Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 25, 2011

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                     to                    

Commission file number 1-9183

 

 

Harley-Davidson, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Wisconsin
  39-1382325
(State of organization)   (I.R.S. Employer Identification No.)
3700 West Juneau Avenue
Milwaukee, Wisconsin
  53208
(Address of principal executive offices)   (Zip code)

Registrants telephone number: (414) 342-4680

None

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨      Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Exchange Act.    Yes  ¨    No  x

Number of shares of the registrant’s common stock outstanding at October 25, 2011: 232,370,530 shares

 

 

 


Table of Contents

Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended September 25, 2011

Part I Financial Information

  

Item 1.

  Financial Statements      3   
 

Condensed Consolidated Statements of Operations

     3   
 

Condensed Consolidated Balance Sheets

     4   
 

Condensed Consolidated Statements of Cash Flows

     5   
 

Notes to Condensed Consolidated Financial Statements

     6   
Item 2.  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     37   
Item 3.  

Quantitative and Qualitative Disclosures About Market Risk

     60   
Item 4.  

Controls and Procedures

     60   

Part II Other Information

     61   
Item 1.  

Legal Proceedings

     61   
Item 2.  

Unregistered Sales of Equity Securities and Use of Proceeds

     61   
Item 6.  

Exhibits

     61   

Signatures

     62   

 

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Table of Contents

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

HARLEY-DAVIDSON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share amounts)

(Unaudited)

 

     Three months ended     Nine months ended  
     September 25,      September 26,     September 25,      September 26,  
     2011      2010     2011      2010  

Revenue:

          

Motorcycles and related products

   $ 1,232,699       $ 1,087,115      $ 3,635,487       $ 3,259,551   

Financial services

     164,557         172,845        492,296         516,387   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue

     1,397,256         1,259,960        4,127,783         3,775,938   

Costs and expenses:

          

Motorcycles and related products cost of goods sold

     817,308         707,309        2,399,962         2,103,214   

Financial services interest expense

     61,907         62,780        176,933         213,104   

Financial services provision for credit losses

     6,189         28,049        5,005         69,117   

Selling, administrative and engineering expense

     256,735         241,976        759,274         720,755   

Restructuring expense

     12,429         67,476        49,022         145,837   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total costs and expenses

     1,154,568         1,107,590        3,390,196         3,252,027   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operating income

     242,688         152,370        737,587         523,911   

Investment income

     2,479         1,239        5,625         3,666   

Interest expense

     11,270         23,102        34,101         70,148   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income before provision for income taxes

     233,897         130,507        709,111         457,429   

Provision for income taxes

     50,303         36,790        215,677         155,684   
  

 

 

    

 

 

   

 

 

    

 

 

 

Income from continuing operations

     183,594         93,717        493,434         301,745   

Loss from discontinued operations, net of tax

     —           (4,888     —           (108,434
  

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 183,594       $ 88,829      $ 493,434       $ 193,311   
  

 

 

    

 

 

   

 

 

    

 

 

 

Earnings per common share from continuing operations:

          

Basic

   $ 0.79       $ 0.40      $ 2.11       $ 1.29   

Diluted

   $ 0.78       $ 0.40      $ 2.09       $ 1.29   

Loss per common share from discontinued operations:

          

Basic

   $ —         $ (0.02   $ —         $ (0.46

Diluted

   $ —         $ (0.02   $ —         $ (0.46

Earnings per common share:

          

Basic

   $ 0.79       $ 0.38      $ 2.11       $ 0.83   

Diluted

   $ 0.78       $ 0.38      $ 2.09       $ 0.82   

Cash dividends per common share

   $ 0.125       $ 0.10      $ 0.350       $ 0.30   

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

HARLEY-DAVIDSON, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

 

     (Unaudited)             (Unaudited)  
     September 25,      December 31,      September 26,  
     2011      2010      2010  

ASSETS

        

Current assets:

        

Cash and cash equivalents

   $ 1,428,753       $ 1,021,933       $ 1,494,301   

Marketable securities

     179,285         140,118         55,229   

Accounts receivable, net

     285,332         262,382         306,085   

Finance receivables, net

     1,104,056         1,080,432         1,065,103   

Restricted finance receivables held by variable interest entities, net

     586,144         699,026         674,371   

Inventories

     345,963         326,446         319,101   

Restricted cash held by variable interest entities

     238,208         288,887         287,613   

Other current assets

     217,445         247,402         297,157   
  

 

 

    

 

 

    

 

 

 

Total current assets

     4,385,186         4,066,626         4,498,960   

Finance receivables, net

     2,095,839         1,553,781         2,045,249   

Restricted finance receivables held by variable interest entities, net

     2,119,789         2,684,330         2,425,788   

Property, plant and equipment, net

     775,213         815,112         779,991   

Goodwill

     30,004         29,590         29,992   

Other long-term assets

     298,328         281,301         260,980   
  

 

 

    

 

 

    

 

 

 
   $ 9,704,359       $ 9,430,740       $ 10,040,960   
  

 

 

    

 

 

    

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

        

Current liabilities:

        

Accounts payable

   $ 289,490       $ 225,346       $ 243,840   

Accrued liabilities

     731,943         556,671         690,811   

Short-term debt

     774,971         480,472         587,981   

Current portion of long-term debt

     —           —           201,426   

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

     644,779         751,293         731,833   
  

 

 

    

 

 

    

 

 

 

Total current liabilities

     2,441,183         2,013,782         2,455,891   

Long-term debt

     2,804,605         2,516,650         2,814,400   

Long-term debt held by variable interest entities

     1,350,294         2,003,941         1,801,537   

Pension liability

     106,795         282,085         353,896   

Postretirement healthcare liability

     262,096         254,762         272,232   

Other long-term liabilities

     138,126         152,654         153,054   

Commitments and contingencies (Note 17)

        

Total shareholders’ equity

     2,601,260         2,206,866         2,189,950   
  

 

 

    

 

 

    

 

 

 
   $ 9,704,359       $ 9,430,740       $ 10,040,960   
  

 

 

    

 

 

    

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

HARLEY-DAVIDSON, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)

 

     Nine months ended  
     September 25,     September 26,  
     2011     2010  

Net cash provided by operating activities of continuing operations (Note 3)

   $ 901,601      $ 1,169,502   

Cash flows from investing activities of continuing operations:

    

Capital expenditures

     (106,115     (77,559

Origination of finance receivables

     (2,164,144     (1,841,403

Collections on finance receivables

     2,130,369        2,041,976   

Purchases of marketable securities

     (142,653     (68,497

Sales and redemptions of marketable securities

     104,975        54,579   
  

 

 

   

 

 

 

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

     (177,568     109,096   

Cash flows from financing activities of continuing operations:

    

Proceeds from issuance of medium-term notes

     394,277        —     

Proceeds from securitization debt

     571,276        —     

Repayments of securitization debt

     (1,333,541     (1,518,528

Net increase in credit facilities and unsecured commercial paper

     182,058        145,687   

Net borrowings of asset-backed commercial paper

     (483     (845

Net change in restricted cash

     50,679        78,928   

Dividends

     (82,557     (70,480

Purchase of common stock for treasury

     (97,456     (1,687

Excess tax benefits from share-based payments

     2,702        3,590   

Issuance of common stock under employee stock option plans

     7,763        7,466   
  

 

 

   

 

 

 

Net cash used by financing activities of continuing operations

     (305,282     (1,355,869

Effect of exchange rate changes on cash and cash equivalents of continuing operations

     (11,857     4,921   

Net increase (decrease) in cash and cash equivalents of continuing operations

     406,894        (72,350

Cash flows from discontinued operations:

    

Cash flows used by operating activities of discontinued operations

     (74     (68,650

Effect of exchange rate changes on cash and cash equivalents of discontinued operations

     —          (1,195
  

 

 

   

 

 

 
     (74     (69,845
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

   $ 406,820      $ (142,195
  

 

 

   

 

 

 

Cash and cash equivalents:

    

Cash and cash equivalents - beginning of period

   $ 1,021,933      $ 1,630,433   

Cash and cash equivalents of discontinued operations - beginning of period

     —          6,063   

Net increase (decrease) in cash and cash equivalents

     406,820        (142,195

Less: Cash and cash equivalents of discontinued operations - end of period

     —          —     
  

 

 

   

 

 

 

Cash and cash equivalents - end of period

   $ 1,428,753      $ 1,494,301   
  

 

 

   

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

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Table of Contents

HARLEY-DAVIDSON, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

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 September 25, 2011 and September 26, 2010, the condensed consolidated statements of operations for the three and nine month periods then ended and the condensed consolidated statements of cash flows for the nine month periods then ended.

Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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.

2. New Accounting Standards

Accounting Standards Recently Adopted

In April 2011, the FASB issued ASU No. 2011-02, “A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring.” ASU No. 2011-02 amends the guidance within ASC Topic 310, “Receivables,” to clarify how creditors determine when a restructuring constitutes a troubled debt restructuring. In addition, ASU No. 2011-02 clarifies the guidance on a creditor’s evaluation of whether a debtor is experiencing financial difficulties even though the debtor may not be in payment default. The Company adopted ASU No. 2011-02 beginning June 27, 2011. Refer to Note 6 for further information regarding the Company’s identification and disclosure of any troubled debt restructurings.

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

 

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

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

The Company was required to adopt the new guidance within ASC Topic 810 and ASC Topic 860 as of January 1, 2010. The Company determined that the formerly unconsolidated QSPEs that HDFS utilized were VIEs, of which the Company was the primary beneficiary, and consolidated them into the Company’s financial statements beginning January 1, 2010; please refer to Note 7 for further information concerning the Company’s consolidated VIEs.

Accounting Standards Not Yet Adopted

In May 2011, the FASB issued 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 is required to adopt ASU No. 2011-04 beginning in the first quarter of 2012, and the adoption of ASU No. 2011-04 will only impact the content of the current disclosure.

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 is required to adopt ASU No. 2011-05 beginning in the first quarter of 2012, and the adoption of ASU No. 2011-05 will only impact the format of the current presentation.

 

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3. Additional Balance Sheet and Cash Flow Information

Marketable Securities

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

 

      September 25,
2011
     December 31,
2010
     September 26,
2010
 

Available-for-sale:

        

Corporate bonds

   $ 179,285       $ 50,231       $ 55,229   

U.S. Treasuries

     —           89,887         —     
  

 

 

    

 

 

    

 

 

 
   $ 179,285       $ 140,118       $ 55,229   
  

 

 

    

 

 

    

 

 

 

The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income, and have maturities of less than one year. During the first nine months of 2011 and 2010, the Company recognized gross unrealized gains of $1.5 million and losses of $1.1 million, respectively, or $0.9 million and $0.7 million net of taxes, respectively, to adjust amortized cost to fair value.

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 consisted of the following (in thousands):

 

      September 25,
2011
    December 31,
2010
    September 26,
2010
 

Components at the lower of FIFO cost or market

      

Raw materials and work in process

   $ 95,957      $ 100,082      $ 103,916   

Motorcycle finished goods

     154,273        158,425        144,794   

Parts and accessories and general merchandise

     131,708        101,975        105,828   
  

 

 

   

 

 

   

 

 

 

Inventory at lower of FIFO cost or market

     381,938        360,482        354,538   

Excess of FIFO over LIFO cost

     (35,975     (34,036     (35,437
  

 

 

   

 

 

   

 

 

 
   $ 345,963      $ 326,446      $ 319,101   
  

 

 

   

 

 

   

 

 

 

 

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Operating Cash Flow

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

 

     Nine months ended  
      September 25,
2011
    September 26,
2010
 

Cash flows from operating activities:

    

Net income

   $ 493,434      $ 193,311   

Loss from discontinued operations

     —          (108,434
  

 

 

   

 

 

 

Income from continuing operations

     493,434        301,745   

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

    

Depreciation

     131,938        199,629   

Amortization of deferred loan origination costs

     59,272        66,605   

Amortization of financing origination fees

     8,171        16,890   

Provision for employee long-term benefits

     50,983        64,331   

Contributions to pension and postretirement plans

     (207,829     (28,138

Stock compensation expense

     28,316        21,486   

Net change in wholesale finance receivables related to sales

     77,519        148,646   

Provision for credit losses

     5,005        69,117   

Loss on debt extinguishment

     8,671        —     

Pension and postretirement healthcare plan curtailment and settlement expense

     236        30,206   

Foreign currency adjustments

     11,381        (18,481

Other, net

     11,036        32,304   

Changes in current assets and liabilities:

    

Accounts receivable, net

     (19,473     (38,603

Finance receivables - accrued interest and other

     7,069        9,825   

Inventories

     (19,451     5,941   

Accounts payable and accrued liabilities

     257,373        306,173   

Restructuring reserves

     2,664        (18,332

Derivative instruments

     (2,279     3,978   

Other

     (2,435     (3,820
  

 

 

   

 

 

 

Total adjustments

     408,167        867,757   
  

 

 

   

 

 

 

Net cash provided by operating activities of continuing operations

   $ 901,601      $ 1,169,502   
  

 

 

   

 

 

 

 

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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. The 2009 impairment charges consisted of $85.5 million goodwill impairment, $19.8 million fixed asset impairment and $10.1 million intangible assets impairment.

At each subsequent reporting date in 2010 through the date of sale, the fair value less selling costs was re-assessed and additional impairment charges totaling $111.8 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 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.

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

 

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

Revenue

   $ 3,983      $ 48,563   

Loss before income taxes

   $ (5,645   $ (131,034

Net loss

   $ (4,888   $ (108,434

Loss per common share

   $ (0.02   $ (0.46

Included in the first nine months of 2010 operating loss was an impairment charge of $111.8 million, or $90.2 million net of tax, which represented the excess of net book value of the held-for-sale assets over the fair value less selling costs. The impairment charge is included in loss from discontinued operations and consisted of $32.3 million accounts receivable valuation allowance; $25.2 million inventory valuation; $26.9 million fixed asset impairment; $15.8 million intangible asset impairment; $2.6 million other asset valuation allowance; and $9.0 million of currency translation adjustment.

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

 

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5. Restructuring Expense

2011 Restructuring Plan

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 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 Restructuring Plan), the Company expects to have about 145 fewer full-time hourly unionized employees in its Kansas City facility than would be required under the existing contract. The new contract will be implemented in 2012.

Under the 2011 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. During the first nine months of 2011, the Company recorded a $8.2 million restructuring charge related to the 2011 Restructuring Plan.

The following table summarizes the Company’s 2011 Restructuring Plan reserve recorded in accrued liabilities (in thousands):

 

     September 25, 2011  
     Motorcycles & Related Products  
     Employee              
     Severance and              
     Termination Costs     Other     Total  

Restructuring expense

   $ 7,819      $ 342      $ 8,161   

Utilized - cash

     (3,948     (342     (4,290

Utilized - noncash

     (236     —          (236
  

 

 

   

 

 

   

 

 

 

Balance June 26, 2011

   $ 3,635      $ —        $ 3,635   
  

 

 

   

 

 

   

 

 

 

For the nine months ended September 25, 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.

2010 Restructuring Plan

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

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

Under the 2010 Restructuring Plan, restructuring expenses consist of employee severance and termination costs and other related costs. The Company expects to incur approximately $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 $53.8 million of restructuring expense under the 2010 Restructuring Plan as of September 25, 2011, of which $9.4 million was incurred during the first nine months of 2011.

 

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The following table summarizes changes in the Company’s 2010 Restructuring Plan reserve which was recorded in accrued liabilities (in thousands):

 

     Nine months ended September 25, 2011     Nine months ended September 26, 2010  
     Motorcycles & Related Products     Motorcycles & Related Products  
     Employee                 Employee              
     Severance and                 Severance and              
     Termination Costs     Other     Total     Termination Costs     Other     Total  

Beginning balance

   $ 8,652      $ —        $ 8,652      $ —        $  —        $ —     

Restructuring expense

     9,432        (1     9,431        40,662        5        40,667   

Utilized - cash

     (828     1        (827     (2,141     (5     (2,146

Utilized - noncash

     —          —          —          (28,171       (28,171
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending Balance

   $ 17,256      $ —        $ 17,256      $ 10,350      $  —        $ 10,350   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

2009 Restructuring Plan

During 2009, in response to the U.S. economic recession and worldwide slowdown in consumer demand, the Company committed to a volume reduction and a combination of restructuring actions (2009 Restructuring Plan) in the Motorcycles and Financial Services segments which are expected to be completed at various dates between 2009 and 2012. The 2009 Restructuring Plan was designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. The Company’s significant announced actions include 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 $401 million to $416 million from 2009 to 2012, of which approximately 30% are expected to be non-cash. On a cumulative basis, the Company has incurred $374.8 million of restructuring and impairment expense under the 2009 Restructuring Plan as of September 25, 2011, of which $31.4 million was incurred during the first nine months of 2011. Approximately 2,500 employees have left the Company under the 2009 Restructuring Plan as of September 25, 2011.

 

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The following tables summarize changes in the Company’s 2009 Restructuring Plan reserve which was recorded in accrued liabilities (in thousands):

 

     Nine months ended September 25, 2011  
     Motorcycles & Related Products     Financial Services         
     Employee                        Employee         
     Severance and     Accelerated                  Severance and      Consolidated  
     Termination Costs     Depreciation      Other     Total     Termination Costs      Total  

Balance December 31, 2010

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

Restructuring expense

     5,932        —           25,498        31,430        —           31,430   

Utilized - cash

     (13,000     —           (28,079     (41,079     —           (41,079

Utilized - noncash

     —          —           —          —          —           —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

Balance September 25, 2011

   $ 16,750      $ —         $ 183      $ 16,933      $ —         $ 16,933   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

    

 

 

 

 

     Nine months ended September 26, 2010  
     Motorcycles & Related Products     Financial Services        
     Employee                       Employee        
     Severance and     Accelerated                 Severance and     Consolidated  
     Termination Costs     Depreciation     Other     Total     Termination Costs     Total  

Balance December 31, 2009

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

Restructuring expense

     31,948        44,425        28,977        105,170        —          105,170   

Utilized - cash

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

Utilized - noncash

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 26, 2010

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

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):

 

     September 25,     December 31,     September 26,  
     2011     2010     2010  

Retail

   $ 5,321,403      $ 5,377,161      $ 5,674,836   

Wholesale

     717,044        813,997        717,660   
  

 

 

   

 

 

   

 

 

 
     6,038,447        6,191,158        6,392,496   

Allowance for credit losses

     (132,619     (173,589     (181,985
  

 

 

   

 

 

   

 

 

 
   $ 5,905,828      $ 6,017,569      $ 6,210,511   
  

 

 

   

 

 

   

 

 

 

At September 25, 2011, December 31, 2010 and September 26, 2010, the Company’s Condensed Consolidated Balance Sheet included finance receivables, net of $2.71 billion, $3.38 billion and $3.10 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.

 

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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 September 25, 2011  
     Retail     Wholesale     Total  

Balance, beginning of period

   $ 130,948      $ 13,456      $ 144,404   

Provision for finance 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 25, 2011  
     Retail     Wholesale     Total  

Balance, beginning of period

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

Provision for finance 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 $125.0 million retail allowance for credit losses on finance receivables is $64.7 million 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. HDFS’ 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 agreements. The impairment is determined based on the cash that HDFS expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan

 

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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 HDFS’ internal risk rating system and collectively evaluated for impairment.

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 HDFS’ 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):

 

     September 25, 2011  
     Retail      Wholesale      Total  

Allowance for credit losses:

        

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:

        

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   
  

 

 

    

 

 

    

 

 

 
     December 31, 2010  
     Retail      Wholesale      Total  

Allowance for credit losses:

        

Individually evaluated for impairment

   $ —         $ 3,566       $ 3,566   

Collectively evaluated for impairment

     157,791         12,232         170,023   
  

 

 

    

 

 

    

 

 

 

Total allowance for credit losses

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

 

 

    

 

 

    

 

 

 

Finance receivables:

        

Individually evaluated for impairment

   $ —         $ 5,423       $ 5,423   

Collectively evaluated for impairment

     5,377,161         808,574         6,185,735   
  

 

 

    

 

 

    

 

 

 

Total finance receivables

   $ 5,377,161       $ 813,997       $ 6,191,158   
  

 

 

    

 

 

    

 

 

 

 

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There are no wholesale finance receivables at September 25, 2011 that are individually deemed to be impaired under ASC Topic 310, “Receivables”. Additional information related to the wholesale finance receivables that are individually deemed to be impaired under ASC Topic 310, “Receivables,” at December 31, 2010 includes (in thousands):

 

     December 31, 2010  
     Recorded
Investment
     Unpaid
Principal
Balance
     Related
Allowance
 

Wholesale:

        

No related allowance recorded

   $ —         $ —         $ —     

Related allowance recorded

     5,423         5,358         3,566   
  

 

 

    

 

 

    

 

 

 

Total impaired wholesale finance receivables

   $ 5,423       $ 5,358       $ 3,566   
  

 

 

    

 

 

    

 

 

 

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 September 25, 2011 and December 31, 2010, all retail finance receivables were accounted for as interest-earning receivables, of which $23.3 million and $34.1 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. 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. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. There are no wholesale finance receivables on non-accrual status at September 25, 2011. The recorded investment of non-accrual status wholesale finance receivables at December 31, 2010 was $5.4 million. At September 25, 2011 and December 31, 2010, $0.6 million and $1.6 million, respectively, of wholesale finance receivables were 90 days or more past due and accruing interest.

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

 

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 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 at origination 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.

 

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

 

     September 25,
2011
 

Prime

   $ 4,280,000   

Sub-prime

     1,041,403   
  

 

 

 

Total

   $ 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 25,
2011
 

Doubtful

   $ 8,260   

Substandard

     9,115   

Special Mention

     6,652   

Medium Risk

     4,305   

Low Risk

     688,712   
  

 

 

 

Total

   $ 717,044   
  

 

 

 

7. Asset-Backed Financing

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

HDFS is considered to have the power over the significant activities of its term asset-backed securitization and asset-backed commercial paper conduit facility VIEs due to its role as servicer. Servicing fees are typically not considered potentially significant variable interests in a VIE. However, HDFS retains a residual interest in the VIEs in the form of a debt security, which gives HDFS the right to receive benefits that could be potentially significant to the VIE. Therefore, the Company is the primary beneficiary and consolidates all of its VIEs within its consolidated financial statements. Servicing fees paid by VIEs to HDFS are eliminated in consolidation and therefore not recorded on a consolidated basis.

 

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

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

Term Asset-Backed Securitization VIEs

The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each term asset-backed securitization SPE is a separate legal entity and the U.S. retail motorcycle finance receivables included in the term asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the term asset-backed securitization transactions and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Cash and cash equivalent balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 2011 to 2018.

During the third quarter of 2011, the Company issued $573.4 million of secured notes through one term asset-backed securitization transaction. There were no term-asset back securitizations during the nine months ended September 26, 2010.

Consolidated assets and liabilities of term asset-backed securitization SPEs were as follows (in thousands):

 

     September 25,
2011
    September 26,
2010
 

Assets

    

Finance receivables

   $ 2,754,409      $ 3,162,842   

Allowance for finance credit losses

     (64,292     (95,736

Restricted cash

     237,030        285,711   

Other assets

     7,394        13,604   
  

 

 

   

 

 

 

Total assets

   $ 2,934,541      $ 3,366,421   
  

 

 

   

 

 

 

Liabilities

    

Term asset-backed securitization debt

   $ 1,995,073      $ 2,533,370   

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 agreement has similar terms as the prior agreement and is for the same amount. 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.

 

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Consolidated assets of the asset-backed commercial paper conduit facility SPE were as follows (in thousands):

 

     September 25,
2011
    September 26,
2010
 

Finance receivables

   $ 16,193      $ 34,082   

Allowance for finance credit losses

     (377     (1,030

Restricted cash

     1,178        1,949   

Other assets

     549        1,875   
  

 

 

   

 

 

 

Total assets

   $ 17,543      $ 36,876   
  

 

 

   

 

 

 

The SPE had no borrowings outstanding under the conduit facility at September 25, 2011 or September 26, 2010; 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.

8. Debt

During the third quarter of 2011, the Company repurchased $44.4 million of its $1.0 billion medium-term 6.80% notes due in June 2018. As a result of the transaction, the Company incurred an $8.7 million loss on extinguishment of debt, including unamortized discounts and fees, which is included in Financial services interest expense.

9. Fair Value of Financial Instruments

The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, accounts receivable, net, finance receivables, net, accounts payable, 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 at September 25, 2011 and September 26, 2010 (in thousands):

 

     September 25, 2011      September 26, 2010  
     Fair Value      Carrying Value      Fair Value      Carrying Value  

Assets:

           

Cash and cash equivalents

   $ 1,428,753       $ 1,428,753       $ 1,494,301       $ 1,494,301   

Marketable securities

   $ 179,285       $ 179,285       $ 55,229       $ 55,229   

Accounts receivable, net

   $ 285,332       $ 285,332       $ 306,085       $ 306,085   

Derivatives

   $ 10,343       $ 10,343       $ 2,169       $ 2,169   

Finance receivables, net

   $ 6,008,081       $ 5,905,828       $ 6,236,095       $ 6,210,511   

Restricted cash held by variable interest entities

   $ 238,208       $ 238,208       $ 287,613       $ 287,613   

Liabilities:

           

Accounts payable

   $ 289,490       $ 289,490       $ 243,840       $ 243,840   

Derivatives

   $ 6,834       $ 6,834       $ 19,924       $ 19,924   

Unsecured commercial paper

   $ 813,571       $ 813,571       $ 697,481       $ 697,481   

Credit facilities

   $ 159,438       $ 159,438       $ 207,234       $ 207,234   

Medium-term notes

   $ 2,530,834       $ 2,303,567       $ 2,256,711       $ 2,099,092   

Senior unsecured notes

   $ 384,110       $ 303,000       $ 804,735       $ 600,000   

Term asset-backed securitization debt

   $ 2,015,261       $ 1,995,073       $ 2,596,730       $ 2,533,370   

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.

 

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

Finance Receivables, Net – Finance receivables, net includes restricted finance receivables held by VIEs, net. Retail and wholesale finance receivables are recorded in the financial statements at historical cost less an allowance for finance credit losses. The fair value of retail finance receivables is generally calculated by discounting future cash flows using an estimated discount rate that reflects current credit, interest rate and prepayment risks associated with similar types of instruments. The historical cost basis of wholesale finance receivables approximates fair value because they either are short-term or have interest rates that adjust with changes in market interest rates.

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

The fair values of the medium-term notes maturing in December 2012, December 2014, March 2016 and June 2018 are estimated based upon rates currently available for debt with similar terms and remaining maturities. The medium-term notes which matured in December 2010 were carried at fair value and included a fair value adjustment due to an interest rate swap agreement, designated as a fair value hedge, which effectively converted a portion of the note from a fixed to a floating rate.

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

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

10. Fair Value Measurements

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

The Company assesses the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for identical instruments and are the most observable. Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the following tables.

 

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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 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       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 26, 2010  
     Balance as of
September 26, 2010
     Quoted Prices in
Active Markets for

Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Cash equivalents

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

Marketable securities

     55,229         —           55,229         —     

Derivatives

     2,169         —           2,169         —     
  

 

 

    

 

 

    

 

 

    

 

 

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

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Derivatives

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

 

 

    

 

 

    

 

 

    

 

 

 

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 securities are valued using publicly quoted prices.

11. Derivative Instruments and Hedging Activities

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

All derivative instruments are recognized on the balance sheet at fair value (see Note 9). In accordance with ASC Topic 815, “Derivatives and Hedging,” the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from

 

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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. In addition, HDFS utilized interest rate swaps with its medium-term notes which matured in December 2010; however, the impact was to convert from a fixed rate basis to a floating rate basis. HDFS also entered into derivative contracts to facilitate its first quarter 2008 term asset-backed securitization transaction as well as its third quarter 2007 term asset-backed securitization transaction. These derivatives, which hedge assets held by VIEs, did not qualify for hedge accounting treatment. The derivative contracts related to these term asset-backed securitizations expired during 2011 and 2010, respectively. Additionally, to facilitate the asset-backed commercial paper conduit facility agreements that the Company entered into in April 2009, HDFS entered into derivative contracts, which did not qualify for hedge accounting treatment. These derivative contracts were terminated in 2010. 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 25, 2011      September 26, 2010  

Derivatives Designated As Hedging

Instruments Under ASC Topic 815

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

Foreign currency contracts(c)

   $ 279,230       $ 10,343       $ 2,439       $ 340,411       $ —         $ 10,431   

Natural gas contracts(c)

     3,530         —           245         2,305         —           505   

Interest rate swaps - unsecured commercial paper(c)

     109,500         —           4,150         144,800         —           8,988   

Interest rate swaps - medium-term notes(d)

     —           —           —           150,000         1,427         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 392,260       $ 10,343       $ 6,834       $ 637,516       $ 1,427       $ 19,924   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     September 25, 2011      September 26, 2010  

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)
 

Derivatives - securitization transactions

   $ —         $ —         $ —         $ 62,613       $ —         $ —     

Derivatives - conduit facility

     —           —           —           476,489         742         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ —         $ 539,102       $ 742       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Included in other current assets
(b) Included in accrued liabilities
(c) Derivative designated as a cash flow hedge
(d) Derivative designated as a fair value hedge

 

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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 25, 2011     September 26, 2010     September 25, 2011     September 26, 2010  

Foreign currency contracts

   $ 9,051      $ (16,512   $ (7,870   $ (2,641

Natural gas contracts

     (200     (519     (464     (1,168

Interest rate swaps - unsecured commercial paper

     (237     (910     (642     (4,391
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ 8,614      $ (17,941   $ (8,976   $ (8,200
  

 

 

   

 

 

   

 

 

   

 

 

 

 

      Amount of Gain/(Loss)
Reclassified from AOCI into Income
 
     Three months ended     Nine months ended     Expected to be Reclassified  

Cash Flow Hedges

   September 25, 2011     September 26, 2010     September 25, 2011     September 26, 2010     Over the Next Twelve Months  

Foreign currency contracts(a)

   $ (5,058   $ (804   $ (25,846   $ 2,877      $ (6,705

Natural gas contracts(a)

     (41     (153     (465     (613     245   

Interest rate swaps - unsecured commercial paper(b)

     (1,254     (1,703     (3,940     (5,047     (3,523
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (6,353   $ (2,660   $ (30,251   $ (2,783   $ (9,983
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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.

For the three and nine months ended September 25, 2011 and September 26, 2010, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.

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

 

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

Fair Value Hedges

   September 25, 2011      September 26, 2010     September 25, 2011      September 26, 2010  

Interest rate swaps - medium-term notes(a)

   $ —         $ (1,491   $ —         $ (4,645

 

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

Fair Value Hedges

   September 25, 2011      September 26, 2010      September 25, 2011      September 26, 2010  

Interest rate swaps - medium-term notes(a)

   $ —         $ 1,491       $ —         $ 4,645   

 

(a) Gain/(loss) recognized in income is included in financial services interest expense.

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

 

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

Derivatives not Designated as Hedges

   September 25, 2011      September 26, 2010     September 25, 2011      September 26, 2010  

Derivatives - securitization transactions(a)

   $ —         $ (1   $ —         $ (8

Derivatives - conduit facility(a)

     —           (887     —           (6,461
  

 

 

    

 

 

   

 

 

    

 

 

 

Total

   $ —         $ (888   $ —         $ (6,469
  

 

 

    

 

 

   

 

 

    

 

 

 

 

(a) Gain/(loss) recognized in income is included in financial services revenue.

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

 

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12. Comprehensive Income

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

 

      Three months ended     Nine months ended  
      September 25,
2011
    September 26,
2010
    September 25,
2011
    September 26,
2010
 

Net income

   $ 183,594      $ 88,829      $ 493,434      $ 193,311   

Other comprehensive income, net of tax:

        

Foreign currency translation adjustment

     (20,058     36,284        (2,060     6,053   

Unrealized gains (losses) on marketable securities

     (164     1,219        938        709   

Derivative financial instruments:

        

Unrealized net gains (losses) arising during period

     5,420        (9,006     (5,659     (2,936

Less: net (gains) losses reclassified into net income

     (4,014     401        (19,088     277   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total derivative financial instruments

     9,434        (9,407     13,429        (3,213

Pension and postretirement benefit plans:

        

Amortization of actuarial loss

     5,896        4,969        18,760        14,908   

Amortization of net prior service (credit) cost

     (141     318        (1,001     952   

Pension and postretirement plan funded status adjustment

     —          (70,586     546        (70,586

Less: actuarial loss reclassified into net income due to settlement

     —          (300     —          (1,925

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

     —          (17,738     (1     (17,094
  

 

 

   

 

 

   

 

 

   

 

 

 

Total pension and postretirement benefit plans:

     5,755        (47,261     18,306        (35,707
  

 

 

   

 

 

   

 

 

   

 

 

 

Total comprehensive income, net of tax

   $ 178,561      $ 69,664      $ 524,047      $ 161,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

13. Income Taxes

The Company’s third quarter 2011 income tax rate was favorably impacted by discrete tax items totaling $29.7 million which primarily 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.

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

The Company’s second quarter 2010 income tax expense was affected by the favorable conclusion of an IRS audit and, in connection with the audit settlement, an adjustment to income taxes payable.

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

14. Product Warranty and Safety Recall Campaigns

The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except for Japan, where the Company currently provides a standard three-year limited warranty on all

 

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new motorcycles sold. The warranty coverage for the retail customer includes parts and labor and generally begins when the motorcycle is sold to a retail customer. The Company maintains reserves for future warranty claims using an estimated cost per unit sold, which is based primarily on historical Company claim information. Additionally, the Company has from time to time initiated certain voluntary safety recall campaigns. The Company reserves for all estimated costs associated with safety recalls in the period that the safety recalls are announced.

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

 

     Three months ended     Nine months ended  
      September 25,
2011
    September 26,
2010
    September 25,
2011
    September 26,
2010
 

Balance, beginning of period

   $ 55,407      $ 62,569      $ 54,134      $ 68,044   

Warranties issued during the period

     10,210        10,865        33,770        27,547   

Settlements made during the period

     (15,016     (16,077     (37,882     (44,150

Recalls and changes to pre-existing warranty liabilities

     759        (903     1,338        5,013   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 51,360      $ 56,454      $ 51,360      $ 56,454   
  

 

 

   

 

 

   

 

 

   

 

 

 

The liability for safety recall campaigns was $2.2 million and $2.2 million as of September 25, 2011 and September 26, 2010, respectively.

15. Earnings Per Share

The Company has a share-based compensation plan under which employees may be granted share-based awards including shares of restricted stock and restricted stock units (RSUs). Non-forfeitable dividends are paid on unvested shares of restricted stock and non-forfeitable dividend equivalents are paid on unvested RSUs. As such, shares of restricted stock and RSUs are considered participating securities under the two-class method of calculating earnings per share as described in ASC Topic 260, “Earnings per Share.” The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation as of September 25, 2011 and September 26, 2010.

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 25,
2011
     September 26,
2010
     September 25,
2011
     September 26,
2010
 

Numerator:

           

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

   $ 183,594       $ 93,717       $ 493,434       $ 301,745   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator:

           

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

     233,800         233,504         233,989         233,232   

Effect of dilutive securities - employee stock compensation plan

     2,061         1,282         1,992         1,395   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

     235,861         234,786         235,981         234,627   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share from continuing operations:

           

Basic

   $ 0.79       $ 0.40       $ 2.11       $ 1.29   

Diluted

   $ 0.78       $ 0.40       $ 2.09       $ 1.29   

 

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Outstanding options to purchase 3.8 million and 4.1 million shares of common stock for the three months ended September 25, 2011 and September 26, 2010, respectively, and 3.7 million and 4.2 million shares of common stock for the nine months ended September 25, 2011 and September 26, 2010, 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.

16. Employee Benefit Plans

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

 

     Three months ended     Nine months ended  
      September 25,
2011
    September 26,
2010
    September 25,
2011
    September 26,
2010
 

Pension and SERPA Benefits

        

Service cost

   $ 9,274      $ 10,345      $ 27,819      $ 31,131   

Interest cost

     20,147        19,409        60,441        58,323   

Expected return on plan assets

     (26,652     (24,392     (79,959     (73,080

Amortization of unrecognized:

        

Prior service cost

     746        1,085        2,235        3,351   

Net loss

     7,550        5,594        22,659        16,878   

Curtailment loss

     —          15,505        236        15,505   

Settlement loss

     —          476        —          3,058   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 11,065      $ 28,022      $ 33,431      $ 55,166   
  

 

 

   

 

 

   

 

 

   

 

 

 

Postretirement Healthcare Benefits

        

Service cost

   $ 1,907      $ 2,480      $ 5,721      $ 7,514   

Interest cost

     4,911        5,297        14,733        15,891   

Expected return on plan assets

     (2,346     (2,445     (7,038     (7,335

Amortization of unrecognized:

        

Prior service credit

     (969     (629     (2,907     (1,887

Net loss

     1,798        2,251        5,394        6,753   

Curtailment loss

     —          12,666        —          11,643   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 5,301      $ 19,620      $ 15,903      $ 32,579   
  

 

 

   

 

 

   

 

 

   

 

 

 

The 2011 Restructuring Plan action resulted in a pension plan curtailment loss of $0.2 million, which is included in restructuring expense for the nine months ended September 25, 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. All other significant assumptions remain unchanged from the December 31, 2010 measurement date. As a result of the remeasurement, 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 nine months of 2010, the Company recorded a net curtailment loss of $27.1 million which was included in restructuring expense. The net curtailment loss consisted of a $28.2 million curtailment loss related to the 2010 Restructuring Plan and a $1.1 million curtailment gain related to the 2009 Restructuring Plan. Also included in the 2010 restructuring expense was a $3.1 million settlement loss related to its SERPA plans.

 

26


Table of Contents

The settlement loss was the result of benefit payments made to former executives who departed from the Company during 2009 and 2010.

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

17. Business Segments

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

 

     Three months ended      Nine months ended  
      September 25,
2011
     September 26,
2010
     September 25,
2011
     September 26,
2010
 

Motorcycles net revenue

   $ 1,232,699       $ 1,087,115       $ 3,635,487       $ 3,259,551   

Gross profit

     415,391         379,806         1,235,525         1,156,337   

Selling, administrative and engineering expense

     222,258         210,828         660,890         624,984   

Restructuring expense

     12,429         67,476         49,022         145,837   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income from Motorcycles

     180,704         101,502         525,613         385,516   

Financial services revenue

     164,557         172,845         492,296         516,387   

Financial services expense

     102,573         121,977         280,322         377,992   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income from Financial Services

     61,984         50,868         211,974         138,395   
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating income

   $ 242,688       $ 152,370       $ 737,587       $ 523,911   
  

 

 

    

 

 

    

 

 

    

 

 

 

18. Commitment and Contingencies

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

Environmental Protection Agency Notice

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

 

27


Table of Contents

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 $4.3 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.

 

28


Table of Contents

19. Supplemental Consolidating Data

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

 

      Three months ended September 25, 2011  
      Motorcycles & Related
Products  Operations
     Financial
Services Operations
     Eliminations     Consolidated  

Revenue:

          

Motorcycles and related products

   $ 1,234,913       $ —         $ (2,214   $ 1,232,699   

Financial services

     —           165,512         (955     164,557   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     1,234,913         165,512         (3,169     1,397,256   

Costs and expenses:

          

Motorcycles and related products cost of goods sold

     817,308         —           —          817,308   

Financial services interest expense

     —           61,907         —          61,907   

Financial services provision for credit losses

     —           6,189         —          6,189   

Selling, administrative and engineering expense

     223,213         36,691         (3,169     256,735   

Restructuring expense

     12,429         —           —          12,429   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total costs and expenses

     1,052,950         104,787         (3,169     1,154,568   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

     181,963         60,725         —          242,688   

Investment income

     2,479         —           —          2,479   

Interest expense

     11,270         —           —          11,270   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

     173,172         60,725         —          233,897   

Provision for income taxes

     27,906         22,397         —          50,303   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income from continuing operations

     145,266         38,328         —          183,594   

Loss from discontinued operations, net of tax

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 145,266       $ 38,328       $ —        $ 183,594   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

      Nine months ended September 25, 2011  
      Motorcycles & Related
Products  Operations
     Financial
Services Operations
     Eliminations     Consolidated  

Revenue:

          

Motorcycles and related products

   $ 3,643,206       $ —         $ (7,719   $ 3,635,487   

Financial services

     —           493,782         (1,486     492,296   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total revenue

     3,643,206         493,782         (9,205     4,127,783   

Costs and expenses:

          

Motorcycles and related products cost of goods sold

     2,399,962         —           —          2,399,962   

Financial services interest expense

     —           176,933         —          176,933   

Financial services provision for credit losses

     —           5,005         —          5,005   

Selling, administrative and engineering expense

     662,376         106,103         (9,205     759,274   

Restructuring expense

     49,022         —           —          49,022   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total costs and expenses

     3,111,360         288,041         (9,205     3,390,196   
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating income

     531,846         205,741         —          737,587   

Investment income

     130,625         —           (125,000     5,625   

Interest expense

     34,101         —           —          34,101   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

     628,370         205,741         (125,000     709,111   

Provision for income taxes

     141,074         74,603         —          215,677   
  

 

 

    

 

 

    

 

 

   

 

 

 

Income from continuing operations

     487,296         131,138         (125,000     493,434   

Loss from discontinued operations, net of tax

     —           —           —          —     
  

 

 

    

 

 

    

 

 

   

 

 

 

Net income

   $ 487,296       $ 131,138       $ (125,000   $ 493,434   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

29


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

Revenue:

         

Motorcycles and related products

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

Financial services

     —          173,227         (382     172,845   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

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

Costs and expenses:

         

Motorcycles and related products cost of goods sold

     707,309        —           —          707,309   

Financial services interest expense

     —          62,780         —          62,780   

Financial services provision for credit losses

     —          28,049         —          28,049   

Selling, administrative and engineering expense

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

Restructuring expense

     67,476        —           —          67,476   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

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

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     102,966        49,404         —          152,370   

Investment income

     1,239        —           —          1,239   

Interest expense

     23,102        —           —          23,102   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

     81,103        49,404         —          130,507   

Provision for income taxes

     19,004        17,786         —          36,790   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

     62,099        31,618         —          93,717   

Loss from discontinued operations, net of tax

     (4,888     —           —          (4,888
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

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

 

 

   

 

 

    

 

 

   

 

 

 

 

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

Revenue:

         

Motorcycles and related products

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

Financial services

     —          517,079         (692     516,387   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total revenue

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

Costs and expenses:

         

Motorcycles and related products cost of goods sold

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

Financial services interest expense

     —          213,104         —          213,104   

Financial services provision for credit losses

     —          69,117         —          69,117   

Selling, administrative and engineering expense

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

Restructuring expense

     145,837        —           —          145,837   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

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

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

     387,131        136,780         —          523,911   

Investment income

     3,666        —           —          3,666   

Interest expense

     70,148        —           —          70,148   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income before provision for income taxes

     320,649        136,780         —          457,429   

Provision for income taxes

     106,442        49,242         —          155,684   
  

 

 

   

 

 

    

 

 

   

 

 

 

Income from continuing operations

     214,207        87,538         —          301,745   

Loss from discontinued operations, net of tax

     (108,434     —           —          (108,434
  

 

 

   

 

 

    

 

 

   

 

 

 

Net income

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

 

 

   

 

 

    

 

 

   

 

 

 

 

30


Table of Contents
     September 25, 2011  
     Motorcycles & Related
Products Operations
     Financial
Services Operations
     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 995,855       $ 432,898       $ —        $ 1,428,753   

Marketable securities

     179,285         —           —          179,285   

Accounts receivable, net

     590,611         —           (305,279     285,332   

Finance receivables, net

     —           1,104,056         —          1,104,056   

Restricted finance receivables held by variable interest entities, net

     —           586,144         —          586,144   

Inventories

     345,963         —           —          345,963   

Restricted cash held by variable interest entities

        238,208         —          238,208   

Other current assets

     159,814         57,631         —          217,445   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     2,271,528         2,418,937         (305,279     4,385,186   

Finance receivables, net

     —           2,095,839         —          2,095,839   

Restricted finance receivables held by variable interest entities, net

     —           2,119,789         —          2,119,789   

Property, plant and equipment, net

     746,230         28,983         —          775,213   

Goodwill

     30,004         —           —          30,004   

Other long-term assets

     344,073         25,874         (71,619     298,328   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,391,835       $ 6,689,422       $ (376,898   $ 9,704,359   
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Current liabilities:

          

Accounts payable

   $ 246,210       $ 348,559       $ (305,279   $ 289,490   

Accrued liabilities

     627,972         107,414         (3,443     731,943   

Short-term debt

     —           774,971         —          774,971   

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

     —           644,779         —          644,779   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     874,182         1,875,723         (308,722     2,441,183   

Long-term debt

     303,000         2,501,605         —          2,804,605   

Long-term debt held by variable interest entities

     —           1,350,294         —          1,350,294   

Pension liability

     106,795         —           —          106,795   

Postretirement healthcare liability

     262,096         —           —          262,096   

Other long-term liabilities

     124,031         14,095         —          138,126   

Commitments and contingencies (Note 17)

          

Total shareholders’ equity

     1,721,731         947,705         (68,176     2,601,260   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,391,835       $ 6,689,422       $ (376,898   $ 9,704,359   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

31


Table of Contents
     December 31, 2010  
     Motorcycles & Related
Products Operations
     Financial
Services Operations
     Eliminations     Consolidated  

ASSETS

          

Current assets:

          

Cash and cash equivalents

   $ 791,791       $ 230,142       $ —        $ 1,021,933   

Marketable securities

     140,118         —           —          140,118   

Accounts receivable, net

     454,311         —           (191,929     262,382   

Finance receivables, net

     —           1,080,432         —          1,080,432   

Restricted finance receivables held by variable interest entities, net

     —           699,026         —          699,026   

Inventories

     326,446         —           —          326,446   

Restricted cash held by variable interest entities

     —           288,887         —          288,887   

Other current assets

     158,692         136,285         (47,575     247,402   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     1,871,358         2,434,772         (239,504     4,066,626   

Finance receivables, net

     —           1,553,781         —          1,553,781   

Restricted finance receivables held by variable interest entities, net

     —           2,684,330         —          2,684,330   

Property, plant and equipment, net

     785,139         29,973         —          815,112   

Goodwill

     29,590         —           —          29,590   

Other long-term assets

     324,750         25,919         (69,368     281,301   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,010,837       $ 6,728,775       $ (308,872   $ 9,430,740   
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Current liabilities:

          

Accounts payable

   $ 195,642       $ 253,794       $ (224,090   $ 225,346   

Accrued liabilities

     501,741         73,569         (18,639     556,671   

Short-term debt

     —           480,472         —          480,472   

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

     —           751,293         —          751,293   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     697,383         1,559,128         (242,729     2,013,782   

Long-term debt

     303,000         2,213,650         —          2,516,650   

Long-term debt held by variable interest entities

     —           2,003,941         —          2,003,941   

Pension liability

     282,085         —           —          282,085   

Postretirement healthcare benefits

     254,762         —           —          254,762   

Other long-term liabilities

     140,804         11,850         —          152,654   

Commitments and contingencies (Note 17)

          

Total shareholders’ equity

     1,332,803         940,206         (66,143     2,206,866   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,010,837       $ 6,728,775       $ (308,872   $ 9,430,740   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

32


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

ASSETS

          

Current assets:

          

Cash and cash equivalents

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

Marketable securities

     55,229         —           —          55,229   

Accounts receivable, net

     600,209         —           (294,124     306,085   

Finance receivables, net

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

Restricted finance receivables held by variable interest entities, net

     —           674,371         —          674,371   

Inventories

     319,101         —           —          319,101   

Restricted cash held by variable interest entities

     —           287,613         —          287,613   

Other current assets

     199,399         97,758         —          297,157   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

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

Finance receivables, net

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

Restricted finance receivables held by variable interest entities, net

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

Property, plant and equipment, net

     749,498         30,493         —          779,991   

Goodwill

     29,992         —           —          29,992   

Other long-term assets

     304,467         25,120         (68,607     260,980   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,535,920       $ 6,867,771       $ (362,731   $ 10,040,960   
  

 

 

    

 

 

    

 

 

   

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

  

Current liabilities:

          

Accounts payable

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

Accrued liabilities

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

Short-term debt

     —           587,981         —          587,981   

Current portion of long-term debt

     —           201,426         —          201,426   

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

     —           731,833         —          731,833   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

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

Long-term debt

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

Long-term debt held by variable interest entities

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

Pension liability

     353,896         —           —          353,896   

Postretirement healthcare liability

     272,232         —           —          272,232   

Other long-term liabilities

     140,681         12,373         —          153,054   

Commitments and contingencies (Note 17)

          

Total shareholders’ equity

     1,345,301         910,227         (65,578     2,189,950   
  

 

 

    

 

 

    

 

 

   

 

 

 
   $ 3,535,920       $ 6,867,771       $ (362,731   $ 10,040,960   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

33


Table of Contents
     Nine months ended September 25, 2011  
     Motorcycles & Related
Products Operations
     Financial
Services Operations
     Eliminations &
Adjustments
     Consolidated  

Cash flows from operating activities:

           

Income from continuing operations

   $ 487,296       $ 131,138       $ (125,000    $ 493,434   

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

           

Depreciation

     127,174         4,764         —           131,938   

Amortization of deferred loan origination costs

     —           59,272         —           59,272   

Amortization of financing origination fees

     355         7,816         —           8,171   

Provision for employee long-term benefits

     49,110         1,873         —           50,983   

Contributions to pension and postretirement plans

     (207,829      —           —           (207,829

Stock compensation expense

     26,282         2,034         —           28,316   

Net change in wholesale finance receivables

     —           —           77,519         77,519   

Provision for credit losses

     —           5,005         —           5,005   

Loss on extinguishment of debt

     —           8,671         —           8,671   

Pension and postretirement healthcare plan curtailment and settlement expense

     236         —           —           236   

Foreign currency adjustments

     11,381         —           —           11,381   

Other, net

     (14,922      25,959         —           11,037   

Change in current assets and current liabilities:

           

Accounts receivable

     (132,823