Analysis: Troubled Navistar Strives to Recover
The following is an analysis by Forbe’s columnist Joann Muller detailing Navistar International Corp.’s efforts to recover financial footing following several setbacks. Navistar is parent to Monaco RV LLC.
Truckmaker Navistar International Corp., in jeopardy because of a risky technology bet that didn’t pan out, said Thursday (Aug. 2) it had secured a $1 billion loan commitment from a group of banks that will help keep it afloat while it races to comply with clean air rules for diesel engines.
But Navistar’s troubles are far from over. The company also disclosed that the Securities & Exchange Commission has launched a formal investigation of various accounting and disclosure matters dating back to November 2010. Navistar said it is fully cooperating with the inquiry.
But the maker of International brand heavy trucks and buses did make an important strategic move Thursday by announcing it will purchase diesel engines and after-treatment components from its rival Cummins, which is already producing engines that comply with emissions rules set by the U.S. Environmental Protection Agency.
While Cummins and every other manufacturer, including Paccar, Volvo Trucks and Daimler‘s Freightliner, met the EPA requirement by outfitting their trucks with diesel after-treatment systems, Navistar thought it could gain a competitive advantage by recycling diesel exhaust back through the engine, eliminating the need for costly, extra equipment. It spent $700 million on developing its advanced engine gas recirculation system. But two and a half years past the deadline for compliance, its engines have yet to receive EPA certification.
Acknowledging the dead end, Navistar relented on July 6 and said it would adopt the same after-treatment technology as the rest of the industry, labeling it ICT+. Its engineering research is not lost, however, the company insists. By combining Cummins’ aftertreatment system with its existing MaxxForce engines, Navistar will not only be able to meet current regulations but will be positioned to meet greenhouse gas rules in advance of 2014 and 2017 requirements. “With this clean engine solution, we are taking the best of both technology paths to provide our customers with the cleanest and most fuel efficient engines and trucks on the market and to meet stringent U.S. emission regulations,” said Daniel C. Ustian, Navistar chairman, president and CEO.
Navistar’s first 13-liter engine using Cummins technology won’t be ready until early 2013, so starting in January, it will offer Cummins’ 15-liter engine in certain truck models. Until then, Navistar will continue to build and ship its current trucks, using a combination of earned emissions credits and fines to offset its polluting engines.
Clearly the company is not yet out of the woods. The company withdrew its forecast for improved earnings in the second half of 2012 and said it will update the year-end outlook in September. Meanwhile, Navistar said it expects a pre-tax loss in the third quarter of $145 million to $105 million. Revenues are expected to be $2.8 billion to $3 billion.
“We expect to sustain our current market share through the balance of the year, and with the addition of ICT+ and an expanded model lineup, improve our market share in 2013,” Ustian said. “We expect to return to profitability in the fourth quarter and believe the company will be in a position to improve margins in 2013 as we realize the benefits of our integration and ongoing cost reduction initiatives.”
Gimme Credit analyst Vicki Bryan, isn’t convinced. “Navistar’s track record on execution is grim and ICT development will take months and potentially millions to complete.” she wrote in a note to bond investors. “In the meantime we see increased pressure on operations, with falling sales, spiking costs and spending, and severely negative cash flow of more than $1 billion in 2012 alone. The company is frantically arranging $1 billion in life saving cash–albeit at near loan shark terms which reflect its substantial and rapid deterioration. Navistar has little choice. The alternative is that its dramatically weakened liquidity could prompt the company to file bankruptcy in the coming months to preserve cash while it attempts to engineer its recovery.”