Navistar withdraws forecast, reports SEC probe

Thu Aug 2, 2012 5:19pm EDT

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(Reuters) - Navistar International Corp withdrew its 2012 profit forecast on Thursday as it works to update its engine technology to comply with emissions regulations and said it would expand use of Cummins Inc technology on some heavy-duty trucks starting next year.

The truck and engine maker also revealed it is the target of a formal U.S. Securities and Exchange Commission inquiry into accounting and disclosure matters.

The accounting probe added to investor concerns that the company's pursuit of a novel engine technology, which differs from rivals', will erode market share. Navistar stock is down by half over the past year. The shares were down 14.8 percent at $21.11 in late trading, touching their lowest level since 2008. Cummins rose 1.7 percent to $95.22.

The SEC is likely looking into a lack of disclosure about Navistar's deteriorating financial condition, said Gimme Credit senior high-yield analyst Vicki Bryan.

"I have a lot of concerns about poor disclosure," she said. "I thought management was downplaying the seriousness of the situation and the fact that they don't have a solution."

Bryan said the Environmental Protection Agency could face pressure to sharply raise penalties on non-compliant engines, from about $1,900 to as much as $10,000 per engine. That, along with repair, warranty and research costs, will cause Navistar to burn through cash faster.

Navistar said a group of banks committed to provide a senior secured loan of up to five years and $1 billion. That reduced liquidity risks in the near term, several analysts said.

Nevertheless, pressures on the company are severe.

"We would assume that the company will lose money until the new engines are available ... for the next several quarters," Jefferies analyst Stephen Volkmann said.

The SEC has requested additional information and subpoenaed documents from November 2010 through the present, and the company is cooperating.

The SEC, Navistar auditor KPMG, and the company all declined comment on specifics of the probe.

Gabelli & Co research analyst Brian Sponheimer said Navistar's disclosures made it a more attractive asset for a potential strategic buyer.

"The company now has a clear path and a clearly defined strategy," he said.

Mario Gabelli's Gamco Investors is one of the largest Navistar shareholders.

ENGINE HEADACHES

Navistar has had trouble winning U.S. Environmental Protection Agency approval for alternate technology that does not use liquid urea to cut pollutants. It has since backed away from that technology, saying it would develop a new model that uses emission controls more in line with industry standards.

Until those new engines are ready next year, the company has been paying penalties on each truck it ships with non-compliant engines while it also works to secure regulatory approval.

"We are having productive conversations with EPA," Navistar spokeswoman Karen Denning said Thursday.

Navistar struck a nonbinding memorandum of understanding for Cummins, a competitor, to provide a component that attaches to Navistar engines, helping them meet guidelines. Navistar will also offer Cummins engines as an option in some of its heavy-duty trucks in the new year.

THIRD-QUARTER LOSS

Lisle, Illinois-based Navistar forecast a third-quarter loss, citing the costs of transitioning to the new engines, complying with the EPA, as well as uncertain market demand in key markets such as Brazil and India.

It expects a pretax loss of $80 million to $115 million, excluding special items, for the third quarter ended in July, but forecast a return to profitability in the fourth quarter.

Analyst expectations were all over the map for Navistar's third quarter, ranging from a loss of $1.80 to a profit of $1.05, according to Reuters data. Navistar estimated third-quarter sales of $2.8 billion to $3 billion, below analyst estimates of $3.5 billion.

Navistar said it will re-introduce its full-year forecast when it reports third-quarter results in September.

Navistar is expected to pay about 650 to 700 basis points over the London interbank offered rate for its $1 billion loan, according to Thomson Reuters Loan Pricing Corp. That is more than many other junk-rated companies paid in the loan market in recent days.

Accounting issues have troubled Navistar before. In 2006, it fired Deloitte & Touche, its independent auditor for nearly a century, citing complex and technical accounting issues, and hired KPMG. Navistar later restated earnings for 2002 through 2005, due mostly to the underpayment of income taxes and accounting for increased pension and warranty reserves.

In June, Navistar reported an unexpected quarterly loss, hit by warranty costs for engines built in 2010 and 2011.

Facing investor pressure to sell itself or focus on building trucks that incorporate rivals' engines, it also adopted a poison pill plan aimed at keeping outsiders from gaining a greater than 15 percent stake.

Asset manager Franklin Resources Inc -- the largest Navistar shareholder, with an 18.8 percent stake -- declined comment, as did activist investment firm MHR Fund Management LLC, which has a stake just under 15 percent. Billionaire Carl Icahn, another large shareholder, could not immediately be reached.

(Additional reporting by Dena Aubin; Editing by Gerald E. McCormick, Lisa Von Ahn, Andrew Hay, Gary Hill)

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