Investors have been anticipating big things from Harley-Davidson (NYSE:HDI), pushing the stock up 36% this year to close at $62.70 per share last week. The motorcycle maker didn't disappoint, crushing expectations with second-quarter earnings of 83 cents per share, 22% higher than last year's second quarter, on record revenue of $1.33 billion.

The company was pleased to announce, and investors should be happy to note, that in-store traffic was, in CEO Jeffrey L. Bleustein's words, "brisk," driving an 18.8% increase in U.S. retail sales. The redesigned Sportster model posted the biggest increase in volume, while Buell Motorcycles -- the torqued-out line that competes with Honda (NYSE:HMC) and Suzuki's street racers -- continues to grow quickly. Increased gross margins (yeah!) resulting from plant efficiencies, combined with nearly 3% fewer shares outstanding, added even more juice to the earnings numbers. You want more good news? The company expects to increase selling prices, and therefore gross margins, on its motorcycles this year. The increase will be less than one percent, but it's still better than the price cuts implemented last year.

Profit margins are a key focus for any company, and investors need to keep an eye on the amount of income contributed by automakers' highly volatile, low-margin financing operations. General Motors (NYSE:GM) produced more than 60% of its first-quarter net income from financing and insurance, while Ford (NYSE:F) generated almost 38% of pre-tax earnings from financing. Harley's credit arm, on the other hand, contributed only 12.8% of operating earnings in the second quarter, down from 14.3% last year, indicating that the company's tangible products are driving profits, while financing plays a supporting role.

If we take off the rose-colored glasses for a moment, we'll notice that not all is perfect in Hog heaven. As Alyce Lomax pointed out, Harley's free cash flow barely budged for the first six months, despite lower capital expenditures and strong profit growth. It's possible the cash flow situation is related to the timing of payables and receivables, as working capital (the cash contributed or used by current assets and liabilities) swung from generating $93 million in the second quarter 2003 to using $25 million this year, a $118 million drop.

Despite the lower operating cash flows, Harley-Davidson is cruising into its second century stronger than ever. Insatiable domestic demand, and a hard charge into China, should keep things rolling at this American icon.

Motley Fool contributor Chris Mallon plans to someday buy a Harley-Davidson motorcycle, and he owns shares of Harley-Davidson and Honda Motors through his private investment partnership.