Navistar Reports Loss in 4Q, CEO Sees Profitable 2014

This story appears in the Dec. 24 & 31 print edition of Transport Topics.

Navistar International Corp. announced last week its fiscal fourth-quarter loss ballooned to $2.76 billion, mostly due to a tax-related charge, but executives said long-term product improvements will restore profits.

Navistar’s loss for the quarter ended Oct. 31 was $566 million — excluding the $2.19 billion charge for valuation of assets for tax purposes — compared with 2011 quarterly net income of $275 million.

Revenue declined 24% to $3.28 billion, reflecting lower sales of trucks, engines and military equipment, as well as annual warranty costs that more than doubled.

“There was a lot of noise in the numbers, which you can expect from a company in transition,” said Lewis Campbell, interim CEO, on a Dec. 19 conference call. “This is a 12-to-18-month turnaround. We will be positioned for a profitable 2014. I believe Navistar’s best days are yet to come.”

Campbell and his management team were in place for most of Navistar’s fiscal fourth quarter, taking over on Aug. 27 from former CEO Daniel Ustian. He retired shortly after Navistar joined every other truck maker in adopting selective catalytic reduction engine emissions technology and refocused its product line to include 15-liter Cummins engines.

Navistar, which is based in Lisle, Ill., said Class 8 market share slipped to 13% in the fourth quarter and 15% for the year. During fiscal 2010, that share was as high as 30%, the company’s report said.

Class 8 sales fell 38% and orders fell 41%, while engine shipments declined 25% in the fourth quarter.

For the full fiscal year, Navistar lost $2.96 billion, after making a $1.78 billion profit the year before. Revenue slipped 7% to $12.95 billion.

Meanwhile, the quarterly loss at the truck business, which accounted for about 70% of revenue, was $160 million. That unit had a $287 million profit in the year-earlier quarter.

Engine unit losses totaled $287 million after a profit of $58 million in the 2001 quarter. Parts profit slipped 13% to $76 million on $582 million in revenue.

The quarter included $149 million in warranty charges that were “significantly larger than historical experience,” the earnings report stated. For the full year, warranty expense was $895 million, nearly triple the total of $322 million in fiscal 2010.

Troy Clarke, president and chief operating officer, said warranty costs were related to the exhaust gas recirculation valves on 2010 and 2011 models and two related parts of that valve. Navistar didn’t say what those other parts were.

“Our trucks are getting better,” Clarke said. “We will do whatever it takes to keep our customers satisfied with the performance of our trucks.”

Speaking about the warranty costs, Campbell said, “I was not disheartened by this development. Our quality performance is improving. The few issues that remain are higher-cost items.”

Robert W. Baird analyst David Leiker said in an investor note that the earnings report was “messy,” but provided “encouraging” details about the turnaround effort.

Navistar recorded several other charges.

There was $73 million for job cuts, $16 million for manufacturing changes related to the planned closing of a plant, and $14 million in penalties paid for trucks sold that don’t meet federal 2010 emissions regulations.

Campbell also mentioned selling a joint venture stake in India, announcing the plant shutdown and discontinuing production of its own 15-liter engine as well as shipping the first 300 ProStars with 15-liter engines from Cummins Inc. Shipping started on Dec. 14, five days earlier than planned.

“This has been a great effort,” Clarke said, referring to the shipping clearance for 15-liter tractors. “Testing of the 13-liter is under way. We have come a long way. Momentum will be evident in 2013.”

Lower military revenue accounted for a portion of the drop in sales. Quarterly military revenue was $410 million, down 49%. In fiscal 2013, it’s expected to fall to $750 million from $1.1 billion.

Chief Financial Officer A.J. Cederoth said Navistar is projecting industrywide annual Class 8 sales of 215,000 units.

For Navistar, he said, the fiscal second quarter ending April 30 will be particularly important because the 15-liter tractors will be available as well as the 13-liter ProStar with SCR.

“We expect our market share to grow; we anticipate our margins will improve,” Cederoth said, targeting a profitable fiscal fourth quarter. “2013 will be the year we focus on fixing the business. We don’t expect to have the quality issues in 2012 repeat themselves in 2013.”

Navistar also disclosed plans to submit the 13-liter engine with SCR for certification by the Environmental Protection Agency on Jan. 10.

Cederoth stressed that Navistar has $1.5 billion in cash to “demonstrate strong liquidity.”

Navistar anticipates that its manufacturing cash balance will slip about $500 million during the fiscal first quarter.

Navistar Financial’s profit was $91 million for the fiscal year, a drop of about 30%.