Navistar Incurs Wider-Than-Expected Q2 Loss

Zacks

Navistar International Corporation (NAV) recorded adjusted net loss of $117 million or $1.44 per share in the second-quarter fiscal 2014 (ended Apr 30, 2014) versus $353 million or $4.39 per share in the year-ago quarter. The loss per share was much wider than the Zacks Consensus Estimate of a loss of $1.30.

On a reported basis, Navistar posted a loss of $297 million or $3.65 per share in the quarter, narrower than the loss of $374 million or $4.65 a year ago.

Navistar’s revenues rose 8.7% year over year to $2.75 billion in the quarter, beating the Zacks Consensus Estimate of $2.67 billion. The hike in revenues was driven by improving market share of the company. The retail market share of Navistar’s the company’s medium-duty Class 6/7 increased to 26.4% from 25.8% in the second quarter of 2013.

Retail market share of combined Class 8 was 14.9%, nominally up from 14.5% a year ago. Retail market share of Navistar's combined Class 6-8 truck and bus was 18.5%, and the company ended the quarter with an order backlog 82% higher than the previous year.

Segment Details

Revenues at Navistar’s North America Truck segment increased 19.4% year over year to $1.8 billion. The segment recorded a loss from continuing operations of $134 million, narrower than the loss of $303 million in the prior-year quarter. The improvement was driven by lower charges for adjustments related to pre-existing warranties and higher structural cost savings.

Revenues at Navistar’s North America Parts segment dropped 1.9% year over year to $623 million in the quarter. The decline was driven by lower military sales, partially offset by higher commercial parts sales. The segment registered an 10.5% increase in profit to $126 million against $114 million a year ago, driven by lower selling, general and administrative expenses due to the ongoing cost-reduction initiatives and better performance in commercial markets.

Revenues at Navistar’s Global Operations segment declined 14.2% to $423 million. The segment plummeted to record a loss of $150 million against a profit of $32 million recorded a year ago. The decline was due to asset impairment charges due to decline in actual and forecasted results from the company's Brazilian operations.

Revenues at Navistar’s Financial Services segment marginally dipped to $57 million from $58 million a year ago. The segment registered a profit of $24 million, up from $19 million in the corresponding quarter last year. The year-over-year improvement was due to lower structural costs resulting from the ongoing cost-reduction initiatives.

Financial Position

Navistar had cash and cash equivalents of $594 million as of Apr 30, 2014, down from $755 million as of Oct 31, 2013. Notes payable and long-term debt was $5.1 billion as of Apr 30, 2014, down from $5.09 billion as of Oct 31, 2013.

Net cash used in operations was $326 million in the first half of fiscal 2014 versus $43 million a year ago. Capital expenditure was $50 million in the period, down from $107 million in the year-ago period.

Capital Deployment

In the second quarter of fiscal 2014, Navistar completed the sale of $411 million of new convertible notes due in Apr 2019. The proceeds from the issuance will be used to repurchase majority of the convertible notes due in Oct 2014. The company also plans to repay $166 million of its debt balance with the cash it holds, thereby leading to no major debt maturities for the company till 2017.

Guidance

Navistar forecasts Class 8 industry sales for 2014 in the U.S. and Canada to be 225,000–235,000 units. The company also expects to incur structural cost savings of $250 million compared with the previous estimate of $175 million. Cash and cash equivalents along with marketable securities are expected to be between $950 million and $1.05 billion by the end of third-quarter 2014.

Our Take

Navistar will benefit from the increasing market share and restructuring of the mid-range engine manufacturing. The company will halt production at its Huntsville, AL, mid-range engine plant and move to Melrose Park, IL. Once the restructuring is complete, Navistar's operating costs are expected to reduce by more than $22 million annually.

Navistar will also enjoy favorable impacts from the addition of the selective catalytic reduction (SCR.V) emissions technology to the company's proprietary 9- and 10-liter, high horsepower inline six-cylinder (I-6) engines. This will improve fuel efficiency by 8% to 12%. It will be marketed from the later part of this summer.

Navistar manufactures and sells commercial trucks, mid-range diesel engines, buses, military vehicles and chassis for motor homes and step-vans. It also provides service parts for trucks and trailers. Currently, the company retains a Zacks Rank #3 (Hold).

Gentherm Inc. (THRM), Tower International, Inc. (TOWR) and Magna International Inc. (MGA) are some better-ranked automobile stocks worth considering. Gentherm carries a Zacks Rank #1 (Strong Buy), while Magna and Tower International are Zacks Rank #2 (Buy) stocks.

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