Heavy truck and bus manufacturer Navistar International (NAV) spent most of 2019 ramping up production and capacity as market demand surged. In a sign of just how cyclical the shipping and transportation industries can be, however, Navistar's customers have apparently pulled back on ordering patterns, as the company forecast lower revenue and adjusted earnings totals for the upcoming year in fourth-quarter fiscal 2019 earnings results issued Tuesday.

Consequently, Navistar shares were trading down as much as 10% in early-afternoon trading following the release. As we review the last three months and management's outlook below, bear in mind that all comparative numbers are presented against the prior-year quarter.

Navistar: The headline numbers

Metric Q4 2019 Q4 2018 Change
Revenue $2.78 billion $3.3 billion (15.8)%
Net income $102 million $188 million (45.7%)
Diluted earnings per share $1.02 $1.89 (46%)

Data source: Navistar International.  

Essential highlights from the quarter

A red semi-truck barrels down the highway.

Image source: Getty Images.

  • Navistar's revenue deceleration wasn't a surprise; the company had issued a press release on Nov. 13 stating that results would be impacted by the United Auto Workers Union strike at General Motors, which effectively shut down Navistar's Springfield, Ohio truck assembly plant for six weeks. During this period, the Springfield plant ceased production of both GM-branded and Navistar trucks.
  • Exacerbating this headwind, Navistar cited a difficult comparison with an extremely strong fourth quarter of fiscal 2018, the sale of its Navistar Defense business in December 2018, and weaker industry demand during the quarter as factors behind the 15% year-over-year top-line slump.
  • Truck segment revenue fell 19.6% to $2.1 billion, while profit dropped by 56% to $86 million. The company blamed an 18% drop in chargeouts (i.e. retail deliveries from dealer inventories) of core market models against the prior-year quarter. Navistar's core market includes heavy truck and bus classes 6 through 8 that are sold in the U.S. and Canada. Class 6 and 7 gross weightings range between 19,501 and 30,000 lbs., while all vehicles weighing 33,001 lbs. and above fall into class 8.
  • Parts revenue decreased by 13.6% to $547 million. Segment profit improved by 3.2% to $161 million due to strength in Navistar's private-label business.
  • Global operations revenue was flat at $93 million, while the segment recorded a loss of $10 million versus a profit of $4 million in Q4 2018. The loss was attributed to a $14 million restructuring charge for cost-saving initiatives that included the shuttering of an engine plant in Argentina and manufacturing restructuring activities in Brazil.
  • The company's financial services segment booked a $1 million improvement in revenue to $71 million, and a $4 million advance in profit to $30 million. 
  • Navistar's lower sales level during the quarter compressed gross margin by 70 basis points, to 16.8%.
  • Adjusted EBITDA dropped 32% to $219 million.

Management's perspective

Navistar's results this quarter indicate a rather sharp faltering of demand after a string of robust reporting periods. In the organization's earnings press release, CEO Troy Clarke acknowledged as much and outlined its posture heading into fiscal 2020:

With a proven track record of managing costs and improving operating results, Navistar is in a much better position than in the past to do well even during cyclical downturns. We are taking actions to adjust our business to current market conditions, including reducing production rates and SG&A expenses while restructuring our global and export operations. Building on the strong gains achieved over the last several years, Navistar has a clear roadmap in place for sustained growth that will set it apart from the industry.

Looking forward

Navistar recently held an investor day in September in which it provided its annual industrywide projection of retail Class 6-8 truck and bus deliveries. The company's estimated range of 335,000 to 365,000 vehicle deliveries didn't change today; however, its fiscal guidance did.

Fiscal 2020 revenue guidance issued in September of between $10 billion and $10.5 billion was ratcheted down in today's release to a new band of $9.25 billion-$9.75 billion. Similarly, adjusted EBITDA for the new fiscal year was revised from a range of $775 million to $825 million to the significantly reduced envelope of $700 million to $750 million.

Navistar has been a handsome stock investment for most of 2019, returning 25% year to date through the close of trading yesterday. But the forecast of brittle demand and declining profits has created a temporary malaise over the "NAV" symbol, not to mention much uncertainty which likely won't be resolved until next quarter's earnings report.