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 July 31, 2000 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.) 455 North Cityfront Plaza Drive, Chicago, Illinois 60611 -------------------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 836-2000 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 August 31, 2000, the number of shares outstanding of the registrant's common stock was 59,219,739. PAGE 2 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ----------------------------- INDEX --------- Page Reference --------- Part I. Financial Information: Item 1. Financial Statements Statement of Income Three Months and Nine Months Ended July 31, 2000 and 1999...... 3 Statement of Financial Condition July 31, 2000, October 31, 1999 and July 31, 1999............. 4 Statement of Cash Flow Nine Months Ended July 31, 2000 and 1999....................... 5 Notes to Financial Statements........................................... 6 Supplemental Financial Information...................................... 12 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.................... 14 Item 3. Quantitative and Qualitative Disclosure About Market Risk 20 Part II. Other Information: Item 1. Legal Proceedings........................................ 20 Item 6. Exhibits and Reports on Form 8-K......................... 20 Signature .............................................................. 21 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 Nine Months Ended July 31 July 31 ------------------ ------------------ 2000 1999 2000 1999 ------- ------- ------- ------- Sales and revenues Sales of manufactured products .......... $ 1,841 $ 1,797 $ 6,240 $ 5,849 Finance and insurance revenue ........... 72 67 205 188 Other income ............................ 11 10 33 48 ------- ------- ------- ------- Total sales and revenues ............ 1,924 1,874 6,478 6,085 ------- ------- ------- ------- Costs and expenses Cost of products and services sold ...... 1,528 1,480 5,184 4,848 Postretirement benefits ................. 48 45 157 159 Engineering and research expense ........ 66 73 213 197 Sales, general and administrative expense 107 112 357 361 Interest expense ........................ 37 32 105 99 Other expense ........................... 16 7 69 43 ------- ------- ------- ------- Total costs and expenses ............ 1,802 1,749 6,085 5,707 ------- ------- ------- ------- Income before income taxes ...... 122 125 393 378 Income tax (expense) benefit .... (26) 130 (129) 34 ------- ------- ------- ------- Net income .............................. $ 96 $ 255 $ 264 $ 412 ======= ======= ======= ======= Earnings per share Basic................................ $ 1.62 $ 3.94 $ 4.32 $ 6.27 Diluted.............................. $ 1.60 $ 3.86 $ 4.26 $ 6.16 Average shares outstanding (millions) Basic................................ 59.4 64.9 61.1 65.8 Diluted.............................. 60.1 66.2 61.9 66.9 - ------------------------------------------------------------------------------------------------------------------------ <FN> See Notes to Financial Statements. </FN> PAGE 4 STATEMENT OF FINANCIAL CONDITION (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- Millions of dollars - --------------------------------------------------------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries -------------------------------------------------------- July 31 October 31 July 31 2000 1999 1999 ---------------- ---------------- ----------------- ASSETS Current assets Cash and cash equivalents.............................. $ 532 $ 243 $ 237 Marketable securities.................................. 55 138 137 Receivables, net....................................... 1,323 1,550 1,286 Inventories............................................ 718 625 743 Deferred tax asset, net................................ 213 229 207 Other assets........................................... 88 57 48 -------------- -------------- --------------- Total current assets.......................................... 2,929 2,842 2,658 -------------- -------------- --------------- Marketable securities......................................... 155 195 252 Finance and other receivables, net............................ 909 1,268 756 Property and equipment, net................................... 1,605 1,475 1,264 Investments and other assets.................................. 188 207 168 Prepaid and intangible pension assets......................... 314 274 243 Deferred tax asset, net...................................... 600 667 759 -------------- -------------- --------------- Total assets ............................................... $ 6,700 $ 6,928 $ 6,100 ============== ============== =============== LIABILITIES AND SHAREOWNERS' EQUITY Liabilities Current liabilities Notes payable and current maturities of long-term debt. $ 131 $ 192 $ 160 Accounts payable, principally trade.................... 907 1,399 975 Other liabilities...................................... 721 911 769 -------------- -------------- --------------- Total current liabilities..................................... 1,759 2,502 1,904 -------------- -------------- --------------- Debt: Manufacturing operations............................... 538 445 467 Financial services operations.......................... 1,873 1,630 1,433 Postretirement benefits liability............................. 682 634 910 Other liabilities............................................. 449 426 356 -------------- -------------- --------------- Total liabilities...................................... 5,301 5,637 5,070 -------------- -------------- --------------- 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)................................... (40) (297) (431) Accumulated other comprehensive loss.......................... (195) (197) (342) Common stock held in treasury, at cost (16.1 million, 12.1 million and 11.7 million shares held)..................... (509) (358) (340) -------------- -------------- --------------- Total shareowners' equity.............................. 1,399 1,291 1,030 -------------- -------------- --------------- Total liabilities and shareowners' equity..................... $ 6,700 $ 6,928 $ 6,100 ============== ============== =============== - -------------------------------------------------------------------------------------------------------------------------- <FN> See Notes to Financial Statements. </FN> PAGE 5 STATEMENT OF CASH FLOW (Unaudited) - --------------------------------------------------------------------------------------------------------------------------- For the Nine Months Ended July 31 (Millions of dollars) - --------------------------------------------------------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries ------------------------------------ 2000 1999 ---------------- ----------------- Cash flow from operations Net income........................................................... $ 264 $ 412 Adjustments to reconcile net income to cash provided by (used in) operations: Depreciation and amortization................................. 158 143 Deferred income taxes......................................... 103 132 Deferred tax asset valuation allowance adjustment............. - (178) Other, net.................................................... (11) 3 Change in operating assets and liabilities: Receivables................................................... 575 (18) Inventories................................................... (91) (243) Prepaid and other current assets.............................. 2 (11) Accounts payable.............................................. (505) (287) Other liabilities............................................. (176) (42) --------------- --------------- Cash provided by (used in) operations............................ 319 (89) --------------- --------------- Cash flow from investment programs Purchases of retail notes and lease receivables...................... (1,027) (1,044) Collections/sales of retail notes and lease receivables.............. 1,029 1,236 Purchases of marketable securities................................... (186) (309) Sales or maturities of marketable securities......................... 309 595 Capital expenditures................................................. (248) (214) Proceeds from sale/leaseback......................................... 81 - Property and equipment leased to others.............................. (62) (81) Investment in affiliates............................................. 6 (55) Capitalized interest and other....................................... (27) (23) --------------- --------------- Cash (used in) provided by investment programs................... (125) 105 --------------- --------------- Cash flow from financing activities Issuance of debt..................................................... 207 134 Principal payments on debt........................................... (69) (120) Net increase (decrease) in notes and debt outstanding under bank revolving credit facility and commercial paper programs ......... 108 (57) Purchases of common stock............................................ (151) (126) --------------- --------------- Cash provided by (used in) financing activities.................. 95 (169) --------------- --------------- Cash and cash equivalents Increase (decrease) during the period............................ 289 (153) At beginning of the year......................................... 243 390 --------------- --------------- Cash and cash equivalents at end of the period....................... $ 532 $ 237 =============== =============== - ------------------------------------------------------------------------------------------------------------------------- <FN> See Notes to Financial Statements. </FN> PAGE 6 Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note A. Summary of Accounting Policies Navistar International Corporation is a holding company whose principal operating subsidiary is International Truck and Engine Corporation (International), formerly Navistar International Transportation Corp. 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 1999 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 1999 amounts have been reclassified to conform with the presentation used in the 2000 financial statements. Note B. Supplemental Cash Flow Information Consolidated interest payments during the first nine months of 2000 and 1999 were $95 million and $97 million, respectively. Consolidated tax payments made during the first nine months of 2000 and 1999 were $28 million and $12 million, respectively. 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 federal income taxes will be minimal. Income tax expense during the third quarter of 2000 was reduced by $20 million for research and development tax credits that will be taken against future income tax payments related to research and development activities that occurred over the last 14 years. Income tax expense in the third quarter of 1999 was reduced by a $178 million reduction of the deferred tax asset valuation allowance as further described in the 1999 Annual Report on Form 10-K. PAGE 7 Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note D. Inventories Inventories are as follows: July 31 October 31 July 31 Millions of dollars 2000 1999 1999 - -------------------------------------------------------------------------------- Finished products................. $ 425 $ 285 $ 340 Work in process................... 50 95 197 Raw materials and supplies........ 243 245 206 -------- ---------- -------- Total inventories.......... $ 718 $ 625 $ 743 ======== ========== ======== Note E. Financial Instruments In November 1999, Navistar Financial Corporation (NFC) sold $533 million of fixed rate retail notes through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary of NFC, on a variable rate basis to two multi-seller asset-backed commercial paper conduits sponsored by a major financial institution. NFC entered into an interest rate swap agreement to hedge the future cash flows of the amounts due from the sale of receivables. In March 2000, NFC transferred all of the rights and obligations of the swap to the conduit. Under the terms of the agreement, NFC will make or receive payments based on the differential between the transferred swap notional amount and the securitization transaction net outstanding balance. In March 2000, NFC sold $475 million of retail notes through NFRRC to an owner trust which, in turn, sold notes to investors. The gains on these sales were not material. In January 2000, NFC sold $300 million of variable funding certificates, through Navistar Financial Securities Corporation (NFSC), a wholly owned subsidiary of NFC, to a conduit sponsored by a major financial institution. As of July 31, 2000, NFSC had $175 million of variable funding certificates outstanding, and reduced its maximum capacity from $300 million to $200 million. In July 2000, NFC issued a $212 million tranche of investor certificates which mature in June 2005. As of July 31, 2000, NFC was a party to a total of $350 million of forward starting swaps in anticipation of an October 2000 sale of retail receivables. Any gain or loss will be included in the gain or loss on the sale of receivables recognized in October 2000. In April 2000, the company entered into a $95 million forward contract which expires in October 2001 to purchase Navistar's outstanding common shares. As of July 31, 2000, the company held German mark forward contracts with notional amounts of $85 million related to committed capital equipment purchases. The company held other derivative contracts with notional amounts of $34 million. The unrealized net loss on these contracts was $6 million. At quarter end, $86 million of a Mexican finance subsidiary's receivables were pledged as collateral for bank borrowings. PAGE 8 Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note F. Earnings Per Share Earnings per share was computed as follows: Three Months Ended Nine Months Ended Millions of dollars, July 31 July 31 ----------------------------- ----------------------------- Except share and per share data 2000 1999 2000 1999 - ---------------------------------------------------- --------- ---------- --------- --------- Net income ......................................... $ 96 $ 255 $ 264 $ 412 ========= ========= ========= ========= Average shares outstanding (millions) Basic......................................... 59.4 64.9 61.1 65.8 Dilutive effect of options outstanding and other dilutive securities....... .7 1.3 .8 1.1 --------- --------- --------- --------- Diluted....................................... 60.1 66.2 61.9 66.9 ========= ========= ========= ========= Earnings per share Basic......................................... $ 1.62 $ 3.94 $ 4.32 $ 6.27 Diluted....................................... $ 1.60 $ 3.86 $ 4.26 $ 6.16 Unexercised employee stock options to purchase 1.5 million and .1 million shares of Navistar common stock during the three months ended July 31, 2000 and 1999, respectively, and to purchase 1.0 million and .2 million shares of Navistar common stock during the nine months ended July 31, 2000 and 1999, respectively, were excluded from the computation of diluted shares outstanding because the exercise prices were greater than the average market price of Navistar common stock. Note G. Comprehensive Income Navistar's total comprehensive income was as follows: Three Months Ended Nine Months Ended July 31 July 31 ----------------------------- ----------------------------- Millions of dollars 2000 1999 2000 1999 - ---------------------------------------------------- ---------- ----------- ----------- ---------- Net income ......................................... $ 96 $ 255 $ 264 $ 412 Other comprehensive income (loss)................... (2) (2) 2 (11) --------- --------- --------- --------- Total comprehensive income.................... $ 94 $ 253 $ 266 $ 401 ========= ========= ========= ========= 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 July 31, 2000 ---------------------------------------------------------------- External revenues............................... $ 1,431 $ 410 $ 74 $ 1,915 Intersegment revenues........................... - 153 24 177 --------- --------- -------- -------- Total revenues............................. $ 1,431 $ 563 $ 98 $ 2,092 ========= ========= ======== ======== Segment profit.................................. $ 44 $ 64 $ 24 $ 132 For the nine months ended July 31, 2000 ---------------------------------------------------------------- External revenues............................... $ 4,945 $ 1,295 $ 213 $ 6,453 Intersegment revenues........................... - 513 69 582 --------- --------- -------- -------- Total revenues............................. $ 4,945 $ 1,808 $ 282 $ 7,035 ========= ========= ======== ======== Segment profit.................................. $ 182 $ 201 $ 69 $ 452 As of July 31, 2000 ---------------------------------------------------------------- Segment assets.................................. $ 1,942 $ 842 $ 2,591 $ 5,375 For the quarter ended July 31, 1999 ---------------------------------------------------------------- External revenues............................... $ 1,399 $ 398 $ 70 $ 1,867 Intersegment revenues........................... - 155 19 174 --------- --------- -------- -------- Total revenues............................. $ 1,399 $ 553 $ 89 $ 2,041 ========= ========= ======== ======== Segment profit.................................. $ 37 $ 80 $ 29 $ 146 For the nine months ended July 31, 1999 ---------------------------------------------------------------- External revenues............................... $ 4,665 $ 1,184 $ 203 $ 6,052 Intersegment revenues........................... - 511 54 565 --------- --------- -------- -------- Total revenues............................. $ 4,665 $ 1,695 $ 257 $ 6,617 ========= ========= ======== ======== Segment profit.................................. $ 179 $ 199 $ 79 $ 457 As of July 31, 1999 ---------------------------------------------------------------- Segment assets.................................. $ 1,658 $ 686 $ 2,169 $ 4,513 PAGE 10 Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note H. Segment Data (continued) Reconciliation to the consolidated financial statements as of and for the three months and nine months ended July 31 is as follows: Three Months Ended Nine Months Ended July 31 July 31 ---------------------------- ---------------------------- Millions of dollars 2000 1999 2000 1999 - -------------------------------------------------------------------------------------------------------------------- Segment sales and revenues..................... $ 2,092 $ 2,041 $ 7,035 $ 6,617 Other income................................... 9 7 25 33 Intercompany................................... (177) (174) (582) (565) -------- -------- -------- -------- Consolidated sales and revenues................ $ 1,924 $ 1,874 $ 6,478 $ 6,085 ======== ======== ======== ======== Segment profit................................. $ 132 $ 146 $ 452 $ 457 Corporate items................................ (14) (22) (66) (83) Manufacturing net interest income.............. 4 1 7 4 -------- -------- -------- -------- Consolidated pretax income..................... $ 122 $ 125 $ 393 $ 378 ======== ======== ======== ======== As of July 31 ---------------------------- 2000 1999 ---------------------------- Segment assets................................. $ 5,375 $ 4,513 Cash and marketable securities................. 437 441 Deferred taxes................................. 813 966 Corporate intangible pension assets............ 121 121 Other corporate and eliminations............... (46) 59 -------- -------- Consolidated assets............................ $ 6,700 $ 6,100 ======== ======== Note I. New Accounting Pronouncements On November 1, 2000, the company will adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended. This statement standardizes the accounting for derivative instruments by requiring 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 hedging instrument with the recognition of (a) the 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. The company is currently assessing the impact of adoption on its financial statements. Based on the company's current portfolio of instruments subject to the statement, it is not expected that adoption of this statement will have a material effect on the company's results of operations, financial condition, or cash flows. PAGE 11 Note I. New Accounting Pronouncements (continued) The company's initial assessment, which is subject to change for subsequent events that occur before adoption, indicates that the transition adjustment to both earnings and comprehensive income is expected to be immaterial. Note J. Subsequent Event During August 2000, the company announced it has begun the process of implementing a restructuring plan designed to allow the company to meet its financial objectives in the face of the long-anticipated sharp drop in demand for new trucks and an extremely competitive marketplace. Part of this plan involved the elimination of approximately 1,100 salaried and contract positions representing approximately 15 percent of the company's white-collar workforce. Charges related to the entire restructuring plan are still being determined and will be recorded in the fourth quarter. PAGE 12 Navistar International Corporation and Consolidated Subsidiaries Supplemental Financial Information (Unaudited) The following supplemental 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 Nine Months Ended July 31 July 31 ----------------------------- ----------------------------- Condensed Statement of Income 2000 1999 2000 1999 - ---------------------------------------------------------- ---------- ----------- ----------- ---------- Sales of manufactured products............................ $ 1,841 $ 1,797 $ 6,240 $ 5,849 Other income.............................................. 10 8 26 36 --------- ---------- ---------- --------- Total sales and revenues............................ 1,851 1,805 6,266 5,885 --------- ---------- ---------- --------- Cost of products sold..................................... 1,519 1,469 5,155 4,822 Postretirement benefits................................... 48 45 157 159 Engineering and research expense.......................... 66 73 213 197 Sales, general and administrative expense................. 94 100 314 322 Other expense............................................. 31 24 116 98 --------- ---------- ---------- --------- Total costs and expenses............................ 1,758 1,711 5,955 5,598 --------- ---------- ---------- --------- Income before income taxes Manufacturing operations............................ 93 94 311 287 Financial services operations....................... 29 31 82 91 --------- ---------- ---------- --------- Income before income taxes..................... 122 125 393 378 Income tax (expense) benefit................... (26) 130 (129) 34 --------- ---------- ---------- --------- Net income ............................................... $ 96 $ 255 $ 264 $ 412 ========= ========== ========== ========= July 31 October 31 July 31 Condensed Statement of Financial Condition 2000 1999 1999 - ---------------------------------------------------------- ---------------- ----------------- ----------------- Cash, cash equivalents and marketable securities............................ $ 498 $ 386 $ 467 Inventories............................................... 676 604 722 Property and equipment, net............................... 1,267 1,188 993 Equity in nonconsolidated subsidiaries.................... 389 377 381 Other assets.............................................. 905 1,527 815 Deferred tax asset, net................................... 815 896 966 -------------- --------------- --------------- Total assets...................................... $ 4,550 $ 4,978 $ 4,344 ============== =============== =============== Accounts payable, principally trade....................... $ 872 $ 1,386 $ 950 Postretirement benefits liability......................... 805 776 972 Other liabilities......................................... 1,474 1,525 1,392 Shareowners' equity....................................... 1,399 1,291 1,030 -------------- --------------- --------------- Total liabilities and shareowners' equity......... $ 4,550 $ 4,978 $ 4,344 ============== =============== =============== PAGE 13 Navistar International Corporation and Consolidated Subsidiaries Supplemental Financial Information (Unaudited) Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars: Nine Months Ended July 31 ---------------------------------- Condensed Statement of Cash Flow 2000 1999 - ----------------------------------------------------------------- ---------------- ----------------- Cash flow from operations Net income....................................................... $ 264 $ 412 Adjustments to reconcile net income to cash used in operations: Depreciation and amortization............................. 114 109 Deferred income taxes..................................... 103 132 Deferred tax asset valuation allowance adjustment............................................. - (178) Equity in earnings of investees, net of dividends received..................................... (32) (17) Other, net................................................ (23) 21 Change in operating assets and liabilities................... (678) (552) -------------- -------------- Cash used in operations.......................................... (252) (73) -------------- -------------- Cash flow from investment programs Purchases of marketable securities............................... (135) (254) Sales or maturities of marketable securities..................... 275 536 Capital expenditures............................................. (246) (203) Proceeds from sale/leaseback..................................... 81 - Receivable from financial services operations.................... 607 28 Investment in affiliates......................................... 5 (57) Capitalized interest and other................................... (28) (31) -------------- -------------- Cash provided by investment programs............................. 559 19 -------------- -------------- Cash used in financing activities................................ (54) (101) -------------- -------------- Cash and cash equivalents Increase (decrease) during the period............................ 253 (155) At beginning of the year......................................... 167 351 -------------- -------------- Cash and cash equivalents at end of the period................... $ 420 $ 196 ============== ============== PAGE 14 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." Third Quarter Ended July 31, 2000 ---------------------------------- The company reported net income of $96 million, or $1.60 per diluted common share for the third quarter ended July 31, 2000, compared with net income of $255 million or $3.86 per diluted common share for the comparable quarter last year. Net income for the third quarter of 2000 benefited from $20 million of research and development tax credits. Net income for the third quarter of 1999 included the benefit of a $178 million reduction in the company's deferred tax asset valuation allowance. Excluding the impact of these tax adjustments, net income was $76 million and $77 million, respectively. Consolidated income before income taxes was $122 million compared with pretax income of $125 million in the third quarter of 1999. The truck segment's profit increased 19% to $44 million due to increased manufacturing performance measures and decreased spending on the company's next generation vehicle (NGV) program compared to the same period last year. Engine segment profit decreased $16 million to $64 million primarily from temporary increases in program expenses related to the design of the company's next generation diesel (NGD) engine and start-up expenses at the new Huntsville engine plant in anticipation of the launch of NGD in 2002. The combined engine and truck segments' profits contributed to manufacturing pretax income of $93 million, which was comparable to the same period last year. The financial services segment's profit for the third quarter of 2000 was $24 million, which was $5 million lower than the same period last year. The decrease in third quarter profit was primarily a result of a gain on the sale of retail note receivables recognized in June 1999. Sales and Revenues. Consolidated sales and revenues for the third quarter of 2000 totaled $1,924 million, 3% higher than the $1,874 million reported for the comparable quarter in 1999. The combined truck and engine segments' revenues resulted in a $44 million increase in sales of manufactured products compared to the same period in 1999 driven primarily by unit volume. The financial services segment's revenues increased 10% to $98 million primarily as a result of increased lease financing activities and insurance premiums earned. PAGE 15 United States (U.S.) and Canadian industry retail sales of Class 5 through 8 trucks totaled 111,900 units in the third quarter of 2000, which is 8% lower than the 121,100 units sold during this period in 1999. Class 8 heavy truck sales of 66,800 units during the third quarter of 2000 were 13% lower than the 1999 level of 76,900 units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, increased slightly to 45,100 units. Industry sales of school buses, which accounted for 19% of the medium truck market, increased 9% to 8,700 units. The company's retail deliveries in the combined U.S. and Canadian Class 5 through 8 truck market increased 6%, contributing to an increase in market share for the third quarter of 2000 to 25.3% from 22.0% for the same period last year. (Sources: Ward's Communications and the Canadian Vehicle Manufacturers Association.) Shipments of mid-range diesel engines by the company to OEMs during the third quarter of 2000 totaled 72,200 units, a 5% increase from the same period of 1999. This increase resulted from higher shipments to Ford Motor Company to meet consumer demand for the light trucks and vans which use this engine. Costs and Expenses. Manufacturing gross margin was 17.5% of sales for the third quarter of 2000 compared with 18.3% for the same period in 1999. Engineering and research expense decreased $7 million from the third quarter of 1999 to $66 million. Approximately 85% of this decrease reflects a reduction in the amount of spending on the company's NGV program. Other expense primarily includes finance charges and insurance claims and underwriting fees. Nine Months Ended July 31, 2000 ------------------------------- The company reported net income of $264 million, or $4.26 per diluted common share for the first nine months ended July 31, 2000, compared with net income of $412 million or $6.16 per diluted common share for the comparable period last year. Net income for the first nine months of 2000 and 1999 included the benefits of the previously mentioned tax related items of $20 million and $178 million, respectively. Excluding the impact of these tax adjustments, net income totaled $244 million and $234 million, respectively. Consolidated pretax income for the first nine months of 2000 was $393 million compared with $378 million reported for the same period of 1999. The combined truck and engine segments' profits along with a reduction in corporate costs contributed to a $24 million increase in manufacturing pretax income, compared to the same period last year. The financial services segment's profit decreased $10 million primarily due to a first quarter 1999 legal settlement in favor of an insurance subsidiary of the company which is included in other income. Sales and Revenues. Consolidated sales and revenues during the first nine months of 2000 totaled $6,478 million, an increase of 6% from 1999. The truck and engine segments' revenues were 6% higher. These increases were attributable to increased shipments of trucks to customers and mid-range diesel engines to other OEMs. The combined truck and engine segments' revenues resulted in a $391 million increase in sales of manufactured products, compared to the same period last year. The financial services segment's revenues increased $25 million to $282 million primarily as a result of increased lease financing activities and insurance premiums earned. PAGE 16 Industry retail sales of Class 5 through 8 trucks during the first nine months of 2000 totaled 346,300 units, a slight decrease from the 348,600 units sold during this period in 1999. Class 8 heavy truck sales of 206,000 units during the first nine months of 2000 were slightly lower than the 1999 level of 210,700 units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, increased slightly to 140,300 units. Industry sales of school buses, which accounted for 19% of the medium truck market, totaled 26,500 units comparable with 1999. The company's retail deliveries in the combined U.S. and Canadian Class 5 through 8 truck market increased slightly to 90,900 units, contributing to an increase in market share for the first nine months of 2000 to 26.2% from the 25.9% reported in 1999. (Sources: Ward's Communications and the Canadian Vehicle Manufacturers Association.) Shipments of mid-range diesel engines by the company to OEMs during the first nine months of 2000 totaled 227,000 units, a 14% increase from the same period of 1999 due to higher shipments to Ford Motor Company. The engine segment's revenues increased at a lower rate than units shipped due to a shift in warranty administration liability between International and its customers. Costs and Expenses. Manufacturing gross margin for the first nine months of 2000 was 17.4% compared with 17.6% in 1999. Engineering and research expense increased $16 million from the first nine months of 1999 to $213 million due to the company's continuing investment in its NGV and NGD programs. Other expense primarily includes finance charges and insurance claims and underwriting fees. Liquidity and Capital Resources Cash flow is generated from the manufacture and sale of trucks and mid-range diesel engines and their associated service parts as well as from product financing and insurance coverage 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 Navistar Financial Corporation (NFC). Insurance operations are self-funded. The company had working capital of $1,170 million at July 31, 2000, compared to $340 million at October 31, 1999. Cash provided by operations during the first nine months of 2000 totaled $319 million primarily from net income of $264 million, $103 million of noncash deferred taxes and $158 million of depreciation and amortization, partially offset by a net change in operating assets and liabilities of $195 million. The net use of cash resulting from the change in operating assets and liabilities included a $176 million decrease in other liabilities primarily due to the timing of the payments required by the company's profit sharing and performance incentive programs. The change also included a $505 million decrease in accounts payable related to the timing of NGD program payments and a decrease in truck and engine production levels compared to those at year end. These were partially offset by a $575 million decrease in accounts receivable primarily due to a net decrease in wholesale note and account balances. PAGE 17 Investment programs used $125 million in cash primarily reflecting a net increase in property and equipment leased to others of $62 million and $248 million of capital expenditures primarily for the NGV and NGD programs. These were partially offset by a net decrease in marketable securities of $123 million and $81 million of proceeds from sale/leasebacks. Cash provided by financing activities of $95 million resulted from a net increase of $108 million in notes and debt outstanding under the bank revolving credit facility and other commercial paper programs, and a $138 million net increase in long-term debt which includes a $95 million forward contract which the company used to purchase its outstanding common shares. Over the first nine months of 2000, the company used cash to purchase $151 million of its common stock. NFC has traditionally obtained funds to provide financing to the company'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 July 31, 2000, NFC's funding consisted of sold finance receivables of $2,935 million, bank and other borrowings of $1,306 million, subordinated debt of $100 million, capital lease obligations of $400 million and equity of $307 million. Through the asset-backed markets, NFC has been able to fund fixed rate retail note receivables at rates offered to companies with investment grade ratings. As further described in Note E, during the first nine months of 2000, NFC sold a total of $1,008 million of retail notes through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary of NFC. As of July 31, 2000, the remaining shelf registration available to NFRRC for the public issuance of asset-backed securities was $1,783 million. In January 2000, NFC sold $300 million of variable funding certificates, through Navistar Financial Securities Corporation (NFSC), a wholly owned subsidiary of NFC, to a conduit sponsored by a major financial institution. As of July 31, 2000, NFSC had $175 million of variable funding certificates outstanding, and reduced its maximum capacity from $300 million to $200 million. The variable funding certificates mature in 2001. In July 2000, NFC issued a $212 million tranche of investor certificates which mature in June 2005. At July 31, 2000, available funding under NFC's bank revolving credit facility and the asset-backed commercial paper facility was $33 million. When combined with unrestricted cash and cash equivalents, $120 million was available to fund the general business purposes of NFC. Also, as of July 31, 2000, NFSC had a revolving wholesale note trust that provides for the funding of $959 million of eligible wholesale notes. As of July 31, 2000, NFC was a party to a total of $350 million of forward starting swaps in anticipation of an October 2000 sale of retail note receivables. Any gain or loss will be included in the gain or loss on the sale of receivables recognized in October 2000. As of July 31, 2000, the company held German mark forward contracts with notional amounts of $85 million related to committed capital equipment purchases. The company held other derivative contracts with notional amounts of $34 million. The unrealized net loss on these contracts was $6 million. PAGE 18 Cash flow from the company's manufacturing operations, financial services operations and financing capacity is sufficient to cover planned investment in the business. The company had outstanding capital commitments of $383 million at July 31, 2000, primarily for the NGV and NGD programs. In February 2000, Standard and Poor's raised the company's and NFC's senior debt ratings from BB+ to BBB-, and raised the company's and NFC's subordinated debt ratings from BB- to BB+. It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow will provide a basis for financing operating requirements and capital expenditures. Management believes that collections on the outstanding receivables portfolios as well as funds available from various sources will permit the financial services operations to meet the financing requirements of the company's dealers and customers. Year 2000 As described in the 1999 Annual Report on Form 10-K, the company had instituted a corporate-wide Year 2000 readiness project to identify all systems which would require modification or replacement, and to establish appropriate remediation and contingency plans to avoid an impact on the company's ability to continue to provide its products and services. Through the date of this report, the company has not experienced any significant Year 2000 problems but will continue to monitor its critical systems over the next several months. In the event that significant issues arise, the company's contingency plans remain in place. The company's total cost of the Year 2000 project, which is funded through operating cash flows, is estimated to be $32 million including $26 million of estimated expense and $6 million of capital expenditures. Approximately $25 million has been expensed and approximately $6 million has been capitalized through July 31, 2000. The remaining costs are estimated to be incurred through the remainder of fiscal year 2000. New Accounting Pronouncements On November 1, 2000, the company will adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" as amended. This statement standardizes the accounting for derivative instruments by requiring 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 hedging instrument with the recognition of (a) the 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. The company is currently assessing the impact of adoption on its financial statements. Based on the company's current portfolio of instruments subject to the statement, it is not expected that adoption of this statement will have a material effect on the company's results of operations, financial condition, or cash flows. PAGE 19 The company's initial assessment, which is subject to change for subsequent events that occur before adoption, indicates that the transition adjustment to both earnings and comprehensive income is expected to be immaterial. Business Environment Sales of Class 5 through 8 trucks have historically been cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates, fuel prices, driver availability and the earnings and cash flow of dealers and customers. Strong levels of medium retail activity has led the company to increase its demand estimates. The company currently projects 2000 United States and Canadian Class 8 heavy truck demand to be 245,000 units. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast at 148,000 units and demand for school buses is forecast at 35,000 units. However, an industry-wide slowdown in orders for heavy trucks has resulted in a schedule change at the company's Chatham Assembly Plant that resulted in the layoff of approximately 800 employees during the first nine months of the year. The decrease in the number of new truck orders is in line with the company's expectations and has decreased the company's order backlog to 27,100 units at July 31, 2000 from 53,300 units at July 31, 1999. The company continually evaluates order receipts and backlog throughout the year and balances production with demand as appropriate. During August 2000, the company announced it has begun the process of implementing a restructuring plan designed to allow the company to meet its financial objectives in the face of the long-anticipated sharp drop in demand for new trucks and an extremely competitive marketplace. Part of this plan involved the elimination of approximately 1,100 salaried and contract positions representing approximately 15 percent of the company's white-collar workforce. Charges related to the entire restructuring plan are still being determined and will be recorded in the fourth quarter. PAGE 20 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, 1999, as reported in the 1999 Annual Report on Form 10-K. PART II - OTHER INFORMATION Item 1. Legal Proceedings Incorporated herein by reference from Item 3 - "Legal Proceedings" in the company's definitive Form 10-K dated December 22, 1999, Commission File No. 1-9618. 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 (b) Reports on Form 8-K: No reports on Form 8-K were filed for the three months ended July 31, 2000. PAGE 21 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) September 14, 2000