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.

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.

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

• 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)

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 $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.

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:

                                                                            %
                                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.

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 %

                                                               Cost of
                                                    Net         Goods         Gross
                                                  Revenue        Sold        Profit
. . .