Derivative Instruments And Hedging Activities

12 Months Ended

Dec. 31, 2012

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments And Hedging Activities

 Derivative Instruments and Hedging Activities

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

All derivative instruments are recognized on the balance sheet at fair value (see Note 9). In accordance with ASC Topic 815, "Derivatives and Hedging," the accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and, further, on the type of hedging relationship. Changes in the fair value of derivatives that are designated as fair value hedges, along with the gain or loss on the hedged item, are recorded in current period earnings. For derivative instruments that are designated as cash flow hedges, the effective portion of gains and losses that result from changes in the fair value of derivative instruments is initially recorded in other comprehensive income (OCI) and subsequently reclassified into earnings when the hedged item affects income. The Company assesses, 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 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, Japanese yen and the Brazilian real. The Company utilizes foreign currency contracts to mitigate the effect of certain 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' interest rate swaps is determined using pricing models that incorporate quoted prices for similar assets and observable inputs such as interest rates and yield curves.

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

	2012						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)
Foreign currency contracts(c)	$	345,021	$	169	$	6,850	$	306,450	$	16,443	$	1,852
Commodities contracts(c)	1,064		148		683		3,915		—		265
Interest rate swaps – unsecured commercial paper(c)	35,800		—		373		102,100		—		3,020
Total	$	381,885	$	317	$	7,906	$	412,465	$	16,443	$	5,137
	2012						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)
Commodities contracts	$	16,237	$	—	$	14	$	—	$	—	$	—
	$	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 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	2012			2011			2010
Foreign currency contracts	$	(344	)	$	(304	)	$	(6,896	)
Commodities contracts	(427		)	(558		)	(1,164		)
Interest rate swaps – unsecured commercial paper	(43		)	(662		)	(4,318		)
Total	$	(814	)	$	(1,524	)	$	(12,378	)

	Amount of Gain/(Loss) Reclassified from AOCI into Income
Cash Flow Hedges	2012			2011			2010			Expected to be Reclassified Over the Next Twelve Months
Foreign currency contracts(a)	$	18,586		$	(24,746	)	$	(312	)	$	(5,731	)
Commodities contracts(a)	(705		)	(539		)	(867		)	(9		)
Interest rate swaps – unsecured commercial paper(b)	(2,542		)	(5,103		)	(6,466		)	(373		)
Total	$	15,339		$	(30,388	)	$	(7,645	)	$	(6,113	)

(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, 2012 and 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.

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	2012		2011		2010
Interest rate swaps – medium-term notes(a)	$	—	$	—	$	(6,072	)

(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	2012		2011		2010
Interest rate swaps – medium-term notes(a)	$	—	$	—	$	6,072

(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	2012			2011		2010
Commodities contracts(a)	$	(535	)	$	—	$	—
Derivatives – securitization transactions(b)	—			—		(8		)
Derivatives – conduit facility(b)	—			—		(6,343		)
	$	(535	)	$	—	$	(6,351	)

(a) Gain/(loss) recognized in income is included in cost of goods sold.

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