Restructuring Has Put Harley-Davidson Back on the Road to Growth and Profitability

After Keith Wandell took over as Harley-Davidson’s (NYSE:HOG) CEO in 2009, the company began a comprehensive restructuring process, with the goal of cutting annual costs by $315-335 million upon completion in 2013. Now with around three years of restructuring completed and related costs of over $470 million to date, it is worth taking a look at the progress the company has made.

When Wandell took over in 2009, the company was struggling with low margins, redundancies, high fixed costs, and had witnessed a steep decline in sales during the recession. The restructuring process began with the aim of maximizing the company’s long term growth opportunities and profitability, driven by greater competitiveness, efficiency and flexibility.

Focus Now Exclusively on Harley-Davidson Brand

In 2009, the company discontinued the Buell line of sports motorcycles and sold the MV Augusta brand of high performance bikes . This reflected the company’s new long term strategy of focusing purely on the Harley-Davidson brand and directing resources towards the manufacture of cruiser bikes, which is its core competency. ^[1]

Although the costs involved were relatively high (around $125 million was spent in shutting down the Buell line), leading to a net loss for the year, the move reflected favorably on the company’s gross margin as well. Overall, the company spent $221 million in 2009, which represented the largest restructuring related outflow over the course of the process.

Revamp of Manufacturing Facilities

Harley began restructuring its York manufacturing facility in late 2009. Its aim was to develop a production facility which would reduce fixed costs and increase quality, efficiency and capacity through initiatives such as merging the four assembly lines into one, the implementation of the ERP system and cutting-edge manufacturing equipment such as automated guided careers. ^[2]

York has been a key focus of the restructuring, but other operations such as Wisconsin and Kansas City have seen productivity improvements as well. The company has also set up assembly plants in India and Brazil, where labor costs are cheaper.

The company has renegotiated labor contracts with the workers at plants including Kansas City, Wisconsin, Milwaukee and Tomahawk. The number of workers required has also decreased dramatically due to productivity improvements. For example, the labor force at the York facility has decreased by around 40% from 2009 to 2012.

Other efforts include the shutting down of the Australian Wheel manufacturing facility, expansion of dealer networks in countries like India and Brazil, and an overall reduction in administrative costs and excess capacity.

Increase in Margins

The resulting decreases in operating costs and SG&A expenses have helped boost margins. Gross margins of the non-financial segment of the company have increased from 32.3% in 2009 to 33.4% 2011, and the company expects 2012 gross margins to be in the range of 34.75-35.75%.

Operating margins excluding restructuring costs have increased from 9.5% in 2009 to 10.6% in 2011. Remaining restructuring costs for the year are estimated to be around $22-32 million, and related costs for the next year are estimated to be around $5-10 million. This would mean an improvement in the bottom line relative to previous years.

We currently have a Trefis price estimate of $56 for Harley-Davidson, which is about 32% above the market price.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Harley profit drops 84%; Buell shut down, Marketwatch, October 2009 [↩]
2. Harley-Davidson to keep production plant in York, Pa., Reliable Plant, January 2010 [↩]