Deeper Into the Woods

More from the “I told you so department:” Thursday, (August 1, 2012) Navistar announced in its guidance for the quarter ending July 31 that, as I predicted a month ago, it will indeed be offering Cummins ISX15 as part of its volte-face on compliance with EPA2010. To quote the guidance statement: “As part of the expanded relationship with Cummins Inc., Navistar plans to offer the Cummins ISX15 engine in certain models, expanding the company's vehicle lineup and on-highway market opportunity. Navistar plans to introduce the Cummins ISX15 engine as a part of its North American on-highway truck line-up beginning in January 2013.”

Navistar spokesman Steve Schrier told Transport Topics that the initial availability of Cummins power will be in International ProStar, PayStar 5900 and 9900 Series.

The expanded role with Cummins also includes bolting Cummins’ proven selective catalytic reduction technology and hardware to the 13-liter MaxxForce as part of the In Cylinder Technology Plus (ICT+) strategy. These will fast-track the switch from all-EGR to a combined technology, similar to that of all Navistar competitors. The timeline for the introduction, according to the announcement, is “early 2013.”

Furthermore, tacitly admitting the EGR solution it sought is a dead horse, the guidance says: “…Navistar has entered into a non-binding memorandum of understanding, under which Cummins Emission Solutions would supply its proven urea-based aftertreatment system to Navistar. This would be combined with Navistar's advanced in-cylinder engine to create ICT+.”

At the time I was criticizing Navistar for blindly pursuing A_EGR, company spokespeople were disparaging the use of SCR urea-based technology, even saying the chemical was toxic. Who’d have thought you’d see Navistar using the U word in a company pronouncement? Especially by Chairman Dan Ustian, who was in the vanguard of the urea bashing.

Included in the remarks is the fact that Navistar will continue to build and ship the 13-liter MaxxForce – or “LacksForce” as one highly disgruntled driver/blogger has christened it. Navistar says it will “continue to ship current model EPA-compliant trucks in all vehicle classes using appropriate combinations of earned emissions credits and/or non-conformance penalties (NCP). Those NCPs could well be vastly more than Navistar anticipates in the Engineering integration costs and charges for non-conformance penalties in its guidance.

NCPs – Nasty, Critical, Painful

Last Friday (July 27), Navistar petitioned the U.S. Court of Appeals, District of Columbia Circuit, to have the EPA NCPs case reheard. The court had previously thrown out an interim rule by the EPA designed to let Navistar sell the noncompliant engines if it paid a fine. The court found the agency violated the Administrative Procedures Act by issuing the interim final rule (IFR) without opportunity for comment or formal notice, and vacated the EPA ruling.

In January, when EPA issued the interim final rule for Navistar, it proposed a fine of $1,919 per non-conforming engine produced. Volvo, Mack and Cummins objected that the proposed rule gives Navistar an unfair advantage. EPA hasn’t said when it will issue the final regulations, or if it will modify its proposal.

Basically the court said this is a way-too-low number that would be little burden on Navistar. The “context of this case reveals that the only purpose of the IFR is, as petitioners put it, to rescue a lone manufacturer from the folly of its own choices,” said the court.

Those with longer memories will recall the NCPs attached to the Caterpillar “bridge” engine produced between October 2002 and when it reached compliance in 2004. Applied on a sliding scale, the NCPs were between $9,000 and $10,000 per engine sold. The Caterpillar penalties were calculated from reports submitted by competitor manufacturers on the costs of 10/02 compliance.

Most of those competitive manufacturers agree they undersold themselves in that instance and are not keen to do the same again. The figures are in and we all wait with bated breath to see what the court will do with them.

Then there’s the matter of some 7,600 engines Navistar says were 2009 engines, but may have actually been completed in 2010. The NCP hit on that may prove to be another serious drain on the company’s earnings and dwindling cash supply.

Some breathing space

Smart money has been saying Navistar has a serious cash flow situation and should run out in as little as eight months at the current rate of hemorrhaging. But in the guidance, Ustian says the company has secured a billion-dollar loan. “Additionally, to support these actions and to improve its financial flexibility, Navistar has entered into a firm commitment letter with a group of banks led by JPMorgan Chase Bank, N.A. and Goldman Sachs Lending Partners LLC and including Merrill Lynch, Pierce, Fenner & Smith Inc. and Credit Suisse pursuant to which the banks have committed to provide an up to five year $1.0 billion senior secured term loan.”

That may have bought Navistar a far more secure future as it pays penalties, deals with the buybacks of trucks, pays out warranty and possible restitution to fleets that have struggled with unreliable Internationals with the 13-liter engines.

But now another shadow falls across the company.

More Woe

Navistar stock today fell in early trading today after the company disclosed a U.S. Securities and Exchange Commission (SEC) inquiry and withdrew its full-year earnings forecast. According to a Bloomberg report, Navistar fell 6.1 percent to $23.25 a share at 8:42 a.m. EST before the start of regular trading. The company’s stock has declined 35 percent this year through yesterday.

This is on top of a 35 percent decline last year.

The company said it received a formal letter from the SEC requesting additional information related to accounting and disclosure matters. Navistar is reported to have said it is “cooperating fully” with the request. The company also said it is withdrawing its yearly forecast until third-quarter earnings are released next month.

In all of this, Navistar has behaved in a most disingenuous manner. Its 13-liter MaxxForce did not meet EPA2010 as company demonstrations claimed. There’s no doubt that stockpiled Cummins engines kept production going through most of 2010 completely contrary to the letter and the spirit of EPA2010. A press announcement that the compliant MaxxForce 15 was in production was made at the Mid America Trucking Show in 2011 yet there is no evidence it is compliant – in fact the evidence of the 13-liter about-face suggests quite the contrary. I don’t see how the engine could even be production ready, let alone “in production.”

For more reading fun, get Forbes take on it with a story titled: Death By Hubris? The Catastrophic Decision That Could Bankrupt A Great American Manufacturer.

http://www.forbes.com/sites/joannmuller/2012/08/02/death-by-hubris-the-catastrophic-decision-that-could-bankrupt-a-great-american-manufacturer

See, like I said the other day, Told You So . . .