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Document And Entity Information
3 Months Ended
Apr. 01, 2012
May 03, 2012
Document And Entity Information [Abstract]
Document Type 10-Q
Document Period End Date Apr 1, 2012
Document Fiscal Year Focus 2012
Document Fiscal Period Focus Q1
Amendment Flag false
Entity Registrant Name HARLEY DAVIDSON INC
Entity Central Index Key 0000793952
Entity Current Reporting Status Yes
Entity Voluntary Filers Yes
Current Fiscal Year End Date --12-31
Entity Filer Category Large Accelerated Filer
Entity Well-known Seasoned Issuer Yes
Entity Common Stock, Shares Outstanding 231,519,008
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Condensed Consolidated Statements Of Operations (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Apr. 01, 2012
Mar. 27, 2011
Revenue:
Motorcycles and related products $ 1,273,369 $ 1,063,044
Financial services 156,322 161,886
Total revenue 1,429,691 1,224,930
Costs and expenses:
Motorcycles and related products cost of goods sold 816,859 711,178
Financial services interest expense 51,256 58,035
Financial services provision for credit losses 9,014 5,606
Selling, administrative and engineering expense 265,653 234,115
Restructuring expense 11,451 22,999
Total costs and expenses 1,154,233 1,031,933
Operating income 275,458 192,997
Investment income 1,933 1,398
Interest expense 11,495 11,481
Income before provision for income taxes 265,896 182,914
Provision for income taxes 93,861 63,654
Income from continuing operations 172,035 119,260
Loss from discontinued operations, net of tax      
Net income $ 172,035 $ 119,260
Earnings per common share from continuing operations:
Basic $ 0.75 $ 0.51
Diluted $ 0.74 $ 0.51
Loss per common share from discontinued operations:
Basic      
Diluted      
Earnings per common share:
Basic $ 0.75 $ 0.51
Diluted $ 0.74 $ 0.51
Cash dividends per common share $ 0.155 $ 0.1
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Condensed Consolidated Statements Of Comprehensive Income (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Apr. 01, 2012
Mar. 27, 2011
Condensed Consolidated Statements Of Comprehensive Income [Abstract]
Comprehensive income $ 180,816 $ 138,431
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Condensed Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Apr. 01, 2012
Dec. 31, 2011
Mar. 27, 2011
Dec. 31, 2010
Current assets:
Cash and cash equivalents $ 1,276,337 $ 1,526,950 $ 932,515 $ 1,021,933
Marketable securities 134,946 153,380 115,209
Accounts receivable, net 264,272 219,039 297,671
Finance receivables, net 1,339,139 1,168,603 1,276,780
Restricted finance receivables held by variable interest entities, net 546,350 591,864 637,760
Inventories 467,941 418,006 372,323
Restricted cash held by variable interest entities 246,995 229,655 294,903
Other current assets 237,550 234,709 243,427
Total current assets 4,513,530 4,542,206 4,170,588
Finance receivables, net 2,020,036 1,754,441 1,806,563
Restricted finance receivables held by variable interest entities, net 1,971,878 2,271,773 2,304,320
Property, plant and equipment, net 791,064 809,459 799,091
Goodwill 29,740 29,081 30,988
Other long-term assets 279,099 267,204 293,592
Total assets 9,605,347 9,674,164 9,405,142
Current liabilities:
Accounts payable 355,902 255,713 292,676
Accrued liabilities 577,619 564,172 580,083
Short-term debt 629,143 838,486 393,393
Current portion of long-term debt 399,939 399,916
Current portion of long-term debt held by variable interest entities 620,624 640,331 721,179
Total current liabilities 2,583,227 2,698,618 1,987,331
Long-term debt 2,784,688 2,396,871 2,963,375
Long-term debt held by variable interest entities 1,133,696 1,447,015 1,603,584
Pension liability 118,212 302,483 99,627
Postretirement healthcare liability 265,871 268,582 254,505
Other long-term liabilities 144,994 140,339 156,472
Commitments and contingencies (Note 16)         
Total shareholders' equity 2,574,659 2,420,256 2,340,248
Total liabilities and shareholders' equity $ 9,605,347 $ 9,674,164 $ 9,405,142
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Condensed Consolidated Statements Of Cash Flows (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Apr. 01, 2012
Mar. 27, 2011
Condensed Consolidated Statements Of Cash Flows [Abstract]
Net cash used by operating activities of continuing operations (Note 3) $ (73,616) $ (104,918)
Cash flows from investing activities of continuing operations:
Capital expenditures (24,680) (27,704)
Origination of finance receivables (645,247) (549,200)
Collections on finance receivables 681,904 676,952
Purchases of marketable securities (5,000)
Sales and redemptions of marketable securities 20,042 29,974
Net cash provided by investing activities of continuing operations 32,019 125,022
Cash flows from financing activities of continuing operations:
Proceeds from issuance of medium-term notes 397,377 447,076
Repayments of securitization debt (333,026) (430,471)
Net decrease in credit facilities and unsecured commercial paper (224,508) (96,174)
Net change in restricted cash (17,340) (6,016)
Dividends (35,943) (23,643)
Purchase of common stock for treasury (20,745) (4,699)
Excess tax benefits from share-based payments 7,962 3,262
Issuance of common stock under employee stock option plans 16,281 3,861
Net cash used by financing activities of continuing operations (209,942) (106,804)
Effect of exchange rate changes on cash and cash equivalents of continuing operations 926 (2,693)
Net decrease in cash and cash equivalents of continuing operations (250,613) (89,393)
Cash flows from discontinued operations:
Cash flows from operating activities of discontinued operations (25)
Cash flows from investing activities of discontinued operations      
Effect of exchange rate changes on cash and cash equivalents of discontinued operations      
Net cash used by discontinued operations, total (25)
Net decrease in cash and cash equivalents (250,613) (89,418)
Cash and cash equivalents:
Cash and cash equivalents - beginning of period 1,526,950 1,021,933
Cash and cash equivalents of discontinued operations - beginning of period      
Net decrease in cash and cash equivalents (250,613) (89,418)
Less: Cash and cash equivalents of discontinued operations - end of period      
Cash and cash equivalents - end of period $ 1,276,337 $ 932,515
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Basis Of Presentation And Use Of Estimates
3 Months Ended
Apr. 01, 2012
Basis Of Presentation And Use Of Estimates [Abstract]
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 group 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 material intercompany 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 April 1, 2012 and March 27, 2011, the condensed consolidated statements of operations for the three month periods then ended, the condensed consolidated statements of comprehensive income for the three month periods then ended and the condensed consolidated statements of cash flows for the three 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, 2011.

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). On October 15, 2009, the Company announced its intent to divest MV, and the Company completed the sale on August 6, 2010. MV is presented as a discontinued operation for all periods.

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New Accounting Standards
3 Months Ended
Apr. 01, 2012
New Accounting Standards [Abstract]
New Accounting Standards

2. New Accounting Standards

Accounting Standards Recently Adopted

In May 2011, the FASB issued Accounting Standards Update (ASU) No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." ASU No. 2011-04 clarifies the application of existing guidance within ASC Topic 820, "Fair Value Measurement" to ensure consistency between U.S. GAAP and International Financial Reporting Standards (IFRS). 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 Levels 1 and 2 in the fair value hierarchy. The Company adopted ASU No. 2011-04 on January 1, 2012. The adoption of ASU No. 2011-04 required additional disclosures of the hierarchy classification for items whose fair value is not recorded on the balance sheet but is disclosed in the notes, refer to Note 9 for additional information. There was no financial impact resulting from the adoption of ASU No. 2011-04.

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 in either 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, condensed consolidated statements of comprehensive income, for all periods presented.

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Additional Balance Sheet And Cash Flow Information
3 Months Ended
Apr. 01, 2012
Additional Balance Sheet And Cash Flow Information [Abstract]
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):

 

     April 1,
2012
     December 31,
2011
     March 27,
2011
 

Available-for-sale:

        

Corporate bonds

   $ 134,946       $ 153,380       $ 55,232   

U.S. Treasuries

     —           —           59,977   
  

 

 

    

 

 

    

 

 

 
   $ 134,946       $ 153,380       $ 115,209   
  

 

 

    

 

 

    

 

 

 

The Company's available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first three months of 2012 and 2011, the Company recognized gross unrealized gains in other comprehensive income of $1.6 million and $0.1 million, respectively, or $1.0 million and $0.04 million net of taxes, respectively, to adjust amortized cost to fair value. The marketable securities have contractual maturities that generally come due over the next 12 to 48 months.

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):

 

     April 1,
2012
    December 31,
2011
    March 27,
2011
 

Components at the lower of FIFO cost or market

      

Raw materials and work in process

   $ 113,127      $ 113,932      $ 99,538   

Motorcycle finished goods

     252,979        226,261        187,687   

Parts and accessories and general merchandise

     145,362        121,340        119,134   
  

 

 

   

 

 

   

 

 

 

Inventory at lower of FIFO cost or market

     511,468        461,533        406,359   

Excess of FIFO over LIFO cost

     (43,527     (43,527     (34,036
  

 

 

   

 

 

   

 

 

 
   $ 467,941      $ 418,006      $ 372,323   
  

 

 

   

 

 

   

 

 

 

 

Operating Cash Flow

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

 

     Three months ended  
     April 1,
2012
    March 27,
2011
 

Cash flows from operating activities:

    

Net income

   $ 172,035      $ 119,260   

Loss from discontinued operations

     —          —     
  

 

 

   

 

 

 

Income from continuing operations

     172,035        119,260   

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

    

Depreciation

     43,203        42,947   

Amortization of deferred loan origination costs

     18,547        19,329   

Amortization of financing origination fees

     2,743        3,107   

Provision for employee long-term benefits

     17,293        15,563   

Contributions to pension and postretirement plans

     (206,832     (204,816

Stock compensation expense

     11,744        9,153   

Net change in wholesale finance receivables related to sales

     (151,046     (163,967

Provision for credit losses

     9,014        5,606   

Pension and postretirement healthcare plan curtailment and settlement expense

     —          236   

Foreign currency adjustments

     (2,911     29   

Other, net

     1,505        14,112   

Changes in current assets and liabilities:

    

Accounts receivable, net

     (43,745     (27,048

Finance receivables - accrued interest and other

     3,299        3,542   

Inventories

     (47,168     (38,200

Accounts payable and accrued liabilities

     117,460        98,960   

Restructuring reserves

     1,296        7,757   

Derivative instruments

     (486     2,157   

Other

     (19,567     (12,645
  

 

 

   

 

 

 

Total adjustments

     (245,651     (224,178
  

 

 

   

 

 

 

Net cash used by operating activities of continuing operations

   $ (73,616   $ (104,918
  

 

 

   

 

 

 
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Discontinued Operations
3 Months Ended
Apr. 01, 2012
Discontinued Operations [Abstract]
Discontinued Operations

4. 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 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 20.0 million Euros to MV as operating capital. The 20.0 million Euros contributed were factored into the Company's estimate of MV's fair value prior to the sale and was recognized in the 2010 impairment charges discussed above. As a result of the impairment charges recorded in 2009 and 2010 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 December 31, 2010, the Company's estimated total tax benefit associated with the loss on the sale of MV was $101.0 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 their 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.

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Restructuring Expense
3 Months Ended
Apr. 01, 2012
Restructuring Expense [Abstract]
Restructuring Expense

5. Restructuring Expense

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 by mid-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 mid-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 $30 million in restructuring charges related to the transition through 2013. Approximately 35% of the $30 million will be non-cash charges. On a cumulative basis, the Company has incurred $12.4 million of restructuring expense under the 2011 New Castalloy Restructuring Plan as of April 1, 2012, of which $3.0 million was incurred during the first quarter of 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 and increased production efficiency. Once the new contract is fully implemented, the production system in Kansas City, like Wisconsin and York, will include the addition of a flexible workforce component.

After taking actions to implement the new ratified labor agreement (2011 Kansas City Restructuring Plan), the Company expects to have about 145 fewer full-time hourly unionized employees in its Kansas City facility than would have been required under the prior contract.

Under the 2011 Kansas City Restructuring Plan, restructuring expenses consist of employee severance and termination costs and other related costs. The Company expects to incur approximately $15 million in restructuring expenses related to the new contract through 2012, of which approximately 10% are expected to be non-cash. On a cumulative basis, the Company has incurred $9.3 million of restructuring expense under the 2011 Kansas City Restructuring Plan as of April 1, 2012, of which $0.5 million was incurred during the first quarter of 2012.

For the three months ended March 27, 2011, restructuring expense included $0.2 million of noncash curtailment losses related to the Company's pension plan that covers employees of the Kansas City facility.

 

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 (in thousands):

 

00000000 00000000 00000000 00000000 00000000 00000000 00000000 00000000
     Three months ended April 1, 2012  
     Kansas City      New Castalloy     Consolidated  
     Employee                    Employee                          
     Severance and                    Severance and                          
     Termination                    Termination     Accelerated                    
     Costs      Other      Total      Costs     Depreciation     Other     Total     Total  

Balance, beginning of period

   $ 4,123       $ —         $ 4,123       $ 8,428      $ —        $ 305      $ 8,733      $ 12,856   

Restructuring expense

     542         —           542         571        2,099        349        3,019        3,561   

Utilized—cash

     —           —           —           (156     —          (361     (517     (517

Utilized—noncash

     —           —           —           —          (2,099     —          (2,099     (2,099
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 4,665       $ —         $ 4,665       $ 8,843      $ —        $ 293      $ 9,136      $ 13,801   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
     Three months ended March 27, 2011  
     Kansas City  
     Employee              
     Severance and              
     Termination              
     Costs     Other     Total  

Restructuring expense

     6,382        134        6,516   

Utilized—cash

     —          (134     (134

Utilized—noncash

     (236     —          (236
  

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 6,146      $ —        $ 6,146   
  

 

 

   

 

 

   

 

 

 

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. Once the new contracts are fully implemented, the production system in Wisconsin, like York, will include the addition of a flexible workforce component.

Based on the new ratified labor agreements (2010 Restructuring Plan), the Company expects to have about 250 fewer full-time hourly unionized employees in its Milwaukee-area facilities when the contracts are fully implemented than would have been required under the prior contract. In Tomahawk, the Company expects to have about 75 fewer full-time hourly unionized employees when the contract is fully implemented than would have been required under the prior 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 $67 million in restructuring expenses related to the new contracts through 2012, of which approximately 42% are expected to be non-cash. On a cumulative basis, the Company has incurred $61.5 million of restructuring expense under the 2010 Restructuring Plan as of April 1, 2012, of which $4.5 million was incurred during the first quarter of 2012.

 

The following table summarizes the Motorcycles segment's 2010 Restructuring Plan reserve activity and balances as recorded in accrued liabilities (in thousands):

 

     Three months ended
April 1, 2012
    Three months ended
March 27, 2011
 
     Employee
Severance and
Termination Costs
    Employee
Severance and
Termination Costs
 

Balance, beginning of period

   $ 20,361      $ 8,652   

Restructuring expense

     1,886        3,144   

Utilized - cash

     (26     (594
  

 

 

   

 

 

 

Balance, end of period

   $ 22,221      $ 11,202   
  

 

 

   

 

 

 

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) that are 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 significant announced actions include the restructuring and transformation of its York, Pennsylvania production facility including the implementation of a new more flexible unionized labor agreement; consolidation of facilities related to engine and transmission production; outsourcing of certain distribution and transportation activities and exiting the Buell product line.

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.

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 $388 million to $408 million from 2009 to 2012, of which approximately 30% are expected to be non-cash. On a cumulative basis, the Company has incurred $386.6 million of restructuring and impairment expense under the 2009 Restructuring Plan as of April 1, 2012, of which $3.3 million was incurred during the first quarter of 2012. Approximately 3,600 employees have left the Company under the 2009 Restructuring Plan as of April 1, 2012.

 

The following table summarizes the Company's 2009 Restructuring Plan reserve activity and balances recorded in accrued liabilities (in thousands):

 

     Three months ended April 1, 2012  
     Motorcycles & Related Products  
     Employee
Severance and
Termination Costs
    Accelerated
Depreciation
     Other     Total  

Balance, beginning of period

   $ 10,089      $ —         $ —        $ 10,089   

Restructuring expense

     323        —           5,681        6,004   

Utilized - cash

     (1,846     —           (5,669     (7,515

Utilized - noncash

     —          —           —          —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, end of period

   $ 8,566      $ —         $ 12      $ 8,578   
  

 

 

   

 

 

    

 

 

   

 

 

 
     Three months ended March 27, 2011  
     Motorcycles & Related Products  
     Employee
Severance and
Termination Costs
    Accelerated
Depreciation
     Other     Total  

Balance, beginning of period

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

Restructuring expense

     2,954        —           10,385        13,339   

Utilized - cash

     (4,028     —           (10,546     (14,574

Utilized - noncash

     —          —           296        296   
  

 

 

   

 

 

    

 

 

   

 

 

 

Balance, beginning of period

   $ 22,744      $ —         $ 2,899      $ 25,643   
  

 

 

   

 

 

    

 

 

   

 

 

 

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. During the first quarter of 2012, the Company released $2.7 million of its 2009 Restructuring Plan reserve related to employee severance costs as these costs are no longer expected to be incurred.

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Finance Receivables
3 Months Ended
Apr. 01, 2012
Finance Receivables [Abstract]
Finance Receivables

6. Finance Receivables

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

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.

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

 

     April 1,     December 31,     March 27,  
     2012     2011     2011  

Retail

   $ 5,043,584      $ 5,087,490      $ 5,225,155   

Wholesale

     956,322        824,640        959,952   
  

 

 

   

 

 

   

 

 

 
            5,912,130        6,185,107   

Allowance for credit losses

     (122,503     (125,449     (159,684
  

 

 

   

 

 

   

 

 

 
   $ 5,877,403      $ 5,786,681      $ 6,025,423   
  

 

 

   

 

 

   

 

 

 

At April 1, 2012, December 31, 2011 and March 27, 2011, the Company's Condensed Consolidated Balance Sheet included finance receivables, net of $2.52 billion, $2.86 billion and $2.94 billion, respectively, which were restricted as collateral for the payment of debt held by VIEs and other related obligations as discussed in Note 7. These receivables are included in retail finance receivables in the table above.

 

A provision for credit losses on finance receivables is charged to earnings in amounts sufficient to maintain the allowance for credit losses on finance receivables at a level that is adequate to cover losses of principal inherent in the existing portfolio. The allowance for credit losses on finance receivables represents management's estimate of probable losses inherent in the finance receivable portfolio as of the balance sheet date. However, due to the use of projections and assumptions in estimating the losses, the amount of losses actually incurred by the Company could differ from the amounts estimated.

Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):

 

     Three months ended April 1, 2012  
     Retail     Wholesale      Total  

Balance, beginning of period

   $ 116,112      $ 9,337       $ 125,449   

Provision for credit losses

     8,705        309         9,014   

Charge-offs

     (25,852     —           (25,852

Recoveries

     13,892        —           13,892   
  

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 112,857      $ 9,646       $ 122,503   
  

 

 

   

 

 

    

 

 

 
     Three months ended March 27, 2011  
     Retail     Wholesale      Total  

Balance, beginning of period

   $ 157,791      $ 15,798       $ 173,589   

Provision for credit losses

     3,439        2,167         5,606   

Charge-offs

     (35,191     —           (35,191

Recoveries

     15,665        15         15,680   
  

 

 

   

 

 

    

 

 

 

Balance, end of period

   $ 141,704      $ 17,980       $ 159,684   
  

 

 

   

 

 

    

 

 

 

Included in the $112.9 and $141.7 million retail allowance for credit losses on finance receivables is $57.0 and $82.3 million, respectively, related to finance receivables held by VIEs.

Portions of the allowance for credit losses on finance receivables are specified to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses on finance receivables 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. As retail finance receivables are collectively and not individually reviewed for impairment, this portfolio does not have finance receivables specifically impaired.

The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company's evaluation for the wholesale allowance for credit losses 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 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 or the fair value of the collateral, if the loan is collateral-dependent. In establishing the allowance for credit losses, management considers a number of factors including the specific borrower's financial performance as well as ability to repay. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company's internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses 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 wholesale 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.

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 was, as follows (in thousands):

 

     April 1, 2012  
     Retail      Wholesale      Total  

Allowance for credit losses, ending balance:

        

Individually evaluated for impairment

   $ —         $ —         $ —     

Collectively evaluated for impairment

     112,857         9,646         122,503   
  

 

 

    

 

 

    

 

 

 

Total allowance for credit losses

   $ 112,857       $ 9,646       $ 122,503   
  

 

 

    

 

 

    

 

 

 

Finance receivables, ending balance:

        

Individually evaluated for impairment

   $ —         $ —         $ —     

Collectively evaluated for impairment

     5,043,584         956,322         5,999,906   
  

 

 

    

 

 

    

 

 

 

Total finance receivables

   $ 5,043,584       $ 956,322       $ 5,999,906   
  

 

 

    

 

 

    

 

 

 
     December 31, 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   
  

 

 

    

 

 

    

 

 

 
     March 27, 2011  
     Retail      Wholesale      Total  

Allowance for credit losses, ending balance:

        

Individually evaluated for impairment

   $ —         $ 3,451       $ 3,451   

Collectively evaluated for impairment

     141,704         14,529         156,233   
  

 

 

    

 

 

    

 

 

 

Total allowance for credit losses

   $ 141,704       $ 17,980       $ 159,684   
  

 

 

    

 

 

    

 

 

 

Finance receivables, ending balance:

        

Individually evaluated for impairment

   $ —         $ 5,187       $ 5,187   

Collectively evaluated for impairment

     5,225,155         954,765         6,179,920   
  

 

 

    

 

 

    

 

 

 

Total finance receivables

   $ 5,225,155       $ 959,952       $ 6,185,107   
  

 

 

    

 

 

    

 

 

 

There were no wholesale finance receivables at April 1, 2012 or December 31, 2011 that were individually deemed to be impaired under ASC Topic 310, "Receivables". Additional information related to the wholesale finance receivables that were individually deemed to be impaired under ASC Topic 310, "Receivables," at March 27, 2011 includes (in thousands):

 

            Unpaid             Average      Interest  
     Recorded      Principal      Related      Recorded      Income  
     Investment      Balance      Allowance      Investment      Recognized  

Wholesale:

              

No related allowance recorded

   $ —         $ —         $ —         $ —         $ —     

Related allowance recorded

     5,187         5,037         3,451         5,527         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total impaired wholesale finance receivables

   $ 5,187       $ 5,037       $ 3,451       $ 5,527       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged-off at 120 days contractually past due. Retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of April 1, 2012, December 31, 2011 and March 27, 2011, all retail finance receivables were accounted for as interest-earning receivables, of which $16.3 million, $27.5 million and $25.1 million, respectively, were 90 days or more past due.

Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due wholesale finance receivables until the date the collection of the finance receivables becomes doubtful, at which time the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these wholesale finance receivables when payments are current according to the terms of the loan agreements and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. There were no wholesale receivables on non-accrual status at April 1, 2012 or December 31, 2011. The recorded investment of non-accrual status wholesale finance receivables at March 27, 2011 was $5.2 million. At April 1, 2012, December 31, 2011 and March 27, 2011, $0.3 million, $0.9 million, and $2.0 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.

An analysis of the aging of past due finance receivables, which includes non-accrual status finance receivables was as follows (in thousands):

 

     April 1, 2012  
                          Greater than             Total  
            31-60 Days      61-90 Days      90 Days      Total      Finance  
     Current      Past Due      Past Due      Past Due      Past Due      Receivables  

Retail

   $ 4,930,739       $ 75,560       $ 21,023       $ 16,262       $ 112,845       $ 5,043,584   

Wholesale

     955,493         354         149         326         829         956,322   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 5,886,232       $ 75,914       $ 21,172       $ 16,588       $ 113,674       $   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
                          Greater than             Total  
            31-60 Days      61-90 Days      90 Days      Total      Finance  
     Current      Past Due      Past Due      Past Due      Past Due      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   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     March 27, 2011  
                          Greater than             Total  
            31-60 Days      61-90 Days      90 Days      Total      Finance  
     Current      Past Due      Past Due      Past Due      Past Due      Receivables  

Retail

   $ 5,059,870       $ 107,471       $ 32,691       $ 25,123       $ 165,285       $ 5,225,155   

Wholesale

     955,478         881         895         2,698         4,474         959,952   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 6,015,348       $ 108,352       $ 33,586       $ 27,821       $ 169,759       $ 6,185,107   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

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

HDFS manages retail credit risk through its credit approval policy and ongoing collection efforts. HDFS uses FICO scores to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail 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, was as follows (in thousands):

 

     April 1, 2012      December 31, 2011      March 27, 2011  

Prime

   $ 4,056,602       $ 4,097,048       $ 4,185,825   

Sub-prime

     986,982         990,442         1,039,330   
  

 

 

    

 

 

    

 

 

 

Total

   $ 5,043,584       $ 5,087,490       $ 5,225,155   
  

 

 

    

 

 

    

 

 

 

HDFS' credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. HDFS utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and capture credit risk factors for each borrower.

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

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

 

     April 1, 2012      December 31, 2011      March 27, 2011  

Doubtful

   $ 13,108       $ 13,048       $ 20,550   

Substandard

     5,599         5,052         19,510   

Special Mention

     8,618         14,361         21,069   

Medium Risk

     6,365         3,032         16,225   

Low Risk

     922,632         789,147         882,598   
  

 

 

    

 

 

    

 

 

 

Total

   $ 956,322       $ 824,640       $ 959,952   
  

 

 

    

 

 

    

 

 

 
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Asset-Backed Financing
3 Months Ended
Apr. 01, 2012
Asset-Backed Financing [Abstract]
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 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 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.

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 each term asset-backed securitizations are only available for payment of that secured debt and other obligations arising from the term asset-backed securitization transaction 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 2012 to 2018.

There were no term asset-backed securitization transactions completed during the three months ended April 1, 2012 or March 27, 2011.

The following table presents the assets and liabilities of the consolidated term asset-backed securitization SPEs that were included in the Company's financial statements (in thousands):

 

     April 1,
2012
    December 31,
2011
    March 27,
2011
 

Assets:

      

Finance receivables

   $ 2,564,585      $ 2,916,219      $ 3,000,580   

Allowance for credit losses

     (56,810     (65,735     (81,631

Restricted cash

     245,912        228,776        293,090   

Other assets

     5,620        6,772        10,499   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 2,759,307      $ 3,086,032      $ 3,222,538   
  

 

 

   

 

 

   

 

 

 

Liabilities

      

Term asset-backed securitization debt

   $ 1,754,320      $ 2,087,346      $ 2,324,763   

Asset-Backed Commercial Paper Conduit Facility VIE

On September 9, 2011, the Company amended and restated its third-party bank sponsored asset-backed commercial paper conduit facility which provides for a total aggregate commitment of $600.0 million based on, among other things, the amount of eligible U.S. retail motorcycle loans held by the SPE as collateral. The amended agreement has terms similar to 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 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 7, 2012.

 

The following table presents the assets of the asset-backed commercial paper conduit facility SPEs that were included in our financial statements (in thousands);

 

     April 1,
2012
    December 31,
2011
    March 27,
2011
 

Finance receivables

   $ 10,689      $ 13,455      $ 23,776   

Allowance for credit losses

     (236     (302     (645

Restricted cash

     1,083        879        1,813   

Other assets

     312        449        598   
  

 

 

   

 

 

   

 

 

 

Total assets

   $ 11,848      $ 14,481      $ 25,542   
  

 

 

   

 

 

   

 

 

 

The SPEs had no borrowings outstanding under the conduit facility at April 1, 2012, December 31, 2011 or March 27, 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.

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Fair Value Measurements
3 Months Ended
Apr. 01, 2012
Fair Value Measurements [Abstract]
Fair Value Measurements

8. 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 (in thousands):

 

April 1, 2012  
     Balance as of
April 1, 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

   $ 997,669       $ 997,669       $ —         $ —     

Marketable securities

     134,946         —           134,946         —     

Derivatives

     6,345         —           6,345         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,138,960       $ 997,669       $ 141,291       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives

   $ 2,234       $ —         $ 2,234       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     December 31, 2011  
     Balance as of
December 31, 2011
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Cash equivalents

   $ 1,302,367       $ 1,302,367       $ —         $ —     

Marketable securities

     153,380         —           153,380         —     

Derivatives

     16,443         —           16,443         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 1,472,190       $ 1,302,367       $ 169,823       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives

   $ 5,136       $ —         $ 5,136       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     March 27, 2011  
     Balance as of
March 27, 2011
     Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Cash equivalents

   $ 593,344       $ 593,344       $ —         $ —     

Marketable securities

     115,209         59,977         55,232         —     

Derivatives

     18         —           18         —     
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 708,571       $ 653,321       $ 55,250       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives

   $ 24,787       $ —         $ 24,787       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 
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Fair Value Of Financial Instruments
3 Months Ended
Apr. 01, 2012
Fair Value Of Financial Instruments [Abstract]
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 10). 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 (in thousands):

 

     April 1, 2012      December 31, 2011      March 27, 2011  
     Fair Value      Carrying Value      Fair Value      Carrying Value      Fair Value      Carrying Value  

Assets:

                 

Cash and cash equivalents

   $ 1,276,337       $ 1,276,337       $ 1,526,950       $ 1,526,950       $ 932,515       $ 932,515   

Marketable securities

   $ 134,946       $ 134,946       $ 153,380       $ 153,380       $ 115,209       $ 115,209   

Accounts receivable, net

   $ 264,272       $ 264,272       $ 219,039       $ 219,039       $ 297,671       $ 297,671   

Derivatives

   $ 6,345       $ 6,345       $ 16,443       $ 16,443       $ 18       $ 18   

Finance receivables, net

   $ 5,961,825       $ 5,877,403       $ 5,888,040       $ 5,786,681       $ 6,105,350       $ 6,025,423   

Restricted cash held by variable interest entities

   $ 246,995       $ 246,995       $ 229,655       $ 229,655       $ 294,903       $ 294,903   

Liabilities:

                 

Accounts payable

   $ 355,902       $ 355,902       $ 255,713       $ 255,713       $ 292,676       $ 292,676   

Derivatives

   $ 2,234       $ 2,234       $ 5,136       $ 5,136       $ 24,787       $ 24,787   

Unsecured commercial paper

   $ 662,343       $ 662,343       $ 874,286       $ 874,286       $ 488,493       $ 488,493   

Credit facilities

   $ 150,195       $ 150,195       $ 159,794       $ 159,794       $ 217,651       $ 217,651   

Medium-term notes

   $ 2,936,475       $ 2,698,232       $ 2,561,458       $ 2,298,193       $ 2,514,092       $ 2,347,624   

Senior unsecured notes

   $ 366,651       $ 303,000       $ 376,513       $ 303,000       $ 406,961       $ 303,000   

Term asset-backed securitization debt

   $ 1,768,140       $ 1,754,320       $ 2,099,060       $ 2,087,346       $ 2,366,270       $ 2,324,763   

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 of similar financial assets. Changes in fair value are recorded, net of tax, as other comprehensive income and included as a component of shareholders' equity. Fair Value is based on Level 2 inputs.

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 a provision for 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. Fair value is determined based on Level 3 inputs. 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. Fair value is calculated using Level 2 inputs.

 

The fair values of the medium-term notes maturing in December 2012, December 2014, March 2016, March 2017 and June 2018 are estimated based upon rates currently available for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.

The fair value of the senior unsecured notes is estimated based upon rates currently available for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.

The fair value of the debt related to term asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities. Fair value is calculated using Level 2 inputs.

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Derivative Instruments And Hedging Activities
3 Months Ended
Apr. 01, 2012
Derivative Instruments And Hedging Activities [Abstract]
Derivative Instruments And Hedging Activities

10. 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 foreign currency contracts and natural gas contracts generally have maturities of less than one year.

The Company's earnings are affected by changes in interest rates. HDFS utilizes interest rate swaps to reduce the impact of fluctuations in interest rates on its unsecured commercial paper by converting a portion from a floating rate basis to a fixed rate basis. HDFS also entered into derivative contracts to facilitate its first quarter 2008 term asset-backed securitization transaction. These derivatives, which hedge assets held by a VIE, did not qualify for hedge accounting treatment and expired during 2011. The fair value of HDFS's interest rate swaps is determined using pricing models that incorporate quoted prices for similar assets and observable inputs such as interest rates and yield curves. Fair value is determined using Level 2 inputs.

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

 

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  

        Cash Flow Hedges

   April 1, 2012     March 27, 2011  

Foreign currency contracts

   $ (6,215   $ (10,161

Natural gas contracts

     (315     (37

Interest rate swaps—unsecured commercial paper

     (15     (8
  

 

 

   

 

 

 

Total

   $ (6,545   $ (10,206
  

 

 

   

 

 

 

 

For the three months ended April 1, 2012 and March 27, 2011, 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.

For the three months ended April 1, 2012 and March 27, 2011, there were no gains or losses recognized in income related to derivative financial instruments designated as fair value hedges.

For the three months ended April 1, 2012 and March 27, 2011, there were no gains or losses recognized in income related to derivative financial instruments not designated as hedging instruments.

 

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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Income Taxes
3 Months Ended
Apr. 01, 2012
Income Taxes [Abstract]
Income Taxes

11. Income Taxes

The Company's first quarter 2012 income tax rate was 35.3% compared to 34.8% for the same period last year. The first quarter of 2011 was favorably impacted by the Federal research and development credit that expired at the end of 2011.

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Product Warranty And Safety Recall Campaigns
3 Months Ended
Apr. 01, 2012
Product Warranty And Safety Recall Campaigns [Abstract]
Product Warranty And Safety Recall Campaigns

12. 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. 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 using an estimated cost, 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  
     April 1,
2012
    March 27,
2011
 

Balance, beginning of period

   $ 54,994      $ 54,134   

Warranties issued during the period

     14,912        11,225   

Settlements made during the period

     (13,958     (10,296

Recalls and changes to pre-existing warranty liabilities

     1,154        2,048   
  

 

 

   

 

 

 

Balance, end of period

   $ 57,102      $ 57,111   
  

 

 

   

 

 

 

The liability for safety recall campaigns was $8.0 million and $3.4 million as of April 1, 2012 and March 27, 2011, respectively.

 

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Earnings Per Share
3 Months Ended
Apr. 01, 2012
Earnings Per Share [Abstract]
Earnings Per Share

13. Earnings Per Share

 

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  
     April 1,
2012
     March 27,
2011
 

Numerator:

     

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

   $ 172,035       $ 119,260   
  

 

 

    

 

 

 

Denominator:

     

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

     228,988         233,820   

Effect of dilutive securities—employee stock compensation plan

     2,296         2,083   
  

 

 

    

 

 

 

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

     231,284         235,903   
  

 

 

    

 

 

 

Earnings per common share from continuing operations:

     

Basic

   $ 0.75       $ 0.51   

Diluted

   $ 0.74       $ 0.51   

Outstanding options to purchase 2.4 million and 3.3 million shares of common stock for the three months ended April 1, 2012 and March 27, 2011, 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.

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 April 1, 2012 and March 27, 2011.

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Employee Benefit Plans
3 Months Ended
Apr. 01, 2012
Employee Benefit Plans [Abstract]
Employee Benefit Plans

14. Employee Benefit Plans

The Company has defined benefit pension plans and 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  
     April 1,
2012
    March 27,
2011
 

Pension and SERPA Benefits

    

Service cost

   $ 8,420      $ 9,273   

Interest cost

     20,816        20,147   

Expected return on plan assets

     (29,277     (26,653

Amortization of unrecognized:

    

Prior service cost

     740        745   

Net loss

     10,969        7,554   

Curtailment loss

     —          236   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 11,668      $ 11,302   
  

 

 

   

 

 

 

Postretirement Healthcare Benefits

    

Service cost

   $ 1,853      $ 1,907   

Interest cost

     4,578        4,911   

Expected return on plan assets

     (2,356     (2,346

Amortization of unrecognized:

    

Prior service credit

     (963     (969

Net loss

     1,855        1,798   
  

 

 

   

 

 

 

Net periodic benefit cost

   $ 4,967      $ 5,301   
  

 

 

   

 

 

 

The 2011 Restructuring Plan action resulted in a pension plan curtailment loss of $0.2 million, which is included in restructuring expense for the three months ended March 27, 2011. The curtailment loss also resulted in a pension plan remeasurement during the first quarter of 2011 using a discount rate of 5.76% and a postretirement healthcare plan remeasurement using a discount rate of 5.30%. At December 31, 2010, the discount rates used to measure the pension plans and the postretirement healthcare plans were 5.79% and 5.28%, respectively. As a result of the remeasurements, the Company recognized a funded status adjustment consisting of a $0.9 million decrease to its pension and postretirement healthcare liabilities and an increase to other comprehensive income of $0.9 million, or $0.5 million net of tax.

During the first quarter of 2012, the Company voluntarily contributed $200.0 million in cash to further fund its pension plans. No additional pension contributions are required in 2012. The Company also voluntarily contributed $200.0 million in cash to further fund its pension plans during the first quarter of 2011. The Company expects it will continue to make on-going contributions related to current benefit payments for SERPA and postretirement healthcare plans.

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Business Segments
3 Months Ended
Apr. 01, 2012
Business Segments [Abstract]
Business Segments

15. 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  
     April 1,
2012
     March
27, 2011
 

Motorcycles net revenue

   $ 1,273,369       $ 1,063,044   

Gross profit

     456,510         351,866   

Selling, administrative and engineering expense

     236,995         203,805   

Restructuring expense

     11,451         22,999   
  

 

 

    

 

 

 

Operating income from Motorcycles

     208,064         125,062   

Financial services income

     156,322         161,886   

Financial services expense

     88,928         93,951   
  

 

 

    

 

 

 

Operating income from Financial Services

     67,394         67,935   

Operating income

   $ 275,458       $ 192,997   
  

 

 

    

 

 

 
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Commitment And Contingencies
3 Months Ended
Apr. 01, 2012
Commitment And Contingencies [Abstract]
Commitment And Contingencies

16. 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

In December 2009, the Company 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 promptly submitted written responses to the EPA's inquiry and 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.

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.

The Company estimates that its share of the future Response Costs at the York facility will be approximately $3.3 million and has established a reserve for this amount which is included in accrued liabilities in the Condensed Consolidated Balance Sheets. As noted above, the RI/FS is still underway and given the uncertainty that exists concerning the nature and scope of additional environmental investigation and remediation that may ultimately be required under the RI/FS or otherwise at the York facility, we are unable to make a reasonable estimate of those additional costs, if any, that may result.

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 primarily 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
3 Months Ended
Apr. 01, 2012
Supplemental Consolidating Data [Abstract]
Supplemental Consolidating Data

17. 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.