Accounting issues
In January 2006, the company declared it would not file its form 10-K annual report with the U.S. Securities and Exchange Commission on time. The delay was caused by the disagreement with its auditors, Deloitte & Touche, over complex accounting issues. In April, Navistar fired Deloitte, its independent auditor for 98 years, and hired KPMG to help restate earnings back to 2002 to fix accounting errors. On December 15, 2006, Navistar executives announced a further delay in its restatement and 2006 results. The announcement prompted the New York Stock Exchange (NYSE) to announce the delisting of the company, after 98 years of trading, although the NYSE subsequently delayed the delisting pending an appeal by Navistar. However, Navistar was removed from the S&P 500 Index, and the NYSE eventually denied Navistar's appeal and delisted the stock; it traded on the Pink Sheets until 30 June 2008, when it was relisted on the NYSE, under its previous ticker symbol, NAV, after catching up with its filings. [87] Christopher Anderson, the Deloitte partner responsible for the 2003 audit, accepted a one-year suspension from public audits in 2008, and became the first individual to be fined by the Public Company Accounting Oversight Board. [88]
CEO Daniel Ustian agreed to surrender to Navistar shares worth $1.3 million, while former Chief Financial Officer Robert C. Lannert consented to repay $1.05 million, each sum reflecting monetary bonuses they had received during the restatement period, the SEC said. Four other company executives paid civil penalties without admitting liability.
In December 2014, Navistar disclosed more accounting problems. These involved out-of-period adjustments, which were corrections of prior period errors relating to product warranties. This resulted in a $36 million increase in Cost of Products Sold. In addition, a material weakness was disclosed. In the company's annual 10K, they reported that weakness was "surrounding validation of the completeness and accuracy of underlying data used in the determination of significant accounting estimates and accounting transactions. Specifically, controls were not designed to identify errors in the underlying data which was used to calculate warranty cost estimates and other significant accounting estimates and the accounting effects of significant transactions. [89]
Failed engine strategy
In 2001, then CEO Dan Ustian faced numerous United States Environmental Protection Agency (EPA) regulations to reduce the amount of nitrogen oxides and soot emanating from diesel engines. Despite the change in the compliance arena, the regulations would not begin to be phased in until 2007, with full implementation slated for 2010. [90]
Ustian had multiple engineering paths available. Among them were Selective Catalytic Reduction (SCR), Exhaust Gas Recirculation (EGR), or the use of nitrogen oxide absorbers. All required more engineering and development to achieve compliance. Ustian believed truckers did not want to bother with an extra tank of fluid after treatment. As a result, he convinced the company to spend $700 million to fund EGR development. [90]
On October 31, 2007, Navistar formally announced their intent to move forward with EGR as the company's strategy. The company statement included Ustian mentioning "I have publicly been an advocate of customer friendly emissions control solutions which do not add additional costs to our truck and bus customers. While SCR is a means to achieve the NOx reduction requirement for 2010, it comes with a steep cost to our customers. Our ability to achieve our goals without adding customer cost and inconvenience is a competitive advantage for International." [91]
On November 24, 2008, Navistar revealed it would use EPA Credits in order to comply with the 2010 legislation. [91]
In February 2009, Ustian touted the benefits of EGR technology as a key differentiator for the company's engines. However, by now, the rest of the industry had chosen to use compliant SCR technology. Ustian disagreed with SCR, saying "the other thing that EGR avoids is the risks of an SCR strategy. Read the label on this and it will show you that there are challenges with keeping control of using this technology: 'Store between 23 degrees and 68 degrees.' So essentially it says you can't throw it outside. You can't operate it in conditions above 85 [degrees] or below 12 [degrees]. You can, but, it will put the burden onto the customers." [92]
The EPA recognized Navistar's imminent non-compliance and created a system of Non-Conformance Penalties (NCPs) that included a $1,919 fine for every non-compliant engine that Navistar sold. To bridge the gap, Navistar began using EPA credits it had previously earned for being compliant in lieu of paying fines. In August 2012, Navistar stated they would run out of EPA credits soon. Only days earlier the EPA announced increased new penalties of $3,744 per engine. [93]
In March 2009, Navistar sued the EPA, claiming that the agency's guidance documents for SCR implementation were invalid because they were adopted without a public process and with input only from the SCR engine makers. Navistar and the EPA settled the lawsuit a year later. [94]
Further masking the EGR problem were high military sales. In the company's 2010 10K report, Navistar cited orders for MRAPs as offsetting flat commercial sales due to the recession. [95]
In January 2012, the EPA adopted an interim final rule that allowed Navistar to continue selling the engines subject to NCPs. Several Navistar competitors sued, and in June 2012 the same appeals court ruled that EPA's interim rule was invalid because it did not give the public notice and an opportunity for comment. [94]
In the meantime, Navistar's EGR decision had led to significant reliability issues and quality problems (which were ultimately traceable to the fundamental physical reality that recirculation of exhaust gas introduces intrinsically abrasive soot and inherently corrosive acid gases back into the engine). Truck drivers began losing trust and confidence as Navistar vehicles were breaking down frequently. Consequently, they abandoned Navistar trucks in favor of competitor's trucks. [96]
Legal issues (MaxxForce engines)
In December 2014, the United States Judicial Panel on Multidistrict Litigation ordered that 13 of 14 civil lawsuits brought against Navistar for MaxxForce engines would be consolidated into one case. The consolidated lawsuits say Navistar's use of Advanced Exhaust Gas Recirculation emission control system, or EGR, was defective and resulted in repeated engine failures and frequent repairs and downtime. [97]
On December 16, 2014, Navistar reported a larger than expected fourth quarter net loss of $72 million. While sales rose 9 percent to $3 billion, the company cited restructuring and warranty costs as the main reasons for the loss. A day earlier, the company announced it would be closing its engine foundry in Indianapolis, resulting in the loss of 100 jobs and costing $11 million. The company estimated annual savings of $13 million in operating costs. [98]
In March 2015, Navistar reported a first-quarter 2015 net loss of $42 million, or $0.52 per diluted share, compared to a first-quarter 2014 net loss of $248 million, or $3.05 per diluted share. Revenues in the quarter were $2.4 billion, up to $213 million or 10 percent, versus the first quarter of 2014. The higher revenues in the quarter were driven by a 17 percent year-over-year increase in charge outs for Class 6-8 trucks and buses in the United States and Canada. This included a 42 percent increase in school buses; a 25 percent increase in Class 6/7 medium trucks; a 7 percent increase in Class 8 heavy trucks; and a 5 percent increase in Class 8 severe service trucks. Higher sales in the company's export truck operations also contributed to the increase, partially offset by a decrease in used truck sales. The company finished the first quarter with a 27 percent year-over-year increase in order backlog for Class 6-8 trucks. [99]
On June 4, 2015, Navistar reported a second-quarter net loss of $64 million, or 78 cents a share, compared with a year-earlier loss of $297 million, or $3.65 a share. Revenue fell to $2.69 billion from $2.75 billion. Analysts had expected a loss of 18 cents a share and revenue of $2.82 billion. [96]
On June 9, 2015, Navistar named Jeff Sass as the new Senior VP of North American Truck Sales. Sass previously worked 20 years for rival Paccar. [100]
On June 12, 2015, Mark Rachesky's MHR Fund Management LLC disclosed a 6% increased stake in Navistar, up to 15,446,562 shares. The firm now owns 18.9% of Navistar. [101]
In July 2015, the EPA filed a civil lawsuit against Navistar seeking $300 million in fines over its use of non-compliant engines in its 2010-model trucks – engines that did not meet the agency's exhaust emission standards. [102] "Because (Navistar) completed manufacturing and assembling processes for the subject engines in 2010 … each and every engine was 'produced' in 2010 and is therefore not a model 2009 engine," the complaint said. Navistar classified the engines as 2009 model year engines because it began assembling them in 2009. Navistar has stated they dispute the allegations and would "aggressively defend" their position. [97]
On July 20, 2015, Navistar announced that it was refinancing the $697.5 million senior secured term loan facility of Navistar, Inc., which matures in August 2017, with a new $1.040 billion senior secured term loan, which will mature in August 2020. The refinancing will extend the maturity of the term loan facility and provide additional liquidity and financial flexibility for the company. [103]
In March 2016, the Securities and Exchange Commission charged Navistar with misleading investors about its development of the advanced technology truck engine. [104]
In August 2017, a Tennessee jury found that Navistar committed fraud and violated the Tennessee Consumer Practice Act in connection with the sale of 243 Navistar International ProStars with MaxxForce engines to Milan Supply Chain Solutions. It awarded $10.8 million in actual damages and $20 million in punitive damages. The trial included testimony from Jim Hebe, who previously was the senior vice president, North America Sales Operations. Hebe retired in October 2012. Hebe's testimony about the engine program mentioned that the company "did not test s**t". In a statement, Navistar said it is disappointed in the jury's verdict and is evaluating its options to challenge it, noting it has successfully defended similar claims in several jurisdictions, including dismissal of claims of fraud in courts in Texas, Wisconsin, Michigan, Indiana, Alabama, and Illinois. [105]