10-Q 1 hog-03312013x10q.htm 10-Q HOG - 03.31.2013 - 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 March 31, 2013
¨
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 May 3, 2013: 224,138,816 shares



Harley-Davidson, Inc.

Form 10-Q

For The Quarter Ended March 31, 2013
 



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
 
March 31,
2013
 
April 1,
2012
Revenue:
 
 
 
Motorcycles and related products
$
1,414,248

 
$
1,273,369

Financial services
156,965

 
156,322

Total revenue
1,571,213

 
1,429,691

Costs and expenses:
 
 
 
Motorcycles and related products cost of goods sold
894,806

 
816,859

Financial services interest expense
40,554

 
51,256

Financial services provision for credit losses
13,110

 
9,014

Selling, administrative and engineering expense
271,499

 
265,653

Restructuring expense
2,938

 
11,451

Total costs and expenses
1,222,907

 
1,154,233

Operating income
348,306

 
275,458

Investment income
1,615

 
1,933

Interest expense
11,391

 
11,495

Income before provision for income taxes
338,530

 
265,896

Provision for income taxes
114,401

 
93,861

Net income
$
224,129

 
$
172,035

Earnings per common share:
 
 
 
Basic
$
1.00

 
$
0.75

Diluted
$
0.99

 
$
0.74

Cash dividends per common share
$
0.210

 
$
0.155

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


3


HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three months ended
 
March 31, 2013
 
April 1,
2012
Net Income
$
224,129

 
$
172,035

Other comprehensive income, net of tax
 
 
 
     Foreign currency translation adjustments
(10,570
)
 
4,661

     Derivative financial instruments
10,601

 
(4,826
)
     Marketable securities
(244
)
 
1,013

     Pension and postretirement benefit plans
10,239

 
7,933

Total other comprehensive income, net of tax
10,026

 
8,781

Comprehensive income
234,155

 
180,816

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



4



HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
 
(Unaudited)
 
 
 
(Unaudited)
 
March 31,
2013
 
December 31,
2012
 
April 1,
2012
ASSETS
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
1,018,759

 
$
1,068,138

 
$
1,276,337

Marketable securities
135,246

 
135,634

 
134,946

Accounts receivable, net
259,673

 
230,079

 
264,272

Finance receivables, net
2,074,036

 
1,743,045

 
1,885,489

Inventories
416,050

 
393,524

 
467,941

Restricted cash
197,025

 
188,008

 
246,995

Other current assets
232,190

 
292,508

 
237,550

Total current assets
4,332,979

 
4,050,936

 
4,513,530

Finance receivables, net
3,959,903

 
4,038,807

 
3,991,914

Property, plant and equipment, net
790,245

 
815,464

 
791,064

Goodwill
28,861

 
29,530

 
29,740

Other long-term assets
223,133

 
236,036

 
279,099

 
$
9,335,121

 
$
9,170,773

 
$
9,605,347

LIABILITIES AND SHAREHOLDERS’ EQUITY
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable
$
360,018

 
$
257,386

 
$
355,902

Accrued liabilities
464,317

 
513,591

 
577,619

Short-term debt
687,705

 
294,943

 
629,143

Current portion of long-term debt
715,143

 
437,162

 
1,020,563

Total current liabilities
2,227,183

 
1,503,082

 
2,583,227

Long-term debt
3,892,469

 
4,370,544

 
3,918,384

Pension liability
152,132

 
330,294

 
118,212

Postretirement healthcare liability
274,597

 
278,062

 
265,871

Other long-term liabilities
131,692

 
131,167

 
144,994

Commitments and contingencies (Note 16)
 
 
 
 
 
Total shareholders’ equity
2,657,048

 
2,557,624

 
2,574,659

 
$
9,335,121

 
$
9,170,773

 
$
9,605,347

 
(Unaudited)
 
 
 
(Unaudited)
 
March 31,
2013
 
December 31,
2012
 
April 1,
2012
Balances held by consolidated variable interest entities (Note 6)
 
 
 
 
 
     Current finance receivables, net
$
432,079

 
$
470,134

 
$
546,350

     Other assets
$
5,229

 
$
5,288

 
$
5,932

     Non-current finance receivables, net
$
1,402,541

 
$
1,631,435

 
$
1,971,878

     Restricted cash
$
185,657

 
$
176,290

 
$
246,995

     Current portion of long-term debt
$
375,835

 
$
399,477

 
$
620,624

     Long-term debt
$
892,737

 
$
1,048,299

 
$
1,133,696

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

5


HARLEY-DAVIDSON, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
Three months ended
 
March 31,
2013
 
April 1,
2012
Net cash used by operating activities (Note 3)
$
(108,489
)
 
$
(73,616
)
Cash flows from investing activities:
 
 
 
Capital expenditures
(22,261
)
 
(24,680
)
Origination of finance receivables
(622,373
)
 
(645,247
)
Collections on finance receivables
665,520

 
681,904

Sales and redemptions of marketable securities

 
20,042

Other
6,656

 

Net cash provided by investing activities
27,542

 
32,019

Cash flows from financing activities:
 
 
 
Proceeds from issuance of medium-term notes

 
397,377

Repayments of securitization debt
(178,923
)
 
(333,026
)
Net increase (decrease) in credit facilities and unsecured commercial paper
392,564

 
(224,508
)
Net borrowings of asset-backed commercial paper
(17,063
)
 

Net change in restricted cash
(9,017
)
 
(17,340
)
Dividends paid
(47,308
)
 
(35,943
)
Purchase of common stock for treasury
(126,411
)
 
(20,745
)
Excess tax benefits from share-based payments
14,468

 
7,962

Issuance of common stock under employee stock option plans
13,887

 
16,281

Net cash provided (used) by financing activities
42,197

 
(209,942
)
Effect of exchange rate changes on cash and cash equivalents
(10,629
)
 
926

Net decrease in cash and cash equivalents
$
(49,379
)
 
$
(250,613
)
Cash and cash equivalents:
 
 
 
Cash and cash equivalents—beginning of period
$
1,068,138

 
$
1,526,950

Net decrease in cash and cash equivalents
(49,379
)
 
(250,613
)
Cash and cash equivalents—end of period
$
1,018,759

 
$
1,276,337

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


6


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 March 31, 2013 and April 1, 2012, the condensed consolidated statements of operations for the three month periods then ended, the condensed consolidated statements of comprehensive income for the three month periods then ended and the condensed consolidated statements of cash flows for the three month periods then ended.
Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) and U.S. generally accepted accounting principles (U.S. GAAP) for interim financial reporting. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.
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.
2. New Accounting Standards
Accounting Standards Recently Adopted
In February 2013, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2013-02 Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (ASU No. 2013-02). ASU No. 2013-02 requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under U.S. GAAP to be reclassified in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that provide additional detail about those amounts. The Company adopted ASU No. 2013-02 effective on January 1, 2013. The required new disclosures are presented in Note 10.

7


3. Additional Balance Sheet and Cash Flow Information
Marketable Securities
The Company’s marketable securities consisted of the following (in thousands):
 
March 31,
2013
 
December 31,
2012
 
April 1,
2012
Available-for-sale:
 
 
 
 
 
Corporate bonds
$
135,246

 
$
135,634

 
$
134,946

 
$
135,246

 
$
135,634

 
$
134,946

The Company’s available-for-sale securities are carried at fair value with any unrealized gains or losses reported in other comprehensive income. During the first three months of 2013 and 2012, the Company recognized gross unrealized losses and gains in other comprehensive income of $0.4 million and $1.6 million, respectively, or $0.2 million and $1.0 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 1 to 38 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):
 
March 31,
2013
 
December 31,
2012
 
April 1,
2012
Components at the lower of FIFO cost or market
 
 
 
 
 
Raw materials and work in process
$
121,481

 
$
111,335

 
$
113,127

Motorcycle finished goods
203,275

 
205,660

 
252,979

Parts and accessories and general merchandise
137,184

 
122,418

 
145,362

Inventory at lower of FIFO cost or market
461,940

 
439,413

 
511,468

Excess of FIFO over LIFO cost
(45,890
)
 
(45,889
)
 
(43,527
)
 
$
416,050

 
$
393,524

 
$
467,941



8



Operating Cash Flow
The reconciliation of net income to net cash provided by operating activities is as follows (in thousands):
 
Three months ended
 
March 31,
2013
 
April 1,
2012
Cash flows from operating activities:
 
 
 
Net income
$
224,129

 
$
172,035

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
42,850

 
43,203

Amortization of deferred loan origination costs
19,753

 
18,547

Amortization of financing origination fees
2,204

 
2,743

Provision for employee long-term benefits
16,684

 
17,293

Contributions to pension and postretirement plans
(182,047
)
 
(206,832
)
Stock compensation expense
11,096

 
11,744

Net change in wholesale finance receivables related to sales
(336,927
)
 
(151,046
)
Provision for credit losses
13,110

 
9,014

Foreign currency adjustments
9,846

 
(2,911
)
Other, net
(1,805
)
 
1,505

Changes in current assets and liabilities:
 
 
 
Accounts receivable, net
(36,165
)
 
(43,745
)
Finance receivables—accrued interest and other
1,246

 
3,299

Inventories
(28,613
)
 
(47,168
)
Accounts payable and accrued liabilities
79,861

 
117,460

Restructuring reserves
(12,388
)
 
1,296

Derivative instruments
(342
)
 
(486
)
Other
69,019

 
(19,567
)
Total adjustments
(332,618
)
 
(245,651
)
Net cash provided by operating activities
$
(108,489
)
 
$
(73,616
)

4. 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 in 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 the end of 2013.
Under the 2011 New Castalloy Restructuring Plan, restructuring expenses consist of employee severance and termination costs, accelerated depreciation and other related costs. The Company expects to incur approximately $31 million in restructuring charges related to the transition through 2013. Approximately 35% of the $31 million will be non-cash charges. On a cumulative basis, the Company has incurred $25.2 million of restructuring expense under the 2011 New Castalloy Restructuring Plan as of March 31, 2013, of which $3.0 million was incurred during the three months ended March 31, 2013.
In February 2011, the Company’s unionized employees at its facility in Kansas City, Missouri ratified a new seven-year labor agreement. The new agreement took effect on August 1, 2011. The new contract is similar to the labor agreements ratified at the Company’s Wisconsin facilities in September 2010 and its York, Pennsylvania facility in December 2009, and allows for similar flexibility, increased production efficiency and the addition of a flexible workforce component.

9


The actions to implement the new ratified labor agreement (2011 Kansas City Restructuring Plan) result in approximately 145 fewer full-time hourly unionized employees in its Kansas City facility than would have been required under the previous contract. The Company expects all actions related to the 2011 Kansas City Restructuring Plan to be completed by the end of 2013.
Under the 2011 Kansas City Restructuring Plan, restructuring expenses consist of employee severance and termination costs and other related costs. On a cumulative basis, the Company has incurred $6.9 million of restructuring expense under the 2011 Kansas City Restructuring Plan as of March 31, 2013 of which approximately 10% is non-cash.

The following table summarizes the Motorcycles segment’s 2011 Kansas City Restructuring Plan and 2011 New Castalloy Restructuring Plan reserve activity and balances as recorded in accrued liabilities (in thousands):
 
Three months ended March 31, 2013
 
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
$
2,259

 
$

 
$
2,259

 
$
9,306

 
$

 
$
145

 
$
9,451

 
$
11,710

Restructuring expense

 

 

 
474

 
2,092

 
444

 
3,010

 
3,010

Utilized—cash

 

 

 
(1,416
)
 

 
(456
)
 
(1,872
)
 
(1,872
)
Utilized—non-cash
(790
)
 

 
(790
)
 

 
(2,092
)
 

 
(2,092
)
 
(2,882
)
Balance, end of period
$
1,469

 
$

 
$
1,469

 
$
8,364

 
$

 
$
133

 
$
8,497

 
$
9,966

 
 
Three months ended April 1, 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
542

 

 
542

 
571

 
2,099

 
349

 
3,019

 
3,561

Utilized—cash

 

 

 
(156
)
 

 
(361
)
 
(517
)
 
(517
)
Utilized—non-cash

 

 

 

 
(2,099
)
 

 
(2,099
)
 
(2,099
)
Balance, end of period
$
4,665

 
$

 
$
4,665

 
$
8,843

 
$

 
$
293

 
$
9,136

 
$
13,801

2010 Restructuring Plan
In September 2010, the Company’s unionized employees in Wisconsin ratified three separate new seven-year labor agreements which took effect in April 2012 when the prior contracts expired. The new contracts are similar to the labor agreement ratified at the Company’s York, Pennsylvania facility in December 2009 and allow for similar flexibility and increased production efficiency and the addition of a flexible workforce component.
The actions to implement the new ratified labor agreements (2010 Restructuring Plan) result in approximately 250 fewer full-time hourly unionized employees in its Milwaukee-area facilities than would have been required under the previous contracts and approximately 75 fewer full-time hourly unionized employees in its Tomahawk, Wisconsin facility than would have been required under the previous contract. The Company expects all actions related to the 2010 Restructuring Plan to be completed by the end of 2013.
Under the 2010 Restructuring Plan, restructuring expenses consist of employee severance and termination costs and other related costs. On a cumulative basis, the Company has incurred $59.7 million of restructuring expense under the 2010 Restructuring Plan as of March 31, 2013, of which approximately 45% is non-cash.



10


The following table summarizes the Motorcycles segment’s 2010 Restructuring Plan reserve activity and balances as recorded in accrued liabilities (in thousands):
 
Three months ended March 31, 2013
 
Three months ended April 1, 2012
 
Employee
Severance and
Termination Costs
 
Employee
Severance and
Termination Costs
Balance, beginning of period
$
10,156

 
$
20,361

Restructuring expense

 
1,886

Utilized—cash
(9,607
)
 
(26
)
Balance, end of period
$
549

 
$
22,221

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 were expected to be completed at various dates between 2009 and 2012. The actions were designed to reduce administrative costs, eliminate excess capacity and exit non-core business operations. The Company’s announced actions include the restructuring and transformation of its York, Pennsylvania production facility including the implementation of a new more flexible unionized labor agreement which allows for the addition of a flexible workforce component; consolidation of facilities related to engine and transmission production; outsourcing of certain distribution and transportation activities and exiting the Buell product line. In addition, the Company implemented projects under this plan involving the outsourcing of select information technology activities and the consolidation of an administrative office in Michigan into its corporate headquarters in Milwaukee, Wisconsin.
The 2009 Restructuring Plan results in a reduction of approximately 2,700 to 2,900 hourly production positions and approximately 800 non-production, primarily salaried positions within the Motorcycles segment and approximately 100 salaried positions in the Financial Services segment. The Company expects all actions related to the 2009 Restructuring Plan to be completed by the end of 2013.
Under the 2009 Restructuring Plan, restructuring expenses consist of employee severance and termination costs, accelerated depreciation on the long-lived assets that will be exited as part of the 2009 Restructuring Plan and other related costs. The Company expects total costs related to the 2009 Restructuring Plan to result in restructuring and impairment expenses of approximately $397 million, of which approximately 30% are expected to be non-cash. On a cumulative basis, the Company has incurred $395.3 million of restructuring and impairment expense under the 2009 Restructuring Plan as of March 31, 2013.


11



The following table summarizes the Company’s 2009 Restructuring Plan reserve activity and balances recorded in accrued liabilities (in thousands):
 
Three months ended March 31, 2013
 
Motorcycles & Related Products
 
Employee
Severance and
Termination Costs
 
Accelerated
Depreciation
 
Other
 
Total
Balance, beginning of period
$
5,196

 
$

 
$
161

 
$
5,357

Restructuring expense

 

 
638

 
638

Utilized—cash
(808
)
 

 
(623
)
 
(1,431
)
Utilized—non-cash

 

 

 

Non-cash reserve release
(710
)
 

 

 
(710
)
Balance, end of period
$
3,678

 
$

 
$
176

 
$
3,854

 
 
 
 
 
 
 
 
 
Three months ended April 1, 2012
 
Motorcycles & Related Products
 
Employee
Severance and
Termination Costs
 
Accelerated
Depreciation
 
Other
 
Total
Balance, beginning of period
$
10,089

 
$

 
$

 
$
10,089

Restructuring expense
323

 

 
5,681

 
6,004

Utilized—cash
(1,846
)
 

 
(5,669
)
 
(7,515
)
Utilized—non-cash

 

 

 

Balance, end of period
$
8,566

 
$

 
$
12

 
$
8,578

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 three months of 2013, 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.
5. 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, consisted of the following (in thousands):
 
March 31,
2013
 
December 31,
2012
 
April 1,
2012
Retail
$
4,981,488

 
$
5,073,115

 
$
5,043,584

Wholesale
1,159,243

 
816,404

 
956,322

 
6,140,731

 
5,889,519

 
5,999,906

Allowance for credit losses
(106,792
)
 
(107,667
)
 
(122,503
)
 
$
6,033,939

 
$
5,781,852

 
$
5,877,403

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 at a level that is adequate to cover losses of principal inherent in the existing portfolio. The allowance for credit losses 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.


12


Changes in the allowance for credit losses on finance receivables by portfolio were as follows (in thousands):
 
Three months ended March 31, 2013
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
101,442

 
$
6,225

 
$
107,667

Provision for credit losses
11,085

 
2,025

 
13,110

Charge-offs
(25,243
)
 

 
(25,243
)
Recoveries
11,258

 

 
11,258

Balance, end of period
$
98,542

 
$
8,250

 
$
106,792

 
Three months ended April 1, 2012
 
Retail
 
Wholesale
 
Total
Balance, beginning of period
$
116,112

 
$
9,337

 
$
125,449

Provision for credit losses
8,705

 
309

 
9,014

Charge-offs
(25,852
)
 

 
(25,852
)
Recoveries
13,892

 

 
13,892

Balance, end of period
$
112,857

 
$
9,646

 
$
122,503

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. Portions of the allowance for credit losses are specified to cover estimated losses on finance receivables specifically identified for impairment. The unspecified portion of the allowance for credit losses covers estimated losses on finance receivables which are collectively reviewed for impairment.

The retail portfolio primarily consists of a large number of small balance, homogeneous finance receivables. HDFS performs a periodic and systematic collective evaluation of the adequacy of the retail allowance for credit losses. HDFS utilizes loss forecast models which consider a variety of factors including, but not limited to, historical loss trends, origination or vintage analysis, known and inherent risks in the portfolio, the value of the underlying collateral, recovery rates, and current economic conditions including items such as unemployment rates. Retail finance receivables are not evaluated individually for impairment prior to charge-off and therefore are not reported as impaired loans.
The wholesale portfolio is primarily composed of large balance, non-homogeneous loans. The Company’s 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.

13


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):
 
March 31, 2013
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
98,542

 
8,250

 
106,792

Total allowance for credit losses
$
98,542

 
$
8,250

 
$
106,792

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
4,981,488

 
1,159,243

 
6,140,731

Total finance receivables
$
4,981,488

 
$
1,159,243

 
$
6,140,731

 
December 31, 2012
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
101,442

 
6,225

 
107,667

Total allowance for credit losses
$
101,442

 
$
6,225

 
$
107,667

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,073,115

 
816,404

 
5,889,519

Total finance receivables
$
5,073,115

 
$
816,404

 
$
5,889,519

 
April 1, 2012
 
Retail
 
Wholesale
 
Total
Allowance for credit losses, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
112,857

 
9,646

 
122,503

Total allowance for credit losses
$
112,857

 
$
9,646

 
$
122,503

Finance receivables, ending balance:
 
 
 
 
 
Individually evaluated for impairment
$

 
$

 
$

Collectively evaluated for impairment
5,043,584

 
956,322

 
5,999,906

Total finance receivables
$
5,043,584

 
$
956,322

 
$
5,999,906



14


There were no wholesale finance receivables at March 31, 2013, December 31, 2012, or April 1, 2012 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 when the receivable is 120 days or more delinquent, the related asset is repossessed or the receivable is otherwise deemed uncollectible. All retail finance receivables accrue interest until either collected or charged-off. Accordingly, as of March 31, 2013December 31, 2012 and April 1, 2012, all retail finance receivables were accounted for as interest-earning receivables, of which $20.3 million, $27.6 million and $16.3 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. Interest continues to accrue on past due finance receivables until the date the finance receivable becomes uncollectible and the finance receivable is placed on non-accrual status. HDFS will resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured. While on non-accrual status, all cash received is applied to principal or interest as appropriate. Wholesale finance receivables are written down once management determines that the specific borrower does not have the ability to repay the loan in full. There were no wholesale receivables on non-accrual status at March 31, 2013, December 31, 2012 or April 1, 2012. At March 31, 2013December 31, 2012 and April 1, 2012, $0.8 million, $0.4 million, and $0.3 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 was as follows (in thousands):
 
March 31, 2013
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
4,855,128

 
$
83,265

 
$
22,837

 
$
20,258

 
$
126,360

 
$
4,981,488

Wholesale
1,157,596

 
535

 
310

 
802

 
1,647

 
1,159,243

Total
$
6,012,724

 
$
83,800

 
$
23,147

 
$
21,060

 
$
128,007

 
$
6,140,731

 
December 31, 2012
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
4,894,675

 
$
113,604

 
$
37,239

 
$
27,597

 
$
178,440

 
$
5,073,115

Wholesale
814,706

 
984

 
278

 
436

 
1,698

 
816,404

Total
$
5,709,381

 
$
114,588

 
$
37,517

 
$
28,033

 
$
180,138

 
$
5,889,519

 
April 1, 2012
 
Current
 
31-60 Days
Past Due
 
61-90 Days
Past Due
 
Greater than
90 Days
Past Due
 
Total
Past Due
 
Total
Finance
Receivables
Retail
$
4,930,739

 
$
75,560

 
$
21,023

 
$
16,262

 
$
112,845

 
$
5,043,584

Wholesale
955,493

 
354

 
149

 
326

 
829

 
956,322

Total
$
5,886,232

 
$
75,914

 
$
21,172

 
$
16,588

 
$
113,674

 
$
5,999,906

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.


15


The recorded investment of retail finance receivables, by credit quality indicator, was as follows (in thousands):
 
March 31, 2013
 
December 31, 2012
 
April 1, 2012
Prime
$
3,942,294

 
$
4,035,584

 
$
4,056,602

Sub-prime
1,039,194

 
1,037,531

 
986,982

Total
$
4,981,488

 
$
5,073,115

 
$
5,043,584

HDFS’ credit risk on the wholesale portfolio is different from that of the retail portfolio. Whereas the retail portfolio represents a relatively homogeneous pool of retail finance receivables that exhibit more consistent loss patterns, the wholesale portfolio exposures are less consistent. HDFS utilizes an internal credit risk rating system to manage credit risk exposure consistently across wholesale borrowers and individually evaluates credit risk factors for each borrower.
HDFS uses the following internal credit quality indicators, based on the Company’s internal risk rating system, listed from highest level of risk to lowest level of risk for the wholesale portfolio: Doubtful, Substandard, Special Mention, Medium Risk and Low Risk. Based upon management’s review, the dealers classified in the Doubtful category are the dealers with the greatest likelihood of being charged off, while the dealers classified as Low Risk are least likely to be charged off. The internal rating system considers factors such as the specific borrowers’ ability to repay and the estimated value of any collateral. Dealer risk rating classifications are reviewed and updated on a quarterly basis.
The recorded investment of wholesale finance receivables, by internal credit quality indicator, was as follows (in thousands):
 
 
March 31, 2013
 
December 31, 2012
 
April 1, 2012
Doubtful
$
4,843

 
$
8,107

 
$
13,108

Substandard
10,441

 
2,593

 
5,599

Special Mention
11,125

 
3,504

 
8,618

Medium Risk
7,804

 
8,451

 
6,365

Low Risk
1,125,030

 
793,749

 
922,632

Total
$
1,159,243

 
$
816,404

 
$
956,322

6. Asset-Backed Financing

HDFS participates in asset-backed financing through both term asset-backed securitization transactions and through asset-backed commercial paper conduit facilities. HDFS treats these transactions as secured borrowing because either they are transferred to consolidated VIEs or HDFS maintains effective control over the assets and does not meet the accounting sale requirements under ASC Topic 860, "Transfers and Servicing". In HDFS' asset-backed financing programs, HDFS transfers retail motorcycle finance receivables to special purpose entities (SPE), which are considered VIEs under U.S. GAAP. Each SPE then converts those assets into cash, through the issuance of debt.

HDFS is required to consolidate any VIEs in which it is deemed to be the primary beneficiary through having power over the significant activities of the entity and having an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. HDFS is considered to have the power over the significant activities of its term asset-backed securitization and asset-backed U.S. commercial paper conduit facility VIEs due to its role as servicer. Servicing fees are typically not considered potentially significant variable interests in a VIE. However, HDFS retains a residual interest in the VIEs in the form of a debt security, which gives HDFS the right to receive benefits that could be potentially significant to the VIE. Therefore, the Company is the primary beneficiary and consolidates all of these VIEs within its consolidated financial statements.
HDFS is not the primary beneficiary of the asset-backed Canadian commercial paper conduit facility VIE; therefore, HDFS does not consolidate this VIE. However, HDFS treats the conduit facility as a secured borrowing as it maintains effective control over the assets transferred to the VIE and therefore does not meet the requirements for sale accounting under ASC Topic 860. As such, the Company retains the transferred assets and the related debt within its Consolidated Balance Sheet.
    
Servicing fees paid by VIEs to HDFS are eliminated in consolidation and therefore are not recorded on a consolidated basis. HDFS is not required, and does not currently intend, to provide any additional financial support to its VIEs. Investors and creditors only have recourse to the assets held by the VIEs.


16


The following table shows the assets and liabilities related to our asset-backed financings that were included in our financial statements (in thousands):
 
March 31, 2013
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$1,871,419
 
$(36,799)
 
$185,657
 
$4,935
 
$2,025,212
 
$1,268,572
Asset-backed U.S. commercial paper conduit facility

 

 

 
294

 
294

 

 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility
174,420

 
(2,923
)
 
11,368

 
167

 
183,032

 
154,596

 
$2,045,839
 
$(39,722)
 
$197,025
 
$5,396
 
$2,208,538
 
$1,423,168
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$2,143,708
 
$(42,139)
 
$176,290
 
$4,869
 
$2,282,728
 
$1,447,776
Asset-backed U.S. commercial paper conduit facility

 

 

 
419

 
419

 

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

 
(3,432
)
 
11,718

 
255

 
202,826

 
175,658

 
$2,337,993
 
$(45,571)
 
$188,008
 
$5,543
 
$2,485,973
 
$1,623,434
 
 
 
 
 
 
 
 
 
 
 
 
 
April 1, 2012
 
Finance receivables
 
Allowance for credit losses
 
Restricted cash
 
Other assets
 
Total assets
 
Asset-backed debt
On-balance sheet assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Consolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Term asset-backed securitizations
$2,564,585
 
$(56,810)
 
$245,912
 
$5,620
 
$2,759,307
 
$1,754,320
Asset-backed U.S. commercial paper conduit facility
10,689

 
(236
)
 
1,083

 
312

 
11,848

 

 
 
 
 
 
 
 
 
 
 
 
 
Unconsolidated VIEs
 
 
 
 
 
 
 
 
 
 
 
Asset-backed Canadian commercial paper conduit facility

 

 

 

 

 

 
$2,575,274
 
$(57,046)
 
$246,995
 
$5,932
 
$2,771,155
 
$1,754,320
Term Asset-Backed Securitization VIEs
The Company transfers U.S. retail motorcycle finance receivables to SPEs which in turn issue secured notes to investors, with various maturities and interest rates, secured by future collections of the purchased U.S. retail motorcycle finance receivables. Each term asset-backed securitization SPE is a separate legal entity and the U.S. retail motorcycle finance receivables included in the term asset-backed securitizations are only available for payment of the secured debt and other obligations arising from the term asset-backed securitization 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

17


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 2013 to 2019. At March 31, 2013, the unaccreted premium associated with the issuance of secured notes that had been previously retained as part of certain term asset-backed securitization transactions was $1.0 million. There was no unaccreted premium at April 1, 2012.
There were no term asset-backed securitization transactions completed during the three months ended March 31, 2013 or April 1, 2012.
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 $600.0 million based on, among other things, the amount of eligible U.S. retail motorcycle loans held by the SPE as collateral. The amended agreement has terms 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. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the U.S. Conduit, any outstanding principal will continue to be reduced monthly through available collections. Unless earlier terminated or extended by mutual agreement of HDFS and the lenders, the U.S. Conduit has an expiration date of September 13, 2013.
The SPE had no borrowings outstanding under the U.S. Conduit at March 31, 2013December 31, 2012 or April 1, 2012; therefore, U.S. Conduit assets are restricted as collateral for the payment of fees associated with the unused portion of the total aggregate commitment.
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$200.0 million. The terms for this debt provide for interest on the outstanding principal based on prevailing market interest rates plus a specified margin. The Canadian Conduit also provides for a program fee and an unused commitment fee based on the unused portion of the total aggregate commitment of C$200.0 million. There is no amortization schedule; however, the debt is reduced monthly as available collections on the related finance receivables are applied to outstanding principal. Upon expiration of the 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.
As HDFS participates in and does not consolidate the Canadian bank-sponsored, multi-seller conduit VIE, the maximum exposure to loss associated with this VIE, which would only be incurred in the unlikely event that all the finance receivables and underlying collateral have no residual value, is $28.4 million at March 31, 2013. The maximum exposure is not an indication of the Company's expected loss exposure.

18


7. 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 securities and cash equivalents are valued using publicly quoted prices.
Level 3 inputs are not observable in the market and include management’s judgments about the assumptions market participants would use in pricing the asset or liability. The use of observable and unobservable inputs is reflected in the hierarchy assessment disclosed in the following tables.

19


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):
 
 
March 31, 2013
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
812,725

 
$
606,722

 
$
206,003

 
$

Marketable securities
135,246

 

 
135,246

 

Derivatives
11,737

 

 
11,737

 

 
$
959,708

 
$
606,722

 
$
352,986

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
2,165

 
$

 
$
2,165

 
$

 
December 31, 2012
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
852,979

 
$
690,691

 
$
162,288

 
$

Marketable securities
135,634

 

 
135,634

 

Derivatives
317

 

 
317

 

 
$
988,930

 
$
690,691

 
$
298,239

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
7,920

 
$

 
$
7,920

 
$

 
April 1, 2012
 
Balance
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
Cash equivalents
$
997,669

 
$
823,694

 
$
173,975

 
$

Marketable securities
134,946

 

 
134,946

 

Derivatives
6,345

 

 
6,345

 

 
$
1,138,960

 
$
823,694

 
$
315,266

 
$

Liabilities:
 
 
 
 
 
 
 
Derivatives
$
2,234

 
$

 
$
2,234

 
$


The hierarchy classification for cash equivalents, as of April 1, 2012, totaling $174 million has been revised from Level 1 to Level 2.

20


8. 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 9).
The following table summarizes the fair value and carrying value of the Company’s financial instruments (in thousands):
 
 
March 31, 2013
 
December 31, 2012
 
April 1, 2012
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
 
Carrying Value
Assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
1,018,759

 
$
1,018,759

 
$
1,068,138

 
$
1,068,138

 
$
1,276,337

 
$
1,276,337

Marketable securities
$
135,246

 
$
135,246

 
$
135,634

 
$
135,634

 
$
134,946

 
$
134,946

Accounts receivable, net
$
259,673

 
$
259,673

 
$
230,079

 
$
230,079

 
$
264,272

 
$
264,272

Derivatives
$
11,737

 
$
11,737

 
$
317

 
$
317

 
$
6,345

 
$
6,345

Finance receivables, net
$
6,108,934

 
$
6,033,939

 
$
5,861,442

 
$
5,781,852

 
$
5,961,825

 
$
5,877,403

Restricted cash
$
197,025

 
$
197,025

 
$
188,008

 
$
188,008

 
$
246,995

 
$
246,995

Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable
$
360,018

 
$
360,018

 
$
257,386

 
$
257,386

 
$
355,902

 
$
355,902

Derivatives
$
2,165

 
$
2,165

 
$
7,920

 
$
7,920

 
$
2,234

 
$
2,234

Unsecured commercial paper
$
687,705

 
$
687,705

 
$
294,943

 
$
294,943

 
$
662,343

 
$
662,343

Global credit facilities
$

 
$

 
$

 
$

 
$
150,195

 
$
150,195

Asset-backed Canadian commercial paper conduit facility
$
154,596

 
$
154,596

 
$
175,658

 
$
175,658

 
$

 
$

Medium-term notes
$
3,169,807

 
$
2,881,444

 
$
3,199,548

 
$
2,881,272

 
$
2,936,475

 
$
2,698,232

Senior unsecured notes
$
337,600

 
$
303,000

 
$
338,594

 
$
303,000

 
$
366,651

 
$
303,000

Term asset-backed securitization debt
$
1,276,046

 
$
1,268,572

 
$
1,457,807

 
$
1,447,776

 
$
1,768,140

 
$
1,754,320

Cash and Cash Equivalents, Restricted Cash, Accounts Receivable, Net and Accounts Payable – With the exception of certain cash equivalents, 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. Fair value is based on Level 1 or Level 2 inputs.
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 – Retail and wholesale finance receivables are recorded in the financial statements at historical cost less an allowance 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 is determined using publicly quoted prices. Fair value is calculated using Level 2 inputs.

Debt – Debt is generally recorded in the financial statements at historical cost. The carrying value of debt provided under credit facilities approximates fair value since the interest rates charged under the facilities are tied directly to market rates and

21


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 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.
9. 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 7). 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, the Japanese yen and the Brazilian real. 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



The following table summarizes the fair value of the Company’s derivative financial instruments (in thousands):
 
March 31, 2013
 
December 31, 2012
 
April 1, 2012
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)
$
449,078

 
$
11,528

 
$
944

 
$
345,021

 
$
169

 
$
6,850

 
$
219,484

 
$
6,345

 
$

Commodity
contracts(c)
969

 
97

 

 
1,064

 
148

 
683

 
918

 

 
262

Interest rate swaps(c)
33,200

 

 
97

 
35,800

 

 
373

 
95,100

 

 
1,972

Total
$
483,247

 
$
11,625

 
$
1,041


$
381,885

 
$
317

 
$
7,906


$
315,502

 
$
6,345

 
$
2,234

 
March 31, 2013
 
December 31, 2012
 
April 1, 2012
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
$
15,390

 
$
112

 
$
1,124

 
$
16,237

 
$

 
$
14

 
$

 
$

 
$

 
$
15,390


$
112

 
$
1,124

 
$
16,237

 
$

 
$
14

 
$

 
$

 
$

 
(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) Before Tax
Recognized in OCI
 
Three Months Ended
Cash Flow Hedges
March 31,
2013
 
April 1,
2012
Foreign currency contracts
$
15,720

 
$
(6,215
)
Commodity contracts
159

 
(315
)
Interest rate swaps
(2
)
 
(15
)
Total
$
15,877

 
$
(6,545
)
 
 
Amount of Gain/(Loss) Before Tax
Reclassified from AOCI into Income
 
 
 
Three Months Ended
 
Expected to be Reclassified
Cash Flow Hedges
March 31,
2013
 
April 1,
2012
 
Over the Next Twelve Months
Foreign currency contracts(a)
$
(740
)
 
$
2,421

 
$
(10,730
)
Commodity contracts(a)
47

 
(318
)
 
(97
)
Interest rate swaps(b)
(263
)
 
(967
)
 
(97
)
Total
$
(956
)
 
$
1,136

 
$
(10,924
)
 
(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


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) Before Tax
Recognized in Income on Derivative
 
Three months ended
Derivatives
March 31,
2013
 
April 1,
2012
Commodity contracts
$
(630
)
 
$

Total
$
(630
)
 
$


For the three months ended March 31, 2013 and April 1, 2012, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.
The 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 evaluates 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.
10. Accumulated Other Comprehensive Income
The following tables set fourth the changes in accumulated other comprehensive loss (AOCL) (in thousands):
 
 
Three months ended March 31, 2013
 
 
Foreign currency translation adjustments
 
Marketable securities
 
Derivative financial instruments
 
Pension and postretirement benefit plans
 
Total
Beginning balance
 
$
51,335

 
$
677

 
$
(3,837
)
 
$
(655,853
)
 
$
(607,678
)
Other comprehensive income (loss) before reclassifications
 
(11,472
)
 
(388
)
 
15,877

 

 
4,017

Income tax
 
902

 
144

 
(5,881
)
 

 
(4,835
)
Net other comprehensive income before reclassifications
 
(10,570
)
 
(244
)
 
9,996

 

 
(818
)
Reclassifications:
 
 
 
 
 
 
 
 
 
 
Realized (gains) losses - marketable securities (a)
 
 
 

 
 
 
 
 

Realized (gains) losses - foreign currency contracts(b)
 
 
 
 
 
740

 
 
 
740

Realized (gains) losses - commodities contracts(b)
 
 
 
 
 
(47
)
 
 
 
(47
)
Realized (gains) losses - interest rate swaps(c)
 
 
 
 
 
263

 
 
 
263

     Prior service credits(d)
 
 
 
 
 
 
 
(527
)
 
(527
)
     Actuarial losses(d)