UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2002
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from To
Commission file number 1-9618
NAVISTAR INTERNATIONAL CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3359573
---------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4201 Winfield Road, P.O. Box 1488
Warrenville, Illinois 60555
-------------------------------------------------------
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (630) 753-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
----
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 28, 2002, the number of shares outstanding of the registrant's common stock was
60,095,384.
PAGE 2
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
INDEX
---------
Page
Reference
---------
Part I. Financial Information:
Item 1. Financial Statements
Statement of Income
Three Months Ended January 31, 2002 and 2001................................ 3
Statement of Financial Condition
January 31, 2002, October 31, 2001 and January 31, 2001..................... 4
Statement of Cash Flow
Three Months Ended January 31, 2002 and 2001................................ 5
Notes to Financial Statements........................................................ 6
Additional Financial Information..................................................... 16
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition................................. 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................................. 23
Part II. Other Information:
Item 1. Legal Proceedings..................................................... 23
Item 2. Changes in Securities and Use of Proceeds............................. 23
Item 6. Exhibits and Reports on Form 8-K...................................... 24
Signature ........................................................................... 25
PAGE 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
STATEMENT OF INCOME (Unaudited)
Millions of dollars, except per share data
- ---------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-----------------------------------------
Three Months Ended
January 31
-----------------------------------------
2002 2001
------------------ -----------------
Sales and revenues
Sales of manufactured products............................................... $ 1,389 $ 1,433
Finance and insurance revenue................................................ 77 76
Other income................................................................. 6 7
--------------- ---------------
Total sales and revenues............................................. 1,472 1,516
--------------- ---------------
Costs and expenses
Cost of products and services sold........................................... 1,256 1,285
Restructuring adjustment..................................................... (1) -
Postretirement benefits expense.............................................. 58 46
Engineering and research expense............................................. 64 65
Sales, general and administrative expense.................................... 134 121
Interest expense............................................................. 40 41
Other expense................................................................ 11 14
--------------- ---------------
Total costs and expenses............................................. 1,562 1,572
--------------- ---------------
Loss before income taxes...................................... (90) (56)
Income tax benefit............................................ (34) (21)
--------------- ---------------
Net loss..................................................................... $ (56) $ (35)
=============== ===============
- ---------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share
Basic................................................................ $ (0.93) $ (0.58)
Diluted.............................................................. $ (0.93) $ (0.58)
Average shares outstanding (millions)
Basic................................................................ 59.8 59.5
Diluted.............................................................. 59.8 59.5
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 4
STATEMENT OF FINANCIAL CONDITION (Unaudited)
Millions of dollars
- ---------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-------------------------------------------------------
January 31 October 31 January 31
2002 2001 2001
---------------- ----------------- ----------------
ASSETS
Current assets
Cash and cash equivalents............................... $ 432 $ 822 $ 431
Marketable securities................................... 10 41 3
Receivables, net........................................ 704 917 767
Inventories............................................. 651 644 705
Deferred tax asset, net................................. 151 145 209
Other assets............................................ 118 167 170
-------------- -------------- --------------
Total current assets............................................ 2,066 2,736 2,285
-------------- -------------- --------------
Marketable securities........................................... 465 222 404
Finance and other receivables, net.............................. 1,041 1,164 957
Property and equipment, net..................................... 1,670 1,669 1,815
Investments and other assets.................................... 191 169 170
Prepaid and intangible pension assets........................... 273 272 304
Deferred tax asset, net......................................... 866 835 703
-------------- -------------- --------------
Total assets.................................................... $ 6,572 $ 7,067 $ 6,638
============== ============== ==============
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt.. $ 369 $ 412 $ 320
Accounts payable, principally trade..................... 887 1,103 968
Other liabilities....................................... 752 758 760
-------------- -------------- --------------
Total current liabilities....................................... 2,008 2,273 2,048
-------------- -------------- --------------
Debt: Manufacturing operations................................ 907 908 582
Financial services operations........................... 1,387 1,560 1,624
Postretirement benefits liability............................... 811 824 667
Other liabilities............................................... 381 375 437
-------------- -------------- --------------
Total liabilities....................................... 5,494 5,940 5,358
-------------- -------------- --------------
Commitments and contingencies
Shareowners' equity
Series D convertible junior preference stock.................... 4 4 4
Common stock (75.3 million shares issued)....................... 2,139 2,139 2,139
Retained earnings (deficit)..................................... (232) (170) (174)
Accumulated other comprehensive loss............................ (339) (339) (180)
Common stock held in treasury, at cost
(15.3 million, 15.9 million and 15.9 million shares held).... (494) (507) (509)
-------------- -------------- --------------
Total shareowners' equity............................... 1,078 1,127 1,280
-------------- -------------- --------------
Total liabilities and shareowners' equity....................... $ 6,572 $ 7,067 $ 6,638
============== ============== ==============
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 5
STATEMENT OF CASH FLOW (Unaudited)
Millions of dollars
- -------------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------------
Three Months Ended
January 31
------------------------------------------
2002 2001
----------------- -----------------
Cash flow from operations
Net loss.......................................................................... $ (56) $ (35)
Adjustments to reconcile net loss
to cash used in operations:
Depreciation and amortization.............................................. 55 53
Deferred income taxes...................................................... (31) (24)
Postretirement benefits funding less than (in excess of) expense........ (8) 8
Other, net................................................................. (40) (1)
Change in operating assets and liabilities, net of effects of acquisition:
Receivables................................................................ 150 161
Inventories................................................................ (18) (55)
Prepaid and other current assets........................................... (20) (1)
Accounts payable........................................................... (221) (144)
Other liabilities.......................................................... 25 (6)
--------------- ---------------
Cash used in operations....................................................... (164) (44)
--------------- ---------------
Cash flow from investment programs
Purchases of retail notes and lease receivables................................... (187) (276)
Collections/sales of retail notes and lease receivables........................... 398 924
Purchases of marketable securities................................................ (244) (313)
Sales or maturities of marketable securities...................................... 32 86
Proceeds from sale of business.................................................... 62 -
Capital expenditures.............................................................. (70) (64)
Payments for acquisition, net of cash acquired.................................... - (60)
Proceeds from sale-leasebacks..................................................... - 58
Property and equipment leased to others........................................... (10) (37)
Investment in affiliates.......................................................... 1 4
Capitalized interest and other.................................................... (10) (1)
--------------- ---------------
Cash provided by (used in) investment programs................................ (28) 321
--------------- ---------------
Cash flow from financing activities
Issuance of debt.................................................................. 31 118
Principal payments on debt........................................................ (51) (78)
Net decrease in notes and debt outstanding
under bank revolving credit facility and commercial paper programs............ (190) (183)
Other financing activities........................................................ 12 -
--------------- ---------------
Cash used in financing activities............................................. (198) (143)
--------------- ---------------
Cash and cash equivalents
Increase (decrease) during the period......................................... (390) 134
At beginning of the period.................................................... 822 297
--------------- ---------------
Cash and cash equivalents at end of the period.................................... $ 432 $ 431
=============== ===============
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 6
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note A. Summary of Accounting Policies
Navistar International Corporation (NIC) is a holding company whose principal operating subsidiary is
International Truck and Engine Corporation (International). As used hereafter, "company" or "Navistar" refers to
Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal
industry segments: truck, engine (collectively called "manufacturing operations"), and financial services. The
consolidated financial statements include the results of the company's manufacturing operations and its wholly
owned financial services subsidiaries. The effects of transactions between the manufacturing and financial
services operations have been eliminated to arrive at the consolidated totals.
The accompanying unaudited financial statements have been prepared in accordance with accounting
policies described in the 2001 Annual Report on Form 10-K and should be read in conjunction with the disclosures
therein.
In the opinion of management, these interim financial statements reflect all adjustments, consisting of
normal recurring accruals, necessary to present fairly the financial position, results of operations and cash
flow for the periods presented. Interim results are not necessarily indicative of results for the full year.
Certain 2001 amounts have been reclassified to conform with the presentation used in the 2002 financial
statements.
Note B. Supplemental Cash Flow Information
Consolidated interest payments during the first three months of 2002 and 2001 were $41 million and $47
million, respectively. Consolidated tax payments made during the first three months of 2002 were immaterial and
were $3 million for the same period in 2001.
Note C. Income Taxes
The benefit of Net Operating Loss (NOL) carryforwards is recognized as a deferred tax asset in the
Statement of Financial Condition, while the Statement of Income includes income taxes calculated at the statutory
rate. The amount reported does not represent cash payment of income taxes except for certain state income,
foreign income and withholding and federal alternative minimum taxes. In the Statement of Financial Condition,
the deferred tax asset is reduced by the amount of deferred tax expense or increased by a deferred tax benefit
recorded during the year. Until the company has utilized its significant NOL carryforwards, the cash payment of
United States (U.S.) federal income taxes will be minimal.
Note D. Inventories
Inventories are as follows:
January 31 October 31 January 31
Millions of dollars 2002 2001 2001
- ---------------------------------------------------------------------------------------------------------------------
Finished products.............................................. $ 418 $ 405 $ 449
Work in process................................................ 34 33 60
Raw materials and supplies..................................... 199 206 196
------------- ------------- -------------
Total inventories.............................................. $ 651 $ 644 $ 705
============= ============= =============
PAGE 7
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note E. Financial Instruments
Accounting for Derivatives and Hedging Activities
The company uses derivative financial instruments as part of its overall interest rate and foreign
currency risk management strategy as further described under Item 7A of the 2001 Annual Report on Form 10-K.
The company is exposed to interest rate risk relating to changes in market interest rates. As part of
its overall strategy to manage the level of exposure to the risk of interest rates adversely affecting net
interest income or expense, the company uses interest rate swap agreements, interest rate caps, and forward
contracts. The company is also occasionally required by third parties to use derivative instruments to make
financing possible under sold note arrangements. These derivatives are used in asset-backed transactions in
order to absorb some portfolio-related risks.
The company is exposed to foreign currency risk relating to changes in certain foreign currency exchange
rates. As part of its overall strategy to manage the level of exposure to exchange rate risk, the company uses
forward contracts. These derivatives are generally designated and qualify as cash flow hedges.
On the date Navistar enters into a derivative contract, management designates the derivative as either a
hedging or non-hedging instrument. Additionally, management distinguishes between fair value hedging
instruments, cash flow hedging instruments, and other derivative instruments.
The company documents and accounts for derivative and hedging activities in accordance with the
provisions of SFAS 133. In general, SFAS 133 requires that an entity recognize all derivatives as assets or
liabilities in the statement of financial position and measure them at fair value. When certain criteria are
met, it also provides for matching the timing of gain or loss recognition on the derivative hedging instrument
with the recognition of (a) changes in the fair value or cash flows of the hedged asset or liability attributable
to the hedged risk or (b) the earnings effect of the hedged forecasted transaction. Changes in the fair value of
derivatives which are not designated as, or which do not qualify as, hedges for accounting purposes are reported
in earnings in the period in which they occur.
In connection with the $179 million floating rate portion of the $500 million sale of retail note
receivables that closed in November 2001, Navistar Financial Corporation (NFC) entered into two interest rate
swap agreements. The notional amount of each swap was $179 million. As of January 31, 2002, the fair values of
the swaps were offsetting immaterial amounts. The purpose of these swaps was to convert the floating rate
interest of the bonds into fixed rate interest to match the interest basis of the receivable pool sold to the
owner trust, and thereby protecting NFC from interest rate volatility. The net outcome, after applying the effect
of these swaps, results in NFC paying a fixed rate of interest on the projected balance of the pool. To the
extent that actual pool balances differ from the projected balances, NFC has retained interest rate exposure on
this difference. These two derivatives are being accounted for as non-hedging derivative instruments.
As of January 31, 2002, NFC has several outstanding derivative instruments that were entered into prior
to the first quarter of 2002. One interest rate swap is classified as a cash flow hedge derivative instrument
and has a notional amount of $34 million. The fair value of this derivative instrument as of January 31, 2002,
was zero and is recorded in other liabilities in the Statement of Financial Condition. The impact on other
comprehensive income for the quarter then ended was not material. NFC has two interest rate swap agreements with
notional amounts of $7 million and $29 million. The fair values of these swaps at January 31, 2002, were
immaterial. NFC has three interest rate caps that are classified as non-hedging derivative instruments with
notional amounts of $48 million, $500 million and
PAGE 8
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note E. Financial Instruments (continued)
$500 million. The fair values of these caps as of January 31, 2002, are zero, $6 million and ($6) million,
respectively. The fair values of these derivative instruments as of January 31, 2002, are recorded in other
liabilities in the Statement of Financial Condition. The changes in fair value for the quarter were recorded in
finance and insurance revenue and were not material.
The company has other derivatives classified as non-hedging, which are further described in Note 12 of
the 2001 Annual Report on Form 10-K.
As of January 31, 2002, the company held other derivative contracts with notional amounts of $86 million.
Note F. Earnings Per Share
Earnings (loss) per share was computed as follows:
For the Three Months Ended
January 31
-------------------------------------
Millions of dollars, except share and per share data 2002 2001
- ---------------------------------------------------------------------------- ---------------- -----------------
Net loss................................................................... $ (56) $ (35)
=============== ================
Average shares outstanding (millions)
Basic.............................................................. 59.8 59.5
Dilutive effect of options outstanding
and other dilutive securities............................... - -
---------------- ----------------
Diluted............................................................ 59.8 59.5
================ ================
Earnings (loss) per share
Basic.............................................................. $ (0.93) $ (0.58)
Diluted............................................................ $ (0.93) $ (0.58)
The computation of diluted shares outstanding for the three months ended January 31, 2002 and 2001,
excludes incremental shares of 1.0 million and 0.5 million, respectively, related to employee stock options and
other dilutive securities. These shares are excluded due to their anti-dilutive effect as a result of the
company's loss for the first quarter of 2002 and 2001.
Note G. Comprehensive Income
The components of comprehensive loss are as follows:
For the Three Months Ended
January 31
-------------------------------------
Millions of dollars 2002 2001
- ---------------------------------------------------------------- ---------------- -----------------
Net loss....................................................... $ (56) $ (35)
Other comprehensive loss....................................... - (3)
------------- -------------
Total comprehensive loss............................... $ (56) $ (38)
============= =============
Included in other comprehensive loss are charges for derivatives that had been used as cash flow type
hedges in accordance with SFAS 133, as further described in Note E. For the three months ended January 31, 2002,
this charge was immaterial, and was $2 million for the comparable period in 2001.
PAGE 9
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note H. Segment Data
Reportable operating segment data is as follows:
Financial
Millions of dollars Truck Engine Services Total
- ------------------------------------------------- ---------------- ------------------ ---------------- -----------------
For the quarter ended January 31, 2002
----------------------------------------------------------------------
External revenues............................... $ 947 $ 442 $ 80 $ 1,469
Intersegment revenues........................... - 96 9 105
--------- --------- --------- ---------
Total revenues............................. $ 947 $ 538 $ 89 $ 1,574
========= ========= ========= =========
Segment profit (loss)........................... $ (113) $ 42 $ 31 $ (40)
As of January 31, 2002
----------------------------------------------------------------------
Segment assets.................................. $ 1,771 $ 1,025 $ 2,368 $ 5,164
For the quarter ended January 31, 2001
----------------------------------------------------------------------
External revenues............................... $ 1,022 $ 411 $ 78 $ 1,511
Intersegment revenues........................... - 119 17 136
--------- --------- -------- --------
Total revenues............................. $ 1,022 $ 530 $ 95 $ 1,647
========= ========= ======== ========
Segment profit (loss)........................... $ (91) $ 42 $ 24 $ (25)
As of January 31, 2001
----------------------------------------------------------------------
Segment assets.................................. $ 1,968 $ 1,239 $ 2,399 $ 5,606
Reconciliation to the consolidated financial statements as of and for the quarters ended January 31 is
as follows:
Millions of dollars 2002 2001
- ------------------------------------------------------------------------ ----------------------- -----------------------
Segment sales and revenues.......................................... $ 1,574 $ 1,647
Other income........................................................ 3 5
Intercompany........................................................ (105) (136)
------------ ------------
Consolidated sales and revenues..................................... $ 1,472 $ 1,516
============ ============
Segment loss........................................................ $ (40) $ (25)
Restructuring adjustment............................................ 1 -
Corporate items..................................................... (38) (35)
Manufacturing net interest income (expense)......................... (13) 4
------------ ------------
Consolidated pretax loss............................................ $ (90) $ (56)
============ ============
Segment assets...................................................... $ 5,164 $ 5,606
Cash and marketable securities...................................... 284 236
Deferred taxes...................................................... 1,017 912
Corporate intangible pension assets................................. 72 66
Other corporate and eliminations.................................... 35 (182)
------------ ------------
Consolidated assets................................................. $ 6,572 $ 6,638
============ ============
PAGE 10
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note I. Restructuring Charge
In October 2000, the company incurred charges for restructuring, asset write-downs, loss on anticipated
sale of business and other exit costs totaling $306 million as part of an overall plan to restructure its
manufacturing and corporate operations ("Plan of Restructuring"). The following are the major restructuring,
integration and cost reduction initiatives included in the Plan of Restructuring:
o Replacement of current steel cab trucks with a new line of high performance next generation vehicles
(NGV) and a concurrent realignment of the company's truck manufacturing facilities
o Closure of certain operations and exit of certain activities
o Launch of the next generation technology diesel engines
o Consolidation of corporate operations
o Realignment of the bus and truck dealership network and termination of various dealership contracts
Of the total pretax restructuring charge of $306 million, $150 million represented non-cash charges.
Through January 31, 2002, approximately $208 million of the charge has been incurred, and $12 million of
curtailment loss related to the company's postretirement benefit has been reclassified as a noncurrent
postretirement liability. The remaining restructuring liability of $86 million is expected to be funded from
existing cash balances and internally generated cash flows from operations.
The specific actions included in the Plan of Restructuring were substantially complete by November
2001. Components of the remaining restructuring charge are as follows:
Balance Amount Balance
(Millions of dollars) October 31, 2001 Incurred January 31, 2002
- ----------------------------------------- ---------------------- --------------- -----------------------
Severance and other benefits $ 32 $ (3) $ 29
Lease terminations 35 - 35
Loss on sale of business 2 - 2
Dealer termination and exit costs 21 (1) 20
---------------------- --------------- -----------------------
Total $ 90 $ (4) $ 86
====================== =============== =======================
The Plan of Restructuring included the reduction of approximately 2,100 employees from the workforce,
primarily in North America, which was revised to 1,900 employees at October 31, 2001. During the quarter,
approximately $3 million was paid for severance and other benefits, and employee headcount was reduced by
approximately 400. As of January 31, 2002, of the total net charge of $75 million, approximately $34 million has
been paid for severance and other benefits for the reduction of approximately 1,900 employees, and $12 million of
curtailment loss has been reclassified as a noncurrent postretirement liability. The severance and other
benefits balance represents costs related to future payments over the next two years for headcount reductions
already incurred.
Lease termination costs include the future obligations under long-term non-cancelable lease agreements
at facilities being vacated following workforce reductions. This charge primarily consists of the estimated
lease costs, net of probable sublease income, associated with the cancellation of the company's corporate office
lease at NBC Tower in Chicago, Illinois, which expires in 2010. As of January 31, 2002, of the total net charge
of $38 million, $3 million has been incurred for lease termination costs.
PAGE 11
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note I. Restructuring Charge (continued)
The Plan of Restructuring included the effect of the sale of Harco National Insurance Company (Harco).
On November 30, 2001, NFC completed the sale of Harco to IAT Reinsurance Syndicate Ltd., a Bermuda reinsurance
company. The remaining payments related to exit costs of approximately $2 million are expected to be incurred in
fiscal year 2002.
Dealer termination and exit costs include the termination of certain dealer contracts in connection with
the realignment of the company's bus distribution network, and other litigation costs to implement the
restructuring initiatives. As of January 31, 2002, of the total net charge of $38 million, approximately $18
million has been paid for dealer terminations and exit costs, of which $1 million was incurred during the quarter.
Note J. Sale of Receivables
NFC's primary business is to provide wholesale, retail and lease financing for new and used trucks sold
by International and International's dealers, and as a result, NFC's receivables and leases have significant
concentration in the trucking industry. NFC retains as collateral a security interest in the equipment
associated with wholesale notes, retail notes and leases.
NFC securitizes and sells certain retail and wholesale receivables through Navistar Financial Retail
Receivables Corporation (NFRRC), Navistar Financial Securities Corporation (NFSC), Truck Retail Accounts
Corporation (TRAC) and Truck Engine Receivables Financing Corporation (TERFCO), all special purpose entities and
wholly-owned subsidiaries of NFC. The sale of receivables in each of the securitizations constitute sales under
generally accepted accounting principles, with the result that the sold receivables are removed from NFC's
balance sheet and the investor's interests in the related trust or conduit are not reflected as liabilities.
However, the special purpose entity's residual interest in the related trusts or assets held by the conduit are
reflected in the Statement of Financial Condition as assets. NFRRC, NFSC, TRAC and TERFCO have limited recourse
on the sold receivables. The terms of receivable sales generally require NFC to maintain cash reserves with the
trusts and conduits as credit enhancement. These cash reserves are restricted under the terms of the securitized
sales agreements. The maximum exposure under all receivable sale recourse provisions at January 31, 2002, was
$408 million. Management believes the recorded reserves for losses are adequate.
At January 31, 2002, NFC has a $500 million revolving retail warehouse facility due in October 2005. In
October 2000, Truck Retail Instalment Paper Corporation, a special purpose entity and wholly-owned subsidiary of
NFC, issued $475 million of senior class AAA rated and $25 million of subordinated class A rated floating rate
asset-backed notes. The proceeds were used to purchase eligible receivables from NFC and establish a revolving
retail warehouse facility for NFC's retail notes and retail leases, other than fair market value leases.
NFC continues to service the receivables, for which a servicing fee is received. Servicing fees are
earned on a level yield basis over the terms of the related sold receivables. Servicing fees are typically set
at 1.0% of average outstanding net receivable balances, representing NFC's estimated costs to service the
receivables.
Gains or losses on sales of receivables are estimated based upon the present value of future expected
cash flows using assumptions for prepayment speeds and current market interest rates. These assumptions use
management's best estimates commensurate with the risks involved. An allowance for credit losses is provided
prior to the receivable sale and is reclassified as part of retained interest upon sale.
PAGE 12
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note J. Sale of Receivables (continued)
Finance receivable balances do not include receivables sold by NFC to public and private investors with
limited recourse provisions. Outstanding sold receivable balances are as follows, in millions:
January 31 October 31 January 31
2002 2001 2001
----------------- -------------- ----------------
Retail notes.............................. $ 2,042 $ 1,863 $ 2,401
Wholesale notes........................... 713 797 792
Retail accounts........................... 200 191 185
------- ------- -------
Total................................ $ 2,955 $ 2,851 $ 3,378
======= ======= =======
Additional financial data for gross serviced finance receivables as of January 31, 2002, is as follows,
in millions:
Retail Wholesale
Notes Leases Notes Accounts
------------ ------------ -------------- --------------
Gross serviced finance receivables.......... $ 2,612 $ 522 $ 750 $ 333
Gross serviced finance receivables with
installments past due.................. 37 12 7 17
Credit losses net of recoveries............. 4 - - -
During the three months ended January 31, 2002, NFC sold $500 million of retail notes, net of unearned
finance income, through NFRRC. NFC sold the retail notes to an owner trust, which, in turn, issued $500 million
of asset-backed securities that were sold to investors. Aggregate gains of $17 million were recognized on these
sales.
At January 31, 2002, NFSC has in place a revolving wholesale note trust that provides for the funding of
$837 million of eligible wholesale notes. TERFCO has in place a revolving trust that provides for the funding of
$100 million of eligible Ford Motor Company accounts receivable. TRAC has in place a revolving retail account
conduit that provides for the funding of $100 million of eligible retail accounts.
When receivables are sold, NFC retains interest in the securitized receivables in the form of
interest-only strips, servicing rights, cash reserve accounts and subordinated certificates. The carrying amount
of these retained interests approximate fair value and were $392 million, $324 million and $357 million at
January 31, 2002, October 31, 2001 and January 31, 2001, respectively. These amounts are included in finance and
other receivables in the Statement of Financial Condition.
Key economic assumptions used in measuring the gains and the related retained interest at January 31,
2002, were a prepayment speed of 1.3 to 1.5, a weighted average remaining life of 22 months and a residual cash
flows discount rate of 6.86%.
The following table summarizes certain cash flows received from (paid to) securitization trusts/conduits
during the three months ended January 31, 2002, in millions:
Proceeds from initial sales of retail receivables.................................................. $ 500
Proceeds from subsequent sales of receivables into revolving facilities............................ 1,129
Servicing fees received............................................................................ 6
All other cash received from trusts................................................................ 45
Purchase of delinquent or foreclosed receivables................................................... (14)
Cash used for pool buybacks........................................................................ -
PAGE 13
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note K. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets" and Statement of Financial Accounting
Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 142 was adopted by the
company on November 1, 2001, and did not have a material impact on the company's financial position, results of
operations or cash flows. SFAS 143 is effective for financial statements issued for fiscal years beginning after
June 15, 2002. The company is evaluating the impact of SFAS 143 on its financial position, results of operations
and cash flows.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years. The company is evaluating the impact on the company's
financial position, results of operations and cash flows.
Note L. Condensed Consolidating Guarantor and Non-Guarantor Financial Information
The following tables set forth the condensed consolidating Statements of Financial Condition as of
January 31, 2002 and 2001, and the Statements of Income and Cash Flow for the three months ended January 31, 2002
and 2001. The following information is included as a result of the guarantee of the $400 million Senior Notes by
International, exclusive of its subsidiaries. International is a direct wholly-owned subsidiary of NIC.
International, exclusive of its subsidiaries, also guarantees NIC's obligations under its 7% senior notes due
2003 and 8% senior subordinated notes due 2008. None of NIC's other subsidiaries guarantee any of these notes.
Each of the guarantees is full and unconditional. Separate financial statements and other disclosures concerning
International have not been presented because management believes that such information is not material to
investors. NIC includes the consolidated financial results of the parent company only, with all of its
wholly-owned subsidiaries accounted for under the equity method. International, for purposes of this disclosure
only, includes the consolidated financial results of its wholly-owned subsidiaries accounted for under the equity
method. "Non-Guarantor Companies and Eliminations" includes the consolidated financial results of all other
non-guarantor subsidiaries including the elimination entries for all intercompany transactions. All applicable
corporate expenses have been allocated appropriately among the guarantor and non-guarantor subsidiaries.
NIC files a consolidated U.S. federal income tax return which includes International and its U.S.
subsidiaries. International has a tax allocation agreement (Tax Agreement) with NIC which requires International
to compute its separate federal income tax expense based on its adjusted book income. Any resulting tax
liability is paid to NIC. In addition, under the Tax Agreement, International is required to pay to NIC any tax
payments received from its subsidiaries. The effect of the Tax Agreement is to allow NIC, rather than
International, to utilize U.S. operating income/losses and NIC operating loss carryforwards.
PAGE 14
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note L. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
Non-Guarantor
Companies and
NIC International Eliminations Consolidated
-------------- -------------- ----------------- --------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JANUARY 31, 2002
Sales and revenues............................................ $ 2 $ 1,124 $ 346 $ 1,472
----------- ------------ ----------- ------------
Cost of products and services sold............................ - 1,042 214 1,256
Restructuring adjustment...................................... - - (1) (1)
All other operating expenses.................................. (6) 239 74 307
------------ ------------ ------------ ------------
Total costs and expenses.................................. (6) 1,281 287 1,562
------------ ------------ ------------ ------------
Equity in income (loss) of nonconsolidated subsidiaries....... (98) 55 43 -
------------ ------------ ------------ ------------
Income (loss) before income taxes............................. (90) (102) 102 (90)
Income tax expense (benefit).................................. (34) 6 (6) (34)
------------ ------------ ------------ ------------
Net income (loss)............................................. $ (56) $ (108) $ 108 $ (56)
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JANUARY 31, 2002
ASSETS
Cash and marketable securities................................ $ 263 $ 8 $ 636 $ 907
Receivables, net.............................................. 6 63 1,676 1,745
Inventories................................................... - 344 307 651
Property and equipment, net................................... - 890 780 1,670
Investment in affiliates...................................... (1,326) 931 395 -
Deferred tax asset and other assets........................... 1,012 267 320 1,599
------------ ------------ ------------ ------------
Total assets.............................................. $ (45) $ 2,503 $ 4,114 $ 6,572
============ ============ ============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Debt ......................................................... $ 821 $ 21 $ 1,821 $ 2,663
Postretirement benefits liability............................. - 977 97 1,074
Amounts due (from) to affiliates.............................. (2,024) 1,645 379 -
Other liabilities............................................. 80 1,245 432 1,757
------------ ------------ ------------ ------------
Total liabilities......................................... (1,123) 3,888 2,729 5,494
------------ ------------ ------------ ------------
Shareowners' equity (deficit)................................. 1,078 (1,385) 1,385 1,078
------------ ------------ ------------ ------------
Total liabilities and shareowners' equity..................... $ (45) $ 2,503 $ 4,114 $ 6,572
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE THREE MONTHS ENDED JANUARY 31, 2002
Cash provided by (used in) operations......................... $ (448) $ 72 $ 212 $ (164)
------------ ------------ ------------ ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables......... - - 211 211
Net (increase) decrease in marketable securities.............. 30 - (242) (212)
Capital expenditures.......................................... - (62) (8) (70)
Other investing activities.................................... 1 (8) 50 43
------------ ------------ ------------ ------------
Cash provided by (used in) investment programs................ 31 (70) 11 (28)
------------ ------------ ------------ ------------
Cash flow from financing activities
Net repayments of debt........................................ - - (210) (210)
Other financing activities.................................... 12 - - 12
------------ ------------ ------------ ------------
Cash provided by (used in) financing activities............... 12 - (210) (198)
------------ ------------ ------------ ------------
Cash and cash equivalents
Increase (decrease) during the period......................... (405) 2 13 (390)
At beginning of the period.................................... 658 6 158 822
------------ ------------ ------------ ------------
Cash and cash equivalents at end of the period................ $ 253 $ 8 $ 171 $ 432
============ ============ ============ ============
PAGE 15
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note L. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
Non-Guarantor
Companies and
NIC International Eliminations Consolidated
-------------- --------------- ------------------ --------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THREE MONTHS ENDED JANUARY 31, 2001
Sales and revenues.......................................... $ 3 $ 1,225 $ 288 $ 1,516
----------- ------------ ----------- ------------
Cost of products and services sold.......................... - 1,164 121 1,285
All other operating expenses................................ (20) 241 66 287
------------ ------------ ------------ ------------
Total costs and expenses................................ (20) 1,405 187 1,572
------------ ------------ ------------ ------------
Equity in income (loss) of nonconsolidated subsidiaries..... (79) 83 (4) -
------------ ------------ ------------ ------------
Income (loss) before income taxes........................... (56) (97) 97 (56)
Income tax expense (benefit)................................ (21) 5 (5) (21)
------------ ------------ ------------ ------------
Net income (loss)........................................... $ (35) $ (102) $ 102 $ (35)
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JANUARY 31, 2001
ASSETS
Cash and marketable securities.............................. $ 232 $ 5 $ 601 $ 838
Receivables, net............................................ 6 149 1,569 1,724
Inventories................................................. - 421 284 705
Property and equipment, net................................. - 1,043 772 1,815
Investment in affiliates.................................... (831) 848 (17) -
Deferred tax asset and other assets......................... 885 270 401 1,556
------------ ------------ ------------ ------------
Total assets............................................ $ 292 $ 2,736 $ 3,610 $ 6,638
============ ============ ============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Debt........................................................ $ 421 $ 5 $ 2,100 $ 2,526
Postretirement benefits liability........................... - 826 (33) 793
Amounts due (from) to affiliates............................ (1,503) 1,410 93 -
Other liabilities........................................... 94 1,340 605 2,039
------------ ------------ ------------ ------------
Total liabilities....................................... (988) 3,581 2,765 5,358
------------ ------------ ------------ ------------
Shareowners' equity (deficit)............................... 1,280 (845) 845 1,280
------------ ------------ ------------ ------------
Total liabilities and shareowners' equity................... $ 292 $ 2,736 $ 3,610 $ 6,638
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE THREE MONTHS ENDED JANUARY 31, 2001
Cash provided by (used in) operations....................... $ 118 $ (25) $ (137) $ (44)
------------ ------------ ------------ ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables....... - - 648 648
Net (increase) decrease in marketable securities............ 83 - (310) (227)
Capital expenditures........................................ - (50) (14) (64)
Other investing activities.................................. (10) 57 (83) (36)
------------ ------------ ------------ ------------
Cash provided by investment programs........................ 73 7 241 321
------------ ------------ ------------ ------------
Cash flow from financing activities
Net repayments of debt...................................... (23) - (120) (143)
------------ ------------ ------------ ------------
Cash and cash equivalents
Increase (decrease) during the period....................... 168 (18) (16) 134
At beginning of the period.................................. 64 23 210 297
------------ ------------ ------------ ------------
Cash and cash equivalents at end of the period.............. $ 232 $ 5 $ 194 $ 431
============ ============ ============ ============
PAGE 16
Navistar International Corporation and Consolidated Subsidiaries
Additional Financial Information (Unaudited)
The following additional financial information is provided based upon the continuing interest of certain
shareholders and creditors.
Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars:
Three Months Ended
January 31
-----------------------------------------
Condensed Statement of Income 2002 2001
- ---------------------------------------------------------------------------- ---------------- -----------------
Sales of manufactured products............................................... $ 1,389 $ 1,433
Other income................................................................. 3 6
------------- -------------
Total sales and revenues................................................. 1,392 1,439
------------- -------------
Cost of products sold........................................................ 1,241 1,275
Postretirement benefits expense.............................................. 57 45
Engineering and research expense............................................. 64 65
Sales, general and administrative expense.................................... 117 102
Other expenses............................................................... 35 32
------------- -------------
Total costs and expenses................................................. 1,514 1,519
------------- -------------
Income (loss) before income taxes
Manufacturing operations................................................. (122) (80)
Financial services operations............................................ 32 24
------------- -------------
Loss before income taxes............................................. (90) (56)
Income tax benefit................................................... (34) (21)
------------- -------------
Net loss ................................................................... $ (56) $ (35)
============= =============
January 31 October 31 January 31
Condensed Statement of Financial Condition 2002 2001 2001
- ---------------------------------------------------------------- ---------------- ----------------- ----------------
Cash, cash equivalents and marketable securities................ $ 369 $ 806 $ 323
Inventories..................................................... 587 569 662
Property and equipment, net..................................... 1,370 1,359 1,476
Equity in nonconsolidated subsidiaries.......................... 425 398 375
Other assets.................................................... 954 895 892
Deferred tax asset, net......................................... 1,013 979 905
------------- ------------- -------------
Total assets............................................ $ 4,718 $ 5,006 $ 4,633
============= ============= =============
Accounts payable, principally trade............................. $ 836 $ 1,051 $ 946
Postretirement benefits liability............................... 1,062 1,069 784
Debt............................................................ 950 966 645
Other liabilities............................................... 792 793 978
Shareowners' equity............................................. 1,078 1,127 1,280
------------- ------------- -------------
Total liabilities and shareowners' equity............... $ 4,718 $ 5,006 $ 4,633
============= ============= =============
PAGE 17
Navistar International Corporation and Consolidated Subsidiaries
Additional Financial Information (Unaudited)
Navistar International Corporation (with financial services operations on an equity basis)
in millions of dollars:
Three Months Ended
January 31
-----------------------------------------
Condensed Statement of Cash Flow 2002 2001
- --------------------------------------------------------------------------- ---------------- -----------------
Cash flow from operations
Net loss................................................................... $ (56) $ (35)
Adjustments to reconcile net loss
to cash used in operations:
Depreciation and amortization....................................... 39 36
Deferred income taxes............................................... (30) (23)
Postretirement benefits funding less than
(in excess of) expense........................................... (8) 8
Equity in earnings of investees,
net of dividends received........................................ (27) 2
Other, net.......................................................... (23) 7
Change in operating assets and liabilities,
net of effects of acquisition.......................................... (168) (204)
------------- -------------
Cash used in operations.................................................... (273) (209)
------------- -------------
Cash flow from investment programs
Sales or maturities of marketable securities............................... 30 83
Capital expenditures....................................................... (69) (64)
Payments for acquisition, net of cash acquired............................. - (60)
Proceeds from sale-leasebacks.............................................. - 58
Receivable from financial services operations.............................. (83) 272
Investment in affiliates................................................... 1 4
Capitalized interest and other............................................. (10) (1)
------------- -------------
Cash provided by (used in) investment programs............................. (131) 292
------------- -------------
Cash provided by (used in) financing activities............................ (3) 27
------------- -------------
Cash and cash equivalents
Increase (decrease) during the period...................................... (407) 110
At beginning of the period................................................. 766 213
------------- -------------
Cash and cash equivalents at end of the period............................. $ 359 $ 323
============= =============
PAGE 18
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Certain statements under this caption that are not purely historical constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties.
These forward-looking statements are based on current management expectations as of the date made. The company
assumes no obligation to update any forward-looking statements. Navistar International Corporation's actual
results may differ significantly from the results discussed in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed under the caption "Business
Environment."
The company reported a net loss of $56 million, or a $0.93 loss per diluted common share for the first
quarter ended January 31, 2002, primarily due to continued weak, new and used truck pricing and lower new truck
shipments. For the comparable quarter last year, the net loss was $35 million, or a $0.58 loss per diluted
common share.
The truck segment's loss for the first quarter of 2002 increased by $22 million and revenues decreased
$75 million compared to the same period last year. The truck segment's profit and revenue decreases are
primarily the result of reduced industry wide shipments and lower market pricing.
The engine segment's profit for the first three months of 2002 remained consistent with the same period
in 2001 at $42 million, while revenues increased slightly.
The financial services segment's profit for the first quarter of 2002 was $31 million, a $7 million
increase over the comparable period in 2001. The increase is primarily the result of a higher gain on the sale
of retail note receivables offset, in part, by lower finance receivable balances.
Sales and Revenues. Sales and revenues for the first quarter of 2002 totaled $1,472 million, 3% lower
than the $1,516 million reported for the comparable quarter in 2001.
United States (U.S.) and Canadian industry retail sales of Class 5 through 8 trucks totaled 61,100 units
in the first quarter of 2002, which is 23% lower than the 79,000 units sold during this period in 2001. Class 8
heavy truck sales of 33,500 units during the first quarter of 2002 were 22% lower than the 2001 level of 42,700
units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, decreased 24% to 27,700 units.
Industry sales of school buses, which accounted for 21% of the medium truck market, decreased 7% to 5,700 units.
Market share for the first quarter of 2002 increased to 26.3% from 25.1% reported in the same period of
2001. This improvement was driven by focused sales and marketing efforts.
Shipments of mid-range diesel engines by the company to other original equipment manufacturers during
the first quarter of 2002 totaled 78,000 units, a 6% increase from the same period of 2001.
PAGE 19
Costs and expenses. Manufacturing gross margin was 10.7% of sales for the first quarter of 2002, a slight
decrease from the 11.0% reported for the same period in 2001.
Postretirement benefits expense increased $12 million from the first quarter of 2001 to $58 million.
This increase is primarily due to higher interest expense resulting from higher pension and health care
obligations, higher amortization, and lower returns on assets, all of which were driven by large losses in 2001.
Sales, general and administrative expense increased 11% to $134 million in the first quarter of 2002
from $121 million for the comparable quarter in 2001. This increase is due to an increase in the provision for
losses on receivables driven by an increase in repossession frequency and pricing pressure in the used truck
market.
Other expense decreased to $11 million in the first quarter of 2002 from $14 million in the same period
of 2001. This decrease is primarily due to lower financing charges on sold receivables.
Restructuring Charge
In October 2000, the company incurred charges for restructuring, asset write-downs, loss on anticipated
sale of business and other exit costs totaling $306 million as part of an overall plan to restructure its
manufacturing and corporate operations ("Plan of Restructuring"). The following are the major restructuring,
integration and cost reduction initiatives included in the Plan of Restructuring:
o Replacement of current steel cab trucks with a new line of high performance next generation vehicles
(NGV) and a concurrent realignment of the company's truck manufacturing facilities
o Closure of certain operations and exit of certain activities
o Launch of the next generation technology diesel engines
o Consolidation of corporate operations
o Realignment of the bus and truck dealership network and termination of various dealership contracts
Of the total pretax restructuring charge of $306 million, $150 million represented non-cash charges.
Through January 31, 2002, approximately $208 million of the charge has been incurred, and $12 million of
curtailment loss related to the company's postretirement benefit has been reclassified as a noncurrent
postretirement liability. The remaining restructuring liability of $86 million is expected to be funded from
existing cash balances and internally generated cash flows from operations.
The specific actions included in the Plan of Restructuring were substantially complete by November
2001. Components of the remaining restructuring charge are as follows:
Balance Amount Balance
(Millions of dollars) October 31, 2001 Incurred January 31, 2002
- ------------------------------------------ ------------------------- --------------- -------------------------
Severance and other benefits $ 32 $ (3) $ 29
Lease terminations 35 - 35
Loss on sale of business 2 - 2
Dealer termination and exit costs 21 (1) 20
------------------------- --------------- -------------------------
Total $ 90 $ (4) $ 86
========================= =============== =========================
PAGE 20
The Plan of Restructuring included the reduction of approximately 2,100 employees from the workforce,
primarily in North America, which was revised to 1,900 employees at October 31, 2001. During the quarter,
approximately $3 million was paid for severance and other benefits, and employee headcount was reduced by
approximately 400. As of January 31, 2002, of the total net charge of $75 million, approximately $34 million has
been paid for severance and other benefits for the reduction of approximately 1,900 employees, and $12 million of
curtailment loss has been reclassified as a noncurrent postretirement liability. The severance and other
benefits balance represents costs related to future payments over the next two years for headcount reductions
already incurred.
Lease termination costs include the future obligations under long-term non-cancelable lease agreements
at facilities being vacated following workforce reductions. This charge primarily consists of the estimated
lease costs, net of probable sublease income, associated with the cancellation of the company's corporate office
lease at NBC Tower in Chicago, Illinois, which expires in 2010. As of January 31, 2002, of the total net charge
of $38 million, $3 million has been incurred for lease termination costs.
The Plan of Restructuring included the effect of the sale of Harco National Insurance Company (Harco).
On November 30, 2001, Navistar Financial Corporation (NFC) completed the sale of Harco to IAT Reinsurance
Syndicate Ltd., a Bermuda reinsurance company. The remaining payments related to exit costs of approximately $2
million are expected to be incurred in fiscal year 2002.
Dealer termination and exit costs include the termination of certain dealer contracts in connection with
the realignment of the company's bus distribution network, and other litigation costs to implement the
restructuring initiatives. As of January 31, 2002, of the total net charge of $38 million, approximately $18
million has been paid for dealer terminations and exit costs, of which $1 million was incurred during the quarter.
Liquidity and Capital Resources
Cash flow is generated from the manufacture and sale of trucks, mid-range diesel engines and their
associated service parts as well as from product financing provided to the company's dealers and retail customers
by the financial services segment. The company's current debt ratings have made sales of finance receivables the
most economic source of funding for NFC.
The company had working capital of $58 million at January 31, 2002, compared to $463 million at October
31, 2001. Cash used in operations during the first quarter of 2002 totaled $164 million primarily from a net
loss of $56 million and a net change in operating assets and liabilities of $84 million.
The net use of cash resulting from the change in operating assets and liabilities included a $221 million
decrease in accounts payable primarily due to cyclically lower truck and engine production levels in the first
quarter as well as from the timing of invoices paid for capital equipment purchased in the fourth quarter of
2001, and an $18 million increase in inventories primarily caused by the decrease in new truck shipments. These
were partially offset by a $150 million decrease in receivables primarily due to a net decrease in wholesale note
and account balances and lower volumes in truck production.
Cash used in investment programs resulted from a net increase in marketable securities of $212 million and
$70 million of capital expenditures primarily for the NGV and Next Generation Diesel (NGD) programs. These were
partially offset by a net decrease in retail notes and lease receivables of $211 million and the sale of Harco on
November 30, 2001, that provided $62 million in cash proceeds.
PAGE 21
Cash used by financing activities resulted from a net decrease of $190 million in notes and debt
outstanding under the bank revolving credit facility and other commercial paper programs and a net decrease in
long-term debt of $20 million.
NFC has traditionally obtained the funds to provide financing to International's dealers and retail
customers from sales of finance receivables, commercial paper, short and long-term bank borrowings, medium and
long-term debt and equity capital. As of January 31, 2002, NFC's funding consisted of sold finance receivables
of $2,955 million, bank and other borrowings of $999 million, subordinated debt of $100 million, capital lease
obligations of $356 million and equity of $349 million.
NFC securitizes and sells receivables through Navistar Financial Retail Receivables Corporation (NFRRC),
Navistar Financial Securities Corporation (NFSC), Truck Retail Accounts Corporation (TRAC) and Truck Engine
Receivables Financing Corporation (TERFCO), all special purpose entities and wholly-owned subsidiaries of NFC.
The sale of receivables in each of the securitizations constitute sales under generally accepted accounting
principles, with the result that the sold receivables are removed from NFC's balance sheet and the investor's
interests in the related trust or conduit are not reflected as liabilities. However, the special purpose
entity's residual interest in the related trusts or assets held by the conduit are reflected on the Statement of
Financial Condition as assets.
Through the asset-backed public market and private placement sales, NFC has been able to fund fixed rate
retail note receivables at rates offered to companies with higher investment grade ratings. During the first
quarter of 2002, NFC sold $500 million of retail notes, net of unearned finance income, through NFRRC. NFC sold
the retail notes to an owner trust, which in turn, issued $500 million of asset-backed securities that were sold
to investors. Aggregate gains of $17 million were recognized on these sales. Also, as of January 31, 2002, NFSC
has in place a revolving wholesale note trust that provides for the funding of $837 million of eligible wholesale
notes, of which $713 million has been utilized.
At January 31, 2002, available funding under NFC's bank revolving credit facility, the revolving retail
warehouse facility, the retail account facilities and the revolving wholesale note trust was $959 million. When
combined with unrestricted cash and cash equivalents, $1,004 million was available to fund the general business
purposes of NFC.
In November 2000, NFC established TERFCO for the purpose of securitizing engine accounts receivable.
The transaction provides for funding of $100 million and expires in 2006. As of January 31, 2002, NFC has
utilized $100 million of this facility.
TRAC has in place an arrangement with a bank conduit that provides for the funding of $100 million of
eligible retail accounts. As of January 31, 2002, NFC has utilized $100 million of this facility. The facility
expires in August 2002 with an option for renewal.
There have been no material changes in the company's hedging strategies or derivative positions since
October 31, 2001. Further disclosure may be found in Note E to the financial statements and in the company's
2001 Annual Report on Form 10-K.
Cash flow from the company's manufacturing operations, financial services operations and financing
capacity is currently sufficient to cover planned investment in the business. The company had outstanding
capital commitments of $234 million at January 31, 2002, primarily for the NGV and NGD programs.
It is the opinion of management that, in the absence of significant unanticipated cash demands, current
and forecasted cash flow as well as anticipated financing actions will provide sufficient funds to meet operating
requirements and capital expenditures. Management believes that collections on the outstanding receivables
portfolios as well as funds available from various funding sources will permit the financial services operations
to meet the financing requirements of International's dealers and retail customers.
PAGE 22
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards No. 142 (SFAS 142), "Goodwill and Other Intangible Assets" and Statement of Financial Accounting
Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 142 was adopted by the
company on November 1, 2001, and did not have a material impact on the company's financial position, results of
operations or cash flows. SFAS 143 is effective for financial statements issued for fiscal years beginning after
June 15, 2002. The company is evaluating the impact of SFAS 143 on its financial position, results of operations
and cash flows.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," which is effective for fiscal years beginning after December 15,
2001, and interim periods within those fiscal years. The company is evaluating the impact on the company's
financial position, results of operations and cash flows.
Business Environment
Sales of Class 5 through 8 trucks historically have been cyclical, with demand affected by such economic
factors as industrial production, construction, demand for consumer durable goods, interest rates and the
earnings and cash flow of dealers and customers. Truck sales in the first quarter were hindered by a number of
factors including a significant decline in the economy and associated freight tonnage, rising insurance costs,
tightened credit availability, and the used truck problems of high inventory and low prices. The demand for new
trucks reflected these adverse conditions, reducing the company's U.S. and Canadian order backlog at January 31,
2002, to 19,300 units, 14% lower than the 22,300 units at January 31, 2001. Historically, retail deliveries have
been impacted by the rate at which new truck orders are received. Therefore, the company continually evaluates
order receipts and backlog throughout the year and will balance production with demand as appropriate. To
control costs and align production schedules with demand, the company reduced its production schedules during the
quarter through shutdown weeks at its Springfield, Escobedo, Garland, Conway and Tulsa Assembly Plants as well as
at its Engine and Foundry Plants in Melrose Park and Waukesha.
Reflecting the continued industry-wide decline in new truck orders, the company lowered its industry
projections for 2002. The company currently projects 2002 U.S. and Canadian Class 8 heavy truck demand to be
144,000 units, down from the previous forecast of 154,000 units. Class 5, 6, and 7 medium truck demand,
excluding school buses, remains unchanged at 112,500 units, including 87,500 Class 6-7 trucks. Demand for school
buses remains at 28,000 units.
PAGE 23
Navistar International Corporation and Consolidated Subsidiaries
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the company's market risk exposure since October 31, 2001, as
reported in the 2001 Annual Report on Form 10-K.
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
The company and its subsidiaries are subject to various claims arising in the ordinary course of
business, and are parties to various legal proceedings that constitute ordinary routine litigation
incidental to the business of the company and its subsidiaries. In the opinion of the company's
management, none of these proceedings or claims are material to the business or the financial
condition of the company.
Various claims and controversies have arisen between the company and its current fuel system supplier,
Caterpillar Inc., regarding the ownership and validity of certain patents covering fuel system
technology to be used in the company's next generation version of diesel engines. In June 1999, in
Federal Court in Peoria, IL, Caterpillar sued Sturman Industries, Inc. (Sturman), the company's joint
venture partner in developing fuel system technology, alleging that technology invented and patented by
Sturman and licensed to the company, belongs to Caterpillar. The company believes that Sturman has
meritorious defenses to such claims and intends to continue to cooperate with Sturman to defend this
action vigorously. The company believes that Caterpillar may assert claims against the company
regarding other aspects of fuel system technology to be used in the company's new engines. In January
2002, Caterpillar sued the company in the Circuit Court in Peoria County, IL, and the company sued
Caterpillar in the Circuit Court in Cook County, IL, each alleging the other breached the purchase
agreement pursuant to which Caterpillar agreed to be the company's engine fuel system supplier. The
alleged breaches involve Caterpillar's refusal to supply a new, improved fuel system and the company's
subsequent replacement of Caterpillar as the supplier of such systems for the company's next
generation version of diesel engines. The company believes that it has meritorious defenses to any
such claims Caterpillar has asserted or may assert against the company and will defend vigorously any
such actions. Based upon the information developed to date, the company believes that the proceedings
or claims will not have a material adverse impact on the business, results of operations or financial
condition of the company.
Item 2. Changes in Securities and Use of Proceeds
Payments of cash dividends and the repurchase of common stock are currently limited due to
restrictions contained in the company's $400 million Senior Notes, $250 million Senior Subordinated
Notes and $19 million Note Purchase Agreement. The company has not paid dividends on the common stock
since 1980 and does not expect to pay cash dividends on the common stock in the foreseeable future.
PAGE 24
Item 6. Exhibits and reports on Form 8-K
10-Q Page
---------
(a) Exhibits:
3. Articles of Incorporation and By-Laws E-1
4. Instruments Defining The Rights of Security
Holders, Including Indentures E-2
10. Material Contracts E-6
(b) Reports on Form 8-K:
None
PAGE 25
SIGNATURE
-----------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
NAVISTAR INTERNATIONAL CORPORATION
- ----------------------------------------------------------------
(Registrant)
/s/ Mark T. Schwetschenau
- ------------------------------------------
Mark T. Schwetschenau
Vice President and Controller
(Principal Accounting Officer)
March 11, 2002
