Activist investment firm MHR Fund Management LLC said it increased its stake in Navistar International Corp. to 14.95% as of July 9.
Reuters reported that the fund, founded and run by Mark Rachesky, became the largest shareholder in the U.S. truck and engine maker in June by acquiring a 13.6% stake, edging out Carl Icahn.
Navistar has been struggling for the past year to contain costs of developing a new type of diesel engine for heavy trucks, and has seen its shares lose about half their value in the meantime.
Navistar, facing pressure from investors to sell itself or change its engine strategy, said last week it was developing a new engine which is expected to be ready early next year. On June 20 Navistar adopted a poison pill aimed at keeping outsiders from gaining a stake of 15% or more.
Navistar shares closed at $21.95 on Tuesday (July 10) on the New York Stock Exchange.
Shares of Navistar International Corp. tumbled more than 15% today (July 6) on investor worries that the heavy engine and truck maker will have to incur additional costs to get a crucial new engine approved by federal regulators, Manufacturing.net reported.
THE SPARK: Before the market opened today, Navistar said it was in talks with the Environmental Protection Agency (EPA) on a plan that will allow it to continue shipping trucks while it makes a transition to a new emission-reducing technology that will bring it into compliance with EPA requirements.
But the Lisle, Ill.-based company didn’t provide any financial details of the plan, except to say that it will require more product development, resulting in additional short-term costs.
Navistar is the parent company of RV maker Monaco RV LLC.
THE BIG PICTURE: Navistar said its new technology will meet 2010 EPA emissions regulations and help position the company to meet greenhouse gas rules ahead of 2014 and 2017 requirements. The new technology is expected to be available beginning in early 2013.
Navistar has struggled this year amid the uncertainty surrounding whether its Class 8 engine, which is used in the largest commercial trucks, will get EPA approval. Last month, the company reported a net loss of $172 million for the second quarter, pulled down by $108 million in losses at the engine division, and slashed its full-year earnings forecast to a fraction of its previous range.
Navistar said that while the transition will require some additional product development, resulting in additional costs, it will try to offset some of those costs through pricing. In addition, the new technologies will help reduce costs and expand margins in the long term, Navistar said.
The company added that its cash position remains stable and it believes that it would have access to additional financing sources if they were needed. It declined to release specific information about its finances until a deal with the EPA is struck.
Meanwhile, Navistar’s continued drop in share price also has made it a takeover target. Last month, Navistar adopted a shareholder rights plan, after the hedge fund MHR Fund Management LLC and billionaire investor Carl Icahn both boosted their stakes in the company.
A Navistar spokeswoman declined comment on today’s stock drop, saying that the company doesn’t comment on daily stock movements.
THE ANALYSIS: Jefferies analyst Stephen Volkmann backed his “Buy” rating, but cut his 2012 through 2014 earnings estimates for Navistar, saying that the company’s market share and margins will be lower than he previously expected.
“Clearly the prospects for continued non-compliance penalty payments and increased research and development spending were not in Navistar’s most recent earnings guidance,” Volkmann wrote in a note to investors.
Baird’s David Leiker backed his “Neutral” rating for the stock, saying that while the new technology approach appears to be a step in the right direction and will improve the company’s chances of getting EPA certification, investors might want to hold off on buying shares until its near-term financial outlook becomes clearer.
THE SHARES: Down $4.56, or 15.8%, to $24.23 in heavy afternoon trading, after falling as low as $24.04 earlier in the day. Over the past 52 weeks, the company’s shares have traded between $20.21 and $57. Over the past five months, the company’s shares have lost about 39% of their value.
Note: A PowerPoint presentation of Navistar’s webcast today is available on the company’s website, www.navistar.com.
Navistar International Corp., struggling to win U.S. regulatory approval for a new generation of diesel engine, changed course today (July 6), saying it was developing a new model expected to be ready early next year.
The move failed to impress investors, who sent shares of the U.S. truck and engine maker down 8% as analysts questioned the costs for the transition to the new engine, Reuters reported.
Navistar, which makes the International brand heavy trucks and school buses and owns Monaco RV LLC, said the new engine would use liquid urea to help cut emissions of nitrogen oxide, a pollutant linked to asthma. Liquid urea is use as a catalyst in diesel engines to reduce emissions of nitrogen oxides.The move amounts to taking the same road as rivals, including engine maker Cummins Inc. and truck maker Paccar Corp.
“It fell short of my expectations,” said Morningstar analyst Basili Alukos of the move. “I was expecting or hoping for them to abandon their engine business completely and start buying from a third-party supplier.”
A key concern for investors is whether the uncertainty around Navistar’s engine strategy will make trucking companies less willing to buy its vehicles.In addition to its trouble winning regulatory approval for the new engines, Navistar last month surprised Wall Street with a quarterly loss after taking a $104 million charge for warranty claims on engines sold in 2010 and 2011.
Navistar said its new technology, called In-Cylinder Technology Plus, will also help meet greenhouse gas emission rules in advance of 2014 and 2017 requirements.”
Today’s decision (is) a step in the right direction, but more answers (are) needed before becoming aggressive on the stock,” R.W. Baird & Co analyst David Leiker wrote in a note to clients. Key questions include the costs of launching the new engine and how profitable the engine will be, Leiker said.
NO FINANCIAL FORECAST
Navistar Chief Financial Officer Andrew Cederoth told investors in a brief conference call the company would not update its earnings and revenue forecasts until after it receives approval for the new engine from the Environmental Protection Agency (EPA) and California regulators.
Executives took no questions during the call.
Analysts, on average, expect a full-year loss of $2.18 per share, including one-time items, or a profit of 22 cents, excluding items, on $14.22 billion in revenue, according to Thomson Reuters I/B/E/S.
The company said it has already shared its new engine approach with the EPA, which it described as “supportive.”
“We have a high degree of confidence in the certainty of certification,” said Troy Clarke, who was named president of its truck and engine business last month.
An EPA spokeswoman did not immediately respond to a request for comment.
Navistar shares were down $2.31 to $26.48 on the New York Stock Exchange. They have lost one-half of their value over the past year and have been volatile over the past month, following the quarterly loss and the emergence of a new, big activist shareholder.
Activist fund company MHR Fund Management LLC, founded and run by Mark Rachesky, has taken a 13.6% stake in Navistar, becoming the largest shareholder ahead of billionaire investor Carl Icahn, who owns 11.9%.
Faced with the two activist stakeholders, Navistar last month adopted a “poison pill” plan to fend off hostile suitors.
Icahn last year sought to merge Navistar with rival Oshkosh Truck Co, of which he owns 9.5%. Navistar CEO Daniel Ustian had been open to the idea but Oshkosh management and shareholders rejected it.
Navistar International Corp. today (July 6) announced that it will introduce its next generation clean engine solution – In-Cylinder Technology Plus (ICT+) – to meet 2010 U.S. Environmental Protection Agency (EPA) emissions regulations and position the company to meet greenhouse gas (GHG) rules in advance of 2014 and 2017 requirements.
The ICT+ technology combines Navistar’s advanced in-cylinder engine expertise with urea-based aftertreatment and is expected to be available beginning early 2013, according to a news release.
“Our distinctive solution will leverage the investment and advancement we’ve made in clean engine technology while providing immediate certainty for our customers, dealers, employees and investors,” said Daniel C. Ustian, Navistar chairman, president and CEO. “We have made tremendous progress with in-cylinder technology and with the introduction of ICT+ our goal is to offer the world’s cleanest and most fuel efficient diesel engine–benefiting both our customers and the environment for years to come.”
By incorporating an already proven and certified aftertreatment system, the company looks forward to seamlessly offering production-ready vehicles early next year. Furthermore, this approach is expected to provide a clear path to quickly achieving 2017 GHG standards.
The company intends to continue to build and ship current model EPA-compliant trucks in all vehicle classes using appropriate combinations of earned emissions credits and/or non-compliance penalties (NCPs) during the transition to ICT+.
“We’ve shared our new technology path with the EPA and California Air Resources Board (CARB), and both agencies are encouraged by our plans,” Ustian said. “We will continue to work with the agencies to ensure that our customers receive uninterrupted deliveries in all 50 states during this transition.”
Monaco RV LLC is a subsidiary of Navistar.
Editor’s Note: The following column was written by Herb Greenberg, senior stocks commentator for CNBC, and provides his thoughts on the status of Navistar International Corp., whose holdings include Monaco RV LLC.
One of the biggest Navistar critics, Gimme Credit analyst Vicki Bryan, still has her “sell” on Navistar, but with an asterisk: It all depends on what the company says on Friday.
Navistar’s stock rose Tuesday as investors reacted to the company’s 8-K SEC filing disclosing that it will hold a pre-market conference call Friday “to provide an update to various operational matters related to the Company.”
Based on the various issues facing Navistar, “operational matters” could be almost anything—and if it’s something really significant would seem to be an understatement.
But the betting based on various industry reports, regardless of whether it is what the company says on Friday, is that it is likely to move away from the controversial Exhaust Gas Recirculation, or “EGR” technology that Navistar has bet its fortunes on. The rest of the industry uses more conventional Selective Catalytic Reduction, or SCR, technology.
The Wall Street Journal, quoting one source, went so far as to say the company will “announce that it will buy SCR components and install them on its own engines.”
Which gets us back to Bryan, who is among the most bearish Navistar analysts (perhaps because she views it from the credit side of the ledger). In recent reports she has suggested bankruptcy as a credible option for Navistar. She still thinks it is, depending on whether the company discloses something that can genuinely get Navistar out from under.
Her sense is that the company believes whatever it announces is likely to be viewed as positive. Otherwise, she reasons, why would it have a call? (Of course, I could argue: If it was really positive, wouldn’t it have waited until Monday — when most people will be back to work?)
Either way, here is what she believes would be genuinely positive:
- An announcement that the company will abandon its controversial EGR engine. The engine has not won EPA approval and has been riddled with high-warranty cost issues.
- The departure of CEO Dan Ustian, the EGR engine’s biggest promoter.
- A big asset sale to raise the cash that will be needed to transition to a new engine, which some have speculated would result in resorting to engines built by rival Cummins. “While we have suggested Oshkosh as a likely buyer for the military group,” she says, “we think Cummins might be a logical buyer for the medium duty trucks group.” Such a deal, she says, could be part of a Cummins engine deal. She believes a mere joint-venture, with a company like Cummins, would not be enough.
- The possibility of a “friendly” sale brokered, perhaps, by activist investor Carl Icahn, who owns 11.9% of the company’s stock.
And we haven’t even talked write-off of EGR assets, which could be significant.
“Indeed,” Bryan says in a research note put out earlier this week, “Friday may prove to be one of the most important days in the history of Navistar.”
Not-so-positive, she says, would be any move to jerry-rig the existing EGR engines with SGR parts. Such a plan, she believes, would be a costly patch that could further devalue the company as its cash continues to be drained.
“Any news in the Friday call short of a convincing resolution to its problems will be disappointing — further evidence that this management team may not be capable of keeping the company afloat,” she says.
Put another way, for this to really matter, this has got to be something better than a mere update to “operational matters.” If ever there were a need for the company to under-promise and over-deliver, just the opposite of what it has done in recent years, this would appear to be it.
Navistar International Corp. is set to announce “operational changes” during an investor webinar on Friday morning (July 6) amid multiple reports the company will be ditching its advanced exhaust-gas recirculation (EGR) technology for meeting EPA 2010 emissions requirements. The announcement was made in a filing with the Securities and Exchange Commission (SEC) on Monday, Fleet Owner magazine reported.
“Navistar International Corp. (the “company”) announced today that it will present a live webcast on Friday, July 6, to provide an update to various operational matters related to the company,” the announcement said. Speakers will include Daniel C. Ustian, chairman, president and CEO, A. J. Cederoth, executive vice president & CFO, and other company leaders, it said.
The announcement preceded by mere hours a report in the Wall Street Journal that said the company planned to announce it is switching its emissions technology to selective catalytic reduction (SCR) to meet EPA 2010. This report followed one from Friday afternoon that said the company is considering purchasing engines from Cummins, which uses SCR.
Steve Schrier, manager-corporate communications, did not confirm nor deny the Wall Street Journal report in response to Fleet Owner questions, but did note the Friday webinar would address “various operational matters.”
Navistar is the parent company of RV maker Monaco RV LLC, which uses the EGR technology in its diesel-powered motorhomes.
Navistar’s most recent financials showed an unexpected $172 million loss in the second quarter, including significant costs related to warranty claims. Since then, the company stock has fallen 28%.
Following the earnings announcement, the U.S. Court of Appeals for the District of Columbia Circuit ruled in favor of Navistar competitors, including Cummins Inc.; Daimler Trucks North America and its subsidiary Detroit Diesel; and by sister OEMs Mack Trucks and Volvo Trucks North America, in a suit against the EPA. The EPA allowed Navistar to pay non-conformance penalties (NCPs) on diesel engines that did not meet the 0.20 grams of NOx 2010 standards. EPA fast-tracked the interim rule to authorize penalties, bypassing traditional regulatory process, the suit claimed. EPA agreed with Navistar that if EPA did not let it pay NCPs, it would have to end production of its Class 8 engines and trucks.
“In January 2012, EPA promulgated an interim final rule (IFR) to permit manufacturers of heavy-duty diesel engines to pay nonconformance penalties (NCPs) in exchange for the right to sell noncompliant engines,” stated circuit Judge Janice Rogers Brown in her written opinion.
“EPA took this action without providing formal notice or an opportunity for comment, invoking the ‘good cause’ exception provided in the Administrative Procedure Act (APA),” Judge Brown continued. “Because we find that none of the statutory criteria for ‘good cause’ are satisfied, we vacate the IFR.”
Navistar submitted its 13L engine to EPA for 2010 approval at the 0.20 grams of NOx level earlier this year, but no formal announcement regarding the progress of that has been made.
On June 29, the Chicago Daily Herald reported on a report from OTR Global that said that Navistar may offer Cummins engines, possibly as early as 2013. Karen Denning, a Navistar spokeswoman, told the Daily Herald the company doesn’t respond to “rumor and speculation.”
The report did not specify whether the Cummins engines would be sold alongside Navistar engines or in place of Navistar engines.
The market is abuzz with what might come next for Navistar International Corp., corporate parent of Monaco RV LLC, after the company missed earnings estimates for the first two quarters of this year, Automotive World reported.
For its latest quarter, the company reported a loss of $172 million, or $2.50 a diluted share. This included several charges for items such as warranties, asset impairments and non-conformance penalties, but, even excluding these, the net loss was still $137 million, or $1.99 a share.
This was followed by the D.C. Court of Appeals ruling against an interim Environmental Protection Agency (EPA) rule that allowed Navistar to sell non-compliant engines providing it paid a fine of about $1,900 per engine. As reported by dealReporter, the EPA will face an uphill battle if it chooses to challenge the opinion.
Along with Volkswagen, Fiat Industrial is one of the names being talked about as a potential bidder for Navistar, and at this point in time, it appears to be in a stronger position than VW to make such a bid. Indeed, the combination appears to produce greater synergies than if Volkswagen chooses to enter the fray, with Navistar and Fiat Industrial having more product overlap. For instance, Fiat’s Powertrain product line is in direct competition with Navistar’s engines for light, medium and heavy trucks in South America.
Nonetheless, no such deal is imminent, and recent comments by Fiat Industrial’s Chief Executive, Alfredo Altavilla, were intended to end speculation. Furthermore, any such deal would likely be delayed since Fiat appears to have its hands full integrating CNH Global after it acquires the remaining 12% it does not currently own. However, once CNH is comfortably in the fold, there will be an increased rationale for pursuing Navistar. CNH manufactures agricultural and construction equipment that indirectly competes with Navistar’s agricultural engine products.
Volkswagen does not stand to gain the same benefits by acquiring Navistar. Although it has the financial wherewithal to make the deal, the companies do not compete in the same markets, with Volkswagen lacking a major U.S. truck market presence. Therefore, a deal would be more for product diversification in North America, which does not provide the same synergies. Cost savings from duplicative functions would be less significant than for a direct competitor, as would economies of scale.
The sense of excitement around Navistar is partly fuelled by the involvement of activist investors. Carl Icahn and Mario Gabelli have both upped their stakes in the company to 11.6% and 6.2%, respectively, after its results were announced. The following week, Mark Rachesky acquired a 13.6% stake, which he had begun accumulating in late May.
Investors should stay tuned: there will certainly be plenty of twists and turns in this ongoing saga.
Last year, Icahn proposed merging Navistar with Oshkosh, but he was unable to get his slate of directors elected to the latter’s board. Rachesky, an opportunistic investor who tends to be more patient than his protege, may not necessarily go along with Icahn’s plans. The two locked horns when Icahn attempted to take control of Lions Gate Entertainment. In 2010, Icahn’s attempt to take control of the movie studio was thwarted by Rachesky.
On 20 June, Navistar announced its board of directors had adopted a stockholder rights plan, designed to “deter coercive takeover tactics,”according to the company’s press release.
Investors should stay tuned: there will certainly be plenty of twists and turns in this ongoing saga.
Navistar International Corp. is expected to disclose Friday (July 6) that it is backing away from the pollution-reduction technology for its engines that has weighed on the U.S. truck maker’s sales and brought it into conflict with federal regulators, the Wall Street Journal reported, citing people familiar with the company’s plans..
The company plans to adopt the same process for treating diesel-engine emissions used by its rivals in an attempt to reverse falling truck sales and regulatory uncertainty that has caused its stock price to collapse and made the company the subject of takeover speculation.
Observers say the company’s fate hinges on the success of its much-maligned EGR engine, which has been saddled with mechanical problems and unable to get Environmental Protection Agency (EPA) certification.
Navistar International Corp. said Wednesday (June 20) it adopted a stockholder rights plan, or poison pill, to prevent a hostile takeover of the Lisle, Ill.-based maker of engines, military vehicles and recreational vehicles.
“The plan is designed to deter coercive tactics including the accumulation of shares in the open market or through private transactions and to prevent an acquirer from gaining control of the company without offering a fair and adequate price to all of the company’s stockholders,” Navistar said in a press release.
On June 15, investor Mark Rachesky acquired a 13.6% stake in Navistar, surpassing Carl Icahn as the company’s largest shareholder.
Pursuant to the plan, one preferred stock purchase right will be distributed as a dividend on each share of the company’s common stock held of record as of the close of business on June 29. The plan exempts any person or group owning 15% or more of the company’s common stock as of the time of the first public announcement of the Rights Plan, but only for so long as such person or group does not become the beneficial owner of any additional shares of common stock (including through derivatives).
The rights will expire on June 18, 2013.
Details about the Rights Plan will be contained in a Form 8-K to be filed by Navistar with the U.S. Securities and Exchange Commission.
MHR Fund Management LLC said Friday (June 15) it has a 13.6% stake in Navistar International Inc., making it the largest shareholder in the U.S. truck and engine maker, and putting it ahead of the 11.9% stake of investor Carl Icahn.
Reuters reported that MHR, founded by Mark Rachesky, a former associate of activist investor Icahn, now holds 9.4 million shares in the troubled company, bought May 22 through June 13, it said in a filing with the U.S. Securities and Exchange Commission (SEC).
That makes it the biggest investor in Navistar, based on current Reuters data.
Navistar shares leapt 11.2% to $30.95 in early trading Friday on the New York Stock Exchange.
MHR built its position as Navistar hit fresh three-year lows in the wake of an unexpected quarterly loss, and news that a U.S. appeals court would no longer allow it to pay fines to get around curbs on selling diesel truck engines that don’t meet U.S. pollution standards.
In the filing, New York-based MHR said it “may seek to engage in discussions with (the) management and others concerning the business and operations of the company.”
Navistar declined to comment on the news. Rachesky wasn’t immediately available to comment.
Rachesky, who worked for billionaire investor Carl Icahn before co-founding MHR, has previously invested in Lions Gate Entertainment Corp. He is also the chairman of Leap Wireless International Inc.
Last week, Icahn raised his stake in Navistar to 11.9% from about 10%, taking advantage of a sharp drop in the stock price triggered by weak results.
Trading in Navistar shares has been volatile over the past two weeks, plunging as much as 28% on June 7 after news of the quarterly loss, then recovering a day later when Icahn raised his stake, and after Fiat Industrial Chairman Sergio Marchionne hinted he was keen on the company.
The decision by Navistar International Corp. to idle its Workhorse Custom Chassis operation will not bring an end to its entire chassis production, according to a report in the Elkhart Truth.
Instead, the recreational vehicle chassis manufacturing will be shifted to Navistar’s subsidiary Monaco RV LLC, bringing more work and more jobs to the plant on Nelson’s Parkway in Elkhart, according to Navistar spokesman Steve Schrier. Monaco is in the process of hiring 250 new employees to help with the incoming chassis work as well as the additional motorhome production.
Navistar, based in Lisle, Ill., included the announcement about shuttering Workhorse when it released its second quarter results for the fiscal year 2012. The vehicle and engine manufacturer posted a loss of $172 million during the quarter, largely because of $104 million in warranty charges to repair its engines.
To view the entire article in the Elkhart Truth click here.
Volkswagen AG is considering whether to purchase stake in Navistar Inc. According to a Reuters report, Volkswagen has not commented.
Volkswagen does not have a strong presence in the U.S. commercial vehicle market, but a stake in Navistar would put the German auto maker in a better position to compete with Daimler Trucks, currently the biggest global commercial vehicle manufacturer.
“European trucks are built with the cab over engine so synergies are indeed harder to achieve with a U.S. truck maker, but VW would at least gain control over a sales and distribution network in addition to the International brand,” an industry source not involved in any talks told Reuters.
Recently, Navistar reported worse-than-expected financial results for the second quarter, and on June 7, the company’s shares dropped 14%, the most since Aug. 8, to $24.11. The company also announced top-level management changes.
The following day, activist investor Carl Icahn bought 883,200 of the company’s shares at $22.44 per share, raising his stake in Navistar from 10.6% to 12%. Icahn’s actions raised share price to $28.69.
Eugene, Ore., developer Steve Lee said he has struck a deal to buy the sprawling former Monaco Coach Corp. recreational vehicle manufacturing plant.
The Register Guard reported that Lee on Thursday (July 7) said he and his wife, Sally, have agreed to purchase the 69-acre complex that produced RVs for Coburg-based Monaco Coach before plummeting sales pushed the firm into bankruptcy three years ago.
Lee’s deal to buy nine buildings totaling nearly 1 million square feet is with a division of Navistar International Corp., which acquired the property as part of its acquisition of Monaco Coach in 2009. Lee said terms of the deal with Illinois-based Navistar prevent him from disclosing the purchase price or the date the property will change hands.
“It will be in the near future,” said Lee, a local developer with experience in housing, office and retail construction.
At its peak before financial troubles hit the RV industry, Monaco employed about 2,000 people in Coburg. Employment at Monaco had shrunk dramatically since 2008, and Navistar earlier this year moved production of Monaco RVs, along with some management work, from Coburg to Wakarusa, Ind., plus other management jobs to Illinois.
Navistar employs a total of 150 people in Oregon’s Lane and Linn counties, including at a manufacturing plant in Harrisburg that makes RV trailers.
Lee said he will convert the empty buildings in Coburg to a business park called Coburg North. A Monaco RV service center, with about 70 employees, operates from one of the buildings, and the firm will remain there and lease the structure after the property is acquired. Lee said he will seek tenants for the buildings that range in size from 3,700 square feet to 330,000 square feet.
Lee said he worked for Monaco Coach as its construction representative in the mid 1990s when the firm built the manufacturing facility. When he learned a few months ago that the property was for sale, he became interested in buying it.
“I poured my heart into this creation, and when I heard it was going to be sold, I could not imagine anyone else having the chance to buy it and bring it back to life,” he said. “I love the city of Coburg and wanted to be able to help breathe some new air back into the town. The facility is an ideal location for business and I cannot wait to get started.”
Editor’s Note: The following is an article from Crain’s Chicago Business profiling the innovative spirit of Dan Ustian, CEO of Navistar International Corp. The company is parent to Monaco RV LLC and Workhorse Custom Chassis Corp.
Navistar International Corp. CEO Dan Ustian churns out new products so fast, you’d think he was running an Internet incubator, not a 175-year-old company that once made the McCormick reaper.
Ustian has tripled the number of products at Navistar since 2007, expanding the Lisle-based company’s repertoire from commercial trucks to military personnel carriers, pickup trucks and recreational vehicles. Now he’s working on natural gas-powered trucks, among other things.
He’s had hits and misses. Military vehicles took off, but pickups flopped and were discontinued. Navistar’s earnings have been uneven, and Wall Street remains skeptical. Its stock is in reverse.
Many companies around Chicago face the same fundamental challenge confronting Navistar: how to grow in a mature industry. Ustian is proving an important point—old-line industrial companies operating from suburban corporate campuses can innovate as well as a startup in a garage.
“Businesses have to grow,” says Ustian, 61, who got his start at a South Side steel plant and spent his career climbing the ladder at Navistar. By the time he became CEO in 2003, he knew Navistar was headed for decline unless it moved beyond the slow-growing North American truck market.
Too often, established, publicly traded companies milk existing product lines and look for growth through acquisitions or geographic expansion. It seems like the safe play, but neglecting innovation carries the greatest risk of all. Just ask Motorola Inc. or Allstate Corp., which watched as innovative rivals commandeered their markets.
Thomas Kuczmarski, a lecturer at Northwestern University’s Kellogg School of Management who advises big companies, says they should make innovation “a long-term growth strategy.”
If that sounds crazy, big companies should realize they have natural advantages when it comes to developing new products. Along with capital and economies of scale, they have technology and know-how that can be leveraged across a range of products without much additional spending on R&D.
The key is finding new applications for that expertise. When Navistar stopped thinking of itself only as a truck maker, opportunities appeared. “Anything that’s got wheels is a potential market for us,” Ustian says.
Navistar looks for markets where it can improve on existing products and fulfill customer needs that existing suppliers aren’t meeting. In the military market, it beat incumbents to the punch with a vehicle capable of withstanding IED blasts in Iraq. In just a few years, military sales climbed to $2 billion a year, or about 14 percent of Navistar’s total.
Equally important is instilling what Mr. Kuczmarski calls “an innovation mindset” in your workforce. Ustian urges employees to think about a product or market not as it is but “as it could be. This is a difficult concept for people.”
It’s tough for people outside the company, too. When Navistar introduced a small truck engine it touted as more efficient, rivals scoffed and customers balked. But it worked, and competitors are now developing versions of the smaller engine.
Skepticism persists, however. Many question Ustian’s choice of a different technology than rivals are using to develop new truck engines to meet tougher U. S. emissions standards. The move could pay off big, or it could sideline Navistar in a key market.
Ustian’s innovations haven’t helped Navistar’s stock. Wall Street focuses on short-term earnings performance and truck sales forecasts. Thanks to a recent earnings shortfall and worries about the new truck engine, shares are down 40 percent from last May’s 52-week high and trade at a discount to its industry peers. Corporate raider Carl Icahn is pressuring the company into a merger.
For Ustian, the answer is innovation: “We’ve got some more breakthroughs coming.”
Navistar International Corp. today (March 8) reported a loss of $153 million, or $2.19 per diluted share, for the first quarter ended Jan. 31, compared to a loss of $6 million, or $0.08 per diluted share, in the previous year.
Sales during the period rose 11% versus in its year-ago first quarter, which is driven by increased truck volumes in traditional and worldwide markets. In the year-ago first quarter, Navistar reported sales of $2.7 billion. Navistar is parent to Monaco RV LLC and Workhorse Custom Chassis Corp.
According to Navistar, the first quarter traditionally is the weakest period due to seasonal downtime in its two largest markets. Additionally, at its analyst day Feb. 1, the company said it expected a first quarter 2012 loss due to a series of factors, including higher year-over-year healthcare costs; the start up of a new foundry operation; a brake supplier issue that interrupted truck shipments; the temporary shutdown of a key OEM customer of its South America operations due to the Thailand floods; and efforts to improve customers’ vehicles during a traditionally slow period.
“We proactively addressed these product issues in a low usage period during the first quarter, which we believe will improve long-term customer satisfaction and reduce warranty costs,” said Daniel C. Ustian, Navistar chairman, president and CEO. “Strategically, we achieved a number of key milestones in the first quarter, including our submission of a 0.2 NOx engine for EPA certification and the announcement of our development of a full range of natural gas truck offerings.
“We remain confident in our ability to deliver strong 2012 profit performance and make continued progress toward our long-term growth goals,” Ustian said. “We are already seeing accelerated synergies from our recent move into our new integrated product development center beyond the $60 million we originally estimated. We now believe this integration of our people will unlock up to $100 million in savings toward our bottom line in 2012.”
To view the entire report click here.