HOG - 09.30.2012 - 10Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
 
FORM 10-Q
 
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2012
¨
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  ý    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  ý    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
 
ý
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  ý
Number of shares of the registrant’s common stock outstanding at November 1, 2012: 226,257,911 shares



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended September 30, 2012
 
Part I
 
 
 
Item 1.
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Part II
 
 
 
Item 1.
 
 
 
Item 2.
 
 
 
Item 6.
 
 
 


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 30, 2012
 
September 25, 2011
 
September 30, 2012
 
September 25, 2011
Revenue:
 
 
 
 
 
 
 
Motorcycles and related products
$
1,089,268

 
$
1,232,699

 
$
3,931,684

 
$
3,635,487

Financial services
161,027

 
164,557

 
477,962

 
492,296

Total revenue
1,250,295

 
1,397,256

 
4,409,646

 
4,127,783

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and related products cost of goods sold
711,364

 
817,308

 
2,533,453

 
2,399,962

Financial services interest expense
46,231

 
61,907

 
146,199

 
176,933

Financial services provision for credit losses
9,069

 
6,189

 
12,823

 
5,005

Selling, administrative and engineering expense
257,359

 
256,735

 
806,257

 
759,274

Restructuring expense
9,170

 
12,429

 
26,841

 
49,022

Total costs and expenses
1,033,193

 
1,154,568

 
3,525,573

 
3,390,196

Operating income
217,102

 
242,688

 
884,073

 
737,587

Investment income
1,447

 
2,479

 
5,611

 
5,625

Interest expense
11,438

 
11,270

 
34,528

 
34,101

Income before provision for income taxes
207,111

 
233,897

 
855,156

 
709,111

Provision for income taxes
73,110

 
50,303

 
301,870

 
215,677

Income from continuing operations
134,001

 
183,594

 
553,286

 
493,434

Income from discontinued operations, net of tax

 

 

 

Net income
$
134,001

 
$
183,594

 
$
553,286

 
$
493,434

Earnings per common share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.59

 
$
0.79

 
$
2.43

 
$
2.11

Diluted
$
0.59

 
$
0.78

 
$
2.40

 
$
2.09

Earnings per common share from discontinued operations:
 
 
 
 
 
 
 
Basic
$

 
$

 
$

 
$

Diluted
$

 
$

 
$

 
$

Earnings per common share:
 
 
 
 
 
 
 
Basic
$
0.59

 
$
0.79

 
$
2.43

 
$
2.11

Diluted
$
0.59

 
$
0.78

 
$
2.40

 
$
2.09

Cash dividends per common share
$
0.155

 
$
0.125

 
$
0.465

 
$
0.350

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


3

Table of Contents

HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
Nine months ended
 
September 30, 2012
 
September 25, 2011
 
September 30, 2012
 
September 25, 2011
Comprehensive income
$
146,138

 
$
178,561

 
$
572,600

 
$
524,047

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



4

Table of Contents

HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
 
(Unaudited)
 
 
 
(Unaudited)
 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
1,795,141

 
$
1,526,950

 
$
1,428,753

Marketable securities
136,376

 
153,380

 
179,285

Accounts receivable, net
256,193

 
219,039

 
285,332

Finance receivables, net
1,212,977

 
1,168,603

 
1,104,056

Restricted finance receivables held by variable interest entities, net
513,084

 
591,864

 
586,144

Inventories
379,129

 
418,006

 
345,963

Restricted cash held by variable interest entities
217,400

 
229,655

 
238,208

Other current assets
237,396

 
234,709

 
217,445

Total current assets
4,747,696

 
4,542,206

 
4,385,186

Finance receivables, net
2,285,309

 
1,754,441

 
2,095,839

Restricted finance receivables held by variable interest entities, net
1,904,297

 
2,271,773

 
2,119,789

Property, plant and equipment, net
764,835

 
809,459

 
775,213

Goodwill
28,928

 
29,081

 
30,004

Other long-term assets
284,118

 
267,204

 
298,328

 
$
10,015,183

 
$
9,674,164

 
$
9,704,359

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
293,710

 
$
255,713

 
$
289,490

Accrued liabilities
606,078

 
564,172

 
731,943

Short-term debt
404,693

 
838,486

 
774,971

Current portion of long-term debt
437,938

 
399,916

 

Current portion of long-term debt held by variable interest entities
559,256

 
640,331

 
644,779

Total current liabilities
2,301,675

 
2,698,618

 
2,441,183

Long-term debt
3,339,604

 
2,396,871

 
2,804,605

Long-term debt held by variable interest entities
1,132,809

 
1,447,015

 
1,350,294

Pension liability
125,664

 
302,483

 
106,795

Postretirement healthcare liability
261,564

 
268,582

 
262,096

Other long-term liabilities
150,504

 
140,339

 
138,126

Commitments and contingencies (Note 16)
 
 
 
 
 
Total shareholders’ equity
2,703,363

 
2,420,256

 
2,601,260

 
$
10,015,183

 
$
9,674,164

 
$
9,704,359

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


5

Table of Contents

HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Nine months ended
 
September 30,
2012
 
September 25,
2011
Net cash provided by operating activities of continuing operations (Note 3)
$
712,498

 
$
901,601

Cash flows from investing activities of continuing operations:
 
 
 
Capital expenditures
(95,329
)
 
(106,115
)
Origination of finance receivables
(2,328,653
)
 
(2,164,144
)
Collections on finance receivables
2,131,025

 
2,130,369

Purchases of marketable securities
(4,993
)
 
(142,653
)
Sales and redemptions of marketable securities
23,046

 
104,975

Net cash used by investing activities of continuing operations
(274,904
)
 
(177,568
)
Cash flows from financing activities of continuing operations:
 
 
 
Proceeds from issuance of medium-term notes
993,737

 
394,277

Proceeds from securitization debt
763,895

 
571,276

Repayments of securitization debt
(1,161,592
)
 
(1,333,541
)
Net (decrease) increase in credit facilities and unsecured commercial paper
(634,874
)
 
182,058

Net borrowings of asset-backed commercial paper
182,131

 
(483
)
Net repayments of asset-backed commercial paper
(6,538
)
 

Net change in restricted cash
12,255

 
50,679

Dividends
(106,560
)
 
(82,557
)
Purchase of common stock for treasury
(257,981
)
 
(97,456
)
Excess tax benefits from share-based payments
16,390

 
2,702

Issuance of common stock under employee stock option plans
36,342

 
7,763

Net cash used by financing activities of continuing operations
(162,795
)
 
(305,282
)
Effect of exchange rate changes on cash and cash equivalents of continuing operations
(6,608
)
 
(11,857
)
Net increase in cash and cash equivalents of continuing operations
268,191

 
406,894

Cash flows from discontinued operations:
 
 
 
Cash flows from operating activities of discontinued operations

 
(74
)
Cash flows from investing activities of discontinued operations

 

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

 

 

 
(74
)
Net increase in cash and cash equivalents
$
268,191

 
$
406,820

Cash and cash equivalents:
 
 
 
Cash and cash equivalents—beginning of period
$
1,526,950

 
$
1,021,933

Cash and cash equivalents of discontinued operations—beginning of period

 

Net increase in cash and cash equivalents
268,191

 
406,820

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

 

Cash and cash equivalents—end of period
$
1,795,141

 
$
1,428,753

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


6

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 30, 2012 and September 25, 2011, the condensed consolidated statements of operations for the three and nine month periods then ended, the condensed consolidated statements of comprehensive income for the three and nine month periods then ended and the condensed consolidated statements of cash flows for the nine month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.
The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (Financial Services).
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and the accompanying notes. Actual results could differ from those estimates.
During 2008, the Company acquired Italian motorcycle manufacturer MV Agusta (MV). On October 15, 2009, the Company announced its intent to divest MV, and the Company completed the sale on August 6, 2010. MV is presented as a discontinued operation for all periods.
2. New Accounting Standards
Accounting Standards Recently Adopted
In May 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-4 Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (IFRS.) ASU No. 2011-04 clarifies the application of the existing guidance within Accounting Standards Codification (ASC) Topic 820, Fair Value Measurement, to ensure consistency between U.S. GAAP and IFRS. ASU No. 2011-04 also requires new disclosures about purchases, sales, issuances, and settlements related to Level 3 measurements and also requires new disclosures around transfers into and out of Level 1 and 2 in the fair value hierarchy. The Company adopted ASU No. 2011-04 on January 1, 2012. The required new disclosures are presented in Note 9.
In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income.” ASU No. 2011-05 amends the guidance within ASC Topic 220, “Comprehensive Income,” to eliminate the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. ASU No. 2011-05 requires that all nonowner changes in shareholders’ equity be presented in either a single continuous statement of comprehensive income or in two separate but consecutive statements. The Company decided to present comprehensive income in two separate but consecutive statements. The Company adopted ASU No. 2011-05 on January 1, 2012. The adoption of ASU No. 2011-05 and the Company’s decision to present comprehensive income in two separate but consecutive statements required the presentation of an additional financial statement, condensed consolidated statements of comprehensive income, for all periods presented.

7

Table of Contents

3. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
Available-for-sale:
 
 
 
 
 
Corporate bonds
$
136,376

 
$
153,380

 
$
179,285

U.S. Treasuries

 

 

 
$
136,376

 
$
153,380

 
$
179,285

The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first nine months of 2012 and 2011, the Company recognized gross unrealized gains in other comprehensive income of $1.1 million and $1.5 million, respectively, or $0.7 million and $0.9 million net of taxes, respectively, to adjust amortized cost to fair value. The marketable securities have contractual maturities that generally come due over the next 12 to 48 months.
Inventories
Inventories are valued at the lower of cost or market. Substantially all inventories located in the United States are valued using the last-in, first-out (LIFO) method. Other inventories are valued at the lower of cost or market using the first-in, first-out (FIFO) method. Inventories consist of the following (in thousands):
 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
Components at the lower of FIFO cost or market
 
 
 
 
 
Raw materials and work in process
$
121,184

 
$
113,932

 
$
95,957

Motorcycle finished goods
169,515

 
226,261

 
154,273

Parts and accessories and general merchandise
132,789

 
121,340

 
131,708

Inventory at lower of FIFO cost or market
423,488

 
461,533

 
381,938

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

 
$
418,006

 
$
345,963



8

Table of Contents


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

 
$
493,434

Loss from discontinued operations

 

Income from continuing operations
553,286

 
493,434

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

 
131,938

Amortization of deferred loan origination costs
58,438

 
59,272

Amortization of financing origination fees
7,462

 
8,171

Provision for employee long-term benefits
50,348

 
50,983

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

 
28,316

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

 
77,519

Provision for credit losses
12,823

 
5,005

Loss on debt extinguishment

 
8,671

Pension and postretirement healthcare plan curtailment and settlement expense

 
236

Foreign currency adjustments
8,692

 
11,381

Other, net
9,411

 
11,036

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

 
7,069

Inventories
36,463

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

 
257,373

Restructuring reserves
(9,177
)
 
2,664

Derivative instruments
611

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

 
408,167

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

 
$
901,601


4. Discontinued Operations
In October 2009, the Company unveiled a new business strategy to drive growth through a focus of efforts and resources on the unique strengths of the Harley-Davidson brand and to enhance productivity and profitability through continuous improvement. The Company’s Board of Directors approved and the Company committed to the divestiture of MV as part of this strategy. The Company engaged a third party investment bank to assist with the marketing and sale of MV. During 2009, the Company recorded pre-tax impairment charges of $115.4 million related to MV and a net tax benefit of $40 million related to losses estimated in connection with the sale of MV. As of December 31, 2009, the Company estimated the total tax benefit associated with losses related to the sale of MV to be $66 million of which $26 million was deemed uncertain and appropriately reserved against.
At each subsequent reporting date in 2010 through the date of sale of MV in August 2010, the fair value less selling costs was re-assessed and additional impairment charges totaling $111.8 million and additional tax benefits totaling $18 million were recognized in 2010. As the effort to sell MV progressed into 2010, adverse factors led to decreases in the fair value of MV. During 2010, challenging economic conditions continued to persist, negatively impacting the appetite of prospective buyers

9

Table of Contents

and the motorcycle industry as a whole. Information coming directly from the selling process, including discussions with the prospective buyers, indicated a fair value that was less than previously estimated.
On August 6, 2010, the Company concluded its sale of MV to MV Agusta Motor Holding S.r.l., a company controlled by the former owner of MV. Under the agreement relating to the sale, (1) the Company received nominal consideration in return for the transfer of MV and related assets; (2) the parties waived their respective rights under the stock purchase agreement and other documents related to the Company’s purchase of MV in 2008, which included a waiver of the former owner’s right to contingent earn-out consideration; and (3) the Company contributed 20 million Euros to MV as operating capital. The 20 million Euros contributed were factored into the Company’s estimate of MV’s fair value prior to the sale and was recognized in the 2010 impairment charges discussed above. As a result of the impairment charges recorded in 2009 and 2010 prior to the sale, the Company only incurred an immaterial loss on the date of sale, which was included in the loss from discontinued operations, net of tax, during the year ended December 31, 2010.
As of December 31, 2010, the Company’s estimated total tax benefit associated with the loss on the sale of MV was $101 million, of which $43.5 million was deemed uncertain and appropriately reserved against. As a result, the total cumulative net tax benefit recognized as of December 31, 2010 was $57.5 million. The increase in the estimated tax benefit during 2010 was driven by an increase in the losses related to the sale of MV, not a change in the tax position.
In determining the tax benefit recognized from October 2009 through December 2010, the Company engaged appropriate technical expertise and considered all relevant available information. In accordance with ASC 740, “Income Taxes,” at each balance sheet date during this period, the Company re-evaluated the overall tax benefit, determined that it was at least more likely than not that it would be sustained upon review and calculated the amount of recognized tax benefit based on a cumulative probability basis.
Beginning in 2010, the Company voluntarily elected to participate in a pre-filing agreement process with the Internal Revenue Service (IRS) in order to accelerate their review of the Company’s tax position related to MV. The IRS effectively completed its review in late 2011 and executed a Closing Agreement on Final Determination Covering Specific Matters with the Company.
There were no changes to the Company’s estimated gross or recognized tax benefit associated with the loss on the sale of MV during the first three quarters of 2011. In the fourth quarter of 2011, given the outcome of the closing agreement, the Company recognized a $43.5 million tax benefit by reversing the reserve recorded as of September 25, 2011 and recognized an incremental $7.5 million tax benefit related to the final calculation of the tax basis in the loan to and the stock of MV.

5. Restructuring Expense
2011 Restructuring Plans
In December 2011, the Company made a decision to cease operations at New Castalloy, its Australian subsidiary and producer of cast motorcycle wheels and wheel hubs, and source those components through other existing suppliers (2011 New Castalloy Restructuring Plan). The Company expects the transition of supply from New Castalloy to be complete by mid-2013. The decision to close New Castalloy came as part of the Company’s overall long term strategy to develop world-class manufacturing capability throughout the Company by restructuring and consolidating operations for greater competitiveness, efficiency and flexibility. In connection with this decision, the Company will reduce its workforce by approximately 200 employees by mid-2013.
Under the 2011 New Castalloy Restructuring Plan, restructuring expenses consist of employee severance and termination costs, accelerated depreciation and other related costs. The Company expects to incur approximately $30 million in restructuring charges related to the transition through 2013. Approximately 35% of the $30 million will be non-cash charges. On a cumulative basis, the Company has incurred $19.1 million of restructuring expense under the 2011 New Castalloy Restructuring Plan as of September 30, 2012, of which $9.7 million was incurred during the nine months ended September 30, 2012.
In February 2011, the Company’s unionized employees at its facility in Kansas City, Missouri ratified a new seven-year labor agreement. The new agreement took effect on August 1, 2011. The new contract is similar to the labor agreements ratified at the Company’s Wisconsin facilities in September 2010 and its York, Pennsylvania facility in December 2009, and allows for similar flexibility and increased production efficiency. Once the new contract is fully implemented, the production system in Kansas City, like Wisconsin and York, will include the addition of a flexible workforce component.

10

Table of Contents

After taking actions to implement the new ratified labor agreement (2011 Kansas City Restructuring Plan), the Company expects to have about 145 fewer full-time hourly unionized employees in its Kansas City facility than would have been required under the prior contract.
Under the 2011 Kansas City Restructuring Plan, restructuring expenses consist of employee severance and termination costs and other related costs. The Company expects to incur approximately $13 million in restructuring expenses related to the new contract through 2012, of which approximately 10% are expected to be non-cash. On a cumulative basis, the Company has incurred $7.8 million of restructuring expense under the 2011 Kansas City Restructuring Plan as of September 30, 2012. During the first nine months of 2012, the Company released a portion of its 2011 Kansas City Restructuring Plan reserve related to severance costs as these costs are no longer expected to be incurred.
For the nine months ended September 25, 2011, restructuring expense included $0.2 million of non-cash curtailment losses related to the Company’s pension plan that covers employees of the Kansas City facility.

The following table summarizes the Motorcycle segment’s 2011 Kansas City Restructuring Plan and 2011 New Castalloy Restructuring Plan reserve activity and balances as recorded in accrued liabilities (in thousands):
 
Nine months ended September 30, 2012
 
Kansas City
 
New Castalloy
 
Consolidated
 
Employee
Severance and
Termination
Costs
 
Other
 
Total
 
Employee
Severance and
Termination
Costs
 
Accelerated
Depreciation
 
Other
 
Total
 
Total
Balance, beginning of period
$
4,123

 
$

 
$
4,123

 
$
8,428

 
$

 
$
305

 
$
8,733

 
$
12,856

Restructuring expense

 

 

 
2,450

 
6,152

 
1,075

 
9,677

 
9,677

Utilized—cash

 

 

 
(388
)
 

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

 

 

 

 
(6,152
)
 

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

 
(967
)
 

 

 

 

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

 
$

 
$
3,156

 
$
10,490

 
$

 
$
145

 
$
10,635

 
$
13,791

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

 
342

 
8,161

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

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

 
$

 
$
3,635

2010 Restructuring Plan
In September 2010, the Company’s unionized employees in Wisconsin ratified three separate new seven-year labor agreements which took effect in April 2012 when the prior contracts expired. The new contracts are similar to the labor agreement ratified at the Company’s York, Pennsylvania facility in December 2009 and allow for similar flexibility and increased production efficiency. Once the new contracts are fully implemented, the production system in Wisconsin, like York, will include the addition of a flexible workforce component.
Based on the new ratified labor agreements (2010 Restructuring Plan), the Company expects to have about 250 fewer full-time hourly unionized employees in its Milwaukee-area facilities when the contracts are fully implemented than would have been required under the prior contracts. In Tomahawk, the Company expects to have about 75 fewer full-time hourly unionized employees when the contract is fully implemented than would have been required under the prior contract.
Under the 2010 Restructuring Plan, restructuring expenses consist of employee severance and termination costs and other related costs. The Company expects to incur approximately $63 million in restructuring expenses related to the new contracts

11

Table of Contents

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


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

 
$
8,652

Restructuring expense
4,005

 
9,431

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

 
$
17,256

2009 Restructuring Plan
During 2009, in response to the U.S. economic recession and worldwide slowdown in consumer demand, the Company committed to a volume reduction and a combination of restructuring actions (2009 Restructuring Plan) that are expected to be completed at various dates between 2009 and 2012. The actions were designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. The Company’s significant announced actions include the restructuring and transformation of its York, Pennsylvania production facility including the implementation of a new more flexible unionized labor agreement; consolidation of facilities related to engine and transmission production; outsourcing of certain distribution and transportation activities and exiting the Buell product line. In addition, during the third quarter of 2012, the Company implemented projects under this plan involving the outsourcing of select information technology activities and the consolidation of an administrative office in Michigan into its corporate headquarters in Milwaukee, Wisconsin.
The 2009 Restructuring Plan includes an estimated reduction of approximately 2,700 to 2,900 hourly production positions and approximately 800 non-production, primarily salaried positions within the Motorcycles segment and approximately 100 salaried positions in the Financial Services segment.
Under the 2009 Restructuring Plan, restructuring expenses consist of employee severance and termination costs, accelerated depreciation on the long-lived assets that will be exited as part of the 2009 Restructuring Plan and other related costs. The Company expects total costs related to the 2009 Restructuring Plan to result in restructuring and impairment expenses of approximately $384 million to $404 million from 2009 to 2012, of which approximately 30% are expected to be non-cash. On a cumulative basis, the Company has incurred $394.7 million of restructuring and impairment expense under the 2009 Restructuring Plan as of September 30, 2012, of which $14.1 million was incurred during the first nine months of 2012.


12

Table of Contents


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

 
$

 
$

 
$
10,089

Restructuring expense
4,166

 

 
11,987

 
16,153

Utilized—cash
(2,529
)
 

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

 

 

 

Non-cash reserve release
(2,027
)
 

 

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

 
$

 
$

 
$
9,699

 
 
 
 
 
 
 
 
 
Nine months ended September 25, 2011
 
Motorcycles & Related Products
 
Employee
Severance and
Termination Costs
 
Accelerated
Depreciation
 
Other
 
Total
Balance, beginning of period
$
23,818

 
$

 
$
2,764

 
$
26,582

Restructuring expense
5,932

 

 
25,498

 
31,430

Utilized—cash
(13,000
)
 

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

 

 

 

Balance, end of period
$
16,750

 
$

 
$
183

 
$
16,933

Other restructuring costs under the 2009 Restructuring Plan include items such as the exit costs for terminating supply contracts, lease termination costs and moving costs. During the first nine months of 2012, the Company released a portion of its 2009 Restructuring Plan reserve related to employee severance costs as these costs are no longer expected to be incurred.
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 30,
2012
 
December 31,
2011
 
September 25,
2011
Retail
$
5,243,470

 
$
5,087,490

 
$
5,321,403

Wholesale
785,323

 
824,640

 
717,044

 
6,028,793

 
5,912,130

 
6,038,447

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

 
$
5,786,681

 
$
5,905,828

At September 30, 2012December 31, 2011 and September 25, 2011, the Company’s Condensed Consolidated Balance Sheet included $2.42 billion, $2.86 billion and $2.71 billion, respectively, of finance receivables net of a related allowance for credit losses, which were restricted as collateral for the payment of debt held by VIEs and other related obligations as discussed in Note 7. These receivables are included in retail finance receivables in the table above.

13

Table of Contents

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

Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended September 30, 2012
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
106,180

 
$
8,068

 
$
114,248

Provision for credit losses
9,869

 
(800
)
 
9,069

Charge-offs
(19,873
)
 

 
(19,873
)
Recoveries
9,682

 

 
9,682

Balance, end of period
$
105,858

 
$
7,268

 
$
113,126

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

 
$
13,456

 
$
144,404

Provision for credit losses
11,833

 
(5,644
)
 
6,189

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

 

 
10,835

Balance, end of period
$
124,980

 
$
7,639

 
$
132,619

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

 
$
9,337

 
$
125,449

Provision for credit losses
14,892

 
(2,069
)
 
12,823

Charge-offs
(62,779
)
 

 
(62,779
)
Recoveries
37,633

 

 
37,633

Balance, end of period
$
105,858

 
$
7,268

 
$
113,126

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

 
$
15,798

 
$
173,589

Provision for credit losses
12,676

 
(7,671
)
 
5,005

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

 
15

 
41,258

Balance, end of period
$
124,980

 
$
7,639

 
$
132,619

Included in the $105.9 million and $125.0 million retail allowance for credit losses on finance receivables is $49.5 million and $64.7 million, respectively, related to finance receivables held by VIEs.
Portions of the allowance for credit losses on finance receivables are specified to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses on finance receivables covers estimated losses on finance receivables which are collectively reviewed for impairment. Finance receivables are considered impaired when management determines it is probable that the Company will be unable to collect all amounts due according to the terms of the loan agreement.

The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. HDFS performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. HDFS utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates and current economic conditions including items such as unemployment rates. As retail finance receivables are collectively and not individually reviewed for impairment, this portfolio does not have finance receivables specifically impaired.

14

Table of Contents

The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s evaluation for the wholesale allowance for credit losses is first based on a loan-by-loan review. A specific allowance for credit losses is established for wholesale finance receivables determined to be individually impaired when management concludes that the borrower will not be able to make full payment of the contractual amounts due based on the original terms of the loan agreement. The impairment is determined based on the cash that the Company expects to receive discounted at the loan’s original interest rate or the fair value of the collateral, if the loan is collateral-dependent. Finance receivables in the wholesale portfolio that are not considered impaired on an individual basis are segregated, based on similar risk characteristics, according to the Company’s internal risk rating system and collectively evaluated for impairment. The related allowance for credit losses is based on factors such as the specific borrower’s financial performance and ability to repay, the Company’s past loan loss experience, current economic conditions, and the value of the underlying collateral.
Generally, it is the Company’s policy not to change the terms and conditions of finance receivables. However, to minimize the economic loss, the Company may modify certain finance receivables in troubled debt restructurings. Total restructured finance receivables are not significant.
The allowance for credit losses and finance receivables by portfolio, segregated by those amounts that are individually evaluated for impairment and those that are collectively evaluated for impairment, was as follows (in thousands):
 
September 30, 2012
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
105,858

 
7,268

 
113,126

Total allowance for credit losses
$
105,858

 
$
7,268

 
$
113,126

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,243,470

 
785,323

 
6,028,793

Total finance receivables
$
5,243,470

 
$
785,323

 
$
6,028,793

 
December 31, 2011
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
116,112

 
9,337

 
125,449

Total allowance for credit losses
$
116,112

 
$
9,337

 
$
125,449

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,087,490

 
824,640

 
5,912,130

Total finance receivables
$
5,087,490

 
$
824,640

 
$
5,912,130

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

 
$

 
$

Collectively evaluated for impairment
124,980

 
7,639

 
132,619

Total allowance for credit losses
$
124,980

 
$
7,639

 
$
132,619

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,321,403

 
717,044

 
6,038,447

Total finance receivables
$
5,321,403

 
$
717,044

 
$
6,038,447



15

Table of Contents

There were no wholesale finance receivables at September 30, 2012, December 31, 2011, or September 25, 2011 that were individually deemed to be impaired under ASC Topic 310, “Receivables.”
Retail finance receivables are contractually delinquent if the minimum payment is not received by the specified due date. Retail finance receivables are generally charged off at 120 days contractually past due. Interest accrues on retail finance receivables until either collected or charged off. Accordingly, as of September 30, 2012December 31, 2011 and September 25, 2011, all retail finance receivables were accounted for as interest-earning receivables, of which $19.4 million, $27.5 million and $23.3 million, respectively, were 90 days or more past due.
Wholesale finance receivables are delinquent if the minimum payment is not received by the contractual due date. A specific allowance for credit losses is established once management determines that the borrower does not have the ability to repay the loan in full. Interest continues to accrue on past due wholesale finance receivables until the date the collection of the finance receivables becomes doubtful, at which time the finance receivable is placed on non-accrual status. The Company will resume accruing interest on these wholesale finance receivables when payments are current according to the terms of the loan agreements and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. There were no wholesale receivables on non-accrual status at September 30, 2012, December 31, 2011 or September 25, 2011. At September 30, 2012December 31, 2011 and September 25, 2011, $0.5 million, $0.9 million, and $0.6 million of wholesale finance receivables were 90 days or more past due and accruing interest, respectively.
An analysis of the aging of past due finance receivables, which includes non-accrual status finance receivables, was as follows (in thousands):
 
September 30, 2012
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,093,496

 
$
100,706

 
$
29,878

 
$
19,390

 
$
149,974

 
$
5,243,470

Wholesale
784,155

 
445

 
217

 
506

 
1,168

 
785,323

Total
$
5,877,651

 
$
101,151

 
$
30,095

 
$
19,896

 
$
151,142

 
$
6,028,793

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

 
$
107,373

 
$
36,937

 
$
27,469

 
$
171,779

 
$
5,087,490

Wholesale
822,610

 
777

 
344

 
909

 
2,030

 
824,640

Total
$
5,738,321

 
$
108,150

 
$
37,281

 
$
28,378

 
$
173,809

 
$
5,912,130

 
September 25, 2011
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
5,148,199

 
$
112,370

 
$
37,491

 
$
23,343

 
$
173,204

 
$
5,321,403

Wholesale
715,745

 
508

 
197

 
594

 
1,299

 
717,044

Total
$
5,863,944

 
$
112,878

 
$
37,688

 
$
23,937

 
$
174,503

 
$
6,038,447

A significant part of managing HDFS’ finance receivable portfolios includes the assessment of credit risk associated with each borrower. As the credit risk varies between the retail and wholesale portfolios, HDFS utilizes different credit risk indicators for each portfolio.
HDFS manages retail credit risk through its credit approval policy and ongoing collection efforts. HDFS uses FICO scores, a standard credit rating measurement, to differentiate the expected default rates of retail credit applicants enabling the Company to better evaluate credit applicants for approval and to tailor pricing according to this assessment. Retail loans with a FICO score of 640 or above at origination are considered prime, and loans with a FICO score below 640 are considered sub-prime. These credit quality indicators are determined at the time of loan origination and are not updated subsequent to the loan origination date.

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

16

Table of Contents

 
September 30, 2012
 
December 31, 2011
 
September 25, 2011
Prime
$
4,178,726

 
$
4,097,048

 
$
4,280,000

Sub-prime
1,064,744

 
990,442

 
1,041,403

Total
$
5,243,470

 
$
5,087,490

 
$
5,321,403

HDFS’ credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. HDFS utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and capture credit risk factors for each borrower.
HDFS uses the following internal credit quality indicators, based on the Company’s internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged off, while the dealers classified as Low Risk are least likely to be charged off. The internal rating system considers factors such as the specific borrowers’ ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The recorded investment of wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
 
 
September 30, 2012
 
December 31, 2011
 
September 25, 2011
Doubtful
$
10,072

 
$
13,048

 
$
8,260

Substandard
3,689

 
5,052

 
9,115

Special Mention
2,446

 
14,361

 
6,652

Medium Risk
6,035

 
3,032

 
4,305

Low Risk
763,081

 
789,147

 
688,712

Total
$
785,323

 
$
824,640

 
$
717,044

7. Asset-Backed Financing

HDFS participates in asset-backed financing through both term asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. HDFS treats these transactions as secured borrowing because they either are transferred to consolidated VIEs or HDFS maintains effective control over the assets and does not meet the accounting sale requirements under ASC Topic 860, "Transfers and Servicing". In HDFS' asset-backed financing programs, HDFS transfers retail motorcycle finance receivables to special purpose entities (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt. HDFS is required to consolidate any VIEs in which it is deemed to be the primary beneficiary through having power over the significant activities of the entity and having an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE.

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

HDFS is not required, and does not currently intend, to provide any additional financial support to its VIEs. Investors and creditors only have recourse to the assets held by the VIEs.
The Company’s term asset-backed securitization and asset-backed U.S. commercial paper conduit facility VIEs have been aggregated on the balance sheet due to the similarity of the nature of the assets involved as well as the purpose and design of the VIEs.
HDFS is not the primary beneficiary of the asset-backed Canadian commercial paper conduit facility VIE; therefore, HDFS does not consolidate the VIE. However, HDFS treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore cannot meet the requirements for sale accounting under ASC Topic 860. The transferred receivables are included in Finance Receivables, net, in the Consolidated Balance Sheet.

17

Table of Contents

Term Asset-Backed Securitization VIEs
The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each term asset-backed securitization SPE is a separate legal entity and the U.S. retail motorcycle finance receivables included in each term asset-backed securitization are only available for payment of that secured debt and other obligations arising from the term asset-backed securitization transaction and are not available to pay other obligations or claims of the Company’s creditors until the associated secured debt and other obligations are satisfied. Cash and cash equivalent balances held by the SPEs are used only to support the securitizations. There are no amortization schedules for the secured notes; however, the debt is reduced monthly as available collections on the related U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 2012 to 2019.
During the third quarter of 2012, the Company issued $675.3 million of secured notes through one term asset-backed securitization transaction. In addition, during the second quarter of 2012, the Company issued $89.5 million of secured notes through the sale of notes that had been previously retained as part of certain 2009 and 2011 term asset-backed securitization transactions. These notes were sold at a premium, which will be recognized over the term of the notes. At September 30, 2012, the unaccreted premium associated with these notes was $1.5 million. During the third quarter of 2011, the Company issued $573.4 million of secured notes through one term asset-backed securitization transaction.
The following table presents the assets and liabilities of the consolidated term asset-backed securitization SPEs that were included in the Company’s financial statements (in thousands):
 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
Assets:
 
 
 
 
 
Finance receivables
$
2,466,871

 
$
2,916,219

 
$
2,754,409

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

 
228,776

 
237,030

Other assets
5,531

 
6,772

 
7,394

Total assets
$
2,628,672

 
$
3,086,032

 
$
2,934,541

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

 
$
2,087,346

 
$
1,995,073


Asset-Backed U.S. Commercial Paper Conduit Facility VIE
In September 2012, the Company amended and restated its third-party bank sponsored asset-backed commercial paper conduit facility ("U.S. Conduit") which provides for a total aggregate commitment of $600 million based on, among other things, the amount of eligible U.S. retail motorcycle loans held by the SPE as collateral. The amended agreement has terms that are similar to those of the prior agreement and is for the same amount. Under the facility, HDFS may transfer U.S. retail motorcycle finance receivables to a SPE, which in turn may issue debt to third-party bank-sponsored asset-backed commercial paper conduits. The assets of the SPE are restricted as collateral for the payment of the debt or other obligations arising in the transaction and are not available to pay other obligations or claims of the Company’s creditors. The terms for this debt provide for interest on the outstanding principal based on prevailing commercial paper rates, or LIBOR plus a specified margin to the extent the advance is not funded by a conduit lender through the issuance of commercial paper. The U.S. Conduit also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of $600 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the U.S. Conduit has an expiration date of September 13, 2013.
The following table presents the assets of the U.S. Conduit SPEs that were included in our financial statements (in thousands);

18

Table of Contents

 
September 30,
2012
 
December 31,
2011
 
September 25,
2011
Finance receivables
$

 
$
13,455

 
$
16,193

Allowance for credit losses

 
(302
)
 
(377
)
Restricted cash

 
879

 
1,178

Other assets
542

 
449

 
549

Total assets
$
542

 
$
14,481

 
$
17,543

The SPEs had no borrowings outstanding under the U.S. Conduit at September 30, 2012December 31, 2011 or September 25, 2011; therefore, these assets are restricted as collateral for the payment of fees associated with the unused portion of the total aggregate commitment of $600 million. During the third quarter of 2012, all outstanding finance receivables that remained in the U.S. Conduit SPEs were transferred back to HDFS.
Asset-Backed Canadian Commercial Paper Conduit Facility

In August 2012, HDFS entered into an agreement with a Canadian bank-sponsored asset-backed commercial paper conduit facility (“Canadian Conduit”). Under the agreement, the Canadian Conduit is contractually committed, at HDFS' option, to purchase from HDFS eligible Canadian retail motorcycle finance receivables for proceeds up to C$200 million. In August 2012, HDFS transferred $209.1 million of Canadian retail motorcycle finance receivables for proceeds of $183.0 million. HDFS maintains effective control over the transferred assets and therefore does not meet sale accounting requirements under ASC Topic 860. As such, this transaction is treated as a secured borrowing, and the transferred assets are restricted as collateral for payment of the debt.

The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$200 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the Canadian Conduit expires on August 30, 2013. The contractual maturity of the debt is approximately 5 years. At September 30, 2012, $194.0 million of finance receivables and $11.6 million of cash were restricted as collateral for the payment of $176.9 million of debt.

8. Fair Value Measurements
Certain assets and liabilities are recorded at fair value in the financial statements; some of these are measured on a recurring basis while others are measured on a non-recurring basis. Assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared. Assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. In determining fair value of assets and liabilities, the Company uses various valuation techniques. The availability of inputs observable in the market varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the transaction. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management discretion. For other financial instruments, pricing inputs are less observable in the market and may require management judgment.
The Company assesses the inputs used to measure fair value using a three-tier hierarchy. The hierarchy indicates the extent to which inputs used in measuring fair value are observable in the market. Level 1 inputs include quoted prices for identical instruments and are the most observable.
Level 2 inputs include quoted prices for similar assets and observable inputs such as interest rates, foreign currency exchange rates, commodity rates and yield curves. The Company uses the market approach to derive the fair value for its level 2 fair value measurements. Foreign currency exchange contracts are valued using publicly quoted spot and forward prices; commodity contracts are valued using publicly quoted prices, where available, or dealer quotes; interest rate swaps are valued using publicized swap curves; and investments in marketable debt and equity securities are valued using publicly quoted prices.

19

Table of Contents

Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the following tables.

Recurring Fair Value Measurements
The following tables present information about the Company’s assets and liabilities measured at fair value on a recurring basis (in thousands):
 
 
September 30, 2012
 
Balance as of September 30, 2012
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
1,417,900

 
$
1,417,900

 
$

 
$

Marketable securities
136,376

 

 
136,376

 

Derivatives
1,639

 

 
1,639

 

 
$
1,555,915

 
$
1,417,900

 
$
138,015

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
2,458

 
$

 
$
2,458

 
$

 
December 31, 2011
 
Balance as of December 31, 2011
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
1,302,367

 
$
1,302,367

 
$

 
$

Marketable securities
153,380

 

 
153,380

 

Derivatives
16,443

 

 
16,443

 

 
$
1,472,190

 
$
1,302,367

 
$
169,823

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
5,136

 
$

 
$
5,136

 
$

 
September 25, 2011
 
Balance as of September 25, 2011
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
1,144,790

 
$
1,144,790

 
$

 
$

Marketable securities
179,285

 

 
179,285

 

Derivatives
10,343

 

 
10,343

 

 
$
1,334,418

 
$
1,144,790

 
$
189,628

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
6,834

 
$

 
$
6,834

 
$



20

Table of Contents

9. Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash and cash equivalents, marketable securities, trade receivables, finance receivables, net, trade payables, debt, foreign currency contracts and interest rate swaps (derivative instruments are discussed further in Note 10). Under U.S. GAAP, certain of these items are required to be recorded in the financial statements at fair value, while others are required to be recorded at historical cost.
The following table summarizes the fair value and carrying value of the Company’s financial instruments (in thousands):
 
 
September 30, 2012
 
December 31, 2011
 
September 25, 2011
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,795,141

 
$
1,795,141

 
$
1,526,950

 
$
1,526,950

 
$
1,428,753

 
$
1,428,753

Marketable securities
$
136,376

 
$
136,376

 
$
153,380

 
$
153,380

 
$
179,285

 
$
179,285

Accounts receivable, net
$
256,193

 
$
256,193

 
$
219,039

 
$
219,039

 
$
285,332

 
$
285,332

Derivatives
$
1,639

 
$
1,639

 
$
16,443

 
$
16,443

 
$
10,343

 
$
10,343

Finance receivables, net
$
5,993,713

 
$
5,915,667

 
$
5,888,040

 
$
5,786,681

 
$
6,008,081

 
$
5,905,828

Restricted cash held by variable interest entities
$
217,400

 
$
217,400

 
$
229,655

 
$
229,655

 
$
238,208

 
$
238,208

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
293,710

 
$
293,710

 
$
255,713

 
$
255,713

 
$
289,490

 
$
289,490

Derivatives
$
2,458

 
$
2,458

 
$
5,136

 
$
5,136

 
$
6,834

 
$
6,834

Unsecured commercial paper
$
404,693

 
$
404,693

 
$
874,286

 
$
874,286

 
$
813,571

 
$
813,571

Credit facilities
$

 
$

 
$
159,794

 
$
159,794

 
$
159,438

 
$
159,438

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

 
$
176,855

 
$

 
$

 
$

 
$

Medium-term notes
$
3,623,082

 
$
3,297,687

 
$
2,561,458

 
$
2,298,193

 
$
2,530,834

 
$
2,303,567

Senior unsecured notes
$
357,328

 
$
303,000

 
$
376,513

 
$
303,000

 
$
384,110

 
$
303,000

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

 
$
1,692,065

 
$
2,099,060

 
$
2,087,346

 
$
2,015,261

 
$
1,995,073

Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Net and Accounts Payable – With the exception of certain money-market investments, these items are recorded in the financial statements at historical cost. The historical cost basis for these amounts is estimated to approximate their respective fair values due to the short maturity of these instruments.
Marketable Securities – Marketable securities are recorded in the financial statements at fair value. The fair value of marketable securities is based primarily on quoted market prices of similar financial assets. Changes in fair value are recorded, net of tax, as other comprehensive income and included as a component of shareholders’ equity. Fair Value is based on Level 1 or Level 2 inputs.
Finance Receivables, Net – Finance receivables, net includes finance receivables held for investment, net and restricted finance receivables held by VIEs, net. Retail and wholesale finance receivables are recorded in the financial statements at historical cost less a provision for credit losses. The fair value of retail finance receivables is generally calculated by discounting future cash flows using an estimated discount rate that reflects current credit, interest rate and prepayment risks associated with similar types of instruments. Fair value is determined based on Level 3 inputs. The historical cost basis of wholesale finance receivables approximates fair value because they either are short-term or have interest rates that adjust with changes in market interest rates.
Derivatives – Interest rate swaps, foreign currency exchange contracts and commodity contracts are derivative financial instruments and are carried at fair value on the balance sheet. The fair value of interest rate swaps is determined using pricing models that incorporate quoted prices for similar assets and observable inputs such as interest rates and yield curves. The fair value of foreign currency exchange and commodity contracts are determined using publicly quoted prices. Fair value is calculated using Level 2 inputs.


21

Table of Contents

Debt – Debt is generally recorded in the financial statements at historical cost. The carrying value of debt provided under credit facilities approximates fair value since the interest rates charged under the facilities are tied directly to market rates and fluctuate as market rates change. The carrying value of unsecured commercial paper approximates fair value due to its short maturity. Fair value is calculated using Level 2 inputs.

The carrying value of debt provided under the Canadian Conduit approximates fair value since the interest rates charged under the facility are tied directly to market rates and fluctuate as market rates change. Fair value is calculated using Level 2 inputs.
The fair values of the medium-term notes maturing in December 2012December 2014September 2015, March 2016March 2017 and June 2018 are estimated based upon rates currently available for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.
The fair value of the senior unsecured notes is estimated based upon rates currently available for debt with similar terms and remaining maturities. Fair value is calculated using Level 2 inputs.
The fair value of the debt related to term asset-backed securitization transactions is estimated based on pricing currently available for transactions with similar terms and maturities. Fair value is calculated using Level 2 inputs.
10. Derivative Instruments and Hedging Activities
The Company is exposed to certain risks such as foreign currency exchange rate risk, interest rate risk and commodity price risk. To reduce its exposure to such risks, the Company selectively uses derivative financial instruments. All derivative transactions are authorized and executed pursuant to regularly reviewed policies and procedures, which prohibit the use of financial instruments for speculative trading purposes.
All derivative instruments are recognized on the balance sheet at fair value (see Note 9). In accordance with ASC Topic 815, “Derivatives and Hedging,” the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, both at the inception of each hedge and on an on-going basis, whether the derivatives that are used in its hedging transactions are highly effective in offsetting changes in cash flows of the hedged items. Any ineffective portion is immediately recognized in earnings. No component of a hedging derivative instrument’s gain or loss is excluded from the assessment of hedge effectiveness. Derivative instruments that do not qualify for hedge accounting are recorded at fair value and any changes in fair value are recorded in current period earnings.
The Company sells its products internationally and in most markets those sales are made in the foreign country’s local currency. As a result, the Company’s earnings can be affected by fluctuations in the value of the U.S. dollar relative to foreign currency. The Company’s most significant foreign currency risk relates to the Euro, the Australian dollar and the Japanese yen. The Company utilizes foreign currency contracts to mitigate the effects of these currencies’ fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.
The Company utilizes commodity contracts to hedge portions of the cost of certain commodities consumed in the Company’s motorcycle production and distribution operations.
The Company’s foreign currency contracts and commodity contracts generally have maturities of less than one year.
The Company’s earnings are affected by changes in interest rates. HDFS utilizes interest rate swaps to reduce the impact of fluctuations in interest rates on its unsecured commercial paper by converting a portion from a floating rate basis to a fixed rate basis. The fair value of HDFS’s interest rate swaps is determined using pricing models that incorporate quoted prices for similar assets and observable inputs such as interest rates and yield curves.


22

Table of Contents


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

 
$
956

 
$
1,784

 
$
306,450

 
$
16,443

 
$
1,852

 
$
279,230

 
$
10,343

 
$
2,439

Commodity
contracts(c)
1,181

 
80

 

 
3,915

 

 
265

 
3,530

 

 
245

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

 

 
674

 
102,100

 

 
3,020

 
109,500

 

 
4,150

Total
$
425,664

 
$
1,036

 
$
2,458


$
412,465

 
$
16,443

 
$
5,137


$
392,260

 
$
10,343

 
$
6,834

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

 
$
603

 
$

 
$

 
$

 
$

 
$

 
$

 
$

 
$
14,518


$
603

 
$

 
$

 
$

 
$

 
$

 
$

 
$

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

 
$
9,051

 
$
5,799

 
$
(7,870
)
Commodity contracts
32

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

 
$
8,614

 
$
5,363

 
$
(8,976
)
 
 
Amount of Gain/(Loss)
Reclassified from AOCI into Income
 
 
 
Three months ended
 
Nine Months Ended
 
Expected to be Reclassified
Cash Flow Hedges
September 30, 2012
 
September 25, 2011
 
September 30, 2012
 
September 25, 2011
 
Over the Next Twelve Months
Foreign currency contracts(a)
$
7,742

 
$
(5,058
)
 
$
19,846

 
$
(25,846
)
 
$
876

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

Total
$
7,334

 
$
(6,353
)
 
$
16,847

 
$
(30,251
)
 
$
1,470

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

23

Table of Contents


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

 
$

 
$
603

 
$

Total
$
603

 
$

 
$
603

 
$


For the three and nine months ended September 30, 2012 and September 25, 2011, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.
For the three and nine months ended September 30, 2012 and September 25, 2011, there were no gains or losses recognized in income related to derivative financial instruments designated as fair value hedges.
The Company is exposed to credit loss risk in the event of non-performance by counterparties to these derivative financial instruments. Although no assurances can be given, the Company does not expect any of the counterparties to these derivative financial instruments to fail to meet its obligations. To manage credit loss risk, the Company selects counterparties based on credit ratings and, on a quarterly basis, evaluates each hedge’s net position relative to the counterparty’s ability to cover its position.
11. Income Taxes
The Company’s 2012 income tax rate for the three and nine months ended September 30, 2012 was 35.3% compared to 21.5% and 30.4%, respectively, for the same periods last year. The Company's third quarter 2011 effective tax rate was favorably impacted by discrete tax items totaling $29.7 million which consisted of a favorable settlement of an Internal Revenue Service (IRS) audit for tax years 2005 through 2008 and a favorable change in Wisconsin income tax law associated with certain net operating losses, partially offset by increases in certain income tax reserves.
12. Product Warranty and Safety Recall Campaigns
The Company currently provides a standard two-year limited warranty on all new motorcycles sold worldwide, except for Japan, where the Company currently provides a standard three-year limited warranty on all new motorcycles sold. In addition, the Company started offering a one-year warranty for Parts & Accessories (P&A) in 2012. The warranty coverage for the retail customer generally begins when the product is sold to a retail customer. The Company maintains reserves for future warranty claims using an estimated cost, which is based primarily on historical Company claim information. Additionally, the Company has from time to time initiated certain voluntary safety recall campaigns. The Company reserves for all estimated costs associated with safety recalls in the period that the safety recalls are announced.
Changes in the Company’s warranty and safety recall liability were as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 30, 2012
 
September 25, 2011
 
September 30, 2012
 
September 25, 2011
Balance, beginning of period
$
67,801

 
$
55,407

 
$
54,994

 
$
54,134

Warranties issued during the period
10,228

 
10,210

 
42,846

 
33,770

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

 
759

 
18,255

 
1,338

Balance, end of period
$
63,210

 
$
51,360

 
$
63,210

 
$
51,360

The liability for safety recall campaigns was $5.0 million, $10.7 million and $2.2 million as of September 30, 2012December 31, 2011 and September 25, 2011, respectively.


24

Table of Contents

13. Earnings Per Share
The following table sets forth the computation for basic and diluted earnings per share from continuing operations (in thousands, except per share amounts):
 
 
Three months ended
 
Nine months ended
 
September 30,
2012
 
September 25,
2011
 
September 30,
2012
 
September 25,
2011
Numerator:
 
 
 
 
 
 
 
Income from continuing operations used in computing basic and diluted earnings per share
$
134,001

 
$
183,594

 
$
553,286

 
$
493,434

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

 
233,800

 
227,953

 
233,989

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

 
2,061

 
2,117

 
1,992

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

 
235,861

 
230,070

 
235,981

Earnings per common share from continuing operations:
 
 
 
 
 
 
 
Basic
$
0.59

 
$
0.79

 
$
2.43

 
$
2.11

Diluted
$
0.59

 
$
0.78

 
$
2.40

 
$
2.09

Outstanding options to purchase 2.2 million and 3.8 million shares of common stock for the three months ended September 30, 2012 and September 25, 2011, respectively, and 2.3 million and 3.7 million shares of common stock for the nine months ended September 30, 2012 and September 25, 2011, respectively, were not included in the Company’s computation of dilutive securities because the exercise price was greater than the market price and therefore the effect would have been anti-dilutive.
The Company has a share-based compensation plan under which employees may be granted share-based awards including shares of restricted stock and restricted stock units (RSUs). Non-forfeitable dividends are paid on unvested shares of restricted stock and non-forfeitable dividend equivalents are paid on unvested RSUs. As such, shares of restricted stock and RSUs are considered participating securities under the two-class method of calculating earnings per share as described in ASC Topic 260, “Earnings per Share.” The two-class method of calculating earnings per share did not have a material impact on the Company’s earnings per share calculation for the three and nine month periods ending September 30, 2012 and September 25, 2011, respectively.


25

Table of Contents

14. Employee Benefit Plans
The Company has defined benefit pension plans and postretirement healthcare benefit plans, that cover substantially all employees of the Motorcycles segment. The Company also has unfunded supplemental employee retirement plan agreements (SERPA) with certain employees which were instituted to replace benefits lost under the Tax Revenue Reconciliation Act of 1993. Components of net periodic benefit costs were as follows (in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
2012
 
September 25,
2011
 
September 30,
2012
 
September 25,
2011
Pension and SERPA Benefits
 
 
 
 
 
 
 
Service cost
$
8,420

 
$
9,274

 
$
25,260

 
$
27,819

Interest cost
20,816

 
20,147

 
62,448

 
60,441

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

 
746

 
2,219

 
2,235

Net loss
10,969

 
7,550

 
32,906

 
22,659

Curtailment loss

 

 

 
236

Net periodic benefit cost
$
11,668

 
$
11,065

 
$
35,001

 
$
33,431

Postretirement Healthcare Benefits
 
 
 
 
 
 
 
Service cost
$
1,854

 
$
1,907

 
$
5,560

 
$
5,721

Interest cost
4,578

 
4,911

 
13,733

 
14,733

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

 
1,798

 
5,566

 
5,394

Net periodic benefit cost
$
4,968

 
$
5,301

 
$
14,901

 
$
15,903

During the first nine months of 2012 and 2011, the Company voluntarily contributed $200 million in cash to further fund its pension plans. No additional pension contributions are required in 2012. The Company expects it will continue to make on-going contributions related to current benefit payments for SERPA and postretirement healthcare plans.

15. Business Segments
The Company operates in two business segments: Motorcycles and Financial Services. The Company’s reportable segments are strategic business units that offer different products and services. They are managed separately based on the fundamental differences in their operations. Selected segment information is set forth below (in thousands):
 
Three months ended
 
Nine months ended
 
September 30,
2012
 
September 25,
2011
 
September 30,
2012
 
September 25,
2011
Motorcycles net revenue
$
1,089,268

 
$
1,232,699

 
$
3,931,684

 
$
3,635,487

Gross profit
377,904

 
415,391

 
1,398,231

 
1,235,525

Selling, administrative and engineering expense
223,982

 
222,258

 
709,015

 
660,890

Restructuring expense
9,170

 
12,429

 
26,841

 
49,022

Operating income from Motorcycles
144,752

 
180,704

 
662,375

 
525,613

Financial services income
161,027

 
164,557

 
477,962

 
492,296

Financial services expense
88,677

 
102,573

 
256,264

 
280,322

Operating income from Financial Services
72,350

 
61,984

 
221,698

 
211,974

Operating income
$
217,102

 
$
242,688

 
$
884,073

 
$
737,587


26

Table of Contents

16. Commitment and Contingencies
The Company is subject to lawsuits and other claims related to environmental, product and other matters. In determining required reserves related to these items, the Company carefully analyzes cases and considers the likelihood of adverse judgments or outcomes, as well as the potential range of possible loss. The required reserves are monitored on an ongoing basis and are updated based on new developments or new information in each matter.
Environmental Protection Agency Notice
In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and engaged in discussions with the EPA. It is possible that a result of the EPA’s investigation will be some form of enforcement action by the EPA that will seek a fine or other relief. However, at this time the Company does not know and cannot reasonably estimate the impact of any remedies the EPA might seek.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including an ongoing site-wide remedial investigation/feasibility study (RI/FS). In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.

In February 2002, the Company was advised by the EPA that it considers some of the Company’s remediation activities at the York facility to be subject to the EPA’s corrective action program under the Resource Conservation and Recovery Act (RCRA) and offered the Company the option of addressing corrective action under a RCRA facility lead agreement. In July 2005, the York facility was designated as the first site in Pennsylvania to be addressed under the “One Cleanup Program.” The program provides a more streamlined and efficient oversight of voluntary remediation by both PADEP and EPA and will be carried out consistent with the Agreement with the Navy. As a result, the RCRA facility lead agreement has been superseded.
The Company estimates that its share of the future Response Costs at the York facility will be approximately $1.8 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:
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.

27

Table of Contents

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

28

Table of Contents

 
Three months ended September 30, 2012
 
Motorcycles & Related
Products Operations
 
Financial
Services Operations
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and related products
$
1,091,887

 
$

 
$
(2,619
)
 
$
1,089,268

Financial services

 
161,438

 
(411
)
 
161,027

Total revenue
1,091,887

 
161,438

 
(3,030
)
 
1,250,295

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and related products cost of goods sold
711,364

 

 

 
711,364

Financial services interest expense

 
46,231

 

 
46,231

Financial services provision for credit losses

 
9,069

 

 
9,069

Selling, administrative and engineering expense
224,393

 
35,996

 
(3,030
)
 
257,359

Restructuring expense
9,170

 

 

 
9,170

Total costs and expenses
944,927

 
91,296

 
(3,030
)
 
1,033,193

Operating income
146,960

 
70,142

 

 
217,102

Investment income
1,447

 

 

 
1,447

Interest expense
11,438

 

 

 
11,438

Income before provision for income taxes
136,969

 
70,142

 

 
207,111

Provision for income taxes
47,859

 
25,251

 

 
73,110

Income from continuing operations
89,110

 
44,891

 

 
134,001

Income from discontinued operations, net of tax

 

 

 

Net income
$
89,110

 
$
44,891

 
$

 
$
134,001

 
Nine months ended September 30, 2012
 
Motorcycles & Related
Products Operations
 
Financial
Services Operations
 
Eliminations
 
Consolidated
Revenue:
 
 
 
 
 
 
 
Motorcycles and related products
$
3,939,673

 
$

 
$
(7,989
)
 
$
3,931,684

Financial services

 
478,187

 
(225
)
 
477,962

Total revenue
3,939,673

 
478,187

 
(8,214
)
 
4,409,646

Costs and expenses:
 
 
 
 
 
 
 
Motorcycles and related products cost of goods sold
2,533,453

 

 

 
2,533,453

Financial services interest expense

 
146,199

 

 
146,199

Financial services provision for credit losses

 
12,823

 

 
12,823

Selling, administrative and engineering expense
709,240

 
105,231

 
(8,214
)
 
806,257

Restructuring expense
26,841

 

 

 
26,841

Total costs and expenses
3,269,534

 
264,253

 
(8,214
)
 
3,525,573

Operating income
670,139

 
213,934

 

 
884,073

Investment income
230,611

 

 
(225,000
)
 
5,611

Interest expense
34,528

 

 

 
34,528

Income before provision for income taxes
866,222

 
213,934

 
(225,000
)
 
855,156

Provision for income taxes
224,854

 
77,016

 

 
301,870

Income from continuing operations
641,368

 
136,918

 
(225,000
)
 
553,286

Income from discontinued operations, net of tax

 

 

 

Net income
$
641,368

 
$
136,918

 
$
(225,000
)
 
$
553,286


29

Table of Contents

 
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


30

Table of Contents

 
September 30, 2012
 
Motorcycles & Related
Products Operations
 
Financial
Services Operations
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,048,429

 
$
746,712

 
$

 
$
1,795,141

Marketable securities
136,376

 

 

 
136,376

Accounts receivable, net
623,021

 

 
(366,828
)
 
256,193

Finance receivables, net

 
1,212,977

 

 
1,212,977

Restricted finance receivables held by variable interest entities, net

 
513,084

 

 
513,084

Inventories
379,129

 

 

 
379,129

Restricted cash held by variable interest entities

 
217,400

 

 
217,400

Other current assets
177,278

 
60,118

 

 
237,396

Total current assets
2,364,233

 
2,750,291

 
(366,828
)
 
4,747,696

Finance receivables, net

 
2,285,309

 

 
2,285,309

Restricted finance receivables held by variable interest entities, net

 
1,904,297

 

 
1,904,297

Property, plant and equipment, net
735,719

 
29,116

 

 
764,835

Goodwill
28,928

 

 

 
28,928

Other long-term assets
338,987

 
20,193

 
(75,062
)
 
284,118

 
$
3,467,867

 
$
6,989,206

 
$
(441,890
)
 
$
10,015,183

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
251,755

 
$
408,783

 
$
(366,828
)
 
$
293,710

Accrued liabilities
521,867

 
87,936

 
(3,725
)
 
606,078

Short-term debt

 
404,693

 

 
404,693

Current portion of long-term debt

 
437,938

 

 
437,938

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

 
559,256

 

 
559,256

Total current liabilities
773,622

 
1,898,606

 
(370,553
)
 
2,301,675

Long-term debt
303,000

 
3,036,604

 

 
3,339,604

Long-term debt held by variable interest entities

 
1,132,809

 

 
1,132,809

Pension liability
125,664

 

 

 
125,664

Postretirement healthcare benefits
261,564

 

 

 
261,564

Other long-term liabilities
134,509

 
15,995

 

 
150,504

Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Total shareholders’ equity
1,869,508

 
905,192

 
(71,337
)
 
2,703,363

 
$
3,467,867

 
$
6,989,206

 
$
(441,890
)
 
$
10,015,183


31

Table of Contents

 
December 31, 2011
 
Motorcycles & Related
Products Operations
 
Financial
Services Operations
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
Current assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
943,330

 
$
583,620

 
$

 
$
1,526,950

Marketable securities
153,380

 

 

 
153,380

Accounts receivable, net
393,615

 

 
(174,576
)
 
219,039

Finance receivables, net

 
1,168,603

 

 
1,168,603

Restricted finance receivables held by variable interest entities, net

 
591,864

 

 
591,864

Inventories
418,006

 

 

 
418,006

Restricted cash held by variable interest entities

 
229,655

 

 
229,655

Other current assets
167,423

 
67,286

 

 
234,709

Total current assets
2,075,754

 
2,641,028

 
(174,576
)
 
4,542,206

Finance receivables, net

 
1,754,441

 

 
1,754,441

Restricted finance receivables held by variable interest entities, net

 
2,271,773

 

 
2,271,773

Property, plant and equipment, net
779,330

 
30,129

 

 
809,459

Goodwill
29,081

 

 

 
29,081

Other long-term assets
322,379

 
17,460

 
(72,635
)
 
267,204

 
$
3,206,544

 
$
6,714,831

 
$
(247,211
)
 
$
9,674,164

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
 
 
Current liabilities:
 
 
 
 
 
 
 
Accounts payable
$
220,957

 
$
209,332

 
$
(174,576
)
 
$
255,713

Accrued liabilities
482,838

 
85,038

 
(3,704
)
 
564,172

Short-term debt

 
838,486

 

 
838,486

Current portion of long-term debt

 
399,916

 
 
 
399,916

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

 
640,331

 

 
640,331

Total current liabilities
703,795

 
2,173,103

 
(178,280
)
 
2,698,618

Long-term debt
303,000

 
2,093,871

 

 
2,396,871

Long-term debt held by variable interest entities

 
1,447,015

 

 
1,447,015

Pension liability
302,483

 

 

 
302,483

Postretirement healthcare benefits
268,582

 

 

 
268,582

Other long-term liabilities
126,036

 
14,303

 

 
140,339

Commitments and contingencies (Note 17)
 
 
 
 
 
 
 
Total shareholders’ equity
1,502,648

 
986,539

 
(68,931
)
 
2,420,256

 
$
3,206,544

 
$
6,714,831

 
$
(247,211
)
 
$
9,674,164


32

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


33

Table of Contents

 
Nine months ended September 30, 2012
 
Motorcycles & Related
Products Operations
 
Financial
Services Operations
 
Eliminations &
Adjustments
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Income from continuing operations
$
641,368

 
136,918

 
$
(225,000
)
 
$
553,286

Adjustments to reconcile income from continuing operations to cash provided by operating activities:
 
 
 
 
 
 
 
Depreciation
122,570

 
4,873

 

 
127,443

Amortization of deferred loan origination costs

 
58,438

 

 
58,438

Amortization of financing origination fees
355

 
7,107

 

 
7,462

Provision for employee long-term benefits
48,808

 
1,540

 

 
50,348

Contributions to pension and postretirement plans
(220,733
)
 

 

 
(220,733
)
Stock compensation expense
27,881

 
2,406

 

 
30,287

Net change in wholesale finance receivables

 

 
5,570

 
5,570

Provision for credit losses

 
12,823

 

 
12,823

Pension and postretirement healthcare plan curtailment and settlement expense

 

 

 

Foreign currency adjustments
8,692

 

 

 
8,692

Other, net
2,252

 
7,159

 

 
9,411

Change in current assets and current liabilities:
 
 
 
 
 
 
 
Accounts receivable
(230,156
)
 

 
192,252

 
(37,904
)
Finance receivables—accrued interest and other

 
1,597

 

 
1,597

Inventories
36,463

 

 

 
36,463

Accounts payable and accrued liabilities
86,513

 
205,381

 
(192,252
)
 
99,642

Restructuring reserves
(9,177
)
 

 

 
(9,177
)
Derivative instruments
739

 
(128
)
 

 
611

Other
(19,550
)
 
(2,211
)
 

 
(21,761
)
Total adjustments
(145,343
)
 
298,985

 
5,570

 
159,212

Net cash provided by operating activities of continuing operations
496,025

 
435,903

 
(219,430
)
 
712,498


34

Table of Contents

 
Nine months ended September 30, 2012
 
Motorcycles & Related
Products Operations
 
Financial
Services Operations
 
Eliminations &
Adjustments
 
Consolidated
Cash flows from investing activities of continuing operations:
 
 
 
 
 
 
 
Capital expenditures
(91,469
)
 
(3,860
)
 

 
(95,329
)
Origination of finance receivables

 
(5,315,732
)
 
2,987,079

 
(2,328,653
)
Collections of finance receivables

 
5,123,674

 
(2,992,649
)
 
2,131,025

Purchases of marketable securities
(4,993
)
 

 

 
(4,993
)
Sales and redemptions of marketable securities
23,046

 

 

 
23,046

Net cash (used by) provided by investing activities of continuing operations
(73,416
)
 
(195,918
)
 
(5,570
)
 
(274,904
)
Cash flows from financing activities of continuing operations:
 
 
 
 
 
 
 
Proceeds from issuance of medium-term notes

 
993,737

 

 
993,737

Loan to HDFS

 

 

 

Proceeds from securitization of debt

 
763,895

 

 
763,895

Repayments of securitization debt

 
(1,161,592
)
 

 
(1,161,592
)
Net decrease in credit facilities and unsecured commercial paper

 
(634,874
)
 

 
(634,874
)
Net borrowings of asset-backed commercial paper

 
182,131

 

 
182,131

Net repayments of asset-backed commercial paper

 
(6,538
)
 

 
(6,538
)
Net change in restricted cash

 
12,255

 

 
12,255

Dividends paid
(106,560
)
 
(225,000
)
 
225,000

 
(106,560
)
Purchase of common stock for treasury
(257,981
)
 

 

 
(257,981
)
Excess tax benefits from share based payments
16,390

 

 

 
16,390

Issuance of common stock under employee stock option plans
36,342

 

 

 
36,342

Net cash used by financing activities of continuing operations
(311,809
)
 
(75,986
)
 
225,000

 
(162,795
)
Effect of exchange rate changes on cash and cash equivalents of continuing operations
(5,701
)
 
(907
)
 

 
(6,608
)
Net (decrease) increase in cash and cash equivalents of continuing operations
105,099

 
163,092

 

 
268,191

Cash flows from discontinued operations:
 
 
 
 
 
 
 
Cash flows from operating activities of discontinued operations

 

 

 

Cash flows from investing activities of discontinued operations

 

 

 

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

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents
$
105,099

 
$
163,092

 
$

 
$
268,191

Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and cash equivalents—beginning of period
$
943,330

 
$
583,620

 
$

 
$
1,526,950

Cash and cash equivalents of discontinued operations—beginning of period

 

 

 

Net (decrease) increase in cash and cash equivalents
105,099

 
163,092

 

 
268,191

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

 

 

 

Cash and cash equivalents—end of period
$
1,048,429

 
$
746,712

 
$

 
$
1,795,141


35

Table of Contents

 
Nine months ended September 25, 2011
 
Motorcycles & Related
Products Operations
 
Financial
Services Operations
 
Eliminations &
Adjustments
 
Consolidated
Cash flows from operating activities:
 
 
 
 
 
 
 
Net income
$
487,296

 
$
131,138

 
$
(125,000
)
 
$
493,434

Loss from discontinued operations

 

 

 

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
(14,923
)
 
25,959

 

 
11,036

Change in current assets and current liabilities:
 
 
 
 
 
 
 
Accounts receivable
(132,823
)
 

 
113,350

 
(19,473
)
Finance receivables—accrued interest and other

 
7,069

 

 
7,069

Inventories
(19,451
)
 

 

 
(19,451
)
Accounts payable and accrued liabilities
197,233

 
125,929

 
(65,789
)
 
257,373

Restructuring reserves
2,664

 

 

 
2,664

Derivative instruments
(2,297
)
 
18

 

 
(2,279
)
Other
(930
)
 
46,070

 
(47,575
)
 
(2,435
)
Total adjustments
36,182

 
294,480

 
77,505

 
408,167

Net cash provided by (used by) operating activities of continuing operations
523,478

 
425,618

 
(47,495
)
 
901,601


36

Table of Contents

 
Nine months ended September 25, 2011
 
Motorcycles & Related
Products Operations
 
Financial
Services Operations
 
Eliminations &
Adjustments
 
Consolidated
Cash flows from investing activities of continuing operations:
 
 
 
 
 
 
 
Capital expenditures
(100,299
)
 
(5,816
)
 

 
(106,115
)
Origination of finance receivables

 
(4,884,163
)
 
2,720,019

 
(2,164,144
)
Collections of finance receivables

 
4,927,907

 
(2,797,538
)
 
2,130,369

Purchases of marketable securities
(142,653
)
 

 

 
(142,653
)
Sales and redemptions of marketable securities
104,975

 

 

 
104,975

Net cash (used by) provided by investing activities of continuing operations
(137,977
)
 
37,928

 
(77,519
)
 
(177,568
)
Cash flows from financing activities of continuing operations:
 
 
 
 
 
 
 
Proceeds from issuance of medium-term notes

 
394,277

 

 
394,277

        Proceeds from securitization debt

 
571,276

 

 
571,276

Repayments of securitization debt

 
(1,333,541
)
 

 
(1,333,541
)
Net borrowings of asset-backed commercial paper

 
(483
)
 

 
(483
)
Net decrease in credit facilities and unsecured commercial paper

 
182,058

 

 
182,058

Net change in restricted cash

 
50,679

 

 
50,679

Dividends paid
(82,557
)
 
(125,000
)
 
125,000

 
(82,557
)
Purchase of common stock for treasury
(97,456
)
 

 

 
(97,456
)
Excess tax benefits from share based payments
2,702

 

 

 
2,702

Issuance of common stock under employee stock option plans
7,763

 

 

 
7,763

Net cash (used by) provided by financing activities of continuing operations
(169,548
)
 
(260,734
)
 
125,000

 
(305,282
)
Effect of exchange rate changes on cash and cash equivalents of continuing operations
(11,815
)
 
(56
)
 
14

 
(11,857
)
Net (decrease) increase in cash and cash equivalents of continuing operations
204,138

 
202,756

 

 
406,894

Cash flows from discontinued operations:
 
 
 
 
 
 
 
Cash flows from operating activities of discontinued operations
(74
)
 

 

 
(74
)
Cash flows from investing activities of discontinued operations

 

 

 

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

 

 

 

 
(74
)
 

 

 
(74
)
Net (decrease) increase in cash and cash equivalents
$
204,064

 
$
202,756

 
$

 
$
406,820

Cash and cash equivalents:
 
 
 
 
 
 
 
Cash and cash equivalents—beginning of period
$
791,791

 
$
230,142

 
$

 
$
1,021,933

Cash and cash equivalents of discontinued operations—beginning of period

 

 

 

Net (decrease) increase in cash and cash equivalents
204,064

 
202,756

 

 
406,820

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

 

 

 

Cash and cash equivalents—end of period
$
995,855

 
$
432,898

 
$

 
$
1,428,753


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Harley-Davidson, Inc. is the parent company of the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). HDMC produces heavyweight cruiser and touring

37

Table of Contents

motorcycles. HDMC manufactures five families of motorcycles: Touring, Dyna®, Softail®, Sportster® and V-Rod®. HDFS provides wholesale and retail financing and insurance programs primarily to Harley-Davidson dealers and customers.
The Company operates in two business segments: Motorcycles & Related Products (Motorcycles) and Financial Services (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.
The “% Change” figures included in the “Results of Operations” section were calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.
Overview
The Company’s income from continuing operations was $134.0 million, or $0.59 per fully diluted share, for the third quarter of 2012 compared to $183.6 million, or $0.78 per fully diluted share, in the third quarter of 2011. Operating income from the Motorcycles segment was down $36.0 million or 19.9 % from last year’s third quarter on a 14.5% decrease in wholesale shipments of Harley-Davidson motorcycles. The decrease in motorcycle shipments was primarily due to a previously announced plan for lower third-quarter shipments during the launch of an Enterprise Resource Planning (ERP) system at the Company's York, Pennsylvania (York) assembly plant. Operating income from Financial Services in the third quarter of 2012 was $72.4 million compared to $62.0 million in the year-ago quarter reflecting continued credit loss performance improvement and lower interest expense.
During the third quarter of 2012, worldwide independent dealer retail sales of new Harley-Davidson motorcycles decreased 1.3% compared to 2011, including a 5.2% decrease in the U.S. and a 7.6% increase in international markets. Through nine months of 2012, retail sales grew 6.0%, including increases of 6.2% and 5.4% in the U.S. and international markets, respectively. The Company believes U.S. third-quarter retail sales were adversely affected by a limited availability of new motorcycles in July, August and early September resulting from the ERP implementation. The Company also believes third-quarter U.S. and, to a lesser extent, international retail sales were impacted by the re-timing of the Company's annual new model launch from late July to late August. In September, as U.S. dealer inventory returned to more appropriate levels and the new 2013 motorcycles became more available, retail sales responded positively and gained momentum as the Company exited the quarter. The Company continues to remain cautious about its expectations for retail sales globally in an environment of greater economic uncertainty, including in Europe where retail sales have been affected by the challenging Eurozone economy.
 
(1)
Note Regarding Forward-Looking Statements
The Company intends that certain matters discussed in this report are “forward-looking statements” intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such by reference to this footnote or because the context of the statement will include words such as the Company “believes,” “anticipates,” “expects,” “plans,” or “estimates” or words of similar meaning. Similarly, statements that describe future plans, objectives, outlooks, targets, guidance or goals are also forward-looking statements. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of this report. Certain of such risks and uncertainties are described in close proximity to such statements or elsewhere in this report, including under the caption “Cautionary Statements” and in Item 1A “Risk Factors” of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Shareholders, potential investors, and other readers are urged to consider these factors in evaluating the forward-looking statements and cautioned not to place undue reliance on such forward-looking statements. The forward-looking statements included in this report are made only as of the date of the filing of this report (November 8, 2012), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.




38

Table of Contents

Outlook(1) 
On October 23, 2012, the Company reaffirmed its expectation to ship 245,000 to 250,000 Harley-Davidson motorcycles to dealers and distributors worldwide in 2012. In addition, the Company announced that its full-year shipment estimate includes expected shipments of 44,500 to 49,500 motorcycles in the fourth quarter of 2012, down 2% to 12% from the prior year. The Company expects that 2012 fourth quarter shipments and production will be down compared to the prior year due to the implementation of flexible production capabilities at one of its facilities. As previously disclosed, beginning in early 2013, the Company expects to implement flexible production capabilities at York by adding flexible workers thus enabling the Company to increase manufacturing capacity in the first half of 2013 to more closely match retail demand. The Company expects to achieve the ability to maximize flexibility in the entire manufacturing system during 2014 when it expects that the same capability will be in place for the Kansas City, Missouri (Kansas City) operations. Consequently the Company expects U.S. retail inventory to be slightly lower on a year over year basis at the end of 2012 and 2013 which will be aligned with the seasonal low point for retail sales.
Also on October 23, 2012, the Company announced that it continues to expect 2012 full-year gross margin to be between 34.75% and 35.75%. The Company also expects 2012 fourth quarter gross margin percent to be roughly in line with the prior year's fourth quarter gross margin. The Company expects gross margin in the fourth quarter will include productivity gains and improved mix, which will be offset by unfavorable foreign currency exchange rates and significantly lower production levels as compared to the prior year. The Company expects fourth-quarter production to be down compared to prior year due to the planned implementation of flexible production as discussed above, as approximately 7,000 additional motorcycles produced in the fourth quarter of 2011 to support the ERP launch will not be repeated and there is a decrease of five days in the fiscal fourth quarter of 2012 as compared to last year's fourth quarter.
In addition, the Company announced on October 23, 2012 that it expects HDFS 2012 full-year operating profit to be slightly higher than 2011 as a result of continued strong credit performance and a more favorable cost of funds.
The Company also announced on October 23, 2012 that it continues to expect its full-year 2012 effective tax rate from continuing operations to be approximately 35.5%. This guidance excludes the effect of any potential future nonrecurring adjustments such as changes in tax legislation or audit settlements which are recorded as discrete items in the period in which they are settled.
Finally, on October 23, 2012, the Company confirmed its full-year capital expenditure estimate of $190 million to $210 million which includes approximately $35 million of capital expenditures related to restructuring.


Restructuring Activities(1) 
2011 Restructuring Plan
In December 2011, the Company made a decision to cease operations at New Castalloy, its Australian subsidiary and producer of cast motorcycle wheels and wheel hubs, and source those components through other existing suppliers. The Company expects the transition of supply from New Castalloy to be complete by mid-2013. The decision to close New Castalloy came as part of the Company’s overall long term strategy to develop world-class manufacturing capability throughout the Company by restructuring and consolidating operations for greater competitiveness, efficiency and flexibility. In connection with this decision, the Company will reduce its workforce by approximately 200 employees by mid-2013.
In February 2011, the Company’s unionized employees at its Kansas City 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 facility in December 2009, and allows for similar flexibility and increased production efficiency. Once the new contract is fully implemented, the production system in Kansas City, like Wisconsin and York, will include the addition of a flexible workforce component.

After taking actions to fully implement the new ratified labor agreement, the Company expects to have about 145 fewer full-time hourly unionized employees in its Kansas City facility than would be required under the prior contract.
2010 Restructuring Plan
In September 2010, the Company’s unionized employees in Wisconsin ratified three separate new seven-year labor agreements which took effect in April 2012 when the prior contracts expired. The new contracts are similar to the labor agreement ratified at York in December 2009 and allow for similar flexibility and increased production efficiency. Once the

39

Table of Contents

new contracts are fully implemented, the production system in Wisconsin, like York, will include the addition of a flexible workforce component.
After taking actions to fully implement the new ratified labor agreements, the Company expects to have about 250 fewer full-time hourly unionized employees in its Milwaukee-area facilities when the contracts are fully implemented in 2012 than would be required under the previous contract. In Tomahawk, the Company expects to have about 75 fewer full-time hourly unionized employees when the contract is fully implemented than would be required under the previous contract.
2009 Restructuring Plan
During 2009, in response to the U.S. economic recession and worldwide slowdown in consumer demand, the Company committed to a volume reduction and a combination of restructuring actions that were expected to be completed at various dates between 2009 and 2012. The actions were designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. The Company’s significant announced actions include the restructuring and transformation of its York production facility including the implementation of a new more flexible unionized labor agreement; consolidation of facilities related to engine and transmission production; outsourcing of certain distribution and transportation activities and exiting the Buell product line. In addition, during the third quarter of 2012, the Company implemented projects under this plan involving the outsourcing of select information technology activities and the consolidation of an administrative office in Michigan into its corporate headquarters in Milwaukee, Wisconsin.
The 2009 restructuring plan includes an estimated reduction of approximately 2,700 to 2,900 hourly production positions and approximately 800 non-production, primarily salaried positions within the Motorcycles segment and approximately 100 salaried positions in the Financial Services segment.
Restructuring Costs and Savings
During the first nine months of 2012, the Company incurred $26.8 million in restructuring expense related to its combined restructuring plan activities. This is in addition to $455.8 million in restructuring and impairment expense incurred in prior years since the restructuring activities were initiated in 2009. On October 23, 2012, the Company reaffirmed its estimate for restructuring expenses related to its combined restructuring plan activities that it expects to incur from 2009 to 2013 of $490 million to $510 million. The Company continues to expect approximately 35% of those amounts to be non-cash. The estimated restructuring expense includes estimated restructuring expenses of $35 million to $45 million in 2012, which was revised down from the previous estimate of $40 million to $50 million reflecting a $5 million shift in expected expense from 2012 to 2013. The Company has realized or estimates that it will realize cumulative savings from these restructuring activities, measured against 2008, as follows:
2009—$91 million (91% operating expense and 9% cost of sales) (actual);
2010—$172 million (64% operating expense and 36% cost of sales) (actual);
2011—$217 million (51% operating expense and 49% cost of sales) (actual);
2012—$275 million to $295 million (35-45% operating expense and 55-65% cost of sales) (estimated);
2013—$300 million to $320 million (30-40% operating expense and 60-70% cost of sales) (estimated); and
Ongoing annually upon completion—$315 million to $335 million (30-40% operating expense and 60-70% cost of sales) (estimated).




40

Table of Contents

Results of Operations for the Three Months Ended September 30, 2012
Compared to the Three Months Ended September 25, 2011
Consolidated Results
 
 
Three months ended
 
 
 
 
(in thousands, except earnings per share)
September 30,
2012
 
September 25,
2011
 
Increase (Decrease)
 
% Change
Operating income from motorcycles & related products
$
144,752

 
$
180,704

 
$
(35,952
)
 
(19.9
)
Operating income from financial services
72,350

 
61,984

 
10,366

 
16.7

Operating income
217,102

 
242,688

 
(25,586
)
 
(10.5
)
Investment income
1,447

 
2,479

 
(1,032
)
 
(41.6
)
Interest expense
11,438

 
11,270

 
168

 
1.5

Income before income taxes
207,111

 
233,897

 
(26,786
)
 
(11.5
)
Provision for income taxes
73,110

 
50,303

 
22,807

 
45.3

Income from continuing operations
134,001

 
183,594

 
(49,593
)
 
(27.0
)
Income from discontinued operations, net of income taxes

 

 

 
N/M

Net income
$
134,001

 
$
183,594

 
$
(49,593
)
 
(27.0
)
Diluted earnings per share from continuing operations
$
0.59

 
$
0.78

 
$
(0.19
)
 
(24.4
)
Diluted earnings per share from discontinued operations
$

 
$

 
$

 
N/M

Diluted earnings per share
$
0.59

 
$
0.78

 
$
(0.19
)
 
(24.4
)
Operating income for the Motorcycles segment during the third quarter of 2012 declined by $36.0 million compared to the third quarter 2011. The decrease was primarily due to a planned reduction in motorcycle shipments related to the ERP implementation at York, partially offset by higher gross margin percentage and lower restructuring costs Operating income for the Financial Services segment was higher during the third quarter of 2012 compared to the third quarter of 2011, driven by lower interest expense. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
The effective income tax rate for the third quarter of 2012 was 35.3% compared to 21.5% for the third quarter of 2011. The Company's third quarter 2011 effective tax rate was favorably impacted by discrete tax items totaling $29.7 million which consisted of a favorable settlement of an Internal Revenue Service (IRS) audit for tax years 2005 through 2008 and a favorable change in Wisconsin income tax law associated with certain net operating losses, partially offset by increases in certain income tax reserves.

41

Table of Contents


Motorcycles & Related Products Segment
Harley-Davidson Motorcycle Worldwide Retail Sales
Worldwide independent dealer retail sales of Harley-Davidson motorcycles decreased 1.3% during the third quarter of 2012 compared to the third quarter of 2011. Retail sales of Harley-Davidson motorcycles decreased 5.2% in the United States and increased 7.6% internationally in the quarter. The following table includes retail unit sales of Harley-Davidson motorcycles:
Harley-Davidson Motorcycle Worldwide Retail Sales(a) 
Heavyweight (651+cc)
 
Three months ended
 
 
 
 
 
September 30, 2012
 
September 30,
2011
 
Increase
(Decrease)
 
%
Change
North America Region
 
 
 
 
 
 
 
United States
40,402

 
42,640

 
(2,238
)
 
(5.2
)
Canada
2,578

 
2,458

 
120

 
4.9

Total North America Region
42,980

 
45,098

 
(2,118
)
 
(4.7
)
Europe, Middle East and Africa Region (EMEA)
 
 
 
 
 
 
 
Europe(b)
8,146

 
8,064

 
82

 
1.0

Other
1,330

 
1,243

 
87

 
7.0

Total Europe Region
9,476

 
9,307

 
169

 
1.8

Asia Pacific Region
 
 
 
 
 
 
 
Japan
2,941

 
2,868

 
73

 
2.5

Other
3,083

 
2,620

 
463

 
17.7

Total Asia Pacific Region
6,024

 
5,488

 
536

 
9.8

Latin America Region
2,573

 
1,945

 
628

 
32.3

Total Worldwide Retail Sales
61,053

 
61,838

 
(785
)
 
(1.3
)
 
(a)
Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning retail sales and this information is subject to revision. Only Harley-Davidson motorcycles are included in the table above.
(b)
Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.

Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
 
Three months ended
 
 
 
 
 
September 30,
2012
 
September 25,
2011
 
Decrease
 
%
Change
United States
33,152

 
62.8
%
 
41,066

 
66.5
%
 
(7,914
)
 
(19.3
)%
International
19,641

 
37.2
%
 
20,679

 
33.5
%
 
(1,038
)
 
(5.0
)
Harley-Davidson motorcycle units
52,793

 
100.0
%
 
61,745

 
100.0
%
 
(8,952
)
 
(14.5
)%
Touring motorcycle units
18,483

 
35.0
%
 
22,357

 
36.2
%
 
(3,874
)
 
(17.3
)%
Custom motorcycle units(a)
20,719

 
39.2
%
 
25,638

 
41.5
%
 
(4,919
)
 
(19.2
)
Sportster motorcycle units
13,591

 
25.8
%
 
13,750

 
22.3
%
 
(159
)
 
(1.2
)
Harley-Davidson motorcycle units
52,793

 
100.0
%
 
61,745

 
100.0
%
 
(8,952
)
 
(14.5
)%
 
(a)
Custom motorcycle units, as used in this table, include Dyna, Softail, VRSC and CVO models.

42

Table of Contents

The Company shipped 52,793 Harley-Davidson motorcycles worldwide during the third quarter of 2012, which was 14.5% lower than the third quarter of 2011 and in line with Company expectations. During the third quarter of 2012 shipments were lower as a result of lower production due to the implementation of a new ERP system at the York facility. The ERP implementation and lower production also impacted motorcycle product mix during the third quarter resulting in a decrease in touring and custom motorcycle shipments, which are the families of motorcycles manufactured at York, as a percent of total shipments compared to the prior year. U.S. dealer inventories of new Harley-Davidson motorcycles finished the third quarter up approximately 3,100 units compared to the end of the year ago period.


Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
 
Three months ended
 
 
 
 
 
September 30, 2012
 
September 25, 2011
 
Increase
(Decrease)
 
%
Change
Revenue:
 
 
 
 
 
 
 
Motorcycles
$
773,979

 
$
922,469

 
$
(148,490
)
 
(16.1
)%
Parts & Accessories
233,749

 
235,676

 
(1,927
)
 
(0.8
)
General Merchandise
75,632

 
69,333

 
6,299

 
9.1

Other
5,908

 
5,221

 
687

 
13.2

Total revenue
1,089,268

 
1,232,699

 
(143,431
)
 
(11.6
)
Cost of goods sold
711,364

 
817,308

 
(105,944
)
 
(13.0
)
Gross profit
377,904

 
415,391

 
(37,487
)
 
(9.0
)
Selling & administrative expense
192,351

 
188,935

 
3,416

 
1.8

Engineering expense
31,631

 
33,323

 
(1,692
)
 
(5.1
)
Restructuring expense
9,170

 
12,429

 
(3,259
)
 
(26.2
)
Operating expense
233,152

 
234,687

 
(1,535
)
 
(0.7
)
Operating income from motorcycles
$
144,752

 
$
180,704

 
$
(35,952
)
 
(19.9
)%
The following table includes the estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the third quarter of 2011 to the third quarter of 2012 (in millions):
 
Net
Revenue
 
Cost of
Goods Sold
 
Gross
Profit
September 25, 2011
$
1,232.7

 
$
817.3

 
$
415.4

Volume
(128.9
)
 
(81.4
)
 
(47.5
)
Price
5.7

 

 
5.7

Foreign currency exchange rates and hedging
(27.9
)
 
(29.1
)
 
1.2

Product mix
7.7

 
20.4

 
(12.7
)
Raw material prices

 
(2.5
)
 
2.5

Manufacturing costs

 
(13.3
)
 
13.3

Total
(143.4
)
 
(105.9
)
 
(37.5
)
September 30, 2012
$
1,089.3

 
$
711.4

 
$
377.9


The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the third quarter of 2011 to the third quarter of 2012:
On average, wholesale prices on the Company’s 2013 model-year motorcycles are higher than the prior model year resulting in the favorable impact on revenue and gross profit during the period.
Foreign currency exchange rates during the third quarter of 2012 resulted in a negative impact on net revenue, which was more than offset by the favorable impact of gains associated with foreign currency hedging (included in cost of goods sold) and the positive impact of lapping year-ago foreign currency losses. Over the next several quarters, the Company expects downward pressure on gross margins as a result of the devaluation the Company is experiencing in most of its key foreign currencies. The Company believes that

43

Table of Contents

the adverse financial impact of devaluation will be somewhat tempered in the near-term by foreign currency hedges.(1) 
Shipment mix changes positively impacted net revenue and resulted primarily from product mix changes within the Company’s General Merchandise and Parts & Accessories products. However, the impact of mix changes between motorcycle families on cost of goods sold more than offset the positive impact to revenue.
Raw material prices were lower in the third quarter of 2012 relative to the third quarter of 2011 primarily due to lower metals and lower fuel prices.
Manufacturing costs benefited from restructuring savings, partially offset by inflation and a higher fixed cost per unit as a result of lower production volumes. Temporary inefficiencies related to restructuring activities due in part to the ERP implementation were approximately $11 million in the third quarter of 2012 compared to approximately $7 million in the third quarter of 2011. The Company now expects temporary inefficiencies to be approximately $5 million to $8 million in the fourth quarter of 2012 for a total of approximately $32 million to $35 million for 2012.(1)
Operating expenses were relatively flat during the third quarter of 2012 compared to the third quarter of 2011. Lower restructuring expense and lower engineering expense was partially offset by higher selling and administrative expense. For further information regarding the Company’s previously announced restructuring activities, refer to Note 5 of Notes to Condensed Consolidated Financial Statements. The Company expects selling and administrative expenses in the fourth quarter of 2012 to be modestly lower than the same period last year due to the five fewer days in the 2012 fiscal quarter and the $12 million recall charge incurred in the fourth quarter of 2011.(1) The favorability from these items will be partially offset by a moderate increase in spending in the fourth quarter to support the Company's growth initiatives. The Company continues to expect its 2012 full-year selling and administrative expense will be higher than full-year 2011 expense as it invests in its growth initiatives, but it will be lower as a percent of revenue.(1) 
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
 
Three months ended
 
 
 
 
 
September 30, 2012
 
September 25, 2011
 
(Decrease)
Increase
 
%
Change
Interest income
$
147,638

 
$
150,861

 
$
(3,223
)
 
(2.1
)%
Other income
13,389

 
13,696

 
(307
)
 
(2.2
)
Financial services revenue
161,027

 
164,557

 
(3,530
)
 
(2.1
)
Interest expense
46,231

 
61,907

 
(15,676
)
 
(25.3
)
Provision for credit losses
9,069

 
6,189

 
2,880

 
46.5

Operating expenses
33,377

 
34,477

 
(1,100
)
 
(3.2
)
Financial services expense
88,677

 
102,573

 
(13,896
)
 
(13.5
)
Operating income from financial services
$
72,350

 
$
61,984

 
$
10,366

 
16.7
 %

Interest income for the three months ended September 30, 2012 decreased due to lower average finance receivables outstanding. Interest expense was lower primarily due to a more favorable cost of funds and the non-recurrence of an $8.7 million loss incurred in the prior year related to the extinguishment of medium-term notes.
The provision for credit losses was unfavorable in the third quarter of 2012 compared to the third quarter of 2011. The provision for credit losses related to wholesale motorcycle finance receivables increased by $4.8 million primarily due to an allowance release during the third quarter of 2011 resulting from favorable wholesale account performance. The provision for credit losses related to retail motorcycle finance receivables decreased by $1.3 million in the third quarter of 2012 compared to the third quarter of 2011 as retail credit loss performance continues to trend favorably.
Changes in the allowance for credit losses on finance receivables were as follows (in thousands):

44

Table of Contents

 
Three months ended
 
September 30,
2012
 
September 25,
2011
Balance, beginning of period
$
114,248

 
$
144,404

Provision for finance credit losses
9,069

 
6,189

Charge-offs
(19,873
)
 
(28,809
)
Recoveries
9,682

 
10,835

Balance, end of period
$
113,126

 
$
132,619

At September 30, 2012, the allowance for credit losses on finance receivables was $7.3 million for wholesale receivables and $105.9 million for retail receivables, which included $49.5 million related to finance receivables held by VIEs. See Note 7 of Notes to Condensed Consolidated Financial Statements for more information on the Company’s VIEs. At September 25, 2011, the allowance for credit losses on finance receivables was $7.6 million for wholesale receivables and $125.0 million for retail receivables, which included $64.7 million related to receivables held by VIEs.
HDFS’ periodic evaluation of the adequacy of the allowance for credit losses on finance receivables is generally based on HDFS’ past loan loss experience, known and inherent risks in the portfolio, current economic conditions and the estimated value of any underlying collateral.

45

Table of Contents


Results of Operations for the Nine Months Ended September 30, 2012
Compared to the Nine Months Ended September 25, 2011
Consolidated Results
 
Nine months ended
 
 
 
 
(in thousands, except earnings per share)
September 30,
2012
 
September 25,
2011
 
Increase
(Decrease)
 
%
Change
Operating income from motorcycles & related products
$
662,375

 
$
525,613

 
$
136,762

 
26.0
 %
Operating income from financial services
221,698

 
211,974

 
9,724

 
4.6

Operating income
884,073

 
737,587

 
146,486

 
19.9

Investment income
5,611

 
5,625

 
(14
)
 
(0.2
)
Interest expense
34,528

 
34,101

 
427

 
1.3

Income before income taxes
855,156

 
709,111

 
146,045

 
20.6

Provision for income taxes
301,870

 
215,677

 
86,193

 
40.0

Income from continuing operations
553,286

 
493,434

 
59,852

 
12.1

Loss from discontinued operations, net of income taxes

 

 

 
N/M

Net income
$
553,286

 
$
493,434

 
$
59,852

 
12.1
 %
Diluted earnings per share from continuing operations
$
2.40

 
$
2.09

 
$
0.31

 
14.8
 %
Diluted loss per share from discontinued operations
$

 
$

 
$

 
N/M

Diluted earnings per share
$
2.40

 
$
2.09

 
$
0.31

 
14.8
 %
Operating income for the Motorcycles segment during the first nine months of 2012 improved by $136.8 million compared to the first nine months of 2011 primarily due to increased motorcycle shipments, increased gross margin percent and lower restructuring costs, partially offset by increased selling, general and administrative expenses. Operating income for the Financial Services segment improved by $9.7 million during the first nine months of 2012 compared to the first nine months of 2011 primarily due to lower interest expense, partially offset by lower interest income. Please refer to the “Motorcycles and Related Products Segment” and “Financial Services Segment” discussions following for a more detailed discussion of the factors affecting operating income.
The effective income tax rate for the first nine months of 2012 was 35.3% compared to 30.4% for the first nine months of 2011. The Company's effective tax rate for the first nine months of 2011 was favorably impacted by discrete tax items totaling $29.7 million which consisted of a favorable settlement of an Internal Revenue Service (IRS) audit for tax years 2005 through 2008 and a favorable change in Wisconsin income tax law associated with certain net operating losses, partially offset by increases in certain income tax reserves.


46

Table of Contents

Motorcycles & Related Products Segment
Harley-Davidson Motorcycle Worldwide Retail Sales
Worldwide independent dealer retail sales of Harley-Davidson motorcycles increased 6.0% during the first nine months of 2012 compared to the first nine months of 2011. Retail sales of Harley-Davidson motorcycles increased 6.2% in the United States and 5.4% internationally in the first nine months of 2012. On an industry-wide basis, the heavyweight (651+cc) portion of the market was up 3.8% in the United States and down 8.0% in Europe for the nine months ended September 30, 2012 when compared to the same period in 2011. The following table includes retail unit sales of Harley-Davidson motorcycles:

Harley-Davidson Motorcycle Worldwide Retail Sales(a) 
Heavyweight (651+cc)
 
Nine months ended
 
 
 
 
 
September 30, 2012
 
September 30,
2011
 
Increase
(Decrease)
 
%
Change
North America Region
 
 
 
 
 
 
 
United States
135,925

 
127,930

 
7,995

 
6.2
 %
Canada
9,526

 
9,288

 
238

 
2.6

Total North America Region
145,451

 
137,218

 
8,233

 
6.0

Europe, Middle East and Africa Region (EMEA)
 
 
 
 
 
 
 
Europe(b)
31,667

 
33,337

 
(1,670
)
 
(5.0
)
Other
4,539

 
3,947

 
592

 
15.0

Total Europe Region
36,206

 
37,284

 
(1,078
)
 
(2.9
)
Asia Pacific Region
 
 
 
 
 
 
 
Japan
7,915

 
7,827

 
88

 
1.1

Other
9,859

 
7,745

 
2,114

 
27.3

Total Asia Pacific Region
17,774

 
15,572

 
2,202

 
14.1

Latin America Region
7,013

 
4,755

 
2,258

 
47.5

Total Worldwide Retail Sales
206,444

 
194,829

 
11,615

 
6.0
 %
 
(a)
Data source for retail sales figures shown above is new sales warranty and registration information provided by Harley-Davidson dealers and compiled by the Company. The Company must rely on information that its dealers supply concerning retail sales and this information is subject to revision. Only Harley-Davidson motorcycles are included in the table above.
(b)
Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom.
The following table includes industry retail motorcycle registration data:
Heavyweight Motorcycle Registration Data(a) 
 
Nine months ended
 
 
 
 
 
September 30, 2012
 
September 30,
2011
 
Increase
 
%
Change
United States(b)
239,940

 
231,125

 
8,815

 
3.8
 %
 
Nine months ended
 
 
 
 
 
September 30, 2012
 
September 30,
2011
 
Decrease
 
%
Change
Europe(c)
241,702

 
262,614

 
(20,912
)
 
(8.0
)%
 
(a)
Heavyweight data includes street legal 651+cc models. Street legal 651+cc models include on-highway, dual purpose models and three-wheeled vehicles.
(b)
United States industry data is derived from information provided by Motorcycle Industry Council (MIC). This third party data is subject to revision and update.

47

Table of Contents

(c)
Europe data includes Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, Switzerland, and the United Kingdom. Industry retail motorcycle registration data includes 651+cc models derived from information provided by Association des Constructeurs Europeens de Motocycles (ACEM), an independent agency. Europe market data is reported on a one-month lag. This third-party data is subject to revision and update.
Motorcycle Unit Shipments
The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:
 
Nine months ended
 
 
 
 
 
September 30,
2012
 
September 25,
2011
 
Increase
 
%
Change
United States
131,119

 
65.4
%
 
118,555

 
65.0
%
 
12,564

 
10.6
%
International
69,439

 
34.6
%
 
63,832

 
35.0
%
 
5,607

 
8.8

Harley-Davidson motorcycle units
200,558

 
100.0
%
 
182,387

 
100.0
%
 
18,171

 
10.0
%
Touring motorcycle units
77,859

 
38.8
%
 
70,410

 
38.6
%
 
7,449

 
10.6
%
Custom motorcycle units(a)
78,430

 
39.1
%
 
71,526

 
39.2
%
 
6,904

 
9.7

Sportster motorcycle units
44,269

 
22.1
%
 
40,451

 
22.2
%
 
3,818

 
9.4

Harley-Davidson motorcycle units
200,558

 
100.0
%
 
182,387

 
100.0
%
 
18,171

 
10.0
%
 
(a)
Custom motorcycle units, as used in this table, include Dyna, Softail, VRSC and CVO models.
The Company shipped 200,558 Harley-Davidson motorcycles worldwide during the first nine months of 2012, which was 10.0% higher than the first nine months of 2011. This was in line with Company expectations and resulted in slightly higher U.S. dealer inventory at the end of the first nine months of 2012 compared to the end of the first nine months of 2011.

Segment Results
The following table includes the condensed statements of operations for the Motorcycles segment (in thousands):
 
Nine months ended
 
 
 
 
 
September 30, 2012
 
September 25, 2011
 
Increase
(Decrease)
 
%
Change
Revenue:
 
 
 
 
 
 
 
Motorcycles
$
2,993,657

 
$
2,762,563

 
$
231,094

 
8.4
 %
Parts & Accessories
698,381

 
655,387

 
42,994

 
6.6

General Merchandise
225,375

 
204,809

 
20,566

 
10.0

Other
14,271

 
12,728

 
1,543

 
12.1

Total revenue
3,931,684

 
3,635,487

 
296,197

 
8.1

Cost of goods sold
2,533,453

 
2,399,962

 
133,491

 
5.6

Gross profit
1,398,231

 
1,235,525

 
162,706

 
13.2

Selling & administrative expense
616,070

 
560,971

 
55,099

 
9.8

Engineering expense
92,945

 
99,919

 
(6,974
)
 
(7.0
)
Restructuring expense
26,841

 
49,022

 
(22,181
)
 
(45.2
)
Operating expense
735,856

 
709,912

 
25,944

 
3.7

Operating income from motorcycles
$
662,375

 
$
525,613

 
$
136,762

 
26.0
 %

48

Table of Contents

The following table includes the estimated impact of significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from the first nine months of 2011 to the first nine months of 2012 (in millions):
 
Net
Revenue
 
Cost of
Goods Sold
 
Gross
Profit
September 25, 2011
$
3,635.5

 
$
2,400.0

 
$
1,235.5

Volume
338.7

 
233.1

 
105.6

Price
23.8

 

 
23.8

Foreign currency exchange rates and hedging
(64.0
)
 
(60.5
)
 
(3.5
)
Product mix
(2.3
)
 
9.9

 
(12.2
)
Raw material prices

 
(5.6
)
 
5.6

Manufacturing costs

 
(43.4
)
 
43.4

Total
296.2

 
133.5

 
162.7

September 30, 2012
$
3,931.7

 
$
2,533.5

 
$
1,398.2


The following factors affected the comparability of net revenue, cost of goods sold and gross profit from the first nine months of 2011 to first nine months of 2012:
On average, wholesale prices on the Company’s 2012 and 2013 model-year motorcycles are higher than the prior model years resulting in the favorable impact on revenue and gross profit during the period.
Foreign currency exchange rates during the first nine months of 2012 resulted in a negative impact on net revenue and were mostly offset by the favorable impact of gains associated with foreign currency hedging (included in cost of goods sold) when compared to the same period last year.
Shipment mix changes negatively impacted revenue and cost of goods sold. The decrease in gross profit resulted primarily from product mix changes both between and within the Company’s motorcycle families.
Raw material prices were lower in the first nine months of 2012 relative to the first nine months of 2011 primarily due to lower metals costs and lower fuel prices.
Manufacturing costs benefited from restructuring savings and a lower fixed cost per unit as a result of higher production volumes. Temporary inefficiencies related to restructuring activities due in part to the ERP implementation were approximately $27 million in the first nine months of 2012 in line with temporary inefficiencies in the first nine months of 2011.
The net increase in operating expense was primarily due to higher selling and administrative expense driven by incremental investments to support the Company’s growth initiatives, higher warranty and recall costs and six more days in the first nine fiscal months of 2012 compared to the first nine fiscal months of 2011. The higher selling and administrative expenses were partially offset by lower restructuring expense related to the Company’s previously announced restructuring activities as well as lower engineering expense. For further information regarding the Company’s previously announced restructuring activities, refer to Note 5 of Notes to Condensed Consolidated Financial Statements.
Financial Services Segment
Segment Results
The following table includes the condensed statements of operations for the Financial Services segment (in thousands):
 
Nine months ended
 
 
 
 
 
September 30, 2012
 
September 25, 2011
 
(Decrease)
Increase
 
%
Change
Interest income
$
436,447

 
$
450,826

 
$
(14,379
)
 
(3.2
)%
Other income
41,515

 
41,470

 
45

 
0.1

Financial services revenue
477,962

 
492,296

 
(14,334
)
 
(2.9
)
Interest expense
146,199

 
176,933

 
(30,734
)
 
(17.4
)
Provision for credit losses
12,823

 
5,005

 
7,818

 
156.2

Operating expenses
97,242

 
98,384

 
(1,142
)
 
(1.2
)
Financial services expense
256,264

 
280,322

 
(24,058
)
 
(8.6
)
Operating income from financial services
$
221,698

 
$
211,974

 
$
9,724

 
4.6
 %

49

Table of Contents

Interest income for the nine months ended September 30, 2012 decreased due to lower average finance receivables outstanding. Interest expense was lower primarily due to a more favorable cost of funds and the non-recurrence of an $8.7 million loss incurred in the prior year related to the extinguishment of medium-term notes.
The provision for credit losses related to retail motorcycle finance receivables increased by $6.1 million in the first nine months of 2012 compared to the first nine months of 2011. During the first nine months of 2012, there was an $8.7 million allowance release as compared to a $33.0 million allowance release in the first nine months of 2011. Both releases were the result of our favorable credit loss performance. The provision for credit losses related to wholesale motorcycle finance receivables increased by $5.6 million primarily due to smaller allowance releases during the first nine months of 2012 compared to the first nine months of 2011 as a result of significant favorable shifts in risk classification in 2011.

Annualized losses on HDFS’ retail motorcycle loans were 0.65% during the first nine months of 2012 compared to 1.11% in the first nine months of 2011. The decrease in credit losses from 2011 was primarily due to a lower frequency of loss. The 30-day delinquency rate for retail motorcycle loans at September 30, 2012 decreased to 3.24% from 3.73% at September 25, 2011.

Changes in the allowance for finance credit losses on finance receivables were as follows (in thousands):
 
Nine months ended
 
September 30,
2012
 
September 25,
2011
Balance, beginning of period
$
125,449

 
$
173,589

Provision for finance credit losses
12,823

 
5,005

Charge-offs
(62,779
)
 
(87,233
)
Recoveries
37,633

 
41,258

Balance, end of period
$
113,126

 
$
132,619

Other Matters

Contractual Obligations
The Company has updated its Contractual Obligations table as of September 30, 2012 to reflect the new projected principal and interest payments for the remainder of 2012 and beyond as follows (in thousands):
 
2012
 
2013 - 2014
 
2015 - 2016
 
Thereafter
 
Total
Principal payments on debt
$
933,743

 
$
1,620,413

 
$
1,874,194

 
$
1,445,950

 
$
5,874,300

Interest payments on debt
55,105

 
343,972

 
195,530

 
97,567

 
692,174

 
$
988,848

 
$
1,964,385

 
$
2,069,724

 
$
1,543,517

 
$
6,566,474

Interest obligations include the impact of interest rate hedges outstanding as of September 30, 2012. Interest for floating rate instruments, as calculated above, assumes rates in effect at September 30, 2012 remain constant.
As of September 30, 2012, there have been no other material changes to the Company’s summary of expected payments for significant contractual obligations under the caption “Contractual Obligations” in Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.


Commitments 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

50

Table of Contents

In December 2009, the Company received formal, written requests for information from the United States Environmental Protection Agency (EPA) regarding: (i) certificates of conformity for motorcycle emissions and related designations and labels, (ii) aftermarket parts, and (iii) warranty claims on emissions related components. The Company promptly submitted written responses to the EPA’s inquiry and engaged in discussions with the EPA. It is possible that a result of the EPA’s investigation will be some form of enforcement action by the EPA that will seek a fine or other relief. However, at this time the Company does not know and cannot reasonably estimate the impact of any remedies the EPA might seek.
York Environmental Matters:
The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the cleanup of soil and groundwater contamination at its York, Pennsylvania facility. The York facility was formerly used by the U.S. Navy and AMF prior to the purchase of the York facility by the Company from AMF in 1981. Although the Company is not certain as to the full extent of the environmental contamination at the York facility, it has been working with the Pennsylvania Department of Environmental Protection (PADEP) since 1986 in undertaking environmental investigation and remediation activities, including an ongoing site-wide remedial investigation/feasibility study (RI/FS). In January 1995, the Company entered into a settlement agreement (the Agreement) with the Navy. The Agreement calls for the Navy and the Company to contribute amounts into a trust equal to 53% and 47%, respectively, of future costs associated with environmental investigation and remediation activities at the York facility (Response Costs). The trust administers the payment of the Response Costs incurred at the York facility as covered by the Agreement.
In February 2002, the Company was advised by the EPA that it considers some of the Company’s remediation activities at the York facility to be subject to the EPA’s corrective action program under the Resource Conservation and Recovery Act (RCRA) and offered the Company the option of addressing corrective action under a RCRA facility lead agreement. In July 2005, the York facility was designated as the first site in Pennsylvania to be addressed under the “One Cleanup Program.” The program provides a more streamlined and efficient oversight of voluntary remediation by both PADEP and EPA and will be carried out consistent with the Agreement with the Navy. As a result, the RCRA facility lead agreement has been superseded.
The Company estimates that its share of the future Response Costs at the York facility will be approximately $1.8 million and has established a reserve for this amount which is included in accrued liabilities in the Condensed Consolidated Balance Sheets(1). 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:
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.




51

Table of Contents

Liquidity and Capital Resources as of September 30, 2012(1) 
Over the long-term, the Company expects that its business model will continue to generate cash that will allow it to invest in the business, fund future growth opportunities and return value to shareholders. The Company believes the Motorcycles operations will continue to be primarily funded through cash flows generated by operations. The Company’s Financial Services operations have been funded with unsecured debt, unsecured commercial paper, asset-backed commercial paper conduit facilities and committed unsecured bank facilities and through the term asset-backed securitization market.
The Company’s strategy is to maintain a minimum of twelve months of its projected liquidity needs through a combination of cash and marketable securities and availability under credit facilities. The following table summarizes the Company’s cash and marketable securities and availability under credit facilities (in thousands):
 
September 30, 2012
Cash and cash equivalents
$
1,795,141

Marketable securities
136,376

Total cash and cash equivalents and marketable securities
1,931,517

Global credit facilities
945,307

Asset-backed U.S. commercial paper conduit facility(a)
600,000

Asset-backed Canadian commercial paper conduit facility(b)
26,445

Total availability under credit facilities
1,571,752

Total
$
3,503,269

 

(a)
The U.S. commercial paper conduit facility expires on September 13, 2013.
(b)
The Canadian commercial paper conduit facility expires on August 30, 2013 and is limited to Canadian denominated borrowings.
The Company recognizes that it must continue to monitor and adjust to changes in the lending environment for its Financial Services operations. The Company intends to continue with a diversified funding profile through a combination of short-term and long-term funding vehicles and to pursue a variety of sources to obtain cost-effective funding. The Financial Services operations could be negatively affected by higher costs of funding and increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets. These negative consequences could in turn adversely affect the Company’s business and results of operations in various ways, including through higher costs of capital, reduced funds available through its Financial Services operations to provide loans to independent dealers and their retail customers, and dilution to existing shareholders through the use of alternative sources of capital.

Cash Flow Activity
The following table summarizes the cash flow activity of continuing operations for the periods indicated (in thousands):
 
Nine months ended
 
September 30, 2012
 
September 25, 2011
Net cash provided by operating activities
$
712,498

 
$
901,601

Net cash used by investing activities
(274,904
)
 
(177,568
)
Net cash used by financing activities
(162,795
)
 
(305,282
)
Effect of exchange rate changes on cash and cash equivalents
(6,608
)
 
(11,857
)
Net increase in cash and cash equivalents of continuing operations
$
268,191

 
$
406,894

Operating Activities of Continuing Operations
The decrease in cash provided by operating activities for the first nine months of 2012 compared to the first nine months of 2011 was due to increased HDFS wholesale lending activity driven by the timing of motorcycle shipments in the third quarter of 2012 and changes in working capital primarily due to a decrease in accrued liabilities. The Company made a voluntary $200.0 million contribution to the Company’s pension plans in the first quarter of 2012 and in the first quarter of 2011. No additional pension contributions are required in 2012. The Company expects it will continue to make on-going contributions related to current benefit payments for SERPA and postretirement healthcare plans.

52

Table of Contents


Investing Activities of Continuing Operations
The Company’s investing activities consist primarily of capital expenditures, net changes in finance receivables and short-term investment activity. Capital expenditures were $95.3 million in the first nine months of 2012 compared to $106.1 million in the same period last year. Net cash flows from finance receivables, net for the first nine months of 2012 were $163.9 million lower than in the same period last year as a result of an increase in retail motorcycle loan originations during 2012. A net decrease in net cash out-flows related to marketable securities during the first nine months of 2011 resulted in higher investing cash flows of approximately $56 million in 2012.
Financing Activities of Continuing Operations
The Company’s financing activities consist primarily of share repurchases, dividend payments and debt activity. Cash outflows from share repurchases were $258.0 million in the first nine months of 2012 compared to $97.5 million for the same period last year. Share repurchases during the first nine months of 2012 included 5.5 million shares of common stock related to discretionary share repurchases as well as shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock awards. Share repurchases during the first nine months of 2011 included 2.8 million shares of common stock related to discretionary share repurchases as well as shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock awards. As of September 30, 2012, there were 15.3 million shares remaining on a board-approved share repurchase authorization.
The Company paid dividends of $0.465 and $0.350 per share totaling $106.6 million and $82.6 million during the first nine months of 2012 and 2011, respectively.
Financing cash flows related to debt activity resulted in net cash inflows of $136.8 million in the first nine months of 2012 compared to net cash outflows of $186.4 million in the first nine months of 2011. The Company’s total outstanding debt consisted of the following (in thousands):
 
September 30,
2012
 
September 25,
2011
Global credit facilities
$

 
$
159,438

Unsecured commercial paper
404,693

 
813,571

Asset-backed Canadian commercial paper conduit facility
176,855

 

Medium-term notes
3,297,687

 
2,303,567

Senior unsecured notes
303,000

 
303,000

 
4,182,235

 
3,579,576

Term asset-backed securitization debt held by VIEs
1,692,065

 
1,995,073

Total debt
$
5,874,300

 
$
5,574,649

To access the debt capital markets, the Company relies on credit rating agencies to assign short-term and long-term credit ratings. Generally, lower credit ratings result in higher borrowing costs and reduced access to debt capital markets. A credit rating agency may change or withdraw the Company’s ratings based on its assessment of the Company’s current and future ability to meet interest and principal repayment obligations. The Company’s short-term debt ratings affect its ability to issue unsecured commercial paper. The Company’s short-and long-term debt ratings as of September 30, 2012 were as follows:

 
Short-Term
  
Long-Term
  
Outlook
Moody’s
P2
  
Baa1
  
Positive
Standard & Poor’s
A2
  
BBB+
  
Positive
Fitch
F2
  
A-
  
Stable
 
Global Credit Facilities – On April 13, 2012, the Company and HDFS entered into a new $675.0 million five-year credit facility to refinance and replace a $675.0 million three-year credit facility that was due to mature in April 2013. The new five-year credit facility matures in April 2017. The Company and HDFS also have a $675.0 million four-year credit facility which matures in April 2015. The new five-year credit facility and the four-year credit facility (together, the "Global Credit Facilities") bear interest at various variable interest rates, which may be adjusted upward or downward depending on certain criteria, such as credit ratings. The Global Credit Facilities also require the Company to pay a fee based upon the average daily

53

Table of Contents

unused portion of the aggregate commitments under the Global Credit Facilities. The Global Credit Facilities are committed facilities and primarily used to support HDFS’ unsecured commercial paper program.
Unsecured Commercial Paper – Subject to limitations, HDFS could issue unsecured commercial paper of up to $1.35 billion as of September 30, 2012 supported by Global Credit Facilities discussed above. Outstanding unsecured commercial paper may not exceed the unused portion of the Global Credit Facilities. Maturities may range up to 365 days from the issuance date. HDFS intends to repay unsecured commercial paper as it matures with additional unsecured commercial paper or through other means, such as borrowing under the Global Credit Facilities, borrowing under its asset-backed U.S. commercial paper conduit facility or through the use of operating cash flow.(1) 
Medium-Term Notes – The Company had the following medium-term notes (collectively, the Notes) issued and outstanding at September 30, 2012 (in thousands):
Principal Amount
 
Rate
 
Issue Date
 
Maturity Date
$400,000
 
5.25%
 
December 2007
 
December 2012
$500,000
 
5.75%
 
November 2009
 
December 2014
$600,000
 
1.15%
 
September 2012
 
September 2015
$450,000
 
3.875%
 
March 2011
 
March 2016
$400,000
 
2.70%
 
January 2012
 
March 2017
$950,131
 
6.80%
 
May 2008
 
June 2018
The Notes provide for semi-annual interest payments and principal due at maturity. In September 2012, HDFS issued $600.0 million of medium-term notes which mature in 2015 and have an annual interest rate of 1.15%. During the three months ended September 25, 2011, HDFS repurchased an aggregate $44.4 million of its $1.0 billion 6.80% medium-term notes which mature in June 2018. As a result, HDFS recognized an $8.7 million loss on the extinguishment of debt in Financial services interest expense including unamortized discounts and fees. Unamortized discounts on the Notes reduced the balance by $2.4 million and $2.1 million at September 30, 2012 and September 25, 2011, respectively.
The Company plans to fund the repayment of the $400 million medium-term notes that mature in December 2012 with cash on hand.(1) 
Senior Unsecured Notes – In February 2009, the Company issued $600.0 million of senior unsecured notes in an underwritten offering. The senior unsecured notes provide for semi-annual interest payments and principal due at maturity. The senior unsecured notes mature in February 2014 and have an annual interest rate of 15%. During the fourth quarter of 2010, the Company repurchased $297.0 million of the $600.0 million senior unsecured notes at a price of $380.8 million.
Asset-Backed U.S. Commercial Paper Conduit Facility VIE – In September 2012, HDFS amended and restated its revolving asset-backed U.S. commercial paper conduit facility ("U.S. Conduit") which provides for a total aggregate commitment of $600.0 million. The agreement has terms that are similar to those of prior agreement and is for the same amount. At September 30, 2012, HDFS had no outstanding borrowings under the U.S. Conduit.
HDFS is considered to have the power over the significant activities of the U.S. Conduit VIE 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 VIE 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 this VIE within its consolidated financial statements.

This debt provides for interest on outstanding principal based on prevailing commercial paper rates, or LIBOR plus a specified margin to the extent the advance is not funded by a conduit lender through the issuance of commercial paper. The U.S Conduit also provides for an unused commitment fee based on the unused portion of the total aggregate commitment of $600.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivable collateral are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, as of September 30, 2012, the U.S. Conduit expires September 13, 2013.
Asset-Backed Canadian Commercial Paper Conduit Facility – In August 2012, HDFS entered into an agreement with a Canadian bank-sponsored asset-backed commercial paper conduit facility (“Canadian Conduit”). Under the agreement, the Canadian Conduit is contractually committed, at HDFS' option, to purchase from HDFS eligible Canadian retail motorcycle finance receivables for proceeds up to C$200 million. In August 2012, HDFS transferred $209.1 million of Canadian retail motorcycle finance receivables for proceeds of $183.0 million. HDFS maintains effective control over the transferred assets

54

Table of Contents

and therefore the transaction does not meet accounting sale requirements under ASC Topic 860, "Transfers and Servicing". As such, this transaction is treated as a secured borrowing. The transferred assets are restricted as collateral for the payment of the debt. At September 30, 2012, $194.0 million of finance receivables and $11.6 million of cash were restricted as collateral for the payment of $176.9 million of debt.
The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$200 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the Canadian Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the Canadian Conduit has an expiration date of August 30, 2013. The contractual maturity of the debt is approximately 5 years. Approximately $38.0 million of the debt was classified as current at September 30, 2012.

Term Asset-Backed Securitization VIEs – During the third quarter of 2012, the Company issued $675.3 million of secured notes through one term asset-backed securitization transaction. Additionally, during the second quarter of 2012, the Company issued $89.5 million of secured notes through the sale of notes that had been previously retained as part of certain 2009 and 2011 term asset-backed securitization transactions. These notes were sold at a premium, and at September 30, 2012, the unaccreted premium associated with these notes was $1.5 million. During the third quarter of 2011, the Company issued $573.4 million of secured notes through one term asset-backed securitization transaction.
For all of the term asset-backed securitization transactions, HDFS transferred U.S. retail motorcycle finance receivables to separate VIEs, which in turn issued secured notes, with various maturities and interest rates to investors. All of the notes held by the VIEs are secured by future collections of the purchased U.S. retail motorcycle finance receivables. The U.S. retail motorcycle finance receivables included in the term asset-backed securitization transactions are not available to pay other obligations or claims of HDFS’ creditors until the associated debt and other obligations are satisfied. Cash and cash equivalent balances held by the VIEs are used only to support the securitizations. There is no amortization schedule for the secured notes; however, the debt is reduced monthly as available collections on the related retail motorcycle finance receivables are applied to outstanding principal. The secured notes’ contractual lives have various maturities ranging from 2012 to 2019.
HDFS is considered to have the power over the significant activities of its term asset-backed securitization VIEs due to its role as servicer. Servicing fees are typically not considered potentially significant variable interests in a VIE. However, HDFS retains a residual interest in the VIEs in the form of a debt security, which gives HDFS the right to receive benefits that could be potentially significant to the VIE. Therefore, the Company is the primary beneficiary and consolidates all of these VIEs within its consolidated financial statements.
As of September 30, 2012, the assets of the VIEs totaled $2.63 billion, of which $2.42 billion of finance receivables and $205.8 million of cash were restricted as collateral for the payment of $1.69 billion of obligations under the secured notes. Approximately $559.3 million of the obligations under the secured notes were classified as current at September 30, 2012, based on the contractual maturities of the restricted finance receivables.
Intercompany Borrowing –HDFS has a revolving credit line with the Company whereby HDFS may borrow up to $210.0 million from the Company at a market interest rate. As of September 30, 2012 and September 25, 2011, HDFS had no outstanding borrowings owed to the Company under this agreement.
During the second quarter of 2012, HDFS and the Company entered into a $200.0 million Term Loan Agreement which provided for monthly interest payments based on the prevailing commercial paper rates and principal due at maturity in August 2012 or upon earlier demand by the Company. HDFS repaid the $200.0 million Term Loan Agreement in July 2012. During the second quarter of 2011, HDFS and the Company entered in a $200.0 million Term Loan Agreement, which was outstanding at June 26, 2011, and matured and was repaid by HDFS during the third quarter of 2011. The Term Loan balances and related interest are eliminated in the Company’s consolidated financial statements.
The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support to maintain HDFS’ fixed-charge coverage at 1.25 and minimum net worth of $40.0 million. Support may be provided at the Company’s option as capital contributions or loans. Accordingly, certain debt covenants may restrict the Company’s ability to withdraw funds from HDFS outside the normal course of business. No amount has ever been provided to HDFS under the support agreement.


55

Table of Contents

Operating and Financial Covenants – HDFS and the Company are subject to various operating and financial covenants related to the Global Credit Facilities and various operating covenants under the Notes and the U.S. and Canadian asset-backed commercial paper conduit facilities. The more significant covenants are described below.
The covenants limit the Company’s and HDFS’ ability to:
incur certain additional indebtedness;
assume or incur certain liens;
participate in certain mergers, consolidations, liquidations or dissolutions; and
purchase or hold margin stock.
Under the financial covenants of the Global Credit Facilities, the consolidated debt to equity ratio of HDFS cannot exceed 10.0 to 1.0. In addition, the Company must maintain a minimum interest coverage ratio of at least 2.25 to 1.0 for each fiscal quarter through June 2013 and 2.5 to 1.0 for each fiscal quarter thereafter. No financial covenants are required under the Notes or the U.S. or Canadian asset-backed commercial paper conduit facilities.
At September 30, 2012, HDFS and the Company remained in compliance with all of the then existing covenants.
Cash Flows from Discontinued Operations
There were no significant cash flows from discontinued operations during the nine months ended September 30, 2012 and September 25, 2011, respectively.


Cautionary Statements
The Company’s ability to meet the targets and expectations noted depends upon, among other factors, the Company's ability to:
(i)
execute its business strategy,
(ii)
effectively execute the Company’s restructuring plans within expected costs and timing,
(iii)
implement and manage enterprise-wide information technology solutions, including solutions at its manufacturing facilities, and secure data contained in those systems,
(iv)
adjust to fluctuations in foreign currency exchange rates, interest rates and commodity prices,
(v)
anticipate the level of consumer confidence in the economy,
(vi)
manage through inconsistent economic conditions, including changing capital, credit and retail markets,
(vii)
continue to realize production efficiencies at its production facilities and manage operating costs including materials, labor and overhead,
(viii)
manage production capacity and production changes,
(ix)
manages changes and prepare for requirements in legislative and regulatory environments for its products, services and operations,
(x)
successfully implement with our labor unions the agreements that we have executed with them that we believe will provide flexibility and cost-effectiveness to accomplish restructuring goals and long-term competitiveness,
(xi)
manage risks that arise through expanding international operations and sales,
(xii)
manage supply chain issues, including any unexpected interruptions or price increases caused by raw material shortages or natural disasters,
(xiii)
provide products, services and experiences that are successful in the marketplace,
(xiv)
develop and implement sales and marketing plans that retain existing retail customers and attract new retail customers in an increasingly competitive marketplace,
(xv)
manage the risks that our independent dealers may have difficulty obtaining capital and managing through changing economic conditions and consumer demand,
(xvi)
continue to have access to reliable sources of capital funding and adjust to fluctuations in the cost of capital,
(xvii)
manage the credit quality, the loan servicing and collection activities, and the recovery rates of HDFS’ loan portfolio,
(xviii)
sell all of its motorcycles and related products and services to its independent dealers,
(xix)
continue to develop the capabilities of its distributor and dealer network,
(xx)
adjust to healthcare inflation and reform, pension reform and tax changes,
(xxi)
retain and attract talented employees, and
(xxii)
detect any issues with our motorcycles or manufacturing processes to avoid delays in new model launches, recall campaigns, increased warranty costs or litigation.

56

Table of Contents


In addition, the Company could experience delays or disruptions in its operations as a result of work stoppages, strikes, natural causes, terrorism or other factors. Other factors are described in risk factors that the Company has disclosed in documents previously filed with the Securities and Exchange Commission. Many of these risk factors are impacted by the current changing capital, credit and retail markets and the Company’s ability to manage through inconsistent economic conditions.
The Company’s ability to sell its motorcycles and related products and services and to meet its financial expectations also depends on the ability of the Company’s independent dealers to sell its motorcycles and related products and services to retail customers. The Company depends on the capability and financial capacity of its independent dealers and distributors to develop and implement effective retail sales plans to create demand for the motorcycles and related products and services they purchase from the Company.
In addition, the Company’s independent dealers and distributors may experience difficulties in operating their businesses and selling Harley-Davidson motorcycles and related products and services as a result of weather, economic conditions or other factors.
HDFS has experienced historically low levels of retail credit losses and has no assurance that this will continue. The Company believes that HDFS' retail credit losses may increase over time due to changing consumer credit behavior and HDFS' efforts to increase prudently structured loan approvals in the near-prime and sub-prime lending environment.
Refer to “Risk Factors” under Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2011 for a discussion of additional risk factors and a more complete discussion of some of the cautionary statements noted above.

57

Table of Contents

Item 3. Quantitative and Qualitative Disclosures about Market Risk
Refer to the Company's Annual Report on Form 10-K for the year ended December 31, 2011 for a complete discussion of the Company's market risk. There have been no material changes to the market risk information included in the Company's Annual Report on Form 10-K for the year December 31, 2011.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
In accordance with Rule 13a-15(b) of the Securities Exchange Act of 1934 (the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q, the Company’s management evaluated, with the participation of the Company’s Chairman, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer, the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based upon their evaluation of these disclosure controls and procedures, the Chairman, President and Chief Executive Officer and the Senior Vice President and Chief Financial Officer have concluded that the disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time period specified in the Securities and Exchange Commission rules and forms, and to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its Chairman, President and Chief Executive Officer and Senior Vice President and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

Changes in Internal Controls
During the quarter ended September 30, 2012, the Company implemented a new ERP system at its York manufacturing facility. The implementation included sales order processing, procurement, manufacturing, costing, general ledger and financial reporting processes. The Company followed a system development process that required significant pre-implementation planning, design and testing to ensure an ongoing effective control environment. There were no other changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


58

Table of Contents

PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
The information required under this Item 1 of Part II is contained in Item 1 of Part I of the Quarterly report on From 10-Q in Note 16 of the Notes to Condensed Consolidated Financial Statements, and such information is incorporated herein by reference in this Item 1 of Part II.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
The following table contains detail related to the repurchase of common stock based on the date of trade during the quarter ended September 30, 2012:
2012
Fiscal Month
Total Number of
Shares Purchased (a)
 
Average Price
Paid per Share
 
Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
 
Maximum Number of
Shares that May Yet Be
Purchased Under the
Plans or Programs
July 2 to August 5
791,769

 
$
45

 
791,769

 
16,414,882

August 6 to September 2
643,902

 
$
42

 
643,902

 
15,807,383

September 3 to September 30
518,200

 
$
44

 
518,200

 
15,298,437

Total
1,953,871

 
$
44

 
1,953,871

 
 
 
(a)
Includes discretionary share repurchases and shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock awards
The Company has an authorization (originally adopted in December 1997) by its Board of Directors to repurchase shares of its outstanding common stock under which the cumulative number of shares repurchased, at the time of any repurchase, shall not exceed the sum of (1) the number of shares issued in connection with the exercise of stock options occurring on or after January 1, 2004 plus (2) one percent of the issued and outstanding common stock of the Company on January 1 of the current year, adjusted for any stock split. The Company made discretionary share repurchases of 1,944,950 shares during the quarter ended September 30, 2012 under this authorization. As of September 30, 2012, no shares remained under this authorization.
In December 2007, the Company’s Board of Directors separately authorized the Company to buy back up to 20.0 million shares of its common stock with no dollar limit or expiration date. As of September 30, 2012, 15.3 million shares remained under this authorization.
From time to time, the Company may enter into a Rule 10b5-1 trading plan for the purpose of repurchasing shares under the 1997 authorization.
The Harley-Davidson, Inc. 2009 Incentive Stock Plan and predecessor stock plans permit participants to satisfy all or a portion of the statutory federal, state and local withholding tax obligations arising in connection with plan awards by electing to (a) have the Company withhold shares otherwise issuable under the award, (b) tender back shares received in connection with such award or (c) deliver other previously owned shares, in each case having a value equal to the amount to be withheld. During the third quarter of 2012, the Company acquired 8,921 shares of common stock that employees presented to the Company to satisfy withholding taxes in connection with the vesting of restricted stock awards.

Item 6 – Exhibits
Refer to the Exhibit Index on page 61 of this report.


59

Table of Contents

SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
HARLEY-DAVIDSON, INC.
 
 
Date: November 8, 2012
/s/ John A. Olin
 
John A. Olin
 
Senior Vice President and
 
Chief Financial Officer
 
(Principal financial officer)
 
Date: November 8, 2012
/s/ Mark R. Kornetzke
 
Mark R. Kornetzke
 
Chief Accounting Officer
 
(Principal accounting officer)

60

Table of Contents



Harley-Davidson, Inc.
Exhibit Index to Form 10-Q
 
Exhibit No.
  
Description
 
 
10.1*
 
Form of Aircraft Time Sharing Agreement that the Company entered into with Keith E. Wandell, Matthew S. Levatich, John A. Olin, Paul J. Jones and Lawrence G. Hund
 
 
 
31.1
  
Chief Executive Officer Certification pursuant to Rule 13a-14(a)
 
 
31.2
  
Chief Financial Officer Certification pursuant to Rule 13a-14(a)
 
 
32.1
  
Written Statement of the Chief Executive Officer and the Chief Financial Officer pursuant to 18 U.S.C. §1350
 
 
101
  
Financial statements from the quarterly report on Form 10-Q of Harley-Davidson, Inc. for the quarter ended September 30, 2012, filed on November 8, 2012, formatted in XBRL: (i) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Statements of Comprehensive Income; (iii) the Condensed Consolidated Balance Sheets; (iv) the Condensed Consolidated Statements of Cash Flows; and (v) the Notes to Condensed Consolidated Financial Statements.



_______

Instruments relating to the Company's revolving asset-backed commercial paper conduit facilities described in this report need not be filed herewith pursuant to Item 601(b) (4) (v) of Regulation S-K. The registrant, by signing this report, agrees to furnish the Securities and Exchange Commission, upon its request, with a copy of any such instrument.

* Represents a management contract or compensatory plan, contract or arrangement in which a director or named executive officer of the Company participated.

61