Navistar International Corp. (NAV:US), the third-biggest U.S. and Canadian maker of truck engines, fell 5.5 percent after a U.S. appeals court ruled it can no longer pay fines to sell engines that don’t comply with 2010 environmental standards.
The U.S. Court of Appeals in Washington threw out an interim rule by the Environmental Protection Agency designed to let Navistar sell the noncompliant engines if it paid a fine. The court found the agency violated the Administrative Procedures Act by issuing the interim final rule, or IFR, without opportunity for comment or formal notice.
The “context of this case reveals that the only purpose of the IFR is, as petitioners put it, to rescue a lone manufacturer from the folly of its own choices,” the court said.
Mack Trucks Inc. and Volvo Group North America LLC brought the lawsuit.
The court said it recognized that its decision to throw out the interim measure “will be of limited practical impact” as the EPA is drafting a final rule. The deadline for public comments on it was April 12.
The “EPA is certainly free to make whatever finding it deems appropriate in the pending final rulemaking” the court said. “For now therefore, we simply hold that the EPA lacked good cause for not providing a formal notice and comment rulemaking.”
Navistar fell $1.59 to $27.15 at 4:15 p.m. in New York Stock Exchange composite trading, after earlier declining as much as 12 percent. The shares have slid 28 percent this year after falling 35 percent last year.
Navistar’s $900 million of 8.25 percent notes due November 2021 dropped 4 cents to 94 cents on the dollar at 4:40 p.m. in New York, according to Trace, the bond-price reporting system of the Financial Industry Regulatory Authority. The bonds earlier fell as low as 89.9 cents, the lowest price since the company sold them in 2009.
“We are affected and disagree with the court’s ruling,” Karen Denning, a spokeswoman for Lisle, Illinois-based Navistar, said in an e-mail. “We will ask for a rehearing.”
The company is working with the EPA on its certification and on the final rule, she said.
In 2001, the EPA enacted a rule requiring a 95 percent reduction in emissions of nitrogen oxide from heavy-duty diesel engines, delaying its effective date until 2010 to allow the industry to create the necessary technologies, according to the three-judge panel’s decision written by Judge Janice Rogers Brown.
Navistar adopted a different technology from its competitors and was able to keep selling its engines by using so-called banked emission credits, according to the decision. In October, Navistar told the EPA it would run out of credits in 2012, and on Jan. 31 the EPA issued the rule allowing the company instead to pay fines known as non-conformance penalties. The company has declined to disclose how many emission credits it has left.
“Without ability to pay fines, Navistar presumably exhausts remaining credits at a faster pace,” David Leiker, an analyst with Robert W. Baird & Co., said today in a research note.
In January, when the EPA issued the interim final rule for Navistar, it proposed a similar set of standards for the final rule that would continue allowing noncompliant engines to be sold as long as fines were paid.
Volvo, Mack and Cummins Inc. (CMI:US) have objected that the proposed rule gives Navistar an unfair advantage. The EPA hasn’t said when it will issue the final regulations, or if it will modify its proposal.
Cathy Milbourn, a spokeswoman for the agency, declined to comment today on the court’s decision.
Last week, Navistar lowered its annual profit forecast to a range of break-even to $2 a share as it struggles to develop a 13-liter engine that meets EPA certification. The EPA is monitoring truck manufacturers’ efforts to meet clean-air regulations on nitrogen oxides, or NOx, a common smog-forming byproduct of internal combustion engines.
“It goes without saying that the start of the year has been a disappointment for us,” Dan Ustian, Navistar’s chief executive officer, said on a June 7 conference call with analysts and investors.
Navistar said its share of the heavy truck market in the U.S. and Canada has dropped to 16 percent this year from 24 percent in the year ended Oct. 31, 2010. “Aura” and “speculation” in the market and by investors has hurt sales, Ustian said.
A lack of certification cost the company $10 million in penalties in the quarter and may cost as much as $40 million if the engine isn’t certified this year, Ustian said June 7.
The case is Mack Trucks Inc. v. Environmental Protection Agency, 12-1077, U.S. Court of Appeals, District of Columbia Circuit (Washington).
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