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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q

Commission File Number 1-9183

(Registrant's telephone number, including area code) (414) 342-4680

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X    No        

Indicate by check mark whether the registrant is an accelerated filer (as defined by Rule 12b-2 of the Exchange Act).  Yes    X    No        

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock Outstanding as of November 1, 2004: 293,798,337 shares

HARLEY-DAVIDSON, INC.

Form 10-Q Index
For the Quarter Ended September 26, 2004

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PART I — FINANCIAL INFORMATION

Item 1. Consolidated Financial Statements

Harley-Davidson, Inc.
Condensed Consolidated Statements of Income
(Unaudited)
(In thousands, except per share amounts)

See accompanying notes.

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Harley-Davidson, Inc.
Condensed Consolidated Balance Sheets
(In thousands)

See accompanying notes.

4

Harley-Davidson, Inc.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)

See accompanying notes.

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HARLEY-DAVIDSON, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)

Note 1 — Basis of Presentation and Use of Estimates

The condensed interim consolidated financial statements included herein have been prepared by Harley-Davidson, Inc. (the “Company”) without audit. Certain information and footnote disclosures normally included in complete financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission and accounting principles generally accepted in the United States for interim financial information. However, the foregoing statements contain all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of Company management, necessary to present fairly the condensed consolidated balance sheets as of September 26, 2004 and September 28, 2003, the condensed consolidated statements of income for the three- and nine-month periods then ended and the condensed consolidated statements of cash flows for the nine-month periods ended September 26, 2004 and September 28, 2003. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended December 31, 2003.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

Note 2 – Inventories

The Company values its inventories at the lower of cost, principally using the last-in, first-out (LIFO) method, or market. Inventories consist of the following (in thousands):

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Note 3 — Product Warranty

The Company provides a standard limited warranty on all new motorcycles sold. The warranty coverage includes parts and labor and begins when the motorcycle is sold to a retail customer. Beginning with shipments of 2004 model year motorcycles (in September 2003), the Company extended its warranty coverage from one year to two years in all of its markets except Europe, where the term had already been extended to two years in 2002 to comply with European regulations. The Company maintains reserves for future warranty claims using an estimated cost per unit sold, which is based on historical Company claim information. Changes in the Company’s warranty liability were as follows (in thousands):

Note 4 — Business Segments

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. Selected segment information is set forth below (in thousands):

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Note 5 — Earnings Per Share

The following table sets forth the computation for basic and diluted earnings per share (in thousands, except per share amounts):

Note 6 — Comprehensive Income

The following table sets forth the reconciliation of net income to comprehensive income (in thousands):

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Note 7 – Employee Benefit Plans

The Company has several defined benefit pension plans and several postretirement health care 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.

On December 8, 2003, the Medicare Prescription Drug Improvement and Modernization Act of 2003 (the Act) was signed into law. The Act introduced a voluntary prescription drug benefit under Medicare as well as a federal subsidy to sponsors of retiree healthcare plans that provide prescription drug benefits that are at least actuarially equivalent to Medicare. The Company has determined that prescription drug benefits offered under its plans are at least actuarially equivalent to the benefits that will be provided under Medicare and expects to receive the federal subsidy provided under the Act. The Company has recognized the initial impact of the Act’s provisions in the current quarter ended September 26, 2004. As a result, postretirement benefit cost for the three months ended September 26, 2004 was $1.0 million lower than it would have been, had the Company not recognized the impact of the provisions of the Act. The Company’s recognition of the impact of these provisions has also resulted in a decrease of $23.3 million in the accumulated postretirement benefit obligation, related to benefits attributed to past service.

Components of net periodic benefit costs were as follows (in thousands):

As disclosed in the Company’s annual report on Form 10-K for the year ended December 31, 2003, the Company has no minimum required pension plan contributions in 2004 and currently does not plan to make a contribution in 2004. Postretirement healthcare claims are paid as incurred.

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Note 8 — Stock Options

The Company has stock option plans under which the Board of Directors may grant to employees nonqualified stock options with or without appreciation rights. The Company accounts for those plans under the recognition and measurement principles of APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. No stock-based employee compensation cost is reflected in net income, as all options granted under those plans had an exercise price equal to the market value of the underlying common stock on the date of grant. For purposes of pro forma disclosures under SFAS No. 123, “Accounting for Stock-Based Compensation,” the estimated fair value of the options, using the Black-Scholes options pricing model, is amortized to expense over the options’ vesting period. The Company’s pro forma information follows (in thousands, except per share amounts):

Note 9 – 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 on-going basis and are updated based on new developments or new information in each matter.

In January 2001, the Company, on its own initiative, notified each owner of 1999 and early-2000 model year Harley-Davidson^® motorcycles equipped with Twin Cam 88 and Twin Cam 88B engines that the Company was extending the warranty for a rear cam bearing to 5 years or 50,000 miles. Subsequently, on June 28, 2001, a putative nationwide class action was filed against the Company in state court in Milwaukee County, Wisconsin, which was amended by a complaint filed September 28, 2001. The complaint alleged that this cam bearing is defective and asserted various legal theories. The complaint sought unspecified compensatory and punitive damages for affected owners, an order compelling the Company to repair the engines, and other relief. On February 27, 2002, the Company’s motion to dismiss the amended complaint was granted by the Court and the amended complaint was dismissed in its entirety. An appeal was filed with the Wisconsin Court of Appeals. On April 12, 2002, the same attorneys filed a second putative nationwide class action against the Company in state court in Milwaukee County, Wisconsin relating to this cam bearing issue and asserting different legal theories than in the first action. The complaint sought unspecified compensatory damages, an order compelling the Company to repair the engines and other relief. On September 23, 2002, the Company’s motion to dismiss was granted by the Court, the complaint was dismissed in its entirety, and no appeal was taken. On January 14, 2003, the Wisconsin Court of Appeals reversed the trial court’s February 27, 2002 dismissal of the complaint in the first action, and the Company petitioned the Wisconsin Supreme Court for review. On March 26, 2004, the Wisconsin Supreme Court reversed the Court of Appeals and dismissed the remaining claims in the action. On April 12, 2004, the same attorneys filed a third action in the state court in Milwaukee County, on behalf of the same plaintiffs from the action dismissed by the Wisconsin Supreme Court. This third action was dismissed by the court on July 26, 2004. In addition, the plaintiffs in the original case moved to reopen that matter and amend the complaint to add new causes of action, which motion was denied on August 23, 2004. A notice of appeal to the Wisconsin Court of Appeals from the latter dismissal has now been filed. The Company intends to continue to vigorously defend this matter. The Company believes that the 5 year/50,000 mile warranty extension it announced in January 2001 adequately addresses the condition for affected owners.

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The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the clean up 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 since 1986 in undertaking environmental investigation and remediation activities, including an on-going 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 U.S. Environmental Protection Agency (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. The objectives and procedures for facility lead corrective action under RCRA are consistent with the investigation and remediation already being conducted under the Agreement with the Navy, and the Company agreed to participate in EPA’s corrective action program under a RCRA facility lead agreement.

Although the RI/FS is still underway and substantial uncertainty exists concerning the nature and scope of the additional environmental investigation and remediation that will ultimately be required at the York facility, the Company estimates that its share of the future Response Costs at the York facility will be approximately $6.7 million. The Company has established reserves for this amount, which are included in Accrued expenses and other liabilities in the consolidated balance sheets.

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 over a period of several years ending in 2010. Response Costs related to ground water remediation may continue for some time beyond 2010. However, these Response Costs are expected to be much lower than those related to the remediation of soil.

Under the terms of the sale of the Commercial Vehicles Division in 1996, the Company has agreed to indemnify Utilimaster Corporation, until 2008, for certain claims related to environmental contamination present at the date of sale, up to $20 million. Based on the environmental studies performed as part of the sale of the Transportation Vehicles segment, the Company does not expect to incur any material expenditures under this indemnification.

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Additionally, the Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures which 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.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Harley-Davidson, Inc. is the parent company for the groups of companies doing business as Harley-Davidson Motor Company, Buell Motorcycle Company and Harley-Davidson Financial Services (HDFS). Harley-Davidson Motor Company produces heavyweight motorcycles and offers a complete line of motorcycle parts, accessories, apparel and general merchandise. Harley-Davidson Motor Company manufactures five families of motorcycles: Touring, Dyna Glide, Softail^®, VRSC and Sportster^®. Buell Motorcycle Company produces sport motorcycles, including four big-twin XB models and the single-cylinder Buell^® Blast^®. Buell also offers a line of motorcycle parts, accessories, apparel and general merchandise. Harley-Davidson Financial Services provides wholesale and retail financing and insurance programs primarily to Harley-Davidson/Buell dealers and customers.

Overview⁽¹⁾

During the third quarter of 2004 the Company shipped 80,578 Harley-Davidson units and increased diluted earnings per share 24.2% over the same quarter last year. On a year-to-date basis the Company shipped 236,702 Harley-Davidson motorcycles and grew diluted earnings per share 20.5% over the same period last year.

Management believes that the Company’s results through the third quarter of 2004 are on track to meet its previously stated goals. The Company has confirmed its 2004 annual objective to ship 317,000 Harley-Davidson units and has announced a new target to ship 339,000 units in 2005. The 2005 Harley-Davidson unit target represents a 7% increase over the 2004 target and is in line with the Company’s previously stated objective to increase units in the range of 7 to 9%. The Company also maintains its goal to satisfy demand for 400,000 Harley-Davidson units in 2007 and to achieve earnings growth rates in the mid-teens for the foreseeable future.

Results of Operations for the Three Months Ended September 26, 2004
Compared to the Three Months Ended September 28, 2003

The “% Change” figures included in this section have been calculated using unrounded dollar amounts and may differ from calculations using the rounded dollar amounts presented.

Overall

For the third quarter ended September 26, 2004, net revenue totaled $1.30 billion, a $167.1 million or 14.7% increase over the same period last year. Net income for the third quarter of 2004 was $229.0 million compared to $190.1 million in the third quarter of 2003, an increase of 20.5%. Diluted earnings per share for the third quarter of 2004 was $.77, representing a 24.2% increase over 2003 third quarter earnings per share of $.62. Diluted earnings per share was positively impacted during the third quarter of 2004 by a decrease in the weighted-average shares outstanding, which were 295.8 million in the third quarter of 2004 compared to 304.6 million in the same quarter last year. The decrease in weighted-average shares outstanding was driven by the Company’s share repurchases that occurred during the first nine months of 2004. The Company’s share repurchases are discussed in further detail under “Liquidity and Capital Resources.”

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Motorcycle Unit Shipments & Net Revenue

The following table includes wholesale motorcycle unit shipments and net revenue for the Motorcycles segment for the three months ended September 26, 2004 and September 28, 2003 (dollars in millions):

*Custom motorcycle units, as used in this table, includes Softail^®, Dyna Glide, VRSC and other custom models.

During the third quarter of 2004, net revenue for the Motorcycles segment increased $167.1 million over the same period last year, primarily due to the increase in revenue from the sale of Harley-Davidson motorcycles. During the third quarter of 2004, Harley-Davidson motorcycle revenue was up $152.3 million or 18.0% over the same quarter last year driven by the increase in units shipped. Harley-Davidson motorcycle revenue also benefited from favorable changes in foreign currency exchange rates, resulting in $9.2 million of higher revenue during the third quarter of 2004. However, the revenue benefit from exchange rates was more than offset by lower revenue due to changes in product mix, as discussed below.

During the third quarter of 2004, Harley-Davidson motorcycle revenue was impacted by changes in product mix related primarily to an increase in the percentage of shipments consisting of lower-priced Sportster motorcycles and a decrease in the percentage of shipments consisting of more expensive touring motorcycles. The increase in Sportster shipments began with the introduction of the completely redesigned 2004 Sportster models which are an important part of the Company’s strategy to attract new customers to the Harley-Davidson family. As a result, the percentage of shipments consisting of Touring and Custom motorcycles has also been impacted during 2004. The Company expects that the mix of Sportster motorcycles will continue to be in the range of 20% to 25% of total units shipped over the longer term.⁽¹⁾

Parts and Accessories (P&A) net revenue for the third quarter of 2004, of $224.4 million, was up $16.6 million or 8.0%, compared to the third quarter of 2003. On a long-term basis, the Company expects the growth rate for P&A revenue to be slightly higher than the growth rate for Harley-Davidson motorcycle units.⁽¹⁾

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General Merchandise net revenue, which includes clothing and collectibles, was $61.4 million for the third quarter of 2004, up $.9 million or 1.4%, compared to the third quarter of 2003. The Company expects that the long-term growth rate for General Merchandise revenue will be lower than the growth rate for Harley-Davidson^® motorcycle units. ⁽¹⁾

Gross Profit

Gross profit of $494.6 million for the Motorcycles segment in the third quarter of 2004 was $91.3 million, or 22.6%, higher than gross profit in the same quarter last year. The $91.3 million increase in gross profit resulted primarily from the increase in net revenue. Gross margin for the third quarter of 2004 was 38.0% compared to 35.6% in the third quarter of 2003. During the third quarter of 2004, gross margin was positively impacted by lower production costs and favorable changes in foreign currency exchange rates, which more than offset the impact of product mix changes discussed under “Net Revenue.” During the third quarter of last year the Company experienced additional costs and inefficiencies associated with the ramp up of its new Softail factory in York, Pennsylvania. With the Softail factory now fully integrated, these costs and inefficiencies were not repeated during the third quarter of 2004. Additionally, favorable changes in foreign currency exchange rates resulted in $8.5 million of higher gross profit during the third quarter of 2004 when compared to the same quarter in 2003.

Financial Services

The following table includes the condensed statements of operations for the Financial Services segment (which consists of HDFS), for the three months ended September 26, 2004 and September 28, 2003 (in millions):

The increase in operating income from Financial Services during the third quarter of 2004 was driven by continued strong marketplace acceptance of HDFS’ finance and insurance products and increased income on investment in retained securitization interests, partially offset by a lower gain on the 2004 third quarter securitization.

During the third quarter of 2004, HDFS sold $625.0 million of retail motorcycle loans through a securitization transaction resulting in a gain of $13.8 million.  During the third quarter of 2003, HDFS sold $475.0 million of retail motorcycle loans resulting in a gain of $22.2 million.  The gain as a percentage of loans securitized in 2004 was 2.2%, in line with the Company’s expectation of 2.0 to 2.5% in the current competitive market and interest rate environment. The gain as a percentage of the amount of loans securitized was lower when compared with last year’s gain due to the costs of an enhanced dealer participation program introduced during the second quarter of 2004 and rising market interest rates.

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During the third quarter of 2004, income on investment in retained securitization interests increased $6.9 million over the same period in 2003, due to larger securitization transactions in 2004 and better than anticipated performance on prior year’s transactions.

Over the long-term, the Company expects the HDFS operating income growth rate to be slightly higher than the Company’s motorcycle unit growth rate.⁽¹⁾ HDFS’ periodic evaluation of the adequacy of the allowance for credit losses is generally based on HDFS’ past loan experience, known and inherent risks in the portfolio, and current economic conditions. HDFS believes the allowance is adequate to cover the losses of principal and accrued interest in the existing portfolio. Changes in HDFS’ allowance for credit losses during the three months ended September 26, 2004 and September 28, 2003 were as follows (in millions):

Operating Expenses

The following table includes operating expenses for the Motorcycles segment and Corporate for the three months ended September 26, 2004 and September 28, 2003 (in millions):

Operating expenses, which include selling, administrative and engineering expenses, were 14.7% and 14.5% of net revenue for the third quarters of 2004 and 2003, respectively. The increase in operating expenses in 2004 was driven by overall growth in the Motorcycles business, but was also impacted by a change in the timing of expenses that occurred during 2003. During 2003, certain expenditures were accelerated into the first half of the year to support the Company’s 100th Anniversary activities. This change resulted in relatively less spending and lower operating expenses during the third quarter of 2003.

Provision for income taxes

The Company’s effective income tax rate was 35.5% and 34.5% during the third quarters of 2004 and 2003, respectively. The Company’s effective income tax rate increased to 35.5% during the fourth quarter of 2003 as pre-tax income grew faster than certain tax benefits. The Company expects that the income tax rate will be 35.5% during the remainder of 2004.⁽¹⁾

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Results of Operations for the Nine Months Ended September 26, 2004
Compared to the Nine Months Ended September
28, 2003

Overall

Net revenue for the nine months ended September 26, 2004 totaled $3.79 billion, a $328.0 million or 9.5% increase over the same period last year. Net income for the first nine months of 2004 was $680.8 million compared to $578.5 million in the first nine months of 2003, an increase of 17.7%. Diluted earnings per share for the first nine months of 2004 were $2.29 on 297.4 million weighted-average shares outstanding, compared to $1.90 on 304.5 million weighted-average shares outstanding during the same period last year, an increase in earnings per share of 20.5%.

Motorcycle Unit Shipments & Net Revenue

The following table includes wholesale motorcycle unit shipments and net revenue for the Motorcycles segment for the nine months ended September 26, 2004 and September 28, 2003 (dollars in millions):

The increase in net revenue for the Motorcycles segment during the first nine months of 2004 was driven by the $259.4 million, or 9.7% increase in Harley-Davidson motorcycle net revenue. Harley-Davidson motorcycle revenue was higher primarily as a result of the 10.6% increase in units shipped and also benefited from favorable changes in foreign currency exchange rates which resulted in $38.6 million of higher revenue during the first nine months of 2004. However, the benefit from exchange rates was offset by lower revenue due to changes in product mix and lower wholesale prices, as discussed below.

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During the first nine months of 2004, Harley-Davidson motorcycle revenue was impacted by changes in product mix related primarily to an increase in the percentage of shipments consisting of lower-priced Sportster motorcycles and a decrease in the percentage of shipments consisting of more expensive custom motorcycles. As discussed under the “Results of Operations for Three Months Ended September 26, 2004,” the percentage of shipments consisting of Touring and Custom motorcycles has been impacted during 2004 by the Company’s planned increase in Sportster production.

Harley-Davidson motorcycle revenue was also impacted by the lower wholesale prices associated with the 2004 model year motorcycles sold during the first and second quarters of 2004. Wholesale prices on the 2004 models reflected the elimination of 100^th Anniversary special edition features and as a result were slightly lower than the wholesale prices for the 100^th Anniversary models sold during the first half of 2003. Average wholesale prices on 2005 model year motorcycles, which began shipping in July of 2004, are approximately.5% higher than model year 2004 prices.

During the first nine months of 2004, net revenue from Parts and Accessories (P&A) totaled $623.7 million, a 9.1% increase over the same period in 2003. Total P&A revenue for the first nine months of 2003 included $32.1 million from sales of 100th Anniversary P&A products. Excluding revenue from the sale of 100th Anniversary products from 2003, the P&A revenue increase for the first nine months of 2004 was 15.6%.

General Merchandise revenue during the first nine months of 2004 was $168.8 million, up 5.1% over the same period last year. Revenue from 100th Anniversary General Merchandise products accounted for $9.3 million of total General Merchandise revenue during the first nine months of 2003. Excluding revenue from the sale of 100^th Anniversary products from 2003, the General Merchandise revenue growth rate for the first nine months of 2004 was 11.6%.

Harley-Davidson Retail Motorcycle Sales

The Company’s wholesale motorcycle unit shipments are retailed through an independent worldwide dealer network. Retail sales of the Company’s Harley-Davidson motorcycles in the United States were up 7.1% for the first nine months of 2004, but down 9.8% for the third quarter of 2004, when compared to the same periods last year. The Company believes that the lower retail sales figures for the third quarter of 2004 were largely due to exceptional retail sales results in the third quarter of 2003. In the third quarter of 2003, retail sales were up approximately 27% over same period in the prior year driven by interest created by the Company’s 100^th Anniversary Celebration in 2003.

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Through September 2004, retail sales of the Company’s Harley-Davidson motorcycles in Europe and Japan were down 5.1% and 10.2%, respectively, when compared with the same period in 2003. While retail sales of Harley-Davidson motorcycles are growing in many of the Company’s international markets, the Company believes that retail sales in Germany, the Company’s largest market in Europe, and Japan have decreased due to economic and market conditions. Retail sales data for the heavyweight motorcycle industry in the U.S., Europe and Japan are provided in the following table.

Motorcycle Retail Registrations (Units)
Year-to-date Heavyweight (651+ cc)

Gross Profit

Gross profit for the first nine months of 2004 totaled $1.44 billion, an increase of $188.6 million or 15.1% over the same period in 2003. Gross margin was 37.9% in the first nine months of 2004, up from 36.0% for the first nine months of 2003. During the first nine months of 2004, gross margin was positively impacted by lower production costs and favorable changes in foreign currency exchange rates, which more than offset the impact of product mix changes discussed under “Net Revenue.” Lower production costs were driven by manufacturing efficiencies and, as discussed under the “Results of Operations for Three Months Ended September 26, 2004,” the Company has also benefited during 2004 from the full integration of its new Softail^® factory in York, Pennsylvania. In addition, through the first nine months of 2004, favorable changes in foreign currency exchange rates have resulted in $24.3 million of higher gross profit when compared to the same period in 2003.

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Financial Services

The following table includes the condensed statements of operations for the Financial Services segment (which consists of HDFS) for the nine months ended September 26, 2004 and September 28, 2003 (in millions):

The increase in operating income from Financial Services during the first nine months of 2004 was primarily driven by strong marketplace acceptance of HDFS’ finance and insurance products and increased income on investment in retained securitization interests, partially offset by lower gains on current year securitization transactions.

During the first nine months of 2004, HDFS sold approximately $1.9 billion of retail motorcycle loans through securitization transactions resulting in gains of $58.3 million.  During the first nine months of 2003, HDFS sold approximately $1.4 billion of retail motorcycle loans resulting in gains of $70.8 million.  The gain as a percentage of the amount of loans securitized was lower when compared with last year’s gain due to the cost of an enhanced dealer participation program that was introduced during the second quarter of 2004 and rising market interest rates throughout the first nine months of 2004. Under HDFS’s dealer participation program, HDFS pays Harley-Davidson dealers cash incentives for originating retail motorcycle loans.

During the first nine months of 2004, income on investment in retained securitization interests increased $18.7 million over the same period in 2003 due to larger securitization transactions in 2004 and better than anticipated performance on prior year’s transactions. Changes in HDFS’ allowance for finance credit losses during the nine-month periods ended September 26, 2004 and September 28, 2003 were as follows (in millions):

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Operating Expenses

The following table includes operating expenses for the Motorcycles segment and Corporate for the nine months ended September 26, 2004 and September 28, 2003 (in millions):

Operating expenses were 14.3% and 14.8% of net revenue for the first nine months of 2004 and 2003, respectively. The increase in operating expenses in 2004 was driven by overall growth in the Motorcycles business combined with the Company’s on-going investment in specific initiatives designed to support its current and future growth objectives.

Provision for income taxes

The Company’s effective income tax rate was 35.5% and 34.5% during the first nine months of 2004 and 2003, espectively.

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Other Matters

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 on-going basis and are updated based on new developments or new information in each matter.

In January 2001, the Company, on its own initiative, notified each owner of 1999 and early-2000 model year Harley-Davidson^® motorcycles equipped with Twin Cam 88 and Twin Cam 88B engines that the Company was extending the warranty for a rear cam bearing to 5 years or 50,000 miles. Subsequently, on June 28, 2001, a putative nationwide class action was filed against the Company in state court in Milwaukee County, Wisconsin, which was amended by a complaint filed September 28, 2001. The complaint alleged that this cam bearing is defective and asserted various legal theories. This complaint and a second lawsuit filed on April 12, 2002 in state court in Milwaukee County, Wisconsin were dismissed as reported in more detail in Note 9 to the Condensed Consolidated Financial Statements included in this report (Note 9). On April 12, 2004, the same attorneys filed a third action in state court in Milwaukee County on behalf of the same plaintiffs from the action dismissed by the Wisconsin Supreme Court. This third action was dismissed by the court on July 26, 2004. In addition, the plaintiffs in the original case moved to reopen that matter and amend the complaint to add new causes of action, which was denied on August 23, 2004. A notice of appeal to the Wisconsin Court of Appeals has now been filed. The Company intends to continue to vigorously defend this matter. The Company believes that the 5 year/50,000 mile warranty extension it announced in January 2001 adequately addresses the condition for affected owners.

The Company is involved with government agencies and groups of potentially responsible parties in various environmental matters, including a matter involving the clean up 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 since 1986 in undertaking environmental investigation and remediation activities, including an on-going site-wide remedial investigation/feasibility study (RI/FS). Note 9 includes a discussion of the history of this matter in more detail.

Although the RI/FS is still underway and substantial uncertainty exists concerning the nature and scope of the additional environmental investigation and remediation that will ultimately be required at the York facility, the Company estimates that its share of the future costs associated with environmental investigation and remediation activities at the York facility (Response Costs) will be approximately $6.7 million. The Company has established reserves for this amount, which are included in Accrued expenses and other liabilities in the consolidated balance sheets.

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 over a period of several years ending in 2010. Response Costs related to ground water remediation may continue for some time beyond 2010. However, these Response Costs are expected to be much lower than those related to the remediation of soil.

Additionally, the Company is involved in product liability suits related to the operation of its business. The Company accrues for claim exposures which 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.

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Liquidity and Capital Resources as of September 26, 2004

Operating Activities

The Company’s main source of liquidity is cash from operating activities which consists of net income adjusted for non-cash operating activities, collections of retained securitization interests, pension plan contributions, the tax benefit of stock option exercises and changes in current assets and liabilities.

The Company generated $956.9 million of cash from operating activities during the first nine months of 2004 compared to $862.3 million in the first nine months of 2003. The largest components of cash from operations are net income and the adjustment for depreciation which resulted in a combined cash inflow of $841.6 million and $724.6 during the first nine months of 2004 and 2003, respectively. Please refer to the Condensed Consolidated Statements of Cash Flows for additional detail regarding cash flows from operating activities.

Net changes in current assets and liabilities included in net cash provided by operating activities during the first nine months of 2004 and 2003 consisted of the following (in millions):

A net increase in accounts receivable during the first nine months of 2004 resulted in a $26.6 million negative adjustment to operating cash flow. The change in accounts receivable relates primarily to an increase in the Company’s international accounts receivable balances in Europe and Japan. The Company’s international accounts receivable balances will typically be higher at the end of the third quarter as compared to the end of December. In addition, accounts receivable balances in Europe have also increased due to the acquisition of an independent distributor in 2004.

The increase in Company inventory resulted in a negative adjustment to operating cash flow during the first nine months of 2004. Net increases in inventory were due primarily to higher finished goods inventory, partially offset by lower raw materials and work-in-process inventory. Finished goods increases were driven by an increase in motorcycle units on hand, primarily in Europe. In an on-going effort to improve its distribution capabilities in Europe the Company has experienced modest increases in its European motorcycle inventory levels. The Company has continued to improve its distribution network in Europe by acquiring some independent distributors and by continuing its effort to provide its dealers with a wider selection of products that can be quickly accessed from a centralized Company-controlled warehouse.

During the first nine months of 2004, the change in “finance receivables — accrued interest and other” resulted in a $64.8 million reduction to operating cash flow. This change was driven by an increase in deferred charges related to higher dealer participation payments on the origination of retail motorcycle loans.

Accounts payable and accrued expenses increased $90.0 million during the first nine months of 2004 resulting in a positive adjustment to operating cash flow. The net increase was driven by higher accounts payable in connection with higher motorcycle production volumes.

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Investing Activities

The Company’s investing activities consist primarily of capital expenditures, finance receivables activity and net changes in marketable securities. Net cash provided by / (used in) investing activities was $52.5 million and ($94.8) million during the first nine months of 2004 and 2003, respectively.

Capital expenditures were $109.9 million and $124.4 million during the first three quarters of 2004 and 2003, respectively. The Company estimates that total capital expenditures required in 2004 will be in the range of $200 to $225 million.⁽¹⁾ The Company anticipates it will have the ability to fund all capital expenditures in 2004 with internally generated funds.⁽¹⁾

Investing activity related to finance receivables resulted in a cash inflow of $183.0 million during the first nine months of 2004 compared to a cash outflow of $33.7 million during the first nine months of 2003. The change in net investing cash flow related to finance receivables was due primarily to the timing of HDFS’ most recent securitization transaction, which was completed late in the third quarter of 2004.

Financing Activities

The Company’s financing activities consist primarily of stock transactions, dividend payments and finance debt activity. Net cash used in financing activities during the first nine months of 2004 and 2003 was $812.2 million and $106.4 million, respectively.

During the first nine months of 2004 the Company repurchased 10.6 million shares of its common stock at a total cost of $564.1 million. The Company repurchased 7.8 million shares under a general authorization from the Company’s Board of Directors. The remaining 2.8 million shares were repurchased under an authorization from the Company’s Board of Directors that is designed to provide the Company with continuing authority to repurchase shares to offset dilution caused by the exercise of stock options.

During the first three quarters of 2004, the Company’s Board of Directors has declared three cash dividends totaling $.28 per share or $82.4 million, compared to a total of $.115 per share or $30.6 million, during the first three quarters of last year.

In addition to operating cash flow and asset-backed securitizations, HDFS is financed by the issuance of commercial paper, borrowings under revolving credit facilities, medium term notes, senior subordinated debt and borrowings from the Company. HDFS’ outstanding debt consisted of the following as of September 26, 2004 and September 28, 2003 (in millions):

Credit Facilities

On September 16, 2004, HDFS entered into a $1.1 billion revolving credit facility (Global Credit Facility) due September 2009. This facility replaced a $750 million Domestic Credit Facilities and a $200 million European credit facility. The primary use of the Global Credit Facility is to provide liquidity to the unsecured commercial paper program and to fund domestic and foreign operations. Subject to certain limitations, HDFS has the option to borrow in various currencies. Interest is based on London interbank offered rates (LIBOR), European interbank offered rates or other short term indices, depending on the type of advance. The Global Credit Facility is a committed facility and HDFS pays a fee for its availability.

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Commercial Paper

Subject to limitations, HDFS may issue up to $1.1 billion of short-term commercial paper with maturities up to 270 days. Outstanding commercial paper may not exceed the unused portion of the Global Credit Facility. As a result, the combined total of commercial paper and borrowings under the Global Credit Facility is limited to $1.1 billion.

Medium-Term Notes

During November 2003, HDFS issued $400 million of 3.63% in medium term notes (Notes) due in December 2008. The Notes provide for semi-annual interest payments and principal due at maturity. At September 26, 2004, the Notes included a fair value adjustment of ($1.9) million due to interest rate swap agreements designated as fair value hedges. The effect of the interest rate swap agreements is to convert the interest rate on the Notes from a fixed to a floating rate, which is based on 3-month LIBOR.

Senior Subordinated Debt

HDFS has $30 million of ten year senior subordinated notes, due in 2007.

Inter-company Borrowing

HDFS has a revolving credit line with the Company whereby HDFS may borrow up to $210 million from the Company at a market interest rate. As of September 26, 2004 and September 28, 2003, HDFS had no outstanding borrowings owed to the Company under this agreement.

The Company also has a support agreement with HDFS whereby, if required, the Company agrees to provide HDFS with financial support in order to maintain certain financial covenants. 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.

In connection with its debt agreements, HDFS has various operating and financial covenants and remains in compliance at September 26, 2004. 

The Company expects future activities of HDFS will be financed from funds internally generated by HDFS, sale of loans through securitization programs, issuance of commercial paper and medium term notes, borrowings under revolving credit facilities, advances or loans from the Company and subordinated debt.⁽¹⁾

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Risk Factors

The Company’s ability to meet the targets and expectations noted depends upon, among other factors, the Company’s ability to (i) continue to realize production efficiencies at its production facilities through the implementation of innovative manufacturing techniques and other means, (ii) successfully implement production capacity increases in its facilities, (iii) successfully introduce new products and services, (iv) avoid unexpected P&A/general merchandise supplier backorders, (v) sell all of the Harley-Davidson motorcycles it plans to produce, (vi) continue to develop the capacity of its distributor and dealer network, (vii) avoid unexpected changes in the regulatory environment for its products, (viii) successfully adjust to foreign currency exchange rate fluctuations, (ix) successfully adjust to interest rate fluctuations, and (x) successfully manage changes in the credit quality of HDFS’s loan portfolio. In addition, the Company could experience delays in the operation of manufacturing facilities as a result of work stoppages, difficulty with suppliers, natural causes, terrorism or other factors. These risks, potential delays and uncertainties could also adversely impact the Company’s capital expenditure estimates (see “Liquidity and Capital Resources” section).