Navistar Posts $247 Mln. 3Q Loss, But Still Optimistic on Turnaround

This story appears in the Sept. 9 print edition of Transport Topics.

Original equipment manufacturer Navistar International Corp. lost $247 million, or $3.06 a share, during the three months ended July 31 as declines in truck and engine market share led to an 11.9% fall in sales.

Revenue for Navistar’s fiscal third quarter dropped to $2.86 billion from $3.25 billion during the same period a year earlier, when the company earned $84 million, or $1.22 a share. The Lisle, Ill., company’s truck and engine divisions lost money for the quarter, while the parts and financial services segments remained profitable.

“While we’re pleased with the progress we’re making, we fell short in our traditional and global volume assumptions,” CEO Troy Clarke said during a Sept. 4 earnings call. He added that Navistar is 12 months into its projected 18-month “Drive to Deliver” campaign to restore profitability and switch engine technology to selective catalytic reduction from exhaust gas recirculation.

“We are not satisfied with our performance,” Chief Operating Officer Jack Allen said later in the call. “But we are building momentum to enter 2014 on a positive trajectory.”

Bloomberg News’ survey of 16 analysts following Navistar showed that they had anticipated a loss per share of $1.295, based on results from continuing operations. The company’s actual result was $2.94 a share.

“Despite yet another messy quarter, cash balances were at the upper end of guidance with adjusted EBITDA [cash flow] at the lower end,” Stephen Volkmann told clients of Jefferies Group.

“Navistar continues to make progress on gaining incremental market share in the Class 8 market. We anticipate sequential improvement ramping into a profitable 2014,” Volkmann added.

The heavy-duty and medium-duty truck markets encapsulate what Navistar has done and still needs to do.

On the Class 8 side, the company’s fiscal third-quarter share of retail sales was 14%, while its share of new orders during the same time was 20%. This suggests that sales should rise over time, company executives said. In fiscal 2011, its U.S. and Canadian Class 8 share was 21%.

After dropping its EGR approach in July 2012, Navistar started offering ISX 15-liter engines by Cummins Inc. and Cummins’ SCR aftertreatment for Navistar’s MaxxForce 13-liter engines.

Allen named prominent fleet customers that have placed large orders for heavy-duty trucks: Heartland Express, Knight Transportation, Penske Truck Leasing, Ryder System and Swift Transportation Co.

However, depressed medium-duty sales contributed to poor quarterly cash flow, Clarke said.

Classes 6-7 sales had a 24% share during the quarter, whereas order intake was only 16%, indicating that sales probably will drop further. In fiscal 2011, Navistar had a 41% market share in Classes 6 and 7.

The day before the earnings call, Navistar President Bill Kozek said at a news conference the OEM will offer Cummins’ 6.7-liter ISB engines in Classes 6-7 DuraStar trucks and in its CE Series of school buses. Order taking for ISB-powered vehicles started immediately, with full production on the DuraStars anticipated by December.

The ISB, which also uses SCR, competes directly with Navistar’s MaxxForce 7 and DT engines. The in-house power plants use Navistar’s EGR technology, but they achieve federal regulatory compliance through the use of emissions credits.

Clarke has said he wanted to fix Class 8 products first and then move to medium-duty. The problem, Clarke said last week, is that many medium-duty customers have been “waiting on the sidelines” for the technological change.

“We’re not claiming victory, but it does give us confidence that we are wrestling those issues to the ground,” he said of the company’s heavy-duty progress, which will be useful in the medium-duty efforts.

While adopting the ISB is anticipated to cannibalize demand for the MaxxForce medium-duty models, having an SCR option ready now should lead to more Classes 6-7 sales sooner, Kozek said at the news conference.

The Cummins option also gives Navistar more time to rework MaxxForce 7 and DT. Originally, they were planned to appear in SCR formation in 2014, but that will now be delayed, Kozek said.

This could affect the company’s two Huntsville, Ala., engine plants — one for heavy-duty and the other for medium-duty, Clarke said during the earnings call.

“I have highlighted in the past, very specifically, we have too much engine-manufacturing capacity, and we need to do something about that. . . . We fully expect to be able to act on that in 2014. We need to kind of see the take rate of the ISB in order for us to select among the options that we have,” Clarke said.

In August, Navistar said it would cut jobs, and in the earnings announcement the company specified that would be 500 salaried employees and long-term contractors, but there were no details on location. The company said the layoffs would save $50 million to $60 million in annual spending.