Navistar’s Road to Recovery

Navistar seems set on recovery. ProStar Plus trucks with Cummins engines are on their way to dealers days ahead of an impossibly tight schedule. However, the cost of recovery is high, with Navistar today reporting a nearly $3 billion loss for the last quarter of 2012, including restructuring and warranties. And Navistar has announced that the third nominee to the board by major investors has been confirmed.

These important steps signal a turnaround for the company is under way, if it can survive the cost.

Fourth Quarter Loss
Today, Navistar reported a fourth-quarter loss on tax expenses and expenses from its cost-reduction programs and engine warranties. Navistar lost $2.8 billion, or $40.13 per share, compared with a profit of $255 million, or $3.48 per share, a year ago. The pre-tax loss was $566 million, compared with a $275 million pre-tax profit for the same period a year ago. Revenue for the quarter ending Oct. 31 fell 24% to $3.3 billion, from lower sales (as predicted here).

The loss included $2 billion, or $28.59 per share, in tax costs and, as again predicted, charges of

• $149 million in warranty expenses related to 2010 big-bore engines
• $73 million in cost-reduction actions
• $16 million in restructuring charges for its North American manufacturing operations and engineering integration
• $14 million in non-conformance penalties—a number that would have been much higher without the sweetheart deal from EPA.

Navistar says its net loss for fiscal 2012 was $3 billion, or $43.56 per diluted share, compared with net income of $1.7 billion, or $22.64, for fiscal year 2011. “Unfortunately, we saw a spike in warranty spending in late October and early November for the few remaining engine issues and the cost to take the proactive actions to support our customers and fix those items is higher than we anticipated,” said Chairman and CEO Lewis Campbell in a release.

Cummins to the Rescue
The switch to selective catalytic reduction (SCR) from exhaust-gas recirculation (A-EGR) has been accomplished with Cummins help in packaging the aftertreatment system onto the International chassis in record time. Navistar is shipping 300 International ProStar Plus Class 8 tractors equipped with Cummins ISX15 engines.

Reaching the goal five days ahead of schedule, “demonstrates the tremendous progress we’re making in delivering our first SCR-based Class 8 trucks to the marketplace,” said Troy Clarke, Navistar’s president. “Working collaboratively and fully integrated with our Cummins colleagues, the team has beat an aggressive launch timeline while ensuring the highest levels of quality.”

Board Moves
Meanwhile, the new Navistar International board member is Samuel J. Merksamer, managing director at Icahn Capital LP. He replaces Diane Gulyas, who retired after serving three years as a Navistar board member. Merksamer's appointment to the board and Gulyas's retirement were effective December 10, maintaining the total number of Navistar board members at 10, nine of whom are independent.

Merksamer is the third board member appointment made as part of an agreement with Carl Icahn and Icahn Partners and Mark Rachesky’s MHR Fund Management. Between them, these two investors own nearly a third of Navistar stock and Icahn had demanded three seats on the Board after the previous management engineered a stock price slide approaching 50%, apparently with the Board’s approval.

The other nominees are Vincent Intrieri on behalf of Icahn, and Mark Rachesky. Merksamer will stand for election at the company's 2013 Annual Meeting of Shareholders. "We welcome Sam to the board and we look forward to his insights as we continue to execute on our plan to drive long-term profitability and deliver shareholder value," said Lewis B. Campbell, Navistar's chairman and CEO commented before the latest financial report.

Merksamer is a managing director at Icahn Capital LP, where he has served since 2008. He is responsible for identifying, analyzing and monitoring investment opportunities and portfolio companies for Icahn Capital.