With Ustian’s abrupt departure, changes coming to Navistar
BY DAVID ROEDER Business Reporter/droeder@suntimes.com August 27, 2012 8:10AM
Navistar Chairman and CEO Daniel Ustian, 62, retired abruptly Monday after 37 years with the company. | Brian Jackson~Sun-Times
Updated: September 29, 2012 6:06AM
The first shoe dropped Monday at Navistar International Corp., landing heavily and putting investors and employees on alert for deep structural changes at one of the oldest companies with a Chicago pedigree.
Under pressure from activist shareholders and with a cash burn rate one analyst called “atrocious,” Lisle-based Navistar installed an outsider as its chairman and “interim” chief executive and announced the abrupt retirement of its top officer, Daniel Ustian. Ustian, 62, had been with the company for 37 years, becoming CEO in 2003 and chairman in 2004.
Lewis Campbell, named to succeed Ustian, comes to the engine and truck manufacturer from Textron Inc., where he was chairman and CEO. Campbell, 66, also spent 24 years in product design and engineering at General Motors Co.
Navistar also said it was promoting Troy Clarke, 57, another former GM executive who joined Navistar in 2010, to president and chief operating officer, the company’s top day-to-day role.
Analysts said the appointments indicate the board’s willingness to entertain bold steps in righting the company. They also repudiate an engine-emissions technology that Ustian championed but that never got clearance from federal regulators.
As a result, Navistar has been forced to buy high-cost engines from a competitor, Cummins Inc., that meet standards for the emissions of nitrous oxide.
Also part of Ustian’s departure were a $172 million loss the company reported for its second quarter and its Aug. 2 revelation that the Securities and Exchange Commission is investigating its accounting. For investors, it was an unpleasant reminder of an accounting probe from 2007 that got the company’s stock pulled from the New York Stock Exchange for 16 months.
Likely next steps for Navistar, analysts said, are layoffs as the company turns its attention to its high costs. Sales of certain operations or a deal for the entire company also are possible.
“Near-term, the next six to nine months are critical as Navistar brings new products [and] technology to market,” said David Leiker, who follows the company for Robert W. Baird & Co. Inc. He has a neutral rating and a $25 price target on the stock.
In Monday’s trading, Navistar shares rose 34 cents, or 1.5 percent, to $23.32. The shares are down 42 percent over the last 12 months.
“The business will shrink. I think they will get rid of a lot of tangential things they have been manufacturing,” said Basili Alukos, analyst at Morningstar Inc. He said the management changes are important to the company’s turnaround and noted that while it exhibits an “atrocious” cash burn rate, it has secured $1 billion in financing from a group of banks.
Navistar reported that as of June 30, its cash on hand dwindled to $400 million from $539 million at the start of the year. It has high ongoing costs for warranty repairs and an unfunded pension obligation that Leiker said was $3.2 billion as of last October.
Vicki Bryan, senior analyst who rates corporate bonds for Gimme Credit, said Navistar could exhaust the bank credit in just two to three quarters as it struggles to bring emissions-compliant engines to market. She also said the loss last week of a U.S. Army contract to develop a successor to the Humvee indicated Navistar is losing credibility with core customers.
“This keeps the risk of bankruptcy high as Navistar struggles to preserve cash through its most difficult transition ever under extreme financial distress,” she said in a report to clients.
Navistar, the former International Harvester, traces its history to Cyrus McCormick’s invention of the reaper in the 1830s.
Morningstar’s Alukos said management’s ultimate goal probably will be to “clean up the business for a potential sale,” although the pension costs and other operational problems could prove to be roadblocks.
Truck maker Oshkosh Corp. has been mentioned as a possible partner, as have non-U.S. manufacturers Volkswagen and Fiat.
Activist investor Carl Icahn and a protege, hedge fund manager Mark Rachesky, together own a 26 percent stake in Navistar. Icahn also owns close to 10 percent of Oshkosh, and he has urged that company to sell noncore businesses. He failed, however, to get a slate of board directors elected early this year.
Investment firm Franklin Resources Inc. owns 19 percent of Navistar, meaning that about 45 percent of the company’s stock is in the hands of three entities.
