Global heavy vehicle manufacturer Navistar International (NYSE:NAV) reported a vigorous set of results in recapping its fiscal third quarter of 2019 before markets opened on Wednesday. While profitability dipped, sales increased at an extremely healthy pace, and the Lisle, Illinois-based organization widened its share of the market in its biggest sales category. Below, we'll run through headline numbers and discuss the factors underpinning the industrial giant's success this quarter.
Note that all comparative numbers in this article are presented against the prior-year quarter.
The raw numbers
|Metric||Q3 2019||Q3 2018||Change|
|Revenue||$3.0 billion||$2.6 billion||15.3%|
|Net income||$156 million||$170 million||(8.2%)|
|Diluted earnings per share||$1.56||$1.71||(8.7%)|
What happened with Navistar this quarter?
- Management attributed most of the company's revenue gains to performance in its core market, which comprises heavy truck and bus classes 6 through 8 sold in the U.S. and Canada. Class 6 and 7 gross weightings land between 19,501 and 30,000 lbs., while class 8 includes all vehicles weighing 33,001 lbs. and above. The company gained an impressive 2.6 percentage points of core market share over the prior-year quarter.
- In the truck segment, Navistar's largest business, net revenue advanced 25% to $2.4 billion. In addition to higher core sales, the company improved sales in Mexico and also notched rising sales of class 4 and 5 vehicles to GM. Truck sales growth was partially offset by the impact of the sale of the Navistar Defense business in December 2018.
- Parts segment revenue declined by 6% to $571 million, due to lower Blue Diamond Parts sales and the implementation of a new accounting standard; the drop was mitigated by higher parts sales in the North American market.
- Navistar's global operations business was flat at $90 million in revenue, while net revenue in financial services jumped 14% to $74 million, which management attributed to higher average receivables portfolio balances in both the U.S. and Mexico.
- Despite healthier sales, cost of products sold rose during the quarter, causing manufacturing gross margin to fall 180 basis points to 16.5%. The lower margin was the primary culprit behind lower net profitability against the prior-year quarter, as seen in the table above.
- Adjusted EBITDA increased by 22% to $266 million.
- Navistar generated $250 million in manufacturing free cash flow, i.e. free cash flow excluding activity from the company's financing business.
- The organization opened its newest parts distribution center in Memphis, Tennessee to speed maintenance turnaround times. Additionally, Navistar announced plans to invest $125 million in its Huntsville, Alabama plant in order to manufacture "next-generation" big-bore powertrains with its joint venture partner, Traton (a subsidiary of Volkswagen).
Despite the threat of lower global economic growth in the near term, Navistar has focused on speeding manufacturing throughput as it supplies vehicles for the freight shipping and logistics market as well as other commercial and public uses. As you can see from CEO Troy Clarke's comments in the company's earnings press release directly below, Navistar intends to maintain an aggressive manufacturing and service posture over the next few quarters:
This was another great quarter for Navistar. Market share increased, revenues and earnings grew at double-digit rates, and we made significant investments in our operations and our Uptime [parts and maintenance servicing] promise...We are on course for a strong end to 2019, and we're not standing still. The company is recapturing market share and is growing revenue, EBITDA and cash flow. We remain focused on setting ourselves up for long-term success.
Navistar maintained its full-year guidance estimates in its earnings release. The company expects industry retail deliveries of class 6-8 buses and trucks in the U.S. and Canada to be between 435,000 and 455,000 units, and it expects to own a share of 18.5% to 19% of this core market by year-end.
Navistar is aiming for fiscal full-year revenue of $11.25 billion to $11.75 billion. Management anticipates that fiscal 2019 gross margin will fall within the rather tight range of 17.75% to18%. While the company doesn't provide earnings-per-share guidance, management reaffirmed its expectation for fiscal 2019 adjusted EBITDA of $875 million to $925 million. Shareholders were pleased that Navistar is trucking on ahead in both year-to-date results and its outlook heading into the fourth quarter: Shares soared as much as 12.5% during the Wednesday trading session.