Employee Benefit Plans and Other Postretirement Benefits

The Company has a qualified defined benefit pension plan and several postretirement healthcare benefit plans, which cover employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. During 2012, the Company consolidated four qualified defined benefit pension plans into one qualified pension plan. The consolidation had no impact on participant benefits.

Pension benefits are based primarily on years of service and, for certain plans, levels of compensation. Employees are eligible to receive postretirement healthcare benefits upon attaining age 55 after rendering at least 10 years of service to the Company. Some of the plans require employee contributions to partially offset benefit costs.

Obligations and Funded Status:

The following table provides the changes in the benefit obligations, fair value of plan assets and funded status of the Company’s pension, SERPA and postretirement healthcare plans as of the Company’s December 31, 2012 and 2011 measurement dates (in thousands):



	Pension and SERPA Benefits						Postretirement Healthcare Benefits
	2012			2011			2012			2011
Change in benefit obligation
Benefit obligation, beginning of period	$	1,570,930		$	1,390,374		$	380,625		$	378,341
Service cost	33,681			37,341			7,413			7,630
Interest cost	83,265			80,805			18,310			19,644
Actuarial losses (gains)	276,069			127,259			23,367			(1,364		)
Plan participant contributions	1,459			3,441			1,561			1,527
Early Retirement Reinsurance Program Proceeds	—			—			—			2,249
Benefits paid, net of Medicare Part D subsidy	(93,829		)	(68,525		)	(28,049		)	(27,402		)
Net curtailments and settlements	—			235			—			—
Benefit obligation, end of period	1,871,575			1,570,930			403,227			380,625
Change in plan assets:
Fair value of plan assets, beginning of period	1,253,916			1,105,487			109,160			121,064
Actual return on plan assets	160,731			8,129			13,946			820
Company contributions	216,741			205,383			27,675			14,111
Plan participant contributions	1,459			3,441			1,561			1,527
Benefits paid	(93,829		)	(68,524		)	(29,236		)	(28,362		)
Fair value of plan assets, end of period	1,539,018			1,253,916			123,106			109,160
Funded status of the plans, December 31	$	(332,557	)	$	(317,014	)	$	(280,121	)	$	(271,465	)
Amounts recognized in the Consolidated Balance Sheets, December 31:
Accrued benefit liability (current liabilities)	$	(2,263	)	$	(14,531	)	$	(2,059	)	$	(2,883	)
Accrued benefit liability (long-term liabilities)	(330,294		)	(302,483		)	(278,062		)	(268,582		)
Net amount recognized	$	(332,557	)	$	(317,014	)	$	(280,121	)	$	(271,465	)

Benefit Costs:

Components of net periodic benefit costs for the years ended December 31 (in thousands):



	Pension and SERPA Benefits									Postretirement Healthcare Benefits
	2012			2011			2010			2012			2011			2010
Service cost	$	33,681		$	37,341		$	42,889		$	7,413		$	7,630		$	9,957
Interest cost	83,265			80,805			77,996			18,310			19,644			20,774
Expected return on plan assets	(117,110		)	(106,612		)	(97,376		)	(9,423		)	(9,386		)	(9,781		)
Amortization of unrecognized:
Prior service cost (credit)	2,958			2,981			4,383			(3,853		)	(3,878		)	(2,914		)
Net loss	43,874			30,266			23,872			7,421			7,192			9,394
Net curtailment loss	—			236			15,508			—			—			11,643
Settlement loss	6,242			274			4,673			—			—			—
Net periodic benefit cost	$	52,910		$	45,291		$	71,945		$	19,868		$	21,202		$	39,073

The 2010 Restructuring Plan actions discussed in Note 5 resulted in the pension and postretirement healthcare plan net curtailment losses noted in the table above and were included in restructuring expense in the consolidated income statement.

Amounts included in accumulated other comprehensive income, net of tax, at December 31, 2012 which have not yet been recognized in net periodic benefit cost are as follows (in thousands):



	Pension and SERPA Benefits		Postretirement Healthcare Benefits			Total
Prior service cost (credit)	$	3,489	$	(15,921	)	$	(12,432	)
Net actuarial loss	577,140		91,145			668,285
	$	580,629	$	75,224		$	655,853

Amounts expected to be recognized in net periodic benefit cost, net of tax, during the year ended December 31, 2013 are as follows (in thousands):



	Pension and SERPA Benefits		Postretirement Healthcare Benefits			Total
Prior service cost (credit)	$	1,099	$	(2,426	)	$	(1,327	)
Net actuarial loss	36,900		5,382			42,282
	$	37,999	$	2,956		$	40,955

Assumptions:

Weighted-average assumptions used to determine benefit obligations and net periodic benefit cost at December 31 were as follows:



	Pension and SERPA Benefits						Postretirement Healthcare Benefits
	2012		2011		2010		2012		2011		2010
Assumptions for benefit obligations:
Discount rate	4.23	%	5.30	%	5.79	%	3.93	%	4.90	%	5.28	%
Rate of compensation	4.00	%	3.49	%	3.49	%	n/a		n/a		n/a
Assumptions for net periodic benefit cost:
Discount rate	5.30	%	5.79	%	6.00	%	4.90	%	5.28	%	5.65	%
Expected return on plan assets	7.80	%	8.00	%	8.25	%	8.00	%	8.00	%	8.25	%
Rate of compensation increase	3.49	%	3.49	%	3.66	%	n/a		n/a		n/a

Pension and SERPA Accumulated Benefit Obligation:

Each of the Company’s pension and SERPA plans has a separately determined accumulated benefit obligation (ABO) and plan asset value. The ABO is the actuarial present value of benefits based on service rendered and current and past compensation levels. This differs from the projected benefit obligation (PBO) in that it includes no assumption about future compensation levels. The total ABO for all the Company’s pension and SERPA plans combined was $1.73 billion and $1.46 billion as of December 31, 2012 and 2011, respectively.

The following table summarizes information related to Company pension plans with a PBO in excess of the fair value of plan assets at December 31 (in millions):



	2012		2011
Pension plans with PBOs in excess of fair value of plan assets:
PBO	$	1,833.8	$	1,530.0
Fair value of plan assets	$	1,539.0	$	1,253.9
Number of plans	1		4

The following table summarizes information related to Company pension plans with an ABO in excess of the fair value of plan assets at December 31 (in millions):



	2012		2011
Pension plans with ABOs in excess of fair value of plan assets:
ABO	$	1,708.1	$	1,436.8
Fair value of plan assets	$	1,539.0	$	1,253.9
Number of plans	1		4

The Company’s SERPA plans, which can only be funded as claims are paid, had projected and accumulated benefit obligations of $37.8 million and $20.1 million, respectively, as of December 31, 2012 and $41.0 million and $27.4 million, respectively, as of December 31, 2011.

Plan Assets:

The Company’s investment objective is to ensure assets are sufficient to pay benefits while mitigating the volatility of retirement plan assets or liabilities recorded in the balance sheet. The company mitigates volatility through asset diversification and partial asset/liability matching. The investment portfolio contains a diversified blend of equity and fixed-income investments. The Company’s current overall targeted asset allocation as a percentage of total market value was approximately 68% equities and 32% fixed-income. Assets are rebalanced regularly to keep the actual allocation in line with targets. Equity holdings primarily include investments in small-, medium- and large-cap companies in the U.S. (including Company stock), investments in developed and emerging foreign markets and alternative investments such as private equity and real estate. Fixed-income holdings consist of U.S. government and agency securities, state and municipal bonds, corporate bonds from diversified industries and foreign obligations. In addition, cash equivalent balances are maintained at levels adequate to meet near-term plan expenses and benefit payments. Investment risk is measured and monitored on an ongoing basis through quarterly investment portfolio reviews.

The following tables present the fair values of the plan assets related to the Company’s pension and postretirement healthcare plans within the fair value hierarchy as defined in Note 8.

The fair values of the Company’s pension plan assets as of December 31, 2012 are as follows (in thousands):



	Balance as of December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	42,625	$	—	$	42,625	$	—
Equity holdings:
U.S. companies	540,579		540,578		1		—
Foreign companies	85,415		85,415		—		—
Harley-Davidson common stock	62,189		62,189		—		—
Pooled equity funds	309,878		309,878		—		—
Limited partnership interests	35,954		—		—		35,954
Other	628		—		—		628
Total equity holdings	1,034,643		998,060		1		36,582
Fixed-income holdings:
U.S. Treasuries	55,014		55,014		—		—
Federal agencies	14,302		—		14,302		—
Corporate bonds	189,643		—		189,643		—
Pooled fixed income funds	165,192		48,528		116,664		—
Foreign bonds	29,149		—		29,149		—
Municipal bonds	8,450		—		8,450		—
Total fixed-income holdings	461,750		103,542		358,208		—
Total pension plan assets	$	1,539,018	$	1,101,602	$	400,834	$	36,582

Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $62.2 million at December 31, 2012.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2012 (in thousands):



	Total			Limited Partnership Interests			Other
Balance, beginning of period	$	42,127		$	40,016		$	2,111
Actual return on plan assets:
Relating to assets still held at the reporting date	(820		)	(930		)	110
Purchases, sales and settlements	(4,725		)	(3,132		)	(1,593		)
Balance, end of period	$	36,582		$	35,954		$	628

The fair values of the Company’s postretirement healthcare plan assets, which did not contain any Level 3 assets, as of December 31, 2012, are as follows (in thousands):



	Balance as of December 31, 2012		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents	$	5,522	$	—	$	5,522
Equity holdings:
U.S. companies	60,658		60,658		—
Foreign companies	13,625		13,625		—
Pooled equity funds	27,617		27,617		—
Total equity holdings	101,900		101,900		—
Fixed-income holdings:
U.S. Treasuries	5,370		5,370		—
Federal agencies	3,489		—		3,489
Corporate bonds	6,033		—		6,033
Foreign bonds	659		—		659
Municipal bonds	133		—		133
Total fixed-income holdings	15,684		5,370		10,314
Total postretirement healthcare plan assets	$	123,106	$	107,270	$	15,836

The fair values of the Company’s pension plan assets as of December 31, 2011 are as follows (in thousands):



	Balance as of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
Assets:
Cash and cash equivalents	$	48,286	$	—	$	48,286	$	—
Equity holdings:
U.S. companies	533,030		529,630		3,400		—
Foreign companies	55,555		55,555		—		—
Harley-Davidson common stock	49,505		49,505		—		—
Pooled equity funds	166,460		166,460		—		—
Limited partnership interests	40,016		—		—		40,016
Other	2,111		—		—		2,111
Total equity holdings	846,677		801,150		3,400		42,127
Fixed-income holdings:
U.S. Treasuries	50,715		50,715		—		—
Federal agencies	51,290		—		51,290		—
Corporate bonds	77,295		—		77,295		—
Pooled fixed income funds	172,968		172,968		—		—
Foreign bonds	6,312		—		6,312		—
Municipal bonds	373		—		373		—
Total fixed-income holdings	358,953		223,683		135,270		—
Total pension plan assets	$	1,253,916	$	1,024,833	$	186,956	$	42,127

Included in the pension plan assets are 1,273,592 shares of the Company’s common stock with a market value of $49.5 million at December 31, 2011.

The following table presents a reconciliation of the fair value measurements using significant unobservable inputs (Level 3) as of December 31, 2011 (in thousands):



	Total			Limited Partnership Interests			Other
Balance, beginning of period	$	42,632		$	40,421		$	2,211
Actual return on plan assets:
Relating to assets still held at the reporting date	(2,888		)	(3,018		)	130
Purchases, sales and settlements	2,383			2,613			(230		)
Balance, end of period	$	42,127		$	40,016		$	2,111

The fair values of the Company’s postretirement healthcare plan assets, which did not contain any Level 3 assets, as of December 31, 2011, are as follows (in thousands):



	Balance as of December 31, 2011		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)
Assets:
Cash and cash equivalents	$	1,858	$	—	$	1,858
Equity holdings:
U.S. companies	79,544		79,091		453
Foreign companies	10,365		10,365		—
Total equity holdings	89,909		89,456		453
Fixed-income holdings:
U.S. Treasuries	7,237		7,237		—
Federal agencies	4,172		—		4,172
Corporate bonds	5,537		—		5,537
Foreign bonds	307		—		307
Municipal bonds	140		—		140
Total fixed-income holdings	17,393		7,237		10,156
Total postretirement healthcare plan assets	$	109,160	$	96,693	$	12,467

No plan assets are expected to be returned to the Company during the fiscal year ending December 31, 2013.

For 2013, the Company’s overall expected long-term rate of return on assets is 7.75%. The expected long-term rate of return is based on the portfolio as a whole and not on the sum of the returns on individual asset categories. The return is based on historical returns adjusted to reflect the current view of the long-term investment market.

Postretirement Healthcare Cost:

The weighted-average healthcare cost trend rate used in determining the accumulated postretirement benefit obligation of the healthcare plans was as follows:



	2012		2011
Healthcare cost trend rate for next year	7.5	%	8.5	%
Rate to which the cost trend rate is assumed to decline (the ultimate rate)	5.0	%	5.0	%
Year that the rate reaches the ultimate trend rate	2019		2019

This healthcare cost trend rate assumption can have a significant effect on the amounts reported. A one-percentage-point change in the assumed healthcare cost trend rate would have the following effects (in thousands):



	One Percent Increase		One Percent Decrease
Total of service and interest cost components in 2012	$	814	$	(789	)
Accumulated benefit obligation as of December 31, 2012	$	14,879	$	(13,948	)

Future Contributions and Benefit Payments:

In January 2013, the Company voluntarily contributed $175.0 million to further fund its qualified pension plans. No additional pension plan contributions are required in 2013. The Company expects it will continue to make on-going contributions related to current benefit payments for SERPA and postretirement healthcare plans in 2013⁽¹⁾.

The expected benefit payments and Medicare subsidy receipts for the next five years and thereafter are as follows (in thousands):



	Pension Benefits		SERPA Benefits		Postretirement Healthcare Benefits		Medicare Subsidy Receipts
2013	$	66,638	$	2,262	$	30,054	$	1,418
2014	$	67,587	$	2,725	$	30,449	$	1,639
2015	$	68,536	$	1,611	$	30,735	$	1,851
2016	$	70,042	$	1,691	$	30,247	$	2,104
2017	$	72,095	$	2,113	$	29,679	$	2,301
2018-2022	$	414,800	$	12,346	$	146,714	$	15,240

Defined Contribution Plans:

The Company has various defined contribution benefit plans that in total cover substantially all full-time employees. Employees can make voluntary contributions in accordance with the provisions of their respective plan, which includes a 401(k) tax deferral option. The Company expensed $15.3 million, $12.5 million and $12.6 million for Company contributions during 2012, 2011 and 2010, respectively.