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Document And Entity Information (USD $)
12 Months Ended
Dec. 31, 2012
Jan. 31, 2013
Jul. 01, 2012
Document and Entity Information [Abstract]
Entity Registrant Name HARLEY DAVIDSON INC.
Entity Central Index Key 0000793952
Current Fiscal Year End Date --12-31
Entity Filer Category Large Accelerated Filer
Document Type 10-K
Document Period End Date Dec 31, 2012
Document Fiscal Year Focus 2012
Document Fiscal Period Focus FY
Amendment Flag false
Entity Common Stock, Shares Outstanding 226,249,774
Entity Well-known Seasoned Issuer Yes
Entity Voluntary Filers No
Entity Current Reporting Status Yes
Entity Public Float $ 10,329,347,573
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Consolidated Statements Of Operations (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Revenue:
Motorcycles and related products $ 4,942,582,000 $ 4,662,264,000 $ 4,176,627,000
Financial services 637,924,000 649,449,000 682,709,000
Total revenue 5,580,506,000 5,311,713,000 4,859,336,000
Costs and expenses:
Motorcycles and related products cost of goods sold 3,222,394,000 3,106,288,000 2,749,224,000
Financial services interest expense 195,990,000 229,492,000 272,484,000
Financial services provision for credit losses 22,239,000 17,031,000 93,118,000
Selling, administrative and engineering expense 1,111,232,000 1,060,943,000 1,020,371,000
Restructuring expense and asset impairment 28,475,000 67,992,000 163,508,000
Total costs and expenses 4,580,330,000 4,481,746,000 4,298,705,000
Operating income 1,000,176,000 829,967,000 560,631,000
Investment income 7,369,000 7,963,000 5,442,000
Interest expense 46,033,000 45,266,000 90,357,000
Loss on debt extinguishment 0 0 85,247,000
Income before provision for income taxes 961,512,000 792,664,000 390,469,000
Provision for income taxes 337,587,000 244,586,000 130,800,000
Income from continuing operations 623,925,000 548,078,000 259,669,000
Income (loss) from discontinued operations, net of tax 0 51,036,000 (113,124,000)
Net income (loss) $ 623,925,000 $ 599,114,000 $ 146,545,000
Earnings per common share from continuing operations:
Basic $ 2.75 $ 2.35 $ 1.11
Diluted $ 2.72 $ 2.33 $ 1.11
Earnings (loss) per common share from discontinued operations:
Basic $ 0 $ 0.22 $ (0.48)
Diluted $ 0 $ 0.22 $ (0.48)
Earnings (loss) per common share:
Basic $ 2.75 $ 2.57 $ 0.63
Diluted $ 2.72 $ 2.55 $ 0.62
Cash dividends per common share $ 0.62 $ 0.475 $ 0.4
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Consolidated Statements Of Comprehensive Income (USD $)
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Net income $ 623,925,000 $ 599,114,000 $ 146,545,000
Other comprehensive income, net of tax
Foreign currency translation adjustment 1,400,000 (5,616,000) 9,449,000
Derivative financial instruments:
Unrealized net gains (losses) arising during the period (513,000) (966,000) (7,852,000)
Net losses (gains) reclassified into net income (9,631,000) 19,185,000 4,880,000
Total derivative financial instruments (10,144,000) 18,219,000 (2,972,000)
Marketable securities:
Unrealized gains (losses) on marketable securities 350,000 460,000 (133,000)
Net (gains) losses reclassified into net income 0 0 0
Total marketable securities 350,000 460,000 (133,000)
Pension and postretirement benefit plans:
Amortization of net prior service (credit) cost (563,000) (564,000) 925,000
Amortization of actuarial loss 32,295,000 23,584,000 20,944,000
Other Comprehensive Income (Loss), Pension and Other Postretirement Benefit Plans, Net Unamortized Gain (Loss) Arising During Period, Net of Tax (158,213,000) (146,768,000) 18,431,000
Actuarial loss reclassified into net income due to settlement 3,930,000 173,000 2,942,000
Prior service credit (cost) reclassified into net income due to net curtailment loss 0 1,000 (1,393,000)
Total pension and postretirement benefit plans 122,551,000 123,574,000 (41,849,000)
Total other comprehensive (loss) income, net of tax (130,945,000) (110,511,000) 48,193,000
Comprehensive income $ 492,980,000 $ 488,603,000 $ 194,738,000
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Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Dec. 31, 2012
Dec. 31, 2011
Current assets:
Cash and cash equivalents $ 1,068,138 $ 1,526,950
Marketable securities 135,634 153,380
Accounts receivable, net 230,079 219,039
Finance receivables, net 1,743,045 1,760,467
Inventories 393,524 418,006
Restricted Cash and Cash Equivalents 188,008 229,655
Deferred income taxes 110,853 132,331
Other current assets 181,655 102,378
Total current assets 4,050,936 4,542,206
Finance receivables, net 4,038,807 4,026,214
Property, plant and equipment, net 815,464 809,459
Goodwill 29,530 29,081
Deferred income taxes 171,845 202,439
Other long-term assets 64,191 64,765
Total assets 9,170,773 9,674,164
Current liabilities:
Accounts payable 257,386 255,713
Accrued liabilities 513,591 564,172
Short-term debt 294,943 838,486
Current portion of long-term debt 437,162 1,040,247
Total current liabilities 1,503,082 2,698,618
Long-term debt 4,370,544 3,843,886
Pension liability 330,294 302,483
Postretirement healthcare liability 278,062 268,582
Other long-term liabilities 131,167 140,339
Commitments and contingencies (Note 17)      
Shareholders' equity:
Series A Junior participating preferred stock, none issued 0 0
Common stock, 341,265,838 and 339,107,230 shares issued in 2012 and 2011, respectively 3,413 3,391
Additional paid-in-capital 1,066,069 968,392
Retained earnings 7,306,424 6,824,180
Accumulated other comprehensive loss (607,678) (476,733)
Stockholders equity before treasury stock 7,768,228 7,319,230
Less: Treasury stock (115,165,744 and 108,566,699 shares in 2012 and 2011, respectively), at cost (5,210,604) (4,898,974)
Total shareholders' equity 2,557,624 2,420,256
Total liabilities and shareholders' equity 9,170,773 9,674,164
Variable Interest Entity, Primary Beneficiary [Member]
Current assets:
Finance receivables, net 470,134 591,864
Restricted Cash and Cash Equivalents 176,290 229,655
Other current assets 5,288 7,221
Finance receivables, net 1,631,435 2,271,773
Current liabilities:
Current portion of long-term debt 399,477 640,331
Long-term debt $ 1,048,299 $ 1,447,015
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Consolidated Balance Sheets (Parenthetical)
Dec. 31, 2012
Dec. 31, 2011
Statement of Financial Position [Abstract]
Preferred stock, shares issued 0 0
Common stock, shares issued 341,265,838 339,107,230
Treasury stock, shares 115,165,744 108,566,699
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Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Statement of Cash Flows [Abstract]
Net cash provided by operating activities of continuing operations (Note 2) $ 801,458 $ 885,291 $ 1,163,418
Cash flows from investing activities of continuing operations:
Capital expenditures (189,002) (189,035) (170,845)
Origination of finance receivables (2,858,701) (2,622,024) (2,252,532)
Collections on finance receivables 2,768,089 2,760,049 2,668,962
Purchases of marketable securities (4,993) (142,653) (184,365)
Sales and redemptions of marketable securities 23,296 130,121 84,217
Net cash (used by) provided by investing activities of continuing operations (261,311) (63,542) 145,437
Cash flows from financing activities of continuing operations:
Proceeds from issuance of medium term notes 993,737 447,076 0
Repayment of medium term notes 420,870 59,211 200,000
Repayment of senior unsecured notes 0 0 (380,757)
Proceeds from securitization debt 763,895 1,082,599 598,187
Repayments of securitization debt 1,405,599 1,754,568 1,896,665
Net borrowings of asset-backed commercial paper 200,417 0 0
Net repayments in asset-backed commercial paper 24,301 483 845
Net increase (decrease) in credit facilities and unsecured commercial paper (744,724) 237,827 30,575
Net change in restricted cash 41,647 59,232 77,654
Dividends 141,681 111,011 94,145
Purchase of common stock for treasury, net of issuances (311,632) (224,548) (1,706)
Excess tax benefits from share-based payments 13,065 6,303 3,767
Issuance of common stock under employee stock option plans 45,973 7,840 7,845
Net cash (used by) provided by financing activities of continuing operations (990,073) (308,944) (1,856,090)
Effect of exchange rate changes on cash and cash equivalents of continuing operations (8,886) (7,788) 4,940
Net increase (decrease) in cash and cash equivalents of continuing operations (458,812) 505,017 (542,295)
Cash flows from discontinued operations:
Cash flows from operating activities of discontinued operations 0 0 (71,073)
Cash flows from investing activities of discontinued operations 0 0 0
Effect of exchange rate changes on cash and cash equivalents of discontinued operations 0 0 (1,195)
Net cash used by discontinued operations, total 0 0 (72,268)
Net increase (decrease) in cash and cash equivalents (458,812) 505,017 (614,563)
Cash and cash equivalents:
Cash and cash equivalents - beginning of period 1,526,950 1,021,933 1,630,433
Cash and cash equivalents of discontinued operations - beginning of period 0 0 6,063
Net increase (decrease) in cash and cash equivalents (458,812) 505,017 (614,563)
Less: Cash and cash equivalents of discontinued operations - end of period 0 0 0
Cash and cash equivalents - end of period $ 1,068,138 $ 1,526,950 $ 1,021,933
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Consolidated Statements Of Shareholders' Equity (USD $)
Total
Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Accumulated Other Comprehensive Income (Loss) [Member]
Treasury Balance [Member]
Beginning Balance at Dec. 31, 2009 $ 2,108,118,000 $ 3,368,000 $ 871,100,000 $ 6,324,268,000 $ (417,898,000) $ (4,672,720,000)
Beginning Balance, shares at Dec. 31, 2009 336,800,970
Other comprehensive income, net of tax
Net income (loss) 146,545,000 0 0 146,545,000 0 0
Amortization of net prior service cost, net of taxes (925,000)
Amortization of actuarial loss, net of taxes 20,944,000
Change in net unrealized gains (losses):
Other Comprehensive Income (Loss), Net of Tax 48,193,000 0 0 0 48,193,000 0
Adjustment for consolidation of QSPEs under ASC Topics 810 and 860 (37,108,000) 0 0 (40,591,000) 3,483,000 0
Dividends 94,145,000 0 0 94,145,000 0 0
Repurchase of common stock 1,706,000 0 0 0 0 1,706,000
Share-based compensation and 401(k) match made with Treasury shares 26,961,000 0 26,961,000 0 0 0
Issuance of nonvested stock (in shares) 0 823,594 (8,000) 0 0 0
Issuance of nonvested stock 8,000
Exercise of stock options 7,845,000 6,000 7,839,000 0 0 0
Exercise of stock options (in shares) 635,892
Tax benefit of stock options and nonvested stock 2,163,000 0 2,163,000 0 0 0
Ending Balance at Dec. 31, 2010 2,206,866,000 3,382,000 908,055,000 6,336,077,000 (366,222,000) (4,674,426,000)
Ending Balance, shares at Dec. 31, 2010 338,260,456
Other comprehensive income, net of tax
Net income (loss) 599,114,000 0 0 599,114,000 0 0
Amortization of net prior service cost, net of taxes 564,000
Amortization of actuarial loss, net of taxes 23,584,000
Change in net unrealized gains (losses):
Other Comprehensive Income (Loss), Net of Tax (110,511,000) 0 0 0 (110,511,000) 0
Dividends 111,011,000 0 0 111,011,000 0 0
Repurchase of common stock 224,551,000 0 0 0 0 224,551,000
Share-based compensation and 401(k) match made with Treasury shares 49,996,000 0 49,993,000 0 0 3,000
Issuance of nonvested stock (in shares) 0 473,240 (5,000) 0 0 0
Issuance of nonvested stock 5,000
Exercise of stock options 7,840,000 4,000 7,836,000 0 0 0
Exercise of stock options (in shares) 373,534
Tax benefit of stock options and nonvested stock 2,513,000 0 2,513,000 0 0 0
Ending Balance at Dec. 31, 2011 2,420,256,000 3,391,000 968,392,000 6,824,180,000 (476,733,000) (4,898,974,000)
Ending Balance, shares at Dec. 31, 2011 339,107,230
Other comprehensive income, net of tax
Net income (loss) 623,925,000 0 0 623,925,000 0 0
Amortization of net prior service cost, net of taxes 563,000
Amortization of actuarial loss, net of taxes 32,295,000
Change in net unrealized gains (losses):
Other Comprehensive Income (Loss), Net of Tax (130,945,000) 0 0 0 (130,945,000) 0
Dividends 141,681,000 0 0 141,681,000 0 0
Repurchase of common stock 311,632,000 0 0 0 0 311,632,000
Share-based compensation and 401(k) match made with Treasury shares 42,058,000 0 42,056,000 0 0 2,000
Issuance of nonvested stock (in shares) 0 535,807 (6,000) 0 0 0
Issuance of nonvested stock 6,000
Exercise of stock options 45,973,000 16,000 45,957,000 0 0 0
Exercise of stock options (in shares) (1,666,000) 1,622,801
Tax benefit of stock options and nonvested stock 9,670,000 0 9,670,000 0 0 0
Ending Balance at Dec. 31, 2012 $ 2,557,624,000 $ 3,413,000 $ 1,066,069,000 $ 7,306,424,000 $ (607,678,000) $ (5,210,604,000)
Ending Balance, shares at Dec. 31, 2012 341,265,838
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Consolidated Statements Of Shareholders' Equity (Parenthetical) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Dec. 31, 2012
Dec. 31, 2011
Dec. 31, 2010
Statement of Stockholders' Equity [Abstract]
Derivative financial instruments, tax (expense) benefit $ 513 $ 966 $ 7,852
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Summary Of Significant Accounting Policies
12 Months Ended
Dec. 31, 2012
Accounting Policies [Abstract]
Summary Of Significant Accounting Policies
Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation – The consolidated financial statements include the accounts of Harley-Davidson, Inc. and its wholly-owned subsidiaries (the Company), including the accounts of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) 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 transactions are eliminated.
All of the Company’s subsidiaries are wholly owned and are included in the consolidated financial statements. Substantially all of the Company’s international subsidiaries use their respective local currency as their functional currency. Assets and liabilities of international subsidiaries have been translated at period-end exchange rates, and revenues and expenses have been translated using average exchange rates for the period.
The Company operates in two principal business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (Financial Services).
On October 15, 2009, the Company announced its intent to divest MV Agusta (MV) and completed the sale of MV on August 6, 2010. MV is presented as a discontinued operation for all periods.
Use of Estimates – The preparation of financial statements in conformity with U.S. generally accepted accounting principles (U.S. GAAP) requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash and Cash Equivalents – The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents.
Marketable Securities – The Company’s marketable securities consisted of the following at December 31 (in thousands):
 
 
 
2012
 
2011
Available-for-sale:
 
 
 
 
Corporate bonds
 
$
135,634

 
$
153,380

 
 
$
135,634

 
$
153,380


The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During 2012 and 2011, the Company recognized gross unrealized gains of $0.6 million and $0.7 million, respectively, or gains of $0.4 million and $0.5 million, net of tax, respectively, to adjust amortized cost to fair value. The marketable securities have contractual maturities that generally come due over the next 12 to 36 months.
Accounts Receivable – The Company’s motorcycles and related products are sold to independent dealers and distributors outside the U.S. and Canada generally on open account and the resulting receivables are included in accounts receivable in the Company’s consolidated balance sheets. The allowance for doubtful accounts deducted from total accounts receivable was $5.0 million as of December 31, 2012 and 2011. Accounts receivable are written down once management determines that the specific customer does not have the ability to repay the balance in full. The Company’s sales of motorcycles and related products in the U.S. and Canada are financed by the purchasing dealers or distributors through HDFS and the related receivables are included in finance receivables in the consolidated balance sheets.
Reclassifications - The Company has adjusted the format of its Consolidated Balance Sheets to present assets and liabilities held by consolidated VIEs in a table below the Consolidated Balance Sheets versus the previous format which included the assets and liabilities as separate line items within the Consolidated Balance sheets. The assets and liabilities held by consolidated VIEs are now included in the Consolidated Balance Sheets within finance receivables, net, restricted cash, other current assets, current portion of long-term debt and long-term debt. All periods presented have been adjusted.
Finance Receivables, Net – Finance receivables include both retail and wholesale finance receivables, net, including amounts held by VIEs. Finance receivables are recorded in the financial statements at historical cost net of an allowance for credit losses. The provision for credit losses on finance receivables is charged to earnings in amounts sufficient to maintain the allowance for credit losses at a level that is adequate to cover losses of principal inherent in the existing portfolio. Portions of the allowance for credit losses are specified to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance covers estimated losses on finance receivables which are collectively reviewed for impairment. Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement.
The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. HDFS performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. HDFS utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and therefore are not reported as impaired loans.
The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s wholesale allowance evaluation is first based on a loan-by-loan review. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. In establishing the allowance, management considers a number of factors including the specific borrower’s financial performance as well as ability to repay. As described below in the Financial Services Revenue Recognition policy, the accrual of interest on such finance receivables is discontinued when the collection of the account becomes doubtful. While a finance receivable is considered impaired, all cash received is applied to principal or interest as appropriate.
Finance receivables in the wholesale portfolio that are not individually evaluated for impairment are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance is based on factors such as the Company’s past loan loss experience, current economic conditions as well as the value of the underlying collateral.
Impaired finance receivables also include loans that have been modified in troubled debt restructurings as a concession to borrowers experiencing financial difficulty. Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss the Company may modify certain impaired finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
Repossessed inventory is recorded at the lower of cost or net realizable value and is reclassified from finance receivables to other current assets with any related loss recognized as a charge against the allowance for credit losses on finance receivables in the period during which the asset was transferred. Repossessed inventory was $11.9 million and $14.5 million at December 31, 2012 and 2011, respectively.
Asset-Backed Financing – HDFS participates in asset-backed financing through both term asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. HDFS treats these transactions as secured borrowing because either they are transferred to consolidated VIEs or HDFS maintains effective control over the assets and does not meet the accounting sale requirements under ASC Topic 860, "Transfers and Servicing." In HDFS' asset-backed financing programs, HDFS transfers retail motorcycle finance receivables to special purpose entities (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt.
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 U.S. 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 these VIEs within its consolidated financial statements.
HDFS is not the primary beneficiary of the asset-backed Canadian commercial paper conduit facility VIE; therefore, HDFS does not consolidate the VIE. However, HDFS treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore does not meet the requirements for sale accounting under ASC Topic 860. As such, the Company retains the transferred assets and the related debt within its Consolidated Balance Sheet.
Servicing fees paid by VIEs to HDFS are eliminated in consolidation and therefore are not 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.
Inventories – Inventories are valued at the lower of cost or market. Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories totaling $195.0 million at December 31, 2012 and $215.2 million at December 31, 2011 are valued at the lower of cost or market using the first-in, first-out (FIFO) method.
Property, Plant and Equipment – Property, plant and equipment is recorded at cost. Depreciation is determined on the straight-line basis over the estimated useful lives of the assets. The following useful lives are used to depreciate the various classes of property, plant and equipment: buildings – 30 years; building equipment and land improvements – 7 years; machinery and equipment –3 to 10 years; furniture and fixtures -5 years; and software 3 to 7 years. Accelerated methods of depreciation are used for income tax purposes.
Goodwill – Goodwill represents the excess of acquisition cost over the fair value of the net assets purchased. Goodwill is tested for impairment, based on financial data related to the reporting unit to which it has been assigned, at least annually or whenever events or changes in circumstances indicate that the carrying value may not be recoverable. The impairment test involves comparing the estimated fair value of the reporting unit associated with the goodwill to its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, goodwill must be adjusted to its implied fair value. During 2012 and 2011, the Company tested its goodwill balances for impairment and no adjustments were recorded to goodwill as a result of those reviews.
Long-lived Assets – The Company periodically evaluates the carrying value of long-lived assets to be held and used when events and circumstances warrant such review. If the carrying value of a long-lived asset is considered impaired, a loss is recognized based on the amount by which the carrying value exceeds the fair value of the long-lived asset for assets to be held and used. The Company also reviews the useful life of its long-lived assets when events and circumstances indicate that the actual useful life may be shorter than originally estimated. In the event that the actual useful life is deemed to be shorter than the original useful life, depreciation is adjusted prospectively so that the remaining book value is depreciated over the revised useful life.
Asset groups classified as held for sale are measured at the lower of carrying amount or fair value less cost to sell, and a loss is recognized for any initial adjustment required to reduce the carrying amount to the fair value less cost to sell in the period the held for sale criteria are met. The fair value less cost to sell must be assessed each reporting period the asset group remains classified as held for sale. Gains or losses not previously recognized resulting from the sale of an asset group will be recognized on the date of sale.
Product Warranty and Safety Recall Campaigns – The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except for Japan, where the Company provides a standard three-year limited warranty on all new motorcycles sold. In addition, the Company started offering a one-year warranty for Parts & Accessories (P&A) in 2012. The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company maintains reserves for future warranty claims which are 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):
 
 
 
2012
 
2011
 
2010
Balance, beginning of period
 
$
54,994

 
$
54,134

 
$
68,044

Warranties issued during the period
 
54,394

 
44,092

 
36,785

Settlements made during the period
 
(67,247
)
 
(55,386
)
 
(58,067
)
Recalls and changes to pre-existing warranty liabilities
 
18,122

 
12,154

 
7,372

Balance, end of period
 
$
60,263

 
$
54,994

 
$
54,134


The liability for safety recall campaigns was $4.6 million, $10.7 million and $3.2 million at December 31, 2012, 2011 and 2010, respectively.
Derivative Financial Instruments – The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.
All derivative instruments are recognized on the balance sheet at fair value (see Note 8). In accordance with ASC Topic 815, “Derivatives and Hedging,” the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, at both the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative instruments that do not qualify for hedge accounting are recorded at fair value and any changes in fair value are recorded in current period earnings. Refer to Note 10 for a detailed description of the Company’s derivative instruments.
Motorcycles and Related Products Revenue Recognition – Sales are recorded when products are shipped to wholesale customers (independent dealers and distributors) and ownership is transferred. The Company may offer sales incentive programs to both wholesale and retail customers designed to promote the sale of motorcycles and related products. The total costs of these programs are generally recognized as revenue reductions and are accrued at the later of the date the related sales are recorded or the date the incentive program is both approved and communicated.
Financial Services Revenue Recognition – Interest income on finance receivables is recorded as earned and is based on the average outstanding daily balance for wholesale and retail receivables. Accrued and uncollected interest is classified with finance receivables. Certain loan origination costs related to finance receivables, including payments made to dealers for certain retail loans, are deferred and amortized over the estimated life of the contract.
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of December 31, 2012 and 2011, all retail finance receivables are accounted for as interest-earning receivables.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. HDFS will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full.
Insurance and protection product commissions as well as commissions on the sale of extended service contracts are recognized when contractually earned. Deferred revenue related to extended service contracts was $8.3 million and $12.2 million as of December 31, 2012 and 2011, respectively.
Research and Development Expenses – Expenditures for research activities relating to product development and improvement are charged against income as incurred and included within selling, administrative and engineering expenses in the consolidated statement of operations. Research and development expenses were $137.3 million, $145.4 million and $136.2 million for 2012, 2011 and 2010, respectively.
Advertising Costs – The Company expenses the production cost of advertising the first time the advertising takes place. Advertising costs relate to the Company’s efforts to promote its products and brands through the use of media. During 2012, 2011 and 2010, the Company incurred $80.7 million, $82.3 million and $75.8 million in advertising costs, respectively.
Shipping and Handling Costs – The Company classifies shipping and handling costs as a component of cost of goods sold.
Share-Based Award Compensation Costs – The Company recognizes the cost of its share-based awards in its statement of operations. The total cost of the Company’s equity awards is equal to their grant date fair value and is recognized as expense on a straight-line basis over the service periods of the awards. The total cost of the Company’s liability for cash-settled awards is equal to their settlement date fair value. The liability for cash-settled awards is revalued each period based on a recalculated fair value adjusted for vested awards. Total share-based award compensation expense recognized by the Company during 2012, 2011 and 2010 was $40.8 million, $38.2 million and $30.4 million, respectively, or $25.7 million, $24.0 million and $19.2 million net of taxes, respectively.
Income Tax Expense – The Company recognizes interest and penalties related to unrecognized tax benefits in the provision for income taxes.
New Accounting Standards

Accounting Standards Recently Adopted

In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-4. "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS." ASU No. 2011-04 clarifies the application of the existing guidance within Accounting Standards Codification (ASC) Topic 820, "Fair Value Measurement", to ensure consistency between U.S. GAAP and International Financial Reporting Standards. ASU No. 2011-04 also requires new disclosures about purchases, sales, issuances, and settlements related to Level 3 measurements and also requires new disclosures around transfers into and out of Level 1 and 2 in the fair value hierarchy. The Company adopted ASU No. 2011-04 on January 1, 2012. The required new disclosures are presented in Note 9.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. ASU No. 2011-05 amends
the guidance within ASC Topic 220, “Comprehensive Income”, to eliminate the option to present the components of other
comprehensive income as part of the statement of shareholders’ equity. ASU No. 2011-05 requires that all nonowner changes in
shareholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but
consecutive statements. The Company decided to present comprehensive income in two separate but consecutive statements.
The Company adopted ASU No. 2011-05 on January 1, 2012. The adoption of ASU No. 2011-05 and the Company’s decision
to present comprehensive income in two separate but consecutive statements required the presentation of an additional financial
statement, consolidated statements of comprehensive income, for all periods presented.
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Additional Balance Sheet And Cash Flow Information
12 Months Ended
Dec. 31, 2012
Additional Balance Sheet And Cash Flow Information [Abstract]
Additional Balance Sheet And Cash Flow Information
Additional Balance Sheet and Cash Flow Information
The following information represents additional detail for selected line items included in the consolidated balance sheets at December 31 and the statements of cash flows for the years ended December 31.
Balance Sheet Information:
Inventories, net (in thousands):
 
 
 
2012
 
2011
Components at the lower of FIFO cost or market
 
 
 
 
Raw materials and work in process
 
$
111,335

 
$
113,932

Motorcycle finished goods
 
205,660

 
226,261

Parts and accessories and general merchandise
 
122,418

 
121,340

Inventory at lower of FIFO cost or market
 
439,413

 
461,533

Excess of FIFO over LIFO cost
 
(45,889
)
 
(43,527
)
 
 
$
393,524

 
$
418,006


Inventory obsolescence reserves deducted from FIFO cost were $22.9 million and $24.8 million as of December 31, 2012 and 2011, respectively.
Property, plant and equipment, at cost (in thousands):
 
 
 
2012
 
2011
Land and related improvements
 
57,801

 
59,995

Buildings and related improvements
 
417,316

 
466,652

Machinery and equipment
 
2,042,484

 
1,920,485

Construction in progress
 
167,243

 
158,237

 
 
2,684,844

 
2,605,369

Accumulated depreciation
 
(1,869,380
)
 
(1,795,910
)
 
 
815,464

 
809,459


Accrued liabilities (in thousands):
 
 
 
2012
 
2011
Payroll, employee benefits and related expenses
 
215,461

 
226,381

Restructuring reserves
 
27,223

 
43,310

Warranty and recalls
 
60,263

 
54,994

Sales incentive programs
 
43,938

 
41,448

Tax-related accruals
 
19,923

 
57,706

Fair value of derivative financial instruments
 
7,920

 
5,136

Other
 
138,863

 
135,197

 
 
513,591

 
564,172



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

 
 
2012
 
2011
 
2010
Cash flows from operating activities:
 
 
 
 
 
 
Net income
 
$
623,925

 
$
599,114

 
$
146,545

Income (loss) from discontinued operations
 

 
51,036

 
(113,124
)
Income from continuing operations
 
623,925

 
548,078

 
259,669

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
 
 
 
Depreciation
 
168,978

 
180,408

 
255,171

Amortization of deferred loan origination costs
 
78,592

 
78,695

 
87,223

Amortization of financing origination fees
 
9,969

 
10,790

 
19,618

Provision for employee long-term benefits
 
71,347

 
59,441

 
79,630

Contributions to pension and postretirement plans
 
(244,416
)
 
(219,695
)
 
(39,391
)
Stock compensation expense
 
40,815

 
38,192

 
30,431

Net change in wholesale finance receivables related to sales
 
2,513

 
(2,335
)
 
81,527

Provision for credit losses
 
22,239

 
17,031

 
93,118

Loss on debt extinguishment
 
4,323

 
9,608

 
85,247

Pension and postretirement healthcare plan curtailment and settlement expense
 
6,242

 
236

 
31,824

Deferred income taxes
 
128,452

 
87,873

 
(17,591
)
Foreign currency adjustments
 
9,773

 
10,678

 
(21,480
)
Other, net
 
(7,216
)
 
(15,807
)
 
11,910

Changes in current assets and liabilities:
 
 
 
 
 
 
Accounts receivable, net
 
(13,690
)
 
43,050

 
2,905

Finance receivables – accrued interest and other
 
(4
)
 
5,027

 
10,083

Inventories
 
21,459

 
(94,957
)
 
2,516

Accounts payable and accrued liabilities
 
(10,798
)
 
120,291

 
215,013

Restructuring reserves
 
(16,087
)
 
8,072

 
(32,477
)
Derivative instruments
 
2,758

 
(2,488
)
 
5,339

Prepaid and other
 
(97,716
)
 
3,103

 
3,133

Total adjustments
 
177,533

 
337,213

 
903,749

Net cash provided by operating activities of continuing operations
 
$
801,458

 
$
885,291

 
$
1,163,418



Cash paid during the period for interest and income taxes (in thousands):
 
 
 
2012
 
2011
 
2010
Interest
 
$
225,228

 
$
251,341

 
$
346,855

Income taxes
 
$
317,812

 
$
84,984

 
$
47,084


Interest paid represents interest payments of HDFS (included in financial services interest expense) and interest payments of the Company (included in interest expense).
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Discontinued Operations
12 Months Ended
Dec. 31, 2012
Discontinued Operation, Additional Disclosures [Abstract]
Discontinued Operations
 Discontinued Operations
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. During 2009, the Company recorded pre-tax impairment charges of $115.4 million related to MV and a net tax benefit of $40 million related to losses estimated in connection with the sale of MV. As of December 31, 2009, the Company estimated the total tax benefit associated with the losses related to the sale of MV to be $66 million of which $26 million was deemed uncertain and appropriately reserved against.
At each subsequent reporting date in 2010 through the date of sale of MV in August 2010, the fair value less selling costs was re-assessed and additional impairment charges totaling $111.8 million and additional tax benefits totaling $18 million were recognized in 2010. As the effort to sell MV progressed into 2010, adverse factors led to decreases in the fair value of MV. During 2010, challenging economic conditions continued to persist, negatively impacting the appetite of prospective buyers and the motorcycle industry as a whole. Information coming directly from the selling process, including discussions with the prospective buyers, indicated a fair value that was less than previously estimated.
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 million Euros to MV as operating capital. The 20 million Euros contributed were factored into the Company’s estimate of MV’s fair value prior to the sale and were recognized in the 2010 impairment charges discussed above. As a result of the impairment charges recorded prior to the sale, the Company only incurred an immaterial loss on the date of sale, which was included in the loss from discontinued operations, net of tax, during the year ended December 31, 2010.
As of August 6, 2010, assets and liabilities of discontinued operations that were sold consisted of $0.6 million of accounts receivable, net; $3.6 million of inventories; $14.3 million of other assets; $41.7 million of accounts payable and accrued liabilities and $16.6 million of other liabilities.
As of December 31, 2010, the Company’s estimated total tax benefit associated with the loss on the sale of MV was $101 million, of which $43.5 million was deemed uncertain and appropriately reserved against. As a result, the total cumulative net tax benefit recognized as of December 31, 2010 was $57.5 million. The increase in the estimated tax benefit during 2010 was driven by an increase in the losses related to the sale of MV, not a change in the tax position.
In determining the tax benefit recognized from October 2009 through December 2010, the Company engaged appropriate technical expertise and considered all relevant available information. In accordance with ASC 740, “Income Taxes,” at each balance sheet date during this period, the Company re-evaluated the overall tax benefit, determined that it was at least more likely than not that it would be sustained upon review and calculated the amount of recognized tax benefit based on a cumulative probability basis.
Beginning in 2010, the Company voluntarily elected to participate in a pre-filing agreement process with the Internal Revenue Service (IRS) in order to accelerate the IRS' review of the Company’s tax position related to MV. The IRS effectively completed its review in late 2011 and executed a Closing Agreement on Final Determination Covering Specific Matters with the Company.
There were no changes to the Company’s estimated gross or recognized tax benefit associated with the loss on the sale of MV during the first three quarters of 2011. In the fourth quarter of 2011, given the outcome of the closing agreement, the Company recognized a $43.5 million tax benefit by reversing the reserve recorded as of September 25, 2011 and recognized an incremental $7.5 million tax benefit related to the final calculation of the tax basis in the loan to and the stock of MV.
The following table summarizes the net revenue, pre-tax loss, net income (loss) and earnings (loss) per common share from discontinued operations for the following years ended December 31 (in thousands except per share amounts):
 
 
 
2012
 
2011
 
2010
Revenue
 
$

 
$

 
$
48,563

Loss before income taxes
 
$

 
$
(407
)
 
$
(131,034
)
Net income (loss)
 
$

 
$
51,036

 
$
(113,124
)
Earnings (loss) per common share
 
$

 
$
0.22

 
$
(0.48
)
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Restructuring Expense and Other Impairments
12 Months Ended
Dec. 31, 2012
Restructuring Charges [Abstract]
Restructuring Expense and Other Impairments
 Restructuring Expense and Other Impairments
2011 Restructuring Plans
In December 2011, the Company made a decision to cease operations at New Castalloy, its Australian subsidiary and producer of cast motorcycle wheels and wheel hubs, and source those components through other existing suppliers (2011 New Castalloy Restructuring Plan). The Company expects the transition of supply from New Castalloy to be complete in 2013. The decision to close New Castalloy comes as part of the Company’s overall long term strategy to develop world-class manufacturing capability throughout the Company by restructuring and consolidating operations for greater competitiveness, efficiency and flexibility. In connection with this decision, the Company will reduce its workforce by approximately 200 employees by the end of 2013.
Under the 2011 New Castalloy Restructuring Plan restructuring expenses consist of employee severance and termination costs, accelerated depreciation and other related costs. The Company expects to incur about $31 million in restructuring charges related to the transition through 2013. Approximately 35% of the $31 million will be non-cash charges. On a cumulative basis, the Company has incurred $22.2 million of restructuring expenses under the 2011 New Castalloy Restructuring Plan through 2012, of which $12.8 million were incurred in the year ended December 31, 2012.
In February 2011, the Company’s unionized employees at its facility in Kansas City, Missouri ratified a new seven-year labor agreement. The new agreement took effect on August 1, 2011. The new contract is similar to the labor agreements ratified at the Company’s Wisconsin facilities in September 2010 and its York, Pennsylvania facility in December 2009, and allows for similar flexibility, increased production efficiency and the addition of a flexible workforce component.
The actions to implement the new ratified labor agreement (2011 Kansas City Restructuring Plan) result in approximately 145 fewer full-time hourly unionized employees in its Kansas City facility than would have been required under the previous contract.
Under the 2011 Kansas City Restructuring Plan, restructuring expenses consist of employee severance and termination costs and other related costs. On a cumulative basis, the Company has incurred $6.9 million of restructuring expenses under the 2011 Kansas City Restructuring Plan through 2012, of which approximately10% are non-cash . During the year ended December 31, 2012, the Company released a portion of its Kansas City Restructuring Plan reserve related to severance costs as these costs are no longer expected to be incurred.
The following table summarizes the Motorcycle Segment’s 2011 Kansas City Restructuring Plan and 2011 New Castalloy Restructuring Plan reserve activity and balances as recorded in accrued liabilities for the year ended December 31 (in thousands):
 
 
 
2012
 
 
Kansas City
 
New Castalloy
 
Consolidated
 
 
Employee Severance and Termination Costs
 
Other
 
Total
 
Employee Severance and Termination Costs
 
Accelerated Depreciation
 
Other
 
Total
 
Total
Balance, beginning of period
 
$
4,123

 
$

 
$
4,123

 
$
8,428

 
$

 
$
305

 
$
8,733

 
$
12,856

Restructuring expense
 

 

 

 
3,180

 
8,212

 
1,427

 
12,819

 
12,819

Utilized - cash
 

 

 

 
(2,302
)
 

 
(1,587
)
 
(3,889
)
 
(3,889
)
Utilized - noncash
 

 

 

 

 
(8,212
)
 

 
(8,212
)
 
(8,212
)
Non-cash reserve release
 
(1,864
)
 

 
(1,864
)
 

 

 

 

 
(1,864
)
Balance, end of period
 
$
2,259

 
$

 
$
2,259

 
$
9,306

 
$

 
$
145

 
$
9,451

 
$
11,710


 
 
2011
 
 
Kansas City
 
New Castalloy
 
Consolidated
 
 
Employee Severance and Termination Costs
 
Other
 
Total
 
Employee Severance and Termination Costs
 
Accelerated Depreciation
 
Other
 
Total
 
Total
Restructuring expense
 
$
8,447

 
$
342

 
$
8,789

 
$
8,428

 
$
656

 
$
305

 
$
9,389

 
$
18,178

Utilized - cash
 
(4,088
)
 
(342
)
 
(4,430
)
 

 

 

 

 
(4,430
)
Utilized - noncash
 
(236
)
 

 
(236
)
 

 
(656
)
 

 
(656
)
 
(892
)
Balance, end of period
 
$
4,123

 
$

 
$
4,123

 
$
8,428

 
$

 
$
305

 
$
8,733

 
$
12,856


2010 Restructuring Plan
In September 2010, the Company’s unionized employees in Wisconsin ratified three separate new seven-year labor agreements which took effect in April 2012 when the prior contracts expired. 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 and the addition of a flexible workforce component.
The actions to implement the new ratified labor agreements (2010 Restructuring Plan) result in approximately 250 fewer full-time hourly unionized employees in its Milwaukee-area facilities than would be required under the previous contract and approximately 75 fewer full-time hourly unionized employees in its Tomahawk facility than would have been required under the previous contract.
Under the 2010 Restructuring Plan, restructuring expenses consist of employee severance and termination costs and other related costs. On a cumulative basis, the Company has incurred $59.7 million of restructuring and impairment expenses under the 2010 Restructuring Plan as of December 31, 2012, of which approximately 45% are non-cash. During the year ended December 31, 2012, the Company released a portion of its 2010 Restructuring Plan reserve related to severance costs as these costs are no longer expected to be incurred.
The following table summarizes the Motorcycle Segment’s 2010 Restructuring Plan reserve activity and balances as recorded in accrued liabilities for the following years ended December 31 (in thousands):
 
 
 
 
2012
 
2011
 
2010
 
 
 
Employee
Severance  and
Termination Costs
 
Employee
Severance  and
Termination Costs
 
Employee
Severance  and
Termination Costs
 
 
 
Balance, beginning of period
 
$
20,361

 
$
8,652

 
$

 
Restructuring expense
 
4,005

 
12,575

 
44,383

 
Utilized – cash
 
(12,898
)
 
(866
)
 
(7,557
)
 
Utilized – noncash
 

 

 
(28,174
)
 
Non-cash reserve release
 
(1,312
)
 

 

 
Balance, end of period
 
$
10,156

 
$
20,361

 
$
8,652



For the year ended December 31, 2010, restructuring expense included $28.2 million of noncash curtailment losses related to the Company’s pension and postretirement healthcare plans that cover employees of the affected facilities in Milwaukee and Tomahawk, Wisconsin.
2009 Restructuring Plan
During 2009, in response to the U.S. economic recession and worldwide slowdown in consumer demand, the Company committed to a volume reduction and a combination of restructuring actions that were expected to be completed at various dates between 2009 and 2012. The actions were designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. The Company’s announced actions included the restructuring and transformation of its York, Pennsylvania production facility including the implementation of a new more flexible unionized labor agreement which allows for the addition of a flexible workforce component; consolidation of facilities related to engine and transmission production; outsourcing of certain distribution and transportation activities and exiting the Buell product line. In addition, the Company implemented projects under this plan involving the outsourcing of select information technology activities and the consolidation of an administrative office in Michigan into its corporate headquarters in Milwaukee, Wisconsin.
The 2009 restructuring plan results in a reduction of approximately 2,700 to 2,900 hourly production positions and approximately 800 non-production, primarily salaried positions within the Motorcycles segment and approximately 100 salaried positions in the Financial Services segment.
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 $397 million, of which approximately 30% are expected to be non-cash. On a cumulative basis, the Company has incurred $395.4 million of restructuring and impairment expense under the 2009 Restructuring Plan as of December 31, 2012, of which $14.8 million was incurred during the year ended December 31, 2012.
The following tables summarize the Company’s 2009 Restructuring Plan reserve activity and balances as recorded in accrued liabilities for the following years ended December 31 (in thousands):
 
 
 
2012
Motorcycles & Related Products
 
Financial Services
 
Consolidated
Employee
Severance
and
Termination
Costs
 
Accelerated
Depreciation
 
Other
 
Total
 
Employee
Severance
and
Termination
Costs
 
Other
 
Total
 
Consolidated Total
Balance, beginning of period
 
$
10,089

 
$

 
$

 
$
10,089

 
$

 
$

 
$

 
$
10,089

Restructuring expense
 
4,099

 

 
13,154

 
17,253

 

 

 

 
17,253

Utilized – cash
 
(6,566
)
 

 
(12,993
)
 
(19,559
)
 

 

 

 
(19,559
)
Utilized – noncash
 

 

 

 

 

 

 

 

Noncash reserve release
 
(2,426
)
 

 

 
(2,426
)
 

 

 

 
(2,426
)
Balance, end of period
 
$
5,196

 
$

 
$
161

 
$
5,357

 
$

 
$

 
$

 
$
5,357

 
 
2011
 
 
Motorcycles & Related Products
 
Financial Services
 
Consolidated
Employee
Severance
and
Termination
Costs
 
Accelerated
Depreciation
 
Other
 
Total
 
Employee
Severance
and
Termination
Costs
 
Other
 
Total
 
Consolidated
Total
Balance, beginning of period
 
$
23,818

 
$

 
$
2,764

 
$
26,582

 
$

 
$

 
$

 
$
26,582

Restructuring expense
 
5,062

 

 
34,470

 
39,532

 

 

 

 
39,532

Utilized – cash
 
(16,498
)
 

 
(37,234
)
 
(53,732
)
 

 

 

 
(53,732
)
Utilized – noncash
 

 

 

 

 

 

 

 

Noncash reserve release
 
(2,293
)
 

 

 
(2,293
)
 

 

 

 
(2,293
)
Balance, end of period
 
$
10,089

 
$

 
$

 
$
10,089

 
$

 
$

 
$

 
$
10,089

 
 
2010
 
 
Motorcycles & Related Products
 
Financial Services
 
Consolidated
Employee
Severance
and
Termination
Costs
 
Accelerated
Depreciation
 
Other
 
Total
 
Employee
Severance
and
Termination
Costs
 
Other
 
Total
 
Consolidated
Total
Balance, beginning of period
 
$
36,070

 
$

 
$
31,422

 
$
67,492

 
$
219

 
$

 
$
219

 
$
67,711

Restructuring expense
 
31,119

 
47,923

 
40,083

 
119,125

 

 

 

 
119,125

Utilized – cash
 
(44,394
)
 

 
(61,514
)
 
(105,908
)
 
(44
)
 

 
(44
)
 
(105,952
)
Utilized – noncash
 
1,023

 
(47,923
)
 
(3,406
)
 
(50,306
)
 
(175
)
 

 
(175
)
 
(50,481
)
Noncash reserve release
 

 

 
(3,821
)
 
(3,821
)
 

 

 

 
(3,821
)
Balance, end of period
 
$
23,818

 
$

 
$
2,764

 
$
26,582

 
$

 
$

 
$

 
$
26,582


Other restructuring costs include items such as the exit costs for terminating supply contracts, lease termination costs and moving costs. During 2012 and 2011, the Company released $2.4 million and $2.3 million, respectively, of its 2009 Restructuring Plan reserve related to employee severance costs as these costs are no longer expected to be incurred. In addition, the Company released $3.8 million of its 2009 Restructuring Plan reserve related to exiting the Buell product line during 2010, as these costs are no longer expected to be incurred.
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Goodwill
12 Months Ended
Dec. 31, 2012
Goodwill [Abstract]
Goodwill
 Goodwill
The following table summarizes changes in the carrying amount of goodwill in the Company’s Motorcycles segment for the following years ended December 31(in thousands):
 
 
 
Motorcycles
 
 
 
Balance, December 31, 2009
 
$
31,400

Currency translation
 
(1,810
)
Balance, December 31, 2010
 
$
29,590

Currency translation
 
(509
)
Balance, December 31, 2011
 
$
29,081

Currency translation
 
$
449

Balance, December 31, 2012
 
$
29,530


The Company’s Financial Services segment did not have a goodwill balance.
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Finance Receivables
12 Months Ended
Dec. 31, 2012
Finance Receivables [Abstract]
Finance Receivables
Finance Receivables
Finance receivables, net at December 31 for the past five years were as follows (in thousands):
 
 
 
2012
 
2011
 
2010
 
2009
 
2008
Wholesale
 
 
 
 
 
 
 
 
 
 
United States
 
$
776,633

 
$
778,320

 
$
735,481

 
$
787,891

 
$
1,074,377

Canada
 
39,771

 
46,320

 
78,516

 
82,110

 
89,859

Total wholesale
 
816,404

 
824,640

 
813,997

 
870,001

 
1,164,236

Retail
 
 
 
 
 
 
 
 
 
 
United States
 
4,850,450

 
4,858,781

 
5,126,699

 
3,835,235

 
514,637

Canada
 
222,665

 
228,709

 
250,462

 
256,658

 
226,084

Total retail
 
5,073,115

 
5,087,490

 
5,377,161

 
4,091,893

 
740,721

 
 
5,889,519

 
5,912,130

 
6,191,158

 
4,961,894

 
1,904,957

Allowance for credit losses
 
(107,667
)
 
(125,449
)
 
(173,589
)
 
(150,082
)
 
(40,068
)
 
 
5,781,852

 
5,786,681

 
6,017,569

 
4,811,812

 
1,864,889

Investment in retained securitization interests
 

 

 

 
245,350

 
330,674

 
 
$
5,781,852

 
$
5,786,681

 
$
6,017,569

 
$
5,057,162

 
$
2,195,563

Retail - finance receivables held for sale
 
 
 
 
 
 
 
 
 
 
United States
 

 

 

 

 
2,443,965

Total finance receivables, net
 
$
5,781,852

 
$
5,786,681

 
$
6,017,569

 
$
5,057,162

 
$
4,639,528


Prior to the second quarter of 2009, U.S. retail motorcycle finance receivables intended for securitization at origination were classified as finance receivables held for sale. These finance receivables held for sale were carried at the lower of cost or estimated fair value. Any amount by which cost exceeded fair value was accounted for as a valuation adjustment. Included in finance receivables held for sale at December 31, 2008 is a lower of cost or market adjustment of $31.7 million.
 
HDFS offers wholesale financing to the Company’s independent dealers. Wholesale loans to dealers are generally secured by financed inventory or property and are originated in the U.S. and Canada.
HDFS provides retail financial services to customers of the Company’s independent dealers in the U.S. and Canada. The origination of retail loans is a separate and distinct transaction between HDFS and the retail customer, unrelated to the Company’s sale of product to its dealers. Retail finance receivables consist of secured promissory notes and installment loans. HDFS holds either titles or liens on titles to vehicles financed by promissory notes and installment loans. As of December 31, 2012 and 2011, approximately 12% and 11%, respectively, of gross outstanding finance receivables were originated in Texas.
At December 31, 2012 and 2011, unused lines of credit extended to HDFS’ wholesale finance customers totaled $955.5 million and $909.9 million, respectively. Approved but unfunded retail finance loans totaled $137.7 million and $139.3 million at December 31, 2012 and 2011, respectively.
Wholesale finance receivables are related primarily to motorcycles and related parts and accessories sales to independent Harley-Davidson dealers and are generally contractually due within one year. Retail finance receivables are primarily related to sales of motorcycles to the dealers’ customers. On December 31, 2012, contractual maturities of finance receivables were as follows (in thousands):
 
 
 
United States
 
Canada
 
Total
2013
 
$
1,685,921

 
$
81,268

 
$
1,767,189

2014
 
988,995

 
44,726

 
1,033,721

2015
 
1,117,929

 
50,035

 
1,167,964

2016
 
1,146,884

 
55,975

 
1,202,859

2017
 
601,981

 
30,432

 
632,413

Thereafter
 
85,373

 

 
85,373

Total
 
$
5,627,083

 
$
262,436

 
$
5,889,519


As of December 31, 2012, all finance receivables due after one year were at fixed interest rates.
The allowance for credit losses on finance receivables is comprised of individual components relating to wholesale and retail finance receivables. Changes in the allowance for credit losses on finance receivables by portfolio for the year ended December 31 were as follows (in thousands):
 
 
 
2012
Retail
 
Wholesale
 
Total
Balance, beginning of period
 
$
116,112

 
$
9,337

 
$
125,449

Provision for credit losses
 
25,252

 
(3,013
)
 
22,239

Charge-offs
 
(86,963
)
 
(99
)
 
(87,062
)
Recoveries
 
47,041

 

 
47,041

Balance, end of period
 
$
101,442

 
$
6,225

 
$
107,667


 
 
 
2011
Retail
 
Wholesale
 
Total
Balance, beginning of period
 
$
157,791

 
$
15,798

 
$
173,589

Provision for credit losses
 
23,054

 
(6,023
)
 
17,031

Charge-offs
 
(118,993
)
 
(503
)
 
(119,496
)
Recoveries
 
54,260

 
65

 
54,325

Balance, end of period
 
$
116,112

 
$
9,337

 
$
125,449


Changes in the allowance for credit losses on finance receivables for the year ended December 31 were as follows (in thousands):
 
 
 
2010
Balance, beginning of period
 
$
150,082

Allowance related to newly consolidated finance receivables (1)
 
49,424

Provision for credit losses
 
93,118

Charge-offs, net of recoveries
 
(119,035
)
Balance, end of period
 
$
173,589



(1) As a part of the required consolidation of formerly unconsolidated VIEs done in connection with the adoption of the new requirements within ASC Topics 810 and 860 on January 1, 2010, the Company consolidated a $49.4 million allowance for credit losses related to the newly consolidated finance receivables.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, at December 31, were as follows (in thousands):
 
 
 
2012
 
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$

 
$

Collectively evaluated for impairment
 
101,442

 
6,225

 
107,667

Total allowance for credit losses
 
$
101,442

 
$
6,225

 
$
107,667

Finance receivables, ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$

 
$

Collectively evaluated for impairment
 
5,073,115

 
816,404

 
5,889,519

Total finance receivables
 
$
5,073,115

 
$
816,404

 
$
5,889,519

 
 
2011
 
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$

 
$

Collectively evaluated for impairment
 
116,112

 
9,337

 
125,449

Total allowance for credit losses
 
$
116,112

 
$
9,337

 
$
125,449

Finance receivables, ending balance:
 
 
 
 
 
 
Individually evaluated for impairment
 
$

 
$

 
$

Collectively evaluated for impairment
 
5,087,490

 
824,640

 
5,912,130

Total finance receivables
 
$
5,087,490

 
$
824,640

 
$
5,912,130


Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the loan agreement. As retail finance receivables are collectively and not individually reviewed for impairment, this portfolio does not have specifically impaired finance receivables. A specific allowance is established for wholesale finance receivables determined to be individually impaired in accordance with the applicable accounting standards when management concludes that the borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate and the fair value of the collateral, if the loan is collateral-dependent. In establishing the allowance, management considers a number of factors including the specific borrower’s financial performance as well as ability to repay. At December 31, 2012 and 2011, there were no wholesale finance receivables that were individually deemed to be impaired under ASC Topic 310, “Receivables”.
Retail finance receivables accrue interest until either collected or charged-off. Interest continues to accrue on past due wholesale finance receivables until the finance receivable becomes uncollectible, at which time the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these wholesale finance receivables when payments are current according to the terms of the loan agreements and future payments are reasonably assured. At December 31, 2012 and 2011, there were no wholesale finance receivables on non-accrual status.
An analysis of the aging of past due finance receivables at December 31 was as follows (in thousands):
 
 
 
2012
 
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
 
$
4,894,675

 
$
113,604

 
$
37,239

 
$
27,597

 
$
178,440

 
$
5,073,115

Wholesale
 
814,706

 
984

 
278

 
436

 
1,698

 
816,404

Total
 
$
5,709,381

 
$
114,588

 
$
37,517

 
$
28,033

 
$
180,138

 
$
5,889,519


 
 
 
2011
 
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
 
$
4,915,711

 
$
107,373

 
$
36,937

 
$
27,469

 
$
171,779

 
$
5,087,490

Wholesale
 
822,610

 
777

 
344

 
909

 
2,030

 
824,640

Total
 
$
5,738,321

 
$
108,150

 
$
37,281

 
$
28,378

 
$
173,809

 
$
5,912,130



The recorded investment of retail and wholesale finance receivables, excluding non-accrual status finance receivables, that are contractually past due 90 days or more at December 31 for the past five years was as follows (in thousands):
 
 
 
2012
 
2011
 
2010
 
2009
 
2008
United States
 
$
26,500

 
$
27,171

 
$
34,391

 
$
24,629

 
$
23,678

Canada
 
1,533

 
1,207

 
1,351

 
2,161

 
1,275

Total
 
$
28,033

 
$
28,378

 
$
35,742

 
$
26,790

 
$
24,953


A significant part of managing HDFS’ finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, HDFS utilizes different credit risk indicators for each portfolio.
HDFS manages retail credit risk through its credit approval policy and ongoing collection efforts. HDFS uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.
The recorded investment of retail finance receivables, by credit quality indicator, at December 31 was as follows (in thousands):
 
 
 
2012
 
2011
Prime
 
$
4,035,584

 
$
4,097,048

Sub-prime
 
1,037,531

 
990,442

Total
 
$
5,073,115

 
$
5,087,490


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

The recorded investment of wholesale finance receivables, by internal credit quality indicator, at December 31 was as follows (in thousands):
 
 
 
2012

 
2011

Doubtful
 
$
8,107

 
$
13,048

Substandard
 
2,593

 
5,052

Special Mention
 
3,504

 
14,361

Medium Risk
 
8,451

 
3,032

Low Risk
 
793,749

 
789,147

Total
 
$
816,404

 
$
824,640

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Asset-Backed Financing
12 Months Ended
Dec. 31, 2012
Asset-Backed Financing [Abstract]
Asset-Backed Financing
Asset-Backed Financing
HDFS participates in asset-backed financing through both term asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. HDFS treats these transactions as secured borrowing because assets are either transferred to consolidated VIEs or HDFS maintains effective control over the assets and does not meet the accounting sale requirements under ASC Topic 860. See Note 1 for more information on the Company's accounting for asset-backed financings and VIEs.
The following table shows the assets and liabilities related to our asset-backed financings that were included in our financial statements at December 31 (in thousands):
 
2012
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
2,143,708

 
$
(42,139
)
 
$
176,290

 
$
4,869

 
$
2,282,728

 
$
1,447,776

Asset-backed U.S. commercial paper conduit facility

 

 

 
419

 
419

 

 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
194,285

 
(3,432
)
 
11,718

 
255

 
202,826

 
175,658

 
$
2,337,993

 
$
(45,571
)
 
$
188,008

 
$
5,543

 
$
2,485,973

 
$
1,623,434

 
 
 
 
 
 
 
 
 
 
 
 
 
2011
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$
2,916,219

 
$
(65,735
)
 
$
228,776

 
$
6,772

 
$
3,086,032

 
$
2,087,346

Asset-backed U.S. commercial paper conduit facility
13,455

 
(302
)
 
879

 
449

 
14,481

 

Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility

 

 

 

 

 

 
$
2,929,674

 
$
(66,037
)
 
$
229,655

 
$
7,221

 
$
3,100,513

 
$
2,087,346



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.
In 2012 and 2011, HDFS transferred $715.7 million and $1.21 billion, respectively, of U.S. retail motorcycle finance receivables to three separate SPEs. The SPEs in turn issued $675.3 million and $1.09 billion, respectively, of secured notes. At December 31, 2012, the Company's consolidated balance sheet included outstanding balances related to the following secured notes with the related maturity dates and interest rates (in thousands):
 
Issue Date
 
Principal
Amount at Date of Issuance
 
Weighted-Average
Rate at Date of
Issuance
 
Contractual Maturity Date
July 2012
 
$
675,306

 
0.59
%
 
August 2013 - June 2018
November 2011
 
$
513,300

 
0.88
%
 
November 2012 - February 2018
August 2011
 
$
573,380

 
0.76
%
 
September 2012 - August 2017
November 2010
 
$
600,000

 
1.05
%
 
December 2011 - April 2018
December 2009
 
$
562,499

 
1.55
%
 
December 2010 - June 2017

In addition, during 2012, the Company issued $89.5 million of secured notes through the sale of notes that had been previously retained as part of the December 2009, August 2011 and November 2011 term asset-backed securitization transactions. These notes were sold at a premium and have contractual maturities ranging from June 2017 to April 2019.
Outstanding balances related to the following secured notes were included in the Company's consolidated balance sheet at December 31, 2011 (in thousands) and the Company completed repayment of those balances during 2012:
 
 
Issue Date
 
Principal
Amount at Date of Issuance
 
Weighted-Average
Rate at Date of
Issuance
 
Contractual Maturity Date
 
 
October 2009
 
$
700,000

 
1.16
%
 
October 2010 - April 2017
 
July 2009
 
$
700,000

 
2.11
%
 
July 2010 - February 2017
 
May 2009
 
$
500,000

 
2.77
%
 
May 2010 - January 2017
 
February 2008
 
$
486,000

 
3.94
%
 
February 2009 - December 2013
 
August 2007
 
$
782,000

 
5.50
%
 
September 2008 - May 2015
 
May 2007
 
$
950,000

 
5.20
%
 
May 2008 - August 2015

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.
For the year ended December 31, 2012 and 2011, the SPEs recorded interest expense on the secured notes of $25.8 million and $60.2 million, respectively, which is included in financial services interest expense. The weighted average interest rate of the outstanding term asset-backed securitization transactions was 1.09% and 1.96% at December 31, 2012 and 2011, respectively.
Asset-Backed U.S. Commercial Paper Conduit Facility VIE
In September 2012, the Company amended and restated its third-party bank sponsored asset-backed commercial paper conduit facility (U.S. Conduit) 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 finance receivables held by the SPE as collateral. The amended agreement has similar terms as the prior agreement and is for the same amount. Under the facility, HDFS may transfer U.S. retail motorcycle finance receivables to a SPE, which in turn may issue debt to third-party bank-sponsored asset-backed commercial paper conduits.
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 U.S. Conduit 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 U.S. Conduit, 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 U.S. Conduit has an expiration date of September 13, 2013.
The SPE had no borrowings outstanding under the U.S. Conduit at December 31, 2012 or 2011; therefore, these assets are restricted as collateral for the payment of fees associated with the unused portion of the total aggregate commitment of $600.0 million.
For the years ended December 31, 2012 and 2011, the SPE recorded interest expense of $1.4 million and $1.5 million, respectively, related to the unused portion of the total aggregate commitment of $600.0 million. Interest expense on the U.S. Conduit is included in financial services interest expense. There was no weighted average interest rate at December 31, 2012 or 2011 as HDFS had no outstanding borrowings under the U.S. Conduit during 2012 or 2011.

Asset-Backed Canadian Commercial Paper Conduit Facility

In 2012, HDFS entered into an agreement with a Canadian bank-sponsored asset-backed commercial paper conduit facility (Canadian Conduit). Under the agreement, the Canadian Conduit is contractually committed, at HDFS' option, to purchase from HDFS eligible Canadian retail motorcycle finance receivables for proceeds up to C$200 million. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$200 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the Canadian Conduit expires on August 30, 2013. The contractual maturity of the debt is approximately 5 years.

During 2012, HDFS transferred $230.0 million of Canadian retail motorcycle finance receivables for proceeds of $201.3 million This transaction is treated as a secured borrowing, and the transferred assets are restricted as collateral for payment of the debt.

For the year ended December 31, 2012, HDFS recorded interest expense of $1.1 million on the secured notes. Interest expense on the Canadian Conduit is included in financial services interest expense. The weighted average interest rate of the outstanding Canadian Conduit was 1.95% at December 31, 2012.

As HDFS participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, is $27.2 million at December 31, 2012. The maximum exposure is not an indication of the Company's expected loss exposure.
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Fair Value Measurements
12 Months Ended
Dec. 31, 2012
Fair Value Disclosures [Abstract]
Fair Value Measurements
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. The Company uses the market approach to derive the fair value for its level 2 fair value measurements. Foreign currency exchange contracts are valued using publicly quoted spot and forward prices; commodity contracts are valued using publicly quoted prices, where available, or dealer quotes; interest rate swaps are valued using publicized swap curves; and investments in marketable debt and equity securities are valued using publicly quoted prices.
Level 3 inputs are not observable in the market and include management's judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the following tables.
Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31 (in thousands):
 
 
 
Balance as of
2012
 
Quoted Prices  in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Cash equivalents
 
$
852,979

 
$