Navistar Narrows Quarterly Loss

This story appears in the Jan. 6 print edition of Transport Topics.

Navistar International Corp. reported a narrower fiscal fourth quarter loss, which the truck and engine maker said is setting the stage for a stronger 2014.

The loss for the quarter ended Oct. 31 was $154 million, or $1.91 per share. A year earlier, the loss was $2.77 billion, or $40.13, including more than $2 billion in one-time costs. Revenue fell 13% to $2.75 billion from $3.18 billion, reflecting what Navistar said were “weaker industry conditions and lower market share.”

The company has been trying to recover from its failed emissions control technology known as exhaust gas recirculation, or EGR. After market share fell as low as 12% and warranty costs skyrocketed, Navistar ditched EGR for selective catalytic reduction, or SCR, used by all other manufacturers, and reshuffled management to make Troy Clarke CEO.

“2014 will be a better year for Navistar,” Clarke said on a Dec. 20 conference call. “We are confident positive financial results are on the way.”

“We are entering 2014 with a significantly better order backlog,” Clarke said, highlighting a 26% improvement in the order pace at the end of its fiscal year, compared with the prior year period. Class 8 order backlog is up by one-third, he added.

Clarke acknowledged that the path to profitability has been slower than hoped, saying “2013 has been a challenging year.”

The Lisle, Ill.-based company didn’t disclose a target for 2014 profitability or earnings before interest, taxes, depreciation and amortization. Instead, positive results based on EBITDA of 8% to 10% are now targeted for 2015.

That forecast was a shift from comments on the conference call at the end of the 2012 fiscal year.

At that time, interim CEO Lewis Campbell said, “We will be positioned for a strong and profitable 2014 and beyond.”

Nevertheless, analysts praised Navistar’s progress.

“Navistar delivered major accomplishments in 2013 to right the ship,” analyst David Leiker wrote  in a report for Robert W. Baird & Co. “2014 is another year of major change setting the stage for fundamental improvements in 2015.”

Clarke identified other positive trends, including a planned reduction in costs of $175 million for fiscal 2014 on top of $330 million in fiscal 2013.

Clarke believes the second quarter of the fiscal year “will better represent the true progress of our ‘Drive to Deliver’ plan.”

That will follow a first quarter when chargeouts, or vehicles that have been invoiced, will be slightly below the fourth quarter, as manufacturing of medium-duty trucks catches up with demand.

In the fourth quarter, that total was 13,700 on a worldwide basis, including 6,100 heavy-duty trucks, based on information in Navistar’s earnings presenta-tion. Those figures were both about 1,000 below the comparable 2012 period, almost completely due to lower medium-duty activity.

On Dec. 23, Navistar said it had shipped the first of its medium-duty trucks with Cummins Inc. ISB engines. Navistar now has orders for more than 4,500 of those trucks, which were introduced in September.

The company plans to take action in 2014 to trim manufacturing costs.

“We know we have too much capacity today,” Clarke said, without specifying a date. “We don’t need to have three [engine plants].”

Clarke also said higher warranty costs hurt results.

Navistar added $152 million in reserves for future warranty claims. In the fiscal 2012 quarter, $149 million was added to warranty reserves.

EGR-related costs should fall in the future, Navistar said.

During the conference call, Navistar projected a reduction of about 20% by the end of fiscal 2014, with more than half of the EGR engines coming off warranty by the end of 2015.

The goal is to push warranty costs to 2.5% of revenue or below, in line with industry standards and pre-EGR performance. That percentage has been as high as 7% of revenue, Clarke said.

Included in the fourth quarter 2013 results were a tax benefit and an asset impairment that reduced the loss by $123 million.

For the full fiscal year, Navistar lost $898 million, or $11.17 per share, compared with $3.01 billion, or $43.56.