How Navistar Turned Into Road Kill For Activist Shareholders



Navistar International Corp.’s CEO Daniel C. Ustian is battling the threat of investors wresting away the truck and engine maker, and news hit this Thursday that his team got fined by the Environmental Protection Agency. Investors have had warnings for years that Navistar’s shares come with high corporate governance risk.The EPA is fining Navistar for shortcomings in pollution-control technology the agency helped it develop, Bloomberg reported on Thursday. This follows Navistar’s announcement Wednesday that it has adopted a stockholder rights plan intended to deter investors who try to take over the company by accumulating shares.  Mark Rachesky said last week that his investment fund had acquired nearly 14% of Navistar’s stock and activist investor Carl Icahn raised his fund’s stake in Navistar this month to about 12%, the Wall Street Journal reported. Navistar’s new plan kicks in once an investor buys at least a 15% stake.

Investors are eyeing Navistar after the company’s stock shed more than 30% of its value in the year to date. Its shares traded at $26.30 per share intra-day on Thursday, down more than 7.5% compared to Wednesday’s close. Ustian and his team have struggled against headwinds in recent years ranging from the economic crisis to production failures.

Still, Ustian’s total compensation has risen each year since he took  on the role of chairman and CEO in 2004. In 2011 he earned $15.2 million, compared to $3.9 million in 2008.

The board chairman overseeing his own performance, Ustian has navigated his company through some disagreements with regulators in recent years. In late January 2005, Navistar disclosed its need to restate its financial filings for the fiscal years 2002 and 2003 and the first three quarters of fiscal 2004, which it did the following month. Then in March 2005, Navistar announced that the Securities and Exchange Commission’s earlier inquiry had become a formal investigation into the company’s restatement. In April 2006, Navistar said it would restate its financial results for the fiscal years 2002 through 2004 and for the first nine months of fiscal year 2005.

On December 15, 2006, Navistar said that the New York Stock Exchange was going to suspend trading in its shares because of SEC filing delays involving results for 2005 and some quarters of 2006. Navistar appealed, but the NYSE finally went ahead with its earlier plan in February 2007. In October 2007 Navistar restated its earnings for fiscal 2003 and 2004. Then after finally becoming totally current on its financial filings, Navistar got to trade its shares on the NYSE again on June 30, 2008.

The need to rejigger financial documents continued. In December 2008, Navistar announced that it would restate its results for the nine months ended July 31, 2008. Then in 2011 the company sued its former auditor Deloitte & Touche for malpractice in its services before 2006.

In part due to such red flags, GMI gives Navistar an F on its corporate governance. The company’s financial statements currently reflect an AGR score of 34, indicating higher accounting and governance risk than 66% of companies. While that’s an improvement from the AGR of 8 that Navistar had in September 2009, it’s not yet perfect.

CEO Ustian is clearly a fighter. But when that also means running into cross hairs with the regulators, it’s time for Icahn and his friends to jump into the fray.


Region: North America
Sector: Industrials
Industry: Construction / Agricultural Machinery
Market Cap: $ 1,944.5mm (Mid Cap)

ESG Rating:   F
AGR:   Aggressive (34)

Read more posts on GMI Ratings »

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