Navistar Loses $80 Million in Fiscal 2Q

OEM Turns to Exports for Used Trucks
Navistar International Corp.

This story appears in the June 12 print edition of Transport Topics.

Navistar International Corp. lost $80 million, or 86 cents a share, during the fiscal second quarter as the manufacturer set aside $60 million for its reserve fund to deal with used trucks with troubled engines that are largely exported.

Revenue for the period ended April 30 was $2.1 billion.

In an earnings call June 7, Chairman and CEO Troy Clarke said the one-time charge for the fund is expected to be the last significant action needed to resolve issues related to the MaxxForce 13-liter engines that have enmeshed the Lisle, Ill., original equipment manufacturer since 2012, leading to net losses in 18 of the past 19 fiscal quarters.

“Warranty and used-truck issues from the MaxxForce 13 [exhaust gas recirculation] products continued to diminish, and now is the time for us to take steps to put these issues behind us faster,” Clarke said. Other executives on the call estimated it would take until the end of next year to wind down the MaxxForce issue completely.

Navistar has met with increasing success in finding export homes for the used vehicles. Mexico was mentioned as a destination for the heavy-duty trucks in the earnings call, and a company spokesman said afterward that South and Central America and Southeast Asia also are important markets.

“The trucks stay intact when they leave here,” Navistar spokesman James Spangler said. “But in the receiving countries, some of the components are de-contented to meet local emissions and fuel standards,” he said.

Spangler would not specify which components are removed abroad, but the manufacturer’s domestic troubles were related to its choice of third-generation exhaust gas recirculation, or EGR, to meet 2010 federal emissions standards.

All North American heavy-duty truck makers now use select- ive catalytic reduction as a complement to EGR, rather than EGR alone.

A year ago, Navistar earned $4 million, or 5 cents, on quarterly sales of $2.2 billion.

The current quarter’s truck sales were led by Classes 6 and 7 medium-duty vehicles, which rose to 7,000 units from 6,200 a year ago. Heavy-duty sales dropped to 5,300 from 6,800 for the quarter.

For the quarter, the company’s truck division lost $56 million on sales of $1.39 billion. In the comparable 2016 quarter, the loss was $23 million on revenue of $1.46 billion.

Chief Financial Officer Walter Borst observed that without the charge for the $60 million reserve fund, the truck division would have posted a profit.

Clarke and Bill Kozek, president of the truck and parts businesses, said they are “bullish” on the rest of this year, especially on heavy-duty sales.

Clarke said that while medium-­duty truck sales are front-­loaded during a typical year, “Class 8 demand builds through the year.” He cited projections from market research firms forecasting better heavy-duty sales during the second ­half of this year compared with the first six months.

“We’re participating in the increase in the order intake as well. Our medium growth is signifi­cantly higher than the Class 8, but the Class 8 is holding its own,” Kozek said of the company’s trend on orders.

“Our backlog is as far out as it’s been since [2013], so that’s a positive trend for us in the second half. But the other piece of that is customers are having pretty good years in general. And now they’re looking at vehicles for now and then into 2018,” Kozek said.

“Production levels are ex- pected to increase sequentially as positive order trends through the first half of the year support our expectation for a recovery in the heavy-duty truck cycle following 2016’s ‘midcycle pause,’?” said analyst Stephen Volkmann, who follows Navistar for Jefferies Group.

Volkmann, who rates Navistar as “buy,” said he is optimistic about truck sales and has projected 2017 industry builds to be closer to replacement, about 245,000 for Class 8. “We would note that industry order rates to start the year have been solid, and despite the May step down we continue to expect industry forecasts to be raised from the current 228,000.”

In addition to his efforts at fixing Navistar’s previous problems, Clarke has emphasized the need to introduce new products to generate future sales. For on-highway, Class 8 equipment, Navistar launched the LT tractor last year, the RH model in April and the 12.4-liter A26 engine in February.

Clarke said his Class 8 backlog includes 1,500 trucks with A26 engines.