Financial Analysis

Harley-Davidson Inc. (NYSE: HOG)

Matt Mielnik, Robert Bablak, Luke Peterson, Alex Hudock

4/2/2013

In the following report, we will analyze the financial position of Harley-Davidson Inc. to determine whether to invest in the company.

ContentsCompany Profile....................................................................................................................................2

Industry Situation & Company Plans.....................................................................................................5

Accounting Policies...............................................................................................................................7

Measures of Liquidity............................................................................................................................8

Common-Size Percentages for 2012 Current Assets.......................................................................8

Current and Acid-Test Ratios............................................................................................................9

Working Capital (in thousands of dollars)..........................................................................................9

Measures of Efficiency........................................................................................................................10

Solvency..............................................................................................................................................12

Solvency (Cont.)..............................................................................................................................13

Profitability...........................................................................................................................................14

Cash Flows..........................................................................................................................................15

Comparative Industry Analysis............................................................................................................16

Company Evaluation and Market Outlook...........................................................................................18

Recommendation................................................................................................................................19

Works Cited.........................................................................................................................................20

Appendix..............................................................................................................................................21

Balance Sheet.................................................................................................................................21

Assets..........................................................................................................................................21

Liabilities......................................................................................................................................22

Shareholder Equity......................................................................................................................23

Ratios...............................................................................................................................................24

Liquidity and Efficiency................................................................................................................24

Solvency......................................................................................................................................24

Profitability...................................................................................................................................25

DuPont Analysis...........................................................................................................................25

Income Statement...........................................................................................................................26

Cash Flows..................................................................................................................................27

Yamaha Information........................................................................................................................28

Yamaha Income Statement.........................................................................................................28

Yamaha Balance Sheet...............................................................................................................29

Yamaha Ratios............................................................................................................................30

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Company Profile

Chief Executive Officer (CEO)Mr. Keith E. Wandell, 63 Chairman of the Board, Chief Exec. Officer and President (2009-present)

Corporate Headquarters3700 West Juneau AvenueMilwaukee, WI 53208United States - MapPhone: 414-342-4680Fax: 414-343-4621Website: http://www.harley-davidson.com

Ending Date of Last Fiscal YearDecember 31, 2013Net profit of $70.6 million

History of Harley-DavidsonIn 1903, William S. Harley and Arthur Davidson opened up a motor-bicycle shop in

Milwaukee, Wisconsin. By 1904, Harley and Davidson had manufactured their first motorcycle, which took 4th place in the Milwaukee motorcycle race. Surged with confidence, the two friends opened up a factory in 1906. As time went on, the duo continued to improve their designs. At the start of World War I, the government hired Harley-Davidson to produce motorcycles adapted for combat service. Altogether, Harley-Davidson produced 15,000 bikes for the military during the war.

After WWI came the Great Depression, and with it came the closing of all but two motorcycle manufacturers. One of these two was Harley-Davidson, who was again contracted to produce bikes for the Allied Forces in World War II. Multiple mistakes after WWII led to dwindling sales, which plagued the company until its restructuring in 1981. Among other things, the restructuring focused production on the “retro” appeal of the motorcycles, which became hugely popular among American consumers. Since the company’s revival in 1981, few things changed until 2009, when new CEO Keith Wandell took the reins and started another restructuring. This change sought to prepare Harley-Davidson for the future by focusing on innovation, customization, international market penetration, and broadening the customer base.

Principal ProductsTo the American consumer, Harley-Davidson Inc. is synonymous with motorcycles. For

years, Harley-Davidson has developed a reputation for producing quality motorcycles with style. They design, manufacture, and sell new and classic models of bikes, including ones for sport,

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leisure, and distance. By producing a wide range of motorcycles, consumers can find exactly what they are looking for with Harley-Davidson. If they can't, Harley-Davidson allows customers to customize their bikes to fit exactly what they need. Harley-Davidson also offers financing to customers, making the bikes more affordable and easier to purchase.

Target ConsumerFrom the beginning, Harley-Davidson’s core customers have primarily been white,

young-middle aged men. Currently, Harley-Davidson has been executing a multi-generational and multi-cultural marketing strategy within the U.S. to expand its consumer base. New target consumer segments include young adults (men and women 18-34), Caucasian women 35+, and diverse men and women (African-American and Hispanic 35+). Their efforts have worked, as motorcycle registration results place Harley-Davidson as the segment leader in the U.S. for on-road motorcycle registrations, including heavyweight (651cc+) and all displacement (all cc) registrations, in their four targeted demographics (core, young adults, women, and diverse customers) [“Investor Relations”].

Main Geographic Area of ActivityFor years, Harley-Davidson has sold most of their products in the U.S. However, their

sales are becoming increasingly international. In 2007, about 74% of sales were within the U.S. By 2011, only 65% of sales were within the U.S. Thus, total international sales increased by 9% [“Investor Relations”]. This change over the years reflects Harley-Davidson's commitment to expanding their business beyond core U.S. consumers to new international consumers. According to company estimates, international sales should account for 40% of all sales by 2014.

Independent AuditorsErnst & Young LLP875 E Wisconsin Ave Ste 500Milwaukee, WI 53202United StatesPhone: (414) 273-5900Fax: (414) 223-7200 In 2010, Ernst & Young LLP expressed:"In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Harley-Davidson, Inc. at December 31, 2009 and 2008, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2009, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein."

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Investor SnapshotAs of March 28 - Close (from Google Finance)Price: 53.30Year to Date % Change: Jan 2 2013 - Mar 28 2013: +4.47 (9.15%)P/E: 19.65Beta: 2.1452 Week: 37.84 - 55.51Market Cap: 12.06BEarnings Per Share: 2.71

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Industry Situation & Company Plans

Harley Davidson is the dominant player in the American motorcycle industry. Although they do not act as a monopoly (demand for motorcycles is elastic, so the company cannot price fix), Harley still holds just over 50.2% of the total motorcycle market share in the U.S. Aside from their efforts to maintain control in North America, the company has been focusing on penetrating foreign markets to expand the brand. The push for this came in 2009 when Keith Wandell became CEO. As part of his tenure at Harley-Davidson, he planned to restructure the company. For years, Harley-Davidson had embraced a brand image of the American ideals of individuality, freedom, and adventure. When Keith Wandell planned to restructure, he wanted to innovate, penetrate global markets, and adapt to cultural differences all while maintaining the brand’s image.

Harley-Davidson’s restructuring revolved mostly around the company’s image and the definition of a “Harley.” From the company’s perspective, they don’t sell bikes; they sell adventure. To help convey this message to customers, the management and employees were pushed to embrace Harley-Davidson as a producer of “adventure.” Because Harley-Davidson has been around for over a century, many people began to view them as an aging fad from the baby-boomer generation. By pushing for motorcycles as a means of transformation rather than transportation, the consumer idea of what a Harley is has begun to change. This repositioning has helped Harley-Davidson maintain sales and growth in recent years.

In international markets, Harley-Davidson’s restructuring has focused on ensuring brand loyalty while increasing international adaptation without losing authenticity. Currently, Harleys are sold in 67 different countries. Innovative marketing strategies and research have helped Harley-Davidson solidify its brand image of selling adventure across all of its markets. One example of Harley-Davidson connecting with its loyal customers is the Harley Owners Group (H.O.G.), which is a bi-monthly magazine that lists all types of services, new bikes, and discounted products. Ensuring that loyal customers remain such allows Harley-Davidson to continue to expand without losing past customers.

Along with ensuring brand loyalty, Harley-Davidson has spent much time looking at how to improve advertising. By expanding market research, Harley-Davidson has been able to study all sorts of facts such as owners’ demographics, their typical jobs, and their typical incomes. Armed with such vital knowledge has allowed Harley-Davidson to know exactly how and where to advertise to reach their typical customer.

As a whole, Harley-Davidson’s restructuring was a huge success. When the company seemed to be losing business, they bounced back and experienced huge growth. While this growth is certainly impressive, will it continue in the future?

According to Harley-Davidson’s website, 43% of global purchases were by customers who had either never owned a motorcycle or previously owned a competitor’s product. This percentage is huge considering the establishment of other international motorcycle companies. Harley-Davidson’s expansion into international markets has clearly been a success.

Currently, Harley-Davidson motorcycles are considered luxury products. Over the years, this has become increasingly true, especially considering recent economic issues. The company

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claims that the median income of purchasers from 2007 to 2011 increased from $83,000 to $99,000. In just five years, customers of Harley-Davidson seemingly shifted to be much richer rather than they had in the past. However, these numbers probably come from Harley-Davidson’s identification of their core customers. Market research revealed most Harley owners are lawyers, doctors, and teachers. Lawyers and doctors tend to earn a lot of money while teachers tend to be married to someone who also works. By focusing on reaching core customers with advertising, Harley-Davidson has honed its business on its most loyal customers.

As time goes on, Harley-Davidson plans to expand into more international markets. This process will be slow, but it seems promising. Selling a customizable, affordable “adventure” is great business model when looking to expand to areas where Harley-Davidson may be completely unknown. If past marketing and advertising methods are continued (obviously with continued tweaking and polishing), Harley-Davidson will most likely continue growing and claiming market share. Anything can happen, however, so only time will tell Harley-Davidson’s fate.

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Accounting Policies

Harley Davidson Follows the typical accounting procedures when compiling annual reports for investors. However, there are some exceptions that they make for certain portions of the industry. To start, Harley essentially has two receivable accounts. The actual accounts receivable is used for the credit sale of bikes to independent dealers, while their finance receivables is used for bikes sold to customers through Harley Davidson and its dealers.

For inventories, Harley Davidson uses the Last In, First Out (LIFO) method of inventory. Goods are valued at the lower of cost or market. The 10K also provides the 2011 and 2012 figures of inventory calculated under FIFO in addition.

Harley Davidson has a two year warranty program for all bikes bought (three years in Japan) and a one year warranty on parts. Because of this, the company holds future reserves for the use of paying warranty liabilities.

Revenue is split into two categories, motorcycle revenue and financial services. Motorcycle revenue recognized when a sale is made and ownership is transferred to the dealer from Harley. Additionally, discounts and sales incentive programs are accrued later. Interest is recorded as earned.

Research and Development expenses are distributed amongst sales expense, administrative and engineering expense. The formal numbers for R&D are available in the 10K.

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Measures of Liquidity

Harley Davidson, Inc. is currently doing well to ensure that they have enough liquid assets to pay off their short-term debts, with a current ratio of 2.695 and an acid-test ratio of 2.114. With both of these figures lying above 2, Harley seems to be able to effectively pay off any short-term liabilities, even without selling off inventory. Harley would instead be able to use Finance Receivables held for sale to pay off most of their immediate debt, since receivables comprise over 43% of their current assets. Upon further thought, it makes sense that receivables would count for such a large portion of Harley’s assets, since last year, they financed 50.9% of the motorcycles they sold [Form 10-K]. It is also important to realize that Harley’s sales reach their lowest point seasonally around the time when the 10k is filed at the end of December. Therefore, inventory will most likely make up a smaller percentage of current assets than it would during the spring, which is the peak season for motorcycle sales.

Polaris, one of Harley’s larger competitors, is in a different situation regarding liquidity that is worth noting. Polaris has a current ratio of 1.61 and an acid-test ratio of .88, but inventory makes up 33.89% of their current assets, as opposed to 9.71% [Polaris Industries]. These figures mean that Polaris would have to start depleting inventory to pay off debt sooner than Harley, reflecting that their sales may be less seasonally dependent, which is understandable, since they also sell snowmobiles.

Common-Size Percentages for 2012 Current Assets

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26.37%

3.35%

5.68%

43.03%

9.71%

4.64%

2.74%4.48%

Cash and cash equivalentsmarketable securities accounts receivable, netFinance receivables held for saleInventoriesRestricted cash held by variable interest entitiesDeffered income taxesPrepaid Expenses and Other Current Assets

Harley’s liquidity ratios have remained greater than 1 over the last 5 years, in spite of a turbulent economic climate. It is easy to see that Harley was more conservative when managing their liquidity in 2007, because they did not feel the need to invest in new operations that would require more leverage.

However, since the recession, Harley has been using more leverage to expand their company abroad, ensuring that they also expand their product line to appeal to a younger demographic. Their working capital has followed the same trend, which follows logically, because in 2008, Harley was forced to temporarily ship fewer motorcycles to dealers than it had in previous years. This took away some of Harley’s long-term assets by forcing them to decrease production, but temporarily added to their current assets, which peaked along with working capital in 2008 [Form 10-K].

Current and Acid-Test Ratios

Working Capital (in thousands of dollars)

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2006 2007 2008 2009 2010 2011 20120

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Current RatioAcid_Test Ratio

2006 2007 2008 2009 2010 2011 2012$0

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

$3,000,000

$3,500,000

Working Capital (In Thousands of Dollars)

Measures of Efficiency

Needless to say, efficiency is one of Harley’s highest priorities. With competitors like Honda relocating their manufacturers to Asia, Harley is forced to deal with the pricier, unionized, U.S. labor force to preserve its “Made in America” image. To deal with this issue, the Company has restructured plants to hire seasonal workers in York, PA and Kansas City, MO to match changes in seasonal demand, and consolidate more manufacturing tasks under one roof. The graph below shows that the rate at which Harley is turning over its inventory has not returned to pre-recession levels, which reflects the need for such restructuring [Form 10-K].

Currently, Harley Davidson turns over their inventory 7.942 times per year, which is very comparable to competitors like Polaris, who currently turn over their inventory at 7.105 times per year [Polaris Industries]. So, although Harley’s performance does not live up to their previous standards regarding efficiency, they are still keeping par with their competitors in terms of inventory management.

As was stated earlier, a great percentage of Harley Davidson’s current assets are tied up in Accounts Receivable, making collection efficiency extremely important. The figures themselves show that Harley is exhibiting a positive trend in collection efficiency, bringing their accounts receivable turnover rate up from 17.887 times per year in 2009 to 24.851 times per year in 2012. Not surprisingly, the rate at which Harley has been able to collect on its accounts directly coincides with many of the other trends exhibited by the Company due to the recession. However, even at their low point of 17.887 times per year, they still fell ahead of the current average AR turnover rate for the S&P 500, which is 14.4 [Accounts Receivable Turnover]. This positive trend must continue if the company wants to expand and minimize bad debt and maintain a good relationship with their shareholders into the future.

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2007 2008 2009 2010 2011 20120.000

2.000

4.000

6.000

8.000

10.000

12.000

Inventory Turnover (Times per Year)

Inventory Turnover (Times per Year)

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2007 2008 2009 2010 2011 20120

5

10

15

20

25

30

35

40

Accounts Receivable Turnover

Accounts Receivable Turnover

Solvency

Solvency is the ability of a company to pay back its long term debts in the future. Currently, Harley Davidson’s Debt-to-Equity ratio is 2.586, which means that Harley essentially has two and a half times as many liabilities to creditors as it does to commitments to shareholders. On top of this, Harley Davidson’s debt ratio in 2012 was .721, or in layman’s terms, 72 cents per every dollar of assets. Initially, this may seem like a major concern since Harley has much more debt than equity, but due to the recession in 2007 that extended through 2009, interest rates were (and still are) at or near zero. This allows for money to be borrowed and repaid very easily, with less risk for the company, creating less risk borrowing as opposed to using equity to finance activities. This trend is apparent when looking at horizontal analysis as displayed by this graph.

Solvency (Cont.)

As you can see, Harley started taking on more debt in between 2007 and 2008, just as the Federal Government was lowering interest rates. If there were to be a major spike in interest rates, the effect would hit Harley Davidson more so than other companies in the industry such as Yamaha and Polaris who do not have as much long term debt. Much of this long term debt is being used to finance Harley Davidson’s long term business strategy of growth in international markets. Harley’s plan is to grow their brand in other international markets and hope to capitalize on a new market. This business strategy relies on using long term debt to

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2006 2007 2008 2009 2010 2011 20120.000

0.500

1.000

1.500

2.000

2.500

3.000

3.500

4.000

Debt-to Equity

Debt-to Equity

grow. The major concerns with this long term debt would be if Harley cannot capture international markets, where the Harley Davidson brand (All American) will not hold the same pull as it does here in America [HOG 2012 10K , 13]. The other concern with long term debt would be liabilities to employee pensions and healthcare. Many of the factors regarding the future success of pensions and healthcare are outside of Harley’s control, with federal mandates being the main driver of these. The implementation of the Affordable Care Act is something to watch when looking at debts from healthcare.

Another major concern regarding Harley Davidson’s debt is credit ratings. If Harley Davidson’s credit rating were to experience a drop, a major earnings reduction would occur since Harley relies heavily on capital markets and the ability to easily borrow. Harley Davidson had all-time lows on losses on credit last year; however, their management believes that this is unlikely to occur again this year and in the future due to changes in consumer credit behavior. The one key for Harley Davidson (along with anyone in retail sales) is the return in certainty of the economy, which would very much alleviate the risk of repaying long term debts in the future.

Despite several of the long term concerns, Harley has managed to leverage their debt more effectively in recent history. When looking at Times Interest Earned, Harley Davidson’s financial team has managed to increase the ratio over the past five years. This shows that they have been able to handle more and more of their long term debt effectively and reduce the amount of interest percent of total income.

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Profitability

2006 2007 2008 2009 2010 2011 2012-5%

0%

5%

10%

15%

20%

25%

30%

35%

40%

Profit MarginReturn On AssetsReturn On Equity

Harley-Davidson has historically been a profitable company, with the exception of when the United States was in the midst of the 2007-2009 Recession. As the chart above illustrates, during those years, the company faced diminishing profit margins as sales slid (costs of goods sold fell as sales fell, however selling and administrative expenses did not fall during the period, thus explaining the fall in the company’s profit margin). Due to lower sales, Harley-Davidson also faced diminishing returns on assets, which increased throughout the recession. Sales fell faster than the equity value of the company from 2007 to 2009, which caused diminishing returns on equity for shareholders. However, in recognition of falling profitability ratios, one must note that even during the recession, Harley Davidson managed to maintain a sizable profit margin and returns on assets and equity, with the exception of in 2009 the only year when the company lost money.

Emerging from the recession, Harley-Davidson quickly recovered its profitability indexes to nearly pre-recession levels. Sales have increased steadily since 2009, but the company has also worked to decrease the costs of products (as exemplified by the COGS decrease in 2010 in juxtaposition to increased sales of motorcycles). Additionally, administrative and selling expenses have not grown in proportion to the recovery of sales, thus creating more profit for the company.

As of 2012, Harley-Davidson is operating with a profit margin of 11.2%, meaning that for every dollar of sales, the company keeps 11.2 cents, after expenses, interest, and taxes. This is roughly the same as what it was at the end of 2011 (11.3%), which is a good thing, considering that revenues grew in 2012. The company’s 2012 Return on Assets was 6.6%, which is mediocre compared to its pre-recession measure. In Harley’s restructuring, the company acquired a great amount of long term debt to spur encourage returns similar to past years. While the current ROA is lower than it has been historically, this is not of immediate concern considering the ROA’s consistent growth along with the company’s strong liquidity factors. Harley Davidson’s Return on Equity quickly recovered after the recession and is currently at

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25.1%. This means that the company earns back about a quarter of its net worth over the course of a year.

Cash Flows

As of recent years, Harley Davidson has had an Operating Cash Flows (OCF) to Sales ratio of greater than 100%, suggesting that the company’s income comes primarily from operating activities, as one would expect from a manufacturer with one primary division of products.

The company also generally has a Free Cash Flow ratio between 70% and 85%. This means that, of the company’s operating cash flow, around three fourths are not tied up in expenditures that maintain the company’s competitiveness and efficiency, so the company has a large portion of its cash available for other uses.

Harley Davidson has a low OCF to Current Debt ratio, suggesting that they may not be able to meet their short term obligations through strictly its Operating Cash Flows. However, the company has a high amount of liquidity that can cover its obligations, so its consistently low OCF to Current Debt ratio is not a concern.

Conversely, Harley has a high Capital Expenditure Coverage ratio, meaning that they are more than capable of covering its Capital Expenditures with its Operating Cash Flows. With the exception of in 2008, when Harley net-used cash in its OCF, the company has had a CapEx ratio of between 3.3 and 6.8.

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2006 2007 2008 2009 2010 2011 2012

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Cash Flow Ratios

FCF/OCFShort Term Debt Coverage

Comparative Industry Analysis

As a Company traded on the New York Stock Exchange, Harley Davidson is a part of the Recreational Vehicles industry, which is a subset of consumer goods. Its main American competitors include Polaris Industries Inc., Thor Industries Inc., and Drew Industries Inc. The latter two companies actually produce what are closer to mobile homes, but they still share similarities with Harley, due to their consumer demographics [Polaris Industries, Inc.]. Polaris is Harley’s closest American competitor, producing two motorcycle lines (Victory and Indian) that directly compete with Harley’s large road bikes. With regards to foreign competition, Honda’s motorcycle line and Yamaha’s “Star” line also compete with Harley, but for the sake of simplicity, a comparison with other American manufacturers should suffice.

The graph shown above represents the stock price of Harley Davidson relative to the average stock price of companies in the recreational vehicles industry over time. Since 2012, Harley’s stock prices have outperformed their largest American competitors by a growing margin. Given that Harley motorcycles account for 81% of all new heavyweight motorcycle registrations in the US, Harley still seems to be poised to remain the industry leader in motorcycle production and sales(cite).

As a whole, the Recreational Vehicles industry has a market cap of $33.5B, which is distributed among the different competitors as shown below [Polaris Industries, Inc.]. Harley remains the decisive leader of that industry as far as size is concerned, but they do not perform quite as well as some of their competitors in other performance categories. For instance, Polaris’ Return on Equity for the past year was 52.46%, which was over two times Harley’s rate of 24.65% [Polaris Industries]. This may signify that Polaris is currently doing a better job of

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growing their return to stockholders, in spite of Harley’s comfortable hold on the Heavy Motorcycle market (which represents 62% of all U.S. motorcycle sales), which still leaves them at the forefront of the industry, struggling as it may be.

The fact of the matter is that motorcycles are luxury goods, purchased mainly by those who are older and have more disposable income. Given the recent scarcity of this disposable income for many Americans, the Recreational Vehicles has struggled to stay above water, as it will continue to do until the situation gets dramatically better.

Market Cap Distribution

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36.15%

18.81%5.97%

2.47%

36.60%Harley Davidson, Inc.Polaris Industries, Inc.Thor Industries, Inc.Drew Industries, Inc.Other

Company Evaluation and Market Outlook

Although Harley-Davidson Inc. is prepared to face the challenges that could arise in the short term, there is evidence to suggest that they may have trouble in the long run. After reviewing the financial reports of Harley-Davidson, we have come to several conclusions about the health of the company.

First, we have found that Harley is a highly liquid company. It’s consistently high current and acid-test ratios prove that, in the short run, the company is in a strong position to meet its obligations, which would be especially useful in the case of another economic downturn.

Second, Harley-Davidson has become less efficient with its inventory turnover. In the face of waning sales, the company has not scaled back inventory size to maintain the high level of efficiency that it had pre-recession. However, this problem is being addressed by management; several factories are being restructured to better meet seasonal demand.

Third, we find the company’s long term solvency to be of potential concern. So long as the company maintains its credit rating and can support its employee pensions and healthcare plans, none of these will be an issue. However, the problem remains that they do have liabilities that they have to repay, and if the economy were to fall into trouble once again, those liabilities would become a problem. On a positive note, Harley Davidson seems to be improving their ability to handle debt. Their Times Interest Earned has steadily increased over the past several years, which would imply Harley’s financial department has figured out a way to effectively leverage their debt.

Fourth, Harley’s profitability is generally consistent, and its return on equity is impressive. When the company is not operating at a loss, the company produces high returns on its resources, which credits its merit as an investment. Harley does not waste its revenue-generating potential.

Fifth, the company’s cash flows show that Harley-Davidson is equipped to manage the necessary expenses of remaining competitive in the motorcycle industry as well as manage the debt that it takes on to finance its expansions. A large portion of Harley’s OCF is available for other expenses. Also, the company’s OCF is nearly half of its short term obligations, which would be a problem if Harley-Davidson did not have as many liquid assets as it does. Even with an OCF to short term debt ratio of about one half, Harley should be more than capable of covering its short term obligations.

With those five points considered, we have determined that Harley-Davidson is a healthy company with a strong asset base, a manageable amount of leverage, and well refined operations. We feel that the company itself has a strong financial foundation, but we are hesitant to encourage investment because of the industry in which they exist.

The motorcycle industry is strongly correlated to the ebbs in the business cycle, so any decision regarding investment must take this into account. Motorcycles are luxury goods that people only buy with excess income. If the economy is not doing well, most people will not have the means to purchase a motorcycle. Instead, people will spend their money on necessities, like food, water, clothes, etc. As of right now, with the high level of unemployment in the United

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States along with the slow growth in the macro economy, despite the overall financial fortitude of many firms, we think that a cautious approach to investing is the most appropriate measure.

Recommendation

We rate Harley-Davidson Inc. as a: HOLD

With the company’s solid financial position, one must respect the merit of the company as both a business and an investment, yet, with Harley’s strong adhesion to the flow of the business cycle, one must be cautious investing in such a company in a time of economic uncertainty in the future. We feel that the risk of investing in Harley-Davidson Inc. is not worth the opportunity of investing in a different, equally strong company with more secure market prospects.

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Works Cited

"Accounts Receivable Turnover." Accounting Simplified. N.p., n.d. Web. 03 Apr. 2013.

"An Analysis on Harley Davidson's International Business Strategy." Web log post. TDi Media.TDi Media, 1 Mar. 2010. Web. 30 Mar. 2013. <http://tdimedia.blogspot.com/2010/03/analysis-on-harley-davidsons.html>.

Danova, Antonio. Motorcycle, Bike & Parts Manufacturing in the US. Publication no. 33699a.N.p.: n.p., n.d. IBISWorld. Web. <http://clients1.ibisworld.com/reports/us/industry/default.aspx?entid=856>.

"Ernst & Young Llp in Milwaukee, Wisconsin Branch Location."Www.findthecompany.com. FindThe Company, n.d. Web. 30 Mar. 2013. <http://companies.findthecompany.com/l/8481855/Ernst-And-Young-Llp-in-Milwaukee-WI>.

Form 10-K. 10-K. Washington D.C.: Security and Exchange Commission, 2012 et al.Investor.harley-davidson.com. Harley-Davidson Inc. Web.

"Harley-Davidson Inc." Google.com/finance. Google, n.d. Web. 03 Apr. 2013.

"Investor Relations." Investor.harley-davidson.com. Harley-Davidson Inc., n.d. Web. 3 Apr.2013.

"Polaris Industries." AnnualReports.com. N.p., n.d. Web. 03 Apr. 2013.

"Polaris Industries, Inc." Finance.yahoo.com. Yahoo!, n.d. Web. 3 Apr. 2013.

"Recreational Vehicles - Company List." Finance.yahoo.com. Yahoo!, n.d. Web. 03 Apr. 2013.

"Yamaha Motor Co Ltd." Investing.businessweek.com. Businessweek, n.d. Web. 03 Apr. 2013.

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Appendix

Balance Sheet

Assets

Columns (Current Assets): Cash and cash equivalents; Marketable securities; Accounts receivable, net; Finance receivables held for sale, net; Restricted finance receivables, net; Finance receivables held for investment, net; Inventories; Assets of discontinued operations; Restricted cash; Deferred income taxes; Prepaid Expenses

Columns: Total Current Assets; Finance receivables held for investment, net; Restricted finance receivables; Property, plant and equipment; Prepaid pension costs; Goodwill; Deferred income taxes; Other long-term assets; Total assets

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AssetsCurrent Assets

Year Cash and cash equivalentsmarketable securities accounts receivable, netFinance receivables held for saleRestricted finance receivables held by variable interest entities, netFinance receivables held for investment, netInventoriesAssets of discontinued operationsRestricted cash held by variable interest entitiesDeffered income taxesPrepaid Expenses and Other Current Assets2006 238397 658133 143049 547106 0 1554260 287798 0 0 73389 485012007 402854 2475 181217 781280 0 1575283 349697 0 0 103278 712302008 568894 0 265319 2443965 0 1378461 379141 238715 0 123327 1287302009 1630433 39685 269371 0 0 1436114 323029 181211 0 179685 2824212010 1021933 140118 262382 1080432 699026 0 326446 0 288887 146411 1009912011 1526950 153380 219039 1168603 591864 0 418006 0 229655 132331 1023782012 1068138 135634 230079 1743045 0 0 393524 0 188008 110853 181655

Other Assets Total Assets

Total Current AssetsFinance receivables held for investment, netRestricted finance receivables held by variable interest entities, netProperty, plant and equipment, netPrepaid pension costsGoodwill Deferred income taxesOther long-term assetsTotal Assets2006 3550633 725957 0 1024469 55351 58800 42986 73954 55321502007 3467314 854044 0 1060590 89881 61401 54376 78000 56566062008 5526552 817102 0 1056928 0 60131 288240 79672 78286252009 4341949 3621048 0 906906 0 31400 177504 76711 91555182010 4066626 1553781 2684330 815112 0 29590 213989 67312 94307402011 4542206 1754441 2271773 809459 0 29081 202439 64765 96741642012 4050936 4038807 0 815464 0 29530 171845 64191 9170773

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Liabilities

Columns (Current Liabilities): Accounts Payable; Accrued liabilities; Liabilities of discontinued operations; Short-term debt; Current portion of long-term debt; Current portion of long-term debt held by variable interest entities

Other Liabilities Total Liabilities

Total Current LiabilitiesLong-term debtLong-Term Debt Held by Variable Interest EntitiesPension liabilitypostretirement healthcare liabilityother long-term liabilitiesTotal Liabilities2006 1595677 870000 0 47916 201126 60694 27754132007 905079 980000 0 51551 192531 151954 22811152008 2603757 2176238 0 484003 274408 174616 57130222009 2268224 4114039 0 245332 264472 155333 70474002010 2013782 2516650 2003941 282085 254762 152654 72238742011 2698618 2396871 1447015 302483 268582 140339 72539082012 1503082 4370544 0 330294 278062 131167 6613149

Columns: Total current liabilities; Long-term debt; Long-term debt held by variable interest entities; Pension liability; Postretirement healthcare liability; Other long-term liabilities; Total liabilities

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LiabilitiesCurrent Liabilities

Accounts PayableAccrued LiabilitiesLiabilities of Discontinued OperationsShort-term DebtCurrent portion of long-term debtCurrent Portion of Long Term Debt Held by Variable Interest Entities2006 283477 479709 0 0 832491 02007 300188 484936 0 0 119955 02008 323736 541372 0 1738649 0 02009 162515 514084 69535 189999 1332091 02010 225346 556671 0 480472 0 7512932011 255713 564172 0 838486 399916 6403312012 257386 513591 0 294943 437162 0

Shareholder Equity

Shareholder's EquityShareholder's equity Total Shareholder's Equity

Common StockAdditional Paid-In-CapitalRetained EarningsAccumulated Other Comprehensive LossEquity Pre-Treasury Cost<Less Treasury Stock, at Cost>Total Equity2006 3343 766382 5460629 -206662 6023692 3266955 27567372007 3352 812224 6117567 -137258 6795885 4420394 23754912008 3357 846796 6458778 -522526 6786405 4670802 21156032009 3368 871100 6324268 -417898 6780838 4672720 21081182010 3382 908055 6336077 -366222 6881292 4674426 22068662011 3391 968392 6824180 -476733 7319230 4898974 24202562012 3413 1066069 7306424 -607678 7768228 5210604 2557624

Columns: Common Stock; Additional paid-in capital; Retained earnings; Accumulated other comprehensive loss; Equity pre-treasury cost; <Less treasury stock, at cost>; Total Equity

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Ratios

Liquidity and Efficiency

Ratio AnalysisLiquidity and Effi ciency

Working CapitalCurrent Ratio Acid-Test Ratio Inventory Turnover Accounts Receivable TurnoverDays Sales UncollectedDays Sales in InventoryTotal Asset Turnover2006 1954956 2.225 1.968 N/A N/A 8.441 29.443 N/A2007 2562235 3.831 3.252 11.334 37.889 10.767 35.330 1.0982008 2922795 2.123 1.788 10.008 26.674 16.261 37.942 0.8832009 2073725 1.914 1.488 8.263 17.887 20.561 40.644 0.5632010 2052844 2.019 1.244 8.466 18.277 19.708 43.341 0.5232011 1843588 1.683 1.137 8.345 22.067 15.051 49.117 0.5562012 2547854 2.695 2.114 7.942 24.851 15.049 44.574 0.592

Columns: Working capital; Current ratio; Acid-test ratio; Inventory Turnover; Accounts receivable turnover; Days sales uncollected; Days sales in inventory; Total asset turnover

Solvency

Solvency

Debt RatioEquity RatioDebt-Equity RatioTimes Interest Earned2006 0.502 0.498 1.007 N/A2007 0.403 0.420 0.960 N/A2008 0.730 0.270 2.700 235.6812009 0.770 0.230 3.343 9.2412010 0.766 0.234 3.273 5.3212011 0.750 0.250 2.997 18.5112012 0.721 0.279 2.586 21.887

Columns: Debt ratio; Equity ratio; Debt-Equity ratio; Times interest earned

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Profitability

Profitability

Profit MarginReturn on AssetsReturn on Common Stockholder's Equity2006 17% N/A N/A2007 15.2% 16.7% 36.4%2008 11.0% 9.7% 29.2%2009 -1.2% -0.6% -2.6%2010 3.0% 1.6% 6.8%2011 11.3% 6.3% 25.9%2012 11.2% 6.6% 25.1%

Columns: Profit margin; Return on assets; Return on equity

DuPont Analysis

DuPont Analysis

Profit Margin Asset Turnover Leverage(Equity Multiplier)Total Return on Equity2006 17% N/A N/A N/A2007 15% 1.098 2.180 36.391%2008 11% 0.883 3.003 29.156%2009 -1% 0.563 4.021 -2.610%2010 3% 0.523 4.307 6.792%2011 11% 0.556 4.129 25.896%2012 11% 0.592 3.786 25.068%

Columns: Profit margin; Asset turnover; Leverage (equity multiplier); Total return on equity

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Income Statement

Revenues Costs and Expenses

Year Motorcycle and Related ProductsFinancial ServicesTotal RevenuesMotorcycles and related products cost of goods soldFinancial Services Interest ExpenseFinancial Services Provision for Credit LossesSelling, Administrative, and Engineering ExpenseRestructuring Expense and Asset ImpairmentGoodwill ImpairmentTotal Costs and Expenses2006 5800686 384891 6185577 3567839 174167 0 846418 0 0 45884242007 5726848 416196 6143044 3612748 204027 0 900708 0 0 47174832008 5578414 376970 5955384 3647270 136763 39555 1060154 12475 0 48962172009 4287130 494779 4781909 2900934 283634 169206 979384 224278 28387 45858232010 4176627 682709 4859336 2749224 272484 93118 1020371 163508 0 42987052011 4662264 649449 5311713 3106288 229492 17031 1060943 67992 0 44817462012 4942582 637924 5580506 3222394 195990 22239 1111232 28475 0 4580330

Columns: Motorcycles and related products; Financial services; Total revenues; Motorycles and related products cogs; Financial services interest expense; Financial services provision for credit loss; Selling, administrative, and engineering expenses; Restructuring expense and asset impairment; Goodwill; Total Costs and Expenses

Taxes Net Income

Operating IncomeInvestment IncomeInterest ExpenseLoss on Debt ExtinguishmentIncome Before Provision for Income TaxesProvision for Income TaxesIncome from Continuing OperationsIncome (Loss) from discontinued operations, net of taxNet Income2006 1597153 27087 0 0 1624240 -581087 1043153 0 10431532007 1425561 22258 0 0 1447819 -513976 933843 0 9338432008 1059167 11296 -4542 0 1065921 -381686 684235 -29517 6547182009 196086 4254 -21680 0 178660 -108019 70641 -125757 -551162010 560631 5442 -90357 -85247 390469 -130800 259669 -113124 1465452011 829967 7963 -45266 0 792664 -244586 548078 51036 5991142012 1000176 7369 -46033 0 961512 -337587 623925 0 623925

Columns: Operating income; Investment income; Interest expense; Loss on debt extinguishment; Income before provision for income taxes; Provision for income taxes; Income from continuing operations, net of tax; Net income

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Cash Flows

Cash Flows Information

Cash: Operating ActivitiesCash: InvestingCapEx Cash: Financing OCF/SalesFCF/OCF Short Term Debt CoverageCapital Expenditure Coverage2006 761,780 -35,259 219,602 -637,023 73% 71% 48% 3.4689122007 798,146 391,205 242,113 -1,037,803 85% 70% 88% 3.2965852008 -608,029 -294,875 228,959 1,293,390 -93% 138% -23% -2.655622009 609,010 -863,487 116,748 1,381,937 -1105% 81% 27% 5.2164492010 1,163,418 145,437 170,845 -1,856,090 794% 85% 58% 6.8097872011 885,291 -63,542 189,035 -308,944 148% 79% 33% 4.6832122012 801,458 -261,311 189,002 -990,073 128% 76% 53% 4.240474

Columns: Cash: Operating activities; Cash: Investing activities; CapEx (Capital Expenditures); OCF/Sales; FCF/OCF; Short term debt coverage; Capital Expenditure Coverage

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Yamaha Information

Yamaha Income Statement

2009 2010 2011 2012

TOTAL REVENUES115364

2129413

1127615

9120767

5

Cost Of Goods Sold 951350 998565100011

3 972607GROSS PROFIT 202292 295566 276046 235068Selling General & Admin Expenses, Total 251769 244256 211212 216470Other Operating Expenses 13103 -- 11428 --OTHER OPERATING EXPENSES, TOTAL 264872 244256 222640 216470OPERATING INCOME -62580 51310 53406 18598Interest Expense -9984 -8023 -6814 -6687Interest And Investment Income 8899 9410 8849 6368Other Non-Operating Expenses, Total -1585 13775 7707 8987Other Non-Operating Income (Expenses) -937 7187 7627 8693Merger & Restructuring Charges -103764 -11 -- --Gain (Loss) On Sale Of Investments -3067 -290 -81 -9Gain (Loss) On Sale Of Assets -1350 -563 -561 -1075Other Unusual Items, Total -239 -6662 -1301 -352EBT, INCLUDING UNUSUAL ITEMS -173670 58946 61205 25830Income Tax Expense 39258 31797 26873 14015Minority Interest In Earnings -3220 -8849 -7372 -4326Earnings From Continuing Operations -212928 27149 34332 11815NET INCOME -216148 18300 26960 7489NET INCOME TO COMMON INCLUDING EXTRA ITEMS -216148 18300 26960 7489NET INCOME TO COMMON EXCLUDING EXTRA ITEMS -216148 18300 26960 7489

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Yamaha Balance Sheet

Assets 2009 2010 2011 2012Cash And Equivalents 137219 203878 133707 106462Short-Term Investments 721 2016 -- --TOTAL CASH AND SHORT TERM INVESTMENTS 137940 205894 133707 106462Accounts Receivable 193393 176208 160234 185069TOTAL RECEIVABLES 193393 176208 160234 185069Inventory 223527 213634 213558 233427Deferred Tax Assets, Current 3276 3669 -- --Other Current Assets 62664 39623 53706 61839TOTAL CURRENT ASSETS 620800 639028 561205 586797Gross Property Plant And Equipment 792034 766196 -- --

Accumulated Depreciation-

516478-

515876 -- --NET PROPERTY PLANT AND EQUIPMENT 275556 250320 248430 272942Long-Term Investments 38110 35278 51297 58088Loans Receivable, Long Term 32390 37034 36017 40560Deferred Tax Assets, Long Term 5707 3797 -- --Other Intangibles 4802 4247 3469 3940Other Long-Term Assets 9712 8639 2 2TOTAL ASSETS 987077 978343 900420 962329

LIABILITIESAccounts Payable 159475 160143 124827 117580Accrued Expenses 8052 8800 9292 9230Short-Term Borrowings 87574 35455 42919 102476Current Portion Of Long-Term Debt/Capital Lease 30470 57576 69398 58158Current Income Taxes Payable 2480 8282 -- --Other Current Liabilities, Total 91647 94875 119979 103709TOTAL CURRENT LIABILITIES 379698 365131 366415 391153Long-Term Debt 281898 229410 162403 166340Minority Interest 36796 36454 29042 33595Pension & Other Post-Retirement Benefits 34904 35499 39611 44098Deferred Tax Liability Non-Current 7024 7009 6143 6107Other Non-Current Liabilities 34287 30485 15933 13069TOTAL LIABILITIES 737811 667534 590505 620767EquityCommon Stock 48342 85666 85666 85666Additional Paid In Capital 60824 98147 74582 74582Retained Earnings 180880 199190 249478 249724

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Treasury Stock -677 -681 -683 -686

Comprehensive Income And Other -76899-

107967-

128170-

101319TOTAL COMMON EQUITY 212470 274355 280873 307967TOTAL EQUITY 249266 310809 309915 341562TOTAL LIABILITIES AND EQUITY 987077 978343 900420 962329

Yamaha Ratios

2009 2010 2011 2012Working Capital Current Assets - Current Liabilites

241102

273897

194790

195644

Current Ratio Current Assets / Current Liabilities

1.634984

1.750134

1.53161

1.500173

LiquidityAcid Test Ratio

Cash+Short Term Investments+Accounts Recievable)/(Current Liabilities)

0.872622

1.046479

0.802208

0.745312

Receivable Turnover Net Sales / Avg Accts Receivable

5.965273

7.002854

7.586205

6.994871

Days' Sales Uncollected Days in Yr / Receivable Turnover

61.18748

52.1216

48.11365

52.18109

Inventory Turnover COGS / Avg Inventory

4.256085

4.568408

4.682265

4.351855

Days' Inventory On Hand Days in Yr / Inventory Turnover

85.75956

79.89653

77.95373

83.87228

Payables Turnover

(COGS +/- Change in Inventory) / Avg Accts Payable

5.965512

6.186585

7.018542

8.188509

Days' Payable Days in Yr / Payables Turnover

61.18503

58.99862

52.0051

44.57466

Operating Cycle

Days' Payable + Financing Period or Days' Inventory on Hand + Days' Sales Uncollected

146.947

132.0181

126.0674

136.0534

Financing Period

Days' Inventory on Hand + Days Sales Uncollected - Days' Payable

85.76201

73.01952

74.06228

91.47871

Profitability

Profit Margin Net Income / Net Sales

-18.736

11.4140

762.1125

890.6201

17Gross Margin

(Net Sales- COGS)/(Net Sales) 0.824649

0.77161

0.78369

0.805355

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RatioGeneral Gross Takeaway

(Administrative,Selling,and General Expenses)/(Gross Profit)

1.244582

0.826401

0.765133

0.920882

R&D Gross Takeaway

(Research and Development Expenses)/(Gross Profit) NA NA NA NA

Asset Turnover Net Sales / Avg Total Assets

1.168746 1.3169

1.35851

1.296659

Return on Assets Net Income / Avg Total Assets

-0.2189

80.0186

22 0.02870.0080

41

Return on Equity

Net Income - Preferred Dividends / Avg Owner's Equity

-0.8671

40.0653

480.0868

660.0229

91

Long Term Solvency

Liability to Equity Ratio Total Liabilites / Owner's Equity

2.959934

2.147731

1.905377

1.817436

Debt to Equity Long term debt/ equity

1.130912

0.738106

0.524024

0.486998

Interest Coverage Ratio

(Income before taxes + Interest Expense) / Interest Expense

17.71735

3.280942

4.95656

2.119934

Cash Flow Yield

Net Cash Flows from Operating Activites / Net Income

0.289524

2.803825

1.980935

2.483376

Cash Flows to Sales

Net Cash Flows from Operating Activites / Net Sales

-0.0542

50.0396

480.0418

49 0.0154Cash Flows to Assets

Net Cash Flows from Operating Activities / Avg Total Assets

-0.0634

0.052213

0.056852

0.019968

Free Cash Flow

Net Cash Flows from Operating Activities - Dividends - Net Capital Expenditures

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