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Document and Entity Information (USD  $)
12 Months Ended
Dec. 31, 2010
Jan. 31, 2011
Jun. 27, 2010
Document Type 10-K
Document Period End Date Dec 31, 2010
Document Fiscal Year Focus 2010
Document Fiscal Period Focus FY
Amendment Flag false
Entity Registrant Name HARLEY DAVIDSON INC
Entity Central Index Key 0000793952
Entity Current Reporting Status Yes
Entity Voluntary Filers Yes
Current Fiscal Year End Date --12-31
Entity Filer Category Large Accelerated Filer
Entity Well-known Seasoned Issuer Yes
Entity Common Stock, Shares Outstanding 235,521,693
Entity Public Float  $ 5,691,839,774
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CONSOLIDATED STATEMENTS OF OPERATIONS (USD  $)
In Thousands, except Per Share data
12 Months Ended
Dec. 31, 2010
Dec. 31, 2009
Dec. 31, 2008
Revenue:
Motorcycles and related products  $ 4,176,627  $ 4,287,130  $ 5,578,414
Financial services 682,709 494,779 376,970
Total revenue 4,859,336 4,781,909 5,955,384
Costs and expenses:
Motorcycles and related products cost of goods sold 2,749,224 2,900,934 3,647,270
Financial services interest expense 272,484 283,634 136,763
Financial services provision for credit losses 93,118 169,206 39,555
Selling, administrative and engineering expense 1,020,371 979,384 1,060,154
Restructuring expense and other impairments 163,508 224,278 12,475
Goodwill impairment 28,387
Total costs and expenses 4,298,705 4,585,823 4,896,217
Operating income 560,631 196,086 1,059,167
Investment income 5,442 4,254 11,296
Interest expense 90,357 21,680 4,542
Loss on debt extinguishment 85,247
Income before provision for income taxes 390,469 178,660 1,065,921
Provision for income taxes 130,800 108,019 381,686
Income from continuing operations 259,669 70,641 684,235
Loss from discontinued operations, net of tax (113,124) (125,757) (29,517)
Net income (loss)  $ 146,545  $ (55,116)  $ 654,718
Earnings per common share from continuing operations:
Basic  $ 1.11  $ 0.3  $ 2.92
Diluted  $ 1.11  $ 0.3  $ 2.92
Loss per common share from discontinued operations:
Basic  $ (0.48)  $ (0.54)  $ (0.13)
Diluted  $ (0.48)  $ (0.54)  $ (0.13)
Earnings (loss) per common share:
Basic  $ 0.63  $ (0.24)  $ 2.8
Diluted  $ 0.62  $ (0.24)  $ 2.79
Cash dividends per common share  $ 0.4  $ 0.4  $ 1.29
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CONSOLIDATED BALANCE SHEETS (USD  $)
In Thousands
12 Months Ended
Dec. 31, 2010
Dec. 31, 2009
Current assets:
Cash and cash equivalents  $ 1,021,933  $ 1,630,433
Marketable securities 140,118 39,685
Accounts receivable, net 262,382 269,371
Finance receivables held for investment, net 1,080,432 1,436,114
Restricted finance receivables held by variable interest entities, net 699,026
Inventories 326,446 323,029
Assets of discontinued operations 181,211
Restricted cash held by variable interest entities 288,887
Deferred income taxes 146,411 179,685
Other current assets 100,991 282,421
Total current assets 4,066,626 4,341,949
Finance receivables held for investment, net 1,553,781 3,621,048
Restricted finance receivables held by variable interest entities, net 2,684,330
Property, plant and equipment, net 815,112 906,906
Goodwill 29,590 31,400
Deferred income taxes 213,989 177,504
Other long-term assets 67,312 76,711
Total Assets 9,430,740 9,155,518
Current liabilities:
Accounts payable 225,346 162,515
Accrued liabilities 556,671 514,084
Liabilities of discontinued operations 69,535
Short-term debt 480,472 189,999
Current portion of long-term debt 1,332,091
Current portion of long-term debt held by variable interest entities 751,293
Total current liabilities 2,013,782 2,268,224
Long-term debt 2,516,650 4,114,039
Long-term debt held by variable interest entities 2,003,941
Pension liability 282,085 245,332
Postretirement healthcare liability 254,762 264,472
Other long-term liabilities 152,654 155,333
Commitments and contingencies (Note 17)    
Shareholders' equity:
Series A Junior participating preferred stock, none issued    
Common stock, 338,260,456 and 336,800,970 shares issued in 2010 and 2009, respectively 3,382 3,368
Additional paid-in-capital 908,055 871,100
Retained earnings 6,336,077 6,324,268
Accumulated other comprehensive loss (366,222) (417,898)
Stockholders equity before treasury stock 6,881,292 6,780,838
Less: Treasury stock (102,739,587 and 102,487,275 shares in 2010 and 2009, respectively), at cost (4,674,426) (4,672,720)
Total shareholders' equity 2,206,866 2,108,118
Total liabilities and shareholders' equity  $ 9,430,740  $ 9,155,518
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CONSOLIDATED BALANCE SHEETS (Parenthetical)
Dec. 31, 2010
Dec. 31, 2009
CONSOLIDATED BALANCE SHEETS
Preferred stock, shares issued 0 0
Common stock, shares issued 338,260,456 336,800,970
Treasury stock, shares 102,739,587 102,487,275
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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD  $)
In Thousands
12 Months Ended
Dec. 31, 2010
Dec. 31, 2009
Dec. 31, 2008
Net cash provided by (used by) operating activities of continuing operations (Note 2)  $ 1,163,418  $ 609,010  $ (608,029)
Cash flows from investing activities of continuing operations:
Capital expenditures (170,845) (116,748) (228,959)
Originations of finance receivables (2,252,532) (1,378,226) (608,621)
Collections on finance receivables 2,668,962 607,168 448,990
Collection of retained securitization interests 61,170 93,747
Purchases of marketable securities (184,365) (39,685)
Sales and redemptions of marketable securities 84,217 2,543
Other, net 2,834 (2,575)
Net cash provided by (used by) investing activities of continuing operations 145,437 (863,487) (294,875)
Cash flows from financing activities of continuing operations:
Proceeds from issuance of medium term notes 496,514 993,550
Repayment of medium term notes (200,000) (400,000)
Proceeds from issuance of senior unsecured notes 595,026
Repayment of senior unsecured notes (380,757)
Proceeds from securitization debt 598,187 2,413,192
Repayments of securitization debt (1,896,665) (263,083)
Net increase (decrease) in credit facilities and unsecured commercial paper 30,575 (1,083,331) 761,065
Net change in asset-backed commercial paper (845) (513,168) 490,000
Net change in restricted cash 77,654 (167,667)
Dividends (94,145) (93,807) (302,314)
Purchase of common stock for treasury (1,706) (1,920) (250,410)
Excess tax benefits from share-based payments 3,767 170 320
Issuance of common stock under employee stock option plans 7,845 11 1,179
Net cash (used by) provided by financing activities of continuing operations (1,856,090) 1,381,937 1,293,390
Effect of exchange rate changes on cash and cash equivalents of continuing operations 4,940 6,789 (20,352)
Net (decrease) increase in cash and cash equivalents of continuing operations (542,295) 1,134,249 370,134
Cash flows from discontinued operations:
Cash flows from operating activities of discontinued operations (71,073) (71,298) (75,028)
Cash flows from investing activities of discontinued operations (18,805) (99,963)
Effect of exchange rate changes on cash and cash equivalents of discontinued operations (1,195) (1,208) (4,439)
Net cash used by discontinued operations, total (72,268) (91,311) (179,430)
Net (decrease) increase in cash and cash equivalents (614,563) 1,042,938 190,704
Cash and cash equivalents:
Cash and cash equivalents - beginning of period 1,630,433 568,894 402,854
Cash and cash equivalents of discontinued operations - beginning of period 6,063 24,664
Net (decrease) increase in cash and cash equivalents (614,563) 1,042,938 190,704
Less: Cash and cash equivalents of discontinued operations - end of period (6,063) (24,664)
Cash and cash equivalents - end of period  $ 1,021,933  $ 1,630,433  $ 568,894
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (USD  $)
In Thousands, except Share data
Common Stock [Member]
Additional paid-in capital [Member]
Retained Earnings [Member]
Other comprehensive income (loss) [Member]
Treasury Balance [Member]
Total
Beginning Balance, shares at Dec. 31, 2007 335,211,201
Beginning Balance, value at Dec. 31, 2007  $ 3,352  $ 812,224  $ 6,117,567  $ (137,258)  $ (4,420,394)  $ 2,375,491
Comprehensive income:
Net income (loss) 654,718 654,718
Other comprehensive income (loss):
Foreign currency translation adjustment (44,012) (44,012)
Amortization of net prior service cost, net of taxes 3,116 3,116
Amortization of actuarial loss, net of taxes 7,376 7,376
Pension and postretirement plan funded status adjustment, net of taxes (347,165) (347,165)
Change in net unrealized gains (losses):
Investment in retained securitization interest, net of (taxes) benefit (18,838) (18,838)
Derivative financial instruments, net of taxes 11,556 11,556
Marketable securities, net of taxes 76 76
Adjustment to apply measurement date provisions of SFAS No. 158, net of taxes (11,193) 2,623 (8,570)
Dividends (302,314) (302,314)
Repurchase of common stock (250,410) (250,410)
401(k) match made with Treasury Shares 9,166 2 9,168
Share-based compensation 24,021 24,021
Issuance of nonvested stock (in shares) 384,761
Issuance of nonvested stock 4 (4)
Exercise of stock options 1 1,178 1,179
Exercise of stock options (in shares) 57,615
Tax benefit of stock options 211 211
Ending Balance, shares at Dec. 31, 2008 335,653,577
Ending Balance, value at Dec. 31, 2008 3,357 846,796 6,458,778 (522,526) (4,670,802) 2,115,603
Comprehensive income:
Net income (loss) (55,116) (55,116)
Other comprehensive income (loss):
Foreign currency translation adjustment 30,932 30,932
Amortization of net prior service cost, net of taxes 2,679 2,679
Amortization of actuarial loss, net of taxes 11,761 11,761
Pension and postretirement plan funded status adjustment, net of taxes 29,111 29,111
Pension and post-retirement plan settlement and curtailment, net of taxes 32,197 32,197
Change in net unrealized gains (losses):
Investment in retained securitization interest, net of (taxes) benefit 13,600 13,600
Derivative financial instruments, net of taxes (1,239) (1,239)
Adjustment to apply measurement date provisions of FSP 115-2, net of taxes 14,413 (14,413)
Dividends (93,807) (93,807)
Repurchase of common stock (1,920) (1,920)
401(k) match made with Treasury Shares 11,066 2 11,068
Share-based compensation 16,297 16,297
Issuance of nonvested stock (in shares) 1,147,393
Issuance of nonvested stock 11 (11)
Tax benefit of stock options (3,048) (3,048)
Ending Balance, shares at Dec. 31, 2009 336,800,970
Ending Balance, value at Dec. 31, 2009 3,368 871,100 6,324,268 (417,898) (4,672,720) 2,108,118
Comprehensive income:
Net income (loss) 146,545 146,545
Other comprehensive income (loss):
Foreign currency translation adjustment 9,449 9,449
Amortization of net prior service cost, net of taxes 925 925
Amortization of actuarial loss, net of taxes 20,944 20,944
Pension and postretirement plan funded status adjustment, net of taxes 18,431 18,431
Pension and post-retirement plan settlement and curtailment, net of taxes 1,549 1,549
Change in net unrealized gains (losses):
Derivative financial instruments, net of taxes (2,972) (2,972)
Marketable securities, net of taxes (133) (133)
Adjustment for consolidation of QSPEs under ASC Topics 810 and 860 (40,591) 3,483 (37,108)
Dividends (94,145) (94,145)
Repurchase of common stock (1,706) (1,706)
Share-based compensation 26,961 26,961
Issuance of nonvested stock (in shares) 823,594
Issuance of nonvested stock 8 (8)
Exercise of stock options 6 7,839 7,845
Exercise of stock options (in shares) 635,892
Tax benefit of stock options 2,163 2,163
Ending Balance, shares at Dec. 31, 2010 338,260,456
Ending Balance, value at Dec. 31, 2010  $ 3,382  $ 908,055  $ 6,336,077  $ (366,222)  $ (4,674,426)  $ 2,206,866
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CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (Parenthetical) (USD  $)
In Thousands
12 Months Ended
Dec. 31, 2010
Dec. 31, 2009
Dec. 31, 2008
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Amortization of net prior service cost, taxes  $ (544)  $ (1,576)  $ (1,919)
Amortization of actuarial loss, taxes (12,322) (6,919) (4,539)
Pension and post-retirement plan funded status adjustment, taxes (7,056) (17,126) (203,485)
Pension and post-retirement plan settlement and curtailment, taxes (911) (18,942)
Investment in retained securitization interests, tax (expense) benefit (7,619) 10,252
Derivative financial instruments, tax (expense) benefit 1,761 1,184 (7,464)
Adjustment to apply measurement date provisions of SFAS No.158, taxes (6,887)
Marketable securities, taxes 78 45
Adjustment to apply measurement date provisions of FSP 115-2, taxes  $ (8,108)
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Summary of Significant Accounting Policies
12 Months Ended
Dec. 31, 2010
Summary of Significant Accounting Policies

1.    Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation – The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the groups of companies doing business as Harley-Davidson Motor Company (HDMC), Harley-Davidson Financial Services (HDFS) and Buell Motorcycle Company (Buell). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and transactions are eliminated.

All of the Company's subsidiaries are wholly owned and are included in the consolidated financial statements. Substantially all of the Company's international subsidiaries use their respective local currency as their functional currency. Assets and liabilities of international subsidiaries have been translated at period-end exchange rates, and income and expenses have been translated using average exchange rates for the period.

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

During 2008, the Company acquired Italian motorcycle manufacturer MV Agusta (MV). On October 15, 2009, the Company announced its intent to divest MV and completed the sale of MV on August 6, 2010. MV is presented as a discontinued operation for all periods.

Use of Estimates – The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and Cash Equivalents – The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.

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

 

     December 31,
2010
     December 31,
2009
 

Available-for-sale:

     

Corporate bonds

    $ 50,231        $ 39,685   

U.S. Treasuries

     89,887         —     
                 
    $ 140,118        $ 39,685   
                 

The Company's available-for-sale securities have maturities of less than one year and are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During 2010, the Company recognized gross unrealized losses of  $0.2 million, or  $0.1 million net of tax, to adjust amortized cost to fair value. As of December 31, 2009, fair value approximated carrying value and as such no adjustment was required.

Accounts Receivable – The Company's motorcycles and related products are sold to independent dealers and distributors outside the U.S. and Canada generally on open account and the resulting receivables are included in accounts receivable in the Company's Consolidated Balance Sheets. The allowance for doubtful accounts deducted from total accounts receivable was  $10.4 million and  $11.4 million as of December 31, 2010 and 2009, respectively. Accounts receivable are written down once management determines that the specific customer does not have the ability to repay the balance in full. The Company's sales of motorcycles and related products in the U.S. and Canada are financed by the purchasing dealers or distributors through HDFS and the related receivables are included in finance receivables held for investment in the consolidated balance sheets.

 

Finance Receivables, Net – Finance receivables include both retail and wholesale finance receivables held for investment, net and restricted finance receivables held by VIEs, net. Finance receivables are recorded in the financial statements at historical cost net of an allowance for credit losses. The provision for credit losses on finance receivables is charged to earnings in amounts sufficient to maintain the allowance for uncollectible accounts at a level that is adequate to cover losses of principal inherent in the existing portfolio. Portions of the allowance for uncollectible accounts are specified to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance covers estimated losses on finance receivables which are collectively reviewed for impairment. Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement.

The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. HDFS performs a periodic and systematic collective evaluation of the adequacy of the retail allowance. HDFS utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and therefore are not reported as impaired loans.

The wholesale portfolio is primarily composed of large balance, non-homogeneous finance receivables. The Company's wholesale allowance evaluation is first based on a loan-by-loan review. A specific allowance is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan's original interest rate or the fair value of the collateral, if the loan is collateral-dependent. In establishing the allowance, management considers a number of factors including the specific borrower's financial performance as well as ability to repay. As described in Financial Services Revenue Recognition, the accrual of interest on such finance receivables is discontinued when the collection of the account becomes doubtful. While a finance receivable is considered impaired, all cash received is applied to principal or interest as appropriate.

Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company's internal risk rating system and collectively evaluated for impairment. The related allowance is based on factors such as the Company's past loan loss experience, current economic conditions as well as the value of the underlying collateral.

Impaired finance receivables also include loans that have been modified in troubled debt restructurings as a concession to borrowers experiencing financial difficulty. Generally, it is the Company's policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss the Company may modify certain impaired finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.

Repossessed inventory is recorded at the lower of cost or net realizable value and is reclassified from finance receivables to other current assets with any related loss recognized in the period during which the asset was transferred. Repossessed inventory was  $26.5 million and  $19.1 million at December 31, 2010 and 2009, respectively.

Finance Receivables Held for Sale – Prior to the second quarter of 2009, U.S. retail motorcycle finance receivables intended for securitization at origination were classified as finance receivables held for sale. These finance receivables held for sale in the aggregate were carried at the lower of cost or estimated fair value. Any amount by which cost exceeded fair value was accounted for as a valuation adjustment with an offset to other income. Cash flows related to finance receivables held for sale were included in cash flows from operating activities.

 

Off-Balance Sheet Finance Receivables Securitizations – Prior to 2009, HDFS sold U.S. retail motorcycle finance receivables through securitization transactions that qualified for accounting sale treatment under prior U.S. GAAP. Under the terms of securitization transactions, HDFS sold U.S. retail motorcycle finance receivables to a securitization trust utilizing the two-step process described below. The securitization trust issued notes to investors, with various maturities and interest rates, secured by future collections of purchased U.S. retail motorcycle finance receivables. The proceeds from the issuance of the term asset-backed securities were utilized by the securitization trust to purchase U.S. retail motorcycle finance receivables from HDFS.

Upon sale of the U.S. retail motorcycle finance receivables to the securitization trust, HDFS received cash, recorded a gain or loss on the transaction and also retained an interest in excess cash flows, subordinated securities, and the right to receive cash reserve account deposits in the future, collectively referred to as "investment in retained securitization interests." The investment in retained securitization interests was included with finance receivables held for investment in the consolidated balance sheets. The Company's continuing involvement in the securitized U.S. retail motorcycle finance receivables was limited to its investment in retained securitization interests and servicing rights.

The interest in excess cash flows reflected the expected cash flows arising from U.S. retail motorcycle finance receivables sold to the securitization trust less expected servicing fees, credit losses and contracted payment obligations owed to securitization trust investors. Key assumptions in determining the present value of projected excess cash flows were prepayments, credit losses and discount rate. The fair value of the interest in excess cash flows was  $77.4 million at December 31, 2009.

As part of the first quarter 2008 securitization transaction, HDFS retained  $54.0 million of the subordinated securities issued by the securitization trust. These securities had a stated principal and fixed interest rate and were subordinated to the senior securities within the securitization trust. Fair value was determined using discounted cash flow methodologies. The fair value of the retained subordinated securities was  $53.1 million as of December 31, 2009. Unrealized gains on the subordinated securities recorded in other comprehensive income were  $0.05 million, or  $0.03 million net of taxes, as of December 31, 2009.

Reserve account deposits represented interest-earning cash deposits which collateralized the trust securities. The funds were not available for use by HDFS until the reserve account balances exceeded thresholds specified in the securitization agreements. The fair value of the reserve account deposits was  $114.8 million at December 31, 2009.

HDFS retained servicing rights on the U.S. retail motorcycle finance receivables that it had sold to the securitization trust and received a servicing fee. The servicing fee paid to HDFS was considered adequate compensation for the services provided and was included in financial services revenue as earned. HDFS earned  $42.0 million and  $55.1 million from contractually specified servicing fees, late fees, and ancillary fees during 2009 and 2008, respectively. These fees were recorded in financial services revenue.

Gains or losses on off-balance sheet term asset-backed securitizations of U.S. retail motorcycle finance receivables were recognized in the period in which the sale occurred. The amount of the gain or loss depended on the proceeds received and the original carrying amount of the transferred U.S. retail motorcycle finance receivables, allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer.

The investment in retained securitization interests was measured in the same manner as an investment in debt securities that is classified as available-for-sale as defined by ASC Topic 320, "Investments – Debt and Equity Securities" (ASC Topic 320). As such, the investment in retained securitization interests was recorded at fair value and periodically reviewed for impairment. Market quotes of fair value are generally not available for retained interests; therefore, HDFS estimated fair value based on the present value of future expected cash flows using HDFS' best estimates of key assumptions for credit losses, prepayments and discount rates that, in management's judgment, reflected the assumptions marketplace participants would use. If the fair value of the investment in retained securitization interests was less than the amortized cost, an unrealized loss existed which indicated that the investment was other-than-temporarily impaired.

HDFS utilized a two-step process to transfer U.S. retail motorcycle finance receivables to a securitization trust. U.S. retail motorcycle finance receivables were initially transferred to a special purpose, bankruptcy remote, wholly-owned subsidiary which in turn sold the U.S. retail motorcycle finance receivables to the securitization trust. The securitization trust was funded with cash obtained through the issuance of the term asset-backed securities. HDFS surrendered control of retail finance receivables sold to the securitization trust. Securitization transactions were structured such that: (1) transferred assets were isolated from HDFS by being put presumptively beyond the reach of HDFS and its creditors, even in bankruptcy or other receivership; (2) each holder of a beneficial interest in the securitization trust had the right to pledge or exchange their interest; and (3) HDFS did not maintain effective control over the transferred assets through either (a) an agreement that both entitled and obligated HDFS to repurchase or redeem the transferred assets before their maturity other than for breaches of certain representations, warranties and covenants relating to the transferred assets, or (b) the ability to unilaterally cause the holder to return specific assets, other than through a customary cleanup call.

Activities of the securitization trust were limited to acquiring U.S. retail motorcycle finance receivables, issuing term asset-backed securities, making payments on securities to investors and other activities permissible under prior U.S. GAAP. Securitization trusts had a limited life and generally terminated upon final distribution of amounts owed to the investors in the term asset-backed securities. Historically, the life of securitization trusts that purchased U.S. retail motorcycle finance receivables from HDFS approximated four years.

HDFS did not guarantee payments on the securities issued by the securitization trusts or the projected cash flows from the U.S. retail motorcycle finance receivables purchased from HDFS. The Company's retained securitization interests, excluding servicing rights, were subordinate to the interests of securitization trust investors. Such investors had priority interests in the cash collections on the U.S. retail motorcycle finance receivables sold to the securitization trust (after payment of servicing fees) and in the cash reserve account deposits. Investors also did not have recourse to the assets of HDFS for failure of the obligors on the retail finance receivables to pay when due.

Due to the overall structure of the securitization transaction, the nature of the assets held by the securitization trust and the limited nature of its activities, the securitization trusts were considered qualifying special purpose entities (QSPEs). Accordingly, gain or loss on sale was recognized upon transfer of retail finance receivables to a QSPE and the assets and liabilities of the QSPEs were not consolidated in the financial statements of HDFS. See Note 7 for further discussion of HDFS' securitization program.

As discussed later under New Accounting Standards, the Company was required to adopt new guidance regarding the consolidation of off-balance sheet QSPEs.

Asset-Backed Financing – HDFS participates in asset-backed financing through both term asset-backed securitization transactions and its asset-backed commercial paper conduit facility. In both types of asset-backed financing programs, HDFS transfers U.S. retail motorcycle finance receivables to a consolidated special purpose entity (SPE) while retaining the servicing rights. Each SPE then converts those assets into cash, through the issuance of debt. These SPEs are considered VIEs under U.S. GAAP. HDFS is required to consolidate any VIEs in which it is deemed to be the primary beneficiary through having power over the significant activities of the entity and having an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE.

HDFS is considered to have the power over the significant activities of its term asset-backed securitization and asset-backed commercial paper conduit facility VIEs due to its role as servicer. Servicing fees are typically not considered potentially significant variable interests in a VIE. However, HDFS retains a residual interest in the VIEs in the form of a debt security, which gives HDFS the right to receive benefits that could be potentially significant to the VIE. Therefore, the Company is the primary beneficiary and consolidates all of its VIEs within its consolidated financial statements. Servicing fees paid by VIEs to HDFS are eliminated in consolidation and therefore no longer recorded on a consolidated basis.

HDFS is not required, and does not currently intend, to provide any additional financial support to its VIEs. Investors and creditors only have recourse to the assets held by the VIEs.

The Company's VIEs have been aggregated on the balance sheet due to the similarity of the nature of the assets involved as well as the purpose and design of the VIEs.

Inventories – Inventories are valued at the lower of cost or market. Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories totaling  $153.4 million at December 31, 2010 and  $141.9 million at December 31, 2009 are valued at the lower of cost or market using the first-in, first-out (FIFO) method.

Property, Plant and Equipment – Property, plant and equipment is recorded at cost. Depreciation is determined on the straight-line basis over the estimated useful lives of the assets. The following useful lives are used to depreciate the various classes of property, plant and equipment: buildings – 30 to 40 years; building equipment and land improvements – 7 to 10 years; and machinery and equipment – 3 to 10 years. Accelerated methods of depreciation are used for income tax purposes.

Goodwill – Goodwill represents the excess of acquisition cost over the fair value of the net assets purchased. Goodwill is tested for impairment, based on financial data related to the reporting unit to which it has been assigned, at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment test involves comparing the estimated fair value of the reporting unit associated with the goodwill to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, goodwill must be adjusted to its implied fair value. During 2010, the Company tested its goodwill balances for impairment and no adjustments were recorded to goodwill as a result of those reviews. During 2009, the Company tested its goodwill balances for impairment; see Note 5 for additional discussion.

Long-lived Assets – The Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset for assets to be held and used. The Company also reviews the useful life of its long-lived assets when events and circumstances indicate that the actual useful life may be shorter than originally estimated. In the event that the actual useful life is deemed to be shorter than the original useful life, depreciation is adjusted prospectively so that the remaining book value is depreciated over the revised useful life.

Asset groups classified as held for sale are measured at the lower of carrying amount or fair value less cost to sell, and a loss is recognized for any initial adjustment required to reduce the carrying amount to the fair value less cost to sell in the period the held for sale criteria are met. The fair value less cost to sell must be assessed each reporting period the asset group remains classified as held for sale. Gains or losses not previously recognized resulting from the sale of an asset group will be recognized on the date of sale.

Product Warranty and Safety Recall Campaigns – The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except for Japan, where the Company provides a standard three-year limited warranty on all new motorcycles sold. The warranty coverage for the retail customer includes parts and labor and generally begins when the motorcycle is sold to a retail customer. The Company maintains reserves for future warranty claims using an estimated cost per unit sold, which is based primarily on historical Company claim information. Additionally, the Company has from time to time initiated certain voluntary safety recall campaigns. The Company reserves for all estimated costs associated with safety recalls in the period that the safety recalls are announced.

 

Changes in the Company's warranty and safety recall liability were as follows (in thousands):

 

     2010     2009     2008  

Balance, beginning of period

    $ 68,044       $ 64,543       $ 70,523   

Warranties issued during the period

     36,785        51,336        52,645   

Settlements made during the period

     (58,067     (74,022     (71,737

Recalls and changes to pre-existing warranty liabilities

     7,372        26,187        13,112   
                        

Balance, end of period

    $ 54,134       $ 68,044       $ 64,543   
                        

The liability for safety recall campaigns was  $3.2 million,  $6.7 million and  $4.6 million at December 31, 2010, 2009 and 2008, respectively.

Derivative Financial Instruments – The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.

All derivative instruments are recognized on the balance sheet at fair value (see Note 9). In accordance with ASC Topic 815, "Derivatives and Hedging," the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, at both the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative instrument's gain or loss is excluded from the assessment of hedge effectiveness. Derivative instruments that do not qualify for hedge accounting are recorded at fair value and any changes in fair value are recorded in current period earnings. Refer to Note 11 for a detailed description of the Company's derivative instruments.

Motorcycles and Related Products Revenue Recognition – Sales are recorded when products are shipped to wholesale customers (independent dealers and distributors) and ownership is transferred. The Company may offer sales incentive programs to both wholesale and retail customers designed to promote the sale of motorcycles and related products. The total costs of these programs are generally recognized as revenue reductions and are accrued at the later of the date the related sales are recorded or the date the incentive program is both approved and communicated.

Financial Services Revenue Recognition – Interest income on finance receivables is recorded as earned and is based on the average outstanding daily balance for wholesale and retail receivables. Accrued and uncollected interest is classified with finance receivables. Certain loan origination costs related to finance receivables, including payments made to dealers for certain retail loans, are deferred and amortized over the estimated life of the contract.

Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off at 120 days contractually past due. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of December 31, 2010 and 2009, all retail finance receivables are accounted for as interest-earning receivables.

 

Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes doubtful and the finance receivable is placed on non-accrual status. HDFS 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. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full.

Insurance commissions and commissions on the sale of extended service contracts are recognized when contractually earned. Deferred revenue related to extended service contracts was  $13.7 million and  $14.6 million as of December 31, 2010 and 2009, respectively.

Research and Development Expenses – Expenditures for research activities relating to product development and improvement are charged against income as incurred and included within selling, administrative and engineering expenses in the consolidated statement of operations. Research and development expenses were  $136.2 million,  $143.1 million and  $163.5 million for 2010, 2009 and 2008, respectively.

Advertising Costs – The Company expenses the production cost of advertising the first time the advertising takes place. Advertising costs relate to the Company's efforts to promote its products and brands through the use of media. During 2010, 2009 and 2008, the Company incurred  $75.8 million,  $80.2 million and  $89.2 million in advertising costs, respectively.

Shipping and Handling Costs – The Company classifies shipping and handling costs as a component of cost of goods sold.

Share-Based Award Compensation Costs – The Company recognizes the cost of its share-based awards in its statement of operations. The total cost of the Company's equity awards is equal to their grant date fair value and is recognized as expense on a straight-line basis over the service periods of the awards. The total cost of the Company's liability for cash-settled awards is equal to their settlement date fair value. The liability for cash-settled awards is revalued each period based on a recalculated fair value adjusted for vested awards. Total share-based award compensation expense recognized by the Company during 2010, 2009 and 2008 was  $30.4 million,  $17.6 million and  $24.5 million, respectively, or  $19.2 million,  $11.0 million and  $15.3 million net of taxes, respectively.

Income Tax Expense – The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.

New Accounting Standards

Additional Finance Receivables and Allowance for Credit Losses Disclosures

In July 2010, the FASB issued Accounting Standards Update (ASU) No. 2010-20, "Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses." ASU No. 2010-20 amends the guidance with ASC Topic 310, "Receivables" to facilitate financial statement users' evaluation of (1) the nature of credit risk inherent in the entity's portfolio of financing receivables; (2) how that risk is analyzed and assessed in arriving at the allowance for credit losses; and (3) the changes and reasons for those changes in the allowance for credit losses. The amendments in ASU No. 2010-20 also require an entity to provide additional disclosures such as a rollforward schedule of the allowance for credit losses on a portfolio segment basis, credit quality indicators of financing receivables and the aging of past due financing receivables. The Company was required to adopt a portion of ASU No. 2010-20 as of December 31, 2010 with the remainder as of January 1, 2011; please refer to Note 6 for further discussion.

 

Consolidation of Off-Balance Sheet Special Purpose Entities

In June 2009, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 166, "Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140." SFAS No. 166 amended the guidance within Accounting Standards Codification (ASC) Topic 860, "Transfers and Servicing," primarily by removing the concept of a qualifying special purpose entity as well as removing the exception from applying FASB Interpretation No. 46(R), "Consolidation of Variable Interest Entities." Upon the effective adoption date, former QSPEs as defined under prior U.S. GAAP had to be evaluated for consolidation within an entity's financial statements. Additionally, the guidance within ASC Topic 860 requires enhanced disclosures about the transfer of financial assets as well as an entity's continuing involvement, if any, in transferred financial assets. In connection with term asset-backed securitization transactions prior to 2009, HDFS utilized QSPEs as defined under prior U.S. GAAP which were not subject to consolidation in the Company's financial statements.

In June 2009, the FASB issued SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)." SFAS No. 167 amended the guidance within ASC Topic 810, "Consolidations," by adding formerly off-balance sheet QSPEs to its scope (the concept of these entities was eliminated by SFAS No. 166). In addition, companies must perform an analysis to determine whether the company's variable interest or interests give it a controlling financial interest in a variable interest entity (VIE). Companies must also reassess on an ongoing basis whether they are the primary beneficiary of a VIE.

Effects of Adoption on January 1, 2010

The Company was required to adopt the new guidance within ASC Topic 810 and ASC Topic 860 as of January 1, 2010. The Company determined that the formerly unconsolidated QSPEs that HDFS utilized were VIEs, of which the Company was the primary beneficiary, and consolidated them into the Company's financial statements beginning January 1, 2010. In accordance with ASC Topic 810, the Company measured the initial carrying values of the assets and liabilities of the VIEs by determining what those values would have been on January 1, 2010 as if the new guidance had been in effect when the Company first met the conditions as the primary beneficiary. The Company's VIEs are discussed in further detail in Note 7.

The initial adoption of the new accounting guidance within ASC Topic 810 and ASC Topic 860 did not impact the Company's statement of operations. The following table summarizes the effects on the Company's balance sheet of adopting the new guidance within ASC Topic 810 and ASC Topic 860 on January 1, 2010 (in thousands):

 

     As of
December 31, 2009
    Effect of
consolidation
    As of
January 1, 2010
 

Finance receivables held for investment(1)

    $ 4,961,894       $ 1,922,833       $ 6,884,727   

Allowance for finance credit losses(1)

    $ (150,082    $ (49,424    $ (199,506

Investment in retained securitization interests(1)

    $ 245,350       $ (245,350    $ —     

Restricted cash held by variable interest entities(2)

    $ —         $ 198,874       $ 198,874   

Other current assets(2)

    $ 462,106       $ 40,224       $ 502,330   

Accrued liabilities

    $ (514,084    $ (11,952    $ (526,036

Long-term debt

    $ (5,446,130    $ (1,892,313    $ (7,338,443

Retained earnings

    $ (6,324,268    $ 40,591       $ (6,283,677

Accumulated other comprehensive loss

    $ 417,898       $ (3,483    $ 414,415   

(1) These three lines items were reported together as finance receivables held for investment, net prior to January 1, 2010.
(2) At December 31, 2009, the Company had  $167.7 million of restricted cash related to its 2009 on-balance sheet term-asset backed securitization transactions and its asset-backed commercial paper conduit facility. These amounts were reported within Other current assets as of December 31, 2009.

 

Financial Statement Comparability to Prior Periods

The new accounting guidance within ASC Topic 810 and ASC Topic 860 is adopted on a prospective basis. Prior periods have not been restated and therefore will not be comparable to the current period as discussed below.

Under the new accounting guidance, the Company's securitization transactions are considered secured borrowings rather than asset sales. Beginning in 2010, the Company recognizes interest income and credit losses on the previously unconsolidated securitized receivables and interest expense on the related debt. The Company's statement of operations no longer includes income from securitizations which consisted of an initial gain or loss on new securitization transactions, income on the investment in retained securitization interests and servicer fees. In addition, the Company no longer incurs charges related to other-than-temporary impairments on its investment in retained securitization interests as that asset has been derecognized.

Finance receivables consolidated as part of the adoption of the new accounting guidance, as well as finance receivables securitized as part of the Company's 2009 on-balance sheet securitization transactions and finance receivables restricted as collateral under the Company's asset-backed commercial paper conduit facility, are reported on the Company's balance sheet as restricted finance receivables held for investment by VIEs. Prior to the adoption of the new accounting guidance, finance receivables held by VIEs were included in finance receivables held for investment. In addition, finance receivable securitization debt is now reported as debt held by VIEs.

Historically, U.S. retail motorcycle finance receivables intended for securitization through off-balance sheet securitization transactions were initially classified as finance receivables held for sale. Accordingly, all of the related cash flows were classified as operating cash flows in the statement of cash flows. After the adoption of the new guidance within ASC Topic 810 and ASC Topic 860, all retail finance receivables are considered held for investment, as the Company has the intent and ability to hold the finance receivables for the foreseeable future, or until maturity. The adoption guidance within ASC Topic 810 and ASC Topic 860 requires the Company to apply the standards on a prospective basis as if they had always been in effect. Therefore, the Company has classified post-January 1, 2010 cash flows related to all of its retail motorcycle finance receivables as investing cash flows in the statement of cash flows.

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Additional Balance Sheet and Cash Flow Information
12 Months Ended
Dec. 31, 2010
Additional Balance Sheet and Cash Flow Information

2.    Additional Balance Sheet and Cash Flow Information

The following information represents additional detail for selected line items included in the consolidated balance sheets at December 31 and the statements of cash flows for the years ended December 31.

Balance Sheet Information:

Inventories, net (in thousands):

 

     2010     2009  

Components at the lower of FIFO cost or market

    

Raw materials and work in process

    $ 100,082       $ 104,641   

Motorcycle finished goods

     158,425        168,002   

Parts and accessories and general merchandise

     101,975        84,823   
                

Inventory at lower of FIFO cost or market

     360,482        357,466   

Excess of FIFO over LIFO cost

     (34,036     (34,437
                
    $ 326,446       $ 323,029   
                

Inventory obsolescence reserves deducted from FIFO cost were  $34.2 million and  $34.7 million as of December 31, 2010 and 2009, respectively.

 

Property, plant and equipment, at cost (in thousands):

 

     2010     2009  

Land and related improvements

    $ 59,613       $ 59,922   

Buildings and related improvements

     477,935        474,891   

Machinery and equipment

     2,068,842        2,311,779   

Construction in progress

     165,548        112,498   
                
     2,771,938        2,959,090   

Accumulated depreciation

     (1,956,826     (2,052,184
                
    $ 815,112       $ 906,906   
                

Accrued liabilities (in thousands):

 

     2010      2009  

Payroll, performance incentives and related expenses

    $ 199,408        $ 137,523   

Restructuring reserves

     35,234         67,711   

Warranty and recalls

     54,134         68,044   

Sales incentive programs

     35,762         62,206   

Tax-related accruals

     63,115         16,038   

Fair value of derivative financial instruments

     20,083         16,293   

Other

     148,935         146,269   
                 
    $ 556,671        $ 514,084   
                 

Components of accumulated other comprehensive loss, net of tax (in thousands):

 

     2010     2009  

Cumulative foreign currency translation adjustment

    $ 55,551       $ 46,102   

Unrealized loss on investment in retained securitization interest

     —          (3,483

Unrealized net loss on derivative financial instruments

     (11,912     (8,940

Unrealized net loss on marketable securities

     (133     —     

Unrecognized pension and postretirement healthcare liabilities

     (409,728     (451,577
                
    $ (366,222    $ (417,898
                

 

Cash Flow Information:

The reconciliation of net income (loss) to net cash provided by (used by) operating activities of continuing operations is as follows (in thousands):

 

     2010     2009     2008  

Cash flows from operating activities:

      

Net income (loss)

    $ 146,545       $ (55,116    $ 654,718   

Loss from discontinued operations

     (113,124     (125,757     (29,517
                        

Income from continuing operations

     259,669        70,641        684,235   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation

     255,171        246,344        220,755   

Amortization of deferred loan origination costs

     87,223        66,779        38,222   

Amortization of financing origination fees

     19,618        27,145        4,517   

Provision for employee long-term benefits

     79,630        80,387        76,426   

Contributions to pension and postretirement plans

     (39,391     (233,224     (19,517

Stock compensation expense

     30,431        17,576        24,473   

Loss on off-balance sheet securitizations

     —          —          5,370   

Net change in wholesale finance receivables

     81,527        332,167        99,373   

Origination of retail finance receivables held for sale

     —          (1,180,467     (2,788,463

Collections on retail finance receivables held for sale

     —          919,201        507,106   

Proceeds from securitization of retail finance receivables

     —          —          467,722   

Impairment of retained securitization interests

     —          45,370        41,403   

Lower of cost or fair market value adjustment on finance receivables held for sale

     —          5,895        37,764   

Provision for credit losses

     93,118        169,206        39,555   

Loss on debt extinguishment

     85,247        —          —     

Pension and postretirement healthcare plan curtailment and settlement expense

     31,824        37,814        —     

Goodwill and other impairments

     —          46,411        —     

Deferred income taxes

     (17,591     6,931        (46,729

Foreign currency adjustments

     (21,480     (22,234     2,892   

Other, net

     11,910        9,665        15,756   

Changes in current assets and liabilities:

      

Accounts receivable, net

     2,905        8,809        2,710   

Finance receivables – accrued interest and other

     10,083        (3,360     (7,149

Inventories

     2,516        85,472        (42,263

Accounts payable and accrued liabilities

     215,013        (201,195     45,998   

Restructuring reserves

     (32,477     65,988        2,149   

Derivative instruments

     5,339        4,711        (11,962

Other

     3,133        2,978        (8,372
                        

Total adjustments

     903,749        538,369        (1,292,264
                        

Net cash provided by (used by) operating activities of continuing operations

    $ 1,163,418       $ 609,010       $ (608,029
                        

Cash paid during the period for interest and income taxes (in thousands):

 

     2010      2009      2008  

Interest

    $ 346,855        $ 336,453        $ 128,006   

Income taxes

    $ 47,084        $ 123,232        $ 413,998   

 

Interest paid represents interest payments of HDFS (included in financial services interest expense) and interest payments of the Company (included in interest expense).

Non-cash investing activity during the period (in thousands):

 

     2010      2009      2008  

Investment in retained securitization interests received in connection with securitizations during the year

    $ —          $ —          $ 87,171   
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Discontinued Operations
12 Months Ended
Dec. 31, 2010
Discontinued Operations

3.    Discontinued Operations

In August 2008, the Company purchased privately-held Italian motorcycle maker MV Agusta (MV). The Company acquired 100 percent of MV shares for total consideration of €68.3 million ( $105.1 million), which included the satisfaction of existing bank debt for €47.5 million ( $73.2 million).

In October 2009, the Company unveiled a new business strategy to drive growth through a focus of efforts and resources on the unique strengths of the Harley-Davidson brand and to enhance productivity and profitability through continuous improvement. The Company's Board of Directors approved and the Company committed to the divestiture of MV as part of this strategy. The Company engaged a third party investment bank to assist with the marketing and sale of MV.

On August 6, 2010, the Company concluded its sale of MV to MV Augusta Motor Holding S.r.l., a company controlled by the former owner of MV. Under the agreement relating to the sale, (1) the Company received nominal consideration in return for the transfer of MV and related assets; (2) the parties waived their respective rights under the stock purchase agreement and other documents related to the Company's purchase of MV in 2008, which included a waiver of the former owner's right to contingent earn-out consideration; and (3) the Company contributed 20.0 million Euros to MV as operating capital.

The following table summarizes the net revenue, pre-tax loss, net loss and loss per common share from discontinued operations for the periods noted (in thousands except per share amounts):

 

      Twelve months ended     August 8, 2008  -
December 31, 2008
 
     December 31, 2010     December 31, 2009    

Revenue

    $ 48,563       $ 56,729       $ 15,893   

Loss before income taxes

    $ (131,034    $ (165,383    $ (31,944

Net loss

    $ (113,124    $ (125,757    $ (29,517

Loss per common share

    $ (0.48    $ (0.54    $ (0.13

During 2010, the Company incurred a  $131.0 million pre-tax loss from discontinued operations, or  $113.1 million net of tax. Included in the 2010 operating loss were impairment charges of  $111.8 million, or  $90.2 million net of tax, which represented the excess of net book value of the held-for-sale assets over the fair value less selling costs. The impairment charges consisted of  $32.3 million accounts receivable valuation allowance;  $25.2 million inventory valuation allowance;  $26.9 million fixed asset impairment;  $15.8 million intangible asset impairment;  $2.6 million other asset valuation allowance; and  $9.0 million of currency translation adjustment. As a result of these impairment charges, the Company only incurred an immaterial loss on the date of sale, which is included in loss from discontinued operations, net of tax, during the year ended December 31, 2010.

During 2009, the Company recorded an impairment charge of  $115.4 million which represented the excess of net book value of the held-for sale assets over the fair value less selling costs. The impairment charge is included in loss from discontinued operations and consisted of  $85.5 million goodwill impairment,  $19.8 million fixed asset impairment and  $10.1 million intangible asset impairment.

 

The effective tax rate for discontinued operations during 2010, 2009 and 2008 was 13.7%, 24.0% and 7.3%, respectively. At December 31, 2010, the Company had a reserve of  $43.5 million related to uncertain tax benefits associated with discontinued operations that was included within accrued liabilities. At December 31, 2009, the reserve related to uncertain tax benefits associated with discontinued operations amount was  $26.0 million.

As of August 6, 2010, assets of discontinued operations that were sold consisted of  $0.6 million of accounts receivable, net;  $3.6 million of inventories; and  $14.3 million of other assets. As of August 6, 2010, liabilities of discontinued operations that were sold consisted  $41.7 million of accounts payable and accrued liabilities and  $16.6 million of other liabilities.

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Restructuring Expense and Other Impairments
12 Months Ended
Dec. 31, 2010
Restructuring Expense and Other Impairments

4.    Restructuring Expense and Other Impairments

2010 Restructuring Plan

In September 2010, the Company's unionized employees at its facilities in Milwaukee and Tomahawk, Wisconsin ratified three separate new seven-year labor agreements which take effect in April 2012 when the current contracts expire. The new contracts are similar to the labor agreement ratified at the Company's York, Pennsylvania facility in December 2009 and allow for similar flexibility and increased production efficiency. Once the new contracts are implemented, the production system in Wisconsin, like York, will include the addition of a flexible workforce component.

After taking actions to implement the new ratified labor agreements (2010 Restructuring Plan), the Company expects to have about 700 full-time hourly unionized employees in its Milwaukee facilities when the contracts are implemented in 2012, about 250 fewer than would be required under the existing contract. In Tomahawk, the Company expects to have a full-time hourly unionized workforce of about 200 when the contract is implemented, about 75 fewer than would be required under the current contract.

Under the 2010 Restructuring Plan, restructuring expenses consist of employee severance and termination costs and other related costs. The Company expects to incur approximately  $78 million in restructuring expenses (compared to previous expected total costs of approximately  $85 million) related to the new contracts through 2012, of which approximately 35% are expected to be non-cash. During the year ended December 31, 2010, the Company recorded a  $44.4 million restructuring charge related to the 2010 Restructuring Plan.

The following table summarizes the Company's 2010 Restructuring Plan reserve recorded in accrued liabilities as of December 31, 2010 (in thousands):

 

     Motorcycles & Related Products  
     Employee Severance and
Termination Costs
 

Restructuring expense

    $ 44,383   

Utilized – cash

     (7,557

Utilized – noncash

     (28,174
        

Balance December 31, 2010

    $ 8,652   
        

For the year ended December 31, 2010, restructuring expense included  $28.2 million of noncash curtailment losses related to the Company's pension and postretirement healthcare plans that cover employees of the affected facilities in Milwaukee and Tomahawk, Wisconsin.

2009 Restructuring Plan

During 2009, in response to the U.S. economic recession and worldwide slowdown in consumer demand, the Company committed to a volume reduction and a combination of restructuring actions (2009 Restructuring Plan) in the Motorcycles and Financial Services segments which are expected to be completed by 2012. The 2009 Restructuring Plan was designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. The Company's significant announced actions include:

 

   

consolidating its two engine and transmission plants in the Milwaukee area into its facility in Menomonee Falls, Wisconsin;

 

   

closing its distribution facility in Franklin, Wisconsin and consolidating Parts and Accessories and General Merchandise distribution through a third party;

 

   

discontinuing the domestic transportation fleet;

 

   

consolidating its vehicle test facilities from three locations in Alabama, Arizona and Florida into one location in Arizona;

 

   

restructuring its York, Pennsylvania motorcycle production facility to focus on the core operations of motorcycle assembly, metal fabrication and paint; and

 

   

exiting the Buell product line. The Company ceased production of Buell motorcycles at the end of October 2009 and the sale of remaining Buell motorcycle inventory to independent dealers and/or distributors was substantially completed during 2010.

The 2009 Restructuring Plan includes a reduction of approximately 2,700 to 2,900 hourly production positions and approximately 720 non-production, primarily salaried positions within the Motorcycles segment and approximately 100 salaried positions in the Financial Services segment. These reductions began in 2009 and are expected to be completed during 2011.

Under the 2009 Restructuring Plan, restructuring expenses consist of employee severance and termination costs, accelerated depreciation on the long-lived assets that will be exited as part of the 2009 Restructuring Plan and other related costs. The Company expects total costs related to the 2009 Restructuring Plan to result in restructuring and impairment expenses of approximately  $417 million to  $432 million from 2009 to 2012 (compared to previous expected total costs of approximately  $420 million to  $450 million), of which approximately 30% are expected to be non-cash. On a cumulative basis, the Company has incurred  $343.4 million of restructuring and impairment expense under the 2009 Restructuring Plan as of December 31, 2010, of which  $119.1 million was incurred during the year ended December 31, 2010. Approximately 2,600 employees have left the Company under the 2009 Restructuring Plan as of December 31, 2010.

 

The following table summarizes the Company's 2009 Restructuring Plan reserve recorded in accrued liabilities as of December 31, 2010 (in thousands):

 

    Motorcycles & Related Products     Financial Services  
    Employee
Severance
and

Termination
Costs
    Accelerated
Depreciation
    Asset
Impairment
    Other     Total     Employee
Severance
and

Termination
Costs
    Other     Total     Consolidated
Total
 

Restructuring expense

   $ 103,769       $ 26,905       $ 18,024       $ 72,278       $ 220,976       $ 1,679       $ 1,623       $ 3,302       $ 224,278   

Utilized – cash

    (29,885     —          —          (40,856     (70,741     (1,460     (1,197     (2,657     (73,398

Utilized – noncash

    (37,814     (26,905     (18,024     —          (82,743     —          (426     (426     (83,169
                                                                       

Balance, December 31, 2009

   $ 36,070       $ —         $ —         $ 31,422       $ 67,492       $ 219       $ —         $ 219       $ 67,711   

Restructuring expense

    31,119        47,923        —          40,083        119,125        —          —          —          119,125   

Utilized – cash

    (44,394     —          —          (61,514     (105,908     (44     —          (44     (105,952

Utilized – noncash

    1,023        (47,923     —          (3,406     (50,306     (175     —          (175     (50,481

Noncash reserve release

    —          —          —          (3,821     (3,821     —          —          —          (3,821
                                                                       

Balance, December 31, 2010

   $ 23,818       $ —         $ —         $ 2,764       $ 26,582       $ —         $ —         $ —         $ 26,582   
                                                                       

During the fourth quarter of 2009, the Company determined that an evaluation of the carrying value of the Buell fixed assets was necessary in accordance with its announcement that it was exiting the Buell product line. As a result, the Company recorded a fixed asset impairment charge of  $18.0 million in 2009.

Other restructuring costs include items such as the exit costs for terminating supply contracts, lease termination costs and moving costs. During the fourth quarter of 2010, the Company released  $3.8 million of its 2009 Restructuring Plan reserve related to exiting the Buell product line as these costs are no longer expected to be incurred.

2008 Restructuring Plan

During the second quarter of 2008, the Company finalized a plan to ship fewer motorcycles to its worldwide dealer network in 2008 than it shipped in 2007. The Company executed this reduction through temporary plant shutdowns, adjusted daily production rates and a workforce reduction involving approximately 730 positions. As a result of the workforce reduction plan, the Company recorded a  $12.4 million charge during 2008. The total restructuring charge consisted of  $7.6 million of employee severance benefits and  $4.8 million of special retiree benefits for those individuals eligible to receive benefits. All employees and contract workers affected by the 2008 Restructuring Plan departed from the Company during 2008.

The following table summarizes the Company's 2008 Restructuring Plan reserve activity during 2008 and 2009 (in thousands):

 

     Employee Severance and
Termination Costs
 

Restructuring expense

    $ 7,594   

Utilized – cash

     (5,445
        

Balance, December 31, 2008

    $ 2,149   

Utilized – cash

     (2,149
        

Balance, December 31, 2009

    $ —     
        
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Goodwill
12 Months Ended
Dec. 31, 2010
Goodwill

5.    Goodwill

The changes in the carrying amount of goodwill in each of the Company's reporting segments for the years ended December 31, 2010 and 2009 were as follows (in thousands):

 

     Motorcycles     Financial
Services
    Total  

December 31, 2008

    $ 31,291       $ 28,840       $ 60,131   

Impairment

     —          (28,387     (28,387

Currency translation

     609        —          609   

Other

     (500     (453     (953
                        

December 31, 2009

    $ 31,400       $ —         $ 31,400   

Currency translation

     (1,810     —          (1,810
                        

December 31, 2010

    $ 29,590       $ —         $ 29,590   
                        

As a result of the Company's lower retail sales volume projections and the decline in operating performance at HDFS during 2009 due to significant write-downs of its loan portfolio and investment in retained securitization interests, the Company performed an impairment test of the goodwill balance associated with HDFS as of June 28, 2009. The results of the impairment test indicated the current fair value of HDFS at that time had declined below its carrying value and as such the Company recorded an impairment charge of  $28.4 million during 2009.

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Finance Receivables
12 Months Ended
Dec. 31, 2010
Finance Receivables

6.    Finance Receivables

Finance receivables, net at December 31 for the past five years were as follows (in thousands):

 

 

 

2010

 

 

2009

 

 

2008

 

 

2007

 

 

2006

 

Wholesale

 

 

 

 

 

United States

 

 $

735,481

 

 

 $

787,891

 

 

 $

1,074,377

 

 

 $

1,132,748

 

 

 $

1,206,753

 

Europe

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

86,947

 

 

 

66,421

 

Canada

 

 

78,516

 

 

 

82,110

 

 

 

89,859

 

 

 

108,756

 

 

 

65,538

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total wholesale

 

 

813,997

 

 

 

870,001

 

 

 

1,164,236

 

 

 

1,328,451

 

 

 

1,338,712

 

Retail

 

 

 

 

 

United States

 

 

5,126,699

 

 

 

3,835,235

 

 

 

514,637

 

 

 

485,579

 

 

 

409,788

 

Canada

 

 

250,462

 

 

 

256,658

 

 

 

226,084

 

 

 

228,850

 

 

 

174,894

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total retail

 

 

5,377,161

 

 

 

4,091,893

 

 

 

740,721

 

 

 

714,429

 

 

 

584,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,191,158

 

 

 

4,961,894

 

 

 

1,904,957

 

 

 

2,042,880

 

 

 

1,923,394

 

Allowance for credit losses

 

 

(173,589

 

 

(150,082

 

 

(40,068

 

 

(30,295

 

 

(27,283

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6,017,569

 

 

 

4,811,812

 

 

 

1,864,889

 

 

 

2,012,585

 

 

 

1,896,111

 

Investment in retained securitization interests

 

 

—  

 

 

 

245,350

 

 

 

330,674

 

 

 

407,742

 

 

 

384,106

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 $

6,017,569

 

 

 $

5,057,162

 

 

 $

2,195,563

 

 

 $

2,420,327

 

 

 $

2,280,217

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables held for sale at December 31 for the past five years were as follows (in thousands):

 

 

 

2010

 

 

2009

 

 

2008

 

 

2007

 

 

2006

 

Retail

 

 

 

 

 

United States

 

 $

—  

 

 

 $

—  

 

 

 $

2,443,965

 

 

 $

781,280

 

 

 $

547,106

 

 

HDFS offers wholesale financing to the Company's independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada. Effective January 1, 2008, the finance receivables and related assets of the international wholesale operations located in Oxford, England were transferred at book value to Harley-Davidson Europe Ltd., a subsidiary of HDMC. Beginning in 2008, HDMC assumed responsibility for the collection of all wholesale receivables in Europe.

At December 31, 2010 and 2009, unused lines of credit extended to HDFS' wholesale finance customers totaled  $1.04 billion and  $1.16 billion, respectively. Approved but unfunded retail finance loans totaled  $96.5 million and  $123.9 million at December 31, 2010 and 2009, respectively.

HDFS provides retail financial services to customers of the Company's independent dealers in the United States and Canada. The origination of retail loans is a separate and distinct transaction between HDFS and the retail customer, unrelated to the Company's sale of product to its dealers. Retail finance receivables consist of secured promissory notes and installment loans. HDFS holds either titles or liens on titles to vehicles financed by promissory notes and installment loans. As of December 31, 2010 and 2009, approximately 11% of gross outstanding finance receivables were originated in Texas.

During the second quarter of 2009, the Company reclassified  $3.14 billion of finance receivables held for sale at the lower of cost or fair value to finance receivables held for investment due to the Company's intent to structure subsequent securitization transactions in a manner that did not qualify for accounting sale treatment under prior U.S. GAAP. As a result of the reclassification, the Company recorded a  $72.7 million increase to the allowance for credit losses during the second quarter of 2009 in order to establish the initial reserve for the reclassified receivables. Included in finance receivables held for sale at December 31, 2008 is a lower of cost or market adjustment of  $31.7 million. At December 31, 2010 and 2009, the Company's Consolidated Balance Sheet included finance receivables of  $3.38 billion and  $2.81 billion, respectively, which were restricted as collateral for the payment of debt held by VIEs and other related obligations as discussed in Note 8.

HDFS has cross-border outstandings in Canada which total  $88.7 million,  $77.1 million and  $75.8 million as of December 31, 2010, 2009 and 2008, respectively.

Wholesale finance receivables are related primarily to motorcycles and related parts and accessories sales to independent Harley-Davidson dealers and are generally contractually due within one year. Retail finance receivables are primarily related to sales of motorcycles to the dealers' customers. On December 31, 2010, contractual maturities of finance receivables were as follows (in thousands):

 

 

 

United
States

 

 

Canada

 

 

Total

 

2011

 

 $

1,700,390

 

 

 $

123,521

 

 

 $

1,823,911

 

2012

 

 

1,048,786

 

 

 

48,423

 

 

 

1,097,209

 

2013

 

 

1,187,411

 

 

 

53,901

 

 

 

1,241,312

 

2014

 

 

1,344,399

 

 

 

60,000

 

 

 

1,404,399

 

2015

 

 

425,494

 

 

 

43,133

 

 

 

468,627

 

Thereafter

 

 

155,700

 

 

 

—  

 

 

 

155,700

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 $

5,862,180

 

 

 $

328,978

 

 

 $

6,191,158

 

 

 

 

 

 

 

 

 

 

 

 

 

As of December 31, 2010, all finance receivables due after one year were at fixed interest rates.

 

The allowance for finance credit losses on finance receivables is comprised of individual components relating to wholesale and retail finance receivables. Changes in the allowance for finance credit losses on finance receivables for the years ended December 31 were as follows (in thousands):

 

 

 

2010

 

 

2009

 

 

2008

 

Balance, beginning of period

 

 $

150,082

 

 

 $

40,068

 

 

 $

30,295

 

Allowance related to newly consolidated finance receivables(a)

 

 

49,424

 

 

 

—  

 

 

 

—  

 

Provision for finance credit losses

 

 

93,118

 

 

 

169,206

 

 

 

39,555

 

Charge-offs, net of recoveries

 

 

(119,035

 

 

(59,192

 

 

(29,782

 

 

 

 

 

 

 

 

 

 

 

 

Balance, end of period

 

 $

173,589

 

 

 $

150,082

 

 

 $

40,068

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(a)

As part of the required consolidation of formerly off-balance sheet securitization trusts, the Company established a  $49.4 million allowance for finance credit losses related to the newly consolidated finance receivables as discussed in Note 1.

The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, at December 31, 2010 is as follows (in thousands):

 

 

 

Retail

 

 

Wholesale

 

 

Total

 

Allowance for credit losses, ending balance:

 

 

 

Individually evaluated for impairment

 

 $

—  

 

 

 $

3,566

 

 

 $

3,566

 

Collectively evaluated for impairment

 

 

157,791

 

 

 

12,232

 

 

 

170,023

 

 

 

 

 

 

 

 

 

 

 

 

 

Total allowance for credit losses

 

 $

157,791

 

 

 $

15,798

 

 

 $

173,589

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables, ending balance:

 

 

 

Individually evaluated for impairment

 

 $

—  

 

 

 $

5,423

 

 

 $

5,423

 

Collectively evaluated for impairment

 

 

5,377,161

 

 

 

808,574

 

 

 

6,185,735

 

 

 

 

 

 

 

 

 

 

 

 

 

Total finance receivables

 

 $

5,377,161

 

 

 $

813,997

 

 

 $

6,191,158

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the loan agreement. As retail finance receivables are collectively and not individually reviewed for impairment, this portfolio does not have finance receivables specifically impaired. A specific allowance is established for wholesale finance receivables determined to be individually impaired in accordance with the applicable accounting standards when management concludes that the borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreements. The impairment is determined based on the cash that the Company expects to receive discounted at the loan's original interest rate or the fair value of the collateral, if the loan is collateral-dependent. In establishing the allowance, management considers a number of factors including the specific borrower's financial performance as well as ability to repay. The following table only includes finance receivables that are individually deemed to be impaired under ASC Topic 310, "Receivables" at December 31, 2010 (in thousands):

 

 

 

Recorded
Investment

 

 

Unpaid
Principal
Balance

 

 

Related
Allowance

 

 

Average
Recorded
Investment

 

 

Interest
Income
Recognized

 

Wholesale:

 

 

 

 

 

No related allowance recorded

 

 $

—  

 

 

 $

—  

 

 

 $

—  

 

 

 $

—  

 

 

 $

—  

 

Related allowance recorded

 

 

5,423

 

 

 

5,358

 

 

 

3,566

 

 

 

5,577

 

 

 

—  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total impaired wholesale finance receivables

 

 $

5,423

 

 

 $

5,358

 

 

 $

3,566

 

 

 $

5,577

 

 

 $

—  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail finance receivables accrue interest until either collected or charged-off. Interest continues to accrue on past due wholesale finance receivables until the date the collection of the finance receivables becomes doubtful, at which time the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these wholesale finance receivables when payments are current according to the terms of the loan agreements and future payments are reasonably assured. The recorded investment of non-accrual status wholesale finance receivables at December 31, 2010 was  $5.4 million.

An analysis of the aging of past due finance receivables, which includes non-accrual status finance receivables, at December 31, 2010 is as follows (in thousands):

 

 

 

Current

 

 

31-60 Days
Past Due

 

 

61-90 Days
Past Due

 

 

Greater than
90 Days

Past Due

 

 

Total
Past Due

 

 

Total
FinancingFinance
Receivables

 

Retail

 

 $

5,144,910

 

 

 $

147,564

 

 

 $

50,550

 

 

 $

34,137

 

 

 $

232,251

 

 

 $

5,377,161

 

Wholesale

 

 

809,058

 

 

 

2,178

 

 

 

934

 

 

 

1,827

 

 

 

4,939

 

 

 

813,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 $

5,953,968

 

 

 $

149,742

 

 

 $

51,484

 

 

 $

35,964

 

 

 $

237,190

 

 

 $

6,191,158

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The recorded investment of retail and wholesale finance receivables, which excludes non-accrual status finance receivables and are contractually past due 90 days or more at December 31 for the past five years were as follows (in thousands):

 

 

 

2010

 

 

2009

 

 

2008

 

 

2007

 

 

2006

 

United States

 

 $

34,391

 

 

 $

24,629

 

 

 $

23,678

 

 

 $

6,205

 

 

 $

4,476

 

Canada

 

 

1,351

 

 

 

2,161

 

 

 

1,275

 

 

 

1,759

 

 

 

1,561

 

Europe

 

 

—  

 

 

 

—  

 

 

 

—  

 

 

 

386

 

 

 

452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 $

35,742

 

 

 $

26,790

 

 

 $

24,953

 

 

 $

8,350

 

 

 $

6,489

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in the  $35.7 million of finance receivables which are accruing interest and are contractually past due 90 days or more are  $34.1 million of retail finance receivables and  $1.6 million of wholesale finance receivables.

A significant part of managing HDFS' finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, HDFS utilizes different credit risk indicators for each portfolio.

HDFS manages retail credit risk through its credit approval policy and ongoing collection efforts. HDFS uses FICO scores to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail finance receivablesloans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.

The recorded investment of retail finance receivables, by credit quality indicator, at December 31, 2010 were as follows (in thousands):

 

 

 

2010

 

Prime

 

 $

4,303,050

 

Sub-prime

 

 

1,074,111

 

 

 

 

 

Total

 

 $

5,377,161

 

 

 

 

 

HDFS' 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. HDFS utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and capture credit risk factors for each borrower.

HDFS uses the following internal credit quality indicators, based on the Company's internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management's review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged-off, while the dealers classified as Low Risk are least likely to be charged-off. The internal rating system considers factors such as the specific borrowers' ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.

The recorded investment of wholesale finance receivables, by internal credit quality indicator, at December 31, 2010 were as follows (in thousands):

 

 

 

2010

 

Doubtful

 

 $

23,570

 

Substandard

 

 

7,139

 

Special Mention

 

 

18,330

 

Medium

 

 

16,766

 

Low

 

 

748,192

 

 

 

 

 

Total

 

 $

813,997

 

 

 

 

 

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Off-Balance Sheet Finance Receivable Securitization Transactions
12 Months Ended
Dec. 31, 2010
Off-Balance Sheet Finance Receivable Securitization Transactions

7.    Off-Balance Sheet Finance Receivable Securitization Transactions

The following disclosures apply to the Company's term asset-backed securitization activities prior to 2009, when pre-2009 term asset-backed securitization transactions utilized off-balance sheet QSPEs that qualified for accounting sale treatment under prior U.S. GAAP. As discussed in Note 1, the Company adopted new accounting guidance within ASC Topic 810 and ASC Topic 860 as of January 1, 2010 that ultimately required the Company to consolidate these formerly off-balance sheet QSPEs.

During 2008 the Company sold  $540.0 million of retail motorcycle finance receivables through securitization transactions utilizing QSPEs (see Note 1). This sale resulted in cash proceeds of  $467.7 million during 2008. There were no off-balance sheet securitization transactions during 2009. The Company retained an interest in excess cash flows, subordinated securities and cash reserve account deposits, collectively referred to as investment in retained securitization interests (a component of finance receivables held for investment in the Company's Consolidated Balance Sheets). The Company retained servicing rights and received annual servicing fees approximating 1% of the outstanding securitized retail motorcycle finance receivables. HDFS serviced  $1.89 billion of securitized retail motorcycle finance receivables as of December 31, 2009. The total investment in retained securitization interests received in connection with securitizations during the year for the last three years is disclosed under non-cash investing activities in Note 2. In conjunction with sales prior to 2009, HDFS had investments in retained securitization interests of  $245.4 million at December 31, 2009.

The Company's investment in retained securitization interests, excluding servicing rights, was subordinate to the interests of securitization trust investors. Such investors had priority interests in the cash collections on the retail motorcycle finance receivables sold to the securitization trust (after payment of servicing fees) and in the cash reserve account deposits. Investors did not have recourse to the assets of HDFS for failure of the obligors on the retail motorcycle finance receivables to pay when due. The investment in retained securitization interests was recorded at fair value. Key assumptions in the valuation of the investment in retained securitization interests and in calculating the gain or loss on current year securitizations were credit losses, prepayments and discount rate.

 

On March 30, 2009, the Company adopted new guidance codified within ASC Topic 320. In accordance with this guidance, if management has no intent to sell the other-than-temporarily impaired investment and it is more likely than not that it will not be required to sell, only the credit loss component of the impairment is recognized in earnings, while the rest of the impairment is recognized as an unrealized loss in other comprehensive income. The credit loss component recognized in earnings is identified as the amount of cash flows not expected to be received over the remaining life of the investment as projected using assumptions for credit losses, prepayments and discounts rates as discussed below. Upon adoption the Company recorded an increase to the opening balance of retained earnings of  $22.5 million ( $14.4 million, net of tax) and a decrease to accumulated other comprehensive income of  $22.5 million ( $14.4 million, net of tax) to reclassify the non-credit component of  $52.2 million of previously recognized impairments on its investment in retained securitization interests. The credit component of previously recognized impairments on its investment in retained securitization interests was  $29.7 million. The fair value of the investment in retained securitization interests did not change.

During the nine months from the date of adoption to December 31, 2009, the Company recorded other-than-temporary impairments related to its investment in retained securitization interests. The impairments were due to higher actual and anticipated credit losses partially offset by a slowing in actual and expected prepayment speeds on certain securitization portfolios. As prescribed by the new guidance within ASC Topic 320, the Company recognized the credit component of the other-than-temporary impairment in earnings and the non-credit component in other comprehensive income as the Company did not intend to sell the investment and it is more likely than not that the Company would not be required to sell it prior to recovery of its cost basis. The components of the impairment were as follows (in thousands):

 

     Nine months ended
December 31, 2009
 

Total other-than-temporary impairment losses

    $ 22,240   

Portion of loss reclassified from other comprehensive income

     6,000   
        

Net impairment losses recognized in earnings

    $ 28,240   
        

The following activity only applied to other-than-temporary impairments on investment in retained securitization interests for which a component of the impairment was recognized in earnings and a component was recognized in other comprehensive income. The total credit component of other-than-temporary impairments recognized in earnings for all investment in retained securitization interests held as of December 31, 2009 was as follows (in thousands):

 

     Nine months ended
December 31, 2009
 

Balance, beginning of period

    $ 29,686   

Credit component recognized in earnings during the period

     28,240   

Reductions due to sale/repurchase(a)

     (954
        

Balance, end of period

    $ 56,972   
        

(a)    The Company exercised its 10% clean up call repurchase option for certain securitization trusts.

  

Prior to March 30, 2009, if an impairment existed and management deemed it to be other-than-temporary, the entire impairment was recorded in the consolidated statements of operations. During the three months ended March 29, 2009, the Company recorded an other-than-temporary impairment charge of  $17.1 million related to its investment in retained securitization interests which included both the credit and non-credit components.

During 2008, the Company recorded an other-than-temporary impairment charge of  $41.4 million related to its investment in retained securitization interests. The decline in fair value below amortized cost was due to higher actual and anticipated credit losses on certain securitization portfolios, and an increased discount rate in the fourth quarter of 2008 from 12% to 18%. This charge was recorded as a reduction of financial services revenue.

 

The following table summarizes the amortized cost, fair value and gross unrealized gains and losses of the investment in retained securitization interests (in thousands):

 

     December 31, 2009  
     Total Investment in
Retained
Securitization Interests
    Investment in Retained
Securitization Interests
Currently in a Loss Position
for less than 12 Months
    Investment in Retained
Securitization Interests
Currently in a Gain Position
 

Amortized cost

    $ 250,793       $ 161,857       $ 88,936   

Gross unrealized gains

     1,645        —          1,645   

Gross unrealized losses

     (7,088     (7,088     —     
                        

Fair value

    $ 245,350       $ 154,769       $ 90,581   
                        

The unrealized loss position was primarily due to a difference between the discount rate used to calculate fair value at December 31, 2009 and the initial rate used to value the retained securitization interests at their inception. The discount rate used at December 31, 2009 to calculate fair value was 15%. A discount rate of 12% was used to calculate the portion of unrealized gain/loss on the securitization and the initial value of the investment in retained securitization interests. None of the investments in retained securitization interests were in a continuous loss position for more than twelve months.

The investment in retained securitization interests had no stated contractual maturity date. Historically, the investment in retained securitization interests had a life of approximately four years.

As of December 31, 2009, the following weighted-average key assumptions were used to value the investment in retained securitization interests:

 

     2009  

Prepayment speed (Single Monthly Mortality)

     1.71

Weighted-average life (in years)

     2.07   

Expected cumulative net credit losses

     5.70

Residual cash flows discount rate

     14.79

Expected cumulative net credit losses were a key assumption in the valuation of the investment in retained securitization interests. As of December 31, 2009 and 2008, respectively, weighted-average expected net credit losses for all active securitizations were 5.70% and 4.63%. The table below summarizes, as of December 31, 2009 and 2008, respectively, expected weighted-average cumulative net credit losses by year of securitization, expressed as a percentage of the original balance of loans securitized for all securitizations completed during the years noted.

 

Expected weighted-average cumulative net credit losses (%) as of:

   2008     2007     2006  

December 31, 2009

     5.75     6.12     5.32

December 31, 2008

     4.50     4.66     4.78

 

The sensitivity of the fair value to immediate 10% and 20% adverse changes in the weighted-average key assumptions for the investment in retained securitization interests at December 31, 2009 was as follows (dollars in thousands):

 

     2009  

Carrying amount/fair value of retained interests

    $ 245,350   

Weighted-average life (in years)

     2.07   

Prepayment speed assumption (monthly rate)

     1.71

Impact on fair value of 10% adverse change

    $ (2,400

Impact on fair value of 20% adverse change

    $ (4,600

Expected cumulative net credit losses

     5.70

Impact on fair value of 10% adverse change

    $ (36,400

Impact on fair value of 20% adverse change

    $ (72,200

Residual cash flows discount rate (annual)

     14.79

Impact on fair value of 10% adverse change

    $ (4,500

Impact on fair value of 20% adverse change

    $ (9,000

These sensitivities are hypothetical and should not be considered to be predictive of future performance. Changes in fair value generally cannot be extrapolated because the relationship of change in assumption to change in fair value may not be linear. Also, in this table, the effect of a variation in a particular assumption on the fair value of the retained interest is calculated independently from any change in another assumption. In reality, changes in one factor may contribute to changes in another, which may magnify or counteract the sensitivities. Furthermore, the estimated fair values as disclosed should not be considered indicative of future earnings on these assets.

The following table provides information regarding certain cash flows received from and paid to all motorcycle loan securitization trusts during the years ended December 31, 2009 (in thousands):

 

     2009  

Proceeds from new securitizations

    $ —     

Servicing fees received

    $ 26,693   

Other cash flows received on retained interests

    $ 69,418   

10% clean-up call repurchase option

    $ (161,390

Prior to the adoption of the new accounting guidance discussed in Note 1, managed retail motorcycle finance receivables consisted of all retail motorcycle finance receivables serviced by HDFS including those held by off-balance sheet securitization trusts and those held by HDFS. As of December 31, 2009, managed retail motorcycle finance receivables totaled  $5.59 billion, of which  $1.89 billion were securitized in off-balance sheet term asset-backed securitization transactions. The principal amount of managed retail motorcycle finance receivables 30 days or more past due was  $324.1 million at December 31, 2009. The principal amount of securitized retail motorcycle finance receivables 30 days or more past due was  $183.7 million at December 31, 2009. Managed finance receivables 30 days or more past due exclude finance receivables reclassified as repossessed inventory. Credit losses, net of recoveries, of the managed retail motorcycle finance receivables were  $167.4 million and  $138.7 million during 2009 and 2008, respectively. Securitized retail motorcycle finance receivables credit losses, net of recoveries, were  $94.6 million and  $107.9 million during 2009 and 2008, respectively.

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Asset-Backed Financing
12 Months Ended
Dec. 31, 2010
Asset-Backed Financing

8.    Asset-Backed Financing

Term 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 transferred U.S. retail motorcycle finance receivables.

In 2010 and 2009, HDFS transferred  $670.8 million and  $3.08 billion, respectively, of U.S. retail motorcycle finance receivables to five separate SPEs. The SPEs in turn issued the following secured notes with the related maturity dates and interest rates (dollars in thousands):

 

Issue Date

   Principal
Amount
     Weighted-Average
Rate at Date of
Issuance
    Maturity Dates

November 2010

    $ 600,000         1.05   December 2011 - April 2018

December 2009

    $ 562,499         1.55   December 2010 - June 2017

October 2009

    $ 700,000         1.16   October 2010 - April 2017

July 2009

    $ 700,000         2.11   July 2010 - February 2017

May 2009

    $ 500,000         2.77   May 2010 - January 2017

As discussed in Note 1, the Company adopted new accounting guidance within ASC Topic 810 and ASC Topic 860 as of January 1, 2010 that ultimately required the Company to consolidate its formerly off-balance sheet QSPEs discussed in Note 7. As a result, the following secured notes, which were issued by the former QSPEs, are included in the Company's consolidated balance sheet at December 31, 2010 (in thousands):

 

Issue Date

   Principal
Amount
     Weighted-Average
Rate at Date of
Issuance
    Maturity Dates

February 2008

    $ 486,000         3.94   February 2009 - December 2013

August 2007

    $ 782,000         5.50   September 2008 - May 2015

May 2007

    $ 950,000         5.20   May 2008 - August 2015

January 2007

    $ 800,000         5.27   February 2008 - April 2015

August 2006

    $ 800,000         5.31   September 2007 - November 2014

May 2006

    $ 800,000         5.37   October 2010 - August 2014

February 2006

    $ 730,000         5.06   June 2010 - November 2013

Each term asset-backed securitization SPE is a separate legal entity and the U.S. retail motorcycle finance receivables included in the term asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the term 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. Cash and cash equivalent 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.

At December 31, 2010, the assets of the consolidated term asset-backed securitization SPEs totaled  $3.65 billion and were primarily included in restricted finance receivables held by VIEs, net and restricted cash held by VIEs in the Company's Consolidated Balance Sheet. The SPEs held U.S. retail motorcycle finance receivables of  $3.36 billion restricted as collateral for the payment of  $2.76 billion of obligations under the secured notes at December 31, 2010. The SPEs also held  $287.3 million of cash restricted for payment on the secured notes at December 31, 2010.

At December 31, 2009, the assets of the consolidated term asset-backed securitization SPEs totaled  $2.93 billion and were primarily included in finance receivables held for investment and other current assets in the Company's Consolidated Balance Sheet. The SPEs held U.S. retail motorcycle finance receivables of  $2.75 billion restricted as collateral for the payment of  $2.16 billion of obligations under the secured notes at December 31, 2009. The SPEs also held  $164.1 million of cash restricted for payment on the outstanding debt at December 31, 2009.

For the year ended December 31, 2010 and 2009, the SPEs recorded interest expense on the secured notes of  $106.3 million and  $17.3 million, respectively, which is included in financial services interest expense. The weighted average interest rate of the outstanding term asset-backed securitization transactions was 3.11% and 1.90% at December 31, 2010 and 2009, respectively.

Asset-Backed Commercial Paper Conduit Facility VIE

In December 2008, HDFS transferred U.S. retail motorcycle finance receivables to a SPE, which in turn issued debt to third-party bank-sponsored asset-backed commercial paper conduits. The SPE funded the purchase of the finance receivables from HDFS primarily with cash obtained through the issuance of the debt. In April 2009, HDFS replaced its December 2008 asset-backed commercial paper conduit facility agreement with a new agreement.

On September 10, 2010, the Company amended and restated its April 2009 third-party bank sponsored asset-backed commercial paper conduit facility to provide for a total aggregate commitment of up to  $600.0 million based on, among other things, the amount of eligible U.S. retail motorcycle finance receivables held by the SPE as collateral. The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company's creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates, or LIBOR plus a specified margin to the extent the advance is not funded by a conduit lender through the issuance of commercial paper. The conduit facility also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of  $600.0 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 conduit facility, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the conduit facility has an expiration date of September 9, 2011.

At December 31, 2010, HDFS had no borrowings outstanding under the conduit facility. The SPE held  $28.0 million of finance receivables and  $1.6 million of cash collections restricted as collateral for the payment of fees associated with the unused portion of the total aggregate commitment of  $600.0 million. The assets of the SPE totaled  $30.6 million at December 31, 2010, and were primarily included in restricted finance receivables held by VIEs, net and restricted cash held by VIEs in the Company's Consolidated Balance Sheet.

At December 31, 2009, HDFS had no borrowings outstanding under the conduit facility. The SPE held  $55.2 million of finance receivables and  $3.6 million of cash collections restricted as collateral for the payment of fees associated with the unused portion of the then total aggregate commitment of  $1.20 billion. The assets of the SPE totaled  $73.0 million at December 31, 2009, and were primarily included in finance receivables and other current assets in the Company's Consolidated Balance Sheet.

For the year ended December 31, 2010, the SPE recorded interest expense of  $9.3 million related to the unused portion of the total aggregate commitment of  $600.0 million. For the year ended December 31, 2009, the SPE recorded interest expense of  $41.1 million related to both the outstanding borrowings and the unused portion of the total aggregate commitment of  $1.20 billion. Interest expense on the conduit facility is included in financial services interest expense. There was no weighted average interest rate at December 31, 2010 as HDFS had no outstanding borrowings under the conduit facility. The weighted average interest rate of the outstanding asset-backed commercial paper conduit facility, which includes the impact of the interest rate swap agreements, was 8.33% at December 31, 2009.

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Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2010
Fair Value of Financial Instruments

9.    Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash equivalents, marketable securities, trade receivables, finance receivables, net, trade payables, debt, foreign currency contracts and interest rate swaps (derivative instruments are discussed further in Note 11). Under U.S. GAAP certain of these items are required to be recorded in the financial statements at fair value, while others are required to be recorded at historical cost.

The following table summarizes the fair value and carrying value of the Company's financial instruments at December 31, 2010 and 2009 (in thousands):

 

     2010      2009  
     Fair Value      Carrying Value      Fair Value      Carrying Value  

Assets:

           

Cash and cash equivalents

    $ 1,021,933        $ 1,021,933        $ 1,630,433        $ 1,630,433   

Marketable securities

    $ 140,118        $ 140,118        $ 39,685        $ 39,685   

Accounts receivable, net

    $ 262,382        $ 262,382        $ 269,371        $ 269,371   

Derivatives

    $ 37        $ 37        $ 13,678        $ 13,678   

Finance receivables, net

    $ 6,120,682        $ 6,017,569        $ 4,802,322        $ 4,811,812   

Investment in retained securitization interests

    $ —          $ —          $ 245,350        $ 245,350   

Restricted cash held by variable interest entities

    $ 288,887        $ 288,887        $ 167,667        $ 167,667   

Liabilities:

           

Accounts payable and accrued liabilities

    $ 761,934        $ 761,934        $ 660,306        $ 660,306   

Derivatives

    $ 20,083        $ 20,083        $ 16,293        $ 16,293   

Unsecured commercial paper

    $ 582,572        $ 582,572        $ 325,099        $ 325,099   

Credit facilities

    $ 213,772        $ 213,772        $ 448,049        $ 448,049   

Medium-term notes

    $ 2,018,429        $ 1,897,778        $ 2,152,612        $ 2,103,396   

Senior unsecured notes

    $ 395,384        $ 303,000        $ 816,998        $ 600,000   

Term asset-backed securitization debt

    $ 2,805,954        $ 2,755,234        $ 2,166,056        $ 2,159,585   

Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Net and Accounts Payable – With the exception of certain money-market investments, these items are recorded in the financial statements at historical cost. The historical cost basis for these amounts is estimated to approximate their respective fair values due to the short maturity of these instruments.

Marketable Securities – Marketable securities are recorded in the financial statements at fair value. The fair value of marketable securities is based primarily on quoted market prices. Changes in fair value are recorded, net of tax, as other comprehensive income and included as a component of shareholders' equity.

Finance Receivables, Net – Finance receivables, net includes finance receivables held for investment, net and restricted finance receivables held by VIEs, net. Retail and wholesale finance receivables are recorded in the financial statements at historical cost less an allowance for finance 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. The historical cost basis of wholesale finance receivables approximates fair value because they either are short-term or have interest rates that adjust with changes in market interest rates.

The investment in retained securitization interests, which was a component of finance receivables held for investment in the Consolidated Balance Sheets, was recorded in the financial statements at fair value and was estimated based on the present value of future expected cash flows using management's best estimates of the key assumptions.

Debt – Debt is generally recorded in the financial statements at historical cost. The carrying value of debt provided under credit facilities approximates fair value since the interest rates charged under the facilities are tied directly to market rates and fluctuate as market rates change. The carrying value of unsecured commercial paper approximates fair value due to its short maturity.

 

The fair values of the medium-term notes maturing in December 2012, December 2014 and June 2018 are estimated based upon rates currently available for debt with similar terms and remaining maturities. The medium-term notes that matured in December 2010 were carried at fair value and included a fair value adjustment due to the interest rate swap agreement, designated as a fair value hedge, which effectively converted a portion of the note from a fixed to a floating rate.

The fair value of the senior unsecured notes is estimated based upon rates currently available for debt with similar terms and remaining maturities.

The fair value of the debt related to term asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities.

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Fair Value Measurements
12 Months Ended
Dec. 31, 2010
Fair Value Measurements

10.    Fair Value Measurements

Certain assets and liabilities are recorded at fair value in the financial statements; some of these are measured on a recurring basis while others are measured on a non-recurring basis. Assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. In determining fair value of assets and liabilities, the Company uses various valuation techniques. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.

The Company assesses the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market. 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 rates and yield curves. Level 3 inputs are not observable in the market and include management's judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the following tables.

Recurring Fair Value Measurements

The following tables present information about the Company's assets and liabilities measured at fair value on a recurring basis as of December 31, 2010 and 2009 (in thousands):

 

     Balance as of
December 31, 2010
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Cash equivalents

    $ 763,885        $ 763,885        $ —          $ —     

Marketable securities

     140,118         89,887         50,231         —     

Derivatives

     37         —           37         —     
                                   
    $ 904,040        $ 853,772        $ 50,268        $ —     
                                   

Liabilities:

           

Derivatives

    $ 20,083        $ —          $ 20,083        $ —     
                                   

 

     Balance as of
December 31, 2009
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Assets:

           

Cash equivalents

    $ 1,298,254        $ 1,298,254        $ —          $ —     

Marketable securities

     39,685         —           39,685         —     

Derivatives

     13,678         —           13,678         —     

Investment in retained securitization interests

     245,350         —           —           245,350   
                                   
    $ 1,596,967        $ 1,298,254        $ 53,363        $ 245,350   
                                   

Liabilities:

           

Derivatives

    $ 16,293        $ —          $ 16,293        $ —     
                                   

The investment in retained securitization interests was valued using discounted cash flow methodologies incorporating assumptions that, in management's judgment, reflect assumptions marketplace participants would use at December 31, 2009. The following table presents additional information about the investment in retained securitization interests which was measured at fair value on a recurring basis using significant unobservable inputs (Level 3) (in thousands):

 

     2009  

Balance, beginning of period

    $ 330,674   

Net realized losses included in financial services income(a)

     (13,683

Unrealized gains included in other comprehensive income(b)

     21,219   

Sales, repurchases and settlements, net

     (92,860
        

Balance, end of period

    $ 245,350   
        

As discussed in Note 1, upon adoption of the new guidance within ASC Topic 810 and ASC Topic 860, the Company derecognized its investment in retained securitization interests on January 1, 2010. The carrying value of the investment in retained securitization interests that was derecognized on that date was  $245.4 million.

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Derivative Instruments and Hedging Activities
12 Months Ended
Dec. 31, 2010
Derivative Instruments and Hedging Activities

11.    Derivative Instruments and Hedging Activities

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

All derivative instruments are recognized on the balance sheet at fair value (see Note 9). In accordance with ASC Topic 815, the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, at both the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative instrument's gain or loss is excluded from the assessment of hedge effectiveness. Derivative instruments which do not qualify for hedge accounting are recorded at fair value and any changes in fair value are recorded in current period earnings.

The Company sells its products internationally and in most markets those sales are made in the foreign country's local currency. As a result, the Company's earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company's most significant foreign currency risk relates to the Euro, the Australian dollar and the Japanese yen. The Company utilizes foreign currency contracts to mitigate the effect of these currencies' fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.

The Company utilizes natural gas contracts to hedge portions of the cost of natural gas consumed in the Company's motorcycle production operations.

The Company's foreign currency contracts and natural gas contracts generally have maturities of less than one year.

The Company's earnings are affected by changes in interest rates. HDFS utilizes interest rate swaps to reduce the impact of fluctuations in interest rates on its unsecured commercial paper by converting a portion from a floating rate basis to a fixed rate basis. In addition, HDFS utilized interest rate swaps with its medium-term notes which matured in December 2010; however, the impact was to convert from a fixed rate basis to a floating rate basis. HDFS also entered into derivative contracts to facilitate its first quarter 2008 term asset-backed securitization transaction as well as its third quarter 2007 term asset-backed securitization transaction. These derivatives, which hedge assets held by VIEs, do not qualify for hedge accounting treatment. During 2010, the derivative contracts related to the third quarter 2007 term asset-backed securitization expired. Additionally, to facilitate asset-backed commercial paper conduit facility agreements that the Company entered into April 2009, HDFS entered into derivative contracts which did not qualify for hedge accounting treatment. These derivative contracts were terminated in 2010.

The following tables summarize the fair value of the Company's derivative financial instruments (in thousands):

 

     December 31, 2010      December 31, 2009  

Derivatives Designated As Hedging
Instruments Under ASC Topic 815

   Notional
Value
     Asset
Fair  Value(a)
     Liability
Fair  Value(b)
     Notional
Value
     Asset
Fair  Value(a)
     Liability
Fair  Value(b)
 

Foreign currency contracts(c)

    $ 270,931        $ —          $ 12,369        $ 144,805        $ —          $ 6,599   

Natural gas contracts(c)

     1,704         —           246         3,312         51         —     

Interest rate swaps – unsecured commercial paper(c)

     135,100         —           7,431         177,800         —           9,694   

Interest rate swaps – medium-term notes(d)

     —           —           —           150,000         6,072         —     
                                                     

Total

    $ 407,735        $ —          $ 20,046        $ 475,917        $ 6,123        $ 16,293   
                                                     

 

     December 31, 2010      December 31, 2009  

Derivatives Not Designated As Hedging
Instruments Under ASC Topic 815

   Notional
Value
     Asset
Fair  Value(a)
     Liability
Fair  Value(b)
     Notional
Value
     Asset
Fair  Value(a)
     Liability
Fair  Value(b)
 

Derivatives – securitization transactions

    $ 38,113        $ 37        $ 37        $ 254,904        $ 352        $ —     

Derivatives – conduit facility

     —           —           —           575,164         7,203         —     
                                                     
    $ 38,113        $ 37        $ 37        $ 830,068        $ 7,555        $ —     
                                                     

The following tables summarize the amount of gains and losses for the years ended December 31, 2010 and 2009 related to derivative financial instruments designated as cash flow hedges (in thousands):

 

     Amount of Gain/(Loss)
Recognized in OCI
 

Cash Flow Hedges

       2010             2009      

Foreign currency contracts

    $ (6,896    $ (4,402

Natural gas contracts

     (1,164     (1,329

Interest rate swaps – unsecured commercial paper

     (4,318     (1,299

Interest rate swaps – conduit facility

     —          (1,447
                

Total

    $ (12,378    $ (8,477
                

 

     Amount of Gain/(Loss)
Reclassified from AOCI into Income
 

Cash Flow Hedges

   2010     2009     Expected to be Reclassified
Over the Next Twelve  Months
 

Foreign currency contracts(a)

    $ (312    $ 13,520       $ (11,271

Natural gas contracts(a)

     (867     (2,713     (246

Interest rate swaps – unsecured commercial paper(b)

     (6,466     (8,817     (4,992

Interest rate swaps – conduit facility(b)

     —          (6,452     —     
                        

Total

    $ (7,645    $ (4,462    $ (16,509
                        

For the years ended December 31, 2010 and 2009, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.

The following tables summarize the amount of gains and losses for the years ended December 31, 2010 and 2009 related to derivative financial instruments designated as fair value hedges (in thousands):

 

     Amount of Loss
Recognized in Income on Derivative
 

Fair Value Hedges

   2010     2009  

Interest rate swaps – medium-term notes(a)

    $ (6,072    $ (3,626
     Amount of Gain
Recognized in Income on Hedged Debt
 

Fair Value Hedges

   2010     2009  

Interest rate swaps – medium-term notes(a)

    $ 6,072       $ 3,626   

 

The following table summarizes the amount of gains and losses for the years ended December 31, 2010 and 2009 related to derivative financial instruments not designated as hedging instruments (in thousands):

 

     Amount of Gain/(Loss)
Recognized in Income on Derivative
 

Derivatives not Designated as Hedges

       2010             2009      

Derivatives – securitization transactions(a)

    $ (8    $ 1,177   

Derivatives – conduit facility(a)

     (6,343     (2,101
                
    $ (6,351    $ (924
                

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Comprehensive Income
12 Months Ended
Dec. 31, 2010
Comprehensive Income

12.    Comprehensive Income

The following table sets forth the reconciliation of net income (loss) to comprehensive income for the years ended December 31 (in thousands):

 

    2010     2009     2008  

Net income (loss)

     $ 146,545         $ (55,116      $ 654,718   

Other comprehensive income, net of tax:

           

Foreign currency translation adjustment

      9,449          30,932          (44,012

Investment in retained securitization interest:

           

Unrealized net gains (losses) arising during the period

    —            9,760          (18,838  

Less: net losses reclassified into net income

    —          —          (3,840     13,600        —          (18,838
                             

Derivative financial instruments:

           

Unrealized net losses arising during period

    (7,852       (4,242       (6,060  

Less: net losses reclassified into net income

    (4,880     (2,972     (3,003     (1,239     (17,616     11,556   
                             

Marketable securities

           

Unrealized losses on marketable securities

    (133       —            —       

Less: net losses reclassified into net income

    —          (133     —          —          (76     76   
                             

Pension and postretirement healthcare plans:

           

Amortization of net prior service cost

    925          2,679          3,116     

Amortization of actuarial loss

    20,944          11,761          7,376     

Pension and postretirement healthcare funded status adjustment

    18,431          37,504          (347,165  

Less: actuarial loss reclassified into net income due to settlement

    (2,942       (884       —       

Less: net prior service credit (cost) reclassified into net income due to curtailment

    1,393        41,849        (22,920     75,748        —          (336,673
                                               

Comprehensive income

     $ 194,738         $ 63,925         $ 266,827   
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Debt
12 Months Ended
Dec. 31, 2010
Debt

13.    Debt

Debt with contractual terms less than one year is generally classified as short-term debt and consisted of the following as of December 31 (in thousands):

 

     2010      2009  

Unsecured commercial paper

    $ 480,472        $ 189,999   

 

Debt with a contractual term greater than one year is generally classified as long-term debt and consisted of the following as of December 31 (in thousands):

 

     2010     2009  

Unsecured commercial paper

    $ 102,100       $ 135,100   

Bank borrowings

    

Credit facilities

     213,772        448,049   

Secured debt

    

Term asset-backed securitization debt

     2,755,234        2,159,585   

Unsecured notes

    

5.00% Medium-term notes due in 2010 ( $200.0 million par value)

     —          206,065   

5.25% Medium-term notes due in 2012 ( $400.0 million par value)

     399,825        399,734   

5.75% Medium-term notes due in 2014 ( $500.0 million par value)

     499,383        499,222   

6.80% Medium-term notes due in 2018 ( $1,000.0 million par value)

     998,570        998,375   

15.00% senior unsecured notes due in 2014 ( $600.0 million par value)

     303,000        600,000   
                

Gross long-term debt

     5,271,884        5,446,130   

Less: current portion of long-term debt

     (751,293     (1,332,091
                

Long-term debt

    $ 4,520,591       $ 4,114,039   
                

At the end of 2009, the Company had  $205.0 million of credit facilities debt related to the MV acquisition and subsequent working capital advances. In conjunction with the sale of MV, the Company repaid all outstanding credit facility debt associated with MV.

The Company has classified  $315.9 million and  $378.2 million related to its unsecured commercial paper and its Global Credit Facilities as long-term debt as of December 31, 2010 and 2009, respectively. This amount has been excluded from current liabilities because it is supported by the Global Credit Facilities and is expected to remain outstanding for an uninterrupted period extending beyond one year from the balance sheet date.

Commercial paper maturities may range up to 365 days from the issuance date. The weighted-average interest rate of outstanding commercial paper balances was 1.38% and 2.87% at December 31, 2010 and 2009, respectively. The December 31, 2010 and 2009 weighted-average interest rates include the impact of interest rate swap agreements.

On April 29, 2010, the Company and HDFS entered into a 2010  $675.0 million 364-day credit facility (2010 364-Day Credit Facility) to refinance and replace a  $625.0 million 364-day credit facility, which matured in April 2010. The 2010 364-Day Credit Facility matures in April 2011. In connection with the 2010 364-Day Credit Facility, the Company and HDFS also entered into a new  $675.0 million three-year credit facility agreement to refinance and replace a  $950.0 million three-year credit facility agreement, which was set to mature in July 2011. The new three-year credit facility matures in April 2013. The 2010 364-Day Credit Facility and the new three-year credit facility agreement (together, the Global Credit Facilities) bear interest at various variable interest rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based upon the average daily unused portion of the aggregate commitments under the Global Credit Facilities. The Global Credit Facilities are committed facilities and primarily used to support HDFS' unsecured commercial paper program. HDFS may issue unsecured commercial paper in the aggregate equal to the unused portion of the Global Credit Facilities.

As discussed in Note 8, on September 10, 2010, the Company amended and restated its revolving asset-backed conduit facility which provides for a total aggregate commitment of  $600.0 million. At December 31, 2010 and 2009, HDFS had no outstanding borrowings under the conduit facility.

 

As discussed in Note 8, during 2010, the Company issued  $600.0 million of secured notes through one term asset-backed securitization transaction. During 2009,  $2.46 billion of secured notes were issued through four separate term asset-backed securitization transactions. The SPEs in turn issued  $600.0 million and  $2.46 billion of secured notes in 2010 and 2009, respectively, with various maturities and interest rates to investors in term asset-backed sheet securitization transactions. The term-asset backed securitization transactions are further discussed in Note 8. As discussed in Note 1, the Company consolidated formerly off-balance sheet term asset-backed securitization trusts.

HDFS' medium-term notes (collectively the Notes) provide for semi-annual interest payments and principal due at maturity. During December 2010, the  $200.0 million medium-term note matured and the principal and accrued interest was paid in full. As a result, the Notes no longer include a fair value adjustment as the interest rate swaps related to the  $200.0 million medium-term note only. At December 31, 2009, the Notes included a fair value adjustment increasing the balance by  $6.1 million due to interest rate swap agreements designated as fair value hedges. The effect of the interest rate swap agreements was to convert the interest rate on a portion of the Notes from a fixed to a floating rate, which is based on 3-month LIBOR. Unamortized discounts on the Notes reduced the balance by  $2.2 million and  $2.7 million at December 31, 2010 and 2009, respectively.

During the fourth quarter of 2010, the Company repurchased  $297.0 million of the  $600.0 million senior unsecured notes at a price of  $380.8 million. As a result of the transaction, the Company incurred a loss on debt extinguishment of  $85.2 million which also includes  $1.4 million of capitalized debt issuance costs that were written-off. The Company used cash on hand for the repurchase and the repurchased notes were cancelled.

HDFS has a revolving credit line with the Company whereby HDFS may borrow up to  $210.0 million at market rates of interest. As of December 31, 2010 and 2009, HDFS had no borrowings owed to the Company under the revolving credit agreement.

The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support in order 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.

HDFS and the Company are subject to various operating and financial covenants related to the Global Credit Facilities and the asset-backed commercial paper conduit facility and various operating covenants under the Notes. The more significant covenants are described below.

The covenants limit the Company's and HDFS' ability to:

 

   

incur certain additional indebtedness;

 

   

assume or incur certain liens;

 

   

participate in a merger, consolidation, liquidation or dissolution; and

 

   

purchase or hold margin stock.

Under the financial covenants of the Global Credit Facilities and the asset-backed commercial paper conduit facility, the debt to equity ratio of HDFS and its consolidated subsidiaries cannot exceed 10.0 to 1.0 and HDFS must maintain a consolidated tangible net worth of not less than  $500.0 million. In addition, the Company must maintain a minimum interest coverage ratio of 2.25 to 1.0 for the fiscal quarter ended December 31, 2010 and 2.5 to 1.0 for each fiscal quarter thereafter. No financial covenants are required under the Notes or the Company's senior unsecured notes.

At December 31, 2010 and 2009, HDFS and the Company remained in compliance with all of these covenants.

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Income Taxes
12 Months Ended
Dec. 31, 2010
Income Taxes

14.    Income Taxes

Provision for income taxes for the years ended December 31 consists of the following (in thousands):

 

 

 

2010

 

 

2009

 

 

2008

 

Current:

 

 

 

Federal

 

 $

138,221

 

 

 $

94,984

 

 

 $

376,796

 

State

 

 

6,919

 

 

 

5,201

 

 

 

21,174

 

Foreign

 

 

4,486

 

 

 

1,395

 

 

 

29,044

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

149,626

 

 

 

101,580

 

 

 

427,014

 

Deferred:

 

 

 

Federal

 

 

(18,428

 

 

(10,665

 

 

(36,368

State

 

 

(1,361

 

 

22,690

 

 

 

(2,225

Foreign

 

 

963

 

 

 

(5,586

 

 

(6,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(18,826

 

 

6,439

 

 

 

(45,328

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 $

130,800

 

 

 $

108,019

 

 

 $

381,686