Fitch Ratings Affirms Harley-Davidson & Harley-Davidson Financial Services

CHICAGO--Aug. 18, 2004--Fitch Ratings has affirmed Harley-Davidson Inc.'s (HDI) senior unsecured debt at 'AA-' and Harley-Davidson Financial Services, Inc.'s (Financial) senior unsecured debt at 'AA-', as well as its 'F1+' commercial paper rating issued under 100% owned subsidiary, Harley-Davidson Funding Corp. The Rating Outlook is Stable.

The affirmations reflect HDI's strong cash flow generation based on an operating model of prudent unit production growth, with revenue and net income growth in excess of unit production growth. This operating model is supported by HDI's leading market position in the core heavyweight motorcycle segment (651 CC+) in the U.S. with a highly effective brand management program. HDI's products and brands appeal to a large base of U.S. demographics which has helped sustain the long-running operating and financial track record of the company. Also key to the ratings is HDI's conservative financial policy to maintain and build on its large cash balances, which in effect is viewed as support for the managed assets of the consolidated entity.

While recent share repurchase activity has been significant, strong operating cash flow has allowed for the continued maintenance of a large cash balance to support the rating. Deviation from the longstanding conservative financial policy, however, via a more than supportable share repurchase or dividend scheme and/or a substantial acquisition strategy is a mild credit concern. Moreover, although the retail demand for heavyweight motorcycles in the U.S. has shown a solid and sustained track record of growth and resilience to economic cycles, HDI's operating model remains tied to this core market.

Strong retail demand for Harley-Davidson motorcycles in the United States where retail unit sales were up by 16.5% allowed for continued growth of HDI's net revenue and profitability in the first half of 2004. Net revenue increased 6.9% to $2.5 billion for the six months ended June 27, 2004. HDI's revenue growth was lower than the retail sales growth because wholesale unit shipment of motorcycles increased at a lower rate of 6.6%, wholesale pricing was relatively flat following last year's 100th year pricing, and because of a shift in wholesale shipment mix towards the relatively lower priced Sportster line which had been redesigned for the 2004 model year.

Operating profits from Motorcycles and related Products increased 18.9% to $602 million for the six months ended June 27, 2004, also expanding in margin to 24.1% from 21.7%. Some of the profitability and margin pick up in the first six months of 2004 stem from better comparability with the lack of 100th year related spending in 2004 versus 2003. Also a large contribution in 2003 to increase the funded level of the pensions program has translated into better pension expense comparison for 2004.

Although a large sum of $473 million was deployed for share repurchase with an additional $53 million for dividends in the first half of 2004, strong operating cash flow and decreased capital expenditures allowed for consolidated cash and marketable securities to remain relatively unchanged at $1.3 billion at June 27, 2004 versus the year-end 2003 level.

While HDI maintains a nominal amount of bank line which is drawn on occasion for operational purposes, manufacturing operations of HDI are effectively debt free. Fitch expects capital expenditures to increase for the latter half of 2004, but cash flow from operations and the large cash balances on hand to more than adequately fund capital expenditures and any other liquidity needs. Looking forward, Fitch anticipates that HDI will continue to generate significant levels of free cash flow from operations and maintain its conservative financial policy.

Financial's ratings reflect the parent's strong market position and balance sheet which showed $1.3 billion in cash and marketable securities with a nominal amount of debt at June 27, 2004. In addition, the ratings reflect consistent asset quality and relatively high managed leverage. Financial has a support agreement with Harley in which Harley must maintain Financial's fixed-charge coverage at 1.25 times (x) and minimum net worth of $40 million.

Profitability metrics continue to be good in 2004 following record operating performance in 2003 as demand for Harley products continues to be vigorous. Operating income increased to $99.3 million for the six months ended June 27, 2004, from $87.8 million for the comparable period in 2003. Financial's operating performance continues to be driven by strong demand for Harley products in conjunction with an increasing percentage of the financing of Harley products by Financial. Asset quality remains sound, benefiting from strong motorcycle collateral values and the quality of consumer financed by Financial has increased.

Credit losses to managed loans excluding bankcard and open accounts remained relatively stable, ticking up a bit to 0.85% for the year-ended Dec. 3, 20041, 2003 from 0.72% the previous year but improving again down to 0.63% in first-half 2004. Over a longer five-year period, the credit loss experience has generally run in a relatively tight band from 0.72% to 0.90%. Managed debt has improved over the past few years but continues to be high in relation to peers. Fitch expects leverage to continue to improve through good earnings retention. Mitigating the high managed debt, is the support that the parent could provide in a stressed scenario. Financial's funding profile has expanded with the addition of medium term notes in late 2003 as commercial paper as a percentage of total debt declined to 26% at June 27, 2004 from a high of 75% at the comparable period in 2002.