Harley Davidson 2014 Annual Report Download - page 37

SERPA obligations from 5.08% as of December€31, 2013 to 4.21% as of December€31, 2014. The Company decreased the
discount rate for postretirement healthcare obligations from 4.70% to 3.99%. The Company determines its healthcare trend
assumption for the postretirement healthcare obligation by considering factors such as estimated healthcare inflation, the
utilization of healthcare benefits and changes in the health of plan participants. Based on the Company’s assessment of this data
as of December€31, 2014, the Company set its healthcare cost trend rate at 8.0% as of December€31, 2014. The Company
expects the healthcare cost trend rate to reach its ultimate rate of 5.0% by 2021.(1) These assumption changes were reflected
immediately in the benefit obligation and will be amortized into net periodic benefit costs over future periods.
In the fourth quarter of 2014, the Society of Actuaries (SOA) issued new mortality tables (RP-2014 and MP-2014).€The
Company’s base mortality assumption, used in measuring the 2014 retirement plan benefit obligations, was developed using the
RP 2014 table with weighted adjustments for the Company’s own credibility-adjusted mortality experience.€In addition, after
reviewing the SOA’s new MP-2014 table, the Company changed its long-term mortality projections to reflect longer anticipated
life expectancies.€The current assumptions represent the Company’s best estimate of mortality for its plan participants. The
change in mortality assumptions at the end of 2014 resulted in an increase to the Company’s projected benefit obligation for
pension plans of $64 million. The change did not have a meaningful impact on the accumulated benefit obligation for
postretirement healthcare plans.€These changes are considered actuarial losses and will be amortized to net periodic benefit cost
along with other actuarial gains and losses.€The Company will continue to review, and when necessary, adjust its mortality
assumptions in connection with the measurement of its retirement program obligations.
Plan assets are measured at fair value and are subject to market volatility. In estimating the expected return on plan assets,
the Company considers the historical returns on plan assets, adjusted to reflect the current view of the long-term investment
market.
Changes in the funded status of defined benefit pension and postretirement benefit plans resulting from the difference
between assumptions and actual results are initially recognized in other comprehensive income and amortized to expense over
future periods. The following information is provided to illustrate the sensitivity of pension and postretirement healthcare
obligations and costs to changes in these major assumptions (in thousands):€
Amounts€based
on current
assumptions
Impact€of€a€1%
decrease in the
discount rate
Impact€of€a€1%
decrease in the
expected
return€on€assets
Impact€of€a€1%
increase€in€the
healthcare
cost trend rate
2014 Net periodic benefit costs
Pension and SERPA $19,369 $24,624 $17,648 n/a
Postretirement healthcare $14,340 $1,256 $1,354 $1,587
2014 Benefit obligations
Pension and SERPA $2,069,980 $389,051 n/a n/a
Postretirement healthcare $361,006 $35,859 n/a $12,909
This information should not be viewed as predictive of future amounts. The calculation of pension, SERPA and
postretirement healthcare obligations and costs is based on many factors in addition to those discussed here. This information
should be considered in combination with the information provided in Note 13 of Notes to Consolidated Financial Statements.
Stock Compensation Costs – The total cost of the Company’s share-based equity awards is equal to the grant date fair
value per award multiplied by the number of awards granted (adjusted for forfeitures). This cost is recognized as expense on a
straight-line basis over the service periods of the awards. Forfeitures are initially estimated based on historical Company
information and subsequently updated over the life of the awards to ultimately reflect actual forfeitures. As a result, changes in
forfeiture activity can influence the amount of stock compensation cost recognized from period to period.
The Company estimates the fair value of option awards as of the grant date using a lattice-based option valuation model
which utilizes ranges of assumptions over the expected term of the options, including stock price volatility, dividend yield and
risk-free interest rate.
The valuation model uses historical data to estimate option exercise behavior and employee terminations. The expected
term of options granted is derived from the output of the option valuation model and represents the average period of time that
options granted are expected to be outstanding.
The Company uses implied volatility to determine the expected volatility of its stock. The implied volatility is derived
from options that are actively traded and the market prices of both the traded options and underlying shares are measured at a
similar point in time to each other and on a date reasonably close to the grant date of the employee stock options. In addition,
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