NFI Group’s backlog shrank 10.6% as earnings surged. How can both be true?

NFI Group Inc. (TSX: NFI; OTC: NFYEF) has a smaller order book than it did a year ago, but the part of that order book backed by firm commitments has actually grown. That distinction changes how investors should read the bus manufacturer’s latest results.

NFI closed its second quarter with 14,483 equivalent units in backlog, down 1,715 units, or 10.6%, from the same quarter last year. The headline looks like a warning about demand. Underneath it, firm orders rose 3.1% while options fell 18.8%. The backlog is smaller because its less certain layer contracted, not because the firm layer collapsed.

That finding matters because second-quarter revenue rose 18.6% to US$1.03 billion, adjusted EBITDA climbed 46.9% to US$104.0 million, and NFI raised its 2026 guidance. Yet the shares were already near their 52-week high. Investors must decide whether NFI is converting backlog into durable cash earnings or benefiting from favorable timing. All operating figures below are in U.S. dollars unless stated otherwise.

Why did NFI Group’s backlog shrink despite stronger firm orders?

NFI makes buses and motorcoaches through New Flyer, MCI, Alexander Dennis and ARBOC and supports fleets through its aftermarket business. Public agencies often combine a firm initial order with options that customers must later exercise.

At the end of the second quarter of 2025, NFI reported 6,082 firm units and 10,116 option units, for 16,198 units in total. One year later, it had 6,271 firm units and 8,212 options. Firm units increased by 189, or 3.1%, while options declined by 1,904, or 18.8%. As a result, firm orders rose from 37.5% to 43.3% of total backlog, an improvement of about 5.8 percentage points.

This does not make every remaining order risk-free, and NFI does not disclose a value split between firm units and options. It does show that the 10.6% fall in total units came entirely from the option bucket. Backlog value fell more slowly, from approximately US$13.5 billion to US$12.5 billion, a company-reported decline of 7.5%. Using those rounded totals, value per backlog unit increased from roughly US$833,000 to US$863,000, close to the company’s disclosed 3.4% improvement in average backlog pricing.

Quarterly replenishment lagged deliveries even though new firm and option orders rose 31.9% year over year to 1,084 EUs. NFI’s official quarterly book-to-bill ratio was 78.8%, down from 88.2% a year earlier, because this measure counts new firm orders and exercised options rather than every new option award. The last-12-month ratio remained above parity at 106.0%, although it had declined from 119.9%. This longer measure shows that new firm orders and option exercises exceeded deliveries over the period, but its direction confirms that order momentum has moderated from an unusually strong comparison base.

The option decline was not just an accounting upgrade. NFI’s reconciliation shows that 594 option EUs expired during Q2, compared with 59 a year earlier, primarily because of customer fleet plans and competition. Only three firm EUs were cancelled or expired. The greater firm share is constructive, but every removed option cannot be dismissed as harmless housekeeping.

NFI also cited 6,195 active units in its North American public bid universe, including 4,530 submitted bids and 500 units awaiting awards, plus a five-year outlook of 26,603 units. Those figures do not guarantee wins, but they make one slow quarter less conclusive.

Is NFI Group’s manufacturing recovery producing sustainable margins?

NFI delivered 1,232 equivalent units, up 14.5% year over year. Transit bus deliveries rose 22% to 911, motorcoach deliveries increased 7.6% to 142, and low-floor cutaway and medium-duty deliveries fell 9.1% to 179. Zero-emission vehicles accounted for 21.1% of new deliveries, down from 30.9% a year earlier.

Manufacturing revenue rose 19.8% to US$853.3 million. Segment adjusted EBITDA increased 34.5% to US$70.7 million, lifting the margin to 8.3%. NFI attributed the change to stronger volumes, sales mix, backlog pricing, healthier supply performance and fixed-cost absorption. Some vehicles originally expected in the first quarter were completed in the second, so Q2 is not a clean run rate.

Aftermarket was the second engine. Revenue reached a quarterly record of US$176.2 million, up 13.1%, while adjusted EBITDA rose 38.6% to US$42.3 million. Its 24.0% margin is far above manufacturing’s, so a relatively small revenue contribution had an outsized effect on group earnings. Purchases related to the FIFA World Cup and mid-life retrofit programs helped the result. Management expects second-half aftermarket revenue to grow year over year but fall below the first half, making normalization an important part of the forecast.

Net earnings improved to US$17.4 million from a US$160.8 million loss. That swing exaggerates the operating comparison because the prior-year quarter included refinancing expenses, Alexander Dennis impairments and seat-supply disruption costs. The cleaner measures are the 32.1% growth in gross margin, 46.9% growth in adjusted EBITDA and the increase in return on invested capital from 7.9% to 13.6%.

Operating activities generated US$159.1 million, helped by lower work-in-process inventory and receivable collections, while free cash flow was US$20.7 million. NFI expects to rebuild working capital in Q3, so operating cash should not be annualized. Liquidity reached US$520 million and total leverage fell to 2.81 times from 4.75 times a year earlier, still above management’s 1.5 to 2.5 times target.

What does NFI Group’s raised 2026 guidance require in the second half?

NFI lifted its revenue guidance range from US$3.9 billion to US$4.2 billion to a new range of US$4.0 billion to US$4.2 billion. The adjusted EBITDA range rose from US$370 million to US$410 million to US$385 million to US$415 million, while cash capital expenditure guidance increased to US$55 million to US$65 million.

The midpoint arithmetic is revealing. First-half revenue was US$1.8715 billion and first-half adjusted EBITDA was US$190.1 million, a margin of 10.16%. Reaching the new full-year midpoints of US$4.1 billion and US$400 million requires second-half revenue of US$2.2285 billion and adjusted EBITDA of US$209.9 million. That implies a second-half margin of about 9.42%, roughly 74 basis points below the first half.

In other words, the raised midpoint requires revenue to increase 19.1% from the first half, but EBITDA only 10.4%. It does not assume that the World Cup aftermarket lift, second-quarter inventory unwind or longest manufacturing quarter of the year repeats at the same intensity. The implied margin cushion makes the guidance more credible than a forecast built on uninterrupted sequential expansion.

Execution still matters. NFI expects a modest sequential decline in third-quarter deliveries and revenue because of summer factory shutdowns and slower customer acceptance, followed by a seasonally stronger fourth quarter. The principal operating variables are supplier readiness, private motorcoach demand, tariff recovery and the timing of customer acceptances. A delayed fourth-quarter delivery can move revenue and cash into the following period even when the underlying order remains intact.

Does NFI Group’s share price already reflect the earnings turnaround?

The latest completed close available in NFI’s LSEG-sourced historical record when checked on August 14 was C$24.96 on August 12. That was down about 0.6% from C$25.12 five trading sessions earlier and up about 0.2% from C$24.90 one month earlier. The 52-week range was C$12.50 to C$26.40, placing the stock only 5.5% below its high and almost double its low. The market has already recognized a meaningful part of the turnaround.

A rough enterprise-value check helps frame expectations. At C$24.96 and approximately 119.15 million shares, equity value was about C$2.97 billion. Converting at the C$1.375 per U.S. dollar rate used in NFI’s July financing presentation gives roughly US$2.16 billion. Applying the reported 2.81 times leverage ratio to US$392.3 million of last-12-month adjusted EBITDA implies about US$1.10 billion of net debt, including the debt and lease items in NFI’s leverage definition. The resulting enterprise value is approximately US$3.26 billion, or about 8.2 times the US$400 million guidance midpoint.

That multiple is approximate because currencies move, leverage is a non-IFRS measure, and July’s refinancing changed the debt mix after quarter-end. At roughly eight times guided adjusted EBITDA, NFI is not priced like a distressed manufacturer. Further upside depends on reaching the leverage target, converting firm backlog without margin leakage and sustaining cash generation after working-capital timing reverses.

The July financing reduced near-term maturity risk rather than debt by itself. NFI issued C$350 million of 6.625% senior unsecured notes due 2033, using the proceeds to repay C$300 million of revolver borrowings and a C$50 million Manitoba loan. It also extended its first-lien facility to July 2030 and plans to redraw in January 2027 to repay C$338 million of convertible debentures. The maturity profile is better, but investors should continue tracking interest expense and absolute net debt.

What risks could weaken NFI Group’s backlog and earnings recovery?

The first risk is that option weakness eventually reaches firm orders. Options still represented 56.7% of backlog units, so customer funding, procurement schedules and political priorities remain important. A 106% last-12-month book-to-bill ratio is reassuring, but the 78.8% quarterly ratio and 594 option expiries deserve monitoring until new firm awards arrive.

Tariffs are the second risk. Current guidance includes known U.S. and Canadian measures as of August 6, but not future changes. NFI has negotiated surcharges and benefits from localized production, yet private motorcoaches entering the United States face a 10% tariff and some supplier inputs face higher duties. Cost recovery can also create a cash timing gap between tariff payment and customer collection.

The United Kingdom is another pressure point. Alexander Dennis faces stronger foreign competition and has restructured Scottish operations to match capacity with demand. Meanwhile, the North American battery recall campaign had replaced batteries on 49 buses by quarter-end and used US$9.7 million of cash year to date. Neither issue invalidates the recovery, but both can absorb management attention and cash.

Finally, Q2 contained favorable timing. Inventory carried from Q1 was delivered, World Cup activity lifted aftermarket demand, and working capital generated cash. Management has already warned that some of these effects reverse or moderate in the second half. The thesis is strongest if manufacturing margins keep improving even as aftermarket mix and working capital become less helpful.

What are the key investor takeaways from NFI Group’s shrinking backlog?

• The 10.6% year-over-year decline in backlog came from options, while firm units rose 3.1%. However, 594 options expired in Q2, so the mix improvement is not automatically bullish.
• The operating recovery has multiple supports, including higher deliveries, better backlog pricing, improved fixed-cost absorption and a high-margin aftermarket business.
• The raised guidance midpoint implies a 9.42% second-half adjusted EBITDA margin, about 74 basis points below the first half, so management is not forecasting a straight-line repeat of Q2.
• At roughly 8.2 times guided adjusted EBITDA by a simplified enterprise-value calculation, the stock needs continued deleveraging and cash conversion, not just backlog headlines.

Is NFI Group’s shrinking backlog a demand warning or a conversion signal?

For now, the smaller backlog reflects both conversion and option attrition rather than a clean demand warning or an uncomplicated quality upgrade. NFI delivered more vehicles, raised guidance, improved pricing and retained more firm units than it had a year earlier. At the same time, the lower quarterly book-to-bill ratio and unusually high option expiries show that the order picture is not uniformly positive.

That conclusion is conditional. The quarterly order rate was below deliveries, options remain the majority of backlog, and the share price sits close to its 52-week high. Investors should watch firm units, 12-month book-to-bill, manufacturing margin and net leverage together. If firm backlog holds while leverage enters the target range, the shrinking headline will have marked successful conversion. If firm orders begin to fall before new awards replenish them, the same headline will become an early demand signal.

NFI’s second quarter therefore supports a cautiously constructive interpretation. A greater portion of backlog is firm, pricing is higher, and the earnings plan can tolerate lower second-half margins than NFI already produced in the first half. The next proof point is replenishment: firm awards must stay resilient as the company converts backlog and works through a still-substantial option book.