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Navistar International Corp (NYSE:NAV) said on Friday that it will introduce next-generation engines with emission treatment system to meet the  emission standards set by Environmental Protection Agency. The Lisle-based truck and engine maker made the announcement after a ruling last month by the U.S. Court of Appeals. The regulations could have forced Navistar International Corp to shut down the engine business for noncompliance with emission standards which require companies to manufacture engines that emit 95 percent less nitrogen oxide by 2010.

“It is not about going back, it’s not about backing up, it’s about going forward,” said Troy Clarke, Navistar’s president of Truck and Engine. The new engines will hit the market in early 2013, and are likely to meet the 2014 and 2017 greenhouse gas regulations. The company said it will be using urea to substantially lower the release of nitrogen oxide from heavy duty engines.

The shares of Navistar plunged 15.2 percent to $24.78 per share as investors raised concerns over the possible cost of this initiative. Analysts and investors expected the company to purchase third-party engines that already meet the EPA standards, and focus completely on its trucking business.

Navistar heavy duty engines are used in commercial trucks, military vehicles, school buses and other vehicles over 33,000 pounds. Developing the Exhaust Gas Recirculation, or EGR engine will cost Navistar $700 million and take the company over a decade. It will be fully compliant with the EPA regulations.

After 2010, the company has been paying a fine of $1,919 per engine to the EPA for selling noncompliant engines. “Our distinctive solution will leverage the investment and advancement we’ve made in clean engine technology while providing immediate certainty for our customers, dealers, employees and investors,” Navistar Chairman and CEO Daniel Ustian.

Navistar lost $172 million in second-quarter due to warranty expenses to repair engines in trucks sold after 2010, and falling truck sales.

Last month, Navistar International Corp (NYSE:NAV)’s stock jumped 20 percent after billionaire investor Carl Icahn raised his stake in the company from 9.99 percent to 11.87 percent. Icahn expressed his interest to merge Navistar with Oshkosh Corporation (NYSE:OSK), another company that he has invested in. There have been rumors that Fiat SpA (BIT:F) and Volkswagen AG (ETR:VOW)  are interested in bidding for Navistar, but neither of the European auto giants have made any official statement.