In a scenario similar to its last sequential quarter, Navistar International (NYSE:NAV) again benefited from buoyant sales of its heaviest trucks in its most recent reporting period. In fiscal second-quarter 2019 earnings issued Tuesday, commercial truck sales offset lower parts and global operations revenue, while financing income rose vigorously. Management raised the manufacturer's full-year earnings guidance, with one significant caveat, which we'll discuss below. Note that all comparative numbers in this article are presented against the prior-year quarter.

The raw numbers

Metric Q2 2019 Q2 2018 Change (YOY)
Revenue $3.0 billion $2.4 billion 25%
Net income ($48.0 million) $55.0 million N/A
Diluted earnings per share ($0.48) $0.55 N/A

Data source: Navistar International. YOY = year over year. N/A = Not applicable.  

What happened with Navistar this quarter?

  • Navistar gained 1.9% in "core" market share. Navistar refers to its heavy truck and bus classes 6 through 8 sold in the U.S. and Canada as its core market. Class 6 and 7 gross weightings range between 19,501 and 30,000 lbs., while class 8 encompasses vehicles of 33,001 lbs. and above.
  • Truck segment revenue improved by 35% to $2.3 billion, paced by higher core sales, an increase in GM-branded trucks manufactured for General Motors, and higher truck sales in Mexico.
  • Parts segment revenue dipped 4% to $579 million, which management attributed to lower sales of Blue Diamond brand parts and the application of a new accounting standard. These effects were partially offset by higher North American sales.
  • Global operations revenue declined 10% to $87 million due to economic conditions in the company's South American engines business, as well as the depreciation of the Brazilian real against the U.S. dollar during the period.
  • Higher receivables balances in the U.S. and higher operating lease balances in both the U.S. and Mexico drove financing revenue higher by 24%, to $78 million.
  • The loss for the quarter was caused by a one-time $159 million legal class action settlement charge and associated legal fees related to legacy MaxxForce engines.
  • Adjusted EBITDA improved by 23% to $224 million.
  • The company revealed that it's opening a parts distribution center in Memphis, Tennessee, even as it upgrades its inventory management system. Both actions aim to expedite parts delivery to improve customer uptime.
  • Navistar established an "Aftersale" function in order to "manage every facet of the business after the sale of the truck, including oversight of parts and service, warranty, and dealer development." The purpose of this new service is to reduce the total cost of ownership for truck customers.
  • Navistar reduced long-term debt by repaying $411 million worth of subordinated convertible notes. After quarter-end, the company also closed on a new credit facility of roughly $750 million, while repaying an additional $400 million of term loans. The company's long-term debt currently stands at approximately $4.9 billion after factoring in the post-quarter term loan reduction.
Semi-trucks on an interstate highway in the mountains.

Image source: Getty Images.

Management's perspective

In Navistar's earnings press release, CEO Troy Clarke praised the company's achievements during the last three months while also discussing the back half of the year and beyond:

In the second half, we believe our growth in market share will translate to improved revenues and gross margins that will generate higher adjusted EBITDA margins than in the first half. Our marketplace progress, which has delivered our strongest backlog this decade, provides confidence that both 2019 and 2020 will be good years for Navistar.

Looking forward

Due to a strong environment for truck sales and its continued high manufacturing throughput, Navistar adjusted various outlook items for the remainder of the year. The company raised its revenue estimate to $11.25 billion-$11.75 billion, from a previous range of $10.75 billion-$11.25 billion. Adjusted EBITDA for fiscal 2019 has been bumped up to a band of $875 million-$925 million, against the earlier expectation of $850 million-$900 million. 

While investors cheered these revisions and pushed Navistar shares up 9% during the trading session following the earnings release, shareholders should be aware of a significant caveat. Current estimates don't address the potential effect of threatened tariffs on goods incoming from Mexico into the U.S.

The first wave of tariffs, recently announced by the Trump administration, are due to take effect in just a few days and will potentially escalate further. According to Navistar's press release, when additional information on the threatened tariffs becomes available, "the [company's guidance] will be reassessed and, if necessary, adjusted accordingly."