Navistar Appoints New CEO to Navigate Out of the Swamp

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Navistar (NYSE:NAV), the truck and diesel engine manufacturing giant and holding company asked for the resignation of CEO Dan Ustian in an effort to regain a vestige of investor confidence in the company that has faltered so dramatically in the past two years.  The share price closed today at $23.32, up a slight 0.34 cents from Friday’s close.  Today’s mark still leaves the stock at less than 50% of this year’s high of $48.48, which it hit briefly on February 3rd.

Will Diesel Despair Turn Into Demise?

Navistar, formerly known as International Harvester, has been primarily known as a premier designer and manufacturer of diesel engines.  It’s most well known engines are the MaxxForce and the Ford Powerstroke.  After enjoying a successful transition from being primarily an agricultural company through the last 15 years of the twentieth century, the company did not manage to get through the next decade without considerable problems.

The resignation of Daniel Ustian, announced this weekend, follows accounting issues and flawed engine concepts and designs that have made Navistar a “household name” at the U.S. Securities and Exchange Commission and the Environmental Protection Agency.  One analyst noted that, after 39 years with the company, nine of which he was CEO, Mr. Ustian faced challenges that simply proved too great for him to handle.  Wells Fargo analyst Andrew Casey said, “The departure of Ustian is not a surprise after the failure of the company’s engine strategy. The surprise is the length of time that it took for this to happen.”

The Accounting Issue Coffin

In January 2006, with Ustian at the helm, the company delayed the statutory filing of its annual report following a disagreement with its auditors over accounting issues.  Navistar hired a new auditing firm to research and restate earnings for the four previous years before filing for 2006.  At year end, the company was still not ready to file.  The NYSE ultimately removed Navistar’s listing and its inclusion in the S&P 500.  Navistar continued to be traded on the OTC Pink Sheets until it had caught up on its filings.  Navistar was readmitted to the NYSE in June 2008, but only after Ustian was ordered by the Public Company Accounting Oversight Board to repay $1.3 million in company shares that had been previously awarded to him.

The Engine Design Nail in the Coffin

Shareholders began to revolt recently and demand Ustian’s ouster following a disastrous attempt to introduce a new diesel engine that failed to meet EPA emission standards.  For two-and-a-half years Ustian insisted that the company was capable of redesigning and delivering a compliant engine, although the Navistar attempted to negotiate a deal whereby they would put the non-compliant engines into the market and agreed to be fined $1,919 per engine by the agency for doing so.  The US Court of Appeals disallowed the deal.

Then There’s Those Three Other Minor Things

One of the things that probably drove investors to the edge was the $172 million loss reported for the second quarter of this year.  When coupled with the news that Navistar’s strategy to get out from under the new engine design fiasco was to acquire EPA compliant engines from a competitor, investor confidence was likely to wane just a tad as long as Ustian remained in charge.  Then there’s the report that Navistar is once again under investigation by the SEC for reasons “related to certain accounting and disclosure matters.”  As in the previous case, Navistar withdrew its earnings forecast until September.

Interim CEO Named

Navistar has named Lewis Campbell as Chairman and Interim CEO to bring the company out of the swamp and back onto solid ground.   Mr. Campbell was formerly CEO at Textron, after spending 35 years at General Motors.  In addition to getting the company back on firm footing, he is going to have to reckon with the maneuverings of Carl Ichan and other activist investors who have been “scooping up” company shares during the stock’s decline in value.  Navistar adopted a takeover-defense policy that has limited investments to a 15% stake in the company and hold the Icahns of the world at bay.

It’s going to be a long road ahead.  Even when he pulls the company out of the swamp, the road is probably going to still be a bumpy one for Campbell.

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