Harley-Davidson had long been one of the nation’s most profitable firms and had one of the world’s most recognizable and valuable brand names. For years Harley-Davidson reacquired its own stock because its cash flow exceeded its capital needs by so much.
Harley-Davidson financed most of its retail motorcycle sales through Harley-Davidson credit. Harley-Davidson customers are highly loyal, so credit defaults were rare, and the firm easily securitized its high-quality motorcycle receivables. Buyers paid 10-12% interest but were so reliable that Harley-Davidson could contribute $1 billon of receivables and $35 million in cash to a securitization trust, and the trust could then issue $1 billion of 6% notes.
In early 2008, the sub-prime mortgage crises led to a complete collapse of the securitization market. If Harley-Davidson wanted to finance its retail sales, it would need to obtain funds by issuing long-term debt. It did issue debt throughout 2008, but by the end of 2008, Harley-Davidson was near its debt capacity. As a result, it could not continue to finance customer receivables at the same level as in the past.
The case also includes information on several accrual accounts. In the past, the accrual account balances were highly conservative. In some instances, balances seemed to be at least double what would be needed to meet liabilities. As Harley-Davidson’s financial conditions worsened the accruals became less conservative, to the point that in some instances they seemed lower than estimated liabilities. Despite all this, Harley-Davidson’s financial disclosures remained clear and comprehensive, making it easy for students to see how Harley-Davidson’s financial condition worsened as the recession deepened.
The case also includes Harley’s disclosures about major investment losses in its pension and retiree health benefit fund investments. A table compares Harley’s investment losses with lower losses for other pension funds because Harley invests a higher percentage of its retiree funds in equities than most other funds.