Daniel Ustian former CEO Navistar International

Failure to Develop EPA-Compliant Engines Drives Ustian Out of Navistar International

Navistar International Corp. has jettisoned Chairman and CEO Daniel Ustian, whose strategy to meet EPA engine-emissions regulations failed miserably. Navistar on Monday said Ustian will retire, "effective immediately," after 37 years with the company. Navistar appointed former Textron Inc. chief Lewis Campbell as interim CEO, and promoted Navistar Truck and Engine executive Troy Clark to president and COO.

Commercial-truck manufacturer Navistar International Corp. (IW 500/86) has jettisoned Chairman and CEO Daniel Ustian, whose strategy to meet EPA engine-emissions regulations failed miserably.

Lisle, Ill.-based Navistar on Monday said Ustian will retire, "effective immediately," after 37 years with the company.

Coinciding with Ustian's departure, Navistar appointed former Textron Inc. (IW 500/100) chief Lewis Campbell as interim CEO, and promoted Navistar Truck and Engine executive Troy Clark to president and COO.

While competitors such as Paccar Inc. (IW 500/69) and Daimler AG (IW 1000/18) are reaping the benefits of an upswing in the truck-sales cycle, Navistar reported a $172 million second-quarter loss, which included $10 million in penalties for failing to comply with EPA standards covering nitrogen-oxide emissions in diesel engines.  
 
Cleveland-based analyst Brian Rayle traces Navistar's struggles back to Ustian's decision to rely solely on exhaust-gas recirculation (EGR) technology to try to meet the EPA standards, when the rest of the industry opted for a mix of EGR and selective catalytic-reduction (SCR) technology in their engines.

"This was his doing as CEO," said Rayle, who is managing director and equity research analyst for Northcoast Research Holdings LLC. "Ultimately it didn't work, and he was shown the door."

Still Not Compliant

Under Ustian's strategy, Navistar boasted that it was developing an engine that would meet emissions regulations without relying on SCR technology, which requires the use of an additional operating fluid -- urea -- as well as after-treatment equipment.

SCR technology, Navistar said in 2009, would "add hundreds of pounds of bulky, complex componentry to each vehicle."

But Navistar failed to obtain EPA approval for its engine that relied exclusively on EGR, and in July announced that it was shifting to an approach that will incorporate urea-based after-treatment into its engines.

"On Jan. 1, 2010, everybody was supposed to be compliant with the new nitrogen-oxide standards," Rayle said. "Navistar, even now, is still not compliant."

In early August, the company abandoned its full-year financial outlook and said it might incur a third-quarter loss of up to $15 million, when factoring in EPA penalties.  

Adding to Navistar's woes, the company missed out on a $4 billion contract to build the next generation of Humvees for the U.S. Army.

The Defense Department on Aug. 24 announced that AM General LLC, Lockheed Martin Corp. (IW 500/30) and Oshkosh Corp. (IW 500/137) all have received contracts to develop prototypes of what the Army is calling the joint light tactical vehicle.

"You didn't get the defense business. Your engine strategy was flawed. And even if you strip some of that out, [Navistar] still wasn't a profitable company anyway," Rayle said.

By contrast, Paccar reported second-quarter earnings of $297.2 million, or 83 cents per diluted share, up 24% year-over-year. Navistar reported a second-quarter loss of $2.50 per diluted share.

"This is when [Navistar] should be making decent money," said Rayle, who forecasts a full-year loss of $8 per share for the company. "The truck cycle is getting better."

Big Challenge Ahead

Campbell, who will serve as executive chairman of the Navistar board in addition to interim CEO, is no stranger to turnarounds.

The 66-year-old led a major overhaul of Textron's operations, serving as chairman, president and CEO of the Providence, R.I.-based diversified manufacturer from 1999 to 2009.

Prior to joining Textron as COO in 1992, Campbell spent 24 years in various positions at General Motors Co. (IW 500/4).

"Lewis Campbell is a high-caliber executive who brings to Navistar deep and broad strategic, technical and operational skills and a proven track record of leadership with global industrial companies," Michael Hammes, Navistar's independent lead director, said in a news release.  

Campbell will have his work cut out for him at Navistar.

The company plans to incorporate the EPA-compliant 15-liter Cummins ISX15 engine into certain Navistar trucks in January, and introduce its own 13-liter engine featuring CSR technology in early 2013.

That's an aggressive schedule for a company that has "a history of not executing" when it needs to execute, Rayle said.

On top of that, the company just switched CEOs in the midst of "one of the biggest strategy changes since they spun off their [agriculture-equipment] business in the 1980s," he added.

Still, Rayle called the decision to oust Ustian a "net positive."

"When you're losing money hand over fist during an up cycle, while all of your competitors are doing fairly well, it's time to go at some point," Rayle said.

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