Navistar Second-Quarter Net Income Rises 72%

Navistar International Corp. last week reported net income for its fiscal second quarter jumped 72% and predicted sharp increases in production, sales and profits during the second half of the year.

The manufacturer of International trucks said that output was restricted by inadequate supplies of some components as well as by U.S. weather and political problems in Mexico.

Navistar raised net income for the quarter ended April 30 to $74 million, from $43 million a year earlier, the company reported on June 7. Revenue climbed 22% to $3.36 billion.

Navistar also said it expects profit of $427 million to $465 million for its full fiscal year, excluding costs such as engineering integration.

“The second-quarter results represent good earnings,” CEO Daniel Ustian said. “The market is better, revenue is better, profit is commensurate with that. There is a clear path to increasing heavy truck and severe service to 25%” market share.

He attributed second-quarter improvements to multiple factors, saying “our core business has seen an increase in volume, and our military and service parts continue to deliver strong results.”

In the second quarter, truck sales generated $2.26 billion, or about two-thirds of Navistar’s sales as revenue jumped 22%. Both engine and parts revenue rose 41% to $955 million and $562 million respectively.

While Navistar projected growth, Ustian also outlined supply and inventory issues.

“We are sitting on more inventory than we’d like,” he said, attributing that to production disruptions tied to U.S. weather and Mexican political unrest.

“We are stretched out in our ability to make as many vehicles as we can sell,” Ustian said, as Navistar is under pressure to find adequate supplies of engines, axles and tires.

“We believe that [supply] stress will end by the end of the year,” Ustian said. “For the next several months, it will be there.”

The supply issue for engines is casting and machining of crank cases. Ustian attributed the axle supply pressure to sourcing changes that suppliers had to make to survive during the recession.

To achieve the 25% Class 8 market share for the full year, Navistar intends to boost sales and market share to 28% in the second half of the fiscal year from about 20% in the first half. 

To accomplish that, production of Class 8 trucks, which totaled 15,000 in the first half, will roughly double to as much as 31,000 in the second half, with a heavy emphasis on vehicles with 13-liter engines, to achieve annual sales of between 42,000 and 46,000, Navistar officials said.

The company forecast that the increased sales and market share would result in Navistar earning up to 80% of its profit during the second half of the fiscal year.

Sales are expected to rise from $6.1 billion in the first half of the year to as much as $8.2 billion during the second half.

The second-half projections, if met, would continue the stepped up pace of production, which rose 34% from the first quarter and 22% year-over-year production.

Exports are expected to be a key part of the growth, Ustian said.

Vehicle sales to Mexico, Latin America, South Africa and Australia are expected to double this year to 16,000, sparked by higher foreign market profitability.

“Margins are going to be better in the export business than they are in North America,” Ustian said. “We can get a better price on vehicles sold in Mexico than we can in the U.S. In Latin America, South Africa and Australia that is the story as well.”

He also said Navistar is committed to supporting new foreign dealers by taking their needs into account when allocating capacity.

Ustian also signaled that fleets seeking a new tractor for 2011 delivery may not get one. Asked if there were slots available this year, he said, “It depends on who they are.”

Ustian added Navistar expects that continuing increases in costs for materials such as steel will limit profit margin growth, and steered away from discounting to boost share.

“We are just trying to be competitive on price, not driving for share,” he said, noting that offering the lowest price damages a company’s quality image.

He said that margins would be enhanced by cost-cutting efforts that will save $80 million in manufacturing costs this year. Those changes include improving flexibility so that plants can make multiple models.

Military business will add to growth, Ustian said, projecting $1 billion in second-half sales after revenue of $840 million in the first half.