Navistar scores ‘important financial milestone’

Sept. 4, 2014
OEM declares 3Q results show “foundation of our business has improved dramatically”

While plainly stating what it must further accomplish, Navistar International Corp. (NYSE: NAV) also had some solidly positive news to relay in its Q3 earnings report.

"While we have work ahead of us to grow the business, improve our market share and further reduce our cost of doing business,” stated Troy A. Clarke, president & CEO of the truck and engine builder, “we do take some satisfaction in achieving positive income from continuing operations before taxes— an important financial milestone we've not realized in our quarterly performance since 2011."

Morgan Stanley analyst Nicole DeBlase reiterated an Equal-Weight (EW) rating and a $35.00 “price target” for Navistar, per a posting today to the online financial-services platform Benzinga. Morgan Stanley further stated that with its 3Q earnings report Navistar “exhibited very strong execution this quarter, and delivered upside vs. its EBITDA guidance.” However, the financial firm noted that the truck and engine builder’s “market share regain remains a challenge.”

The company advised that in Q3 it incurred a net loss of $2 million, or $0.02 per diluted share. That compares very favorably to last year’s Q3, when Navistar booked a net loss of $247 million, or $3.06 per diluted share.

Revenues in the quarter amounted to $2.8 billion, which the OEM described as “essentially flat vs. the third quarter of 2013.”

What’s more, Navistar reported $21 million in income from continuing operations before income taxes in Q3—compared to a $211 million loss from continuing operations before income taxes for the same period a year ago.

Q3 EBITDA was $142 million vs. an EBITDA loss of $74 million incurred for the same period a year ago.

Navistar noted that its Q3 results included a $29-million benefit in pre-existing warranty adjustments, partially offset by $20 million in restructuring and impairment charges.

Significantly, the OEM reported that its “warranty spend” sharply improved in Q3-- falling 22% year over year. “These results were driven by significant quality performance improvements, lower repair costs and a reduced population of trucks still in the warranty periods,” the company remarked.

“The improvement [in financial performance] reflects continued reductions in structural costs, as well as lower warranty expense,” said Walter Borst, executive vp & CFO, during Navistar’s earnings call.

Borst remarked that it was a “testament of our strong quality and focus on costs to show this type of earnings improvement with relatively flat sales.”

He added that “during the first nine months of this year, warranty expense as a percent of manufacturing revenue was 4.2%, compared to 7.7% for all of last year. We are on course to achieve our goal of decreasing warranty as a percent of manufacturing revenue by four percentage points.

“The reduction in warranty expense speaks volumes on the improved performance in quality of our products,” said Borst. “And the continued reduction in structural costs reflects the team's dedication to our new lean culture and focus on lowering the business's breakeven point.”

Jack Allen, executive vp & COO, also addressed the positive impact of reduced warranty expenditures during the call. He said warranty spend is “coming down for three reasons: the cost of each repair is declining due to better repair practices; the improved quality of the new SCR engines is driving a lower warranty spend on these engines; and, to a lesser impact, fewer ETR engines are in the warranty period.

“We believe this lower warranty spend rate is sustainable, and will result in spend and expense at levels consistent with industry norms,” he continued.

Allen added that the OEM’s new remote-diagnostics product, OnCommand Connection, “will enable us to further decrease our warranty expense [as] it helps to increase vehicle uptime, supports quicker repair, and helps to control maintenance and repair costs.”

Navistar finished the third quarter 2014 with $1.1 billion in manufacturing cash, cash equivalents and marketable securities.

The company reduced its year-over-year structural costs in the third quarter by an additional $86 million, including $67 million in savings from selling, general, and administrative (SG&A) expense and $19 million in reduced engineering costs.

Year-to-date, Navistar said it has reduced its structural costs by $245 million.

Navistar noted these Q3 developments:

  • A 10% year-over-year increase in chargeouts for Class 6-8 trucks and buses in the U.S.and Canada
  • Ending the quarter with a 54% increase in order backlog year-over-year
  • Launching (in July) its line of severe-service trucks powered by the company's 9/10 SCR engines

The company also provided these “guidance updates”:

  • Raised Class 8 industry forecast for FY2014 (US/Canada) to 235,000 to 240,000 units
  • Expects to finish FY2014 with $300 million in structural cost savings
  • Projects Q4 EBITDA of $115 million to $165 million, excluding pre-existing warranty and one-time items
  • Projects between $1.0 billion and $1.1 billion in manufacturing cash, cash equivalents and marketable securities at the end of Q4 after repaying the remaining $166 million of the company's 3% senior subordinated convertible notes maturing in October

“The foundation of our business has improved dramatically,” Allen remarked during the call with analysts. “We have the right lineup of SCR-based Class 6-8 trucks and buses, product warranty is declining, uptime is improving, order backlog, production and quoting levels are all up year-over-year [and] the quality, fuel economy and driver acceptance of our new trucks is improving, and our dealer body is healthy and investing in the future.

“These are all indicators of improving performance,” he continued, “and we are encouraged about the upcoming 2015 buying season.”

"Regaining market share remains a top priority and while we still have work to do, we are excited by the favorable feedback we receive from those customers who have bought and experienced our new trucks," stated Clarke.

"With additional offerings for medium-duty and severe- service applications, we're very encouraged with our future prospects," he added.

As of 11 am EDT today, Navistar’s stock price stood at $39.76, or up 3.51%.

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