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Document and Entity Information
9 Months Ended
Sep. 26, 2010
Oct. 29, 2010
Document and Entity Information
Document Type 10-Q
Amendment Flag false
Document Period End Date 2010-09-26
Document Fiscal Year Focus 2010
Document Fiscal Period Focus Q3
Trading Symbol HOG
Entity Registrant Name HARLEY DAVIDSON INC
Entity Central Index Key 0000793952
Current Fiscal Year End Date --12-31
Entity Filer Category Large Accelerated Filer
Entity Common Stock, Shares Outstanding 235,535,660
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD  $)
In Thousands, except Per Share data
3 Months Ended 9 Months Ended
Sep. 26, 2010
Sep. 27, 2009
Sep. 26, 2010
Sep. 27, 2009
Revenue:
Motorcycles and related products  $ 1,087,115  $ 1,108,465  $ 3,259,551  $ 3,522,631
Financial services 172,845 136,993 516,387 365,627
Total revenue 1,259,960 1,245,458 3,775,938 3,888,258
Costs and expenses:
Motorcycles and related products cost of goods sold 707,309 738,331 2,103,214 2,291,256
Financial services interest expense 62,780 80,174 213,104 212,992
Financial services provision for credit losses 28,049 56,445 69,117 137,831
Selling, administrative and engineering expense 241,976 219,450 720,755 690,836
Restructuring expense and other impairments 67,476 51,949 145,837 101,942
Goodwill impairment 28,387
Total costs and expenses 1,107,590 1,146,349 3,252,027 3,463,244
Operating income 152,370 99,109 523,911 425,014
Investment income 1,239 947 3,666 3,217
Interest expense 23,102 882 70,148 11,468
Income before provision for income taxes 130,507 99,174 457,429 416,763
Provision for income taxes 36,790 42,793 155,684 198,952
Income from continuing operations 93,717 56,381 301,745 217,811
Loss from discontinued operations, net of tax (4,888) (29,898) (108,434) (54,231)
Net income  $ 88,829  $ 26,483  $ 193,311  $ 163,580
Earnings per common share from continuing operations:
Basic  $ 0.4  $ 0.24  $ 1.29  $ 0.94
Diluted  $ 0.4  $ 0.24  $ 1.29  $ 0.93
Loss per common share from discontinued operations:
Basic  $ (0.02)  $ (0.13)  $ (0.46)  $ (0.23)
Diluted  $ (0.02)  $ (0.13)  $ (0.46)  $ (0.23)
Earnings per common share:
Basic  $ 0.38  $ 0.11  $ 0.83  $ 0.7
Diluted  $ 0.38  $ 0.11  $ 0.82  $ 0.7
Cash dividends per common share  $ 0.1  $ 0.1  $ 0.3  $ 0.3
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CONDENSED CONSOLIDATED BALANCE SHEETS (USD  $)
In Thousands
9 Months Ended 12 Months Ended
Sep. 26, 2010
Sep. 27, 2009
Dec. 31, 2009
Current assets:
Cash and cash equivalents  $ 1,494,301  $ 1,518,799  $ 1,630,433
Marketable securities 55,229 39,685
Accounts receivable, net 306,085 304,410 269,371
Finance receivables held for investment, net 1,065,103 1,525,164 1,436,114
Restricted finance receivables held by variable interest entities, net 674,371
Inventories 319,101 398,852 323,029
Assets of discontinued operations 233,339 181,211
Restricted cash held by variable interest entities 287,613
Other current assets 297,157 410,853 462,106
Total current assets 4,498,960 4,391,417 4,341,949
Finance receivables held for investment, net 2,045,249 3,652,987 3,621,048
Restricted finance receivables held by variable interest entities, net 2,425,788
Property, plant and equipment, net 779,991 939,446 906,906
Goodwill 29,992 32,498 31,400
Other long-term assets 260,980 336,720 254,215
Total Assets 10,040,960 9,353,068 9,155,518
Current liabilities:
Accounts payable 243,840 276,789 162,515
Accrued liabilities 690,811 620,354 514,084
Liabilities of discontinued operations 71,058 69,535
Short-term debt 587,981 1,325,303 189,999
Current portion of long-term debt 201,426 668,205 1,332,091
Current portion of long-term debt held by variable interest entities 731,833
Total current liabilities 2,455,891 2,961,709 2,268,224
Long-term debt 2,814,400 3,176,648 4,114,039
Long-term debt held by variable interest entities 1,801,537
Pension liability 353,896 498,959 245,332
Postretirement healthcare liability 272,232 269,515 264,472
Other long-term liabilities 153,054 156,265 155,333
Commitments and contingencies (Note 18)      
Total shareholders' equity 2,189,950 2,289,972 2,108,118
Total liabilities and shareholders' equity  $ 10,040,960  $ 9,353,068  $ 9,155,518
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD  $)
In Thousands
9 Months Ended
Sep. 26, 2010
Sep. 27, 2009
Condensed Consolidated Statements of Cash Flows
Net cash provided by operating activities of continuing operations (Note 3)  $ 1,169,502  $ 561,338
Cash flows from investing activities of continuing operations:
Capital expenditures (77,559) (76,601)
Origination of finance receivables held for investment (1,841,403) (943,557)
Collections on finance receivables held for investment 2,041,976 423,641
Collection of retained securitization interests 45,843
Purchases of marketable securities (68,497)
Sales and redemptions of marketable securities 54,579
Net cash provided by (used by) investing activities of continuing operations 109,096 (550,674)
Cash flows from financing activities of continuing operations:
Proceeds from issuance of senior unsecured notes 589,030
Proceeds from securitization debt 1,195,129
Repayments of securitization debt (1,518,528) (106,350)
Net increase (decrease) in credit facilities and unsecured commercial paper 145,687 (556,101)
Net borrowings of asset-backed commercial paper (845) 56,691
Net change in restricted cash 78,928 (127,462)
Dividends (70,480) (70,329)
Purchase of common stock for treasury (1,687) (296)
Excess tax benefits from share-based payments 3,590 148
Issuance of common stock under employee stock option plans 7,466 11
Net cash (used by) provided by financing activities of continuing operations (1,355,869) 980,471
Effect of exchange rate changes on cash and cash equivalents of continuing operations 4,921 11,829
Net (decrease) increase in cash and cash equivalents of continuing operations (72,350) 1,002,964
Cash flows from discontinued operations:
Cash flows from operating activities of discontinued operations (68,650) (50,044)
Cash flows from investing activities of discontinued operations (18,010)
Effect of exchange rate changes on cash and cash equivalents of discontinued operations (1,195) (4,086)
Net cash used by discontinued operations, total (69,845) (72,140)
Net (decrease) increase in cash and cash equivalents (142,195) 930,824
Cash and cash equivalents:
Cash and cash equivalents-beginning of period 1,630,433 568,894
Cash and cash equivalents of discontinued operations-beginning of period 6,063 24,664
Net (decrease) increase in cash and cash equivalents (142,195) 930,824
Less: Cash and cash equivalents of discontinued operations-end of period (5,583)
Cash and cash equivalents-end of period  $ 1,494,301  $ 1,518,799
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Basis of Presentation and Use of Estimates
9 Months Ended
Sep. 26, 2010
Basis of Presentation and Use of Estimates
Basis of Presentation and Use of Estimates
1. Basis of Presentation and Use of Estimates

The condensed 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), Buell Motorcycle Company (Buell) and Harley-Davidson Financial Services (HDFS). In addition, certain variable interest entities (VIEs) related to secured financing are consolidated as the Company is the primary beneficiary. All intercompany accounts and material transactions are eliminated.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the condensed consolidated balance sheets as of September 26, 2010 and September 27, 2009, the condensed consolidated statements of operations for the three and nine month periods then ended and the condensed consolidated statements of cash flows for the nine month periods then ended.

Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company's Annual Report on Form 10-K for the year ended December 31, 2009.

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

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

During 2008, the Company acquired Italian motorcycle manufacturer MV Agusta (MV) and the results of MV were included in the Motorcycles segment. On October 15, 2009, the Company announced its intent to divest MV. The Motorcycles segment financial information has been adjusted to reflect MV as a discontinued operation for all periods presented. On August 6, 2010, the Company concluded the sale of MV to a company controlled by the former owner of MV.

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New Accounting Standards
9 Months Ended
Sep. 26, 2010
New Accounting Standards
New Accounting Standards
2. New Accounting Standards

Accounting Standards Recently Adopted

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, formerly qualifying special purpose entities (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.

Accounting Standards Not Yet Adopted

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 is required to adopt ASU No. 2010-20 as of December 15, 2010 and is currently evaluating the impact the new disclosure requirements will have on its financials statements and notes.

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Additional Balance Sheet and Cash Flow Information
9 Months Ended
Sep. 26, 2010
Additional Balance Sheet and Cash Flow Information
Additional Balance Sheet and Cash Flow Information
3. Additional Balance Sheet and Cash Flow Information

Marketable Securities

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

 

     September 26,
2010
     December 31,
2009
     September 27,
2009
 

Available-for-sale:

        

Corporate bond investments

    $ 55,229        $ 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 the first nine months of 2010, the Company recognized gross unrealized gains of  $1.1 million, or  $0.7 million net of tax, to adjust amortized cost to fair value. There were no marketable securities held at September 27, 2009.

 

Finance Receivables

Finance receivables held for investment, net, including finance receivables held by VIEs, consisted of the following (in thousands):

 

     September 26,
2010
    December 31,
2009
    September 27,
2009
 

Wholesale

    $ 717,660       $ 870,001       $ 958,683   

Retail

     5,674,836        4,091,893        4,103,286   
                        
     6,392,496        4,961,894        5,061,969   

Allowance for finance credit losses

     (181,985     (150,082     (148,917
                        
     6,210,511        4,811,812        4,913,052   

Investment in retained securitization interests

     —          245,350        265,099   
                        
    $ 6,210,511       $ 5,057,162       $ 5,178,151   
                        

At September 26, 2010, the allowance for finance credit losses on finance receivables held for investment was  $182.0 million which consisted of  $171.1 million for retail finance receivables and  $10.9 million for wholesale finance receivables. Of the  $171.1 million allowance for finance credit losses on retail finance receivables,  $96.8 million related to retail finance receivables held by VIEs.

As part of the January 1, 2010 adoption of the new accounting guidance within ASC Topic 810 and ASC Topic 860, the Company established an initial  $49.4 million allowance for credit losses related to the previously unconsolidated securitized finance receivables. The initial allowance was recorded through the adoption adjustment to retained earnings.

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 are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories consist of the following (in thousands):

 

     September 26,
2010
    December 31,
2009
    September 27,
2009
 

Components at the lower of FIFO cost or market

      

Raw materials and work in process

    $ 103,916       $ 104,641       $ 104,153   

Motorcycle finished goods

     144,794        168,002        228,703   

Parts and accessories and general merchandise

     105,828        84,823        100,745   
                        

Inventory at lower of FIFO cost or market

     354,538        357,466        433,601   

Excess of FIFO over LIFO cost

     (35,437     (34,437     (34,749
                        
    $ 319,101       $ 323,029       $ 398,852   
                        

 

Operating Cash Flow

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

 

     Nine months ended  
     September 26,
2010
    September 27,
2009
 

Cash flows from operating activities:

    

Net income

    $ 193,311       $ 163,580   

Loss from discontinued operations

     (108,434     (54,231
                

Income from continuing operations

     301,745        217,811   

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:

    

Depreciation

     199,629        181,614   

Provision for employee long-term benefits

     64,331        59,225   

Contributions to pension and postretirement plans

     (28,138     (14,820

Stock compensation expense

     21,486        12,689   

Net change in wholesale finance receivables

     148,646        243,531   

Origination of retail finance receivables held for sale

     —          (1,180,467

Collections on retail finance receivables held for sale

     —          725,042   

Impairment of retained securitization interests

     —          35,575   

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

     —          5,895   

Provision for credit losses

     69,117        137,831   

Pension and postretirement healthcare plan curtailment and settlement expense

     30,206        4,903   

Goodwill and other impairments

     —          42,562   

Foreign currency adjustments

     (18,481     (20,835

Other, net

     115,799        70,558   

Changes in current assets and liabilities:

    

Accounts receivable, net

     (38,603     (24,234

Finance receivables - accrued interest and other

     9,825        (2,282

Inventories

     5,941        10,358   

Accounts payable and accrued liabilities

     306,173        16,501   

Restructuring reserves

     (18,332     43,033   

Derivative instruments

     3,978        3,195   

Other

     (3,820     (6,347
                

Total adjustments

     867,757        343,527   
                

Net cash provided by operating activities of continuing operations

    $ 1,169,502       $ 561,338   
                

 

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MV Divestiture
9 Months Ended
Sep. 26, 2010
MV Divestiture
MV Divestiture
4. MV Divestiture

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. As a result, MV is presented as a discontinued operation for all periods presented.

 

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 Company incurred an immaterial loss on the sale, which is included in loss from discontinued operations, net of tax, during the three and nine months ended September 26, 2010.

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):

 

     Three months ended     Nine months ended  
     September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Revenue

    $ 3,983       $ 12,810       $ 48,563       $ 42,940   

Loss before income taxes

    $ (5,645    $ (29,891    $ (131,034    $ (54,214

Net loss

    $ (4,888    $ (29,898    $ (108,434    $ (54,231

Loss per common share

    $ (0.02    $ (0.13    $ (0.46    $ (0.23

During the first nine months of 2010, the Company incurred a  $131.0 million pre-tax loss from discontinued operations, or  $108.4 million net of tax. Included in the first nine months of 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. During the three and nine months ended September 27, 2009, the Company incurred an  $18.9 million goodwill impairment charge.

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
9 Months Ended
Sep. 26, 2010
Restructuring Expense and Other Impairments
Restructuring Expense and Other Impairments
5. 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 "casual" 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  $85 million in restructuring expenses related to the new contracts through 2012, of which approximately 35% are expected to be non-cash. During the third quarter of 2010, the Company recorded a  $40.7 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 September 26, 2010 (in thousands):

 

     Motorcycles & Related Products  
     Employee
Severance and
Termination Costs
    Other     Total  

Restructuring expense

    $ 40,662       $ 5       $ 40,667   

Utilized - cash

     (2,141     (5     (2,146

Utilized - noncash

     (28,171     —          (28,171
                        

Balance September 26, 2010

    $ 10,350       $ —         $ 10,350   
                        

For the three months ended September 26, 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 planned 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 is expected to be completed during 2010.

The 2009 Restructuring Plan included 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 headcount 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  $420 million to  $450 million from 2009 to 2012 (compared to previous expected total costs of approximately  $430 million to  $460 million), of which approximately 30% are expected to be non-cash. On a cumulative basis, the Company has incurred  $329.4 million of restructuring and impairment expense under the 2009 Restructuring Plan as of September 26, 2010, of which  $105.2 million was incurred during the first nine months of 2010. Approximately 2,500 employees have left the Company under the 2009 Restructuring Plan as of September 26, 2010.

 

The following table summarizes the Company's 2009 Restructuring Plan reserve recorded in accrued liabilities as of September 26, 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

   $ 63,778       $ 16,384       $ 14,175       $ 6,401       $ 100,738       $ 1,204       $ —         $ 1,204       $ 101,942   

Utilized - cash

    (18,963     —          —          (6,401     (25,364     (836     —          (836     (26,200

Utilized - noncash

    (4,533     (16,384     (14,175     —          (35,092     —          —          —          (35,092
                                                                       

Balance, September 27, 2009

   $ 40,282       $ —         $ —         $ —         $ 40,282       $ 368       $ —         $ 368       $ 40,650   

Restructuring expense

    39,991        10,521        3,848        65,877        120,237        475        1,623        2,098        122,335   

Utilized - cash

    (10,922     —          —          (34,455     (45,377     (624     (1,197     (1,821     (47,198

Utilized - noncash

    (33,281     (10,521     (3,848     —          (47,650     —          (426     (426     (48,076
                                                                       

Balance, December 31, 2009

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

Restructuring expense

    31,948        44,245        —          28,977        105,170        —          —          —          105,170   

Utilized - cash

    (39,602     —          —          (47,990     (87,592     (44     —          (44     (87,636

Utilized - noncash

    1,023        (44,245     —          (2,819     (46,041     (175     —          (175     (46,216
                                                                       

Balance, September 26, 2010

   $ 29,439       $ —         $ —         $ 9,590       $ 39,029       $ —         $ —         $ —         $ 39,029   
                                                                       

Other restructuring costs under the 2009 Restructuring Plan include items such as the exit costs for terminating supply contracts, lease termination costs and moving costs.

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Goodwill
9 Months Ended
Sep. 26, 2010
Goodwill
Goodwill
6. 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.

As a result of the Company's lower shipment volume projections and the decrease 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 had declined below its carrying value and as such the Company recorded an impairment charge of  $28.4 million during the second quarter of 2009. The impairment charge represented the Company's total goodwill balance associated with the Financial Services segment.

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Asset-Backed Financing
9 Months Ended
Sep. 26, 2010
Asset-Backed Financing
Asset-Backed Financing
7. 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.

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 purchased U.S. retail motorcycle finance receivables. 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. The secured notes' contractual lives have various maturities ranging from 2010 to 2017.

At September 26, 2010, the assets of the consolidated term asset-backed securitization SPEs totaled  $3.37 billion and were primarily included in restricted finance receivables held by VIEs, net and restricted cash held by variable interest entities in the Company's Condensed Consolidated Balance Sheet. At September 26, 2010, the SPEs held U.S. retail motorcycle finance receivables of  $3.07 billion restricted as collateral for the payment of  $2.53 billion of obligations under the secured notes. The SPEs also held  $285.7 million of cash restricted for payment on the secured notes at September 26, 2010.

At September 27, 2009, the assets of the consolidated term asset-backed securitization SPE totaled  $1.49 billion and were primarily included in other current assets and finance receivables held for investment in the Company's Condensed Consolidated Balance Sheet. At September 27, 2009, the SPE held U.S. retail motorcycle finance receivables of  $1.39 billion restricted as collateral for the payment of  $1.09 billion of obligations under the secured notes. The SPE also held  $89.5 million of cash restricted for payment on the secured notes at September 27, 2009.

Asset-Backed Commercial Paper Conduit Facility VIE

On September 10, 2010, the Company amended and restated its third-party bank sponsored asset-backed commercial paper conduit facility which provides for a total aggregate commitment of up to  $600.0 million based on, among other things, the amount of eligible U.S. retail motorcycle loans 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 September 26, 2010, HDFS had no borrowings outstanding under the conduit facility. The SPE held  $33.1 million of finance receivables and  $1.9 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  $36.9 million at September 26, 2010, and were primarily included in restricted finance receivables held by VIEs, net and restricted cash held by VIEs in the Company's Condensed Consolidated Balance Sheet.

At September 27, 2009, the SPE held finance receivables of  $759.2 million restricted as collateral for the payment of the  $570.1 million short-term asset-backed conduit facility debt, which was included in the Company's Condensed Consolidated Balance Sheet. The SPE also held  $38.0 million of cash collections from the finance receivables held by the SPE restricted for payment on the outstanding debt at September 27, 2009. The assets of the SPE totaled  $818.1 million at September 27, 2009 and were primarily included in finance receivables held for investment, net and other current assets in the Company's Condensed Consolidated Balance Sheet.

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Off-Balance Sheet Finance Receivable Securitizations
9 Months Ended
Sep. 26, 2010
Off-Balance Sheet Finance Receivable Securitizations
Off-Balance Sheet Finance Receivable Securitizations

 

8. Off-Balance Sheet Finance Receivable Securitizations

During 2009, the Company entered into term asset-backed securitization transactions that did not satisfy the requirements for accounting sale treatment under prior U.S. GAAP. As such, the 2009 term asset-backed securitization transactions were accounted for as secured financings and the related assets and liabilities were consolidated in the Company's consolidated financial statements.

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 2, 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.

Prior to 2009, HDFS sold U.S. retail motorcycle finance receivables to securitization trusts through off-balance sheet term asset-backed securitization transactions. The securitization trust issued notes to investors, with various maturities and interest rates, secured by future collections of purchased retail loans. The proceeds from the issuance of the term asset-backed securities were utilized by the securitization trust to purchase U.S. retail motorcycle loans from HDFS.

Upon sale of the U.S. retail motorcycle loans 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, net in the Condensed Consolidated Balance Sheets. In conjunction with prior year sales, the Company had investments in retained securitization interests of  $265.1 million at September 27, 2009.

The interest in excess cash flows reflected the expected cash flows arising from U.S. retail motorcycle loans sold to the securitization trust less expected servicing fees, credit losses and contracted payment obligations owed to securitization trust investors.

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.

HDFS retained servicing rights on the U.S. retail motorcycle loans that it sold to the securitization trust and received annual servicing fees approximating 1% of the outstanding securitized retail loans. HDFS serviced  $2.19 billion of U.S. retail motorcycle loans securitized in off-balance sheet term asset-backed securitization transactions as of September 27, 2009. 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  $32.3 million from contractually specified servicing fees, late fees, and ancillary fees during the first nine months of 2009. These fees were recorded in financial services revenue.

Gains or losses on off-balance sheet term asset-backed securitizations from the sale of U.S. retail motorcycle loans 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 loans, allocated between the assets sold and the retained interests based on their relative fair values at the date of transfer.

Activities of the securitization trust were limited to acquiring U.S. retail motorcycle loans, 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 lives of securitization trusts that purchased U.S. retail motorcycle loans 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 loans 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 retail loans 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 loans to pay when due.

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." As such, the investment in retained securitization interests was recorded at fair value and periodically reviewed for impairment. Market quotes of fair value were 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 is less than the amortized cost, an unrealized loss exists which indicates that the investment is other-than-temporarily impaired.

On March 30, 2009, the Company adopted new guidance codified within ASC Topic 320 regarding the recognition and presentation of other-than-temporary impairments. 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 three months ended September 27, 2009 and during the six months from the date of adoption to September 27, 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 was 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):

 

     Three months ended
September 27,
2009
     Six months ended
September 27,
2009
 

Total other-than-temporary impairment losses

    $ 438        $ 14,106   

Portion of loss reclassified from other comprehensive income

     2,972         4,338   
                 

Net impairment losses recognized in earnings

    $ 3,410        $ 18,444   
                 

 

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 September 27, 2009 was as follows (in thousands):

 

     Three months ended
September 27,
2009
    Six months ended
September 27,
2009
 

Balance, beginning of period

    $ 44,329       $ 29,686   

Credit component recognized in earnings during the period

     3,410        18,444   

Reductions due to sale/repurchase(1)

     (563     (954
                

Balance, end of period

    $ 47,176       $ 47,176   
                

 

(1) 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.

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

 

     September 27, 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 Loss Position
for more than 12 Months
    Investment in Retained
Securitization Interests
Currently in a Gain Position
 

Amortized cost

    $ 275,916       $ 207,491       $ 53,072       $ 15,353   

Gross unrealized gains

     274        —          —          274   

Gross unrealized losses

     (11,091     (9,101     (1,990     —     
                                

Fair value

    $ 265,099       $ 198,390       $ 51,082       $ 15,627   
                                

The unrealized loss position was primarily due to a difference between the discount rate used to calculate fair value at September 27, 2009 and the initial rate used to value the retained securitization interests at their inception. The discount rate used in the third quarter of 2009 to calculate fair value was 16%. 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.

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 September 27, 2009, the following weighted-average key assumptions were used to value the investment in retained securitization interests:

 

Prepayment speed (Single Monthly Mortality)

     1.71

Weighted-average life (in years)

     2.08   

Expected cumulative net credit losses

     5.45

Residual cash flows discount rate

     15.82

Expected cumulative net credit losses were a key assumption in the valuation of the investment in retained securitization interests. As of September 27, 2009, weighted-average expected net credit losses for all active securitizations were 5.45%. The table below summarizes, as of September 27, 2009, 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:

 

     Loans securitized in  

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

   2009      2008     2007     2006     2005  

September 27, 2009

     —           5.50     5.78     5.13     4.86

 

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 September 27, 2009 was as follows (dollars in thousands):

 

Carrying amount/fair value of retained interests

    $ 265,099   

Weighted-average life (in years)

     2.08   

Prepayment speed assumption (monthly rate)

     1.71

Impact on fair value of 10% adverse change

    $ (2,863

Impact on fair value of 20% adverse change

    $ (5,652

Expected cumulative net credit losses

     5.45

Impact on fair value of 10% adverse change

    $ (34,477

Impact on fair value of 20% adverse change

    $ (68,467

Residual cash flows discount rate (annual)

     15.82

Impact on fair value of 10% adverse change

    $ (5,526

Impact on fair value of 20% adverse change

    $ (10,871

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 nine months ended September 27, 2009 (in thousands):

 

Proceeds from new securitizations

    $ —     

Servicing fees received

    $ 21,320   

Other cash flows received on retained interests

    $ 56,978   

10% clean-up call repurchase option

    $ 100,317   

Prior to the adoption of the new accounting guidance discussed in Note 2, managed retail motorcycle loans consisted of all retail motorcycle installment loans serviced by HDFS including those held by off-balance sheet securitization trusts and those held by HDFS. As of September 27, 2009, managed retail motorcycle loans totaled  $5.88 billion, of which  $2.19 billion were securitized in off-balance sheet term asset-backed securitization transactions. The principal amount of managed retail motorcycle loans 30 days or more past due was  $302.3 million at September 27, 2009. The principal amount of securitized retail motorcycle loans 30 days or more past due was  $157.4 million at September 27, 2009. Managed loans 30 days or more past due exclude loans reclassified as repossessed inventory. Credit losses, net of recoveries, of the managed retail motorcycle loans were  $119.0 million during the first nine months of 2009 which included securitized retail motorcycle loan credit losses, net of recoveries, of  $60.2 million.

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Fair Value of Financial Instruments
9 Months Ended
Sep. 26, 2010
Fair Value of Financial Instruments
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 September 26, 2010 (in thousands):

 

     September 26, 2010      September 27, 2009  
     Fair Value      Carrying Value      Fair Value      Carrying Value  

Assets:

           

Cash and cash equivalents

    $ 1,494,301        $ 1,494,301        $ 1,518,799        $ 1,518,799   

Marketable securities

    $ 55,229        $ 55,229        $ —          $ —     

Accounts receivable, net

    $ 306,085        $ 306,085        $ 304,410        $ 304,410   

Derivatives

    $ 2,169        $ 2,169        $ 15,483        $ 15,483   

Finance receivables, net

    $ 6,236,095        $ 6,210,511        $ 4,885,118        $ 4,913,052   

Investment in retained securitization interests

    $ —          $ —          $ 265,099        $ 265,099   

Restricted cash held by variable interest entities

    $ 287,613        $ 287,613        $ 127,462        $ 127,462   

Liabilities:

           

Accounts payable and accrued liabilities

    $ 914,727        $ 914,727        $ 869,011        $ 869,011   

Derivatives

    $ 19,924        $ 19,924        $ 28,132        $ 28,132   

Unsecured commercial paper

    $ 697,481        $ 697,481        $ 899,971        $ 899,971   

Asset-backed commercial paper conduit facility

    $ —          $ —          $ 570,132        $ 570,132   

Credit facilities

    $ 207,234        $ 207,234        $ 400,939        $ 400,939   

Medium-term notes

    $ 2,256,711        $ 2,099,092        $ 1,567,270        $ 1,605,464   

Senior unsecured notes

    $ 804,735        $ 600,000        $ 770,253        $ 600,000   

Finance receivable securitization debt

    $ 2,596,730        $ 2,533,370        $ 1,109,375        $ 1,093,650   

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.

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 carrying value of debt provided under the asset-backed commercial paper conduit facility approximates the fair value since the interest rates charged on the outstanding portion are tied directly to market rates and fluctuate as market rates change.

The fair values of the Company's 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 maturing in December 2010 are carried at fair value and include a fair value adjustment due to the interest rate swap agreement, designated as a fair value hedge, which effectively converts a portion of the note from a fixed to a floating rate.

The fair value of the Company's 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 finance receivable securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities.

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Fair Value Measurements
9 Months Ended
Sep. 26, 2010
Fair Value Measurements
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 September 26, 2010 and September 27, 2009 (in thousands):

 

     Balance as of
September 26, 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

    $ 1,091,200        $ 1,091,200        $ —          $ —     

Marketable securities

     55,229         —           55,229         —     

Derivatives

     2,169         —           2,169         —     
                                   
    $ 1,148,598        $ 1,091,200        $ 57,398        $ —     
                                   

Liabilities:

           

Derivatives

    $ 19,924        $ —          $ 19,924        $ —     
                                   

 

     Balance as of
September 27, 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

    $ 1,260,544        $ 1,260,544        $ —          $ —     

Derivatives

     15,483         —           15,483         —     

Investment in retained securitization interests

     265,099         —           —           265,099   
                                   
    $ 1,541,126        $ 1,260,544        $ 15,483        $ 265,099   
                                   

Liabilities:

           

Derivatives

    $ 28,132        $ —          $ 28,132        $ —     
                                   

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 September 27, 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):

 

     Three months ended
September 27,

2009
    Nine months ended
September 27,

2009
 

Balance, beginning of period

    $ 276,227       $ 330,674   

Realized gains (losses) included in financial services income(a)

     2,607        (9,205

Unrealized gains included in other comprehensive income(b)

     11,221        15,845   

Sales, repurchases and settlements, net

     (24,956     (72,215
                

Balance, end of period

    $ 265,099       $ 265,099   
                

 

(a) As discussed in Note 7, realized gains (losses) included in financial services income includes an impairment charge of  $3.4 and  $35.6 million for the three and nine months ended September 27, 2009, respectively.
(b) During the three and nine months ended September 27, 2009,  $3.0 million and  $4.3 million of net unrealized losses were reclassified out of accumulated other comprehensive income into financial services income.

As discussed in Note 2, 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
9 Months Ended
Sep. 26, 2010
Derivative Instruments and Hedging Activities
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, "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, both at 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.

 

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 effects 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 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. Similarly, HDFS utilizes interest rate swaps with its medium-term notes; however, the impact is 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. Additionally, to facilitate the asset-backed commercial paper conduit facility agreement that the Company entered into in April 2009, HDFS entered into derivative contracts, certain of which do not qualify for hedge accounting treatment.

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

 

     September 26, 2010      September 27, 2009  

Derivatives Designated As Hedging Instruments Under ASC Topic
815

   Notional
Value
     Asset
Fair  Value(1)
     Liability
Fair  Value(2)
     Notional
Value
     Asset
Fair  Value(1)
     Liability
Fair  Value(2)
 

Foreign currency contracts(3)

    $ 340,411        $ —          $ 10,431        $ 216,587        $ —          $ 16,707   

Natural gas contracts(3)

     2,305         —           505         2,980         —           51   

Interest rate swaps - unsecured commercial paper(3)

     144,800         —           8,988         190,300         —           11,374   

Interest rate swaps - medium-term notes(4)

     150,000         1,427         —           150,000         7,436         —     
                                                     

Total

    $ 637,516        $ 1,427        $ 19,924        $ 559,867        $ 7,436        $ 28,132   
                                                     
     September 26, 2010      September 27, 2009  

Derivatives Not Designated As Hedging Instruments Under ASC
Topic 815

   Notional
Value
     Asset
Fair Value(1)
     Liability
Fair Value(2)
     Notional
Value
     Asset
Fair Value(1)
     Liability
Fair Value(2)
 

Derivatives - securitization transactions

    $ 62,613        $ —          $ —          $ 366,807        $ 502        $ —     

Derivatives - conduit facility

     476,489         742         —           603,738         7,545         —     
                                                     
    $ 539,102        $ 742        $ —          $ 970,545        $ 8,047        $ —     
                                                     

 

(1) Included in other current assets
(2) Included in accrued liabilities
(3) Derivative designated as a cash flow hedge
(4) Derivative designated as a fair value hedge

 

The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):

 

     Amount of Gain/(Loss)
Recognized in OCI
 
     Three months ended     Nine months ended  

Cash Flow Hedges

   September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Foreign currency contracts

    $ (16,512    $ (12,769    $ (2,641    $ (4,053

Natural gas contracts

     (519     (91     (1,168     (1,071

Interest rate swaps - unsecured commercial paper

     (910     (2,075     (4,391     (1,004

Interest rate swaps - conduit facility

     —          —          —          (1,447
                                

Total

    $ (17,941    $ (14,935    $ (8,200    $ (7,575
                                

 

     Amount of Gain/(Loss)
Reclassified from AOCI into Income
 
     Three months ended     Nine months ended     Expected to be Reclassified
Over the Next Twelve Months
 

Cash Flow Hedges

   September 26,
2010
    September 27,
2009
    September 26,
2010
    September  27,
2009
   

Foreign currency contracts(1)

    $ (804    $ (4,596    $ 2,877       $ 23,274       $ (10,203

Natural gas contracts(1)

     (153     (442     (613     (2,353     (505

Interest rate swaps - unsecured commercial paper(2)

     (1,703     (2,306     (5,047     (6,846     5,335   

Interest rate swaps - conduit facility(2)

     —          —          —          (6,452     —     
                                        

Total

    $ (2,660    $ (7,344    $ (2,783    $ 7,623       $ (5,373
                                        

 

(1) Gain/(loss) reclassified from accumulated other comprehensive income (AOCI) to income is included in cost of goods sold
(2) Gain/(loss) reclassified from AOCI to income is included in HDFS interest expense, a component of Financial Services expense

For the three and nine months ended September 26, 2010 and September 27, 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 related to derivative financial instruments designated as fair value hedges (in thousands):

 

     Amount of Loss
Recognized in Income on Derivative
 
     Three months ended     Nine months ended  

Fair Value Hedges

   September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Interest rate swaps - medium-term notes(1)

    $ (1,491    $ (591    $ (4,645    $ (2,262

 

     Amount of Gain
Recognized in Income on Hedged Debt
 
     Three months ended      Nine months ended  

Fair Value Hedges

   September 26,
2010
     September 27,
2009
     September 26,
2010
     September 27,
2009
 

Interest rate swaps - medium-term notes(1)

    $ 1,491        $ 591        $ 4,645        $ 2,262   

 

(1) Gain/(loss) recognized in income is included in HDFS interest expense, a component of Financial Services expense

 

The following table summarizes the amount of gains and losses related to derivative financial instruments not designated as hedging instruments (in thousands):

 

     Amount of Gain/(Loss)
Recognized in Income on Derivative
 
     Three months ended     Nine months ended  

Derivatives not Designated as Hedges

   September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Derivatives - securitization transactions(1)

    $ (1    $ 311       $ (8    $ 715   

Derivatives - conduit facility(1)

     (887     (1,992     (6,461     (1,759
                                
    $ (888    $ (1,681    $ (6,469    $ (1,044
                                

 

(1) Gain/(loss) recognized in income is included in HDFS other income, a component of Financial Services revenue

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

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Comprehensive Income
9 Months Ended
Sep. 26, 2010
Comprehensive Income
Comprehensive Income
12. Comprehensive Income

The following tables set forth the reconciliation of net income to comprehensive income (in thousands):

 

     Three months ended  
     September 26, 2010     September 27, 2009  

Net income

      $ 88,829         $ 26,483   

Other comprehensive income, net of tax:

        

Foreign currency translation adjustment

       36,284          23,495   

Investment in retained securitization interest:

        

Unrealized net gains arising during the period

     —            5,279     

Less: net losses reclassified into net income

     —          —          (1,902     7,181   
                    

Derivative financial instruments:

        

Unrealized net losses arising during period

     (9,006       (9,384  

Less: net gains (losses) reclassified into net income

     401        (9,407     (4,631     (4,753
                    

Marketable securities

        

Unrealized gains on marketable securities

     1,219        1,219        —          —     
                    

Pension and postretirement benefit plans:

        

Amortization of actuarial loss

     4,969          2,534     

Amortization of net prior service cost

     318          693     

Pension and postretirement plan funded status adjustment

     (70,586       —       

Less: actuarial loss reclassified into net income due to settlement

     (300       —       

Less: prior service cost reclassified into net income due to curtailment loss

     (17,738     (47,261     —          3,227   
                                
      $ 69,664         $ 55,633   
                    

 

     Nine months ended  
     September 26, 2010     September 27, 2009  

Net income

      $ 193,311         $ 163,580   

Other comprehensive income, net of tax:

        

Foreign currency translation adjustment

       6,053          33,061   

Investment in retained securitization interest:

        

Unrealized net gains arising during the period

     —            7,384     

Less: net losses reclassified into net income

     —          —          (2,778     10,162   
                    

Derivative financial instruments:

        

Unrealized net losses arising during period

     (2,936       (3,673  

Less: net gains reclassified into net income

     277        (3,213     4,596        (8,269
                    

Marketable securities

        

Unrealized gains on marketable securities

     709        709        —          —     
                    

Pension and postretirement benefit plans:

       —         

Amortization of actuarial loss

     14,908          7,868     

Amortization of net prior service cost

     952          2,125     

Pension and postretirement plan funded status adjustment

     (70,586       12,499     

Less: actuarial loss reclassified into net income due to settlement

     (1,925       (232  

Less: net prior service cost reclassified into net incomedue to net curtailment loss

     (17,094     (35,707     (2,839     25,563   
                                
      $ 161,153         $ 224,097   
                    

 

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Income Taxes
9 Months Ended
Sep. 26, 2010
Income Taxes
Income Taxes
13. Income Taxes

During the first quarter of 2010, the Patient Protection and Affordable Care Act was signed into law. As a result of this Act, reimbursements the Company receives under Medicare Part D coverage for providing retiree prescription drug benefits would no longer be tax free beginning in 2011. At the beginning of second quarter of 2010, the Health Care and Education Reconciliation Act of 2010 delayed the impact of this change to 2013. On April 14, 2010, the SEC staff announced that the Office of the Chief Accountant would not object to a view that the two Acts should be considered together for accounting purposes. The Company accounted for both Acts in the first quarter of 2010 and recorded income tax expense of  $13.3 million associated with this change which affected the Company's first quarter 2010 income tax rate.

The Company's second quarter 2010 income tax rate was affected by the favorable conclusion of an Internal Revenue Service audit during the second quarter of 2010 and, in connection with the audit settlement, an adjustment to income taxes payable.

The Company's third quarter 2010 income tax rate was favorably affected by a domestic manufacturing benefit.

During the first quarter of 2009, an unanticipated change in Wisconsin tax law resulted in the Company establishing a valuation allowance of  $22.5 million related to net operating loss carryforwards with a corresponding charge to income tax expense.

During the second quarter of 2009, the Company incurred a  $28.4 million non-deductible goodwill impairment.

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Product Warranty and Safety Recall Campaigns
9 Months Ended
Sep. 26, 2010
Product Warranty and Safety Recall Campaigns
Product Warranty and Safety Recall Campaigns
14. 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 currently 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):

 

     Three months ended     Nine months ended  
     September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 

Balance, beginning of period

    $ 62,569       $ 60,935       $ 68,044       $ 64,543   

Warranties issued during the period

     10,865        12,384        27,547        36,195   

Settlements made during the period

     (16,077     (20,688     (44,150     (53,625

Recalls and changes to pre-existing warranty liabilities

     (903     778        5,013        6,296   
                                

Balance, end of period

    $ 56,454       $ 53,409       $ 56,454       $ 53,409   
                                

The liability for safety recall campaigns was  $2.2 million and  $2.6 million as of September 26, 2010 and September 27, 2009, respectively.

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Earnings Per Share
9 Months Ended
Sep. 26, 2010
Earnings Per Share
Earnings Per Share
15. Earnings Per Share

The Company has a share-based compensation plan under which employees may be granted share-based awards including shares of restricted stock and restricted stock units (RSUs). Non-forfeitable dividends are paid on unvested shares of restricted stock and non-forfeitable dividend equivalents are paid on unvested RSUs. As such, shares of restricted stock and RSUs are considered participating securities under the two-class method of calculating earnings per share as described in ASC Topic 260, "Earnings per Share." The two-class method of calculating earnings per share did not have a material impact on the Company's earnings per share calculation as of September 26, 2010 and September 27, 2009.

The following table sets forth the computation for basic and diluted earnings per share from continuing operations (in thousands, except per share amounts):

 

     Three months ended      Nine months ended  
     September 26,
2010
     September 27,
2009
     September 26,
2010
     September 27,
2009
 

Numerator:

           

Income from continuing operations used in computing basic and diluted earnings per share

    $ 93,717        $ 56,381        $ 301,745        $ 217,811   
                                   

Denominator:

           

Denominator for basic earnings per share-weighted-average common shares

     233,504         232,677         233,232         232,527   

Effect of dilutive securities - employee stock compensation plan

     1,282         1,198         1,395         830   
                                   

Denominator for diluted earnings per share-adjusted weighted-average shares outstanding

     234,786         233,875         234,627         233,357   
                                   

Earnings per common share from continuing operations:

           

Basic

    $ 0.40        $ 0.24        $ 1.29        $ 0.94   

Diluted

    $ 0.40        $ 0.24        $ 1.29        $ 0.93   

Outstanding options to purchase 4.1 million and 4.6 million shares of common stock for the three months ended September 26, 2010 and September 27, 2009, respectively, and 4.2 million and 5.2 million shares of common stock for the nine months ended September 26, 2010 and September 27, 2009, respectively, were not included in the Company's computation of dilutive securities because the exercise price was greater than the market price and therefore the effect would have been anti-dilutive.

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Employee Benefit Plans
9 Months Ended
Sep. 26, 2010
Employee Benefit Plans
Employee Benefit Plans
16. Employee Benefit Plans

The Company has several defined benefit pension plans and several postretirement healthcare benefit plans, which cover substantially all employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. Components of net periodic benefit costs were as follows (in thousands):

 

     Three months ended     Nine months ended  
     September 26,
2010
    September 27,
2009
    September 26,
2010
    September 27,
2009
 
Pension and SERPA Benefits         

Service cost

    $ 10,345       $ 11,702       $ 31,131       $ 36,620   

Interest cost

     19,409        18,589        58,323        57,744   

Expected return on plan assets

     (24,392     (21,885     (73,080     (67,740

Amortization of unrecognized:

        

Prior service cost

     1,085        1,432        3,351        4,473   

Net loss

     5,594        2,764        16,878        8,855   

Curtailment loss

     15,505        —          15,505        4,164   

Settlement loss

     476        —          3,058        370   
                                

Net periodic benefit cost

    $ 28,022       $ 12,602       $ 55,166       $ 44,486   
                                
Postretirement Healthcare Benefits         

Service cost

    $ 2,480       $ 2,807       $ 7,514       $ 8,753   

Interest cost

     5,297        5,570        15,891        17,142   

Expected return on plan assets

     (2,445     (2,724     (7,335     (8,376

Amortization of unrecognized:

        

Prior service credit

     (629     (283     (1,887     (867

Net loss

     2,251        1,357        6,753        4,223   

Curtailment loss

     12,666        —          11,643        369   
                                

Net periodic benefit cost

    $ 19,620       $ 6,727       $ 32,579       $ 21,244   
                                

As disclosed in Note 5, the Company recorded restructuring expense of  $145.8 million related to its Motorcycles segment during the first nine months of 2010. The restructuring action resulted in a pension and postretirement healthcare plan net curtailment loss of  $27.1 million, which is included in the  $145.8 million restructuring expense, and a net increase to equity of  $27.1 million, or  $17.1 million net of tax, which is included in other comprehensive income, during the first nine months of 2010. The net curtailment loss of  $27.1 million consists of a  $28.2 million curtailment loss related to the 2010 Restructuring Plan and a  $1.1 million curtailment gain related to the 2009 Restructuring Plan. The net curtailment loss also resulted in a pension plan remeasurement using a discount rate of 5.0% and a postretirement healthcare plan remeasurement using a discount rate of 4.6%. At December 31, 2009, the discount rates used to measure the pension plans and the postretirement healthcare plans were 6.0% and 5.65%, respectively. All other significant assumptions remain unchanged from the December 31, 2009 measurement date. As a result of the remeasurements, the Company recognized a funded status adjustment consisting of a  $112.1 million increase to its pension and postretirement healthcare liabilities and a decrease to other comprehensive income of  $112.1 million, or  $70.6 million net of tax. During the first nine months of 2009, the Company recorded restructuring expense of  $50.0 million, which included a pension and postretirement healthcare plan curtailment loss of  $4.5 million, and an increase to equity of  $13.3 million.

 

During the first nine months of 2010, the Company incurred a  $3.1 million settlement loss related to its SERPA plans compared to a settlement loss of  $0.4 million during the first nine months of 2009. The settlement losses were the result of benefit payments made to former executives who departed from the Company during 2009 and 2010.

The Company is currently evaluating a contribution during the fourth quarter of 2010 to further fund its pension plans.

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Business Segments
9 Months Ended
Sep. 26, 2010
Business Segments
Business Segments
17. Business Segments

The Company operates in two business segments: Motorcycles and Financial Services. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations. Selected segment information is set forth below (in thousands):

 

     Three months ended     Nine months ended  
     September 26,
2010
     September 27,
2009
    September 26,
2010
     September 27,
2009
 

Motorcycles net revenue

    $ 1,087,115        $ 1,108,465       $ 3,259,551        $ 3,522,631   

Gross profit

     379,806         370,134        1,156,337         1,231,375   

Selling, administrative and engineering expense

     210,828         188,736        624,984         594,778   

Restructuring expense and other impairments

     67,476         50,745        145,837         100,738   
                                  

Operating income from Motorcycles

     101,502         130,653        385,516         535,859   

Financial services income

     172,845         136,993        516,387         365,627   

Financial services expense

     121,977         167,333        377,992         446,881   

Goodwill impairment

     —           —          —           28,387   

Restructuring expense

     —           1,204        —           1,204   
                                  

Operating income (loss) from Financial Services

     50,868         (31,544     138,395         (110,845
                                  

Operating income

    $ 152,370        $ 99,109       $ 523,911        $ 425,014   
                                  

As discussed in Note 2, Financial Services operating income for the three and nine months ended September 26, 2010 includes the effects of consolidating formerly unconsolidated QSPEs.

As discussed in Note 8, operating income from Financial Services for the three and nine months ended September 27, 2009 includes an other-than-temporary impairment charge of  $3.4 million and  $35.6 million, respectively, related to the investment in retained securitization interests.

Financial Services operating income for the nine months ended September 27, 2009 includes a  $72.7 million charge related to increased provision for credit losses resulting from the one-time reclassification of finance receivables held for sale to finance receivables held for investment.

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Commitment and Contingencies
9 Months Ended
Sep. 26, 2010
Commitment and Contingencies
Commitments and Contingencies
18. Commitment and Contingencies

The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The required reserves are monitored on an ongoing basis and are updated based on new developments or new information in each matter.

Environmental Protection Agency Notice

The Company has received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company has submitted written responses to the EPA's inquiry and has engaged in discussions with the EPA. It is possible that a result of the EPA's investigation will be some form of enforcement action by the EPA that will seek a fine or other relief. However, at this time the Company does not know and cannot reasonably estimate the impact of any remedies the EPA might seek.

 

Shareholder Lawsuits:

In re Harley-Davidson, Inc. Securities Litigation was a consolidated shareholder securities class action lawsuit filed in the United States District Court for the Eastern District of Wisconsin. On October 2, 2006, the Lead Plaintiffs filed a Consolidated Class Action Complaint, which named the Company and certain former Company officers as defendants, that alleged securities law violations and sought unspecified damages relating generally to the Company's April 13, 2005 announcement that it was reducing short-term production growth and planned increases of motorcycle shipments. In 2006, the defendants filed a motion to dismiss the Consolidated Complaint. On October 8, 2009, the judge granted defendants' motion to dismiss, and the clerk of court entered judgment dismissing the consolidated lawsuit. No appeal was taken from the final judgment and the dismissal of the case became final. Subsequently, on March 18, 2010, a group of individuals who appear to be inmates in a federal correctional institution filed a motion to intervene which was immediately dismissed by the District Court because judgment had already been entered. On April 5, 2010, two of the individuals filed notices of appeal of the dismissal. On May 27, 2010, the Court of Appeals for the Seventh Circuit dismissed the appeals for failure to pay the required docketing fees. The dismissal of the action again became final.

In 2005, three shareholder derivative lawsuits were filed in the United States District Court for the Eastern District of Wisconsin (one of which was later voluntarily dismissed), and two shareholder derivative lawsuits were filed in Milwaukee County Circuit Court on July 22, 2005 and November 16, 2005, against some or all of the following current or former directors and officers of the Company: Jeffrey L. Bleustein, James L. Ziemer, James M. Brostowitz, Barry K. Allen, Richard I. Beattie, George H. Conrades, Judson C. Green, Donald A. James, Sara L. Levinson, George L. Miles, Jr., James A. Norling, James A. McCaslin, Donna F. Zarcone, Jon R. Flickinger, Gail A. Lione, Ronald M. Hutchinson, W. Kenneth Sutton, Jr. and John A. Hevey. The lawsuits also name the Company as a nominal defendant. In general, the shareholder derivative complaints include factual allegations similar to those in the class action complaints and allege that officers and directors breached their fiduciary duties to the Company. In 2006, the state court consolidated the two state court derivative actions and appointed Lead Plaintiffs and Lead Plaintiffs' counsel, and the state court ordered that the consolidated state court derivative action be stayed until after motions to dismiss the federal securities class action were decided.

On November 24, 2009, both federal court derivative plaintiffs moved to voluntarily dismiss their lawsuits and all claims without prejudice. On November 30, 2009, the federal court entered orders granting the motions and dismissing the federal court derivative lawsuits without prejudice, and those cases are now closed. Lead plaintiffs in the consolidated state court derivative action filed an amended complaint on February 22, 2010 and defendants moved to dismiss the amended complaint in its entirety on April 26, 2010. The motion has been fully briefed, and the court is scheduled to hear arguments on the motion on November 18, 2010.

The Company believes the allegations in the state court derivative lawsuit are without merit and it intends to vigorously defend against the suit. The Company is unable to predict the scope or outcome or quantify their eventual impact, if any, on the Company. At this time, the Company is also unable to estimate associated expenses or possible losses. The Company maintains insurance that may limit its financial exposure for defense costs and liability for an unfavorable outcome, should it not prevail, for claims covered by the insurance coverage.

York Environmental Matters:

The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including an ongoing site-wide remedial investigation/feasibility study (RI/FS). In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.

 

In February 2002, the Company was advised by the EPA that it considers some of the Company's remediation activities at the York facility to be subject to the EPA's corrective action program under the Resource Conservation and Recovery Act (RCRA) and offered the Company the option of addressing corrective action under a RCRA facility lead agreement. In July 2005, the York facility was designated as the first site in Pennsylvania to be addressed under the "One Cleanup Program." The program provides a more streamlined and efficient oversight of voluntary remediation by both PADEP and EPA and will be carried out consistent with the Agreement with the Navy. As a result, the RCRA facility lead agreement has been superseded.

Although the RI/FS is still underway and substantial uncertainty exists concerning the nature and scope of the additional environmental investigation and remediation that will ultimately be required at the York facility, the Company estimates that its share of the future Response Costs at the York facility will be approximately  $5.9 million. The Company has established reserves for this amount, which are included in accrued liabilities in the Condensed Consolidated Balance Sheets.

The estimate of the Company's future Response Costs that will be incurred at the York facility is based on reports of independent environmental consultants retained by the Company, the actual costs incurred to date and the estimated costs to complete the necessary investigation and remediation activities. Response Costs related to the remediation of soil are expected to be incurred over a period of several years ending in 2015. Response Costs related to ground water remediation may continue for some time beyond 2015.

Product Liability Matters:

Additionally, the Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures that are probable of occurrence and can be reasonably estimated. The Company also maintains insurance coverage for product liability exposures. The Company believes that its accruals and insurance coverage are adequate and that product liability will not have a material adverse effect on the Company's consolidated financial statements.

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Supplemental Consolidating Data
9 Months Ended
Sep. 26, 2010
Supplemental Consolidating Data
Supplemental Consolidating Data
19. Supplemental Consolidating Data

The supplemental consolidating data for the periods noted is presented for informational purposes. The supplemental consolidating data may be different than segment information presented elsewhere due to the allocation of intercompany eliminations to reporting segments. All supplemental data is presented in thousands.

 

     Three months ended September 26, 2010  
     Motorcycles & Related
Products Operations
    Financial
Services Operations
     Eliminations     Consolidated  

Revenue:

         

Motorcycles and related products

    $ 1,088,961       $ —          $ (1,846    $ 1,087,115   

Financial services

     —          173,227         (382     172,845   
                                 

Total revenue

     1,088,961        173,227         (2,228     1,259,960   

Costs and expenses:

         

Motorcycles and related products cost of goods sold

     707,309        —           —          707,309   

Financial services interest expense

     —          62,780         —          62,780   

Financial services provision for credit losses

     —          28,049         —          28,049   

Selling, administrative and engineering expense

     211,210        32,994         (2,228     241,976   

Restructuring expense

     67,476        —           —          67,476   
                                 

Total costs and expenses

     985,995        123,823         (2,228     1,107,590   
                                 

Operating income

     102,966        49,404         —          152,370   

Investment income

     1,239        —           —          1,239   

Interest expense

     23,102        —           —          23,102   
                                 

Income before provision for income taxes

     81,103        49,404         —          130,507   

Provision for income taxes

     19,004        17,786         —          36,790   
                                 

Income from continuing operations

     62,099        31,618         —          93,717   

Loss from discontinued operations, net of tax

     (4,888     —           —          (4,888
                                 

Net income

    $ 57,211       $ 31,618        $ —         $ 88,829   
                                 

 

     Nine months ended September 26, 2010  
     Motorcycles & Related
Products Operations
    Financial
Services Operations
     Eliminations     Consolidated  

Revenue:

         

Motorcycles and related products

    $ 3,261,858       $ —          $ (2,307    $ 3,259,551   

Financial services

     —          517,079         (692     516,387   
                                 

Total revenue

     3,261,858        517,079         (2,999     3,775,938   

Costs and expenses:

         

Motorcycles and related products cost of goods sold

     2,103,214        —           —          2,103,214   

Financial services interest expense

     —          213,104         —          213,104   

Financial services provision for credit losses

     —          69,117         —          69,117   

Selling, administrative and engineering expense

     625,676        98,078         (2,999     720,755   

Restructuring expense

     145,837        —           —          145,837   
                                 

Total costs and expenses

     2,874,727        380,299         (2,999     3,252,027   
                                 

Operating income

     387,131        136,780         —          523,911   

Investment income

     3,666        —           —          3,666   

Interest expense

     70,148        —           —          70,148   
                                 

Income before provision for income taxes

     320,649        136,780         —          457,429   

Provision for income taxes

     106,442        49,242         —          155,684   
                                 

Income from continuing operations

     214,207        87,538         —          301,745   

Loss from discontinued operations, net of tax

     (108,434     —           —          (108,434
                                 

Net income

    $ 105,773       $ 87,538        $ —         $ 193,311   
                                 

 

     Three months ended September 27, 2009  
     Motorcycles & Related
Products Operations
    Financial
Services Operations
    Eliminations     Consolidated  

Revenue:

        

Motorcycles and related products

    $ 1,108,465       $ —         $ —         $ 1,108,465   

Financial services

     —          137,381        (388     136,993   
                                

Total revenue

     1,108,465        137,381        (388     1,245,458   

Costs and expenses:

        

Motorcycles and related products cost of goods sold

     738,331        —          —          738,331   

Financial services interest expense

     —          80,174        —          80,174   

Financial services provision for credit losses

     —          56,445        —          56,445   

Selling, administrative and engineering expense

     189,124        30,714        (388     219,450   

Restructuring expense and other impairments

     50,745        1,204        —          51,949   

Goodwill impairment

     —          —          —          —     
                                

Total costs and expenses

     978,200        168,537        (388     1,146,349   
                                

Operating income

     130,265        (31,156     —          99,109   

Investment income

     947        —          —          947   

Interest expense

     882        —          —          882   
                                

Income (loss) before provision for income taxes

     130,330        (31,156     —          99,174   

Provision for (benefit from) income taxes

     54,345        (11,552     —          42,793   
                                

Income (loss) from continuing operations

     75,985        (19,604     —          56,381   

Loss from discontinued operations, net of tax

     (29,898     —          —          (29,898
                                

Net income (loss)

    $ 46,087       $ (19,604    $ —         $ 26,483   
                                

 

     Nine months ended September 27, 2009  
     Motorcycles & Related
Products Operations
    Financial
Services Operations
    Eliminations     Consolidated  

Revenue:

        

Motorcycles and related products

    $ 3,522,631       $ —         $ —         $ 3,522,631   

Financial services

     —          366,652        (1,025     365,627   
                                

Total revenue

     3,522,631        366,652        (1,025     3,888,258   

Costs and expenses:

        

Motorcycles and related products cost of goods sold

     2,291,256        —          —          2,291,256   

Financial services interest expense

     —          212,992        —          212,992   

Financial services provision for credit losses

     —          137,831        —          137,831   

Selling, administrative and engineering expense

     595,803        96,058        (1,025     690,836   

Restructuring expense and other impairments

     100,738        1,204        —          101,942   

Goodwill impairment

     —          28,387        —          28,387   
                                

Total costs and expenses

     2,987,797        476,472        (1,025     3,463,244   
                                

Operating income (loss)

     534,834        (109,820     —          425,014   

Investment income

     3,217        —          —          3,217   

Interest expense

     11,468        —          —          11,468   
                                

Income (loss) before provision for income taxes

     526,583        (109,820     —          416,763   

Provision for (benefit from) income taxes

     228,336        (29,384     —          198,952   
                                

Income (loss) from continuing operations

     298,247        (80,436     —          217,811   

Loss from discontinued operations, net of tax

     (54,231     —          —          (54,231
                                

Net income (loss)

    $ 244,016       $ (80,436    $ —         $ 163,580   
                                

 

     September 26, 2010  
     Motorcycles & Related
Products Operations
     Financial
Services Operations
     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

    $ 1,278,025        $ 216,276        $ —         $ 1,494,301   

Marketable securities

     55,229         —           —          55,229   

Accounts receivable, net

     600,209         —           (294,124     306,085   

Finance receivables held for investment, net

     —           1,065,103         —          1,065,103   

Restricted finance receivables held by variable interest entities, net

     —           674,371         —          674,371   

Inventories

     319,101         —           —          319,101   

Restricted cash held by variable interest entities

     —           287,613         —          287,613   

Other current assets

     199,399         97,758         —          297,157   
                                  

Total current assets

     2,451,963         2,341,121         (294,124     4,498,960   

Finance receivables held for investment, net

     —           2,045,249         —          2,045,249   

Restricted finance receivables held by variable interest entities, net

     —           2,425,788         —          2,425,788   

Property, plant and equipment, net

     749,498         30,493         —          779,991   

Goodwill

     29,992         —           —          29,992   

Other long-term assets

     304,467         25,120         (68,607     260,980   
                                  
    $ 3,535,920        $ 6,867,771        $ (362,731    $ 10,040,960   
                                  

LIABILITIES AND SHAREHOLDERS' EQUITY

          

Current liabilities:

          

Accounts payable

    $ 207,236        $ 330,728        $ (294,124    $ 243,840   

Accrued liabilities

     616,574         77,266         (3,029     690,811   

Short-term debt

     —           587,981         —          587,981   

Current portion of long-term debt

     —           201,426         —          201,426   

Current portion of long-term debt held by variable interest entities

     —           731,833         —          731,833   
                                  

Total current liabilities

     823,810         1,929,234         (297,153     2,455,891   

Long-term debt

     600,000         2,214,400         —          2,814,400   

Long-term debt held by variable interest entities

     —           1,801,537         —          1,801,537   

Pension liability

     353,896         —           —          353,896   

Postretirement healthcare benefits

     272,232         —           —          272,232   

Other long-term liabilities

     140,681         12,373         —          153,054   

Commitments and contingencies (Note 18)

          

Total shareholders' equity

     1,345,301         910,227         (65,578     2,189,950   
                                  
    $ 3,535,920        $ 6,867,771        $ (362,731    $ 10,040,960   
                                  

 

     December 31, 2009  
     Motorcycles & Related
Products Operations
     Financial
Services Operations
     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

    $ 1,141,862        $ 488,571        $ —         $ 1,630,433   

Marketable securities

     39,685         —           —          39,685   

Accounts receivable, net

     356,932         —           (87,561     269,371   

Finance receivables held for investment, net

     —           1,436,114         —          1,436,114   

Inventories

     323,029         —           —          323,029   

Assets of discontinued operations

     181,211         —           —          181,211   

Other current assets

     191,748         270,358         —          462,106   
                                  

Total current assets

     2,234,467         2,195,043         (87,561     4,341,949   

Finance receivables held for investment, net

     —           3,621,048         —          3,621,048   

Property, plant and equipment, net

     872,336         34,570         —          906,906   

Goodwill

     31,400         —           —          31,400   

Other long-term assets

     293,681         26,932         (66,398     254,215   
                                  
    $ 3,431,884        $ 5,877,593        $ (153,959    $ 9,155,518   
                                  

LIABILITIES AND SHAREHOLDERS' EQUITY

          

Current liabilities:

          

Accounts payable

    $ 141,097        $ 108,979        $ (87,561    $ 162,515   

Accrued liabilities

     447,021         69,644         (2,581     514,084   

Liabilities of discontinued operations

     69,535         —           —          69,535   

Short-term debt

     —           189,999         —          189,999   

Current portion of long-term debt

     204,959         1,127,132         —          1,332,091   
                                  

Total current liabilities

     862,612         1,495,754         (90,142     2,268,224   

Long-term debt

     600,000         3,514,039         —          4,114,039   

Pension liability

     245,332         —           —          245,332   

Postretirement healthcare benefits

     264,472         —           —          264,472   

Other long-term liabilities

     143,905         11,428         —          155,333   

Commitments and contingencies (Note 18)

          

Total shareholders' equity

     1,315,563         856,372         (63,817     2,108,118   
                                  
    $ 3,431,884        $ 5,877,593        $ (153,959    $ 9,155,518   
                                  

 

     September 27, 2009  
     Motorcycles & Related
Products Operations
     Financial
Services Operations
     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

    $ 667,226        $ 851,573        $ —         $ 1,518,799   

Accounts receivable, net

     629,030         —           (324,620     304,410   

Note receivable from HDFS

     600,000         —           (600,000     —     

Finance receivables held for investment, net

     —           1,525,164         —          1,525,164   

Inventories

     398,852         —           —          398,852   

Assets of discontinued operations

     233,339         —           —          233,339   

Other current assets

     161,910         248,943         —          410,853   
                                  

Total current assets

     2,690,357         2,625,680         (924,620     4,391,417   

Finance receivables held for investment, net

     —           3,652,987         —          3,652,987   

Property, plant and equipment, net

     902,958         36,488         —          939,446   

Goodwill

     32,498         —           —          32,498   

Other long-term assets

     378,609         23,972         (65,861     336,720   
                                  
    $ 4,004,422        $ 6,339,127        $ (990,481    $ 9,353,068   
                                  

LIABILITIES AND SHAREHOLDERS' EQUITY

          

Current liabilities:

          

Accounts payable

    $ 242,955        $ 358,454        $ (324,620    $ 276,789   

Accrued liabilities

     525,274         97,592         (2,512     620,354   

Liabilities of discontinued operations

     71,058         —           —          71,058   

Short-term debt

     —           1,325,303         —          1,325,303   

Current portion of long-term debt

     154,242         513,963         —          668,205   
                                  

Total current liabilities

     993,529         2,295,312         (327,132     2,961,709   

Long-term debt

     600,000         2,576,648         —          3,176,648   

Note payable to HDMC

     —           600,000         (600,000     —     

Pension liability

     498,959         —           —          498,959   

Postretirement healthcare benefits

     269,515         —