Navistar International Corp. (NYSE: NAV) announced this morning that it incurred a second-quarter net loss of $297 million, or $3.65 per diluted share, compared to a Q2 2013 net loss of $374 million, or $4.65 per diluted share. Its Q2 revenues reached $2.7 billion, up from $2.5 billion in Q2 2013.
“The largest component of the $297-million loss was the $151 million in accounting charges (intangible asset impairment related to our Brazil business),” a Navistar spokesperson told FleetOwner. “There was also an accounting charge for adjustments to pre-existing warranty and an $8 million restructuring charge.”
The truck and engine maker said that its Q2 results include the aforementioned $151 million and a $29- million tax valuation allowance, “both primarily related to declines in actual and forecasted results” for the company's operations in Brazil.
"We continue to make progress with our 'Drive to Deliver' [turnaround plan] and we have seen a number of encouraging signs this quarter, including improvements in our market share and strong order backlog, positive trends in our warranty expense and spend, and higher than expected structural cost reductions," said Troy A. Clarke, Navistar president & CEO.
"This is the third consecutive quarter where we've met or exceeded our EBITDA guidance and we have now met or exceeded our cash guidance for seven straight quarters," Clarke emphasized.
Queried by FleetOwner on what impact exceeding BITDA and cash guidance might have on investors, the company spokesperson remarked that those are “significant milestones in that [they signal] we’re doing what we said we would do. We’re making progress in our turnaround. Managing cash is an important part of any turnaround. EBITDA is a common metric used with manufacturers. And, once again, we’re making quarter-over-quarter improvements and [experiencing] positive momentum.”
For Q2, Navistar reported that “EBITDA was a loss of $119 million, which included the $151 million intangible asset impairment charge, $42 million in pre-existing warranty adjustments and $8 million in restructuring charges.”
As a result, adjusted EBITDA was $82 million, which the company noted exceeded its Q2 guidance of between $25 million to $75 million, excluding pre-existing warranty and one-time items.
Navistar also said it finished Q2 with $1.06 billion in manufacturing cash, cash equivalents and marketable securities, in line with its cash guidance range of $1.0 billion to $1.1 billion.
"We still have much work to do in our core North America operations as well as in Brazil, where we are taking actions to lower our breakeven point to offset the ongoing economic challenges in that country," Clarke pointed out. "Overall, we feel good about our steady gains and positive momentum."
According to Clarke, Q2 highlights include sequential and year-over-year improvements both in orders and retail market share for medium- and heavy-duty trucks in the U.S./Canada market, described thusly:
- Navistar’s medium-duty Class 6/7 retail market share was 26.4% for the quarter-- up from 17.3% in Q1 and 25.8% in Q2 of 2013
- Its combined Class 8 retail market share was 14.9% for the quarter-- up from 13.9% in Q1 and 14.5% in Q2 2013.
- Navistar's combined Class 6-8 truck and bus retail market share for Q2 was 18.5%
- The company ended Q2 with an order backlog 82% higher year-over-year
Navistar advised that “warranty spend” improved in Q2, declining $23 million— or 13%— year-over-year. “This improvement was driven by lower costs per repair, fewer EGR engines in the warranty period and ongoing quality improvements for its EGR engines as well as new product launches with SCR engines,” the company noted.
The OEM also reported that it reduced its year-over-year structural costs in Q2 by an additional $92 million, including $75 million in savings from selling, general, and administrative (SG&A) expense and $17 million in reduced engineering costs.
The company pointed out that last month it “initiated additional restructuring activities in North America, which will be completed by the end of this fiscal year and are expected to generate $40 million in SG&A savings annually starting in 2015.”
Elaborating on that restructuring activity, the Navistar spokesperson told FleetOwner that “we initiated a small, targeted reduction in force of salaried employees across our U.S. operations. We’re not providing specific breakdowns by function or by specific location.”
Earlier in Q2, Navistar had announced it would consolidate mid-range engine manufacturing by idling its Huntsville, AL, mid-range engine plant and moving that production to Melrose Park, IL.
“Those plans remain on track and once completed later this summer,” stated the company, “are expected to reduce Navistar's operating costs by more than $22 million annually.”
Navistar had also announced during Q2 that it would add selective catalytic reduction (SCR) emissions technology to its proprietary 9- and 10-liter, high- horsepower inline six-cylinder (I-6) engines.
“That launch is on track and progressing well, with first customer deliveries slated for later this summer,” the manufacturer stated. “Test units have been running for the past several months and initial results indicate an 8% to 12% improvement in fuel economy, depending on the application.”
In addition, during Q2 Navistar said it completed the sale of $411 million of new convertible notes due in April 2019 and that the net proceeds from the issuance were used to repurchase the majority of the convertible notes that come due in October 2014.
“The company anticipates repaying the $166 million balance [on the notes] with cash on hand,” stated Navistar. “As a result, the company will have no major debt maturities come due until 2017.”
Navistar also listed these points as “guidance updates”:
- Raised Class 8 industry forecast for FY2014 (U.S./Canada) to 225,000-235,000
- Increased FY2014 structural cost savings goal to $250 million, vs. previous goal of $175 million
- Projects Q3 EBITDA between $75 million and $125 million, excluding pre-existing warranty and one-time items
- Projects between $950 million and $1.05 billion in manufacturing cash, cash equivalents and marketable securities at the end of Q3
As to the jump in Navistar’s forecast for industry Class 8 sales, COO Jack Allen said this during the firm’s earnings call:
“Our original Class 8 forecast for U.S./Canada retail sales was 220,000-230,000— an increase of 7% over last fiscal year. The industry continues to struggle with driver shortages, but customer sentiment is increasingly positive on freight levels, rates and profitability. This has spurred an increase in new orders. And, we believe retail sales in the second half of the year will be stronger than we had planned. Thus, we’re revising our Class 8 industry forecast to 225,000-235,000.”
"We saw our market share bounce back strongly in the second quarter and we look to build on this in the second half of our fiscal year," Clarke remarked in the company’s news release.
"We also expect our financial performance will continue to build quarter-over-quarter, with third-quarter results better than second quarter, and our fourth quarter performance better than the third quarter,” he continued. “We are progressing and building momentum."
Navistar also provided specific details on these particular operations:
- North America Parts: “For Q2, the North America parts segment recorded a profit of $126 million, compared to a year-ago Q2 profit of $114 million. Parts revenues in the quarter declined by 2% due to lower military sales, which were partially offset by higher commercial parts sales. However, profit improved by 11% year-over-year driven by lower SG&A expenses resulting from the company's ongoing cost-reduction initiatives and the stronger performance in commercial markets”
- Global Operations: “For Q2, global operations recorded a loss of $150 million compared to a year-ago Q2 profit of $32 million. The year-over-year decline was primarily driven by asset impairment charges related to declines in actual and forecasted results for the company's operations in Brazil. Also, Q2 2013 results included a $28-million gain from the sale of the company's interest in the Mahindra joint ventures”
- Financial Services: “For Q2, the financial-services segment recorded a profit of $24 million compared to a Q2 2013 profit of $19 million. The year-over-year increase was due primarily to lower structural costs resulting from the company's ongoing cost-reduction initiatives and intercompany loans”