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Navistar's Turnaround Chances Look Worse, Says S&P


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Forbes / 6/14/2013

Standard & Poor’s Ratings Services downgraded Navistar International’s long-term credit rating Friday, saying it had concluded that the risk of an unsuccessful turnaround is “greater than we had anticipated.”

The downgrade comes on the heels of poor earnings results earlier this week for Navistar, which is attempting a turnaround after betting the company on an unproven diesel engine technology (i.e. Massive EGR).

S&P said it lowered Navistar’s rating to ‘B-’ from ‘B’, assigning a negative outlook and changing its business risk profile to “vulnerable” from “weak.”

“This reassessment indicates our view that Navistar may not be able to achieve the market share it needs for a successful business turnaround,” S&P credit analyst Sol Samson wrote.

Navistar’s revenues plunged 23 percent, to $2.5 billion, in the second quarter compared with a year ago. The huge drop was partly explained by a 14% drop in overall industry demand, but the rest was due to lost market share as Navistar scrambled to redesign its engines using a different emissions strategy.

Navistar management still says it can achieve 18% of the Class 8 truck market by year-end, but so far, progress has been slow. Its share in the second quarter was 15%, but May orders were up 38%.

Quality problems also continue to dog the company. In the second quarter, Navistar added $164 million to its warranty reserves to pay for repairs on engines built in 2010 and 2011. Aside from the added repair costs, S&P noted the quality issues could tarnish its reputation and hurt sales going forward.

Navistar chief executive Troy A. Clarke said the company is not satisfied with its results for the quarter, which included a net loss of $374 million, more than double the loss in the second quarter of 2012. But he says Navistar is making turnaround progress on many fronts. “We still face some significant, yet solvable challenges, primarily in the areas of higher pre-existing warranty costs for our earlier EPA 2010 emissions level engines, as well as in rebuilding sales and restoring market share. However, we are already implementing the right leadership and business process changes to effectively address these priority issues.”

Navistar is trying to pull off a turnaround during a cyclical industry slump, making the challenge that much harder. S&P says it’s possible the U.S. commercial truck market will rebound in the second half of 2012, but said Navistar can’t count on a pickup in military truck sales any time soon, depriving the company of a lucrative source of profits.

Even if Navistar does recover, its $6 billion in debt, including retiree obligations, will continue to weigh it down. The company has about $1 billion in cash. “Navistar’s cash liquidity will not last indefinitely, although it is sufficient for several quarters,” said Samson.

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If the company is incorporated in the United States, it is indeed a U.S. company by every accepted definition.

I completely agree that if Navistar and Ford did want to cooperate, the necessary elements are there for mutual benefit. But I can also imagine plugging Cummins into the equation as well.

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But, if things at Navistar are as bad as you have reported, would Ford want to be dragged down by Navistar? In the past after Chrysler and GM dropped out of the heavy truck business Ford eventually

followed suit. While Chrysler and GM have dropped their medium duty trucks, so far, Ford has stayed in the business. During the economic downturn Ford sold off all its other car businesses

(Volvo, Jaguar, etc) to focus (no pun intended) on its core brands. After the falling out over the Blue Diamond endeavor I wonder if Ford would want to get involved again or do they want to keep

their current business plan (hopefully to include medium duty trucks)?

bulldogboy

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But, if things at Navistar are as bad as you have reported, would Ford want to be dragged down by Navistar? In the past after Chrysler and GM dropped out of the heavy truck business Ford eventually

followed suit. While Chrysler and GM have dropped their medium duty trucks, so far, Ford has stayed in the business. During the economic downturn Ford sold off all its other car businesses

(Volvo, Jaguar, etc) to focus (no pun intended) on its core brands. After the falling out over the Blue Diamond endeavor I wonder if Ford would want to get involved again or do they want to keep

their current business plan (hopefully to include medium duty trucks)?

bulldogboy

In my mind, it's a bargain opportunity for Ford Motor Company, IF they actually want to get back into the heavy truck business and also have a significant presence once again in the medium-duty segment.

Under the Lebaniese-born Australian Jacque Nassar, Ford's global car brand acquisitions of Aston-Martin, Jaguar, Land-Rover and Volvo (car) resulting on the Premier Automotive Group was a brilliant move for Ford to extend it's global presence, complimenting Ford Europe. But ex-Boeing executive Alan Mulally foolishly sold it all off. I was indifferent to Ford owning Jaguar, but Aston-Martin, Land-Rover and Volvo (car) did well under Ford. US car models benefited from Volvo's expertise, and Land Rover under Ford became a quality product with cutting edge design.

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