Navistar’s Fiscal 2Q Loss Widens

This story appears in the June 17 print edition of Transport Topics.

Navistar International Corp.’s fiscal second-quarter loss more than doubled from a year earlier to $374 million because of slumping sales, a trend company executives said is being reversed as demand grows.

Navistar on June 10 reported the loss, equal to $4.65 per share, for the quarter ended April 30 as revenue fell 23% to $2.53 billion. In the year-earlier period, the loss was $172 million, or $2.50.

“We have met or exceeded so many goals that we thought progress would come faster,” said CEO Troy Clarke, referring to milestones such as the sales pace for trucks with Cummins Inc.’s

15-liter ISX engines. Navistar has 5,800 orders for that product and already has built 3,200.

Navistar also has 2,200 orders for tractors with its 13-liter MaxxForce engine equipped with selective catalytic reduction aftertreatment.

The company is working to recover from its decision to shift to SCR engines from a different emissions technology.

Chief Operating Officer Jack Allen said Navistar is building 25% more trucks in the current quarter than in the second quarter and will boost production by 18% in its fiscal fourth quarter.

“It feels good to have these product launches under way,” said Clarke on a June 10 conference call. “We still face a few significant, though solvable, challenges.”

For example, he said, “we were disappointed in our sales and [market] share performance,” as well as mounting warranty claims that cost $164 million in the quarter, up from $138 million in the prior-year period.

Clarke said that warranty claims on later-model tractors are lower than the 2010 models because of manufacturing quality improvements.

Navistar’s quarterly results were lower than the average estimate by analysts of $1.14 per share, according to Bloomberg News.

Navistar’s shares fell more than 10% last week following the earnings announcement. However, the stock was trading above $30 a share, well beyond the 52-week low of $18.17.

Robert W. Baird analyst David Leiker said in a report that “much progress is being made in underlying operations,” with a solid balance sheet, improving market share and cost-reduction efforts.

He also said the increasing warranty costs are “an unresolved near-term risk.”

“We are confident we have the right products,” Clarke said. “Now that we are through the product launches and quality improvement, our goal is to improve share.”

Clarke said Navistar’s Class 8 market share inched up to 15% in the second quarter from 14% in the first quarter. He set a target of 18% by Oct. 31, when the fiscal year ends, en route to a market share of between 20% and 25% by 2015.

Clarke said one reason for 2013 optimism was fleets’ traditional buying patterns that include stronger orders later in the year.

The target level would approach Navistar’s peak market share of nearly 30% five years ago.

Chief Financial Officer A.J. Cederoth said Navistar expects to report earnings before interest, taxes, depreciation and amortization, or EBITDA, of as much as $50 million in the third quarter. In the second quarter, Navistar’s EBITDA was a $116 million loss.

Clarke’s 2015 target includes EBITDA of between 8% and 10% in that year, with a combination of increased sales and cost reductions in truck and engine production, improved productivity and lower materials costs.

Jefferies and Co. analyst Stephen Volkmann said, “Navistar’s margin targets assume reasonable market share and industry volume goals. Still, the path to higher EBITDA margins remains a ‘show me’ story.”

In other developments, Navistar said it would begin building medium-duty trucks with SCR next year and is considering its engine-manufacturing plants strategy.

Clarke explained that the company will decide by the end of the year how to deal with a situation where the company has three facilities and actually needs only one.

In the individual business lines, the truck unit’s loss was $109 million, compared with $45 million, and the engine loss also worsened, moving to $138 million from $108 million. Countering the other trends, the parts-business profits rose to $91 million from $41 million.

Truck revenue fell more than 30% to $1.52 billion, and engine revenue dropped more than 15% to $744 million. Parts revenue rose 7% to $530 million.

Clarke also said Navistar is “overachieving” by cutting costs faster than the expected rate of $175 million annually, shedding noncore businesses such as a recreational vehicle unit and adding key executives such as Bill Kozek as president of North American truck and parts.

In the first half of the fiscal year, Navistar lost $497 million, or $6.19 per share, worse than the $325 million loss, or $4.69 per share. Revenue fell 18% to $5.16 billion.

The company shifted technology paths after its engines failed to gain U.S. government emissions certification. The ensuing chaos led to the retirement of CEO Daniel Ustian, who eventually was succeeded by Clarke earlier this year.