Navistar Slashes 3rd-Qtr. Loss to $2 Million; Warranty Costs Fall, Production Increases

This story appears in the Sept. 8 print edition of Transport Topics.

Navistar International Corp. posted its smallest quarterly loss in two years, narrowly missing the break-even point in its fiscal third-quarter results as warranty costs declined and production levels rose.

The company, which builds International trucks and MaxxForce engines, reported a net loss for the quarter ended July 31 of $2 million, or 2 cents per share, compared with a loss of $247 million, or $3.06, in the same period a year earlier.

“Our third-quarter results reflect a number of positive trends, including increased production, improvements in warranty charges, cost reductions that further lowered our break-even point and our continued efforts to manage cash,” CEO Troy Clarke said.

Navistar said its warranty expenses fell 22% to approximately $140 million from a year ago. They also declined 14% from the previous quarter, driven by lower cost per repair, better performance of its newer engines with selective catalytic reduction and fewer 2010-2012 engines in their warranty period, the company said.

“We believe this lower warranty spend rate is sustainable and will result in spend and expense at levels consistent with industry norms,” Chief Operating Officer Jack Allen said on the company’s earnings call Sept. 3.

Revenue for the third quarter declined to $2.84 billion from $2.86 billion a year ago.

The Lisle, Illinois-based manufacturer also reported $21 million in income from continuing operations before taxes, marking the first time it achieved a positive level for that measure since 2011.

Following the call, J.P. Morgan analyst Ann Duignan wrote that her organization believes Navistar’s turnaround “is reaching an inflection point.”

She said: “While there is significant execution risk ahead, we remain encouraged by the progress this management team has made to date.”

Through nine months, Navistar has recorded a loss of $547 million, or $6.73 per share, in the current fiscal year, compared with a loss of $744 million, or $9.25, in the first three quarters of the previous year. Revenue was $7.79 billion compared with $8.02 billion.

Navistar has reported losses in each of its past eight quarters after its previous engine technology failed to meet federal emissions standards without the use of emissions credits. The string of losses began with a $2.77 billion loss in the fourth quarter of 2012. During the next six quarters, the company’s losses ranged from a low of $123 million to a high of $374 million.

During that timeframe, Navistar has been transitioning its truck lineup to SCR by using Cummins engines and adding the technology to its in-house engines.

Despite its improved financial results in the recent quarter, Navistar’s market-share recovery hasn’t been as rapid.

Navistar said its share of the total U.S. and Canadian Class 8 market was 14% in the third quarter, flat from a year ago but down from 15% in the previous quarter.

According to data from WardsAuto.com, Navistar’s U.S. Class 8 market share for calendar year 2014 stood at 15.1% through July, up from 14.4% in full-year 2013.

“The slower-than-expected market share gain in the last two quarters is behind plan,” Clarke said on the earnings call, adding that the company anticipates its share will gradually improve moving forward.

“As time progresses, we are recovering market share as more customers experience our new SCR product,” he said.

Clarke also said the North American truck industry “continues to grow beyond our forecast for the year.”

As a result, the company raised its full-year industrywide Class 8 sales outlook to a range of 235,000 to 240,000 trucks in the United States and Canada, up from a previous projection of 225,000 to 235,000 vehicles.

Navistar invoiced 9,600 Class 8 trucks to customers in the United States and Canada during the quarter, a 10% increase from a year ago. Charge-outs of on-highway trucks climbed 24% to 7,300, but fell 18% to 2,300 for severe-service trucks.

“It’s important to note that the product line where we’ve had SCR products the longest, Class 8 on-highway with the [Cummins] ISX and with the MaxxForce 13 SCR, is growing the fastest,” Allen said.

In July, Navistar began shipping vocational trucks powered by the company’s MaxxForce 9 and MaxxForce 10 engines with SCR.

Charge-outs for Classes 6 and 7 medium-duty trucks rose 6% to 3,600 units, the company said.

Navistar’s third-quarter results benefitted from a $29 million adjustment to pre-existing warranty costs, but that gain was partially offset by $20 million in restructuring charges.

The company also said it reduced structural costs in the third quarter by $86 million, increasing its year-to-date cost savings to $245 million. Navistar said it expects to finish the fiscal year with $300 million in structural cost savings.

Navistar also said it ended the quarter with a 54% higher order backlog than a year earlier.

Based on its order board, Navistar will build more than 20% more trucks in the fourth quarter than in the same period last year, Allen said.

David Leiker, an analyst at Robert W. Baird & Co., said the introduction of Navistar’s 9/10 liter SCR engine will help the company gain back some market share.