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Document and Entity Information
9 Months Ended
Sep. 30, 2012
Nov. 01, 2012
Entity Information [Line Items]
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-Q
Document Period End Date Sep 30, 2012
Document Fiscal Year Focus 2012
Document Fiscal Period Focus Q3
Amendment Flag false
Entity Common Stock, Shares Outstanding 226,257,911
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CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 25, 2011
Sep. 30, 2012
Sep. 25, 2011
Revenue:
Motorcycles and related products $ 1,089,268 $ 1,232,699 $ 3,931,684 $ 3,635,487
Financial services 161,027 164,557 477,962 492,296
Total revenue 1,250,295 1,397,256 4,409,646 4,127,783
Costs and expenses:
Motorcycles and related products cost of goods sold 711,364 817,308 2,533,453 2,399,962
Financial services interest expense 46,231 61,907 146,199 176,933
Financial services provision for credit losses 9,069 6,189 12,823 5,005
Selling, administrative and engineering expense 257,359 256,735 806,257 759,274
Restructuring expense 9,170 12,429 26,841 49,022
Total costs and expenses 1,033,193 1,154,568 3,525,573 3,390,196
Operating income 217,102 242,688 884,073 737,587
Investment income 1,447 2,479 5,611 5,625
Interest expense 11,438 11,270 34,528 34,101
Income before provision for income taxes 207,111 233,897 855,156 709,111
Provision for income taxes 73,110 50,303 301,870 215,677
Income from continuing operations 134,001 183,594 553,286 493,434
Income from discontinued operations, net of tax 0 0 0 0
Net income $ 134,001 $ 183,594 $ 553,286 $ 493,434
Earnings per common share from continuing operations:
Basic $ 0.59 $ 0.79 $ 2.43 $ 2.11
Diluted $ 0.59 $ 0.78 $ 2.4 $ 2.09
Earnings per common share from discontinued operations:
Basic $ 0 $ 0 $ 0 $ 0
Diluted $ 0 $ 0 $ 0 $ 0
Earnings per common share:
Basic $ 0.59 $ 0.79 $ 2.43 $ 2.11
Diluted $ 0.59 $ 0.78 $ 2.4 $ 2.09
Cash dividends per common share $ 0.155 $ 0.125 $ 0.465 $ 0.35
Weighted Average Number of Shares Outstanding, Basic 226,020 233,800 227,953 233,989
Incremental Common Shares Attributable to Share-based Payment Arrangements 1,969 2,061 2,117 1,992
Weighted Average Number Diluted Shares Outstanding Adjustment 227,989 235,861 230,070 235,981
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (USD $)
In Thousands, unless otherwise specified
3 Months Ended 9 Months Ended
Sep. 30, 2012
Sep. 25, 2011
Sep. 30, 2012
Sep. 25, 2011
Comprehensive income $ 146,138 $ 178,561 $ 572,600 $ 524,047
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CONDENSED CONSOLIDATED BALANCE SHEETS (USD $)
In Thousands, unless otherwise specified
Sep. 30, 2012
Dec. 31, 2011
Sep. 25, 2011
Dec. 31, 2010
Current assets:
Cash and cash equivalents $ 1,795,141 $ 1,526,950 $ 1,428,753 $ 1,021,933
Marketable securities 136,376 153,380 179,285
Accounts receivable, net 256,193 219,039 285,332
Finance receivables, net 1,212,977 1,168,603 1,104,056
Restricted finance receivables held by variable interest entities, net 513,084 591,864 586,144
Inventories 379,129 418,006 345,963
Restricted cash held by variable interest entities 217,400 229,655 238,208
Other current assets 237,396 234,709 217,445
Total current assets 4,747,696 4,542,206 4,385,186
Finance receivables, net 2,285,309 1,754,441 2,095,839
Restricted finance receivables held by variable interest entities, net 1,904,297 2,271,773 2,119,789
Property, plant and equipment, net 764,835 809,459 775,213
Goodwill 28,928 29,081 30,004
Other long-term assets 284,118 267,204 298,328
Total assets 10,015,183 9,674,164 9,704,359
Current liabilities:
Accounts payable 293,710 255,713 289,490
Accrued liabilities 606,078 564,172 731,943
Short-term debt 404,693 838,486 774,971
Current portion of long-term debt 437,938 399,916 0
Current portion of long-term debt held by variable interest entities 559,256 640,331 644,779
Total current liabilities 2,301,675 2,698,618 2,441,183
Long-term debt 3,339,604 2,396,871 2,804,605
Long-term debt held by variable interest entities 1,132,809 1,447,015 1,350,294
Pension liability 125,664 302,483 106,795
Postretirement healthcare liability 261,564 268,582 262,096
Other long-term liabilities 150,504 140,339 138,126
Total shareholders' equity 2,703,363 2,420,256 2,601,260
Total liabilities and shareholders' equity $ 10,015,183 $ 9,674,164 $ 9,704,359
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Sep. 30, 2012
Sep. 25, 2011
Net cash provided by operating activities of continuing operations (Note 3) $ 712,498 $ 901,601
Cash flows from investing activities of continuing operations:
Capital expenditures (95,329) (106,115)
Origination of finance receivables (2,328,653) (2,164,144)
Collections on finance receivables 2,131,025 2,130,369
Purchases of marketable securities (4,993) (142,653)
Sales and redemptions of marketable securities 23,046 104,975
Net cash (used by) provided by investing activities of continuing operations (274,904) (177,568)
Cash flows from financing activities of continuing operations:
Proceeds from issuance of medium-term notes 993,737 394,277
Proceeds from securitization debt 763,895 571,276
Repayments of securitization debt (1,161,592) (1,333,541)
Net (decrease) increase in credit facilities and unsecured commercial paper (634,874) 182,058
Net borrowings of asset-backed commercial paper 182,131 (483)
Net repayments of asset-backed commercial paper (6,538) 0
Net change in restricted cash 12,255 50,679
Dividends (106,560) (82,557)
Purchase of common stock for treasury (257,981) (97,456)
Excess tax benefits from share-based payments 16,390 2,702
Issuance of common stock under employee stock option plans 36,342 7,763
Net cash (used by) provided by financing activities of continuing operations (162,795) (305,282)
Effect of exchange rate changes on cash and cash equivalents of continuing operations (6,608) (11,857)
Net decrease in cash and cash equivalents of continuing operations 268,191 406,894
Cash flows from discontinued operations:
Cash flows from operating activities of discontinued operations 0 (74)
Cash flows from investing activities of discontinued operations 0 0
Effect of exchange rate changes on cash and cash equivalents of discontinued operations 0 0
Total cash flows from discontinued operations 0 (74)
Net decrease in cash and cash equivalents 268,191 406,820
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 0 0
Net decrease in cash and cash equivalents 268,191 406,820
Less: Cash and cash equivalents of discontinued operations-end of period 0 0
Cash and cash equivalents-end of period $ 1,795,141 $ 1,428,753
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Basis Of Presentation And Use Of Estimates
9 Months Ended
Sep. 30, 2012
Basis Of Presentation And Use Of Estimates
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 September 30, 2012 and September 25, 2011, the condensed consolidated statements of operations for the three and nine month periods then ended, the condensed consolidated statements of comprehensive income for the three and nine month periods then ended and the condensed consolidated statements of cash flows for the nine month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 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
9 Months Ended
Sep. 30, 2012
New Accounting Standards
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 International Financial Reporting Standards (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 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 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 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
9 Months Ended
Sep. 30, 2012
Additional Balance Sheet and Cash Flow Information
Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
Available-for-sale:
 
 
 
 
 
Corporate bonds
$
136,376

 
$
153,380

 
$
179,285

U.S. Treasuries

 

 

 
$
136,376

 
$
153,380

 
$
179,285


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 nine months of 2012 and 2011, the Company recognized gross unrealized gains in other comprehensive income of $1.1 million and $1.5 million, respectively, or $0.7 million and $0.9 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):
 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
Components at the lower of FIFO cost or market
 
 
 
 
 
Raw materials and work in process
$
121,184

 
$
113,932

 
$
95,957

Motorcycle finished goods
169,515

 
226,261

 
154,273

Parts and accessories and general merchandise
132,789

 
121,340

 
131,708

Inventory at lower of FIFO cost or market
423,488

 
461,533

 
381,938

Excess of FIFO over LIFO cost
(44,359
)
 
(43,527
)
 
(35,975
)
 
$
379,129

 
$
418,006

 
$
345,963




Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Nine months ended
 
September 30,
2012
 
September 25,
2011
Cash flows from operating activities:
 
 
 
Net income
$
553,286

 
$
493,434

Loss from discontinued operations

 

Income from continuing operations
553,286

 
493,434

Adjustments to reconcile income from continuing operations to net cash provided by operating activities:
 
 
 
Depreciation
127,443

 
131,938

Amortization of deferred loan origination costs
58,438

 
59,272

Amortization of financing origination fees
7,462

 
8,171

Provision for employee long-term benefits
50,348

 
50,983

Contributions to pension and postretirement plans
(220,733
)
 
(207,829
)
Stock compensation expense
30,287

 
28,316

Net change in wholesale finance receivables related to sales
5,570

 
77,519

Provision for credit losses
12,823

 
5,005

Loss on debt extinguishment

 
8,671

Pension and postretirement healthcare plan curtailment and settlement expense

 
236

Foreign currency adjustments
8,692

 
11,381

Other, net
9,411

 
11,036

Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(37,904
)
 
(19,473
)
Finance receivables—accrued interest and other
1,597

 
7,069

Inventories
36,463

 
(19,451
)
Accounts payable and accrued liabilities
99,642

 
257,373

Restructuring reserves
(9,177
)
 
2,664

Derivative instruments
611

 
(2,279
)
Other
(21,761
)
 
(2,435
)
Total adjustments
159,212

 
408,167

Net cash provided by operating activities of continuing operations
$
712,498

 
$
901,601

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Discontinued Operations
9 Months Ended
Sep. 30, 2012
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 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 Agusta 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 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 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
9 Months Ended
Sep. 30, 2012
Restructuring Expense
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 came 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 approximately $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 $19.1 million of restructuring expense under the 2011 New Castalloy Restructuring Plan as of September 30, 2012, of which $9.7 million was incurred during the nine months ended September 30, 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 $13 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 $7.8 million of restructuring expense under the 2011 Kansas City Restructuring Plan as of September 30, 2012. During the first nine months of 2012, the Company released a portion of its 2011 Kansas City Restructuring Plan reserve related to severance costs as these costs are no longer expected to be incurred.
For the nine months ended September 25, 2011, restructuring expense included $0.2 million of non-cash 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):
 
Nine months ended September 30, 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

 

 

 
2,450

 
6,152

 
1,075

 
9,677

 
9,677

Utilized—cash

 

 

 
(388
)
 

 
(1,235
)
 
(1,623
)
 
(1,623
)
Utilized—non-cash

 

 

 

 
(6,152
)
 

 
(6,152
)
 
(6,152
)
Non-cash reserve release
(967
)
 

 
(967
)
 

 

 

 

 
(967
)
Balance, end of period
$
3,156

 
$

 
$
3,156

 
$
10,490

 
$

 
$
145

 
$
10,635

 
$
13,791

 
 
Nine months ended September 25, 2011
 
Kansas City
 
Employee
Severance and
Termination
Costs
 
Other
 
Total
Restructuring expense
7,819

 
342

 
8,161

Utilized—cash
(3,948
)
 
(342
)
 
(4,290
)
Utilized—non-cash
(236
)
 

 
(236
)
Balance, end of period
$
3,635

 
$

 
$
3,635


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 contracts. 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 $63 million in restructuring expenses related to the new contracts through 2012, of which approximately 45% are expected to be non-cash. On a cumulative basis, the Company has incurred $61.0 million of restructuring expense under the 2010 Restructuring Plan as of September 30, 2012, of which $4.0 million was incurred during the first nine months of 2012.


The following table summarizes the Motorcycles segment’s 2010 Restructuring Plan reserve activity and balances as recorded in accrued liabilities (in thousands):
 
Nine months ended September 30, 2012
 
Nine months ended September 25, 2011
 
Employee
Severance and
Termination Costs
 
Employee
Severance and
Termination Costs
Balance, beginning of period
$
20,361

 
$
8,652

Restructuring expense
4,005

 
9,431

Utilized—cash
(13,894
)
 
(827
)
Balance, end of period
$
10,472

 
$
17,256


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. In addition, during the third quarter of 2012, 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 includes an estimated 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 $384 million to $404 million from 2009 to 2012, of which approximately 30% are expected to be non-cash. On a cumulative basis, the Company has incurred $394.7 million of restructuring and impairment expense under the 2009 Restructuring Plan as of September 30, 2012, of which $14.1 million was incurred during the first nine months of 2012.


The following table summarizes the Company’s 2009 Restructuring Plan reserve activity and balances recorded in accrued liabilities (in thousands):
 
Nine months ended September 30, 2012
 
Motorcycles & Related Products
 
Employee
Severance and
Termination Costs
 
Accelerated
Depreciation
 
Other
 
Total
Balance, beginning of period
$
10,089

 
$

 
$

 
$
10,089

Restructuring expense
4,166

 

 
11,987

 
16,153

Utilized—cash
(2,529
)
 

 
(11,987
)
 
(14,516
)
Utilized—non-cash

 

 

 

Non-cash reserve release
(2,027
)
 

 

 
(2,027
)
Balance, end of period
$
9,699

 
$

 
$

 
$
9,699

 
 
 
 
 
 
 
 
 
Nine months ended September 25, 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
5,932

 

 
25,498

 
31,430

Utilized—cash
(13,000
)
 

 
(28,079
)
 
(41,079
)
Utilized—non-cash

 

 

 

Balance, end of period
$
16,750

 
$

 
$
183

 
$
16,933


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 nine months of 2012, the Company released a portion 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
9 Months Ended
Sep. 30, 2012
Finance Receivables
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):
 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
Retail
$
5,243,470

 
$
5,087,490

 
$
5,321,403

Wholesale
785,323

 
824,640

 
717,044

 
6,028,793

 
5,912,130

 
6,038,447

Allowance for credit losses
(113,126
)
 
(125,449
)
 
(132,619
)
 
$
5,915,667

 
$
5,786,681

 
$
5,905,828


At September 30, 2012December 31, 2011 and September 25, 2011, the Company’s Condensed Consolidated Balance Sheet included $2.42 billion, $2.86 billion and $2.71 billion, respectively, of finance receivables net of a related allowance for credit losses, 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 or credited to earnings in amounts that the Company believes are 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 September 30, 2012
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
106,180

 
$
8,068

 
$
114,248

Provision for credit losses
9,869

 
(800
)
 
9,069

Charge-offs
(19,873
)
 

 
(19,873
)
Recoveries
9,682

 

 
9,682

Balance, end of period
$
105,858

 
$
7,268

 
$
113,126

 
Three months ended September 25, 2011
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
130,948

 
$
13,456

 
$
144,404

Provision for credit losses
11,833

 
(5,644
)
 
6,189

Charge-offs
(28,636
)
 
(173
)
 
(28,809
)
Recoveries
10,835

 

 
10,835

Balance, end of period
$
124,980

 
$
7,639

 
$
132,619

 
Nine months ended September 30, 2012
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
116,112

 
$
9,337

 
$
125,449

Provision for credit losses
14,892

 
(2,069
)
 
12,823

Charge-offs
(62,779
)
 

 
(62,779
)
Recoveries
37,633

 

 
37,633

Balance, end of period
$
105,858

 
$
7,268

 
$
113,126

 
Nine months ended September 25, 2011
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
157,791

 
$
15,798

 
$
173,589

Provision for credit losses
12,676

 
(7,671
)
 
5,005

Charge-offs
(86,730
)
 
(503
)
 
(87,233
)
Recoveries
41,243

 
15

 
41,258

Balance, end of period
$
124,980

 
$
7,639

 
$
132,619


Included in the $105.9 million and $125.0 million retail allowance for credit losses on finance receivables is $49.5 million and $64.7 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. 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 specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
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 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):
 
September 30, 2012
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
105,858

 
7,268

 
113,126

Total allowance for credit losses
$
105,858

 
$
7,268

 
$
113,126

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,243,470

 
785,323

 
6,028,793

Total finance receivables
$
5,243,470

 
$
785,323

 
$
6,028,793

 
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

 
September 25, 2011
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
124,980

 
7,639

 
132,619

Total allowance for credit losses
$
124,980

 
$
7,639

 
$
132,619

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,321,403

 
717,044

 
6,038,447

Total finance receivables
$
5,321,403

 
$
717,044

 
$
6,038,447


There were no wholesale finance receivables at September 30, 2012, December 31, 2011, or September 25, 2011 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”
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. Interest accrues on retail finance receivables until either collected or charged off. Accordingly, as of September 30, 2012December 31, 2011 and September 25, 2011, all retail finance receivables were accounted for as interest-earning receivables, of which $19.4 million, $27.5 million and $23.3 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. A specific allowance for credit losses is established once management determines that the 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 September 30, 2012, December 31, 2011 or September 25, 2011. At September 30, 2012December 31, 2011 and September 25, 2011, $0.5 million, $0.9 million, and $0.6 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):
 
September 30, 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
$
5,093,496

 
$
100,706

 
$
29,878

 
$
19,390

 
$
149,974

 
$
5,243,470

Wholesale
784,155

 
445

 
217

 
506

 
1,168

 
785,323

Total
$
5,877,651

 
$
101,151

 
$
30,095

 
$
19,896

 
$
151,142

 
$
6,028,793

 
December 31, 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

 
September 25, 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
$
5,148,199

 
$
112,370

 
$
37,491

 
$
23,343

 
$
173,204

 
$
5,321,403

Wholesale
715,745

 
508

 
197

 
594

 
1,299

 
717,044

Total
$
5,863,944

 
$
112,878

 
$
37,688

 
$
23,937

 
$
174,503

 
$
6,038,447


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, was as follows (in thousands):
 
September 30, 2012
 
December 31, 2011
 
September 25, 2011
Prime
$
4,178,726

 
$
4,097,048

 
$
4,280,000

Sub-prime
1,064,744

 
990,442

 
1,041,403

Total
$
5,243,470

 
$
5,087,490

 
$
5,321,403


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):
 
 
September 30, 2012
 
December 31, 2011
 
September 25, 2011
Doubtful
$
10,072

 
$
13,048

 
$
8,260

Substandard
3,689

 
5,052

 
9,115

Special Mention
2,446

 
14,361

 
6,652

Medium Risk
6,035

 
3,032

 
4,305

Low Risk
763,081

 
789,147

 
688,712

Total
$
785,323

 
$
824,640

 
$
717,044

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Asset-Backed Financing
9 Months Ended
Sep. 30, 2012
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 they either 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. 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 term asset-backed securitization and asset-backed U.S. commercial paper conduit facility 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.
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 cannot meet the requirements for sale accounting under ASC Topic 860. The transferred receivables are included in Finance Receivables, net, in the Consolidated Balance Sheet.
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 securitization 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 2019.
During the third quarter of 2012, the Company issued $675.3 million of secured notes through one term asset-backed securitization transaction. In addition, during the second quarter of 2012, the Company issued $89.5 million of secured notes through the sale of notes that had been previously retained as part of certain 2009 and 2011 term asset-backed securitization transactions. These notes were sold at a premium, which will be recognized over the term of the notes. At September 30, 2012, the unaccreted premium associated with these notes was $1.5 million. During the third quarter of 2011, the Company issued $573.4 million of secured notes through one term asset-backed securitization transaction.
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):
 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
Assets:
 
 
 
 
 
Finance receivables
$
2,466,871

 
$
2,916,219

 
$
2,754,409

Allowance for credit losses
(49,490
)
 
(65,735
)
 
(64,292
)
Restricted cash
205,760

 
228,776

 
237,030

Other assets
5,531

 
6,772

 
7,394

Total assets
$
2,628,672

 
$
3,086,032

 
$
2,934,541

Liabilities
 
 
 
 
 
Term asset-backed securitization debt
$
1,692,065

 
$
2,087,346

 
$
1,995,073



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 $600 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 that are similar to those of 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 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 following table presents the assets of the U.S. Conduit SPEs that were included in our financial statements (in thousands);
 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
Finance receivables
$

 
$
13,455

 
$
16,193

Allowance for credit losses

 
(302
)
 
(377
)
Restricted cash

 
879

 
1,178

Other assets
542

 
449

 
549

Total assets
$
542

 
$
14,481

 
$
17,543

The SPEs had no borrowings outstanding under the U.S. Conduit at September 30, 2012December 31, 2011 or September 25, 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 million. During the third quarter of 2012, all outstanding finance receivables that remained in the U.S. Conduit SPEs were transferred back to HDFS.
Asset-Backed Canadian Commercial Paper Conduit Facility

In August 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. In August 2012, HDFS transferred $209.1 million of Canadian retail motorcycle finance receivables for proceeds of $183.0 million. HDFS maintains effective control over the transferred assets and therefore does not meet sale accounting requirements under ASC Topic 860. As such, this transaction is treated as a secured borrowing, and the transferred assets are restricted as collateral for payment of the debt.

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. At September 30, 2012, $194.0 million of finance receivables and $11.6 million of cash were restricted as collateral for the payment of $176.9 million of debt.
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Fair Value Measurements
9 Months Ended
Sep. 30, 2012
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 (in thousands):
 
 
September 30, 2012
 
Balance as of September 30, 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
$
1,417,900

 
$
1,417,900

 
$

 
$

Marketable securities
136,376

 

 
136,376

 

Derivatives
1,639

 

 
1,639

 

 
$
1,555,915

 
$
1,417,900

 
$
138,015

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
2,458

 
$

 
$
2,458

 
$

 
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

 
$

 
September 25, 2011
 
Balance as of September 25, 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
$
1,144,790

 
$
1,144,790

 
$

 
$

Marketable securities
179,285

 

 
179,285

 

Derivatives
10,343

 

 
10,343

 

 
$
1,334,418

 
$
1,144,790

 
$
189,628

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
6,834

 
$

 
$
6,834

 
$

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Fair Value of Financial Instruments
9 Months Ended
Sep. 30, 2012
Fair Value of Financial Instruments
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):
 
 
September 30, 2012
 
December 31, 2011
 
September 25, 2011
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,795,141

 
$
1,795,141

 
$
1,526,950

 
$
1,526,950

 
$
1,428,753

 
$
1,428,753

Marketable securities
$
136,376

 
$
136,376

 
$
153,380

 
$
153,380

 
$
179,285

 
$
179,285

Accounts receivable, net
$
256,193

 
$
256,193

 
$
219,039

 
$
219,039

 
$
285,332

 
$
285,332

Derivatives
$
1,639

 
$
1,639

 
$
16,443

 
$
16,443

 
$
10,343

 
$
10,343

Finance receivables, net
$
5,993,713

 
$
5,915,667

 
$
5,888,040

 
$
5,786,681

 
$
6,008,081

 
$
5,905,828

Restricted cash held by variable interest entities
$
217,400

 
$
217,400

 
$
229,655

 
$
229,655

 
$
238,208

 
$
238,208

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
293,710

 
$
293,710

 
$
255,713

 
$
255,713

 
$
289,490

 
$
289,490

Derivatives
$
2,458

 
$
2,458

 
$
5,136

 
$
5,136

 
$
6,834

 
$
6,834

Unsecured commercial paper
$
404,693

 
$
404,693

 
$
874,286

 
$
874,286

 
$
813,571

 
$
813,571

Credit facilities
$

 
$

 
$
159,794

 
$
159,794

 
$
159,438

 
$
159,438

Asset-backed Canadian commercial paper conduit facility
$
176,855

 
$
176,855

 
$

 
$

 
$

 
$

Medium-term notes
$
3,623,082

 
$
3,297,687

 
$
2,561,458

 
$
2,298,193

 
$
2,530,834

 
$
2,303,567

Senior unsecured notes
$
357,328

 
$
303,000

 
$
376,513

 
$
303,000

 
$
384,110

 
$
303,000

Term asset-backed securitization debt
$
1,702,320

 
$
1,692,065

 
$
2,099,060

 
$
2,087,346

 
$
2,015,261

 
$
1,995,073


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 1 or 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.
Derivatives – Interest rate swaps, foreign currency exchange contracts and commodity contracts are derivative financial instruments and are carried at fair value on the balance sheet. The fair value of 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. The fair value of foreign currency exchange and commodity contracts are determined using publicly quoted prices. Fair value is calculated using Level 2 inputs.

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 carrying value of debt provided under the Canadian Conduit approximates fair value since the interest rates charged under the facility are tied directly to market rates and fluctuate as market rates change. Fair value is calculated using Level 2 inputs.
The fair values of the medium-term notes maturing in December 2012December 2014September 2015, March 2016March 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
9 Months Ended
Sep. 30, 2012
Derivative Instruments and Hedging Activities
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 commodity contracts to hedge portions of the cost of certain commodities consumed in the Company’s motorcycle production and distribution operations.
The Company’s foreign currency contracts and commodity 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. 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.


The following table summarizes the fair value of the Company’s derivative financial instruments (in thousands):
 
September 30, 2012
 
December 31, 2011
 
September 25, 2011
Derivatives Designated As Hedging
Instruments Under ASC Topic 815
Notional
Value
 
Asset
Fair  Value
(a)
 
Liability
Fair  Value
(b)
 
Notional
Value
 
Asset Fair
Value
(a)
 
Liability
Fair  Value
(b)
 
Notional
Value
 
Asset
Fair  Value
(a)
 
Liability
Fair  Value
(b)
Foreign currency contracts(c)
$
385,883

 
$
956

 
$
1,784

 
$
306,450

 
$
16,443

 
$
1,852

 
$
279,230

 
$
10,343

 
$
2,439

Commodity
contracts(c)
1,181

 
80

 

 
3,915

 

 
265

 
3,530

 

 
245

Interest rate swaps—unsecured commercial paper(c)
38,600

 

 
674

 
102,100

 

 
3,020

 
109,500

 

 
4,150

Total
$
425,664

 
$
1,036

 
$
2,458


$
412,465

 
$
16,443

 
$
5,137


$
392,260

 
$
10,343

 
$
6,834

 
September 30, 2012
 
December 31, 2011
 
September 25, 2011
Derivatives Not Designated As Hedging
Instruments Under ASC Topic 815
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
 
Notional
Value
 
Asset
Fair  Value(a)
 
Liability
Fair  Value(b)
Commodity contracts
$
14,518

 
$
603

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
14,518


$
603

 
$

 
$

 
$

 
$

 
$

 
$

 
$


 
(a)
Included in other current assets
(b)
Included in accrued liabilities
(c)
Derivative designated as a cash flow hedge
The following tables summarize the amount of gains and losses related to derivative financial instruments designated as cash flow hedges (in thousands):
 
Amount of Gain/(Loss)
Recognized in OCI
 
Three months ended
 
Nine Months Ended
Cash Flow Hedges
September 30, 2012
 
September 25, 2011
 
September 30, 2012
 
September 25, 2011
Foreign currency contracts
$
1,704

 
$
9,051

 
$
5,799

 
$
(7,870
)
Commodity contracts
32

 
(200
)
 
(393
)
 
(464
)
Interest rate swaps—unsecured commercial paper
(19
)
 
(237
)
 
(43
)
 
(642
)
Total
$
1,717

 
$
8,614

 
$
5,363

 
$
(8,976
)

 
 
Amount of Gain/(Loss)
Reclassified from AOCI into Income
 
 
 
Three months ended
 
Nine Months Ended
 
Expected to be Reclassified
Cash Flow Hedges
September 30, 2012
 
September 25, 2011
 
September 30, 2012
 
September 25, 2011
 
Over the Next Twelve Months
Foreign currency contracts(a)
$
7,742

 
$
(5,058
)
 
$
19,846

 
$
(25,846
)
 
$
876

Commodity contracts(a)
(81
)
 
(41
)
 
(737
)
 
(465
)
 
(80
)
Interest rate swaps—unsecured commercial paper(b)
(327
)
 
(1,254
)
 
(2,262
)
 
(3,940
)
 
674

Total
$
7,334

 
$
(6,353
)
 
$
16,847

 
$
(30,251
)
 
$
1,470

 
(a)
Gain/(loss) reclassified from accumulated other comprehensive income (AOCI) to income is included in cost of goods sold.
(b)
Gain/(loss) reclassified from AOCI to income is included in financial services interest expense.

The following tables summarize the amount of gains and losses related to derivative financial instruments not designated as hedging instruments (in thousands):
 
Amount of Gain/(Loss)
Recognized in Income on Derivative
 
Three months ended
 
Nine Months Ended
Derivatives
September 30, 2012
 
September 25, 2011
 
September 30, 2012
 
September 25, 2011
Commodity contracts
$
603

 
$

 
$
603

 
$

Total
$
603

 
$

 
$
603

 
$


For the three and nine months ended September 30, 2012 and September 25, 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 and nine months ended September 30, 2012 and September 25, 2011, there were no gains or losses recognized in income related to derivative financial instruments designated as fair value hedges.
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
9 Months Ended
Sep. 30, 2012
Income Taxes
Income Taxes
The Company’s 2012 income tax rate for the three and nine months ended September 30, 2012 was 35.3% compared to 21.5% and 30.4%, respectively, for the same periods last year. The Company's third quarter 2011 effective tax rate was favorably impacted by discrete tax items totaling $29.7 million which consisted of a favorable settlement of an Internal Revenue Service (IRS) audit for tax years 2005 through 2008 and a favorable change in Wisconsin income tax law associated with certain net operating losses, partially offset by increases in certain income tax reserves.
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Product Warranty and Safety Recall Campaigns
9 Months Ended
Sep. 30, 2012
Product Warranty and Safety Recall Campaigns
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
 
Nine months ended
 
September 30, 2012
 
September 25, 2011
 
September 30, 2012
 
September 25, 2011
Balance, beginning of period
$
67,801

 
$
55,407

 
$
54,994

 
$
54,134

Warranties issued during the period
10,228

 
10,210

 
42,846

 
33,770

Settlements made during the period
(19,799
)
 
(15,016
)
 
(52,885
)
 
(37,882
)
Recalls and changes to pre-existing warranty liabilities
4,980

 
759

 
18,255

 
1,338

Balance, end of period
$
63,210

 
$
51,360

 
$
63,210

 
$
51,360


The liability for safety recall campaigns was $5.0 million, $10.7 million and $2.2 million as of September 30, 2012December 31, 2011 and September 25, 2011, respectively.
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Earnings Per Share
9 Months Ended
Sep. 30, 2012
Earnings Per Share
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
 
Nine months ended
 
September 30,
2012
 
September 25,
2011
 
September 30,
2012
 
September 25,
2011
Numerator:
 
 
 
 
 
 
 
Income from continuing operations used in computing basic and diluted earnings per share
$
134,001

 
$
183,594

 
$
553,286

 
$
493,434

Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share- weighted-average common shares
226,020

 
233,800

 
227,953

 
233,989

Effect of dilutive securities—employee stock compensation plan
1,969

 
2,061

 
2,117

 
1,992

Denominator for diluted earnings per share- adjusted weighted-average shares outstanding
227,989

 
235,861

 
230,070

 
235,981

Earnings per common share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.59

 
$
0.79

 
$
2.43

 
$
2.11

Diluted
$
0.59

 
$
0.78

 
$
2.40

 
$
2.09


Outstanding options to purchase 2.2 million and 3.8 million shares of common stock for the three months ended September 30, 2012 and September 25, 2011, respectively, and 2.3 million and 3.7 million shares of common stock for the nine months ended September 30, 2012 and September 25, 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 for the three and nine month periods ending September 30, 2012 and September 25, 2011, respectively.
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Employee Benefit Plans
9 Months Ended
Sep. 30, 2012
Employee Benefit Plans
Employee Benefit Plans
The Company has defined benefit pension plans and postretirement healthcare benefit plans, that cover substantially all employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. Components of net periodic benefit costs were as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
2012
 
September 25,
2011
 
September 30,
2012
 
September 25,
2011
Pension and SERPA Benefits
 
 
 
 
 
 
 
Service cost
$
8,420

 
$
9,274

 
$
25,260

 
$
27,819

Interest cost
20,816

 
20,147

 
62,448

 
60,441

Expected return on plan assets
(29,277
)
 
(26,652
)
 
(87,832
)
 
(79,959
)
Amortization of unrecognized:
 
 
 
 
 
 
 
Prior service cost
740

 
746

 
2,219

 
2,235

Net loss
10,969

 
7,550

 
32,906

 
22,659

Curtailment loss

 

 

 
236

Net periodic benefit cost
$
11,668

 
$
11,065

 
$
35,001

 
$
33,431

Postretirement Healthcare Benefits
 
 
 
 
 
 
 
Service cost
$
1,854

 
$
1,907

 
$
5,560

 
$
5,721

Interest cost
4,578

 
4,911

 
13,733

 
14,733

Expected return on plan assets
(2,356
)
 
(2,346
)
 
(7,068
)
 
(7,038
)
Amortization of unrecognized:
 
 
 
 
 
 
 
Prior service credit
(963
)
 
(969
)
 
(2,890
)
 
(2,907
)
Net loss
1,855

 
1,798

 
5,566

 
5,394

Net periodic benefit cost
$
4,968

 
$
5,301

 
$
14,901

 
$
15,903

During the first nine months of 2012 and 2011, the Company voluntarily contributed $200 million in cash to further fund its pension plans. No additional pension contributions are required in 2012. 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
9 Months Ended
Sep. 30, 2012
Business Segments
Business Segments
The Company operates in two business segments: Motorcycles and Financial Services. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations. Selected segment information is set forth below (in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
2012
 
September 25,
2011
 
September 30,
2012
 
September 25,
2011
Motorcycles net revenue
$
1,089,268