recovery as demonstrated by unemployment levels above those experienced prior to the COVID-19 pandemic and continuing COVID-19 pandemic-related challenges across the U.S., among other factors. As such, at the end of the first quarter of 2021, the Company’s economic outlook on economic conditions included economic improvement; however, given the uncertainty surrounding the pace of economic recovery, the Company also included some adverse economic conditions in its economic scenario weighting.

Additionally, the historical experience incorporated into the portfolio-specific models does not fully reflect the Company's comprehensive expectations regarding the future. As such, the Company incorporated qualitative factors to establish an appropriate allowance balance. These factors include motorcycle recovery value considerations, delinquency adjustments, specific problem loan trends, and others, as appropriate.

Due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company in either portfolio could differ from the amounts estimated. Further, the Company’s allowance for credit losses incorporates known conditions at the balance sheet date and the Company's management’s expectations surrounding the economic forecasts. The Company’s expectations surrounding its economic forecasts may change in future periods as additional information becomes available.

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


	Three months ended March 28, 2021
	Retail		Wholesale		Total
Balance, beginning of period	$	371,738	$	19,198	$	390,936
Provision for credit losses	(22,449)		(25)		(22,474)
Charge-offs	(34,589)		—		(34,589)
Recoveries	12,360		—		12,360
Balance, end of period	$	327,060	$	19,173	$	346,233
	Three months ended March 29, 2020
	Retail		Wholesale		Total
Balance, beginning of period	$	188,501	$	10,080	$	198,581
Cumulative effect of change in accounting(a)	95,558		5,046		100,604
Provision for credit losses	70,417		9,002		79,419
Charge-offs	(55,215)		—		(55,215)
Recoveries	12,107		—		12,107
Balance, end of period	$	311,368	$	24,128	$	335,496

(a)On January 1, 2020, the Company adopted ASU 2016-13 and increased the allowance for loan loss through Retained earnings, net of income taxes, to establish an allowance that represents expected lifetime credit losses on the finance receivable portfolios at date of adoption.

The Company manages retail credit risk through its credit approval process and ongoing collection efforts. The Company uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants, enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. For the Company’s U.S. and Canadian retail finance receivables, the Company determines the credit quality indicator for each loan at origination and does not update the credit quality indicator subsequent to the loan origination date.

As loan performance by credit quality indicator differs between the U.S. and Canadian retail loans, the Company’s credit quality indicators vary for the two portfolios. For U.S. retail finance receivables, those with a FICO score of 740 or above at origination are generally considered super prime, loans with a FICO score between 640 and 740 are generally categorized as prime, and loans with FICO score below 640 are generally considered sub-prime. For Canadian retail finance receivables, those with a FICO score of 700 or above at origination are generally considered super prime, loans with a FICO score between 620 and 700 are generally categorized as prime, and loans with FICO score below 620 are generally considered sub-prime.

The amortized cost of the Company's U.S. and Canadian retail finance receivables by vintage and credit quality indicator was as follows (in thousands):


	March 28, 2021
	2021		2020		2019		2018		2017		2016 & Prior		Total
U.S. Retail:
Super prime	$	260,359	$	725,383	$	502,847	$	301,839	$	134,213	$	74,086	$	1,998,727
Prime	349,662		1,026,080		706,940		445,201		249,327		183,217		2,960,427
Sub-prime	130,389		395,495		263,203		156,368		96,998		100,827		1,143,280
	740,410		2,146,958		1,472,990		903,408		480,538		358,130		6,102,434
Canadian Retail:
Super prime	13,938		48,309		42,993		24,549		11,116		4,831		145,736
Prime	4,245		17,350		13,055		9,263		5,808		4,178		53,899
Sub-prime	601		2,949		2,227		1,407		951		778		8,913
	18,784		68,608		58,275		35,219		17,875		9,787		208,548
	$	759,194	$	2,215,566	$	1,531,265	$	938,627	$	498,413	$	367,917	$	6,310,982

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	December 31, 2020
	2020		2019		2018		2017		2016		2015 & Prior		Total
U.S. Retail:
Super prime	$	822,631	$	575,977	$	355,529	$	165,436	$	71,360	$	29,181	$	2,020,114
Prime	1,133,637		794,058		508,713		293,358		156,688		77,046		2,963,500
Sub-prime	435,875		295,403		177,598		111,163		72,556		52,060		1,144,655
	2,392,143		1,665,438		1,041,840		569,957		300,604		158,287		6,128,269
Canadian Retail:
Super prime	53,465		48,692		28,581		13,818		5,018		2,011		151,585
Prime	18,568		14,257		10,269		6,727		3,198		2,025		55,044
Sub-prime	3,172		2,498		1,560		1,095		607		365		9,297
	75,205		65,447		40,410		21,640		8,823		4,401		215,926
	$	2,467,348	$	1,730,885	$	1,082,250	$	591,597	$	309,427	$	162,688	$	6,344,195


	March 29, 2020
	2020		2019		2018		2017		2016		2015 & Prior		Total
U.S. Retail:
Super prime	$	204,937	$	825,176	$	539,296	$	275,621	$	140,284	$	62,924	$	2,048,238
Prime	265,365		1,065,132		717,234		441,284		262,421		155,338		2,906,774
Sub-prime	108,068		394,291		239,571		155,391		108,531		98,124		1,103,976
	578,370		2,284,599		1,496,101		872,296		511,236		316,386		6,058,988
Canadian Retail:
Super prime	12,819		61,889		39,516		22,186		10,565		4,989		151,964
Prime	3,968		16,479		12,389		8,441		4,549		3,929		49,755
Sub-prime	768		2,827		1,919		1,348		921		757		8,540
	17,555		81,195		53,824		31,975		16,035		9,675		210,259
	$	595,925	$	2,365,794	$	1,549,925	$	904,271	$	527,271	$	326,061	$	6,269,247

The Company's credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. The Company utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower. The Company uses the following internal credit quality indicators, based on an internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon the Company’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged-off, while the dealers classified as Low Risk are least likely to be charged-off. Additionally, the Company classifies dealers identified as those in which foreclosure is probable as Non-Performing. The internal rating system considers factors such as the specific borrower's ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.

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The amortized cost of wholesale financial receivables, by vintage and credit quality indicator, was as follows (in thousands):


	March 28, 2021
	2021		2020		2019		2018		2017		2016 & Prior		Total
Non-Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Doubtful	—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—
Special Mention	567		530		262		17		—		—		1,376
Medium Risk	—		728		417		—		—		—		1,145
Low Risk	600,144		122,970		44,614		12,568		6,392		2,819		789,507
	$	600,711	$	124,228	$	45,293	$	12,585	$	6,392	$	2,819	$	792,028


	December 31, 2020
	2020		2019		2018		2017		2016		2015 & Prior		Total
Non-Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Doubtful	—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—
Special Mention	658		365		31		—		—		—		1,054
Medium Risk	1,925		242		—		—		—		—		2,167
Low Risk	388,568		71,441		13,412		7,887		2,297		2,923		486,528
	$	391,151	$	72,048	$	13,443	$	7,887	$	2,297	$	2,923	$	489,749


	March 29, 2020
	2020		2019		2018		2017		2016		2015 & Prior		Total
Non-Performing	$	—	$	2,376	$	1,774	$	107	$	25	$	43	$	4,325
Doubtful	478		4,169		529		51		—		726		5,953
Substandard	5,375		6,374		391		131		—		—		12,271
Special Mention	5,239		8,001		977		6		—		1,268		15,491
Medium Risk	8,307		10,996		1,091		23		—		826		21,243
Low Risk	658,137		574,401		47,101		10,997		6,323		2,414		1,299,373
	$	677,536	$	606,317	$	51,863	$	11,315	$	6,348	$	5,277	$	1,358,656

Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables at amortized cost, excluding accrued interest, are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed, or the receivable is otherwise deemed uncollectible. The Company reverses accrued interest related to charged-off accounts against interest income when the account is charged-off. The Company reversed $5.2 million and $6.4 million of accrued interest against interest income during the three months ended March 28, 2021 and March 29, 2020, respectively. All retail finance receivables accrue interest until either collected or charged-off. Due to the timely write-off of accrued interest, the Company made the election provided under Accounting Standards Codification (ASC) Topic 326, Financial Instruments - Credit Losses (ASC Topic 326) to exclude accrued interest from its allowance for credit losses. Accordingly, as of March 28, 2021, December 31, 2020 and March 29, 2020, all retail finance receivables were accounted for as interest-earning receivables.

Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once the Company determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due finance receivables until the date the Company determines that foreclosure is probable, and the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. Once an account is charged-off, the Company will reverse the associated accrued interest against interest income. As the Company follows a non-accrual policy for interest, the allowance for credit losses excludes accrued interest for the wholesale portfolio.

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There were no charged-off accounts during the three months ended March 28, 2021 and March 29, 2020. As such, the Company did not reverse any accrued interest in those periods. There were no dealers on non-accrual status at March 28, 2021 and December 31, 2020. At March 29, 2020, $4.3 million of wholesale finance receivables outstanding on non-accrual status, and of this, $2.6 million were over 90 days or more past due.

Additional information related to the wholesale finance receivables on non-accrual status at March 29, 2020 includes (in thousands):


	Amortized Cost, Beginning of Period		Amortized Cost, End of Period		Interest Income Recognized
No related allowance recorded	$	—	$	—	$	—
Related allowance recorded	4,994		4,325		—
	$	4,994	$	4,325	$	—

The aging analysis of finance receivables was as follows (in thousands):


	March 28, 2021
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total
Retail finance receivables	$	6,196,345	$	69,032	$	23,420	$	22,185	$	114,637	$	6,310,982
Wholesale finance receivables	791,826		128		22		52		202		792,028
	$	6,988,171	$	69,160	$	23,442	$	22,237	$	114,839	$	7,103,010

	December 31, 2020
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total
Retail finance receivables	$	6,164,369	$	106,818	$	39,933	$	33,075	$	179,826	$	6,344,195
Wholesale finance receivables	489,556		166		23		4		193		489,749
	$	6,653,925	$	106,984	$	39,956	$	33,079	$	180,019	$	6,833,944

	March 29, 2020
	Current		31-60 Days Past Due		61-90 Days Past Due		Greater than 90 Days Past Due		Total Past Due		Total
Retail finance receivables	$	6,091,319	$	101,412	$	37,816	$	38,700	$	177,928	$	6,269,247
Wholesale finance receivables	1,352,084		2,051		1,437		3,084		6,572		1,358,656
	$	7,443,403	$	103,463	$	39,253	$	41,784	$	184,500	$	7,627,903

Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total finance receivables in troubled debt restructurings were not significant as of March 28, 2021, December 31, 2020 and March 29, 2020. Additionally, in certain situations, the Company may offer short-term adjustments to customer payment due dates without affecting the associated interest rate or loan term. During 2020 and into the first quarter of 2021, the Company offered an increased amount of short-term payment due date extensions on eligible retail loans to help retail customers get through financial difficulties associated with the COVID-19 pandemic. During the first quarter of 2021, the volume of payment extensions granted for eligible retail loans declined from the levels experienced during the second quarter and into the third quarter of 2020 but had not yet returned to pre-COVID-19 pandemic levels. The Company continues to grant payment extensions to customers in accordance with its policies.

9. Derivative Financial Instruments and Hedging Activities

The Company is exposed to risks from fluctuations in foreign currency exchange rates, interest rates and commodity prices. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures which prohibit the use of financial instruments for speculative trading purposes.

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The Company sells products in foreign currencies and utilizes foreign currency exchange contracts to mitigate the effects of foreign currency exchange rate fluctuations related to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Chinese yuan, Thai baht, Indian rupee, Singapore dollar, and Pound sterling. The Company's foreign currency exchange contracts generally have maturities of less than one year.

The Company utilizes commodity contracts to mitigate the effects of commodity price fluctuations related to metals and fuel consumed in the Company’s motorcycle operations. The Company's commodity contracts generally have maturities of less than one year.

The Company periodically utilizes treasury rate lock contracts to fix the interest rate on a portion of the principal related to an anticipated issuance of long-term debt, interest rate swaps to reduce the impact of fluctuations in interest rates on medium-term notes with floating interest rates, and cross-currency swaps to mitigate the effect of foreign currency exchange rate fluctuations on foreign currency-denominated debt. The Company also utilizes interest rate caps to facilitate certain asset-backed securitization transactions.

All derivative financial instruments are recognized on the Consolidated balance sheets at fair value. In accordance with ASC Topic 815, Derivatives and Hedging (ASC Topic 815), the accounting for changes in the fair value of a derivative financial instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship.

Changes in the fair value of derivative financial instruments that are designated as cash flow hedges are initially recorded in Other comprehensive income (loss) (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an ongoing basis, whether the derivative financial instruments that are designated as cash flow hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. No component of a designated hedging derivative financial instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative financial instruments not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign currency, commodity risks, and interest rate risks. Changes in the fair value of derivative financial instruments not designated as hedging instruments are recorded directly in income.

The notional and fair values of the Company's derivative financial instruments under ASC Topic 815 were as follows (in thousands):


	Derivative Financial Instruments Designated as Cash Flow Hedging Instruments
	March 28, 2021						December 31, 2020						March 29, 2020
	Notional Value		Other Current Assets		Accrued Liabilities		Notional Value		Other Current Assets		Accrued Liabilities		Notional Value		Other Current Assets		Accrued Liabilities
Foreign currency contracts	$	402,814	$	6,356	$	6,071	$	533,925	$	11	$	21,927	$	414,753	$	12,108	$	575
Commodity contracts	668		3		20		671		—		52		482		—		74
Cross-currency swaps	1,367,460		73,449		—		1,367,460		138,622		—		660,780		—		41,283

Interest rate swaps	—		—		—		450,000		—		3,086		900,000		—		11,398
	$	1,770,942	$	79,808	$	6,091	$	2,352,056	$	138,633	$	25,065	$	1,976,015	$	12,108	$	53,330

	Derivative Financial Instruments Not Designated as Hedging Instruments
	March 28, 2021						December 31, 2020						March 29, 2020
	Notional Value		Other Current Assets		Accrued Liabilities		Notional Value		Other Current Assets		Accrued Liabilities		Notional Value		Other Current Assets		Accrued Liabilities
Foreign currency contracts	$	214,337	$	670	$	595	$	245,494	$	737	$	435	$	182,642	$	2,573	$	2,194
Commodity contracts	8,172		1,193		40		6,806		849		21		7,769		—		1,452
Interest rate caps	844,673		170		—		978,058		47		—		326,976		2		—
	$	1,067,182	$	2,033	$	635	$	1,230,358	$	1,633	$	456	$	517,387	$	2,575	$	3,646

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The amounts of gains and losses related to derivative financial instruments designated as cash flow hedges were as follows (in thousands):


	Gain/(Loss) Recognized in OCI				Gain/(Loss) Reclassified from AOCL into Income
	Three months ended					Three months ended
	March 28, 2021		March 29, 2020				March 28, 2021		March 29, 2020
Foreign currency contracts	$	14,037	$	16,899			$	(4,953)	$	3,400
Commodity contracts	3		(129)				(32)		(135)
Cross-currency swaps	(65,174)		(49,609)				(65,788)		(12,906)
Treasury rate lock contracts	—		—				(124)		(124)
Interest rate swaps	397		(5,333)				(2,689)		(3,116)
	$	(50,737)	$	(38,172)			$	(73,586)	$	(12,881)

The location and amount of gains and losses recognized in income related to derivative financial instruments designated as cash flow hedges were as follows (in thousands):


	Motorcycles cost of goods sold		Selling, administrative & engineering expense		Interest expense		Financial Services interest expense



















	Three months ended March 28, 2021
Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded	$	811,622	$	231,844	$	7,708	$	55,707

Gain/(loss) reclassified from AOCL into income:
Foreign currency contracts	$	(4,953)	$	—	$	—	$	—
Commodity contracts	$	(32)	$	—	$	—	$	—
Cross-currency swaps	$	—	$	(65,788)	$	—	$	—
Treasury rate lock contracts	$	—	$	—	$	(91)	$	(33)
Interest rate swap	$	—	$	—	$	—	$	(2,689)
	Three months ended March 29, 2020
Line item on the Consolidated statements of operations in which the effects of cash flow hedges are recorded	$	780,868	$	277,971	$	7,755	$	52,473

Gain/(loss) reclassified from AOCL into income:
Foreign currency contracts	$	3,400	$	—	$	—	$	—
Commodity contracts	$	(135)	$	—	$	—	$	—
Cross-currency swaps	$	—	$	(12,906)	$	—	$	—
Treasury rate lock contracts	$	—	$	—	$	(91)	$	(33)
Interest rate swaps	$	—	$	—	$	—	$	(3,116)

The amount of net loss included in Accumulated other comprehensive loss (AOCL) at March 28, 2021, estimated to be reclassified into income over the next 12 months was $17.1 million.

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The amount of gains and losses recognized in income related to derivative financial instruments not designated as hedging instruments were as follows (in thousands). Gains and losses on foreign currency contracts and commodity contracts were recorded in Motorcycles cost of goods sold and the interest rate caps were recorded in Financial Services interest expense.


	Amount of Gain/(Loss) Recognized in Income
	Three months ended
	March 28, 2021		March 29, 2020
Foreign currency contracts	$	(3,629)	$	2,194
Commodity contracts	703		(1,551)
Interest rate caps	123		—
	$	(2,803)	$	643

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

10. Leases

The Company determines if an arrangement is or contains a lease at contract inception. Right-of-use (ROU) assets related to the Company's leases are recorded in Lease assets and lease liabilities are recorded in Accrued liabilities and Lease liabilities on the Consolidated balance sheets.

ROU assets represent the Company’s right to use an underlying asset over the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the present value of future lease payments over the lease term. The ROU asset also includes prepaid lease payments and initial direct costs and is reduced for lease incentives paid by the lessor. The discount rate used to determine the present value is generally the Company's incremental borrowing rate because the implicit rate in the lease is not readily determinable. The lease term used to calculate the ROU asset and lease liabilities includes periods covered by options to extend or terminate when the Company is reasonably certain the lease term will include these optional periods.

In accordance with ASC Topic 842, Leases (ASC Topic 842), the Company elected the short-term lease practical expedient that allows entities to recognize lease payments on a straight-line basis over the lease term for leases with a term of 12 months or less. The Company has also elected the practical expedient under ASC Topic 842 allowing entities to not separate non-lease components from lease components, but instead account for such components as a single lease component for all leases except leases involving assets operated by a third-party.

The Company has operating lease arrangements for sales and administrative offices, manufacturing and distribution facilities, product testing facilities, equipment and vehicles. The Company’s leases have remaining lease terms ranging from 1 to 11 years, some of which include options to extend the lease term for periods generally not greater than 5 years and some of which include options to terminate the leases within 1 year. Certain leases also include options to purchase the leased asset. The Company's leases do not contain any material residual value guarantees or material restrictive covenants.

Operating lease expense for the three months ended March 28, 2021 and March 29, 2020 was $8.2 million and $7.3 million, respectively. This includes variable lease costs related to leases involving assets operated by a third party of approximately $3.1 million and $1.9 million for the three months ended March 28, 2021 and March 29, 2020, respectively. Other variable and short-term lease costs were not material.

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Balance sheet information related to the Company's leases was as follows (in thousands):


	March 28, 2021		December 31, 2020		March 29, 2020
Lease assets	$	44,765	$	45,203	$	56,496

Accrued liabilities	$	17,021	$	17,081	$	17,939
Lease liabilities	30,061		30,115		40,053
	$	47,082	$	47,196	$	57,992

Future maturities of the Company's operating lease liabilities as of March 28, 2021 were as follows (in thousands):


	Operating Leases
2021	$	13,805
2022	14,466
2023	6,511
2024	4,518
2025	6,816
Thereafter	3,677
Future lease payments	49,793
Present value discount	(2,711)
Lease liabilities	$	47,082

Other lease information surrounding the Company's operating leases was as follows (dollars in thousands):


	Three months ended
	March 28, 2021		March 29, 2020
Cash outflows for amounts included in the measurement of lease liabilities	$	4,947	$	5,378
ROU assets obtained in exchange for lease obligations, net of modifications	$	5,305	$	557


	March 28, 2021		December 31, 2020		March 29, 2020
Weighted-average remaining lease term (in years)	3.81		3.78		4.20
Weighted-average discount rate	2.9	%	3.1	%	3.3	%

11. Debt

Debt with a contractual term less than 12 months is generally classified as short-term and consisted of the following (in thousands):


	March 28, 2021		December 31, 2020		March 29, 2020
Unsecured commercial paper	$	749,801	$	1,014,274	$	1,335,664
Global credit facility borrowings	15,462		—		—
	$	765,263	$	1,014,274	$	1,335,664

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Debt with a contractual term greater than 12 months is generally classified as long-term and consisted of the following (in thousands):


			March 28, 2021		December 31, 2020		March 29, 2020
Secured debt:
Asset-backed Canadian commercial paper conduit facility			$	102,543	$	116,678	$	155,243
Asset-backed U.S. commercial paper conduit facilities			350,648		402,205		600,000
Asset-backed securitization debt			2,109,046		1,800,393		1,161,047
Unamortized discounts and debt issuance costs			(9,788)		(8,437)		(4,202)
			2,552,449		2,310,839		1,912,088
Unsecured notes (at par value):
Medium-term notes:




Due in 2020, issued May 2018	LIBOR + 0.50%		—		—		450,000
Due in 2020, issued March 2017	2.40	%	—		—		350,000
Due in 2021, issued January 2016	2.85	%	—		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		550,000		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
Due in 2023, issued May 2020(a)	4.94	%	762,996		797,206		—
Due in 2024, issued November 2019(b)	3.14	%	704,304		735,882		660,030
Due in 2025, issued June 2020	3.35	%	700,000		700,000		—
Unamortized discounts and debt issuance costs			(13,564)		(15,374)		(11,046)
			3,803,736		4,917,714		4,148,984

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
Unamortized discounts and debt issuance costs			(5,851)		(6,023)		(6,534)
			744,149		743,977		743,466
			4,547,885		5,661,691		4,892,450
Long-term debt			7,100,334		7,972,530		6,804,538
Current portion of long-term debt, net			(1,622,243)		(2,039,597)		(2,326,460)
Long-term debt, net			$	5,478,091	$	5,932,933	$	4,478,078

(a)Euro denominated, €650.0 million par value remeasured to U.S. dollar at March 28, 2021 and December 31, 2020, respectively

(b)Euro denominated, €600.0 million par value remeasured to U.S. dollar at March 28, 2021, December 31, 2020, and March 29, 2020, respectively

The Company's future principal payments on debt obligations as of March 28, 2021 were as follows (in thousands):


2021	$	1,670,913
2022	1,685,613
2023	1,829,349
2024	1,120,828
2025	1,287,560
Thereafter	300,537
	$	7,894,800

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12. Asset-Backed Financing

The Company participates in asset-backed financing both through asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. In the Company's asset-backed financing programs, the Company transfers retail motorcycle finance receivables to special purpose entities (SPEs), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. The Company retains servicing rights for all of the retail motorcycle finance receivables transferred to SPEs as part of an asset-backed financing. The accounting treatment for asset-backed financings depends on the terms of the related transaction and the Company’s continuing involvement with the VIE.

In transactions where the Company has power over the significant activities of the VIE and has an obligation to absorb losses or the right to receive benefits from the VIE that are potentially significant to the VIE, the Company is the primary beneficiary of the VIE and consolidates the VIE within its consolidated financial statements. On a consolidated basis, the asset-backed financing is treated as a secured borrowing in this type of transaction and is referred to as an on-balance sheet asset-backed financing.

In transactions where the Company is not the primary beneficiary of the VIE, the Company must determine whether it can achieve a sale for accounting purposes under ASC Topic 860, Transfers and Servicing (ASC Topic 860). To achieve a sale for accounting purposes, the assets being transferred must be legally isolated, not be constrained by restrictions from further transfer, and be deemed to be beyond the Company’s control. If the Company does not meet all of these criteria for sale accounting, then the transaction is accounted for as a secured borrowing and is referred to as an on-balance sheet asset-backed financing.

If the Company meets all three of the sale criteria above, the transaction is recorded as a sale for accounting purposes and is referred to as an off-balance sheet asset-backed financing. Upon sale, the retail motorcycle finance receivables are removed from the Company’s Consolidated balance sheets and a gain or loss is recognized for the difference between the cash proceeds received, the assets derecognized, and the liabilities recognized as part of the transaction. The gain or loss on sale is included in Financial Services revenue on the Consolidated statements of operations.

The Company is not required, and does not currently intend, to provide any additional financial support to the on- or off-balance sheet VIEs associated with these transactions. Investors and creditors in these transactions only have recourse to the assets held by the VIEs.

The assets and liabilities related to the on-balance sheet asset-backed financings included in the Consolidated balance sheets were as follows (in thousands):


	March 28, 2021
	Finance receivables		Allowance for credit losses		Restricted cash		Other assets		Total assets		Asset-backed debt
On-balance sheet assets and liabilities:
Consolidated VIEs:
Asset-backed securitizations	$	2,448,681	$	(126,053)	$	166,694	$	2,852	$	2,492,174	$	2,099,258
Asset-backed U.S. commercial paper conduit facility	378,035		(19,432)		30,252		1,175		390,030		350,648
Unconsolidated VIEs:
Asset-backed Canadian commercial paper conduit facility	115,742		(5,388)		9,743		206		120,303		102,543
	$	2,942,458	$	(150,873)	$	206,689	$	4,233	$	3,002,507	$	2,552,449

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	December 31, 2020
	Finance receivables		Allowance for credit losses		Restricted cash		Other assets		Total assets		Asset-backed debt
On-balance sheet assets and liabilities:
Consolidated VIEs:
Asset-backed securitizations	$	2,129,372	$	(124,627)	$	116,268	$	2,622	$	2,123,635	$	1,791,956
Asset-backed U.S. commercial paper conduit facility	441,402		(25,793)		26,624		1,131		443,364		402,205
Unconsolidated VIEs:
Asset-backed Canadian commercial paper conduit facility	133,976		(6,508)		9,073		126		136,667		116,678
	$	2,704,750	$	(156,928)	$	151,965	$	3,879	$	2,703,666	$	2,310,839

	March 29, 2020
	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	$	1,250,382	$	(62,159)	$	61,945	$	852	$	1,251,020	$	1,156,845
Asset-backed U.S. commercial paper conduit facilities	662,385		(32,872)		37,290		1,410		668,213		600,000
Unconsolidated VIEs:
Asset-backed Canadian commercial paper conduit facility	182,353		(6,671)		10,552		148		186,382		155,243
	$	2,095,120	$	(101,702)	$	109,787	$	2,410	$	2,105,615	$	1,912,088

On-Balance Sheet Asset-Backed Securitization VIEs – The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each on-balance sheet asset-backed securitization SPE is a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the asset-backed securitization transactions and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Restricted cash balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes currently have various contractual maturities ranging from 2022 to 2028.

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 first quarter of 2021, the Company transferred $663.1 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $600.0 million, or $597.4 million net of discount and issuance costs, of secured notes through an on-balance sheet asset-backed securitization transaction. During the first quarter of 2020, the Company transferred $580.2 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $525.0 million, or $522.7 million net of discount and issuance costs, of secured notes through an on-balance sheet asset-backed securitization transaction.

On-Balance Sheet Asset-Backed U.S. Commercial Paper Conduit Facilities VIE – Until November 25, 2020, the Company had two separate agreements with third-party bank-sponsored asset-backed U.S. commercial paper conduits, a $300.0 million revolving facility agreement and a $600.0 million revolving facility agreement (together, the Former U.S. Conduit Facilities). On November 25, 2020, the Company amended each revolving facility agreement by consolidating the two agreements into one $900.0 million revolving facility agreement with third-party bank-sponsored asset-backed U.S. commercial paper conduits. Under the revolving facility agreement, the Company may transfer U.S. retail motorcycle finance receivables to an SPE, which in turn may issue debt to those third-party bank-sponsored asset-backed U.S. commercial paper conduits. In addition to the $900.0 million aggregate commitment, the agreement allows for additional borrowings, at the lender’s

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discretion, of up to $300.0 million. Availability under the $900.0 million revolving facility (the U.S. Conduit Facility) is based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral.

Under the U.S. Conduit Facility, the assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates if funded by a conduit lender through the issuance of commercial paper. If not funded by a conduit lender through the issuance of commercial paper, the terms of the interest are based on LIBOR. In each of these cases, a program fee is assessed based on the outstanding principal. The U.S. Conduit Facility also provides for an unused commitment fee based on the unused portion of the total aggregate commitment. When calculating the unused fee, the aggregate commitment does not include any unused portion of the $300.0 million additional borrowings allowed. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facility, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 4 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of March 28, 2021, the U.S. Conduit Facility has an expiration date of November 19, 2021.

The Company is the primary beneficiary of its U.S. Conduit Facility VIE because it retains servicing rights and a residual interest in the VIE in the form of a debt security. As the servicer, the Company is the variable interest holder with the power to direct the activities of the VIE that most significantly impact the VIE’s economic performance. As a residual interest holder, the Company has the obligation to absorb losses and the right to receive benefits which could potentially be significant to the VIE.

There were no finance receivable transfers under the U.S. Conduit Facility during the first quarter of 2021. During the first quarter of 2020, the Company transferred $195.3 million of U.S. retail motorcycle finance receivables to an SPE which, in turn, issued $163.6 million of debt under the Former U.S. Conduit Facilities.

On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – In June 2020, 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 associated debt. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$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 4 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of March 28, 2021, the Canadian Conduit has an expiration date of June 25, 2021.

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 $17.8 million at March 28, 2021. The maximum exposure is not an indication of the Company's expected loss exposure.

There were no finance receivable transfers under the Canadian Conduit Facility during the first quarter of 2021. During the first quarter of 2020, the Company transferred $77.9 million of Canadian retail motorcycle finance receivables to the Canadian Conduit for proceeds of $61.6 million.

Off-Balance Sheet Asset-Backed Securitization VIE – There were no off-balance sheet asset-backed securitization transactions during the first quarter of 2021 or 2020. 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. The gain on sale was included in Financial Services revenue on the Consolidated statements of operations. In April 2020, the Company repurchased the finance receivables associated with this off-balance sheet asset-backed securitization VIE for $27.4 million.

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Similar to an on-balance sheet asset-backed securitization, the Company transferred U.S. retail motorcycle finance receivables to an SPE which in turn issued secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. The off-balance sheet asset-backed securitization SPE was a separate legal entity, and the U.S. retail motorcycle finance receivables included in the asset-backed securitization were only available for payment of the secured debt and other obligations arising from the asset-backed securitization transaction and were not available to pay other obligations or claims of the Company’s creditors. In an on-balance sheet asset-backed securitization, the Company retains a financial interest in the VIE in the form of a debt security. As part of this off-balance sheet securitization, the Company did not retain any financial interest in the VIE beyond servicing rights and ordinary representations and warranties and related covenants.

The Company was not the primary beneficiary of the off-balance sheet asset-backed securitization VIE because it only retained servicing rights and did not have the obligation to absorb losses or the right to receive benefits from the VIE which could potentially be significant to the VIE. Accordingly, this transaction met the accounting sale requirements under ASC Topic 860 and was recorded as a sale for accounting purposes. Upon the sale in 2016, the retail motorcycle finance receivables were removed from the Company’s Consolidated balance sheets 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.

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 on the Consolidated statements of operations. The fees the Company is paid for servicing represent adequate compensation, and consequently, the Company does not recognize a servicing asset or liability. The Company repurchased the finance receivables associated with the off-balance sheet securitization VIE in April 2020. As such, the Company did not recognize any servicing fee income in 2021. The Company recognized servicing fee income of $0.1 million during the first quarter of 2020.

The unpaid principal balance of the off-balance sheet retail motorcycle finance receivables serviced by the Company were $27.4 million as of March 29, 2020 of which $0.7 million were 30 days or more delinquent. Credit losses, net of recoveries for the off-balance sheet retail motorcycle finance receivables as of March 29, 2020 were $0.01 million. There was no unpaid principal balance or credit losses, net of recoveries associated with the off-balance sheet retail motorcycle finance receivables as of December 31, 2020 and March 28, 2021.

13. Fair Value

The Company assesses the inputs used to measure fair value using a three-tier hierarchy.

Level 1 inputs include quoted prices for identical instruments and are the most observable.

Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity prices, and yield curves. The Company uses the market approach to derive the fair value for its Level 2 fair value measurements. Foreign currency contracts, commodity contracts, cross-currency swaps and treasury rate lock contracts 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 the Company's judgments about the assumptions market participants would use in pricing the asset or liability.

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Recurring Fair Value Measurements – The Company’s assets and liabilities measured at fair value on a recurring basis were as follows (in thousands):


	March 28, 2021
	Balance		Level 1		Level 2
Assets:
Cash equivalents	$	2,069,400	$	1,919,400	$	150,000
Marketable securities	50,239		50,239		—
Derivative financial instruments	81,841		—		81,841
	$	2,201,480	$	1,969,639	$	231,841
Liabilities:
Derivative financial instruments	$	6,726	$	—	$	6,726
	December 31, 2020
	Balance		Level 1		Level 2
Assets:
Cash equivalents	$	3,019,884	$	2,819,884	$	200,000
Marketable securities	52,061		52,061		—
Derivative financial instruments	140,266		—		140,266
	$	3,212,211	$	2,871,945	$	340,266
Liabilities:
Derivative financial instruments	$	25,521	$	—	$	25,521
	March 29, 2020
	Balance		Level 1		Level 2
Assets:
Cash equivalents	$	1,207,799	$	1,144,800	$	62,999
Marketable securities	44,144		44,144		—
Derivative financial instruments	14,683		—		14,683
	$	1,266,626	$	1,188,944	$	77,682
Liabilities:
Derivative financial instruments	$	56,976	$	—	$	56,976

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 $18.6 million, $17.7 million and $22.2 million at March 28, 2021, December 31, 2020 and March 29, 2020, respectively, for which the fair value adjustment was $2.4 million, $4.2 million and $10.9 million, respectively. Fair value is estimated using Level 2 inputs based on the recent market values of repossessed inventory.

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Fair Value of Financial Instruments Measured at Cost – The carrying value of the Company's Cash and cash equivalents and Restricted cash approximates their fair values. The fair value and carrying value of the Company’s remaining financial instruments that are measured at cost or amortized cost were as follows (in thousands):


	March 28, 2021				December 31, 2020				March 29, 2020
	Fair Value		Carrying Value		Fair Value		Carrying Value		Fair Value		Carrying Value
Assets:
Finance receivables, net	$	6,930,531	$	6,756,777	$	6,586,348	$	6,443,008	$	7,391,948	$	7,292,407
Liabilities:
Deposits, net	$	152,715	$	152,653	$	79,965	$	79,965	$	—	$	—
Debt:
Unsecured commercial paper	$	749,801	$	749,801	$	1,014,274	$	1,014,274	$	1,335,664	$	1,335,664
Global credit facility borrowings	$	15,462	$	15,462	$	—	$	—	$	—	$	—

Asset-backed U.S. commercial paper conduit facilities	$	350,648	$	350,648	$	402,205	$	402,205	$	600,000	$	600,000
Asset-backed Canadian commercial paper conduit facility	$	102,543	$	102,543	$	116,678	$	116,678	$	155,243	$	155,243
Asset-backed securitization debt	$	2,120,855	$	2,099,258	$	1,817,892	$	1,791,956	$	1,139,076	$	1,156,845
Medium-term notes	$	3,955,743	$	3,803,736	$	5,118,928	$	4,917,714	$	4,013,409	$	4,148,984
Senior notes	$	789,967	$	744,149	$	828,141	$	743,977	$	685,805	$	743,466

Finance Receivables, net – The carrying value of retail and wholesale finance receivables is amortized cost less an allowance for credit losses. The fair value of retail finance receivables is generally calculated by discounting future cash flows using an estimated discount rate that reflects current credit, interest rate and prepayment risks associated with similar types of instruments. Fair value is determined based on Level 3 inputs. The amortized cost basis of wholesale finance receivables approximates fair value because they are generally either short-term or have interest rates that adjust with changes in market interest rates.

Deposits, net – The carrying value of deposits is amortized cost. The fair value of deposits is estimated based upon rates currently available for deposits with similar terms and maturities. Fair value is calculated using Level 3 inputs.

Debt – The carrying value of debt is generally amortized cost, net of discounts and debt issuance costs. The fair value of unsecured commercial paper and credit facility borrowings are calculated using Level 2 inputs and approximates carrying value due to its short maturity. The fair value of debt provided under the U.S. Conduit Facilities and Canadian Conduit Facility is calculated using Level 2 inputs and approximates carrying value since the interest rates charged under the facilities are tied directly to market rates and fluctuate as market rates change. The fair values of the medium-term notes and senior notes are estimated based upon rates currently available for debt with similar terms and remaining maturities (Level 2 inputs). The fair value of the fixed-rate debt related to on-balance sheet asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities (Level 2 inputs). The fair value of the floating-rate debt related to on-balance sheet asset-backed securitization transactions is calculated using Level 2 inputs and approximates carrying value since the interest rates charged are tied directly to market rates and fluctuate as market rates change.

14. Product Warranty and Recall Campaigns

The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except in Japan, where the Company currently provides a standard three-year limited warranty. The Company also provides a five-year unlimited warranty on the battery for electric motorcycles. In addition, the Company provides a one-year warranty for parts and accessories. The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company accrues for future warranty claims at the time of sale using an estimated cost based primarily on historical Company claim information.

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Additionally, the Company has from time to time initiated certain voluntary recall campaigns. The Company records estimated recall costs when the liability is both probable and estimable. This generally occurs when the Company's management approves and commits to a recall. The warranty and recall liability is included in Accrued liabilities and Other long-term liabilities on the Consolidated balance sheets. Changes in the Company’s warranty and recall liabilities were as follows (in thousands):


	Three months ended
	March 28, 2021		March 29, 2020
Balance, beginning of period	$	69,208	$	89,793
Warranties issued during the period	11,672		11,025
Settlements made during the period	(8,585)		(14,157)
Recalls and changes to pre-existing warranty liabilities	132		(353)
Balance, end of period	$	72,427	$	86,308

The liability for recall campaigns, included in the balance above, was $25.3 million, $24.7 million and $33.6 million at March 28, 2021, December 31, 2020 and March 29, 2020, respectively.

15. Employee Benefit Plans

The Company has a qualified pension plan and postretirement healthcare benefit plans. The plans cover certain eligible employees and retirees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees. Service cost is allocated among Selling, administrative and engineering expense, Motorcycles cost of goods sold and Inventories, net. Amounts capitalized in inventory are not significant. Non-service cost components of net periodic benefit cost are presented in Other income, net. Components of net periodic benefit cost for the Company's defined benefit plans were as follows (in thousands):


	Three months ended
	March 28, 2021		March 29, 2020
Pension and SERPA Benefits:
Service cost	$	6,348	$	6,806
Interest cost	15,470		19,112
Expected return on plan assets	(32,720)		(33,764)
Amortization of unrecognized:
Prior service credit	(312)		(272)
Net loss	18,386		16,372
Settlement loss	816		—

Net periodic benefit cost	$	7,988	$	8,254


Postretirement Healthcare Benefits:
Service cost	$	1,288	$	1,201
Interest cost	1,626		2,336
Expected return on plan assets	(3,495)		(3,467)
Amortization of unrecognized:
Prior service credit	(581)		(595)
Net loss	264		123


Net periodic benefit cost	$	(898)	$	(402)

There are no required or planned voluntary qualified pension plan contributions for 2021. The Company expects it will continue to make ongoing benefit payments under the SERPA and postretirement healthcare plans.

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16. 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.

York Environmental Matter – The Company is involved with government agencies and the U.S. Navy 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 an agreement with the U.S. Navy which calls for the U.S. 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). A site wide remedial investigation/feasibility study and a proposed final remedy for the York facility have been completed and approved by the Pennsylvania Department of Environmental Protection and the United States Environmental Protection Agency (EPA). The associated cleanup plan documents were approved in February 2020 and the remaining cleanup activities are expected to begin later in 2021. The Company has an accrual for its share of the estimated future Response Costs recorded in Other long-term liabilities on the Consolidated balance sheets.

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.

17. Accumulated Other Comprehensive Loss

Changes in Accumulated other comprehensive loss were as follows (in thousands):


	Three months ended March 28, 2021
	Foreign currency translation adjustments		Derivative financial instruments		Pension and postretirement benefit plans		Total
Balance, beginning of period	$	(7,589)	$	(46,116)	$	(429,712)	$	(483,417)
Other comprehensive loss, before reclassifications	(17,074)		(50,737)		—		(67,811)
Income tax (expense) benefit	(264)		11,092		—		10,828
	(17,338)		(39,645)		—		(56,983)
Reclassifications:

Net loss on derivative financial instruments	—		73,586		—		73,586
Prior service credits(a)	—		—		(893)		(893)
Actuarial losses(a)	—		—		18,650		18,650
Reclassifications before tax	—		73,586		17,757		91,343
Income tax expense	—		(16,411)		(4,169)		(20,580)
	—		57,175		13,588		70,763
Other comprehensive (loss) income	(17,338)		17,530		13,588		13,780
Balance, end of period	$	(24,927)	$	(28,586)	$	(416,124)	$	(469,637)

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	Three months ended March 29, 2020
	Foreign currency translation adjustments		Derivative financial instruments		Pension and postretirement benefit plans		Total
Balance, beginning of period	$	(40,813)	$	(14,586)	$	(481,550)	$	(536,949)
Other comprehensive loss, before reclassifications	(35,821)		(38,172)		—		(73,993)
Income tax benefit	1,366		8,267		—		9,633
	(34,455)		(29,905)		—		(64,360)
Reclassifications:

Net loss on derivative financial instruments	—		12,881		—		12,881
Prior service credits(a)	—		—		(867)		(867)
Actuarial losses(a)	—		—		16,495		16,495
Reclassifications before tax	—		12,881		15,628		28,509
Income tax expense	—		(2,821)		(3,669)		(6,490)
	—		10,060		11,959		22,019
Other comprehensive (loss) income	(34,455)		(19,845)		11,959		(42,341)
Balance, end of period	$	(75,268)	$	(34,431)	$	(469,591)	$	(579,290)

(a) Amounts reclassified are included in the computation of net periodic benefit cost, discussed further in Note 15

18. Business Segments

Harley-Davidson, Inc. is the parent company for the groups of companies referred to as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). The Company operates in two business 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 Harley-Davidson motorcycles as well as motorcycle parts, accessories, general merchandise and services. The Company's products are sold to retail customers primarily through a network of independent dealers.

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.

Select segment information is set forth below (in thousands):


	Three months ended
	March 28, 2021		March 29, 2020
Motorcycles and Related Products:
Motorcycles revenue	$	1,232,107	$	1,099,788
Gross profit	420,485		318,920
Selling, administrative and engineering expense	193,546		234,353
Restructuring benefit	(593)		—
Operating income	227,532		84,567
Financial Services:
Financial Services revenue	190,400		198,456
Financial Services expense	71,531		175,510
Restructuring expense	227		—
Operating income	118,642		22,946
Operating income	$	346,174	$	107,513

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Total assets for the Motorcycles and Financial Services segments were $2.4 billion and $8.9 billion, respectively, as of March 28, 2021, $2.5 billion and $9.5 billion, respectively, as of December 31, 2020, and $2.5 billion and $8.6 billion, respectively, as of March 29, 2020.

19. Supplemental Consolidating Data

The supplemental consolidating data is presented for informational purposes and is different than segment information due to the allocation of consolidating adjustments to the reportable segments. Supplemental consolidating data is as follows (in thousands):


	Three months ended March 28, 2021
	HDMC Entities		HDFS Entities		Consolidating Adjustments		Consolidated
Revenue:
Motorcycles and Related Products	$	1,238,468	$	—	$	(6,361)	$	1,232,107
Financial Services	—		188,750		1,650		190,400
	1,238,468		188,750		(4,711)		1,422,507
Costs and expenses:
Motorcycles and Related Products cost of goods sold	811,622		—		—		811,622
Financial Services interest expense	—		55,707		—		55,707
Financial Services provision for credit losses	—		(22,474)		—		(22,474)
Selling, administrative and engineering expense	196,359		40,275		(4,790)		231,844
Restructuring (benefit) expense	(593)		227		—		(366)
	1,007,388		73,735		(4,790)		1,076,333
Operating income	231,080		115,015		79		346,174
Other income, net	277		—		—		277
Investment income	1,402		—		—		1,402
Interest expense	7,708		—		—		7,708
Income before income taxes	225,051		115,015		79		340,145
Provision for income taxes	55,996		25,005		—		81,001
Net income	$	169,055	$	90,010	$	79	$	259,144

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	March 28, 2021
	HDMC Entities		HDFS Entities		Consolidating Adjustments		Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	607,941	$	1,712,704	$	—	$	2,320,645

Accounts receivable, net	603,273		—		(386,704)		216,569
Finance receivables, net	—		1,798,194		—		1,798,194
Inventories, net	470,997		—		—		470,997
Restricted cash	—		185,374		—		185,374
Other current assets	81,559		113,797		—		195,356
	1,763,770		3,810,069		(386,704)		5,187,135
Finance receivables, net	—		4,958,583		—		4,958,583
Property, plant and equipment, net	687,086		31,882		—		718,968
Pension and postretirement assets	105,910		—		—		105,910
Goodwill	65,157		—		—		65,157
Deferred income taxes	56,911		79,206		(730)		135,387
Lease assets	36,559		8,206		—		44,765
Other long-term assets	184,876		33,929		(95,722)		123,083
	$	2,900,269	$	8,921,875	$	(483,156)	$	11,338,988
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	355,722	$	433,746	$	(386,704)	$	402,764
Accrued liabilities	443,529		125,768		1,143		570,440
Short-term deposits, net	—		93,887		—		93,887
Short-term debt	—		765,263		—		765,263
Current portion of long-term debt, net	—		1,622,243		—		1,622,243
	799,251		3,040,907		(385,561)		3,454,597
Long-term deposits, net	—		58,766		—		58,766
Long-term debt, net	744,149		4,733,942		—		5,478,091
Lease liabilities	22,461		7,600		—		30,061
Pension and postretirement liabilities	103,854		—		—		103,854
Deferred income taxes	7,166		1,516		—		8,682
Other long-term liabilities	179,525		46,920		2,106		228,551
Commitments and contingencies (Note 16)
Shareholders’ equity	1,043,863		1,032,224		(99,701)		1,976,386
	$	2,900,269	$	8,921,875	$	(483,156)	$	11,338,988

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	Three months ended March 28, 2021
	HDMC Entities		HDFS Entities		Consolidating Adjustments		Consolidated
Cash flows from operating activities:
Net income	$	169,055	$	90,010	$	79	$	259,144
Adjustments to reconcile Net income to Net cash (used) provided by operating activities:
Depreciation and amortization	37,778		2,443		—		40,221
Amortization of deferred loan origination costs	—		19,200		—		19,200
Amortization of financing origination fees	172		3,442		—		3,614
Provision for long-term employee benefits	7,090		—		—		7,090
Employee benefit plan contributions and payments	(9,885)		—		—		(9,885)
Stock compensation expense	8,174		794		—		8,968
Net change in wholesale finance receivables related to sales	—		—		(308,532)		(308,532)
Provision for credit losses	—		(22,474)		—		(22,474)



Deferred income taxes	3,811		9,812		(431)		13,192

Other, net	476		775		(80)		1,171
Changes in current assets and liabilities:
Accounts receivable, net	(388,688)		—		309,676		(79,012)
Finance receivables – accrued interest and other	—		8,947		—		8,947
Inventories, net	45,086		—		—		45,086
Accounts payable and accrued liabilities	104,486		354,507		(305,396)		153,597
Derivative financial instruments	(3,219)		(90)		—		(3,309)
Other	18,222		11,271		(3,730)		25,763
	(176,497)		388,627		(308,493)		(96,363)
Net cash (used) provided by operating activities	(7,442)		478,637		(308,414)		162,781

Cash flows from investing activities:
Capital expenditures	(18,427)		(386)		—		(18,813)
Origination of finance receivables	—		(1,923,911)		1,014,773		(909,138)
Collections on finance receivables	—		1,606,844		(706,359)		900,485




Other investing activities	733		—		—		733
Net cash used by investing activities	(17,694)		(317,453)		308,414		(26,733)

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	Three months ended March 28, 2021
	HDMC Entities		HDFS Entities		Consolidating Adjustments		Consolidated
Cash flows from financing activities:



Repayments of medium-term notes	—		(1,050,000)		—		(1,050,000)

Proceeds from securitization debt	—		597,411		—		597,411
Repayments of securitization debt	—		(291,346)		—		(291,346)

Repayments of asset-backed commercial paper	—		(66,894)		—		(66,894)
Net decrease in unsecured commercial paper	—		(262,517)		—		(262,517)
Net increase in credit facilities	—		15,629		—		15,629
Net increase in deposits	—		72,664		—		72,664

Dividends paid	(23,105)		—		—		(23,105)
Repurchase of common stock	(5,646)		—		—		(5,646)

Issuance of common stock under share-based plans	1,085		—		—		1,085
Net cash used by financing activities	(27,666)		(985,053)		—		(1,012,719)
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(5,418)		255		—		(5,163)
Net decrease in cash, cash equivalents and restricted cash	$	(58,220)	$	(823,614)	$	—	$	(881,834)

Cash, cash equivalents and restricted cash:
Cash, cash equivalents and restricted cash, beginning of period	$	666,161	$	2,743,007	$	—	$	3,409,168
Net decrease in cash, cash equivalents and restricted cash	(58,220)		(823,614)		—		(881,834)
Cash, cash equivalents and restricted cash, end of period	$	607,941	$	1,919,393	$	—	$	2,527,334

20. Subsequent Event

In April 2021, the Company received notification from the Economic Ministry of Belgium that, following a request from the European Union (EU), the Company would be subject to the revocation of Binding Origin Information (BOI) rulings, effective April 19, 2021. Beginning in 2019, the Company has operated under BOIs which allowed it to supply its EU markets with certain motorcycles produced at its Thailand manufacturing facility at tariff rates of 6%. Following the revocation, all non-electric motorcycles that Harley-Davidson imports into the EU, regardless of origin, will be subject to a total tariff rate of 31% from April 19, 2021 through May 31, 2021. This rate is expected to increase to 56% effective June 1, 2021. This ruling will effectively prohibit the Company from functioning competitively in the EU. The Company estimates the impact of the additional EU tariffs in 2021, if unmitigated, to be approximately $135 million and expects the impact to be approximately $200 million to $225 million on annual basis in future years. The Company is appealing the revocation of the BOIs. It has also sought temporary extended reliance on the 6% tariff rate for motorcycles produced in Thailand, ordered prior to April 19, 2021. There is no assurance that the appeal will be successful or that the Company will receive the extended reliance.

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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 “% Change” figures included in the Results of Operations section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented. Certain “% Change” deemed not meaningful (NM) have been excluded.

(1) Note Regarding Forward-Looking Statements

The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” “may,” “will,” “estimates,” “targets,” “intend” or words of similar meaning. Similarly, statements that describe or refer to future expectations, future plans, strategies, objectives, outlooks, targets, guidance, commitments or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially, unfavorably or favorably, from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Cautionary Statements” in this Item 2 and in Item 1A. Risk Factors, as well as in Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020. 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 “Guidance” sections in this Item 2 are only made as of April 19, 2021 and the remaining forward-looking statements in this report are made as of the date of the filing of this report (May 6, 2021), 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 $259.1 million, or $1.68 per diluted share, in the first quarter of 2021, compared to $69.7 million, or $0.45 per diluted share, in the first quarter of 2020. The Motorcycles segment reported operating income of $227.5 million for the first quarter of 2021 which was up $143.0 million over the first quarter of 2020. Operating income from the Motorcycles segment for the first quarter of 2021 was favorably impacted by a 3.5% increase in wholesale motorcycle shipments, favorable product mix, lower sales incentives and reduced selling, administrative and engineering expenses. Operating income from the Financial Services segment in the first quarter of 2021 was $118.6 million, up 417.0% compared to the year-ago quarter due primarily to a lower provision for credit losses.

Worldwide independent dealer retail sales of new Harley-Davidson motorcycles in the first quarter of 2021 were up 9.4% compared to the first quarter of 2020 led by a 30.6% increase in the U.S., partially offset by declines in Europe/Middle East/Africa (EMEA) and Latin America. Refer to the Motorcycles Retail Sales and Registration Data section for further discussion of retail sales results.

The Company is pleased with the pace of recovery that it has experienced across the business as compared to prior year when the Company's results were adversely impacted by the onset of the COVID-19 pandemic. The Company continues to manage through the impacts of the COVID-19 pandemic keeping safety and community well-being at the forefront. The Company believes its actions during 2020 to reshape the business through The Rewire and its initial execution of The Hardwire 5-year strategic plan are having a positive impact on the Company's results. Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2020 for more information on The Rewire and The Hardwire.

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Guidance(1)

Given the strong 2021 first quarter performance, the Company has increased its guidance for the full year. The decision to increase guidance was based on several key factors. First, the Company has better clarity on the cost impact of supply chain challenges and its ability to adapt to those challenges. Also, the economic outlook has improved with falling unemployment numbers, recent federal stimulus in the U.S. and continued progress on the global COVID-19 vaccine roll-out. The Company also has a better read on demand for its new model year 2021 motorcycles, which has been stronger than it had anticipated, particularly in the most profitable segments of Touring and Large Cruiser motorcycles. As a result, for the full-year 2021, the Company now expects:

•Motorcycles segment revenue growth of 30% to 35%, an increase from the previous guidance of 20% to 25%.

•Motorcycles segment operating income margin of 7% to 9%, up from the previous guidance of 5% to 7%, assuming the Company can successfully mitigate the impact of the additional European Union (EU) tariffs discussed below. This increase reflects an improved demand outlook and confidence in the Company's ability to continue navigating through the global supply chain headwinds.

•If the Company is unable to mitigate the impact of the additional EU tariffs to any extent in 2021, the Company expects Motorcycles segment operating income margin of 5% to 7%, in line with the original guidance.

•Financial Services segment operating income growth of 50% to 60%, an increase from the previous guidance of 10% to 15%, driven primarily by a favorable provision for credit losses.

Additionally, for the full-year 2021, the Company continues to expect capital expenditures of $190 million to $220 million.

Within 2021, the Company expects (a) approximately 60% of the total annual Motorcycles segment revenue to occur in the first half of the year driven by momentum from the model year 2021 launch through the riding season and (b) assuming the Company can successfully mitigate the impact of the additional EU tariffs discussed below, Motorcycles segment operating margin percent to be in the mid-teens during the first half of 2021 and near break-even in the second half of 2021.

In the second half of 2021, the Company expects retail inventory to decrease from its expected peak level at the end of the second quarter. In the fourth quarter the Company will prepare its manufacturing facilities to begin production of model year 2022 motorcycles. The Company believes the pattern for inventory and shipments in the second half of 2021 will be similar to what the Company experienced in the second half of 2020. In addition, during 2020, the Company benefited from cost reductions associated with COVID-19 pandemic cash preservation efforts, which started in the second quarter of 2020, and The Rewire restructuring savings, which started in the third quarter of 2020. Refer to "Restructuring Plan Costs and Savings" for additional discussion.

Additional EU Tariffs(1)

In April 2021, the Company received notification from the Economic Ministry of Belgium that, following a request from the EU, the Company would be subject to the revocation of Binding Origin Information (BOI) rulings, effective April 19, 2021. Beginning in 2019, the Company has operated under BOIs which allowed it to supply its EU markets with certain motorcycles produced at its Thailand manufacturing facility at tariff rates of 6%. Following the revocation, all non-electric motorcycles that Harley-Davidson imports into the EU, regardless of origin, will be subject to a total tariff rate of 31% from April 19, 2021 through May 31, 2021. This rate is expected to increase to 56% effective June 1, 2021. This ruling will effectively prohibit the Company from functioning competitively in the EU. The Company estimates the impact of the additional EU tariffs in 2021, if unmitigated, to be approximately $135 million and expects the impact to be approximately $200 million to $225 million on annual basis in future years. The Company is appealing the revocation of the BOIs. It has also sought temporary extended reliance on the 6% tariff rate for motorcycles produced in Thailand, ordered prior to April 19, 2021. There is no assurance that the appeal will be successful or that the Company will receive the extended reliance.

COVID-19 Pandemic

The full impact of the COVID-19 pandemic on future results depends on future developments, such as the ultimate duration and scope of the pandemic, the success of vaccination programs, and its impact on the Company's customers, independent dealers, distributors, and suppliers. Future impacts and disruptions could have an adverse effect on production, supply chains, distribution, and demand for the Company's products.

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Supply Chain – During the first quarter of 2021, the Company experienced some disruption and increased cost related to the adverse impacts of the COVID-19 pandemic on its global supply chain. To date, the Company has been successful in mitigating these disruptions to avoid material adverse impacts on its ability to produce and supply product. The Company expects the global supply chain disruptions to continue through the remainder of 2021, and the Company will continue to actively work to mitigate these impacts on its business.

Liquidity – The Company continues to closely monitor its liquidity in light of the COVID-19 pandemic. At the end the first quarter of 2021, the Company had $4.0 billion of available liquidity through cash, cash equivalents and availability under its credit and conduit facilities. Liquidity is discussed in more detail under Liquidity and Capital Resources.

Supporting Dealers and Riders – The Company's response and recovery plans have included supporting global dealers and customers. HDFS continues to work with qualified retail borrowers who have been impacted by the COVID-19 pandemic by offering short-term adjustments to payment due dates. These temporary extensions do not affect the associated interest rate or loan term. The volume of payment extensions on eligible retail loans has declined from the levels experienced during the second quarter and into the third quarter of 2020 but has not yet returned to pre-COVID-19 pandemic levels.

Safety – The Company continues to proactively manage through the COVID-19 pandemic and has implemented robust protocols to keep workers safe in its manufacturing facilities. Most non-production workers continue to work remotely in light of the COVID-19 pandemic.

Restructuring Plan Costs and Savings(1)

During 2020, the Company initiated certain restructuring activities as part of The Rewire including a workforce reduction, the termination of certain current and future products, facility changes, optimizing its global independent dealer network, exiting certain international markets, and discontinuing its sales and manufacturing operations in India. These actions included restructuring expenses related to employee termination costs, contract termination costs and non-current asset adjustments. The workforce reduction resulted in the elimination of approximately 700 positions globally, including the termination of approximately 500 employees. In addition, the India action resulted in the termination of approximately 70 employees. The Company incurred approximately $130 million of restructuring expense in connection with these actions during 2020. The Company expects to incur total restructuring expenses for these actions of approximately $150 million, including approximately $20 million in 2021. The Company continues to expect annual ongoing gross savings resulting from these restructuring activities of approximately $115 million. Refer to Note 4 of the Notes to Consolidated financial statements for additional information regarding the Company's restructuring activities.

Results of Operations for the Three Months Ended March 28, 2021

Compared to the Three Months Ended March 29, 2020

Consolidated Results


	Three months ended
(in thousands, except earnings per share)	March 28, 2021		March 29, 2020		Increase (Decrease)		% Change
Operating income from Motorcycles and Related Products	$	227,532	$	84,567	$	142,965	169.1	%
Operating income from Financial Services	118,642		22,946		95,696		417.0
Operating income	346,174		107,513		238,661		222.0
Other income, net	277		155		122		78.7
Investment income (loss)	1,402		(5,347)		6,749		(126.2)
Interest expense	7,708		7,755		(47)		(0.6)
Income before income taxes	340,145		94,566		245,579		259.7
Provision for income taxes	81,001		24,871		56,130		225.7
Net income	$	259,144	$	69,695	$	189,449	271.8	%
Diluted earnings per share	$	1.68	$	0.45	$	1.23	273.3	%

During the first quarter of 2021, operating income increased $238.7 million, or 222.0%, compared to the same period last year, driven by strong performance in both the Motorcycles and the Financial Services segments. Refer to the Motorcycles and Related Products Segment and Financial Services Segment discussions for a more detailed analysis of the factors affecting operating income.

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Investment income increased $6.7 million in 2021 as compared to 2020, driven by higher income from investments in marketable securities.

The Company's effective income tax rate for the first quarter of 2021 was 23.8% compared to 26.3% for the same period in 2020. The decrease in the 2021 effective income tax rate as compared to 2020 was due to the increase in Income before provision for income taxes, resulting in discrete income tax adjustments having a reduced impact on the effective income tax rate for the quarter.

Diluted earnings per share was $1.68 in the first quarter of 2021, up 273.3% from diluted earnings per share of $0.45 for the same period last year. Diluted weighted average shares outstanding increased from 153.7 million in the first three months of 2020 to 154.5 million in the first three months of 2021.

Motorcycles Retail Sales and Registration Data

Harley-Davidson Motorcycle Retail Sales(a)

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


	Three months ended
	March 31, 2021	March 31, 2020	Increase (Decrease)	% Change
United States	30,983	23,732	7,251	30.6	%
Canada	1,799	1,466	333	22.7
North America	32,782	25,198	7,584	30.1
Europe/Middle East/Africa (EMEA)	4,943	7,730	(2,787)	(36.1)
Asia Pacific	5,793	5,752	41	0.7
Latin America	717	1,759	(1,042)	(59.2)
	44,235	40,439	3,796	9.4	%

(a)Data source for retail sales figures shown above is new sales warranty and registration information provided by independent Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its independent dealers supply concerning new retail sales, and the Company does not regularly verify the information that its independent dealers supply. This information is subject to revision.

Worldwide retail sales of new Harley-Davidson motorcycles were up 9.4% during the first quarter of 2021 compared to the same period last year, when results were first impacted by the initial effects of the COVID-19 pandemic. The increase in retail sales during 2021 was led by the U.S. market which was positively impacted by the Company's shift in new model year launch timing from August to the first quarter of 2021 and strong demand for the Company's new model year Touring and Large Cruiser motorcycles. Retail sales in EMEA declined compared to the same quarter last year due to the Company's decision not to continue selling Street or Sportster motorcycles in Europe, shipping delays, as well as continued COVID-19 pandemic lockdowns. Latin America retail sales were adversely impacted during the first quarter of 2021 by the reduction of independent dealers and pricing actions executed as part of The Rewire actions in 2020 to restore profitability in those markets.

Across the independent dealer network, worldwide retail inventory of new Harley-Davidson motorcycles was down approximately 50% at the end of March 2021 compared to March 2020 behind the Company's new approach to supply and inventory management which was implemented in the second quarter of 2020. Retail inventory at the end of March 2021 was up approximately 60% over the end of December 2020, as the Company worked to build inventory ahead of the riding season. The Company expects retail inventory at the end of the second and third quarters of 2021 to be lower than average historical levels. The Company believes its approach to inventory management is continuing to improve profitability and strengthen retail pricing, with 2021 first quarter retail motorcycle transaction pricing in the U.S. up for all families, most of which are at or near Manufacturer's Suggested Retail Prices.

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Motorcycle Registration Data and Market Share – 601+cc(a)

Industry retail registration data for new motorcycles and the Company's market share was as follows:


	Three months ended
	March 31, 2021		March 31, 2020		Increase (Decrease)	% Change
Industry new motorcycle registrations:
United States(b)	63,412		47,232		16,180	34.3	%
Europe(c)	100,341		95,504		4,837	5.1	%

Harley-Davidson market share data:
United States(b)	48.3	%	48.9	%	(0.6)	pts.
Europe(c)	3.9	%	7.6	%	(3.7)	pts.

(a)Data includes on-road models with internal combustion engines with displacements greater than 600cc's and electric motorcycles with kilowatt (kW) peak power equivalents greater than 600cc's (601+cc). On-road 601+cc models include dual purpose models, three-wheeled motorcycles and autocycles. Registration data for Harley-Davidson Street® 500 motorcycles is not included in this table.

(b)United States industry data is derived from information provided by Motorcycle Industry Council. This third-party data is subject to revision and update.

(c)Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Italy, Luxembourg, Netherlands, Norway, Spain, Sweden, Switzerland, and the United Kingdom. Industry data is derived from information provided by Management Services Helwig Schmitt GmbH. This third-party data is subject to revision and update.

Motorcycles and Related Products Segment

Motorcycle Unit Shipments

Wholesale Harley-Davidson motorcycle unit shipments were as follows:


	Three months ended
	March 28, 2021			March 29, 2020			Unit	Unit
	Units	Mix %		Units	Mix %		Increase (Decrease)	% Change

U.S. motorcycle shipments	40,153	73.3	%	33,024	62.3	%	7,129	21.6	%



Worldwide motorcycle shipments:
Touring motorcycle units	27,316	49.8	%	21,597	40.8	%	5,719	26.5	%
Cruiser motorcycle units(a)	20,468	37.3	%	20,131	38.0	%	337	1.7
Sportster® / Street motorcycle units	7,026	12.9	%	11,245	21.2	%	(4,219)	(37.5)
	54,810	100.0	%	52,973	100.0	%	1,837	3.5	%

(a) Includes Softail®, CVOTM, and LiveWireTM

The Company shipped 54,810 Harley-Davidson motorcycles worldwide during the first quarter of 2021, which was 3.5% higher than the same period in 2020 reflecting the positive impact of the change in new model year launch timing from August to the first quarter of 2021. In addition, wholesale shipments in the first quarter of 2020 were adversely impacted by the temporary suspension of the Company's global manufacturing operations in March 2020 resulting from the COVID-19 pandemic. The mix of Touring and Cruiser motorcycles shipped during the first quarter of 2021 increased as a percent of total shipments while the mix of Sportster/Street motorcycles decreased compared to the same period last year.

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Segment Results

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


	Three months ended
	March 28, 2021			March 29, 2020			Increase (Decrease)		% Change
Revenue:
Motorcycles	$	1,016,334		$	899,365		$	116,969	13.0	%
Parts & Accessories	149,859			134,685			15,174		11.3
General Merchandise	50,323			49,160			1,163		2.4
Licensing	5,512			8,029			(2,517)		(31.3)
Other	10,079			8,549			1,530		17.9
	1,232,107			1,099,788			132,319		12.0
Cost of goods sold	811,622			780,868			30,754		3.9
Gross profit	420,485			318,920			101,565		31.8
Operating expenses:
Selling & administrative expense	152,689			185,577			(32,888)		(17.7)
Engineering expense	40,857			48,776			(7,919)		(16.2)
Restructuring benefit	(593)			—			(593)		NM
	192,953			234,353			(41,400)		(17.7)
Operating income	$	227,532		$	84,567		$	142,965	169.1	%
Operating margin	18.5		%	7.7		%	10.8		pts.

The estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first three months of 2020 to the first three months of 2021 were as follows (in millions):


	Net Revenue		Cost of Goods Sold		Gross Profit
Three months ended March 29, 2020	$	1,100	$	781	$	319
Volume	35		25		10
Price and sales incentives, net of related costs	13		(4)		17
Foreign currency exchange rates and hedging	19		11		8
Shipment mix	65		8		57
Raw material prices	—		1		(1)
Manufacturing and other costs	—		(11)		11
	132		30		102
Three months ended March 28, 2021	$	1,232	$	811	$	421

Factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first three months of 2020 to the first three months of 2021 were as follows:

•The increase in volume was due to higher wholesale motorcycle shipments and higher Parts & Accessories sales.

•During the first three months of 2021, revenue benefited from lower sales incentives.

•Revenue was favorably impacted by stronger foreign currency exchange rates relative to the U.S. dollar. The favorable revenue benefit was partially offset by unfavorable net foreign currency losses associated with hedging and balance sheet remeasurements recorded in cost of goods sold.

•Changes in the shipment mix between motorcycle families had a favorable impact on gross profit during the first quarter of 2021 as the increased contribution from Touring models more than offset the impact of unit declines of less profitable small Cruiser models.

•Manufacturing and other costs benefited from cost savings resulting from the Company's 2020 restructuring actions and lower tariff costs, partially offset by higher COVID-19 pandemic related supply chain costs.

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Operating expenses were lower in the first quarter of 2021 compared to the same period in 2020 due primarily to lower costs as a result of the Company's 2020 restructuring actions and a shift in the timing of expenses, related to initiatives under The Hardwire, to subsequent quarters in 2021. Refer to Note 4 of the Notes to Consolidated financial statements for additional information regarding restructuring activities.

Financial Services Segment

Segment Results

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


	Three months ended
	March 28, 2021		March 29, 2020		(Decrease) Increase		% Change
Revenue:
Interest income	$	159,814	$	170,001	$	(10,187)	(6.0)	%
Other income	30,586		28,455		2,131		7.5
	190,400		198,456		(8,056)		(4.1)
Expenses:
Interest expense	55,707		52,473		3,234		6.2
Provision for credit losses	(22,474)		79,419		(101,893)		(128.3)
Operating expense	38,298		43,618		(5,320)		(12.2)
Restructuring expense	227		—		227		NM
	71,758		175,510		(103,752)		(59.1)
Operating income	$	118,642	$	22,946	$	95,696	417.0	%

Interest income was unfavorable in the first quarter of 2021, primarily due to lower average outstanding finance receivables, partially offset by a higher average yield. Other income increased due in part to higher insurance income. Interest expense increased due to higher average outstanding debt, partially offset by a lower cost of funds.

The provision for credit losses decreased $101.9 million compared to the first quarter of 2021 driven primarily by improving economic conditions during the first quarter of 2021 and favorable retail credit loss performance. The provision for credit losses was favorable as a result of improvement in the U.S. economy and the Company’s outlook on future economic conditions. However, there is uncertainty surrounding the pace of economic recovery as demonstrated by unemployment levels above those experienced prior to the COVID-19 pandemic and continuing COVID-19 pandemic-related challenges across the U.S., among other factors. As such, the Company considered various third-party economic forecast scenarios and applied a probability-weighting to those economic forecast scenarios. At the end of the first quarter of 2021, the Company's outlook on economic conditions included economic improvement; however, the pace of economic recovery remains uncertain. As a result, the Company included some adverse economic conditions in its economic scenario weighting. The Company’s expectations surrounding its economic forecasts may change in future periods as additional information becomes available.

The 30-day delinquency rate for retail motorcycle loans at March 28, 2021 was 2.14% compared to 3.37% at March 29, 2020. The improved delinquency rate was primarily driven by the benefits provided by U.S. federal stimulus packages as well as continued COVID-19 pandemic-related extensions granted to help customers get through financial difficulties associated with the pandemic. During the first quarter of 2021, the volume of payment extensions declined from the levels experienced during the second quarter and into the third quarter of 2020 but has not yet returned to pre-COVID-19 pandemic levels. The Company continues to grant payment extensions to customers in accordance with its policies. Annualized credit losses for the Company's retail motorcycle loans were 1.46% through March 28, 2021 compared to 2.73% through March 29, 2020. The favorable retail credit loss performance was due to the low delinquency levels as well as improved used motorcycle values at auction due to a limited supply of new and used motorcycles.

Operating expenses decreased $5.3 million compared to the first quarter of 2020 as the Company aggressively managed costs and benefited from lower costs resulting from the Company's 2020 restructuring actions. Refer to Note 4 of the Notes to Consolidated financial statements for additional information regarding restructuring activities.

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


	Three months ended
	March 28, 2021		March 29, 2020
Balance, beginning of period	$	390,936	$	198,581

Cumulative effect of change in accounting(a)	—		100,604
Provision for credit losses	(22,474)		79,419
Charge-offs, net of recoveries	(22,229)		(43,108)
Balance, end of period	$	346,233	$	335,496

(a)On January 1, 2020, the Company adopted ASU 2016-13 and increased the allowance for loan loss through Retained Earnings, net of income taxes, to establish an allowance that represents expected lifetime credit losses on the finance receivable portfolio at date of adoption.

Other Matters

Commitments and Contingencies

Liquidity and Capital Resources(1)

The Company's response to the COVID-19 pandemic included actions implemented during 2020 to preserve cash and secure additional liquidity. The Company continues to monitor its liquidity in light of uncertainty related to the potential impacts of the COVID-19 pandemic. Based on the Company's current outlook, for both the near and longer terms, it expects Motorcycles segment operations to continue to be funded primarily through cash flows generated by operations and Financial Services segment operations to continue to be funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities, committed unsecured bank facilities, asset-backed securitizations and deposits.(1)

The Company's cash allocation priorities are first to fund growth through The Hardwire initiatives, then to reward shareholders through dividends. In addition, given the Company’s strong cash position, it will be evaluating share repurchases and may choose to repurchase shares.

The Company's strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and cash equivalents and availability under its credit facilities. In response to liquidity concerns related to the COVID-19 pandemic, the Company increased its cash and cash equivalents during 2020. The Company's cash and cash equivalents remain elevated at the end of March 2021, but during the first quarter of 2021, the Company began to gradually reduce its cash and cash equivalents from December 2020 levels. The Company’s cash and cash equivalents and availability under its credit and conduit facilities at March 28, 2021 were as follows (in thousands):



Cash and cash equivalents	$	2,320,645



Availability under credit and conduit facilities:
Credit facilities	999,737
Asset-backed U.S. commercial paper conduit facility(a)	600,000
Asset-backed Canadian commercial paper conduit facility(a)	71,895
	$	3,992,277

(a)Includes facilities expiring in the next 12 months which the Company expects to renew prior to expiration.(1)

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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 March 28, 2021 were as follows:

Short-Term

Long-Term

Outlook

Moody’s

Baa3

Stable

Standard & Poor’s

BBB-

Stable

Fitch

BBB+

Negative

The Company recognizes that it must continue to monitor and adjust its business to changes in the lending environment. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding.(1) The Financial Services operations could be negatively affected by higher costs of funding and increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds available through its Financial Services operations to provide loans to independent dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital.

Cash Flow Activity

The Company's cash flow activities were as follows (in thousands):


	Three months ended
	March 28, 2021		March 29, 2020
Net cash provided (used) by operating activities	$	162,781	$	(8,582)
Net cash (used) provided by investing activities	(26,733)		28,288
Net cash (used) provided by financing activities	(1,012,719)		655,508
Effect of exchange rate changes on cash, cash equivalents and restricted cash	(5,163)		(5,732)
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(881,834)	$	669,482

Operating Activities

The increase in net cash from operating activities for the first three months of 2021 compared to the same period in 2020 reflects benefits from improved net income and favorable changes in working capital, including lower inventory. The Company continues to expect that it will generate sufficient cash inflows from operations to fund its ongoing operating cash requirements including those related to existing contractual commitments. The Company's purchase orders for inventory used in manufacturing generally do not become firm commitments until 90 days prior to expected delivery. The Company's material contractual operating cash commitments relate to leases, retirement plan obligations and income taxes. The Company's long-term lease obligations and future payments are discussed further in Note 10 of the Notes to Consolidated financial statements. There are no required qualified pension plan contributions in 2021. The Company’s expected future contributions and benefit payments related to its defined benefit retirement plans are discussed further in Note 15 of the Notes to Consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2020. The Company has a liability for unrecognized tax benefits of $51.4 million and related accrued interest and penalties of $26.1 million as of March 28, 2021. The Company cannot reasonably estimate the period of cash settlement for either the liability for unrecognized tax benefits or accrued interest and penalties.

Investing Activities

The Company’s most significant investing activities consist of capital expenditures and retail finance receivable originations and collections. Capital expenditures were $18.8 million in the first three months of 2021 compared to $32.9 million in the same period last year. The Company's 2021 plan includes estimated capital expenditures between $190 million to $220 million, all of which the Company expects to fund with net cash flow generated by operations.(1)

Net cash outflows from finance receivables for the first quarter of 2021 were $69.9 million higher compared to the same period last year due primarily to higher retail finance receivable originations. The Company funds its finance receivables net lending activity through the issuance of debt, discussed in "Financing Activities" below.

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Financing Activities

The Company’s financing activities consist primarily of dividend payments, share repurchases, and debt activity.

The Company paid dividends of $0.15 and $0.38 per share totaling $23.1 million and $58.8 million during the first three months of 2021 and 2020, respectively.

In the first quarter of 2020, the Company suspended discretionary share repurchases; as a result, there have been no discretionary share repurchases in 2021 or 2020. Share repurchases of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units during the first three months of 2021 and 2020 were $5.6 million or 0.2 million shares and $7.1 million or 0.2 million shares, respectively. As of March 28, 2021, there were 18.2 million shares remaining on board-approved share repurchase authorizations.

Financing cash flows related to debt and deposit activity resulted in net cash outflows of $985.1 million in the first three months of 2021 compared to net cash inflows of $721.4 million in the first three months of 2020. The Company’s total outstanding debt and deposits consisted of the following (in thousands):


	March 28, 2021		March 29, 2020
Outstanding debt:
Global credit facility borrowings	$	15,462	$	—
Unsecured commercial paper	749,801		1,335,664

Asset-backed Canadian commercial paper conduit facility	102,543		155,243
Asset-backed U.S. commercial paper conduit facilities	350,648		600,000
Asset-backed securitization debt, net	2,099,258		1,156,845
Medium-term notes, net	3,803,736		4,148,984
Senior notes, net	744,149		743,466
	$	7,865,597	$	8,140,202

Deposits, net	$	152,653	$	—

Refer to Note 11 of the Notes to Consolidated financial statements for a summary of future principal payments on the Company's debt obligations. Refer to Note 7 of the Notes to Consolidated financial statements for a summary of future maturities on the Company's certificates of deposit.

Deposits – During 2020, HDFS began offering brokered certificates of deposit to customers indirectly through contractual arrangements with third-party banks and/or securities brokerage firms through its bank subsidiary. The Company had $152.7 million, net of fees, of interest-bearing brokered certificates of deposit outstanding as of March 28, 2021. There were no deposits as of March 29, 2020. The deposits are classified as short- and long-term liabilities based upon the term of each brokered certificate of deposit issued. Each separate brokered certificate of deposit is issued under a master certificate, and as such, all outstanding brokered certificates of deposit are considered below the Federal Deposit Insurance Corporation insurance coverage limits.

Credit Facilities – In April 2020, the Company entered into a $707.5 million five-year credit facility to replace the $765.0 million five-year credit facility that was due to mature in April 2021. The new five-year credit facility matures in April 2025. At March 28, 2021, the Company had borrowings of $15.5 million outstanding under this facility, which the Company repaid in full on April 7, 2021. The Company also amended its $780.0 million five-year credit facility in April 2020 to $707.5 million with no change to the maturity date of April 2023. Additionally, the Company has a $350.0 million 364-day credit facility which matures in May 2021. The five-year credit facilities (together, the Global Credit Facilities), as well as the $350.0 million 364-day credit facility, bear interest at variable rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities and the $350.0 million 364-day credit facility also require the Company to pay a fee based on the average daily unused portion of the aggregate commitments. The Global Credit Facilities are committed facilities primarily used to support the Company's unsecured commercial paper program.

Unsecured Commercial Paper – Subject to limitations, the Company could issue unsecured commercial paper of up to $1.40 billion as of March 28, 2021 supported by the Global Credit Facilities, as discussed above. Outstanding unsecured commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. The Company intends to repay unsecured commercial paper as it matures with additional unsecured

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commercial paper or through other means, such as borrowing under the Global Credit Facilities or the $350.0 million 364-day credit facility, borrowing under its asset-backed U.S. commercial paper conduit facility or through the use of operating cash flow and cash on hand.(1)

Medium-Term Notes – The Company had the following unsecured medium-term notes issued and outstanding at March 28, 2021 (in thousands):

Principal Amount

Rate

Issue Date

Maturity Date

$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

$762,996(a)

4.94%

May 2020

May 2023

$704,304(b)

3.14%

November 2019

November 2024

$700,000

3.35%

June 2020

June 2025

(a)Euro denominated, €650.0 million par value remeasured to U.S. dollar at March 28, 2021

(b)Euro denominated, €600.0 million par value remeasured to U.S. dollar at March 28, 2021

The U.S. dollar-denominated medium-term notes provide for semi-annual interest payments and the foreign currency-denominated medium-term notes provide for annual interest payments. Principal on the medium-term notes is due at maturity. Unamortized discounts and debt issuance costs on the medium-term notes reduced the outstanding balance by $13.6 million and $11.0 million at March 28, 2021 and March 29, 2020, respectively. During the first quarter of 2021, $600.0 million of 2.85% medium-term notes and $450.0 million of floating-rate medium-term notes matured, and the principal and accrued interest were paid in full. During the first quarter of 2020, $600.0 million of 2.15% medium-term notes matured, and the principal and accrued interest were paid in full.

Senior Notes – In July 2015, the Company issued $750.0 million of unsecured senior notes in an underwritten offering. The senior notes provide for semi-annual interest payments and principal due at maturity. $450.0 million of the senior notes mature in July 2025 and have an interest rate of 3.50%, and $300.0 million of the senior notes mature in July 2045 and have an interest rate of 4.625%. The Company used the proceeds from the debt to repurchase shares of its common stock in 2015.

On-Balance Sheet Asset-Backed Canadian Commercial Paper Conduit Facility – 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 associated 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 expected remaining term of the related receivables is approximately 4 years. Unless earlier terminated or extended by mutual agreement between the Company and the lenders, as of March 28, 2021, the Canadian Conduit has an expiration date of June 25, 2021.

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The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates if funded by a conduit lender through the issuance of commercial paper. If not funded by a conduit lender through the issuance of commercial paper, the terms of the interest are based on LIBOR. In each of these cases, a program fee is assessed based on the outstanding principal. The U.S. Conduit Facility also provides for an unused commitment fee based on the unused portion of the total aggregate commitment. When calculating the unused fee, the aggregate commitment does not include any unused portion of the $300.0 million additional borrowings allowed. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit Facility, any outstanding principal will continue to be reduced monthly through available collections. The expected remaining term of the related receivables held by the SPE is approximately 4 years. Unless earlier terminated or extended by mutual agreement of the Company and the lenders, as of March 28, 2021, the U.S. Conduit Facility has an expiration date of November 19, 2021.

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. The Company's current outstanding asset-backed securitizations do not meet the criteria to be accounted for as a sale because, in addition to retaining servicing rights, the Company retains a financial interest in the VIE in the form of a debt security. These transactions are treated as secured borrowings. 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 currently have various contractual maturities ranging from 2022 to 2028.

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 medium-term and senior 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 allowance for credit losses on finance receivables plus HDFS’ consolidated shareholders' equity, excluding accumulated other comprehensive loss (AOCL), cannot exceed 10.0 to 1.0 as of the end of any fiscal quarter. In addition, the ratio of the Company's consolidated debt to the Company's consolidated debt and consolidated shareholders’ equity (where the Company's consolidated debt in each case excludes that of HDFS and its subsidiaries, and the Company's consolidated shareholders’ equity excludes AOCL), cannot exceed 0.7 to 1.0 as of the end of any fiscal quarter. No financial covenants are required under the medium-term or senior notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.

As of March 28, 2021, HDFS and the Company remained in compliance with all of the then existing covenants.

Cautionary Statements

Important factors that could affect future results and cause those results to differ materially from those expressed in the forward-looking statements include, among others, the following: (i) the COVID-19 pandemic, including the length and severity of the pandemic across the globe and the pace of recovery following the pandemic; and (ii) the Company’s ability to: (A) execute its business plans and strategies, including The Hardwire, successfully execute its remodeled approach to supply and inventory management, and strengthen its existing business while allowing for desirable growth; (B) mitigate the impact of the revocation of the Binding Origin Information (BOI) decisions that allowed the Company to supply its European Union (EU) market with certain of its motorcycles produced at its Thailand operations at a reduced tariff rate and favorably resolve risks and uncertainties related to the revocation of the BOI decisions including, among other: (1) uncertainties regarding the quantity and mix of motorcycles that the Company imports into the EU; (2) uncertainties regarding the import prices of motorcycles; (3) whether the Company will be granted temporary relief from the effect of the revocation of the BOI decisions; (4) whether the Company will be successful in appealing the revocation of the BOI decisions; (5) uncertainties regarding the size and duration of the EU tariffs; and (6) whether and to what extent the Company determines to attempt to pass on the impact of the revocation to dealers and its success in doing so; (C) accurately analyze, predict and react to changing market conditions and successfully adjust to shifting global consumer needs and interests; (D) successfully access the capital and/or credit markets on terms that are acceptable to the Company and within its expectations; (E) successfully carry out its global manufacturing and assembly operations; (F) develop and introduce products, services and experiences on a timely basis that the market accepts, that enable the Company to generate desired sales levels and that provide the desired financial returns, including successfully implementing and executing plans to strengthen and grow its leadership position in Touring, large Cruiser and Trike, and growing its complementary businesses; (G) perform in a manner that enables the Company to benefit from market opportunities while competing against existing and new competitors; (H) 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; (I) manage supply chain issues, including quality issues and any unexpected interruptions or price increases caused by raw material shortages or natural disasters; (J) manage the impact that prices for and supply of used motorcycles may have on its business, including on retail sales of new motorcycles; (K) realize expectations concerning market demand for electric models, which will depend in part on the building of necessary infrastructure; (L) successfully manage and reduce costs throughout the business; (M) manage through changes in general economic and business conditions, including changing capital, credit and retail markets, and the changing political environment; (N) 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; (O) develop and maintain a productive relationship with Zhejiang Qianjiang Motorcycle Co., Ltd. and launch related products in a timely manner; (P) develop and maintain a productive relationship with Hero MotoCorp as a distributor and licensee of the Harley-Davidson brand name in India; (Q) manage and predict the impact that new or adjusted tariffs may have on the Company’s ability to sell products internationally, and the cost of raw materials and components; (R) successfully maintain a manner in which to sell motorcycles in China and the Company’s Association of Southeast Asian Nations (ASEAN) countries that does not subject its motorcycles to incremental tariffs; (S) manage its Thailand corporate and manufacturing operation in a manner that allows the Company to avail itself of preferential free trade agreements and duty rates, and sufficiently lower prices of its motorcycles in certain markets; (T) accurately estimate and adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices; (U) retain and attract talented employees, and eliminate personnel duplication, inefficiencies and complexity throughout the organization; (V) prevent a cybersecurity breach involving consumer, employee, dealer, supplier,

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or Company data and respond to evolving regulatory requirements regarding data security; (W) manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS' loan portfolio; (X) adjust to tax reform, healthcare inflation and reform and pension reform, and successfully estimate the impact of any such reform on the Company's business; (Y) manage through the effects inconsistent and unpredictable weather patterns may have on retail sales of motorcycles; (Z) implement and manage enterprise-wide information technology systems, including systems at its manufacturing facilities; (AA) manage changes and prepare for requirements in legislative and regulatory environments for its products, services and operations; (BB) manage its exposure to product liability claims and commercial or contractual disputes; (CC) continue to manage the relationships and agreements that the Company has with its labor unions to help drive long-term competitiveness; (DD) accurately predict the margins of its Motorcycles and Related Products segment in light of, among other things, tariffs, the cost associated with product development initiatives and the Company’s complex global supply chain; and (EE) successfully develop and launch the pre-owned motorcycle program, Harley-Davidson Certified.

The Company's operations, demand for its products, and its liquidity could be adversely impacted by work stoppages, facility closures, strikes, natural causes, widespread infectious disease, terrorism, or other factors. Other factors are described in Item 1A. Risk Factors and 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, the impact of the COVID-19 pandemic, 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 this report and Item 1A. Risk Factors of the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 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 currency exchange rates, commodity prices and interest rates. To reduce such risks, the Company selectively uses derivative financial instruments. All hedging transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes. Sensitivity analysis is used to manage and monitor foreign currency exchange rate and interest rate risks. Further disclosure relating to the fair value of the Company's derivative financial instruments is included in Note 9 of the Notes to Consolidated financial statements.

Motorcycles and Related Products Segment

The Company sells its motorcycles and related products internationally and in most markets those sales are made in the foreign country’s local currency. As a result, the Motorcycles segment operating results are affected by fluctuations in the value of the U.S. dollar relative to foreign currencies. The Company’s most significant foreign currency exchange rate risk resulting from the sale of motorcycles and related products relates to the Euro, Australian dollar, Japanese yen, Brazilian real, Canadian dollar, Mexican peso, Chinese yuan, Thai baht, Indian rupee, Singapore dollar and Pound sterling. The Company utilizes foreign currency contracts to mitigate the effect of certain currencies' fluctuations on Motorcycles segment operating results. The foreign currency contracts are entered into with banks and allow the Company to exchange currencies at a future date, based on a fixed exchange rate. There have been no material changes to the foreign currency exchange rate market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

The Company purchases commodities for the use in the production of motorcycles. As a result, Motorcycles segment operating results are affected by changes in commodity prices. The Company uses derivative financial instruments on a limited basis to hedge the prices of certain commodities. There have been no material changes to the commodity market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

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Financial Services Segment

The Company has interest rate sensitive financial instruments including financial receivables, debt and interest rate derivative financial instruments. As a result, Financial Services operating income is affected by changes in interest rates. The Company utilizes interest rate caps to reduce the impact of fluctuations in interest rates on its asset-backed securitization transactions. There have been no material changes to the interest rate market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

HDFS also has short-term commercial paper and debt issued through the commercial paper conduit facilities that is subject to changes in interest rates which it does not hedge. There have been no material changes to the interest rate market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

The Company has foreign denominated medium-term notes. As a result, Financial Services operating income is affected by fluctuations in the value of the U.S. dollar relative to foreign currencies and interest rates. At March 28, 2021, this exposure related to the Euro. The Company utilizes cross-currency swaps to mitigate the effect of the foreign currency exchange rate and interest rate fluctuations related to foreign denominated debt. There have been no material changes to the foreign currency exchange rate and interest rate market risk information included in the Company's Annual Report on Form 10-K for the year ended December 31, 2020.

Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2020 for further information concerning the Company's market risk.

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 Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the President and Chief Executive Officer and the Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this 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 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 March 28, 2021 that materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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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 16 of the Notes to Consolidated financial statements, and such information is incorporated herein by reference in this Item 1 of Part II.

Item 1A. Risk Factors

An investment in Harley-Davidson, Inc. involves risks, including the risk factors discussed in Item 1A. Risk Factors of the Company's Annual Report on Form 10-K for the year ended December 31, 2020, which have not materially changed except as set forth below.

•Trade policies and changes in trade policies, including the imposition of tariffs, their enforcement and downstream consequences, may continue to have a material adverse impact on our business, results of operations and outlook. Tariffs and/or other developments with respect to trade policies, trade agreements and government regulations could have a material adverse impact on the Company's business, financial condition and results of operations. To date, the European Union (EU) has placed a 25% incremental tariff (31% total tariff) on motorcycles imported into the EU from the U.S. and that is scheduled to increase to a 50% incremental tariff (56% total tariff) effective June 1, 2021. Shipments of motorcycles to the European Union are a significant portion of the Company’s total motorcycles sales. Beginning in 2019, the Company obtained regulatory approvals, reflected in five Binding Origin Information (BOI) rulings, that allowed it to supply its EU markets with certain of its motorcycles produced at its Thailand facilities at tariff rates of 6%. In April 2021, the Company received notification from the Economic Ministry of Belgium that, following a request from the European Union, the Company would be subject to the revocation of the BOI rulings, effective April 19, 2021. Following the revocation, non-electric motorcycles Harley-Davidson imports into the European Union, regardless of origin, will be subject to a total tariff rate of 31% from April 19, 2021 to May 31, 2021. This rate is expected to increase to 56% effective June 1, 2021. This ruling will effectively prohibit the Company from functioning competitively in the European Union. The Company is appealing the revocation of the BOIs. It has also sought temporary extended reliance on the 6% tariff rate, for motorcycles produced in Thailand and ordered prior to April 19, 2021. There is no assurance that the appeal will be successful or that the Company will receive the extended reliance. The full impact of the revocation is subject to uncertainties that include the following, among other factors: (i) uncertainties regarding the quantity and mix of motorcycles that the Company imports into the EU; (ii) uncertainties regarding the import prices of motorcycles; (iii) whether the Company will be granted extended reliance on the 6% tariff rate for motorcycles ordered prior to April 19, 2021; (iv) whether the Company will be successful in appealing the revocation of the BOI rulings; (v) uncertainties regarding the size and duration of the EU tariffs; and (vi) whether and to what extent the Company determines to attempt to pass on the impact of the revocation to dealers and its success in doing so.

In addition, the U.S. government imposed increased tariffs on imports from China (Section 301 tariffs), which has resulted in higher costs for components and products sourced from China.

Without limitation, (i) tariffs currently in place, (ii) the imposition by the U.S. government of new tariffs on imports to the U.S. and/or (iii) the imposition by foreign countries of tariffs on U.S. products, including tariffs imposed in response to U.S. tariffs, could materially increase: (a) the cost of Harley-Davidson products that the Company is offering for sale in relevant countries, (b) the cost of certain products that the Company sources from foreign manufacturers and (c) the prices of certain raw materials that the Company utilizes. The Company may not be able to pass such increased costs on to distributors, independent dealers or their customers, and the Company may not be able to secure sources of certain products and materials that are not subject to tariffs on a timely basis. Such developments could have a material adverse impact on the Company's business, financial condition and results of operations.

The Company disclaims any obligation to update these risk factors or any other forward-looking statements. The Company assumes no obligation, and specifically disclaims any such obligation, to update these risk factors or any other forward-looking statements to reflect actual results, changes in assumptions or other factors affecting such forward-looking statements.

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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Company's share repurchases, which consisted of shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock units and performance shares, were as follows during the quarter ended March 28, 2021:


2021 Fiscal Month	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs
January 1 to January 31	2,815	$	36	2,815	18,246,721
February 1 to February 28	154,562	$	36	154,562	18,246,721
March 1 to March 28	479	$	36	479	18,246,721
	157,856	$	36	157,856

In February 2018, the Company's Board of Directors authorized the Company to repurchase up to 15.0 million shares of its common stock on a discretionary basis with no dollar limit or expiration date. In February 2020, the Company's Board of Directors authorized the Company to repurchase up to 10.0 million additional shares of its common stock on a discretionary basis with no dollar limit or expiration date. As of March 28, 2021, 18.2 million shares remained under these authorizations. The Company repurchased no shares on a discretionary basis during the quarter ended March 28, 2021.

Under the share repurchase authorizations, the Company’s common stock may be purchased through any one or more of a Rule 10b5-1 trading plan and discretionary purchases on the open market, block trades, accelerated share repurchases, or privately negotiated transactions. The number of shares repurchased, if any, and the timing of repurchases will depend on a number of factors, including share price, trading volume, and general market conditions, as well as on working capital requirements, general business conditions, and other factors. The repurchase authority has no expiration date but may be suspended, modified, or discontinued at any time.

The Harley-Davidson, Inc. 2020 Incentive Stock Plan and predecessor stock plans permit participants to satisfy all or a portion of the statutory federal, state, and local withholding tax obligations arising in connection with plan awards by electing to (a) have the Company withhold shares otherwise issuable under the award, (b) tender back shares received in connection with such award, or (c) deliver other previously owned shares, in each case having a value equal to the amount to be withheld. During the first quarter of 2021, the Company acquired 157,856 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock units and performance share units.

Item 6. Exhibits

Refer to the exhibit index immediately following this page.

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Harley-Davidson, Inc.

Exhibit Index to Form 10-Q


Exhibit No.						Description
3.1						Restated Articles of Incorporation of Harley-Davidson, Inc. as amended through May 28, 2020
3.2						Harley-Davidson By-Laws, as amended through May 28, 2020 (incorporated herein by reference to Exhibit 3.1 to the Registrant's Current Report on Form 8-K dated May 28, 2020 (File No. 1-9183))
10.1*						Amended and Restated Harley-Davidson, Inc. Director Stock Plan as amended and restated effective May 10, 2018 (incorporated herein by reference to Appendix A to the Company's definitive proxy statement on Schedule 14A for the Company's Annual Meeting of Shareholders held May 10, 2018 filed on March 29, 2018 (File No. 1-9183))
31.1						Chief Executive Officer Certification pursuant to Rule 13a-14(a)
31.2						Chief Financial Officer Certification pursuant to Rule 13a-14(a)
32.1						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
104						Cover Page Interactive Data File - formatted in Inline XBRL and contained in Exhibit 101

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

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: May 6, 2021			/s/ Gina Goetter
			Gina Goetter
			Chief Financial Officer
			(Principal financial officer)


Date: May 6, 2021			/s/ Mark R. Kornetzke
			Mark R. Kornetzke
			Chief Accounting Officer
			(Principal accounting officer)

Harley-Davidson - 10-Q quarterly report FY2021 Q1

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