This morning, Navistar International Corp. (NYSE: NAV) announced “significant actions” that it said would build on its previously announced introduction of ICT+ (In-Cylinder Technology Plus) diesel-engine technology . stressed that these initiatives have a three-fold goal: enhancing the company's competitive position and driving both profitable growth and shareholder value.
The new actions the truck and engine builder will be making include:
- Adopting a U.S. “market-proven aftertreatment solution to accelerate delivery of ICT+, 's next generation clean engine solution”
- A “market transition plan” for Class 8 engine sales
- Securing a $1.0 billion loan commitment, to “further enhance Navistar's liquidity”
"The actions announced today establish a clear path forward for Navistar and position the company to deliver a differentiated product to our customers and provide a platform for generating profitable growth," said Daniel C. Ustian, Navistar chairman, president & CEO.
The company noted that its development of ICT+, revealed early last month, “leverages the advances Navistar has made in clean engine technology while also providing greater certainty for its customers, dealers, and other key constituents.”
To “accelerate delivery” of ICT+ to the marketplace, Navistar said it has entered into a non-binding memorandum of understanding under which Cummins Emission Solutions would supply its “proven urea [DEF]-based aftertreatment system to Navistar.” The Cummins aftertreatment system would then be combined with Navistar's advanced in-cylinder MaxxForce engines to create its ICT+ clean-engine solution.
According to Navistar, it “expects that by combining Cummins' aftertreatment system with its existing MaxxForce engines, its ICT+ will meet 2010 U.S. Environmental Protection Agency (EPA) emissions regulations and position the company to meet greenhouse gas (GHG) rules in advance of 2014 and 2017 requirements.”
"With this clean engine solution, we are taking the best of both technology paths to provide our customers with the cleanest and most fuel efficient engines and trucks on the market and to meet stringent U.S. emission regulations," Ustian remarked.
Navistar said that during its transition to ICT+ engines, it will continue to build and ship current model EPA-compliant trucks in all vehicle classes using appropriate combinations of earned emissions credits and/or non-conformance penalties (NCPs). The company added that it “continues to have productive discussions with the EPA and the California Air Resources Board (CARB) regarding its transition to ICT+.”
As part of the expanded relationship with Cummins, Navistar plans to offer the Cummins ISX15 engine in certain models, “expanding the company's vehicle lineup and on-highway market opportunity.”
Navistar said it specifically plans to introduce the Cummins ISX15 engine as a part of its North American on-highway truck lineup beginning in January 2013 and to begin the introduction of ICT+ in its MaxxForce 13-liter in early 2013.
However, Cummins has made it clear that the agreement with Navistar is not a done deal. A Cummins spokesperson told Fleet Owner that “after Navistar approached us to initiate discussions, we “signed a memorandum of understanding, confirming our intent to further negotiate details to supply engines and heavy duty aftertreatment systems. The basic terms of the MOU include supply of the ISX15 engine and of aftertreatment systems from Cummins Emission Solutions. The MOU signifies our intent to negotiate a supply agreement. However, until all details are agreed upon, such an agreement is not considered final.”
"This agreement with Cummins is the path of least resistance for Navistar, and it well help quickly turn around the dark clouds hanging over the OEM," Sandeep Kar, global director of commercial vehicle research for Frost & Sullivan, told FleetOwner.
Kar pointed out that Cummins has already been supplyingengines for Navistar's trucks, so the deal for SCR-equipped diesel engines "is just a natural extension of that partnership." He said the agreement also benefits Cummins, as it will help the engine maker regain market share lost in North America due to other truck OEMs introducing their own lines of proprietary engines in recent years.
Longer term, Kar thinks there could be an opportunity for Navistar to work its vocational truck building relationship withinto the mix as well. "One thing no one is talking about right now is that Navistar is now the only OEM with a relationship with both Caterpillar and Cummins," he explained. “Where such a potential three-way partnership could end up, however, is still uncertain.”
Possibly the most important development around the memorandum of understanding is that it finally takes the debate over SCR vs. Advanced EGR out of the North American truck market -- a debate Kar believes has become a major sticking point for fleet managers over the last two years.
"Now, with the industry united behind SCR, fleets can look at other differentiating factors among the truck brands available to them, rather than just the emission control technology alone," Kar observed.
Navistar also announced that it expects its manufacturing cash will be between $575 million and $625 million at the end of the third quarter. Additionally, to support the announced actions and to improve its financial flexibility, the OEM said it has entered into a “firm commitment letter” with a group of banks led by JPMorgan Chase Bank, N.A. and Goldman Sachs Lending Partners LLC and including Merrill Lynch, Pierce, Fenner & Smith Incorporated and Credit Suisse “pursuant to which the banks have committed to provide an up to five year $1.0-billion senior secured term loan. Navistar said a portion of the proceeds from this financing will be used to pay down the existing borrowings under Navistar's ABL credit facility.
According to a post by The Detroit News, Navistar will meet with lenders on Aug. 6 in New York to discuss the $1-billion loan. The same news report stated, per an anonymous source, that “The five-year debt, which won't have financial-maintenance requirements, will pay interest at 6.5 percentage points to 7 percentage points more than the London interbank [LIBOR] offered rate”
The company also provided an outlook for fiscal third quarter 2012 and withdrew its full-year fiscal 2012 guidance until it releases its third-quarter results in September, at which time it said it will provide an updated full-year outlook.
Navistar stated that the changes “reflect the company's transition to the ICT+ engine solution, its ongoing work with EPA regarding this solution, and uncertainty regarding overall global demand for trucks and engines, particularly in key markets such as India and Brazil.”
Navistar projects that its overall market share for the fiscal third quarter is to remain flat: Class 8 at 17-18%; Class 6-7 at 35-36%; and school bus at 48-49%.
The company said its third- quarter revenues are expected to be $2.8 billion to $3 billion. In addition, Navistar expects fiscal third quarter adjusted manufacturing segment profit to be between $15 and $40 million, excluding the impact of the company's engineering integration and non-conformance penalties. Including the impact of these charges the manufacturing segment profit is estimated to be between a $15 million loss to $15 million of profit.
Navistar expects an adjusted pretax loss of between $115 million and $80 million. Including the impact of the engineering integration and non-conformance penalties Navistar expects a pretax loss of between $145 and $105 million.
"We expect to sustain our current market share through the balance of the year, and with the addition of ICT+ and an expanded model lineup, improve our market share in 2013," Ustian said.
"We expect to return to profitability in the fourth quarter and believe the company will be in a position to improve margins in 2013 as we realize the benefits of our integration and ongoing cost reduction initiatives,” he continued. “We look forward to providing further details of our plan to drive shareholder value on our third-quarter results conference call in September."
Lastly today, Navistar disclosed that it has received a formal letter of inquiry from the U.S. Securities and Exchange Commission requesting additional information related to certain accounting and disclosure matters. Navistar said it is “cooperating fully with this request.”