HARLEY DAVIDSON INC – 10-K – Management’s Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company (HDMC) and Harley-Davidson Financial Services (HDFS). HDMC produces heavyweight cruiser and touring 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 produced strong financial results in 2011 and continued to make progress against its long-term business strategy, announced in 2009. The Company's long-term business strategy is centered on four key pillars: growth, continuous improvement, leadership development and sustainability. Under this strategy, the Company expects 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 strategy focuses Company resources on Harley-Davidson products and experiences, global expansion, demographic outreach and commitment to core customers. In addition, the Company will continue to expand its initiatives to enhance profitability through continuous improvement in manufacturing, product development and business operations.  During 2011, the Company made progress towards transforming its operations to be more flexible and customer led. The Company's efforts were focused on shortening product development lead times, implementing flexible manufacturing, expanding internationally and providing a premium retail experience. These efforts included significant changes at the York manufacturing facility where production of all models that the facility produces was consolidated onto a single production line, and the Company achieved it target throughput rates by the end of 2011. In addition, international expansion continued with the opening of new regional headquarters for the Company's Asia Pacific region and its Latin America region as well as the addition of new dealers outside the U.S. Finally, the Company began the process of transforming the Company's worldwide dealer network to provide the capabilities and systems that will improve interactions with retail customers, provide a premium retail experience and strengthen dealer profitability.  In 2011, worldwide independent dealer retail sales of new Harley-Davidson motorcycles grew 5.9% compared to 2010, including a 5.8% increase in the U.S. The Company believes the solid improvement in retail sales of new Harley-Davidson motorcycles reflects the strong appeal of its product lineup, its new investments in growth opportunities across all regions, the efforts of the independent dealer network, and improved consumer confidence in the U.S.    

(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 "Risk Factors" in Item 1A and under "Cautionary Statements" in Item 7 of this report. 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 (February 23, 2012), and the Company disclaims any obligation to publicly update such forward-looking statements to reflect subsequent events or circumstances.                                           27 

-------------------------------------------------------------------------------- The Company's income from continuing operations for 2011 was $548.1 million, or $2.33 per diluted share compared to $259.7 million, or $1.11 per diluted share, in 2010. The increase in 2011 income from continuing operations was driven by strong financial performance in both the Motorcycles and the Financial Services segments. Operating income from the Motorcycles segment was up $182.4 million over 2010 on a 10.7% increase in wholesale shipments of Harley-Davidson motorcycles and lower restructuring costs. The Motorcycles segment delivered these results despite pressure on gross margin resulting from temporary inefficiencies associated with restructuring efforts and higher raw material and fuel costs compared to 2010. Operating income from the Financial Services segment was also up over the prior year, increasing $86.9 million on strong credit performance.  

Please refer to the "Results of Operations 2011 Compared to 2010" for additional details concerning the results for 2011.

Outlook(1)

  On January 24, 2012, the Company announced its expectation to ship 240,000 to 245,000 Harley-Davidson motorcycles during 2012, with 58,000 to 63,000 Harley-Davidson motorcycles expected to ship in the first quarter of 2012. The 2012 shipment estimate takes several factors into consideration, including macro-economic concerns, near-term production limitations driven by on-going restructuring activities, and a strategy to move production closer to retail sales. First, while the Company is encouraged by the strong retail sales in 2011, it remains cautious on the U.S. economic recovery and concerned over the continuing debt issues in Europe. Second, the 2012 first quarter shipment expectations reflect an effort to increase U.S. first quarter dealer inventory and to prepare for potential disruptions that may result from the Company's planned implementation of a new enterprise resource planning (ERP) system at York in 2012. Finally, the 2012 shipment guidance takes into consideration a new capability to efficiently flex the manufacturing labor force starting in the first half of 2013. This capability is a key component of the Company's strategy to be more flexible, and to efficiently produce motorcycles closer to customer demand. Beginning in early 2013, the Company expects to be able to increase production at York by adding flexible workers thus increasing capacity utilization in the first and second quarters of 2013. Consequently, in the U.S. it is expected that dealers will retail more units than the Company will ship in 2012, thereby lowering year-end retail inventory in the U.S. dealer network as it enters the winter season. The Company's ability to maximize flexibility in the entire manufacturing system will occur in 2014 when the same capability will be in place for our Kansas City and Wisconsin operations.  In addition, the Company announced its expectation for full year 2012 gross margin to be between 34.75% and 35.75%. The Company expects gross margin will be positively impacted in 2012 by incremental restructuring savings, increased productivity from continuous improvement initiatives and the 2012 model year price increases which took effect in July 2011. The Company believes that product mix, raw materials and temporary inefficiencies from its restructuring activities will be comparable to 2011 levels, and that currency will be a headwind in 2012.  The Company's capital expenditure estimates for 2012 are between $190 million to $210 million, including approximately $25 million to support restructuring activities. The Company anticipates it will have the ability to fund all capital expenditures in 2012 with cash flows generated by operations.  The Company also announced on January 24, 2012 that it expects the full year 2012 effective income tax rate to be approximately 35.5% for continuing operations. 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.                                           28 

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Restructuring Activities(1)

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. The Company expects the transition of supply from New Castalloy to be complete by mid-2013. The decision to close New Castalloy comes 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 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 implemented, the production system in Kansas City, like Wisconsin and York, will include the addition of a flexible workforce component.  

After taking actions to 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 existing contract.

2010 Restructuring Plan

  In September 2010, the Company's unionized employees in Wisconsin ratified three separate new seven-year labor agreements which take effect in April 2012 when the current contracts expire. 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 implemented, the production system in Wisconsin, like York, will include the addition of a flexible workforce component.  Based on 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 implemented in 2012 than would be required under the existing contract. In Tomahawk, the Company expects to have about 75 fewer full-time hourly unionized employees when the contract is implemented than would be required under the current 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 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 included 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.  

The 2009 restructuring plans included a reduction of approximately 2,700 to 2,900 hourly production positions and approximately 720 non-production, primarily salaried positions within the Motorcycles segment and approximately 100 salaried positions in the Financial Services segment.

Restructuring Costs and Savings

  During 2011, the Company incurred $68.0 million in restructuring expense related to its combined restructuring plan activities. This is in addition to $387.8 million in restructuring and impairment expense incurred in prior years since its restructuring activities were initiated in 2009. On January 24, 2012, the Company                                           29 

-------------------------------------------------------------------------------- revised its estimate for restructuring expenses related to its combined restructuring plan activities initiated since early 2009 to $500 million to $520 million from 2009 through 2013, and the Company expects approximately 35% of those amounts to be non-cash. The Company had most recently estimated these expenses to be $505 million to $525 million over the same time period. The revised estimate includes estimated restructuring expenses of $50 million to $60 million for 2012. The Company anticipates annual ongoing total savings from restructuring activities initiated since early 2009 of approximately $315 million to $335 million upon completion of all announced restructuring activities. 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 (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);    

• 2014 - $315 million to $335 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).

Discontinued Operations

  In 2011, the Company recognized a $51.0 million benefit on income from discontinued operations, driven by the reversal of tax amounts reserved in prior years related to the divestiture of the Company's MV Agusta subsidiaries. The amounts had been reserved pending an agreement with the IRS on the tax treatment of the transaction. With the agreement, the Company anticipates no further financial adjustments related to MV Agusta.(1)                                           30  --------------------------------------------------------------------------------                   Results of Operations 2011 Compared to 2010

 Consolidated Results                                                                                         Increase            % (in thousands, except earnings per share)            2011            2010           (Decrease)         Change Operating income from motorcycles & related products                                           $ 561,176      $  378,758       $    182,418           48.2 % Operating income from financial services             268,791         181,873             86,918           47.8  Operating income                                     829,967         560,631            269,336           48.0 Investment income                                      7,963           5,442              2,521           46.3 Interest expense                                      45,266          90,357            (45,091 )        (49.9 ) Loss on debt extinguishment                               -           85,247            (85,247 )           NM  Income before income taxes                           792,664         390,469            402,195          103.0 Provision for income taxes                           244,586         130,800            113,786           87.0  Income from continuing operations                    548,078         259,669            288,409          111.1 Income (loss) from discontinued operations, net of taxes                                              51,036        (113,124 )          164,160         (145.1 )  Net income                                         $ 599,114      $  146,545       $    452,569          308.8 %   Diluted earnings per share from continuing operations                                         $    2.33      $     1.11       $       1.22          109.9 % Diluted (earnings) loss per share from discontinued operations                            $    0.22      $    (0.48 )     $       0.70         (145.8 %) Diluted earnings per share                         $    2.55      $     0.62       $       1.93          311.3 %   Operating income for the Motorcycles segment during 2011 improved by $182.4 million compared to 2010 primarily due to increased motorcycle shipments and lower spending on the Company's ongoing restructuring activities. Operating income for the Financial Services segment improved by <money>$86.9 million during 2011 primarily due to improved credit performance in the retail motorcycle finance receivable portfolio. 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.  Interest expense for 2011 related to the Company's senior unsecured notes, was approximately $45 million lower than in 2010. The decrease in interest expense on the senior unsecured notes is due to the Company's repurchase of $297.0 million of the $600.0 million senior unsecured notes during the fourth quarter of 2010.  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. As a result of the transaction, the Company incurred a loss on debt extinguishment of $85.2 million which also includes $1.4 million of capitalized debt issuance costs that were written-off. The Company used cash on hand for the repurchase and the repurchased notes were cancelled.  

The effective income tax rate for 2011 was 30.9% compared to 33.5% for 2010. The lower 2011 effective tax rate was mainly driven by a change in the 2011 Wisconsin income tax law associated with certain net operating losses and a one-time tax charge in 2010 associated with the federal healthcare legislation.

                                           31  --------------------------------------------------------------------------------                     Motorcycles and Related Products Segment

Harley-Davidson Motorcycle Retail Sales

  Worldwide independent dealer retail sales of Harley-Davidson motorcycles increased 5.9% during 2011 compared to 2010. Retail sales of Harley-Davidson motorcycles increased 5.8% in the United States and 6.1% internationally in 2011. The following table includes retail unit sales of Harley-Davidson motorcycles:                     Harley-Davidson Motorcycle Retail Sales(a)                                Heavyweight (651+cc)                                                                                      (Decrease)           %                                                      2011           2010           Increase         Change North America Region United States                                        151,683        143,391             8,292           5.8 % Canada                                                10,502         10,376               126           1.2  Total North America Region                           162,185        153,767             8,418           5.5  Europe Region (Includes Middle East and Africa) Europe(b)                                             39,334         37,378             1,956           5.2 Other                                                  5,006          3,810             1,196          31.4  Total Europe Region                                   44,340         41,188             3,152           7.7  Asia Pacific Region Japan                                                 10,401         11,405            (1,004 )        (8.8 ) Other                                                 11,015          9,582             1,433          15.0  Total Asia Pacific Region                             21,416         20,987               429           2.0  Latin America Region                                   7,247          6,168             1,079          17.5  Total Worldwide Retail Sales                         235,188        222,110            13,078           5.9 %     

(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.

(b) Data for Europe include 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)                                                                                %                                 2011          2010        Decrease       Change            United States(b)     271,018       259,733        11,285          4.3 %            Europe(c)            293,018       301,321        (8,303 )       (2.8 %)    

(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. Prior periods have been adjusted to include all dual

purpose models that were previously excluded.

(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.                                            32 

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Motorcycle Unit Shipments

  The following table includes wholesale motorcycle unit shipments for the Motorcycles segment:                                                                                              (Decrease)          %                                            2011                       2010                 Increase        Change United States                        152,180        65.3 %      131,636        62.5 %          20,544         15.6 % International                         80,937        34.7 %       78,858        37.5 %           2,079          2.6 

Harley-Davidson motorcycle units 233,117 100.0 % 210,494

  100.0 %          22,623         10.7 %  Touring motorcycle units              92,002        39.5 %       81,927        38.9 %          10,075         12.3 % Custom motorcycle units*              91,459        39.2 %       87,158        41.4 %           4,301          4.9 Sportster motorcycle units            49,656        21.3 %       41,409        19.7 %           8,247         19.9 

Harley-Davidson motorcycle units 233,117 100.0 % 210,494

  100.0 %          22,623         10.7 %  Buell motorcycle units                   274                      2,614                        (2,340 )      (89.5 %)     

* Custom motorcycle units, as used in this table, include Dyna, Softail, VRSC

and CVO models.

   During 2011, wholesale shipments of Harley-Davidson motorcycles were up 10.7% compared to the prior year and within the Company's most recent expected shipment range of 228,000 to 235,000 motorcycles. Temporary production constraints resulting from restructuring efforts at the Company's York, PA (York) facility that impacted York production for 2011 eased during the fourth quarter of 2011, allowing a slightly higher mix of Touring motorcycles compared to the prior year. Sportster shipment mix was also higher than in 2010 and near the high end of the historical range of 18% to 22% due to strong retail demand for Sportster models.  At the end of 2011, U.S. dealer inventory was up slightly compared to 2010. As discussed under the "Outlook" section, the Company expects that its 2012 shipment targets for Harley-Davidson motorcycles to independent dealers in the U.S. will be lower than their retail sales for 2012 and result in a decrease in dealer retail inventory levels. (1)  

Segment Results

The following table includes the condensed statement of operations for the Motorcycles segment (in thousands):

                                                                                  (Decrease)           %                                                2011             2010            Increase         Change Revenue: Harley-Davidson motorcycles                 $ 3,553,291      $ 3,136,987      $    416,304          13.3 % Buell motorcycles                                 1,256           16,280           (15,024 )       (92.3 ) Parts & Accessories                             816,569          749,240            67,329           9.0 General Merchandise                             274,124          259,125            14,999           5.8 Other                                            17,024           14,995             2,029          13.5  Total revenue                                 4,662,264        4,176,627           485,637          11.6  Cost of goods sold                            3,106,288        2,749,224           357,064          13.0  Gross profit                                  1,555,976        1,427,403           128,573           9.0  Selling & administrative expense                788,565          756,177            32,388           4.3 Engineering expense                             138,243          128,960             9,283           7.2 Restructuring expense                            67,992          163,508           (95,516 )       (58.4 )  Operating expense                               994,800        1,048,645           (53,845 )        (5.1 )  Operating income from motorcycles           $   561,176      $   378,758      $    182,418          48.2 %                                             33 

-------------------------------------------------------------------------------- The following table includes the estimated impact of the significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from 2010 to 2011 (in millions):                                                                   Cost of                                                     Net         Goods         Gross                                                   Revenue        Sold        Profit     2010                                          $  4,177     $  2,749      $ 1,428     Volume                                             365          250          115     Price                                               15           -            15    Foreign currency exchange rates and hedging         89           84    

       5     Shipment mix                                        16           15            1     Raw material prices                                 -            32          (32 )     Manufacturing costs                                 -           (24 )         24      Total                                              485          357          128      2011                                          $  4,662     $  3,106      $ 1,556   

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2010 to 2011:

• Volume increases were driven by the 10.7% increase in wholesale shipments

of Harley-Davidson motorcycle units as well as higher sales volumes for

         Parts & Accessories and General Merchandise.    

• On average, wholesale prices on the Company's 2012 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 2011 relative to 2010 resulted in a

positive impact on net revenue. Gains and losses associated with the

revaluation of foreign-denominated assets and liabilities and foreign

         currency hedging (included in cost of goods sold) were unfavorable when          compared to 2010 which offset the majority of the positive impact of          currency included in net revenue.    

• Shipment mix changes positively impacted net revenue and resulted

primarily from product mix changes both between and within the Company's

motorcycle families. However, the impact of these mix changes on cost of

          goods sold mostly offset the benefits included in revenue.          •   Raw material prices were higher in 2011 relative to 2010 due to increased

         metals and fuel costs.          •   Manufacturing costs were favorably impacted by savings related to

restructuring and continuous improvement initiatives, partially offset by

temporary inefficiencies associated with the Company's restructuring and

transformation at its York facility. During 2011, the Company experienced

$32 million in temporary inefficiencies compared to $9 million in 2010 and

expects temporary inefficiencies in 2012 to be generally in line with

2011.(1) In 2012, the Company expects temporary inefficiencies associated

with its restructuring activities, including the completion of

restructuring at York, the implementation of new labor contracts in Kansas

City and Wisconsin, and the continuation of efforts to exit its wheel and

wheel hub manufacturing operations in Australia.(1)

   The increase in selling, administrative and engineering expense was primarily due to increased spending on growth initiatives and higher recall expenses offset by savings realized from the Company's restructuring efforts and continuous improvement initiatives. In addition, the Company incurred during 2010 approximately $15 million of non-recurring costs in connection with the Company's efforts to expand its presence in Brazil. Restructuring expense was lower in 2011 than in 2010. For further information regarding the Company's previously announced restructuring activities, refer to Note 5 of Notes to Condensed Consolidated Financial Statements.                                           34  --------------------------------------------------------------------------------                            Financial Services Segment

Segment Results

The following table includes the condensed statements of operations for the Financial Services segment (in thousands):

                                                                                Increase            %                                                 2011           2010         (Decrease)        Change Interest income                               $ 598,675      $ 635,207      $   (36,532 )        (5.8 %) Other income                                     50,774         47,502            3,272           6.9  Financial services revenue                      649,449        682,709          (33,260 )        (4.9 )  Interest expense                                229,492        272,484          (42,992 )       (15.8 ) Provision for credit losses                      17,031         93,118          (76,087 )       (81.7 ) Operating expenses                              134,135        135,234           (1,099 )        (0.8 )  Financial services expense                      380,658        500,836         (120,178 )       (24.0 ) 

Operating income from financial services $ 268,791$ 181,873$ 86,918 47.8 %

Interest income decreased during 2011 due to lower average retail and wholesale finance receivables outstanding. Interest expense benefited from lower debt levels related to lower average retail and wholesale finance receivables outstanding and a more favorable cost of funds, partially offset by a $9.6 million loss on the extinguishment of debt.

  The provision for credit losses related to retail motorcycle and wholesale receivables decreased by $70.1 million and $7.1 million, respectively, in 2011 compared to 2010. The decrease in the provision for retail motorcycle credit losses was primarily driven by favorable finance receivable credit loss performance. The decrease in provision for wholesale credit losses is primarily due to favorable finance receivable performance.  The Company believes that 2012 operating income from Financial Services will decrease compared to 2011, as approximately $40 million in 2011 balance sheet allowance releases are not expected to reoccur in 2012. In addition lower net interest income is anticipated as the portfolio of retail loans continues to contract as a result of lower U.S. retail sales over the last few years, and we expect a modest tightening of margins on prime tier retail lending due to a more competitive lending environment. Although the Company expects lower operating income in 2012 compared to 2011, it expects to report positive operating income in 2012.(1)  Annual losses on HDFS' retail motorcycle loans were 1.20% during 2011 compared to 2.11% in 2010. The decrease in credit losses from 2010 was due to a lower frequency of loss and a modest improvement in the recovery values of repossessed motorcycles. The 30-day delinquency rate for retail motorcycle loans at December 31, 2011 decreased to 3.85% from 5.07 % at December 31, 2010.  Changes in the allowance for finance credit losses on finance receivables were as follows (in millions):                                                                      2011              2010 Balance, beginning of period                                    $ 173,589        $  150,082 Allowance related to newly consolidated finance receivables            -    

49,424

 Provision for finance credit losses                                17,031   

93,118

 Charge-offs, net of recoveries                                    (65,171 )        (119,035 )  Balance, end of period                                          $ 125,449        $  173,589   

At December 31, 2011, the allowance for finance credit losses on finance receivables was $116.1 million for retail receivables, which included $66.0 million related to finance receivables held by variable interest entities (VIEs), and $9.3 million for wholesale receivables. At December 31, 2010, the allowance for finance credit

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losses on finance receivables was $157.8 million for retail receivables, which included $103.8 million related to finance receivables held by consolidated VIEs, and $15.8 million for wholesale receivables. See Note 7 of Notes to Condensed Consolidated Financial Statements for more information on the Company's VIEs.

  As part of the January 1, 2010 adoption of the new accounting guidance within Accounting Standards Codification (ASC) Topic 810 "Consolidations" and ASC Topic 860 "Transfers and Servicing", the Company consolidated an initial allowance for credit losses of $49.4 million related to the previously unconsolidated securitized finance receivables through an adjustment to retained earnings. Subsequent changes in the provision for credit losses are included in the statement of operations.  HDFS' periodic evaluation of the adequacy of the allowance for finance 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. Please refer to Note 6 of Notes to Consolidated Financial Statements for further discussion regarding the Company's allowance for finance credit losses on finance receivables.                    Results of Operations 2010 Compared to 2009

 Consolidated Results                                                                                                         % (in thousands, except earnings per share)           2010             2009          Increase       Change Operating income from motorcycles & related products                                         $  378,758       $  314,055       $  64,703         20.6 % Operating income (loss) from financial services                                            181,873         (117,969 )       299,842          N/M  Operating income                                    560,631          196,086         364,545        185.9 Investment income                                     5,442            4,254           1,188         27.9 Interest expense                                     90,357           21,680          68,677        316.8 Loss on debt extinguishment                          85,247               - 

85,247 N/M

 Income before income taxes                          390,469          178,660         211,809        118.6 Provision for income taxes                          130,800          108,019          22,781         21.1  Income from continuing operations                   259,669           70,641         189,028        267.6 Loss from discontinued operations, net of income taxes                                       (113,124 )       (125,757 )        12,633         10.0  Net income (loss)                                $  146,545       $  (55,116 )     $ 201,661          N/M  Diluted earnings per share from continuing operations                                       $     1.11       $     0.30       $    0.81        270.0 % Diluted loss per share from discontinued operations                                       $    (0.48 )     $    (0.54 )     $    0.06         11.1 % Diluted earnings (loss) per share                $     0.62       $    

(0.24 ) $ 0.86 N/M

   Operating income for the Motorcycles segment was $64.7 million higher in 2010 compared to 2009 driven by improved gross profit and a decrease in operating expenses. Operating income for the Financial Services segment improved by $299.8 million primarily due to favorable net interest income, improved credit performance and two non-recurring, non-cash charges totaling $101.1 million that were incurred during 2009. The favorable net interest income was primarily due to the increase in on-balance sheet finance receivables and a lower cost of funds. As discussed below, the lower cost of funds was due in part to HDFS' transfer in the fourth quarter of 2009 to the Company of amounts related to the Company's $600.0 million senior unsecured notes issued in February 2009. 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.  Interest expense for 2010 includes $87.5 million related to the Company's senior unsecured notes, compared to $16.2 million in 2009. During the first quarter of 2009, the Company transferred the full $600.0 million of proceeds from the issuance of the notes to HDFS to fund HDFS' operations. As HDFS diversified its debt                                           36 

-------------------------------------------------------------------------------- structure through a combination of actions during 2009, its funding profile improved and allowed HDFS to transfer the full $600.0 million of proceeds back to the Company during the fourth quarter of 2009. As a result, interest expense for 2009 includes interest on the notes only during the periods when the full $600.0 million of proceeds were held by the Company. Interest expense for the periods in which the full $600.0 million of proceeds were held by HDFS is included in financial services interest expense.  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. As a result of the transaction, the Company incurred a loss on debt extinguishment of $85.2 million which also includes $1.4 million of capitalized debt issuance costs that were written-off. The Company used cash on hand for the repurchase and the repurchased notes were cancelled. By repurchasing the notes, the Company will not incur interest expense of approximately $45.0 million per year in 2011 through 2013 and $3.7 million in 2014.  The effective income tax rate for 2010 continuing operations was 33.5% compared to 60.5% for 2009. During 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 were signed into law. As a result of these Acts, reimbursements the Company receives under Medicare Part D coverage for providing retiree prescription drug benefits would no longer be tax free beginning in 2013. In response to these Acts and the Company recorded income tax expense of $13.3 million associated with this change. Also impacting the effective income tax rate for 2010 were a favorable impact from a domestic manufacturing benefit and the favorable conclusion of an Internal Revenue Service audit in 2010 and, in connection with the audit settlement, an adjustment to income taxes payable. The effective income tax rate for 2009 was impacted by a $28.4 million non-deductible goodwill charge incurred during the second quarter of 2009 as well as an unanticipated change in Wisconsin tax law during the first quarter of 2009 which resulted in the Company establishing a valuation allowance of $22.5 million related to net operating loss carryforwards.                                           37 

--------------------------------------------------------------------------------                     Motorcycles and Related Products Segment

Harley-Davidson Motorcycle Retail Sales

  Worldwide independent dealer retail sales of Harley-Davidson motorcycles decreased 8.5% during 2010 compared to 2009. Retail sales continued to be impacted on a global basis by difficult economic conditions. Retail sales of Harley-Davidson motorcycles decreased by 11.7% in the United States and 1.9% internationally during 2010 compared to 2009. On an industry-wide basis, the heavyweight (651+cc) portion of the market was down 14.6% in the United States and down 3.9% in Europe when compared to 2009. The following table includes retail unit sales of Harley-Davidson motorcycles:                     Harley-Davidson Motorcycle Retail Sales(a)                                Heavyweight (651+cc)                                                                                   (Decrease)          %                                                     2010          2009          Increase        Change North America Region United States                                       143,391       162,385          (18,994 )      (11.7 %) Canada                                               10,376        11,406           (1,030 )       (9.0 )  Total North America Region                          153,767       173,791   

(20,024 ) (11.5 )

Europe Region (Includes Middle East and Africa) Europe(b)                                            37,378        36,444              934          2.6 Other                                                 3,810         3,560              250          7.0  Total Europe Region                                  41,188        40,004            1,184          3.0  Asia Pacific Region Japan                                                11,405        13,105           (1,700 )      (13.0 ) Other                                                 9,582         9,884             (302 )       (3.1 )  Total Asia Pacific Region                            20,987        22,989           (2,002 )       (8.7 )  Latin America Region                                  6,168         5,850              318          5.4  Total Worldwide Retail Sales                        222,110       242,634          (20,524 )       (8.5 %)     

(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 Harley-Davidson Motorcycle

Retail Sales data.

(b) Data for Europe include 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)                                                                                %                                 2010          2009        Decrease       Change            United States(b)     259,733       304,304       (44,571 )      (14.6 %)            Europe(c)            301,321       313,569       (12,248 )       (3.9 %)    

(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) U.S. industry data is derived from information provided by Motorcycle

Industry Council (MIC). This third party data is subject to revision and

update. Prior periods have been adjusted to include all dual purpose models

    that were previously excluded.                                            38 

--------------------------------------------------------------------------------

(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 is derived

from information provided by Giral S.A., an independent agency. 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:                                                                                                (Decrease)          %                                              2010                       2009                 Increase        Change United States                          131,636        62.5 %      144,464        64.8 %         (12,828 )       (8.9 %) International                           78,858        37.5 %       78,559        35.2 %             299          0.4 

Harley-Davidson motorcycle units 210,494 100.0 % 223,023

    100.0 %         (12,529 )       (5.6 %)  Touring motorcycle units                81,927        38.9 %       84,104        37.7 %          (2,177 )       (2.6 ) Custom motorcycle units(a)              87,158        41.4 %       91,650        41.1 %          (4,492 )       (4.9 ) Sportster motorcycle units              41,409        19.7 %       47,269        21.2 %          (5,860 )      (12.4 ) 

Harley-Davidson motorcycle units 210,494 100.0 % 223,023

    100.0 %         (12,529 )       (5.6 %)  Buell motorcycle units                   2,614                      9,572                        (6,958 )      (72.7 %)     

(a) Custom motorcycle units, as used in this table, include Dyna, Softail, VRSC

and CVO models.

   During 2010, the Company shipped 210,494 Harley-Davidson motorcycles, a decrease of 12,529 motorcycles, or 5.6%, from 2009. The Company's 2010 shipment volume resulted in lower U.S. dealer inventory of new Harley-Davidson motorcycles at the end of 2010 compared to the end of 2009.  

Segment Results

The following table includes the condensed statement of operations for the Motorcycles segment (in thousands):

                                                                              (Decrease)           %                                             2010             2009           Increase         Change Revenue: Harley-Davidson motorcycles              $ 3,136,987      $ 3,174,810      $   (37,823 )        (1.2 %) Buell motorcycles                             16,280           46,514          (30,234 )       (65.0 ) Parts & Accessories                          749,240          767,275          (18,035 )        (2.4 ) General Merchandise                          259,125          282,210          (23,085 )        (8.2 ) Other                                         14,995           16,321           (1,326 )        (8.1 )  Total revenue                              4,176,627        4,287,130         (110,503 )        (2.6 )  Cost of goods sold                         2,749,224        2,900,934         (151,710 )        (5.2 )  Gross profit                               1,427,403        1,386,196           41,207           3.0  Selling & administrative expense             756,177          702,854           53,323           7.6 Engineering expense                          128,960          148,311          (19,351 )       (13.0 ) Restructuring expense and other impairments                                  163,508          220,976          (57,468 )       (26.0 )  Operating expense                          1,048,645        1,072,141          (23,496 )        (2.2 ) 

Operating income from motorcycles $ 378,758$ 314,055$ 64,703 20.6 %

                                            39 

-------------------------------------------------------------------------------- The following table includes the estimated impact of the significant factors affecting the comparability of net revenue, cost of goods sold and gross profit from 2009 to 2010 (in millions):                                                     Net            Cost of          Gross                                                Revenue        Goods  Sold       Profit  2009                                          $  4,287      $       2,901      $ 1,386  Volume                                            (282 )             (201 )        (81 )  Foreign currency exchange rates and hedging         17                 17           -  Shipment mix                                       126                 10          116  Raw material prices                                 -                  11          (11 )  Manufacturing costs                                 -                  27          (27 )  Buell exit costs                                    29                (16 )         45   Total                                             (110 )             (152 )         42   2010                                          $  4,177      $       2,749      $ 1,428   

The following factors affected the comparability of net revenue, cost of goods sold and gross profit from 2009 to 2010:

         •   Volume decreases were primarily the result of the 5.6% decrease in          wholesale shipments of Harley-Davidson motorcycle units as well as lower          volumes for Parts & Accessories and General Merchandise.    

• Foreign currency exchange rates during 2010 relative to 2009 resulted in a

positive impact on net revenue. Gains and losses associated with the

revaluation of foreign-denominated assets and liabilities and foreign

currency hedging (included in cost of goods sold) were unfavorable when

compared to the same period last year which offset the positive impact of

          currency included in net revenue.          •   Shipment mix changes benefited net revenue and gross profit due to a

higher mix of the Company's higher margin touring motorcycles and changes

in product mix within the Company's motorcycle families. Product mix

changes were also impacted by motorcycle option offerings, shipment

         location and related products.          •   Raw material prices were higher in 2010 relative to 2009 due to          unfavorability in steel and aluminum prices.    

• Manufacturing costs increased partially as the result of a higher fixed

         cost per unit due to allocating fixed costs across fewer units. Higher          manufacturing costs were also the result of increasing product cost          associated with new models and increased product content. Finally,

manufacturing costs were also higher due to temporary inefficiencies

associated with the Company's transition to outsourcing non-core

operations at its York facility. These increased costs were partially

          offset by productivity gains.          •   In 2009, the Company incurred Buell exit costs consisting of sales

incentives to independent dealers and inventory write-downs. The sales

incentives lowered 2009 revenue while the inventory write-downs increased

2009 cost of sales.

   The increase in selling and administrative expense was primarily due to increased expense associated with the Company's variable incentive compensation programs and increased spending on growth initiatives partially offset by savings from the Company's restructuring efforts and lower warranty and recall charges. During 2010, the Company accrued for a payout of variable incentive compensation programs; no accrual was made during 2009 due to the Company's determination that plan targets would not be met. Increased spending on growth initiatives during 2010 included approximately $15 million of costs associated with the Company's efforts to expand its presence in Brazil. As part of these expansion efforts, in late 2010, the Company reached an agreement with the previous dealer in Brazil that permits the Company to develop a new network of independent                                           40 

-------------------------------------------------------------------------------- dealers as it expands its presence in that market. The decrease in engineering expense was primarily due to savings from the Company's restructuring efforts. The Company's announced restructuring plans are further discussed in Note 5 of Notes to Consolidated Financial Statements.                             Financial Services Segment

Segment Results

The following table includes the condensed statements of operations for the financial services segment (in thousands):

                                                                                        Increase            %                                                      2010            2009          (Decrease)        Change Interest income                                    $ 635,207      $  434,152       $   201,055          46.3 % Loss from securitizations                                 -          (13,676 )          13,676           N/M Other income                                          47,502          74,303           (26,801 )       (36.1 )  Financial services revenue                           682,709         494,779           187,930          38.0  Interest expense                                     272,484         283,634           (11,150 )        (3.9 ) Provision for credit losses                           93,118         169,206           (76,088 )       (45.0 ) Operating expenses                                   135,234         128,219             7,015           5.5 Restructuring expense                                     -            3,302           (28,387 )         N/M Goodwill impairment                                       -           28,387            (3,302 )         N/M  Financial services expense                           500,836         612,748          (111,912 )       (18.3 ) 

Operating income (loss) from financial services $ 181,873 $ (117,969 ) $ 299,842

           N/M    On January 1, 2010, the Company adopted Statement of Financial Accounting Standard (SFAS) No. 166, "Accounting for Transfers of Financial Assets, an amendment of FASB Statement No. 140" (codified within ASC Topic 860), and SFAS No. 167, "Amendments to FASB Interpretation No. 46(R)" (codified in ASC Topic 810). As a result of the adoption of the new accounting guidance, the Company consolidated the assets and liabilities of its formerly unconsolidated Qualifying Special Purpose Entities (QSPEs) on January 1, 2010. Beginning on January 1, 2010, the Company began recognizing interest income and credit losses on the previously unconsolidated securitized receivables and interest expense on the related debt within its statement of operations. The Company's statement of operations no longer includes income from securitizations, including the initial gain or loss previously recorded on off-balance sheet securitizations, income on the investment in retained securitization interests and servicer fees. In addition, the Company no longer incurs charges related to other-than-temporary impairments on its investment in retained securitization interests as that asset has been derecognized.  

Interest income during 2010 benefited primarily from higher average retail finance receivables, which was driven by the consolidation of formerly off-balance sheet QSPEs. Interest expense decreased by $11.2 million compared to 2009 due to more favorable cost of funds, partially offset by increased borrowings related to the newly consolidated securitization trusts.

  There was no income or loss from securitizations during 2010 due to the elimination of the investment in retained securitization interests. During 2009, HDFS recorded a $45.4 million other-than-temporary impairment of certain retained securitization interests due to higher actual and anticipated credit losses partially offset by a slowing in actual and expected prepayment speeds. Partially offsetting the other-than-temporary impairment was $31.7 million of income earned from the investment in the retained securitization interests.  Other income decreased during 2010 compared to 2009 primarily due to no servicer fee income partially offset by the benefit of no lower of cost or market valuation adjustment for finance receivables held for sale. As a result of the consolidation of the formerly off-balance sheet securitization trusts, the Company no longer records                                           41 

-------------------------------------------------------------------------------- servicer fee income from servicing off-balance sheet finance receivables. During 2009, the Company earned $25.5 million of servicer fee income. The Company recognized a $5.9 million charge to earnings for a lower of cost or market valuation adjustment related to its finance receivables held for sale during 2009. The charge, which was the result of the determination that the cost exceeded the fair value of the finance receivables held for sale, was due to higher projected credit losses partially offset by lower funding costs. HDFS used discounted cash flow methodologies to estimate the fair value of finance receivables held for sale that incorporated appropriate assumptions for discount rate, funding costs and credit enhancement, as well as estimates concerning credit losses and prepayments that, in management's judgment, reflected assumptions that market participants would use.  The provision for credit losses related to retail and wholesale receivables decreased by $68.5 million and $7.9 million, respectively, in 2010 compared to 2009. The decrease in the provision for retail credit losses was primarily driven by the second quarter 2009 reclassification of $3.14 billion of finance receivables held for sale to finance receivables held for investment. The reclassification resulted in a $72.7 million increase in the allowance for finance credit losses during 2009. The provision for wholesale credit losses was $7.9 million lower during 2010 versus 2009 due to a reduction in wholesale finance receivables outstanding from prior year and lower specific reserve needs in 2010 as a number of dealer credit situations were resolved.  As part of the January 1, 2010 adoption of the new accounting guidance within ASC Topic 810 and ASC Topic 860, the Company consolidated an initial allowance for credit losses of $49.4 million related to the previously unconsolidated securitized finance receivables through an adjustment to retained earnings. Subsequent changes in the provision for credit losses are included in the statement of operations.  Annual losses on HDFS' managed retail motorcycle finance receivables were 2.11% in 2010 compared to 2.86% for 2009. The 30-day delinquency rate for managed retail motorcycle finance receivables at December 31, 2010 decreased to 5.07% from 6.51% at December 31, 2009. At December 31, 2010, managed retail finance receivables were comprised of all finance receivables held by HDFS, including those that were consolidated beginning January 1, 2010. Prior to January 1, 2010, managed retail finance receivables included finance receivables held by HDFS and those sold through off-balance sheet securitization transactions. The decrease in credit losses from 2009 was due to a lower frequency of loss and a modest improvement in the recovery values of repossessed motorcycles.  

Changes in the allowance for finance credit losses on finance receivables held for investment were as follows (in millions):

                                                                      2010             2009 Balance, beginning of period                                    $  150,082

$ 40,068 Allowance related to newly consolidated finance receivables $ 49,424 Provision for finance credit losses

                                 93,118  

169,206

 Charge-offs, net of recoveries                                    (119,035 )        (59,192 )  Balance, end of period                                          $  173,589        $ 150,082    At December 31, 2010, the allowance for finance credit losses on finance receivables was $15.8 million for wholesale receivables and $157.8 million for retail receivables, which includes $103.8 million related to finance receivables held by consolidated variable interest entities (VIEs). See Note 8 of Notes to Consolidated Financial Statements for more information on the Company's VIEs. The allowance for finance credit losses on finance receivables was $133.3 million for retail receivables and $16.8 million for wholesale receivables at December 31, 2009.  

HDFS' periodic evaluation of the adequacy of the allowance for finance credit losses on finance receivables is generally based on HDFS' past loan loss experience, known and inherent risks in the portfolio, current economic

                                       42

--------------------------------------------------------------------------------

conditions and the estimated value of any underlying collateral. Please refer to Note 6 of Notes to Consolidated Financial Statements for further discussion regarding the Company's allowance for finance credit losses on finance receivables.

During 2009, the Company recorded an impairment charge of $28.4 million related to the goodwill associated with HDFS.

                                 Other Matters

New Accounting Standards Not Yet Adopted

  In May 2011, the FASB issued ASU No. 2011-04, "Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs." ASU No. 2011-04 clarifies the application of existing guidance within 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 Levels 1 and 2 in the fair value hierarchy. The Company is required to adopt ASU No. 2011-04 beginning in the first quarter of 2012 and the adoption of ASU No. 2011-04 will only impact the content of the current disclosure.  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 is required to adopt ASU No. 2011-05 beginning in the first quarter of 2012 and the adoption of ASU No. 2011-05 will only impact the format of the current presentation.  

Critical Accounting Estimates

  The Company's financial statements are based on the selection and application of significant accounting policies, which require management to make significant estimates and assumptions. Management believes that the following are some of the more critical judgment areas in the application of accounting policies that currently affect the Company's financial condition and results of operations. Management has discussed the development and selection of these critical accounting estimates with the Audit Committee of the Board of Directors.  Allowance for Finance Credit Losses on Finance Receivables - The allowance for uncollectible accounts is maintained at a level management believes is adequate to cover the losses of principal in the existing finance receivables portfolio. HDFS performs a periodic and systematic collective evaluation of the adequacy of the retail allowance. 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.  The wholesale portfolio is primarily composed of large balance, non-homogeneous finance receivables. HDFS' wholesale allowance evaluation is first based on a loan-by-loan review. A specific allowance 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 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. In establishing the allowance, management considers a number of factors including the specific borrower's financial performance as well as ability to repay. Finance receivables in the wholesale portfolio that are not individually evaluated for impairment are segregated, based on similar risk characteristics, according to                                           43  -------------------------------------------------------------------------------- the Company's internal risk rating system and collectively evaluated for impairment. The related allowance is based on factors such as the Company's past loan loss experience, current economic conditions as well as the value of the underlying collateral.  Product Warranty - Estimated warranty costs are reserved for each motorcycle at the time of sale. The warranty reserve is an estimated cost per unit sold based upon historical Company claim data used in combination with other known factors that may affect future warranty claims. The Company updates its warranty estimates quarterly to ensure that the warranty reserves are based on the most current information available.  The Company believes that past claim experience is indicative of future claims; however, the factors affecting actual claims can be volatile. As a result, actual claims experience may differ from estimated which could lead to material changes in the Company's warranty provision and related reserves. The Company's warranty liability is discussed further in Note 1 of Notes to Consolidated Financial Statements.  Pensions and Other Postretirement Healthcare Benefits - The Company has several defined benefit pension plans and several postretirement healthcare benefit plans, which 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.  

U.S. GAAP requires that companies recognize in their statement of financial position a liability for defined benefit pension and postretirement plans that are underfunded or an asset for defined benefit pension and postretirement benefit plans that are overfunded.

Pension, SERPA and postretirement healthcare obligations and costs are calculated through actuarial valuations. The valuation of benefit obligations and net periodic benefit costs relies on key assumptions including discount rates, long-term expected return on plan assets, future compensation and healthcare cost trend rates.

  The Company determines its discount rate assumptions by referencing high-quality long-term bond rates that are matched to the duration of its own benefit obligations. Based on this analysis, the Company decreased the discount rate for pension and SERPA obligations from 5.79% as of December 31, 2010 to 5.30% as of December 31, 2011. The Company decreased the discount rate for postretirement healthcare obligations from 5.28% to 4.90%. The Company determines its healthcare trend assumption for the postretirement healthcare obligation by considering factors such as estimated healthcare inflation, the utilization of healthcare benefits and changes in the health of plan participants. Based on the Company's assessment of this data as of December 31, 2011, the Company set its healthcare cost trend rate at 8.5% as of December 31, 2011. The Company expects the healthcare cost trend rate to reach its ultimate rate of 5% by 2019.(1) These assumption changes were reflected immediately in the benefit obligation and will be amortized into net periodic benefit costs over future periods.  Plan assets are measured at fair value and are subject to market volatility. In estimating the expected return on plan assets, the Company considers the historical returns on plan assets, adjusted to reflect the current view of the long-term investment market.                                           44 

-------------------------------------------------------------------------------- Changes in the funded status of defined benefit pension and postretirement benefit plans resulting from the difference between assumptions and actual results are initially recognized in other comprehensive income and amortized to expense over future periods. The following information is provided to illustrate the sensitivity of pension and postretirement healthcare obligations and costs to changes in these major assumptions (in thousands):                                                                                        Impact of a 1%          Impact of a 1%                                      Amounts based         Impact of a 1%          decrease in the          increase in the                                       on current           decrease in the             expected               healthcare                                       assumptions           discount rate          return on assets         cost trend rate 2011 Net periodic benefit costs Pension and SERPA                   $        45,291       $          20,343       $           13,328                     n/a Postretirement healthcare           $        21,202       $           1,268       $            1,175       $           1,915  2011 Benefit obligations Pension and SERPA                   $     1,570,930       $         242,383                      n/a                     n/a Postretirement healthcare           $       380,625       $          33,788                      n/a       $          14,225  

This information should not be viewed as predictive of future amounts. The calculation of pension, SERPA and postretirement healthcare obligations and costs is based on many factors in addition to those discussed here. This information should be considered in combination with the information provided in Note 15 of Notes to Consolidated Financial Statements.

  Stock Compensation Costs - The total cost of the Company's share-based awards is equal to the grant date fair value per award multiplied by the number of awards granted (adjusted for forfeitures). This cost is recognized as expense on a straight-line basis over the service periods of the awards. Forfeitures are initially estimated based on historical Company information and subsequently updated over the life of the awards to ultimately reflect actual forfeitures. As a result, changes in forfeiture activity can influence the amount of stock compensation cost recognized from period to period.  The Company estimates the fair value of option awards as of the grant date using a lattice-based option valuation model which utilizes ranges of assumptions over the expected term of the options, including stock price volatility, dividend yield and risk free interest rate.  The valuation model uses historical data to estimate option exercise behavior and employee terminations. The expected term of options granted is derived from the output of the option valuation model and represents the average period of time that options granted are expected to be outstanding.  The Company uses a weighted-average of historical and implied volatility to determine the expected volatility of its stock. The implied volatility is derived from options that are actively traded and the market prices of both the traded options and underlying shares are measured at a similar point in time to each other and on a date reasonably close to the grant date of the employee stock options. In addition, the traded options have exercise prices that are both (a) near-the-money and (b) close to the exercise price of the employee stock options. Finally, the remaining maturities of the traded options on which the estimate is based are at least one year.  Dividend yield was based on the Company's expected dividend payments and the risk-free rate was based on the U.S. Treasury yield curve in effect at the time of grant.  Changes in the valuation assumptions could result in a significant change to the cost of an individual option. However, the total cost of an award is also a function of the number of awards granted, and as result, the Company has the ability to control the cost of its equity awards by adjusting the number of awards granted.  Income Taxes - The Company accounts for income taxes in accordance with ASC Topic 740, "Income Taxes." Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax                                           45 

-------------------------------------------------------------------------------- bases and operating loss and other loss carry-forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The Company is subject to income taxes in the United States and numerous foreign jurisdictions. Significant judgment is required in determining the Company's worldwide provision for income taxes and recording the related deferred tax assets and liabilities. In the ordinary course of the Company's business, there are transactions and calculations where the ultimate tax determination is uncertain. Accruals for unrecognized tax benefits are provided for in accordance with the requirements of ASC Topic 740. An unrecognized tax benefit represents the difference between the recognition of benefits related to exposure items for income tax reporting purposes and financial reporting purposes. The unrecognized tax benefit is included within other long-term liabilities in the Consolidated Balance Sheets. The Company has a reserve for interest and penalties on exposure items, if applicable, which is recorded as a component of the overall income tax provision. The Company is regularly under audit by tax authorities. Although the outcome of tax audits is always uncertain, management believes that it has appropriate support for the positions taken on its tax returns and that its annual tax provision includes amounts sufficient to pay any assessments. Nonetheless, the amounts ultimately paid, if any, upon resolution of the issues raised by the taxing authorities may differ materially from the amounts accrued for each year.  Contractual Obligations 

A summary of the Company's expected payments for significant contractual obligations as of December 31, 2011 is as follows (in thousands):

                                       2012          2013 - 2014       2015 - 2016       Thereafter          Total Principal payments on debt       $ 1,878,733      $  1,917,075      $    977,853      $   948,958      $ 5,722,619 Interest payments on debt            221,704           314,158           159,710           94,221          789,793 Operating lease payments              12,076            14,884             8,683            5,585           41,228                                   $ 2,112,513      $  2,246,117      $  1,146,246      $ 1,048,764      $ 6,553,640    As described in Note 13 of Notes to Consolidated Financial Statements, the Company classified $195.6 million related to its unsecured commercial paper and its Global Credit Facilities (as defined in "Liquidity and Capital Resources") as long-term debt as of December 31, 2011. This amount is classified as long term because it is supported by the Global Credit Facilities and is expected to remain outstanding for an uninterrupted period extending beyond one year. The Company has assumed that this amount will be repaid in 2013.  

Interest obligations include the impact of interest rate hedges outstanding as of December 31, 2011. Interest for floating rate instruments assumes December 31, 2011 rates remain constant.

  As of December 31, 2011, the Company had no material purchase obligations other than those created in the ordinary course of business related to inventory and property, plant and equipment which generally have terms of less than 90 days.  The Company has long-term obligations related to its pension, SERPA and postretirement healthcare plans at December 31, 2011. During 2011, the Company contributed $219.5 million to its pension, SERPA and postretirement healthcare plans, which included a $200.0 million voluntary contribution to its pension plans. No additional contributions were required during 2011 beyond current benefit payments for SERPA and postretirement healthcare plans. In January 2012, the Company voluntarily contributed another $200 million to its qualified pension plans to further fund its pension plans and the Company expects that no additional qualified pension plan contributions will be 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. The Company's expected future contributions to these plans are provided in Note 15 of Notes to Consolidated Financial Statements.                                           46  -------------------------------------------------------------------------------- As described in Note 14 of Notes to Consolidated Financial Statements, the Company has unrecognized tax benefits of $57.1 million and accrued interest and penalties of $24.3 million as of December 31, 2011. However, the Company cannot make a reasonably reliable estimate for the period of cash settlement for either the liability for unrecognized tax benefits or accrued interest and penalties.  

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

  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 $3.9 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.                                           47  -------------------------------------------------------------------------------- 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:

  Additionally, 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.              Liquidity and Capital Resources as of December 31, 2011  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.(1) 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, an asset-backed commercial paper conduit facility, 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):

                                                                    December 31,                                                                      2011     Cash and cash equivalents                                   $    1,526,950     Marketable securities                                              153,380 

Total cash and cash equivalents and marketable securities 1,680,330

      Global credit facilities                                           

315,920

     Asset-backed conduit facility                                      

600,000

      Total availability under credit facilities                         915,920      Total                                                       $    2,596,250    Although the Company believes it has obtained the funding necessary to support HDFS' operations for 2012(1), the Company recognizes that it must continue to adjust its business to changes in the lending environment. 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 the increased difficulty of raising, or potential unsuccessful efforts to raise, funding in the short-term and long-term capital markets.(1) 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.  The Company has long-term obligations related to its pension, SERPA and postretirement healthcare plans at December 31, 2011. During 2011, the Company contributed $219.5 million to its pension, SERPA and postretirement healthcare plans, which includes a $200.0 million voluntary contribution to its pension plans. In                                           48 

-------------------------------------------------------------------------------- January 2012, the Company made a voluntary contribution of $200 million to its qualified pension plans to further fund its pension plans and expects that no additional qualified pension plan contributions will be 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. The Company's expected future contributions to these plans are provided in Note 15 of Notes to Consolidated Financial Statements.  

Cash Flow Activity

The following table summarizes the cash flow activity of continuing operations for the years ended December 31, 2011, 2010 and 2009 (in thousands):

                                                      2011              2010    

2009

 Net cash provided by operating activities      $  885,291       $  1,163,418       $   609,010 Net cash (used) provided by investing activities                                        (63,542 )          145,437          (863,487 ) Net cash (used) provided by financing activities                                       (308,944 )       (1,856,090 )       1,381,937 Effect of exchange rate changes on cash and cash equivalents                                   (7,788 )            4,940             6,789  Net increase (decrease) in cash and cash equivalents                                    $  505,017       $   (542,295 )     $ 1,134,249    Operating Activities  The decrease in operating cash flow in 2011 compared to 2010 was due primarily to a $200.0 million voluntary contribution to the Company's qualified pension plans in 2011 and higher cash outflows related to an increase in wholesale finance receivables originations in 2011. In addition, working capital changes resulted in lower operating cash inflows in 2011 as compared to 2010. This was due in part to increases in inventory that were the result of a management decision to increase finished goods motorcycle inventories at the end of 2011.  In 2012, the Company plans to implement a new ERP system at York which the Company expects to provide new capabilities across the supply chain, including the ability to do more factory customization, enable more flexible production and provide end-to-end supply chain integration. As a result, the Company expects to experience downtime at York as the system is implemented. To minimize the impact on dealers and customers during the implementation, the Company produced and inventoried approximately 7,000 incremental motorcycles in the fourth quarter of 2011. The Company expects to carry higher finished goods inventory into 2012 when it expects production to be impacted by the ERP implementation.(1)  The increase in operating cash flow for 2010 compared to 2009 was due primarily to the classification of the Company's retail lending activities and favorable movements in working capital. U.S. retail motorcycle finance receivables originated prior to June 28, 2009 were classified as held-for-sale based on the Company's intent to securitize these U.S. retail motorcycle finance receivables in off-balance sheet securitization transactions under U.S. GAAP in effect at that time. Accordingly, the net cash outflows related to the origination and collection of these retail finance receivables were classified as operating cash flows in 2009 and prior.  Investing Activities  The Company's investing activities consist primarily of capital expenditures, net changes in retail finance receivables and short-term investment activity. Capital expenditures were $189.0 million, $170.8 million and $116.7 million during 2011, 2010 and 2009, respectively.  Net cash flows from finance receivables, which consisted primarily of retail finance receivables, for 2011 were $278.4 million lower than in the same period last year as a result of an increase in retail motorcycle loan originations during 2011.  Net cash flows from finance receivables for 2010 were $1.19 billion higher than in 2009. The increase in cash flow from net changes in finance receivables in 2010 compared to 2009 reflect the incremental cash flows from finance receivables held by securitization trusts that were not consolidated prior to January 1, 2010. On                                           49 

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January 1, 2010 the Company began consolidating formerly off-balance sheet QSPEs, used in connection with its prior off-balance sheet securitization transactions, as a result of adopting new U.S. GAAP.

  Changes in the Company's investment in marketable securities resulted in cash outflows of $12.5 million, $100.1 million and $39.7 million in 2011, 2010 and 2009, respectively.  Financing Activities 

The Company's financing activities consist primarily of dividend payments, share repurchases and debt activity.

  The Company paid dividends of $0.475 per share totaling $111.0 million during 2011, $0.40 per share totaling $94.1 million during 2010 and $0.40 per share totaling $93.8 million in 2009.  Cash outflows from share repurchases were $224.5 million, $1.7 million and $1.9 million for 2011, 2010 and 2009, respectively. Share repurchases during 2011 included 6.0 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 in 2010 and 2009 were limited to shares of common stock that employees surrendered to satisfy withholding taxes in connection with the vesting of restricted stock awards. As of December 31, 2011, 16.7 million shares remained on a board-approved share repurchase authorization. In addition, as of December 31, 2011, 1.9 million shares remained on a separate board-approved share repurchase authorization that is in place to offset option exercises and restricted stock grants. In total at December 31, 2011, the Company had authorization to repurchase 18.6 million shares of its common stock.  

The Company's total outstanding debt consisted of the following as of December 31, 2011, 2010 and 2009 (in thousands):

                                                 2011            2010            2009    Global credit facilities                $   159,794     $   213,772     $   448,049    Unsecured commercial paper                  874,286         582,572         325,099    Medium-term notes                         2,298,193       1,897,778       2,103,396    Senior unsecured notes                      303,000         303,000         600,000

Term asset-backed securitization debt 2,087,346 2,755,234

 2,159,585     Total debt                              $ 5,722,619     $ 5,752,356     $ 5,636,129    In order 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 December 31, 2011 were as follows:                                     Short-Term      Long-Term      Outlook             Moody's                       P2       Baa1          Stable             Standard & Poor's             A2        BBB      Positive watch             Fitch                         F2       BBB+         Positive  

On January 25, 2012 Standard & Poor's raised the Company's long-term rating to BBB+ and changed the outlook to stable.

  Global Credit Facilities - On April 28, 2011, the Company and HDFS entered into a new $675.0 million four-year credit facility to refinance and replace a $675.0 million 364-day credit facility that matured in April 2011.                                           50  -------------------------------------------------------------------------------- The new four-year credit facility matures in April 2015. The Company and HDFS also have a $675.0 million three-year credit facility which matures in April 2013. The new four-year credit facility and the three-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 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  as of December 31, 2011 supported by the Global Credit Facilities. 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 commercial paper conduit facility or through the use of operating cash flow.(1)  Medium-Term Notes - The Company has the following medium-term notes (collectively, the Notes) issued and outstanding at December 31, 2011 (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        $  450,000                       3.875 %     March 2011      March 2016        $  950,131                        6.80 %      May 2008        June 2018   The Notes provide for semi-annual interest payments and principal due at maturity. During 2011, HDFS repurchased an aggregate $49.9 million of its $1.0 billion, 6.80% medium-term notes which mature in June 2018. As a result, HDFS recognized in financial services interest expense a $9.6 million loss on the extinguishment of debt, which included unamortized discounts and fees. During December 2010, the $200.0 million 5.00% medium-term notes matured, and the principal and accrued interest were paid in full. Unamortized discounts on the Notes reduced the balance by $1.9 million, $2.2 million, and $2.7 million at December 31, 2011, 2010 and 2009, respectively.  In January 2012, HDFS issued $400.0 million of medium-term notes, which mature in March 2017 and have an annual interest rate of 2.70%. The medium-term notes provide for semi-annual interest payments and principal due at maturity.  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 Commercial Paper Conduit Facility - On September 9, 2011, the Company amended and restated its revolving asset-backed conduit facility which provides for a total aggregate commitment of $600.0 million. At December 31, 2011, HDFS had no outstanding borrowings under the conduit facility.  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 conduit facility 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                                           51  -------------------------------------------------------------------------------- outstanding principal. Upon expiration of the conduit facility, 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 December 31, 2011, the conduit facility expires on September 7, 2012.  Term Asset-Backed Securitization Debt - On January 1, 2010, the Company adopted new guidance within ASC Topics 810 and 860 for consolidating VIEs. As a result, the Company consolidated the securitized U.S. retail motorcycle finance receivables, resulting in secured borrowings, and other related assets and liabilities related to the formerly unconsolidated QSPEs in the Company's consolidated financial statements. The consolidation of the secured notes related to these VIEs resulted in a $1.89 billion increase in securitization debt on January 1, 2010, the effective date of adoption.  For all of the term asset-backed securitization transactions, the Company 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 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 the Company's 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 U.S. retail motorcycle finance receivables are applied to outstanding principal. The secured notes' contractual lives have various maturities ranging from 2012 to 2018.  As of December 31, 2011, the assets of the VIEs totaled $3.09 billion, of which $2.85 billion of finance receivables and $228.8 million of cash were restricted as collateral for the payment of $2.09 billion secured notes. Approximately $640.3 million of the obligations under the secured notes were classified as current at December 31, 2011, 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 December 31, 2011, 2010 and 2009, HDFS had no outstanding borrowings owed to the Company under this agreement.

  The Company has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support in order 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.  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 asset-backed commercial paper conduit facility. 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 a merger, consolidation, liquidation or dissolution; 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 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 asset-backed commercial paper conduit facility.                                           52 

--------------------------------------------------------------------------------

At December 31, 2011, 2010 and 2009, HDFS and the Company remained in compliance with all of the existing covenants.

Cash Flows from Discontinued Operations

  There were no cash flows from discontinued operations during 2011. During the years ended December 31, 2010 and 2009, cash flows from discontinued operations were a net cash outflow of $72.3 million and $91.3 million.                               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) 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,    

(ix) manage risks that arise through expanding international operations and

          sales,    

(x) manage supply chain issues, including any unexpected interruptions or

price increases caused by raw material shortages or natural disasters,

      (xi) manage production capacity and production changes,    

(xii) provide products, services and experiences that are successful in the

            marketplace, (xiii) develop and implement sales and marketing 

plans

            that retain existing retail customers and attract new retail 

customers

           in an increasingly competitive marketplace,    

(xiv) manage the risks that our independent dealers may have difficulty

            obtaining capital and managing through changing economic conditions and            consumer demand,          (xv) continue to have access to reliable sources of capital funding and           adjust to fluctuations in the cost of capital,          (xvi) manage the credit quality, the loan servicing and collection            activities, and the recovery rates of HDFS' loan portfolio,    

(xvii) sell all of its motorcycles and related products and services to its

            independent dealers,    

(xviii) continue to develop the capabilities of its distributor and dealer

             network,          (xix) manage changes and prepare for requirements in legislative and            regulatory environments for its products, services and

operations,                                            53 

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(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.   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" under Item 1A which includes a discussion of additional risk factors and a more complete discussion of some of the cautionary statements noted above.  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.                                           54 

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