After several quarters of smooth riding, Navistar International Corp. CEO John Horne is hitting potholes this summer. First came the sudden departure in June of the highly regarded president of Navistar's flagship truck group. And in early July, the company's stock price slipped in the wake of a negative earnings surprise for the third quarter ending July 31.
The earnings disclosure brought at least a temporary halt to a steady nine-month rise in Navi-star's stock price, propelled in part by persistent rumors of a buyout by Sweden's Volvo AB.
Navistar told analysts that short-term profits are suffering from higher-than-expected costs associated with job cuts at its Springfield, Ohio, plant.
Meanwhile, the company remains tight-lipped about the reasons for the sudden departure of Don DeFosset, credited in his two years as truck group president with markedly improving relations between the company and its union and dealers.
Sources say DeFosset left in mid-June in part over an apparent power struggle with Horne. It culminated in DeFosset being told recently that he would not succeed Horne as Navistar's chairman and CEO.
Furthermore, the 61-year-old Horne made it known that he does not intend to retire anytime soon, after speculation that he might call it quits within three years, these sources say.
The 50-year-old DeFosset declined to comment. A Navistar spokesman also declined to comment and referred to a June 17 press release that said DeFosset left to 'pursue other opportunities.'
The release also quoted Horne lauding DeFosset's replacement, Steve Keate, as 'the right leader to continue our aggressive momentum and drive it to the next level.'
Horne was out of town and unavailable for comment. But Keate does not appear to be Horne's heir apparent, either. Though he was named truck group president, he did not inherit DeFosset's additional title of executive vice president.
SURPRISE AND REGRET
Privately, union leaders and dealers expressed surprise and regret at DeFosset's departure. But they aren't concerned that relations with the company will suffer. 'We think Steve will probably do an excellent job,' said Bruce Rosenquist, a dealer in Melrose Park, Ill.
On Wall Street, DeFosset's departure was a nonevent, largely because Keate is regarded as more of a finance-oriented executive than DeFosset, analysts say.
But the earnings warning, which the company tried to convey quietly to analysts, got investors' attention. Navistar's stock dipped 11 percent to $43.25 on July 6 and 7 on volume averaging four times the normal trading level. The stock recovered somewhat later in the week, closing at $44.94 on July 8.
At the heart of the problem is an industrywide shortage of transmissions that impelled Navistar to lay off 262 workers at its Springfield plant. Layoffs are determined based on seniority, and a large number of older workers whose positions were eliminated took over the jobs of more junior colleagues, as they are allowed to do under their union contract.
`A HUGE OVERREACTION'
So, short-term productivity suffered, and the costs of retraining those workers jumped, resulting in a decline of up to $8 million in operating income, the company spokesman says.
That is expected to translate into third-quarter earnings per share of $1.10 to $1.15; the consensus estimate on Wall Street was $1.28.
Analysts said that Navistar, which in recent years consistently has reported earnings in line with expectations, was a victim of Wall Street's increasing intolerance for negative earnings surprises.
The company says it expects to make up for the shortfall in the fourth quarter by running more manufacturing lines than it ordinarily does at that time of year.
'This seems to be a huge overreaction,' says Tobias Levkovich, an analyst with Salomon Smith Barney in New York.