Derivative Instruments And Hedging Activities

12 Months Ended

Dec. 31, 2011

Derivative Instruments And Hedging Activities [Abstract]

Derivative Instruments And Hedging Activities

11.     Derivative Instruments and Hedging Activities

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

All derivative instruments are recognized on the balance sheet at fair value (see Note 9). In accordance with ASC Topic 815, 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, at both 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 which 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 effect of these currencies' fluctuations on earnings. The foreign currency contracts are entered into with banks and allow the Company to exchange a specified amount of foreign currency for U.S. dollars at a future date, based on a fixed exchange rate.

The Company utilizes natural gas contracts to hedge portions of the cost of natural gas consumed in the Company's motorcycle production operations.

The Company's foreign currency contracts and natural gas contracts generally have maturities of less than one year.

The Company's earnings are affected by changes in interest rates. HDFS utilizes interest rate swaps to reduce the impact of fluctuations in interest rates on its unsecured commercial paper by converting a portion from a floating rate basis to a fixed rate basis. In addition, HDFS utilized interest rate swaps with its medium-term notes which matured in December 2010; however, the impact was to convert from a fixed rate basis to a floating rate basis. HDFS also entered into derivative contracts to facilitate its first quarter 2008 term asset-backed securitization transaction as well as its third quarter 2007 term asset-backed securitization transaction. These derivatives, which hedge assets held by VIEs, did not qualify for hedge accounting treatment. During 2011, the derivative contracts related to the 2008 term asset-backed securitization transaction expired. The derivative contracts related to the 2007 term asset-backed securitization expired during 2010. Additionally, to facilitate asset-backed commercial paper conduit facility agreements that the Company entered into April 2009, HDFS entered into derivative contracts which did not qualify for hedge accounting treatment. These derivative contracts were terminated in 2010.

The following tables summarize the fair value of the Company's derivative financial instruments at December 31 (in thousands):

	2011						2010
Derivatives Designated As Hedging Instruments Under ASC Topic 815	Notional Value		Asset Fair Value(a)		Liability Fair  Value(b)		Notional Value		Asset Fair Value(a)		Liability Fair  Value(b)
Foreign currency contracts(c)	$	306,450	$	16,443	$	1,852	$	270,931	$	—	$	12,369
Natural gas contracts(c)		3,915		—		265		1,704		—		246
Interest rate swaps – unsecured commercial paper(c)		102,100		—		3,020		135,100		—		7,431
Interest rate swaps – medium-term notes(d)		—		—		—		—		—		—
Total	$	412,465	$	16,443	$	5,137	$	407,735	$	—	$	20,046
	2011						2010
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)
Derivatives – securitization transactions	$	—	$	—	$	—	$	38,113	$	37	$	37
Derivatives – conduit facility		—		—		—		—		—		—
	$	—	$	—	$	—	$	38,113	$	37	$	37

(a) Included in other current assets

(b) Included in accrued liabilities

(c) Derivative designated as a cash flow hedge

(d) Derivative designated as a fair value hedge

The following tables summarize the amount of gains and losses for the following years ended December 31 related to derivative financial instruments designated as cash flow hedges (in thousands):

	Amount of Gain/(Loss) Recognized in OCI
Cash Flow Hedges	2011			2010			2009
Foreign currency contracts	$	(304	)	$	(6,896	)	$	(4,402	)
Natural gas contracts		(558	)		(1,164	)		(1,329	)
Interest rate swaps – unsecured commercial paper		(662	)		(4,318	)		(1,299	)
Interest rate swaps – conduit facility		—			—			(1,447	)
Total	$	(1,524	)	$	(12,378	)	$	(8,477	)

	Amount of Gain/(Loss) Reclassified from AOCI into Income
Cash Flow Hedges	2011			2010			2009			Expected to be Reclassified Over the Next Twelve Months
Foreign currency contracts(a)	$	(24,746	)	$	(312	)	$	13,520		$	(13,172	)
Natural gas contracts(a)		(539	)		(867	)		(2,713	)		265
Interest rate swaps – unsecured commercial paper(b)		(5,103	)		(6,466	)		(8,817	)		(2,680	)
Interest rate swaps – conduit facility(b)		—			—			(6,452	)		—
Total	$	(30,388	)	$	(7,645	)	$	(4,462	)	$	(15,587	)

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

(b) Gain/(loss) reclassified from AOCI to income is included in financial services interest expense.

For the years ended December 31, 2011 and 2010, the cash flow hedges were highly effective and, as a result, the amount of hedge ineffectiveness was not material. No amounts were excluded from effectiveness testing.

The following tables summarize the amount of gains and losses for the years ended December 31 related to derivative financial instruments designated as fair value hedges (in thousands):

	Amount of (Loss) Recognized in Income on Derivative
Fair Value Hedges	2011		2010			2009
Interest rate swaps – medium-term notes(a)	$	—	$	(6,072	)	$	(3,626	)

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

	Amount of Gain Recognized in Income on Hedged Debt
Fair Value Hedges	2011		2010		2009
Interest rate swaps – medium-term notes(a)	$	—	$	6,072	$	3,626

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

The following table summarizes the amount of gains and losses for the years ended December 31 related to derivative financial instruments not designated as hedging instruments (in thousands):

	Amount of Gain/(Loss) Recognized in Income on Derivative
Derivatives not Designated as Hedges	2011		2010			2009
Derivatives – securitization transactions(a)	$	—	$	(8	)	$	1,177
Derivatives – conduit facility(a)		—		(6,343	)		(2,101	)
	$	—	$	(6,351	)	$	(924	)

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