Navistar believes it will avoid ‘nonconformance’ engine penalties

While Navistar faces stiff fines  from the Environmental Protection Agency (EPA)  for building engines that do not meet the agency’s 2010 emissions standards,  the truck and engine maker told analysts during a meeting at its new  headquarters in Lisle, IL, yesterday it probably won’t have to pay them –  largely because it just submitted its 13L engine to the EPA for emissions  certification.

Jack Allen, president of Navistar’s North American truck group, told  analysts the company just submitted the production version of its 13L “Big  Bore” engine to the EPA on Tuesday for certification to the 0.2 grams per brake  horsepower hour governing oxides of nitrogen emissions (NOx) and that though  the certification process “will take time,” Navistar’s use of in-cylinder  exhaust gas recirculation (EGR) will still give it “a clear path to build and  certify engines” for all 50 U.S. states.

“My impression from the meeting is that they don’t intend to pay any  fines, since they submitted their 13L engine” for certification, Walter Liptak,  an analyst with Barrington Research Associates in Chicago, who attended Navistar’s event, told Fleet Owner.

“They sell a lot of that engine and if they get it certified, they will  use their remaining credits for their 11L and 15L product until they run out,”  Liptak added. He noted that Navistar executives said they expect to submit both  the 11L and 15L products to the EPA for certification “in early spring.”

A Navistar spokeswoman told Fleet  Owner that while the company is hopeful certification of the company’s 13L  product “will be expeditious,” no one can know for sure how long the process  will take. If the engine is not certified, she said Navistar expects “to use the  other options EPA has provided.”

That includes paying fines; what the agency calls “nonconformance  penalties” or NCPs. According to the EPA’s calculations,  those fines may range from $462 to $682 per medium-duty diesel engine and  anywhere from $1,561 to $1,919 for heavy-duty models if they do not meet 2010  emissions standards.

Those potential NCPs relate to model year 2012 and later diesel engines  stemming from what the EPA calls a “technical support document” published in  January this year to buttress the agency’s 2010 emissions standards.

Navistar’s spokeswoman also stressed that “no certification timetable”  for Navistar’s 11L and 15L engines has been announced yet, but that both models  “are in the product development team’s queue” for that event.

Barrington’s Liptak believes that “if Navistar can get this EPA issue  behind them,” it would be well on its way to making its market position more  “stable” and to grow market share down the road.

Navistar noted that its adjusted net income attributable for its fiscal  year ending Oct. 31, 2012, is expected to be between $350 million and $400  million, or $5 to $5.75 adjusted diluted earnings per share, which is lower  than analyst expectations of $5.90 per share. The company also said it plans to  absorb approximately $90 million in higher post retirement health care costs  and expects its effective tax rate to be 25% to 30% with cash taxes expected to  be below 10%.

Navistar is also bullish on overall North American commercial truck  demand, predicting an increase of 5 to 18% by the end of October this year, to between  275,000 and 310,000 units.

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