Ustian Departs Navistar; Clarke to Lead Firm’s Shift to SCR Engines

This story appears in the Sept. 3 print edition of Transport Topics.

Daniel Ustian last week stepped down and retired as chairman, CEO and president of Navistar International Corp., as the company he helped to build saw its financial fortunes turn after its 13-liter engine failed to comply with federal emissions standards.

Ustian departed after losing a gamble: that Navistar’s engineers could successfully take a path that all of the company’s North American competitors had spurned to meet stricter U.S. air pollution standards.

Lewis Campbell, 66, who was CEO of Textron Inc. until December 2009, was named executive chairman and interim CEO to replace the 62-year old Ustian.

At the same time, Troy Clarke was promoted to president to lead day-to-day operations during Navistar’s engine transition from exhaust gas recirculation technology to selective catalytic reduction, which is already being used by every other manufacturer.

Ustian’s departure, announced Aug. 27, ended a 37-year career during which Navistar nearly doubled in size to as much as $14.7 billion in annual revenue, win military contracts and diversify through joint ventures in the United States, China and India. He became president in 2002, CEO in 2003 and chairman the following year.

“We thank Dan for his dedicated service,” said Michael Hammes, lead independent director, praising Ustian for significantly expanding Navistar’s global reach and diversifying its product portfolio.

“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,” Hammes added.

Ustian departed shortly before the truck manufacturer is expected to report its fiscal third-quarter earnings. Navistar lost $325 million in the first half of fiscal 2012 ended April 30, after posting a $68 million profit in the year-earlier period.

“He bet his future on EGR, and it didn’t come through,” said Brian Rayle, an analyst at Northcoast Research Holdings.

“The next few months are going to be telling,” Rayle told Transport Topics. “They are already losing money hand-over-fist. They have to get all hands on deck to get this switchover to SCR done.”

Navistar plans to deliver its ProStar model with a 15-liter Cummins ISX engine using SCR in January and its own 13-liter MaxxForce model with SCR in May. Meanwhile, Navistar is currently selling trucks with noncompliant 13-liter and 15-liter engines by using emissions credits it earned in earlier years or by paying penalties.

Rayle said Navistar did not lose significant market share until May, because it was selling trucks while expecting its 13-liter EGR engine to get Environmental Protection Agency approval. When that approval didn’t occur, Navistar in early July said it was switching to SCR and later negotiated a deal with Cummins to supply engines and aftertreatment systems.

Clarke, 57, was promoted two months after he was named president of truck and engine operations, moving over from the top post in the Asia-Pacific region.

Hammes praised Clarke for “significant contributions he has made in challenging assignments since joining the company in early 2010.”

Navistar’s latest accomplishment in the Asia-Pacific region was securing Chinese government approval of a joint venture deal with Anhui Jianghuai Automobile Co. Ltd., a Chinese truck maker also known as JAC. The joint venture agreement was signed initially in September 2010.

However, Navistar also received several pieces of bad news in late August: It didn’t get a defense contract to build armored military vehicles, and the Securities and Exchange Commission said it was investigating its accounting practices again.

Navistar could be hurt further if EPA stiffens penalties for selling noncompliant engines. The existing penalty of $1,919 per engine was challenged in court by Navistar’s competitors, who won the case and forced EPA to develop a new rule.

“If they double the penalties, that will be a hard hole to climb out of,” Rayle said, citing losses of $130 million at the truck unit and $228 million at the engine unit in the first half of fiscal 2012.

That performance eclipsed Ustian’s optimistic forecast in a March conference call that Navistar could earn about $400 million in the 2012 fiscal year ending Oct. 30.

Until 2012, Navistar recorded four consecutive profitable years, reversing losses earlier in Ustian’s tenure, as truck and other sales rose.

The earlier losses followed an SEC investigation that made Navistar restate its 2003 and 2004 earnings from a profit to a loss. The agency forced Ustian and others to give back part of their bonuses for those years.

Rayle said he believed Navistar’s SCR engine will be approved by EPA, but Navistar is being hurt by the uncertainty surrounding residual values of its EGR engines.

Campbell left Textron, which makes Cessna airplanes, Bell helicopters and other products, at the end of 2009. He received 500,000 Navistar stock options that can be exercised after one year, if Navistar’s shares exceed the Aug. 24 closing price of $22.98 per share.

That price was 50% lower than the share price a year earlier and about 40% below the level when Ustian became CEO. The shares peaked last year at $65.87 after the string of profitable years that began in 2008.

Navistar’s CEO search timetable is unclear.

“At the appropriate time, we will conduct a search for a long-term CEO, which will include internal and external candidates,” Campbell said in Navi-star’s statement.

Both Campbell and Clarke are former General Motors executives, with 24 years and 35 years at the automaker, respectively.