UPDATE 5-Navistar posts loss, cuts forecast; shares plummet

Thu Jun 7, 2012 2:49pm EDT

* Shares hit lowest point since 2008

* Books $104 million Q2 charge for warranty expenses

* Full-year profit forecast cut again

* Still waiting on EPA approval of engine

* Former GM executive promoted to key role

By Scott Malone

June 7 (Reuters) - Navistar International Corp reported a second-quarter loss, hit by a hefty charge for warranty costs related to engines built in 2010 and 2011, sending its shares down as much as 28 percent to their lowest since late 2008.

The U.S. truck and engine maker's revenue also came in shy of Wall Street expectations as a regulatory review of its new model of diesel engine prompted some customers to hold off on ordering.

Navistar said it had promoted Troy Clarke, a former General Motors Co executive who previously ran Navistar's Asian operations, to the new post of president of trucks and engines - essentially overseeing all Navistar business lines.

"It goes without saying that the start of the year has been a disappointment for us," Chief Executive Daniel Ustian told investors on a conference call. "The influences from outside are there, but it has a lot to do with our own execution."

The company warned investors in March that costs for repairing the 2010 and 2011 engines were taking a heavy toll on profit, but at the time it said warranty claims had peaked. But claims shot even higher in April, executives said on Thursday, prompting it to take a $104 million second-quarter charge.

The Lisle, Illinois-based company is still waiting on a U.S. Environmental Protection Agency review of nitrogen oxide emissions from its new heavy-duty truck engine, and Ustian said he could not predict how long that review would take. The engine does not comply with current U.S. emission rules.

"Clearly, their engine strategy hasn't worked and that has filtered through to the rest of the business," said Basili Alukos, an analyst at Morningstar in Chicago who follows the company.

Navistar faces costs of up to $1,919 per non-compliant engine, it said in a filing with the U.S. Securities and Exchange Commission.

The engine in question aims to cut emissions of nitrogen oxide, a pollutant linked to asthma, without using liquid urea, the approach taken by Navistar's rivals. The company says its technology is easier to use, but so far has not won the EPA's blessing for the approach. The company in January submitted an application seeking the EPA's approval for the engine, but later withdrew it and reapplied in late May, it said in an SEC filing.

Navistar fell 11 percent to $25 at mid-afternoon on the New York Stock Exchange, off a session low of $20.21.

Shares of its rivals followed the overall market higher, with truck maker Oshkosh Corp up 2.8 percent at $20.54 and engine maker Cummins Inc up 2.9 percent at $98.50. Truck maker Paccar Inc rose less than 1 percent to $38.15.

UNEXPECTED LOSS

The second-quarter loss of $172 million, or $2.50 per share, included a pretax charge of $104 million for warranty expenses to repair trucks sold in 2010 and 2011. The company earned $74 million, or 93 cents a share, in the year-earlier quarter.

Revenue at the maker of International trucks, Monaco recreational vehicles and school buses fell about 2 percent to $3.3 billion. Analysts had expected $3.63 billion, according to Thomson Reuters I/B/E/S.

In the second downward revision to its forecast this year, the company said it now expects 2012 adjusted earnings to range from breakeven to $2.00 per share, down from an initial forecast of $5.00 to $5.75 a share.

Wall Street had expected 67 cents per share in the second quarter and $3.73 for the year.

Analysts voiced skepticism about the forecast for the rest of the year.

"Management credibility around these numbers is clearly impaired at this point," Jefferies analyst Steve Volkmann wrote in a note to clients on Thursday.

SUCCESSION PLANNING?

Further management changes may be on the way, Volkmann added: "The board of directors will meet on June 19, where we believe additional management changes are likely to be discussed."

Asked on the call if Clarke's promotion - which came with changes in the assignments of two other executives - was the start of a succession plan, the 61-year-old Ustian said, "Some succession throughout the company is in our thought process."

Clarke joined Navistar in January 2010 as a senior vice president for strategic initiatives. He took charge of its Asian operations in April 2011.

Navistar management has had a lot going on over the past year. Activist investor Carl Icahn in late 2011 and early 2012 pushed for it to merge with Oshkosh, a proposal that Ustian said he was open to considering. Oshkosh management and shareholders rejected the idea.

Navistar is also in the midst of developing natural gas-powered trucks, with a goal of having a natural gas option on all its trucks by the end of 2013, betting that more commercial truckers would opt for that fuel over more expensive diesel.

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