EXHIBIT 13
FINANCIAL INFORMATION
Management's Discussion and Analysis of Results
of Operations and Financial Condition............................ 2
Statement of Financial Reporting Responsibility...................... 13
Independent Auditors' Report......................................... 14
Financial Statements
Statement of Income.............................................. 15
Statement of Financial Condition................................. 16
Statement of Cash Flow........................................... 17
Notes to Financial Statements
1 Summary of accounting policies.......................... 18
2 Postretirement benefits................................. 22
3 Income taxes............................................ 25
4 Marketable securities................................... 28
5 Receivables............................................. 29
6 Inventories............................................. 30
7 Property and equipment.................................. 30
8 Debt.................................................... 31
9 Other liabilities....................................... 34
10 Financial instruments................................... 35
11 Commitments, contingencies, restricted assets,
concentrations and leases............................. 37
12 Legal proceedings and environmental matters............. 38
13 Industry segment data................................... 39
14 Preferred and preference stocks......................... 41
15 Common shareowners' equity.............................. 42
16 Earnings per share...................................... 43
17 Stock compensation plans................................ 44
18 Selected quarterly financial data (unaudited)........... 46
Supplemental Financial Information (unaudited)....................... 47
Five -Year Summary of Selected Financial and Statistical Data........ 48
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act, which involve risks and uncertainties.
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."
Navistar International Corporation is a holding company and its principal
operating subsidiary is Navistar International Transportation Corp.
(Transportation). In this discussion and analysis, "company" or "Navistar"
refers to Navistar International Corporation and its consolidated subsidiaries.
The company's manufacturing operations are engaged in the manufacture and
marketing of Class 5 through 8 trucks, including school buses, mid-range diesel
engines and service parts primarily in the United States and Canada as well as
in Mexico, Brazil and other selected export markets. The financial services
operations of the company provide wholesale, retail and lease financing, and
domestic commercial physical damage and liability insurance coverage to the
company's dealers and retail customers and to the general public through an
independent insurance agency system.
The discussion and analysis reviews the operating and financial results,
and liquidity and capital resources of manufacturing operations and financial
services operations. Manufacturing operations include the financial results of
the financial services operations included on a one-line basis under the equity
method of accounting. Financial services operations include Navistar Financial
Corporation (NFC) and the company's foreign finance companies. See Note 1 to the
Financial Statements.
RESULTS OF OPERATIONS
The company reported net income of $299 million for 1998, or $4.11 per
diluted common share, reflecting higher sales of manufactured products as well
as a $45 million reduction in the company's tax valuation allowance. Net income
was $150 million, or $1.65 per diluted common share in 1997 and $65 million, or
$.49 per diluted common share in 1996. Net income in 1996 included a one-time
$35 million pretax charge for costs related to the termination of the next
generation vehicle (NGV) program. In August 1997, the company and the United
Automobile, Aerospace and Agricultural Implement Workers of America (UAW)
reached agreement on a master contract extension that enabled the company to
reinstate this program.
The company's manufacturing operations reported income before income taxes
of $321 million in 1998 compared with pretax income of $164 million in 1997 and
$22 million in 1996. The increases in 1998 and 1997 over the prior years reflect
higher sales of trucks and diesel engines as well as the effects of improved
pricing and various cost improvement initiatives.
NFC's pretax income in 1998 was $85 million, a 13% increase from $75
million in 1997, primarily as a result of an increase in wholesale and retail
financing activity partially offset by lower financing margins. NFC's pretax
income decreased $6 million in 1997 from the $81 million reported in 1996
primarily due to lower income on sales of retail receivables and a decline in
wholesale financing activity.
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Sales and Revenues. U.S. and Canadian industry retail sales of Class 5 through 8
trucks totaled 390,900 units in 1998, a 13% increase from the 347,400 units sold
in 1997, and 15% higher than the 341,200 units sold in 1996. Class 8 heavy truck
sales totaled 232,000 units, an 18% increase from the 196,800 units sold in
1997, and 19% higher than the 195,400 units sold in 1996. Industry sales of
Class 5, 6 and 7 medium trucks, including school buses, totaled 158,900 units in
1998, a 6% increase from 1997 when 150,600 units were sold, which was a 3%
increase over the 145,800 units sold in 1996. Industry sales of school buses,
which accounted for 20% of the medium truck market, decreased approximately 5%
from 1997 to 31,700 units.
Sales and revenues of $7,885 million in 1998 were 24% higher than the
$6,371 million reported in 1997 and 37% higher than the $5,754 million reported
in 1996. Sales of trucks, mid-range diesel engines and service parts totaled
$7,629 million in 1998, 24% above the $6,147 million reported for 1997 and a 39%
increase from the $5,508 million reported in 1996.
The company maintained its position as sales leader in the combined United
States and Canadian Class 5 through 8 truck market in 1998 with a 28.9% market
share, an increase from the 28.6% share in 1997 and the 27.5% share in 1996
(Sources: American Automobile Manufacturers Association, Canadian Vehicle
Manufacturers Association and R. L. Polk & Company). Shipments of mid-range
diesel engines by the company to other original equipment manufacturers during
1998 were a record 213,700 units, a 16% increase over the 184,000 units in 1997,
which represented a 13% improvement over 1996. Higher shipments to Ford Motor
Company to meet consumer demand for the light trucks and vans which use this
engine was the primary reason for the increase.
Service parts sales of $848 million in 1998 increased from the $806 million
reported in 1997 and were 12% higher than the $760 million reported in 1996 as a
result of dealer and national account volume growth.
Finance and insurance revenue was $201 million for 1998, a $27 million
increase over 1997 revenue of $174 million as a result of increased wholesale
and retail financing. Revenue in 1997 was 12% lower than the $197 million
reported in 1996 primarily as a result of a decline in wholesale financing
activity.
Costs and Expenses. Manufacturing gross margin was 15.3% of sales in 1998,
compared with 14.2% in 1997 and 12.5% in 1996. The increases in gross margin are
primarily due to lower unit production costs and improved pricing offset by
provisions for employee profit sharing.
Postretirement benefits plan expense decreased to $174 million in 1998 from
$215 million in 1997 and from $220 million in 1996 mainly as a result of higher
expected return on plan assets.
Engineering and research expense increased to $192 million in 1998 from
$124 million in 1997 and $129 million in 1996, reflecting the company's
continuing investment in its NGV program as well as its investment in its Next
Generation Diesel (NGD) program.
Marketing and administrative expense was $427 million in 1998 compared with
$365 million in 1997 and $319 million in 1996. The change between 1998 and 1997
reflects investment in the company's five-point truck strategy and an increase
in the provision for payment to employees as provided by the company's
performance incentive programs. The $46 million increase between 1997 and 1996
reflects higher sales and distribution costs and an increase in the provision
for payment to employees as provided by the company's performance incentive
programs.
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Interest expense increased to $105 million in 1998 from $74 million in 1997
and $83 million in 1996. The increase in 1998 is primarily due to a $374 million
net increase in debt driven by the issuance of $350 million of senior and senior
subordinated notes. The decrease in 1997 was the result of lower wholesale note
funding requirements and declining interest rates.
The increase in other expenses from 1997 to 1998 includes $14 million of
expenses related to the secondary public offering of 19.9 million shares of the
company's common stock as further described in the liquidity and capital
resources section.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow is generated from the manufacture and sale of trucks, mid-range
diesel engines and service parts as well as product financing and insurance
coverage provided to Transportation's dealers and retail customers by the
financial services operations. The company's current debt ratings have made bank
borrowings and sales of finance receivables the most economic sources of cash
for NFC. Insurance operations are self-funded.
Total cash, cash equivalents and marketable securities of the company
amounted to $1,064 million at October 31, 1998, $965 million at October 31,
1997, and $881 million at October 31, 1996.
Cash provided by operations during 1998 totaled $361 million, primarily
from net income of $299 million. In addition to regular postretirement benefit
payments, the company contributed $200 million to both the Retiree Health Care
Base Plan Trust and to the hourly pension plan during 1998. Income tax expense
for 1998 was $111 million, composed of cash payments of $7 million to federal
and certain state and local governments and $149 million of federal and other
taxes which reduced the deferred tax asset. These were offset by a $45 million
reversal of a portion of the deferred tax asset valuation allowance.
The net change in operating assets and liabilities of $188 million includes
a $192 million increase in receivables, reflecting higher sales in 1998 compared
to 1997, offset by a $192 million increase in accounts payable principally due
to higher production in engine facilities as well as in Mexico and Brazil. The
$202 million increase in other liabilities is primarily due to an increase in
the accrual for the company's performance incentive programs.
During 1998, investment programs used $898 million in cash primarily from a
net increase in marketable securities of $266 million, a net increase in retail
notes and lease receivables of $192 million and a $125 million net increase in
property and equipment leased to others. Additionally, $305 million was used to
fund capital expenditures including $86 million for construction of a truck
assembly facility in Mexico, $106 million to increase mid-range diesel engine
capacity and additional funds for truck product improvements.
Financing activities provided a $374 million net increase in long-term debt
primarily due to the issuance of $100 million 7% Senior Notes due 2003 and $250
million 8% Senior Subordinated Notes due 2008 offset by the $26 million used to
repay the 8% Secured Note due 2002 and by the $45 million used to redeem the
company's 9% Sinking Fund Debentures due June 2004. Financing activities also
provided a $348 million net increase in notes and debt outstanding under the
bank revolving credit facility and asset-backed and other commercial paper
programs. Additionally, $84 million was borrowed under the Mexican credit
facility, of which approximately half is denominated in Mexican pesos. Financing
activities used cash of $240 million for the redemption of the Series G
Preferred Stock and for the payment of $11 million of related dividends. In
addition, $189 million of common stock was repurchased during 1998 offset by $28
million of proceeds from the reissuance of treasury shares.
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In June 1998, a secondary public offering of the common stock of the
company was completed, in which the Navistar International Transportation Corp.
Retiree Supplemental Benefit Trust (the Trust) sold approximately 19.9 million
shares of common stock at an offering price of $26.50 per share. These shares
represented the Class B Common Stock held by the Trust which automatically
converted into Common Stock upon the sale. In conjunction with this offering,
the company and certain of the company's pension plans purchased 2 million and 3
million, respectively, of the shares being offered. The company did not receive
any proceeds from the sale of the shares in the offering, but paid expenses
related to the offering of $14 million pursuant to a pre-existing agreement with
the Trust. These offering fees are included in other expenses. The underwriters
subsequently exercised their over-allotment option and elected to purchase 1.1
million shares from the company at $26.50 per share. The company offset the
dilution of this sale through open market purchases of its Common Stock.
Cash flow from the company's manufacturing and financial services
operations are currently sufficient to cover planned investment in the business.
Capital expenditures for 1999 are expected to be approximately $450 million
including approximately $130 million for the NGV and NGD programs. Additional
capital expenditures are planned for increased manufacturing capacity at the
Indianapolis engine plant, development of operations in Brazil and improvements
to existing facilities and products. The company had outstanding capital
commitments of $153 million at October 31, 1998, primarily for the NGV and NGD
programs and for increased manufacturing capacity at the Indianapolis engine
plant.
The company currently estimates approximately $515 million in capital
spending and $330 million in development expense through 2003 for the NGV
program. Approximately $95 million of this development expense is planned for
1999. During 1998, the company approved a plan for up to $600 million in capital
spending over the next five years in order to manufacture a next generation
version of diesel engines. In addition, approximately $110 million of
development expense was approved for the development of these engines, of which
approximately $30 million is planned for 1999.
The company's truck assembly facility located in Escobedo, Mexico is
encumbered by a lien in favor of certain lenders of the company as collateral
for the $125 million revolving Mexican credit facility. At October 31, 1998, $19
million of a Mexican subsidiary's receivables were pledged as collateral for
bank borrowings. In addition, as of October 31, 1998, the company is
contingently liable for approximately $75 million for various purchasing
commitments, credit guarantees and buyback programs; however, based on
historical loss trends, the company's exposure is not considered material.
Additionally, restrictions under the terms on the senior and senior subordinated
notes and Mexican credit facility include a limitation on indebtedness and a
limitation on certain restricted payments.
Through the asset-backed public market, NFC has been able to fund fixed
rate retail note receivables at rates offered to companies with investment grade
ratings. During 1998 and 1997, NFC sold $1,001 million and $987 million,
respectively, of retail notes, through Navistar Financial Retail Receivables
Corporation (NFRRC), a wholly owned subsidiary. On August 28, 1998, NFRRC filed
a shelf registration statement with the Securities and Exchange Commission which
provides for the issuance of an additional $2,500 million of asset-backed
securities. The aggregate shelf registration available to NFRRC for issuance of
asset-backed securities is $2,972 million. In November 1998, NFC sold an
additional $545 million of retail notes through NFRRC to a multi-seller
asset-backed commercial paper conduit sponsored by a major financial
institution.
At October 31, 1998, Navistar Financial Securities Corporation (NFSC), a
wholly owned subsidiary of NFC, had a revolving wholesale note trust that
provides for the funding of $700 million of wholesale notes comprised of one
$100 million tranche of investor certificates maturing in 1999 and three $200
million tranches of investor certificates maturing in 2003, 2004 and 2008.
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NFC has a $925 million bank revolving credit facility and a $400 million
asset-backed commercial paper (ABCP) program supported by a bank liquidity
facility, which mature in March 2001. As of October 31, 1998, available funding
under the bank revolving credit facility and the ABCP facility was $124 million,
of which $22 million provided funding backup for the outstanding short-term
debt.
NFC's maximum contractual exposure under all receivable sale recourse
provisions at October 31, 1998, was $259 million. However, management believes
the recorded reserves for losses on sold receivables are adequate.
At October 31, 1998, the Canadian operating subsidiary was contingently
liable for retail customers' contracts and leases financed by a third party. The
Canadian operating subsidiary is subject to maximum recourse of $203 million on
retail contracts and $16 million on retail leases. The Canadian operating
subsidiary, NFC and certain other subsidiaries included in financial services
operations are parties to agreements that may result in the restriction of
amounts which can be distributed to Transportation in the form of dividends or
loans and advances. At October 31, 1998, the maximum amount of dividends which
were available for distribution under the most restrictive covenants was $91
million.
The company and Transportation are obligated under certain agreements with
public and private lenders of NFC to maintain the subsidiary's income before
interest expense and income taxes at not less than 125% of its total interest
expense. No income maintenance payments were required for the three years ended
October 31, 1998.
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
also 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 the company's dealers
and customers.
ENVIRONMENTAL MATTERS
In October 1998, Navistar, along with other heavy-duty diesel engine
manufacturers, entered into a Consent Decree with the United States
Environmental Protection Agency (U.S. EPA) and a Settlement Agreement with
California Air Resource Board (CARB) concerning alleged emissions from
heavy-duty diesel engines which utilized strategies to improve fuel economy and
may have affected nitrogen oxide emissions. The company's settlement with the
U.S. EPA and CARB requires a payment of $3 million dollars which was expensed in
1998. The settlement additionally requires changes to new engine configurations
which are to be produced after October 2002. The changes are not expected to
have a material effect on the company's financial position or operating results.
The company has been named a potentially responsible party (PRP), in
conjunction with other parties, in a number of cases arising under an
environmental protection law known as the Superfund law. These cases involve
sites which allegedly have received wastes from current or former company
locations. Based on information available to the company, which, in most cases,
consists of data related to quantities and characteristics of material generated
at, or shipped to, each site as well as cost estimates from PRPs and/or federal
or state regulatory agencies for the cleanup of these sites, a reasonable
estimate is calculated of the company's share, if any, of the probable costs and
is provided for in the financial statements. These obligations generally are
recognized no later than completion of the remedial feasibility study and are
not discounted to their present value. The company reviews its accruals on a
regular basis and believes that, based on these calculations, its share of the
potential additional costs for the cleanup of each site will not have a material
effect on the company's financial results.
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DERIVATIVE FINANCIAL INSTRUMENTS
As disclosed in Notes 1 and 10 to the Financial Statements, the company
uses derivative financial instruments to transfer or reduce the risks of foreign
exchange and interest rate volatility, and potentially increase the return on
invested funds.
The company's manufacturing operations, as conditions warrant, hedge
foreign exchange exposure on the purchase of parts and materials from foreign
countries and its exposure from sales of manufactured products in other
countries. Contracted purchases of commodities for manufacturing may also be
hedged.
NFC may use forward contracts to hedge the fair value of its fixed rate
receivables against changes in market interest rates in anticipation of the sale
of such receivables. NFC also uses interest rate swaps to reduce exposure to
interest rate changes when it sells fixed rate receivables on a variable rate
basis. For the protection of investors in NFC's debt securities, NFC may write
interest rate caps when fixed rate receivables are sold on a variable rate
basis.
MARKET RISK DISCLOSURE
The company's primary market risks include fluctuations in interest rates
and currency exchange rates. The company is also exposed to changes in the
prices of commodities used in its manufacturing operations and to changes in the
prices of equity instruments owned by the company; however commodity price risk
related to the company's current commodity financial instruments and equity
price risk related to the company's current investments in equity instruments
are not material. The company does not hold any material market risk sensitive
instruments for trading purposes.
The company has established policies and procedures to manage sensitivity
to interest rate and foreign currency exchange rate market risk. These
procedures include the monitoring of the company's level of exposures to each
market risk, the funding of variable rate receivables with variable rate debt,
and limiting the amount of fixed rate receivables which may be funded with
floating rate debt. These procedures also include the use of derivative
financial instruments to mitigate the effects of interest rate fluctuations and
to reduce the exposure to exchange rate risk.
Interest rate risk is the risk that the company will incur economic losses
due to adverse changes in interest rates. The company measures its interest rate
risk by estimating the net amount by which the fair value of all of its interest
rate sensitive assets and liabilities would be impacted by selected hypothetical
changes in market interest rates. Assuming a hypothetical 10% decrease in
interest rates as of October 31, 1998, the net fair value of these instruments
would decrease by approximately $5 million. The company's interest rate
sensitivity analysis assumes a parallel shift in interest rate yield curves. The
model, therefore, does not reflect the potential impact of changes in the
relationship between short-term and long-term interest rates.
Foreign currency risk is the risk that the company will incur economic
losses due to adverse changes in foreign currency exchange rates. The company's
primary exposure to foreign currency exchange fluctuations are the Canadian
dollar/U.S. dollar and Mexican peso/U.S. dollar. As of October 31, 1998, the
potential reduction in future earnings from a hypothetical instantaneous 10%
adverse change in quoted foreign currency exchange rates applied to foreign
currency sensitive instruments would be approximately $10 million. The foreign
currency sensitivity model is limited by the assumption that all of the foreign
currencies to which the company is exposed would simultaneously decrease by 10%,
because such synchronized changes are unlikely to occur. The effects of foreign
currency forward contracts have been included in the above analysis; however,
the sensitivity model does not include the inherent risks associated with the
anticipated future transactions denominated in foreign currency for which these
forward contracts have been entered into for hedging purposes.
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YEAR 2000
In 1995, the company instituted a corporate-wide Year 2000 readiness
project to identify all systems which will 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. Navistar has established a team of professionals within each of its
sites and locations to implement and complete this initiative. In 1997, the
company expanded its Year 2000 readiness project to include the company's
products, external suppliers, dealers and facilities.
The company's Year 2000 program is directed to four major areas: products,
internal systems (including information technology (IT) and non-IT systems),
suppliers and dealers.
The company has completed its compliance review of virtually all of its
products and has not learned of any products which it manufactures that will
cease functioning or experience an interruption in operation as a result of the
transition to the Year 2000.
The internal systems portion of the project addresses personal computing;
facilities, including the physical "machines" inside a plant or office complex;
and computer business systems that are commonly run on larger mainframes and
mid-range computers as well as the supporting infrastructure for the company's
computer business systems. The company presently believes that it has identified
all significant applications that will require remediation, which in some cases
will involve the replacement of the systems, to achieve Year 2000 readiness.
Both internal and external resources are being used to make the required
modifications and test for Year 2000 compliance. The company currently estimates
approximately 85% completion of conversion or compliance checking of its
internal systems including significant applications by the end of December 1998.
Integrated testing of major systems is planned to begin in late December 1998.
The company currently anticipates that the modifications and testing process of
all significant applications will be substantially complete by August 1999,
which is prior to any anticipated impact on its operating systems.
With regard to the supplier portion of the project, the company is
currently assessing the Year 2000 readiness of production and service parts
suppliers through a supplier survey process designed by an automotive industry
trade association, the Automotive Industry Action Group (AIAG). Suppliers have
been asked to respond to a compliance questionnaire. Responses to these
questionnaires have been received from about 25% of these suppliers. Based on
these responses, the company believes that approximately half of these suppliers
are making acceptable progress toward Year 2000 readiness. The company is also
assessing non-production suppliers. The supplier assurance process is expected
to be substantially complete by April 1999, including audits of select
suppliers. NFC has received written assurances from its major suppliers of cash
management services that they expect to address all of their significant Year
2000 issues on a timely basis.
The company is working with its independent dealers on their Year 2000
readiness and monitoring their progress. The company has contacted all dealers
and is working with its certified Dealer Business Systems Vendors to assist the
dealers in becoming Year 2000 compliant. Compliance of all certified dealers
systems is expected to be substantially complete by December 1999.
The company's total cost of the Year 2000 project, which will be funded
through operating cash flows, is estimated to be $34 million including $24
million of estimated expense and $10 million of capital expenditures.
Approximately $14 million has been expensed and approximately $4 million has
been capitalized through October 31, 1998. The remaining costs are estimated to
be incurred through fiscal year 2000. The company's annual 1999 expense for the
Year 2000 project is estimated to represent 5% of the company's 1999 information
technology budget. Other non-Year 2000 information technology efforts have not
been materially delayed or impacted by the Year 2000 project.
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The costs of the Year 2000 project and the dates on which the company
believes it will complete the Year 2000 modifications and testing are based on
management's best estimates, which were derived utilizing numerous assumptions
regarding future events, including the continued availability of certain
resources, third party modification plans and other factors. However, there can
be no guarantee that these estimates will be achieved, and actual results could
differ materially from those currently anticipated. Examples of factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes and embedded technology, and similar
uncertainties. In addition, there can be no guarantee that the systems or
products of other entities, including the company's independent dealers, on
which the company relies will be converted on a timely basis, or that a failure
to convert by another company, or a conversion that is incompatible with the
company's systems, would not have a material adverse effect on the company.
The company currently believes that the most reasonably likely worst case
scenario with respect to the Year 2000 issue is the failure of a supplier,
including utility suppliers, to become Year 2000 compliant, which could result
in the temporary interruption of the supply of necessary products or services to
a manufacturing facility. This could result in interruptions in production for a
period of time, which in turn could result in potential lost sales and profits.
Additionally, marketing and administrative expense could increase if automated
functions would need to be performed manually.
The company currently believes that the most reasonably likely worst case
scenario for its financial services operations with respect to the Year 2000
issue would be the inability to sustain its current level of performance and
customer service. Additionally, a significant failure of the banking systems or
key entities in the financial markets could adversely affect the financial
services operations' ability to access various credit and money markets.
As part of its continuous assessment process, the company will develop
contingency plans as necessary. These plans could include, but are not limited
to, material banking, use of alternate suppliers and development of alternate
means to process dealer orders. The company currently plans to complete such
contingency planning by December 1999.
Navistar is using its best efforts to ensure that the Year 2000 impact on
its critical systems and processes will not affect its supply of product,
quality or service. However, in the event that the company is unable to complete
its remedial actions described above and is unable to implement adequate
contingency plans in the event problems arise, there could be a material adverse
effect on the company's business, financial position or results of operations.
The preceding "Year 2000" discussion contains various forward-looking
statements which represent the company's beliefs or expectations regarding
future events. When used in the "Year 2000" discussion, the words "believes,"
"expects," "estimates," "planned," "could," and similar expressions are intended
to identify forward-looking statements. Forward-looking statements include,
without limitation, the company's expectations as to when it will complete the
remediation and testing phases of its Year 2000 program as well as its Year 2000
contingency plans; its estimated cost of achieving Year 2000 readiness; and the
company's belief that its internal systems and equipment will be Year 2000
compliant in a timely manner. All forward-looking statements involve a number of
risks and uncertainties that could cause the actual results to differ materially
from the projected results. Factors that may cause these differences include,
but are not limited to, the availability of qualified personnel and other
information technology resources; the ability to identify and remediate all
date-sensitive lines of computer code or to replace embedded computer chips in
affected systems or equipment; and the actions of governmental agencies or other
third parties with respect to Year 2000 problems.
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NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS 131 establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. SFAS 130 and SFAS 131 expand or modify
current disclosures and, accordingly, will have no impact on the company's
reported financial position, results of operations and cash flows. The company
is currently assessing the impact of SFAS 131 on its reported segments.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement defines whether
or not certain costs related to the development or acquisition of internal use
software should be expensed or capitalized and is effective for fiscal years
beginning after December 15, 1998. The company is currently assessing the impact
of this statement on its results of operations and financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," to establish accounting and reporting requirements for
derivative instruments. This standard requires recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities, measured at fair value, and is effective for fiscal years beginning
after June 15, 1999. This statement additionally requires changes in the fair
value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives. The
company is currently assessing the impact of this statement on its results of
operations, financial position and cash flows.
INCOME TAXES
The Statement of Financial Condition at October 31, 1998 and 1997 includes
a deferred tax asset of $912 million and $934 million, respectively, net of
valuation allowances of $264 million and $309 million, respectively, related to
future tax benefits. The deferred tax assets have been reduced by the valuation
allowance as management believes it is more likely than not that some portion of
the deferred tax asset may not be realized in the future.
The deferred tax asset includes the tax benefits associated with cumulative
tax losses of $1,597 million and temporary differences, which represent the
cumulative expense of $1,437 million recorded in the Statement of Income that
has not been deducted on the company's tax returns. The valuation allowance at
October 31, 1998 assumes that it is more likely than not that approximately $695
million of cumulative tax losses will not be realized before their expiration
date. Realization of the net deferred tax asset is dependent on the generation
of approximately $2,400 million of future taxable income, of which an average of
approximately $70 million would need to be generated annually for the 13-year
period 1999 through 2011. The remaining taxable income, which represents the
realization of tax benefits associated with temporary differences, does not need
to be generated until subsequent to 2011. Until the company has utilized its
significant NOL carryforwards, the cash payment of federal income taxes will be
minimal. See Note 3 to the Financial Statements.
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The company performs extensive analysis to determine the amount of the
deferred tax asset. Such analysis is based on the premise that the company is,
and will continue to be, a going concern and that it is more likely than not
that deferred tax benefits will be realized through the generation of future
taxable income. Management reviews all available evidence, both positive and
negative, to assess the long-term earnings potential of the company. The
financial results are evaluated using a number of alternatives in economic
cycles at various industry volume conditions. Factors considered are the
company's 18-consecutive-year leadership in the combined market share of Class 5
through 8 trucks and recognition as a worldwide leading producer of mid-range
diesel engines.
As a result of the continued successful implementation of its manufacturing
strategy, including the reinstatement of the NGV program, the continued strength
of industry volume conditions, extension of the Ford diesel contract, new
program initiatives and other positive operating indicators, management
initiated an extensive review of its projected future taxable income. This
review was completed during the fourth quarter of 1998 and resulted in a
reduction to the deferred tax asset valuation allowance of $45 million which has
been recorded as a reduction in income tax expense resulting in an effective tax
rate of 27%. Management believes that, with the combination of available tax
planning strategies and the maintenance of significant market share, earnings
are achievable in order to realize the net deferred tax asset of $912 million.
Reconciliation of the company's income before income taxes for financial
statement purposes to United States taxable income for the years ended October
31 is as follows:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Income before income taxes. ........... $ 410 $ 242 $ 105
Exclusion of (income) loss
of foreign subsidiaries.............. (7) (3) 3
State income taxes..................... (3) (2) (2)
Temporary differences.................. (169) 145 (284)
Other ................................. (12) 6 -
------ ------ ------
Taxable income (loss)..... .......... $ 219 $ 388 $ (178)
------ ------ ------
BUSINESS ENVIRONMENT
Sales of Class 5 through 8 trucks 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. Reflecting the stability of the general economy, demand for new
trucks remained strong during 1998. An improvement in the number of new truck
orders has increased the company's order backlog to 72,100 units at October 31,
1998, from 45,300 units at October 31, 1997. 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.
The company currently projects 1999 United States and Canadian Class 8
heavy truck demand to be 224,700 units, a 3% decrease from 1998. Class 5, 6 and
7 medium truck demand, excluding school buses, is forecast at 124,100 units,
slightly lower than in 1998. Demand for school buses is expected to decrease
slightly in 1999 to 31,300 units. Mid-range diesel engine shipments by the
company to original equipment manufacturers in 1999 are expected to be 259,100
units, 21% higher than in 1998. The company's service parts sales are projected
to grow 10% to approximately $935 million.
- 11 -
At current demand levels, the entire truck industry is operating at or near
capacity. Accordingly, constraints have been placed on the company's ability to
meet certain customers' demands because of component parts availability.
During 1997, the company entered into a 10-year agreement, effective with
model year 2003, to supply newly designed, advanced technology engines through
the year 2012 to Ford Motor Company for use in its diesel-powered light trucks
and vans. The company's current engine agreement with Ford was extended through
model year 2002. During March 1998, the company announced that it had been
selected to negotiate an extended term agreement to supply diesel engines to
Ford Motor Company for certain under 8,500 lbs. GVW light duty trucks and sport
utility vehicles beginning with the 2002 model year.
In September 1998, the company formally announced the start of its
distribution of medium and heavy trucks to customers in Brazil. The company also
announced its intent to form a joint venture to develop and manufacture
proprietary next generation diesel fuel injectors incorporating digital valve
technology. In October 1998, the company announced that it signed a letter of
intent to form a joint venture with a Brazilian company to manufacture diesel
engines in South America for a broad range of truck applications.
- 12 -
STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY
Management of Navistar International Corporation and its subsidiaries is
responsible for the preparation and for the integrity and objectivity of the
accompanying financial statements and other financial information in this
report. The financial statements have been prepared in accordance with generally
accepted accounting principles and include amounts that are based on
management's estimates and judgments.
The accompanying financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Management has made available to Deloitte &
Touche LLP all the company's financial records and related data, as well as the
minutes of the Board of Directors' meetings. Management believes that all
representations made to Deloitte & Touche LLP during its audit were valid and
appropriate.
Management is responsible for establishing and maintaining a system of
internal controls throughout its operations that provides reasonable assurance
as to the integrity and reliability of the financial statements, the protection
of assets from unauthorized use and the execution and recording of transactions
in accordance with management's authorization. Management believes that the
company's system of internal controls is adequate to accomplish these
objectives. The system of internal controls, which provides for appropriate
division of responsibility, is supported by written policies and procedures that
are updated by management, as necessary. The system is tested and evaluated
regularly by the company's internal auditors as well as by the independent
auditors in connection with their annual audit of the financial statements. The
independent auditors conduct their audit in accordance with generally accepted
auditing standards and perform such tests of transactions and balances as they
deem necessary. Management considers the recommendations of its internal
auditors and independent auditors concerning the company's system of internal
controls and takes the necessary actions that are cost-effective in the
circumstances to respond appropriately to the recommendations presented.
The Audit Committee of the Board of Directors, composed of four
non-employee Directors, meets periodically with the independent auditors,
management, general counsel and internal auditors to satisfy itself that such
persons are properly discharging their responsibilities regarding financial
reporting and auditing. In carrying out these responsibilities, the Committee
has full access to the independent auditors, internal auditors, general counsel
and financial management in scheduled joint sessions or private meetings as in
the Committee's judgment seem appropriate. Similarly, the company's independent
auditors, internal auditors, general counsel and financial management have full
access to the Committee and to the Board of Directors and each is responsible
for bringing before the Committee or its Chair, in a timely manner, any matter
deemed appropriate to the discharge of the Committee's responsibility.
John R. Horne
Chairman, President and
Chief Executive Officer
Robert C. Lannert
Executive Vice President
and Chief Financial Officer
- 13 -
INDEPENDENT AUDITORS' REPORT
Navistar International Corporation,
Its Directors and Shareowners:
We have audited the Statement of Financial Condition of Navistar
International Corporation and Consolidated Subsidiaries as of October 31, 1998
and 1997, and the related Statements of Income and of Cash Flow for each of the
three years in the period ended October 31, 1998. These consolidated financial
statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Navistar
International Corporation and Consolidated Subsidiaries at October 31, 1998 and
1997, and the results of their operations and their cash flow for each of the
three years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
December 14, 1998
Chicago, Illinois
- 14 -
STATEMENT OF INCOME
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
For the Years Ended October 31
(Millions of dollars,
except per share data) 1998 1997 1996
- ----------------------------------------------------------------------------
Sales and revenues
Sales of manufactured products ........... $7,629 $6,147 $5,508
Finance and insurance revenue ............ 201 174 197
Other income ............................. 55 50 49
------ ------ ------
Total sales and revenues ............... 7,885 6,371 5,754
------ ------ ------
Costs and expenses
Cost of products and services sold ....... 6,498 5,292 4,827
Postretirement benefits .................. 174 215 220
Engineering and research expense ......... 192 124 129
Marketing and administrative expense ..... 427 365 319
Interest expense ......................... 105 74 83
Other expenses ........................... 79 59 71
------ ------ ------
Total costs and expenses ............... 7,475 6,129 5,649
------ ------ ------
Income before income taxes ........... 410 242 105
Income tax expense ................... 111 92 40
------ ------ ------
Net income ............................... 299 150 65
Less dividends on
Series G preferred stock ............... 11 29 29
------ ------ ------
Net income applicable to common stock .... $ 288 $ 121 $ 36
====== ====== ======
- ----------------------------------------------------------------------------
Earnings per share
Basic ................................ $ 4.16 $ 1.66 $ .49
Diluted .............................. $ 4.11 $ 1.65 $ .49
Average shares outstanding (millions)
Basic ................................ 69.1 73.1 73.7
Diluted .............................. 70.0 73.6 73.8
- ----------------------------------------------------------------------------
See Notes to Financial Statements.
- 15 -
STATEMENT OF FINANCIAL CONDITION
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
As of October 31 (Millions of dollars) 1998 1997
- ----------------------------------------------------------------------------
ASSETS
Cash and cash equivalents ................ $ 440 $ 609
Marketable securities .................... 624 356
-------- -------
1,064 965
Receivables, net ......................... 2,146 1,755
Inventories .............................. 505 496
Property and equipment, net ............. 1,106 835
Investments and other assets ............. 246 319
Intangible pension assets ................ 199 212
Deferred tax asset, net .................. 912 934
-------- --------
Total assets ............................. $ 6,178 $ 5,516
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Accounts payable, principally trade ...... $ 1,273 $ 1,100
Debt:
Manufacturing operations ............... 450 92
Financial services operations .......... 1,672 1,224
Postretirement benefits liability ........ 934 1,186
Other liabilities ........................ 1,080 894
-------- --------
Total liabilities .................... 5,409 4,496
-------- --------
Commitments and contingencies
Shareowners' equity
Series G convertible preferred stock ...... - 240
Series D convertible
junior preference stock ................ 4 4
Common stock (75.3 million and 52.2 million
shares issued).......................... 2,139 1,659
Class B Common stock
(0 million and 23.1 million shares issued) - 471
Retained earnings (deficit) ............... (1,160) (1,301)
Common stock held in treasury, at cost
(9.1 million and 2.9 million shares held). (214) (53)
-------- --------
Total shareowners' equity ............. 769 1,020
-------- --------
Total liabilities and shareowners' equity . $ 6,178 $ 5,516
======== ========
- --------------------------------------------------------------------------
See Notes to Financial Statements.
- 16 -
STATEMENT OF CASH FLOW
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
For the Years Ended October 31
(Millions of dollars) 1998 1997 1996
- ------------------------------------------------------------------------------
Cash flow from operations
Net income .............................. $ 299 $ 150 $ 65
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization ....... 159 120 105
Deferred income taxes ............... 149 82 37
Deferred tax asset valuation
allowance adjustment .............. (45) - -
Postretirement benefits funding
in excess of expense .............. (373) (128) 33
Other, net .......................... (16) (51) (28)
Change in operating assets and liabilities:
Receivables ......................... (192) (194) 186
Inventories ......................... (13) (25) (47)
Prepaid and other current assets .... (1) 4 1
Accounts payable .................... 192 288 (110)
Other liabilities ................... 202 137 (123)
-------- -------- --------
Cash provided by operations ........... 361 383 119
-------- -------- --------
Cash flow from investment programs
Purchase of retail notes
and lease receivables ................. (1,263) (970) (1,108)
Collections/sales of retail notes
and lease receivables ................. 1,071 1,054 1,109
Purchase of marketable securities ....... (787) (512) (585)
Sales or maturities
of marketable securities .............. 521 557 752
Capital expenditures .................... (305) (172) (117)
Property and equipment
leased to others ...................... (125) (42) (73)
Other investment programs, net .......... (10) 3 (8)
-------- -------- --------
Cash used in investment programs ...... (898) (82) (30)
-------- -------- --------
Cash flow from financing activities
Issuance of debt ......................... 493 211 -
Principal payments on debt ............... (119) (46) (136)
Net increase (decrease)in notes and debt
outstanding under bank revolving credit
facility and asset-backed and other
commercial paper programs .............. 348 (285) 81
Mexican credit facility .................. 84 - -
Redemption of Series G preferred stock ... (240) - -
Dividends paid ........................... (11) (29) (29)
Repurchase of common stock ............... (189) (23) -
Proceeds from reissuance of Treasury shares 28 - -
Debt and equity issuance costs ........... (26) (7) (3)
-------- -------- --------
Cash provided by (used in)
financing activities ................. 368 (179) (87)
-------- -------- --------
Cash and cash equivalents
(Decrease) increase during the year .... (169) 122 2
At beginning of the year ............... 609 487 485
-------- -------- --------
Cash and cash equivalents
at end of the year ..................... $ 440 $ 609 $ 487
======== ======== ========
- ------------------------------------------------------------------------------
See Notes to Financial Statements.
- 17 -
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1998
1. SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation
Navistar International Corporation is a holding company, whose principal
operating subsidiary is Navistar International Transportation Corp.
(Transportation). As used hereafter, "company" or "Navistar" refers to Navistar
International Corporation and its consolidated subsidiaries. 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 distinction between
current and long-term assets and liabilities in the Statement of Financial
Condition is not meaningful when finance, insurance and manufacturing operations
are combined; therefore, the company has adopted an unclassified presentation.
Certain 1997 and 1996 amounts have been reclassified to conform with the
presentation used in the 1998 financial statements.
The company operates in two principal industry segments: manufacturing and
financial services. Manufacturing operations are responsible for the manufacture
and marketing of medium and heavy trucks, including school buses, mid-range
diesel engines and service parts primarily in the United States and Canada as
well as in Mexico, Brazil and other selected export markets. Based on assets and
revenues, manufacturing operations represent the majority of the company's
business activities. The financial services operations consist primarily of
Navistar Financial Corporation (NFC) and the company's foreign finance
subsidiaries. The financial services operations provide wholesale, retail and
lease financing, and domestic commercial physical damage and liability insurance
coverage to the company's dealers and retail customers and to the general public
through an independent insurance agency system.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Manufacturing operations recognize shipments of new trucks and service
parts to independent dealers and retail customers as sales. Price allowances,
expected in the normal course of business, and the cost of special incentive
programs are recorded at the time of sale. Engine sales are recognized at the
time of shipment to original equipment manufacturers. An allowance for losses on
receivables is maintained at an amount that management considers appropriate in
relation to the outstanding receivables portfolio, and it is charged when
receivables are determined to be uncollectible.
Financial services operations recognize finance charges on finance
receivables as income over the term of the receivables utilizing the interest
method. Operating lease revenues are recognized on a straight-line basis over
- 18 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
the life of the lease. Selected receivables are sold and securitized to public
and private investors with limited recourse. Gains or losses on sales of
receivables are credited or charged to revenue in the period in which the sale
occurs. Financial services operations continue to service the sold receivables
and receive a fee for such services from the investor. An allowance for losses
is maintained at a level deemed appropriate based on such factors as overall
portfolio quality, historical loss experience and current economic conditions.
Insurance premiums are earned on a prorata basis over the terms of the
policies. Underwriting losses and outstanding loss reserve balances are based on
individual case estimates of the ultimate cost of settlement, including actual
losses, and determinations of amounts required for losses incurred but not
reported.
Cash and Cash Equivalents
All highly liquid financial instruments with maturities of three months or
less from date of purchase, consisting primarily of bankers' acceptances,
commercial paper, United States government securities and floating rate notes,
are classified as cash equivalents in the Statement of Financial Condition and
Statement of Cash Flow.
Marketable Securities
Marketable securities are classified as available-for-sale securities and
are reported at fair value. The difference between amortized cost and fair value
is recorded as an adjustment to shareowners' equity, net of applicable deferred
taxes.
Inventories
Inventories are valued at the lower of average cost or market.
Property and Other Long-Lived Assets
Significant expenditures for replacement of equipment, tooling and pattern
equipment, and major rebuilding of machine tools are capitalized. Depreciation
and amortization are generally provided on the straight-line basis over the
estimated useful lives of the assets, which average 35 years for buildings and
improvements and eight years for machinery and equipment. Gains and losses on
property disposals are included in other income and expense. The carrying amount
of all long-lived assets is evaluated periodically to determine if adjustment to
the depreciation and amortization period or to the unamortized balance is
warranted. Such evaluation is based principally on the expected utilization of
the long-lived assets and the projected, undiscounted cash flows of the
operations in which the long-lived assets are deployed.
- 19 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Engineering and Research Expense
Engineering and research expense includes research and development expenses
and routine ongoing costs associated with improving existing products and
manufacturing processes. Research and development expenses, which include
activities for the introduction of new truck and diesel engine products and
major improvements to existing products and processes, totaled $138 million, $85
million and $90 million in 1998, 1997 and 1996, respectively.
Product Related Costs
The company accrues warranty expense at the time of end product sale.
Product liability expense is accrued based on the estimate of total future
payments to settle product liability claims.
Derivative Financial Instruments
The company uses derivatives to transfer or reduce risks of foreign
exchange and interest rate volatility and to potentially increase the return on
invested funds. NFC may use forward contracts to hedge the fair value of its
fixed rate receivables against changes in market interest rates in anticipation
of the sale of such receivables. NFC also uses interest rate swaps to reduce
exposure to interest rate changes when it sells fixed rate receivables on a
variable rate basis. For the protection of investors in NFC's debt securities,
NFC may write interest rate caps when fixed rate receivables are sold on a
variable rate basis. The company also uses derivatives such as forward contracts
to reduce its exposure to foreign exchange volatility.
Derivative financial instruments are generally held for purposes other than
trading. Gains or losses related to hedges of anticipated transactions are
deferred and are recognized in income when the effects of the anticipated
transactions are recognized in earnings. The principal balance of receivables
owned and expected to be sold by NFC equals or exceeds the notional amount of
open forward contracts. Additionally, the value of committed Canadian dollar
truck sales generally exceeds the notional amount of related open derivative
contracts.
Stock-Based Compensation
Effective November 1, 1996, the company adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS 123). Accordingly, the company elected to
continue to account for stock-based compensation plans consistent with prior
years.
Foreign Currency
The financial statements of foreign subsidiaries are translated to U.S.
dollars using the period-end exchange rate for assets and liabilities and a
weighted-average exchange rate for each period for revenues and expenses. The
local currency is the functional currency for most of the company's foreign
subsidiaries and translation adjustments for these subsidiaries are recorded in
shareowners' equity. The U.S. dollar is the functional currency for the
company's Mexican subsidiaries and, accordingly, their translation gains and
losses are included in earnings. Transaction gains and losses arising from
fluctuations in currency exchange rates on transactions denominated in
currencies other than the functional currency, except those transactions which
hedge sales commitments, are recorded in earnings as incurred.
- 20 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Earnings Per Share
Basic earnings per share excludes dilution and is computed by dividing
income available to common shareowners by the weighted-average number of basic
common shares outstanding for the period. Diluted earnings per share assumes the
issuance of Common Stock for other potentially dilutive equivalent shares
outstanding.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS
130), and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information" (SFAS 131). SFAS 130
establishes standards for reporting and display of comprehensive income and its
components. SFAS 131 establishes standards for reporting information about
operating segments and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. SFAS 130 and SFAS 131 expand or modify
current disclosures and, accordingly, will have no impact on the company's
reported financial position, results of operations and cash flows. The company
is assessing the impact of SFAS 131 on its reported segments.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement defines whether
or not certain costs related to the development or acquisition of internal use
software should be expensed or capitalized and is effective for fiscal years
beginning after December 15, 1998. The company is currently assessing the impact
of this statement on its results of operations and financial position.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities," to establish accounting and reporting requirements for
derivative instruments. This standard requires recognition of all derivative
instruments in the statement of financial position as either assets or
liabilities, measured at fair value, and is effective for fiscal years beginning
after June 15, 1999. This statement additionally requires changes in the fair
value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives. The
company is currently assessing the impact of this statement on the company's
results of operations, financial position and cash flows.
- 21 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. POSTRETIREMENT BENEFITS
Effective October 31, 1998, the company adopted Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other
Postretirement Benefits" (SFAS 132). The information for 1998, 1997 and 1996 has
been presented in conformity with the requirements of SFAS 132.
The company provides postretirement benefits to substantially all of its
employees. Costs associated with postretirement benefits include pension and
postretirement health care expenses for employees, retirees and surviving
spouses and dependents. In addition, as part of the 1993 restructured health
care and life insurance plans, profit sharing payments to the Retiree
Supplemental Benefit Trust are required.
The cost of postretirement benefits is segregated as a separate component
in the Statement of Income and is as follows:
Millions of dollars 1998 1997 1996
- ----------------------------------------------------------------------------
Pension expense......................... $ 74 $ 129 $ 160
Health/life insurance................... 42 66 60
Profit sharing provision to Trust....... 58 20 -
------ ------ ------
Total postretirement benefits expense... $ 174 $ 215 $ 220
====== ====== ======
Generally, the pension plans are non-contributory. The company's policy is
to fund its pension plans in accordance with applicable United States and
Canadian government regulations and to make additional payments as funds are
available to achieve full funding of the accumulated benefit obligation. At
October 31, 1998, all legal funding requirements had been met.
In 1993, a trust was established to provide a vehicle for funding the
health care liability through company contributions and retiree premiums. The
company was required to make a prefunding contribution of $200 million to the
trust on or prior to June 30, 1998. This contribution was made during November
1997.
Postretirement Benefits Expense
Net periodic benefits expense included in the Statement of Income is
composed of the following:
Pension Benefits Other Benefits
---------------------- -----------------------
Millions of dollars 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------
Service cost for benefits
earned during the period... $ 37 $ 34 $ 34 $ 14 $ 13 $ 14
Interest on obligation........ 231 238 231 98 96 84
Net amortization
costs and other............. 88 99 104 2 - -
Less expected return on assets (282) (242) (209) (72) (43) (38)
------ ------ ------ ------- ------ ------
Net postretirement benefits
expense..................... $ 74 $ 129 $ 160 $ 42 $ 66 $ 60
====== ====== ====== ====== ====== ======
- 22 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. POSTRETIREMENT BENEFITS (continued)
Postretirement Expense (continued)
"Amortization costs" include amortization of cumulative gains and losses
over the expected remaining service life of employees and amortization of the
initial transition liability over 15 years. Also included is the expense related
to yearly lump-sum payments to retirees required by negotiated labor contracts
and amortization of plan amendments. Plan amendments are recognized over the
remaining service life of employees, except for those plan amendments arising
from negotiated labor contracts, which are amortized over the length of the
contract.
The funded status of the company's plans as of October 31, 1998 and 1997
and a reconciliation with amounts recognized in the Statement of Financial
Condition are provided below.
Pension Benefits Other Benefits
---------------- ----------------
Millions of dollars 1998 1997 1998 1997
- ----------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation
at beginning of year........ $3,299 $3,034 $1,374 $1,225
Service cost ................ 37 34 14 13
Interest on obligation........ 231 238 98 96
Actuarial net loss............ 186 257 164 123
Benefits paid ................ (272) (264) (90) (83)
------ ------ ------ ------
Benefit obligation
at end of year.............. 3,481 3,299 1,560 1,374
------ ------ ------ ------
Change in plan assets
Fair value of plan assets
at beginning of year......... 2,900 2,427 486 401
Actual return on plan assets... 187 505 47 102
Employer contribution.......... 212 227 210 11
Benefits paid ................. (267) (259) (50) (28)
------ ------ ------ ------
Fair value of plan assets
at end of year............... 3,032 2,900 693 486
------ ------ ------ ------
Funded status ................. (449) (399) (867) (888)
Unrecognized actuarial net loss 587 322 344 152
Unrecognized transition amount. 133 167 - -
Unrecognized prior service cost 69 89 (5) (5)
------- ------ ------ ------
Net amount recognized.......... $ 340 $ 179 $ (528) $ (741)
======= ====== ====== ======
Amounts recognized
in the Statement of
Financial Condition consist of:
Prepaid benefit cost...... $ 39 $ 120 $ - $ -
Accrued benefit liability. (406) (445) (528) (741)
Intangible asset.......... 199 212 - -
Accumulated reduction in
shareowners' equity..... 508 292 - -
------ ------ ------ ------
Net amount recognized.......... $ 340 $ 179 $ (528) $ (741)
====== ====== ====== ======
The accumulated reduction in shareowners' equity is recorded in the
Statement of Financial Condition net of deferred income taxes of $172 million
and $97 million at October 31, 1998 and 1997, respectively.
- 23 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
2. POSTRETIREMENT BENEFITS (continued)
Postretirement Expense (continued)
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $3,393 million, $3,336 million and $2,931 million,
respectively, as of October 31, 1998, and $2,067 million, $2,064 million and
$1,621 million, respectively, as of October 31, 1997.
During 1998, the pension plans purchased 3 million shares of the company's
Common Stock. At October 31, 1998, these shares accounted for approximately 2%
of the plans' assets.
The weighted average rate assumptions used in determining expenses and
benefit obligations were:
Pension Benefits Other Benefits
---------------------- -----------------------
Millions of dollars 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------
Discount rate used
to determine present value
of benefit obligation
at end of year............... 6.8% 7.3% 8.1% 7.1% 7.4% 8.2%
Expected long-term rate
of return on plan assets
for the year.................. 9.7% 9.8% 9.0% 10.8% 11.1% 10.5%
Expected rate of increase
in future compensation levels. 3.5% 3.5% 3.5% N/A N/A N/A
For 1999, the weighted average rate of increase in the per capita cost of
covered health care benefits is projected to be 9.7%. The rate is projected to
decrease to 5.0% by the year 2005 and remain at that level each year thereafter.
The effect of changing the health care cost trend rate by one-percentage point
for each future year is as follows:
One-Percentage- One-Percentage-
Point Increase Point Decrease
-------------- --------------
Effect on total of service
and interest cost components.. $ 18 $ (15)
Effect on postretirement
benefit obligation............ 191 (158)
- 24 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes
consist of the following:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Domestic................................ $ 403 $ 239 $ 108
Foreign................................. 7 3 (3)
------ ------ ------
Total income before income taxes........ $ 410 $ 242 $ 105
====== ====== ======
The components of income tax expense consist of the following:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Current:
Federal.............................. $ 4 $ 8 $ 1
State and local...................... 3 2 2
------ ------ ------
Total current expense................ 7 10 3
------ ------ ------
Deferred:
Federal.............................. 127 71 32
State and local...................... 19 11 5
Foreign.............................. 3 - -
------ ------ ------
Total deferred expense............... 149 82 37
------ ------ ------
Less valuation allowance adjustment.... (45) - -
------ ------ ------
Total income tax expense............... $ 111 $ 92 $ 40
====== ====== ======
The deferred tax expense does not represent cash payment of income taxes
and was primarily generated by the utilization of net operating loss (NOL)
carryforwards and the increase of temporary differences, and will not require
future cash payments. Consolidated tax payments made during 1998, 1997 and 1996
were $7 million, $10 million and $3 million, respectively.
- 25 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INCOME TAXES (continued)
The relationship of the tax expense to income before taxes for 1998, 1997
and 1996 differs from the U.S. statutory rate (35%) because of state income
taxes and the benefit of NOLs in foreign countries. Also, the 1998 effective tax
rate reflects a $45 million reduction in the deferred tax asset valuation
allowance. A valuation allowance has been provided for those NOL carryforwards
and temporary differences which are estimated to expire before they are
utilized. The effective tax rates for the years 1998, 1997 and 1996 were 27.0%,
38.0% and 38.1%, respectively.
Undistributed earnings of foreign subsidiaries were $50 million and $35
million at October 31, 1998 and 1997, respectively. Taxes have not been provided
on these earnings because no withholding taxes are applicable upon repatriation
and U.S. tax would be substantially offset by utilization of NOL carryforwards.
Taxpaying entities of the company offset all deferred tax assets and
liabilities within each tax jurisdiction. The components of the deferred tax
asset (liability) at October 31 are as follows:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
United States
Deferred tax assets:
Net operating loss carryforwards.......... $ 590 $ 680
Alternative minimum tax................... 24 19
Product liability and warranty............ 106 97
Other liabilities......................... 232 168
Postretirement benefits................... 347 353
------ ------
Total deferred tax assets................. 1,299 1,317
------ ------
Deferred tax liabilities:
Prepaid pension assets.................... (117) (58)
Depreciation.............................. (30) (37)
------ ------
Total deferred tax liabilities............ (147) (95)
------ ------
Total deferred tax assets................. 1,152 1,222
Less valuation allowance.................. (243) (288)
------ ------
Net deferred U.S. tax assets.............. $ 909 $ 934
====== ======
Foreign
Deferred tax assets:
Net operating loss carryforwards.......... $ 5 $ 2
Postretirement benefits................... 19 19
------ ------
Total deferred tax assets................. 24 21
Less valuation allowance.................. (21) (21)
------ ------
Net deferred foreign tax assets........... 3 -
------ ------
Other deferred tax liabilities........... (20) (16)
------ ------
Net deferred foreign tax liabilities...... $ (17) $ (16)
====== ======
Amounts recognized in the
Statement of Financial Condition:
Deferred tax assets...................... $ 912 $ 934
====== ======
Other liabilities......................... $ (20) $ (16)
====== ======
- 26 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
3. INCOME TAXES (continued)
At October 31, 1998, the company had $1,581 million of domestic and $16
million of foreign NOL carryforwards available to offset future taxable income.
Such carryforwards reflect income tax losses incurred which will expire as
follows, in millions of dollars:
2001 ........................................ $ 104
2002 ........................................ 47
2004 ........................................ 235
2005 ........................................ 7
2006 ........................................ 127
2007 ........................................ 53
2008 through 2011............................. 1,024
------
Total ........................................ $1,597
======
Additionally, the reversal of net temporary differences of $1,437 million
as of October 31, 1998 will create net tax deductions which, if not utilized
previously, will expire subsequent to 2011.
- 27 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
4. MARKETABLE SECURITIES
The fair value of marketable securities is estimated based on quoted market
prices, when available. If a quoted price is not available, fair value is
estimated using quoted market prices for similar financial instruments.
Information related to the company's marketable securities at October 31 is
as follows:
1998 1997
-------------------- ---------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- -----------------------------------------------------------------------------
Corporate securities............. $ 336 $ 338 $ 150 $ 150
U.S. government securities....... 171 174 88 89
Mortgage and
asset-backed securities........ 85 86 86 86
Foreign government securities.... 6 7 10 10
------ ------ ------ ------
Total debt securities......... 598 605 334 335
Equity securities................ 17 19 16 21
------ ------ ------ ------
Total marketable securities...... $ 615 $ 624 $ 350 $ 356
====== ====== ====== ======
Contractual maturities of marketable debt securities at October 31 are as
follows:
1998 1997
-------------------- ---------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- ------------------------------------------------------------------------------
Due in one year or less.......... $ 189 $ 190 $ 113 $ 114
Due after one year
through five years............. 297 301 100 100
Due after five years
through 10 years............... 17 18 25 25
Due after 10 years............... 10 10 10 10
------ ------ ------ ------
513 519 248 249
Mortgage and
asset-backed securities........ 85 86 86 86
------ ------ ------ ------
Total debt securities............ $ 598 $ 605 $ 334 $ 335
====== ====== ====== ======
Gross gains and losses realized on sales or maturities of marketable
securities were not material for each of the two years. At October 31, 1998 and
1997, a domestic insurance subsidiary had $13 million and $15 million,
respectively, of marketable securities which were on deposit with various state
departments of insurance or otherwise not available. These securities are
included in total marketable securities balances at October 31, 1998 and 1997.
- 28 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
5. RECEIVABLES
Receivables at October 31 are summarized by major classification as
follows:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Accounts receivable....................... $ 611 $ 671
Retail notes and lease financing.......... 925 706
Wholesale notes........................... 261 46
Amounts due from sales of receivables..... 246 233
Notes receivable.......................... 109 101
Other .................................... 27 29
Allowance for losses...................... (33) (31)
------ ------
Total receivables, net.............. $2,146 $1,755
====== ======
NFC purchases the majority of the wholesale notes receivable and some
retail notes and accounts receivable arising from Transportation's operations in
the United States.
A portion of NFC's funding for retail and wholesale notes comes from sales
of receivables by NFC to third parties with limited recourse. Proceeds from
sales of retail notes receivable, net of underwriting costs, were $953 million
in 1998, $958 million in 1997 and $982 million in 1996. Uncollected sold retail
and wholesale receivable balances totaled $2,145 million and $1,968 million as
of October 31, 1998 and 1997, respectively.
Contractual maturities of accounts receivable, retail notes and lease
financing and wholesale notes, including unearned finance income, at October 31,
1998 were: 1999 - $1,079 million, 2000 - $325 million, 2001 - $219 million, 2002
- - $175 million, 2003 - $119 million, and 2004 and thereafter - $28 million.
Unearned finance income totaled $148 million at October 31, 1998. Notes
receivable are due upon demand from a limited partnership that invests in S&P
500 stock index arbitrage.
- 29 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
6. INVENTORIES
Inventories at October 31 are as follows:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Finished products......................... $ 223 $ 225
Work in process........................... 69 106
Raw materials and supplies................ 213 165
------ ------
Total inventories......................... $ 505 $ 496
====== ======
7. PROPERTY AND EQUIPMENT
At October 31, property and equipment includes the following:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Land .................................... $ 18 $ 18
------ ------
Buildings, machinery and equipment at cost:
Plants................................ 1,419 1,200
Distribution.......................... 94 86
Construction in progress.............. 130 117
Net investment in operating leases.... 218 124
Other................................. 203 137
------ ------
Total property........................ 2,082 1,682
Less accumulated depreciation
and amortization.................... (976) (847)
------ ------
Total property and equipment, net. $1,106 $ 835
====== ======
Total property includes property under capitalized lease obligations of $25
million at October 31, 1998 and 1997. Future minimum rentals on net investments
in operating leases are: 1999 - $63 million, 2000 - $54 million, 2001 - $35
million, 2002 - $18 million and thereafter - $5 million. Each of these assets is
depreciated on a straight-line basis over the term of the lease in an amount
necessary to reduce the leased vehicle to its estimated residual value at the
end of the lease term.
- 30 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. DEBT
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Manufacturing operations
Notes payable and current maturities
of long-term debt................... $ 4 $ 13
------ ------
8% Senior Subordinated Notes, due 2008 250 -
7% Senior Notes, due 2003............. 100 -
9% Sinking Fund Debentures, due 2004.. - 45
8% Secured Note, due 2002,
secured by plant assets ............ - 21
Mexican credit facility............... 84 -
Capitalized leases and other.......... 12 13
------ ------
Total long-term debt............... 446 79
------ ------
Manufacturing operations debt......... 450 92
------ ------
Financial services operations
Commercial paper...................... 22 141
Capitalized leases.................... 39 13
Current maturities of long-term debt.. 82 -
------ ------
Total short-term debt.............. 143 154
------ ------
Bank revolver, variable rate, due 2003 19 -
Bank revolver, variable rate, due 2005 20 -
Asset-backed commercial paper program,
variable rate, due 2001............ 401 400
Bank revolver, variable rate, due 2001 815 393
------ ------
Total senior debt.................. 1,255 793
------ ------
8 7/8% Subordinated Senior Notes,
due 1998............................. - 94
9% Subordinated Senior Notes, due 2002. 100 100
------ ------
Total subordinated debt............. 100 194
------ ------
Capitalized leases, 4.8% to 5.6%,
due serially through 2004............ 174 83
------ ------
Total long-term debt................ 1,529 1,070
------ ------
Financial services operations debt........ 1,672 1,224
------ ------
Total debt................................ $2,122 $1,316
====== ======
The effective annual interest rate on manufacturing notes payable was 6.8%
in 1998, 8.3% in 1997 and 8.9% in 1996. Consolidated interest payments were $103
million, $66 million and $83 million in 1998, 1997 and 1996, respectively.
- 31 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. DEBT (continued)
During 1998, the company arranged financing for $164 million of funds
denominated in U.S. dollars and Mexican pesos to be used for investment in the
company's Mexican operations. As of October 31, 1998, borrowings outstanding of
this line were $123 million of which 54% is denominated in dollars and 46% in
pesos. The interest rates on the dollar-denominated debt are a negotiated fixed
rate or a variable rate based either on LIBOR or the Federal Funds Rate. On
peso-denominated debt the interest rate is based on the Interbank Interest
Equilibrium Rate. The effective interest rate for the period was 16.8%.
During the second quarter of 1998, the company's manufacturing operations
issued $100 million 7% Senior Notes due 2003 and $250 million 8% Senior
Subordinated Notes due 2008. The proceeds of the Senior Notes were used to
prepay the 8% Secured Note due 2002 and were used to redeem the 9% Sinking Fund
Debentures on June 15, 1998. The proceeds of the Senior Subordinated Notes were
used to redeem the Series G Preferred Stock and to pay related dividends
thereon.
NFC issues commercial paper with varying terms and has short-term
borrowings with various banks on a noncommitted basis. Compensating cash
balances and commitment fees are not required under these borrowings.
The aggregate annual maturities for debt for the years ended October 31 are
as follows:
Financial
Manufacturing Services
Millions of dollars Operations Operations Total
- -------------------------------------------------------------------------------
1999 .................................. $ 4 $ 143 $ 147
2000 .................................. 27 48 75
2001 .................................. 33 1,269 1,302
2002 .................................. 31 142 173
2003 .................................. 101 50 151
Thereafter................................ 254 20 274
------ ------ ------
Total.................................. $ 450 $1,672 $2,122
====== ====== ======
Weighted average interest rate on total debt, including short-term, and the
effect of discounts and related amortization for the years ended:
October 31, 1998..................... 9.3% 6.4% 7.1%
October 31, 1997..................... 10.3% 6.4% 6.8%
At October 31, 1998, NFC has a $925 million contractually committed bank
revolving credit facility and a $400 million asset-backed commercial paper
(ABCP) program supported by a bank liquidity facility plus $14 million of trust
certificates issued in connection with the formation of the ABCP trust.
Available funding under the bank revolving credit facility and the ABCP program
was $124 million, of which $22 million provided funding backup for the
outstanding short-term debt at October 31, 1998.
- 32 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
8. DEBT (continued)
NFC's wholly owned subsidiaries, Navistar Financial Retail Receivables
Corporation (NFRRC) and Navistar Financial Securities Corporation (NFSC), have a
limited purpose of purchasing retail and wholesale receivables, respectively,
and transferring an undivided ownership interest in such notes to investors. The
subsidiaries have limited recourse on the sold receivables and their assets are
available to satisfy the claims of their creditors prior to such assets becoming
available to NFC or affiliated companies.
NFSC has in place a $700 million revolving wholesale note trust that
provides for the continuous sale of eligible wholesale notes on a daily basis.
The trust is comprised of one $100 million tranche of investor certificates
maturing in 1999 and three $200 million tranches maturing in 2003, 2004 and
2008.
During 1998, NFC sold $1,001 million of retail notes, net of unearned
finance income, through NFRRC. The owner trusts in turn issued securities which
were sold to investors. The net proceeds, after underwriting costs and credit
enhancements, were used by NFC for general working capital purposes. On August
28, 1998, NFRRC filed a shelf registration statement with the Securities and
Exchange Commission which provides for the issuance of an additional $2,500
million of asset-backed securities. The aggregate shelf registration available
to NFRRC for issuance of asset-backed securities is $2,972 million.
NFC has entered into various sale/leaseback agreements involving vehicles
subject to retail finance and operating leases with end users. The remaining
balance as of October 31, 1998 is classified under Financial Services operations
as capitalized leases. These agreements grant a security interest in the
underlying vehicles and lease receivables to the purchasers.
In November 1998, NFC sold $545 million of retail notes, net of unearned
finance income, through NFRRC to a multi-seller asset-backed commercial paper
conduit sponsored by a major financial institution.
- 33 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
9. OTHER LIABILITIES
Major classifications of other liabilities at October 31 are as follows:
Millions of dollars 1998 1997
- --------------------------------------------------------------------------
Product liability and warranty............. $ 323 $ 302
Employee incentive programs................ 215 95
Payroll, commissions
and employee-related benefits............ 104 96
Loss reserves and unearned premiums........ 95 99
Taxes .................................. 67 68
Sales and marketing........................ 54 26
Long-term disability
and workers' compensation................ 53 54
Environmental.............................. 27 31
Interest .................................. 22 15
Other .................................. 120 108
------ ------
Total other liabilities................. $1,080 $ 894
====== ======
- 34 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts of financial instruments, as reported in the Statement
of Financial Condition and described in various Notes to the Financial
Statements, and their fair values at October 31 are as follows:
1998 1997
-------------------- ---------------------
Carrying Fair Carrying Fair
Millions of dollars Amount Value Amount Value
- ------------------------------------------------------------------------------
Receivables, net.............. $2,146 $2,166 $1,755 $1,764
Investments and other assets.. 246 249 319 330
Debt.......................... 2,122 2,119 1,316 1,321
Cash and cash equivalents approximate fair value. The cost and fair value
of marketable securities are disclosed in Note 4.
Customer receivables, wholesale notes, retail and wholesale accounts, notes
receivable and other variable-rate retail notes approximate fair value as a
result of the short-term maturities of the financial instruments. The fair value
of truck retail notes is estimated based on quoted market prices of similar sold
receivables. The fair value of amounts due from sales of receivables is
estimated by discounting expected cash flows at estimated current market rates.
The fair value of investments and other assets is estimated based on quoted
market prices or by discounting future cash flows.
The short-term debt and variable-rate borrowings under NFC's bank revolving
credit agreement, which are repriced frequently, approximate fair value. The
fair value of long-term debt is estimated based on quoted market prices, when
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar financial instruments or discounting
future cash flows.
- 35 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
10. FINANCIAL INSTRUMENTS (continued)
Derivatives Held or Issued for Purposes Other Than Trading
The company uses derivatives to transfer or reduce risks of foreign
exchange and interest rate volatility and to potentially increase the return on
invested funds.
The company periodically enters into forward contracts in order to reduce
exposure to exchange rate risk between the U.S. dollar and the Canadian dollar
related to committed Canadian dollar truck sales.
NFC manages its exposure to fluctuations in interest rates by limiting the
amount of fixed rate assets funded with variable rate debt generally by selling
fixed rate receivables on a fixed rate basis and by utilizing derivative
financial instruments. These derivative financial instruments may include
interest rate swaps, interest rate caps and forward interest rate contracts. The
fair value of these instruments is subject to market risks as the instruments
may become less valuable due to changes in market conditions or interest rates.
NFC manages exposure to counter-party credit risk by entering into derivative
financial instruments with major financial institutions that can be expected to
fully perform under the terms of such agreements. NFC's credit exposure is
limited to the fair value of contracts with a positive fair value at the
reporting date. At October 31, 1998, none of NFC's derivative financial
instruments have positive fair values. Notional amounts are used to measure the
volume of derivative financial instruments and do not represent exposure to
credit loss.
NFC enters into forward interest rate contracts to manage its exposure to
fluctuations in the fair value of retail notes anticipated to be sold. NFC
manages such risk by entering into either forward contracts to sell fixed debt
securities or forward interest rate swaps whose fair value is highly correlated
with that of NFC's receivables. Gains or losses incurred with the closing of
these agreements are included as a component of the gain or loss on sale of
receivables.
At October 31, 1998, NFC held forward interest rate contracts with notional
amounts of $450 million and $50 million in anticipation of retail receivable
sales to occur in November 1998 and May 1999, respectively. In addition, the
company held Canadian dollar forward contracts with notional amounts of $33
million and other derivative contracts with notional amounts of $14 million. At
October 31, 1998, the unrealized loss on the $450 million forward contract was
$5 million, and the unrealized net gain on the remaining contracts was not
material.
- 36 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS AND LEASES
Commitments, Contingencies and Restricted Assets
At October 31, 1998, commitments for capital expenditures in progress were
approximately $153 million. The company's truck assembly facility located in
Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the
company as collateral for the $125 million revolving Mexican credit facility. At
October 31, 1998, $19 million of a Mexican subsidiary's receivables were pledged
as collateral for bank borrowings. In addition, as of October 31, 1998, the
company is contingently liable for approximately $75 million for various
purchasing commitments, credit guarantees and buyback programs; however, based
on historical loss trends, the company's exposure is not considered material.
Additionally, restrictions under the terms on the senior and senior subordinated
notes and Mexican credit facility include a limitation on indebtedness and a
limitation on certain restricted payments.
At October 31, 1998, the Canadian operating subsidiary was contingently
liable for retail customers' contracts and leases financed by a third party. The
Canadian operating subsidiary is subject to maximum recourse of $203 million on
retail contracts and $16 million on retail leases. The Canadian operating
subsidiary, NFC and certain other subsidiaries included in financial services
operations are parties to agreements that may result in the restriction of
amounts which can be distributed to Transportation in the form of dividends or
loans and advances. At October 31, 1998, the maximum amount of dividends which
were available for distribution under the most restrictive covenants was $91
million.
The company and Transportation are obligated under certain agreements with
public and private lenders of NFC to maintain the subsidiary's income before
interest expense and income taxes at not less than 125% of its total interest
expense. No income maintenance payments were required for the three years ended
October 31, 1998. NFC's maximum contractual exposure under all receivable sale
recourse provisions at October 31, 1998 was $259 million; however, management
believes that the allowance for credit losses on sold receivables is adequate.
Concentrations
At October 31, 1998, the company employed 12,212 hourly workers and 4,960
salaried workers in the United States and Canada. Approximately 89% of the
hourly employees and 28% of the salaried employees are represented by unions. Of
these represented employees, 92% of the hourly workers and 100% of the salaried
workers are represented by the United Automobile, Aerospace, and Agricultural
Implement Workers of America (UAW) or the National Automobile, Aerospace, and
Agricultural Implement Workers of Canada (CAW). During August 1997, the
company's current master contract with the UAW was extended from October 1, 1998
to October 1, 2002. The collective bargaining agreement with the CAW expires on
October 24, 1999. Additionally, of the company's 309 employees in Mexico,
approximately 48% are also represented by a union.
Reflecting higher consumer demand for light trucks and vans, sales of
mid-range diesel engines to Ford Motor Company were 14% of consolidated sales
and revenues in 1998, 1997 and 1996. During 1997, the company entered into a
10-year agreement, effective with model year 2003, to continue supplying Ford
Motor Company with diesel engines for use in its diesel-powered light trucks and
vans.
- 37 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS, AND LEASES
(continued)
Leases
The company has long-term noncancellable leases for use of various
equipment and facilities. Lease terms are generally for five to 25 years and, in
many cases, provide for renewal options. The company is generally obligated for
the cost of property taxes, insurance and maintenance. The company leases office
buildings, distribution centers, furniture and equipment, machinery and
equipment, and computer equipment.
The majority of the company's lease payments are for operating leases. At
October 31, 1998, future minimum lease payments under operating leases having
lease terms in excess of one year are: 1999 - $42 million, 2000 - $41 million,
2001 - $31 million, 2002 - $19 million, 2003 - $17 million and thereafter - $31
million. Total operating lease expense was $36 million in 1998, $40 million in
1997 and $35 million in 1996. Income received from sublease rentals was $7
million in 1998 and $6 million in 1997 and 1996.
12. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
The company and its subsidiaries are subject to various claims arising in
the ordinary course of business, and are parties to various legal proceedings
which 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 is material to the business or the financial
condition of the company.
The company has been named a potentially responsible party (PRP), in
conjunction with other parties, in a number of cases arising under an
environmental protection law known as the Superfund law. These cases involve
sites which allegedly have received wastes from current or former company
locations. Based on information available to the company, which, in most cases,
consists of data related to quantities and characteristics of material generated
at or shipped to each site as well as cost estimates from PRPs and/or federal or
state regulatory agencies for the cleanup of these sites, a reasonable estimate
is calculated of the company's share, if any, of the probable costs and is
provided for in the financial statements. These obligations generally are
recognized no later than completion of the remedial feasibility study and are
not discounted to their present value. The company reviews its accruals on a
regular basis and believes that, based on these calculations, its share of the
potential additional costs for the cleanup of each site will not have a material
effect on the company's financial results.
- 38 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
13. INDUSTRY SEGMENT DATA
Information concerning operations by industry segment is as follows:
Financial
Manufacturing Services
Millions of dollars Operations Operations Consolidated
- -----------------------------------------------------------------------------
October 31, 1998
- ----------------
Total sales and revenues..... $7,678 $ 280 $7,885
Operating profit............. 1,165 126 1,226
Depreciation and amortization 123 36 159
Capital expenditures......... 305 - 305
Identifiable assets.......... 4,326 2,309 6,178
October 31, 1997
- ----------------
Total sales and revenues..... $6,191 $ 239 $6,371
Operating profit............. 873 112 932
Depreciation and amortization 97 23 120
Capital expenditures......... 172 - 172
Identifiable assets.......... 4,111 1,857 5,516
October 31, 1996
- ----------------
Total sales and revenues..... $5,550 $ 258 $5,754
Operating profit............. 690 121 762
Depreciation and amortization 90 15 105
Capital expenditures......... 117 - 117
Identifiable assets.......... 3,815 1,843 5,326
Intersegment sales and revenues were not material in 1998, 1997 or 1996.
Transactions between manufacturing operations and financial services operations
have been eliminated from the consolidated column. Operating profit of the
financial services operations includes investment income and interest expense.
- 39 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
13. INDUSTRY SEGMENT DATA (continued)
Geographic Area Data
Information concerning operations by principal geographic area was as
follows:
United Interarea
Millions of dollars States Foreign Eliminations Consolidated
- -------------------------------------------------------------------------------
October 31, 1998
- ----------------
Sales and revenues, customers. $7,065 $ 820 $ - $7,885
Interarea transfers........... 486 1,293 (1,779) -
------ ------ ------ ------
Total sales and revenues. 7,551 2,113 (1,779) 7,885
Operating profits............. 1,324 87 (185) 1,226
Identifiable assets........... 5,766 703 (291) 6,178
October 31, 1997
- ----------------
Sales and revenues, customers. $5,807 $ 564 $ - $6,371
Interarea transfers........... 326 967 (1,293) -
------ ------ ------ ------
Total sales and revenues. 6,133 1,531 (1,293) 6,371
Operating profits............ 965 63 (96) 932
Identifiable assets.......... 5,238 550 (272) 5,516
October 31, 1996
- ----------------
Sales and revenues, customers $5,351 $ 403 $ - $5,754
Interarea transfers.......... 253 816 (1,069) -
------ ------ ------- ------
Total sales and revenues 5,604 1,219 (1,069) 5,754
Operating profits............ 754 46 (38) 762
Identifiable assets.......... 5,131 300 (105) 5,326
Interarea transfer prices are established by an agreement between the
buying and selling locations.
- 40 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
14. PREFERRED AND PREFERENCE STOCKS
The company's Nonconvertible Junior Preference Stock Series A is held for
the Retiree Supplemental Benefit Program by the Supplemental Trust. The UAW
holds the Nonconvertible Junior Preference Stock Series B and is currently
entitled to elect one member of the company's Board of Directors. At October 31,
1998, there was one share each of Series A and Series B Preference stock
authorized and outstanding. The value of the preference shares is minimal.
During 1998, the company redeemed all 4.8 million shares of its $6.00
Series G Convertible Cumulative Preferred Stock at a redemption price of $50 per
share plus accrued dividends. At October 31, 1998, there were 172,000 shares of
Series D Convertible Junior Preference Stock (Series D) outstanding and 3
million authorized and issued with an optional redemption price and liquidation
preference of $25 per share plus accrued dividends. The Series D converts into
common stock (subject to adjustment in certain circumstances) at .3125 per
share. The Series D ranks senior to common stock as to dividends and liquidation
and receives dividends at a rate of 120% of the cash dividends on common stock
as declared on an as-converted basis.
Under the General Corporation Law of the State of Delaware (DGCL),
dividends may only be paid out of surplus or out of net profits for the fiscal
year in which the dividend is declared or the preceding fiscal year, and no
dividend may be paid on Common Stock at any time during which the capital of
outstanding preferred stock or preference stock exceeds the net assets of the
company. At October 31, 1998, the company had surplus of $761 million as defined
under DGCL.
- 41 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
15. COMMON SHAREOWNERS' EQUITY
Changes in the common shareowners' equity accounts are as follows:
Millions of dollars 1998 1997 1996
- ------------------------------------------------------------------------------
Common Stock
Beginning of year..................... $1,659 $1,642 $1,641
Conversion of Class B
Common Stock and other.............. 480 17 1
------ ------ ------
End of year........................... $2,139 $1,659 $1,642
------ ------ ------
Class B Common Stock
Beginning of year..................... $ 471 $ 491 $ 491
Repurchase of stock................... (471) (20) -
------ ------ ------
End of year........................... $ - $ 471 $ 491
------ ------ ------
Retained Earnings (Deficit)
Beginning of year..................... $(1,301) $(1,431) $(1,478)
Net income............................ 299 150 65
Preferred dividends................... (11) (29) (29)
Minimum pension liability
adjustments and other............... (147) 9 11
------ ------ ------
End of year........................... $(1,160) $(1,301) $(1,431)
------ ------ ------
Common Stock Held in Treasury
Beginning of year..................... $ (53) $ (30) $ (28)
Repurchase of common stock and other. (189) (23) (2)
Reissuance of Treasury shares......... 28 - -
------ ------ ------
End of year........................... $ (214) $ (53) $ (30)
------ ------ ------
Common Stock
The company has authorized 110 million shares of Common Stock with a par
value of $.10 per share. At October 31, 1998 and 1997, there were 66.2 million
and 49.3 million shares of Common Stock outstanding, net of Common Stock held in
Treasury, respectively. The number of shares of Class B Common Stock outstanding
at October 31, 1997 was 23.1 million.
In January 1998, the company repurchased 3.2 million shares of the Class B
Common Stock that was outstanding. During June 1998, a secondary public offering
of the common stock of the company was completed, in which the Navistar
International Transportation Corp. Retiree Supplemental Benefit Trust (the
Trust) sold approximately 19.9 million shares of common stock at an offering
price of $26.50 per share. These shares represented the Class B Common Stock
held by the Trust which automatically converted into Common Stock upon the sale.
In conjunction with this offering, the company and certain of the company's
pension plans purchased 2 million and 3 million, respectively, of the shares
being offered. The company did not receive any proceeds from the sale of the
shares in the offering but paid expenses related to the offering of $14 million
pursuant to a pre-existing agreement with the Trust. In addition, the
underwriters exercised their over-allotment option and elected to purchase 1.1
million shares from the company at $26.50 per share. The company offset the
dilution through open market purchases.
- 42 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
15. COMMON SHAREOWNERS' EQUITY (continued)
At October 31, 1998, the company recorded its annual minimum pension
liability adjustment which resulted in a $144 million reduction in shareowners'
equity. The minimum pension liability and the resulting reduction in
shareowners' equity will change from year to year as a result of revisions to
actuarial assumptions, experience gains or losses, and settlement rate changes.
16. EARNINGS PER SHARE
Earnings per share was computed as follows:
Millions of dollars,
except share and per share data 1998 1997 1996
- ------------------------------------------------------------------------------
Net income............................ $ 299 $ 150 $ 65
Less dividends on
Series G Preferred Stock............ 11 29 29
------ ------ ------
Net income applicable to common stock.
(Basic and Diluted)................ $ 288 $ 121 $ 36
Average shares outstanding (millions)
Basic............................ 69.1 73.1 73.7
Dilutive effect of options
outstanding and other
dilutive securities........ .9 .5 .1
------ ------ ------
Diluted ........................ 70.0 73.6 73.8
Earnings per share
Basic ........................ $ 4.16 $ 1.66 $ .49
Diluted ........................ $ 4.11 $ 1.65 $ .49
Unexercised employee stock options to purchase .5 million, 1.5 million and
2.2 million shares of Navistar Common Stock during the years ended October 31,
1998, 1997 and 1996, respectively, were not included in the computation of
diluted shares outstanding because the exercise prices were greater than the
average market prices of Navistar Common Stock. Additionally, the diluted
calculations exclude the effects of the conversion of the Series G Preferred
Stock as such conversion would be anti-dilutive.
- 43 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
17. STOCK COMPENSATION PLANS
The company has stock-based compensation plans, approved by the Committee
on Organization of the Board of Directors, which provide for granting of stock
options to employees for purchase of Common Stock at the fair market value of
the stock on the date of grant. The grants generally have a 10-year life.
The company has elected to continue to account for stock option grants in
accordance with Accounting Principles Board Opinion No. 25 and related
interpretations. Accordingly, no compensation cost has been recognized for fixed
stock options because the exercise prices of the stock options equal the market
value of the company's Common Stock at the date of grant. Had compensation cost
for the plans been determined based upon the fair value at the grant date
consistent with SFAS 123, pro forma net income would have been $297 million in
1998, $147 million in 1997 and $63 million in 1996; pro forma diluted earnings
per share would have been $4.09 in 1998, $1.61 in 1997 and $.46 in 1996 and pro
forma basic earnings per share would have been $4.14 in 1998, $1.62 in 1997 and
$.46 in 1996. The pro forma effect on net income for 1998, 1997 and 1996 may not
be representative of the pro forma effect on net income of future years because
it does not take into consideration pro forma compensation expense relating to
grants made prior to November 1, 1995. The pro forma effect on net income for
1998 may not be representative of the pro forma effect on net income of future
years as in 1998, one-third of the options granted became exercisable on each of
the first, second and third anniversaries of grant. Prior to 1998, grants were
generally exercisable after one year.
The weighted-average fair values at date of grant for options granted
during 1998, 1997 and 1996 were $7.53, $5.71 and $5.34, respectively, and were
estimated using the Black-Scholes option-pricing model with the following
assumptions:
1998 1997 1996
---- ---- ----
Risk-free interest rate 5.7% 6.6% 6.1%
Dividend yield 0% 0% 0%
Expected volatility 31.9% 29.8% 30.9%
Expected life in years 3.5 10 10
The following summarizes stock option activity for the years ended October
31:
1998 1997 1996
----------------- -------------------- ------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares in thousands Shares Price Shares Price Shares Price
- ------------------- ------ -------- ------ -------- ------ ---------
Options outstanding
at beginning of year. 2,430 $18.73 2,346 $20.34 1,762 $24.25
Granted................. 809 23.93 876 10.13 718 10.45
Exercised............... (592) 28.52 (715) 12.45 - -
Canceled................ (109) 45.45 (77) 28.52 (134) 18.75
------ ------ ------ ------ ------ ------
Options outstanding
at year-end........... 2,538 $20.29 2,430 $18.73 2,346 $20.34
====== ====== ====== ====== ====== ======
Options exercisable
at year-end........... 1,765 $18.73 1,579 $23.35 1,682 $24.25
====== ====== ====== ====== ====== ======
Options available
for grant at year-end 443 - -
====== ====== ======
- 44 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
17. STOCK COMPENSATION PLANS (continued)
The following table summarizes information about stock options outstanding
and exercisable at October 31, 1998.
Outstanding Options Options Exercisable
--------------------------------------- -------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices (in thousands) Life Price (in thousands) Price
- -------------------- -------------- ---------- -------- ------------ --------
$ 9.31 - $13.75 1,047 7.3 $10.94 1,047 $10.94
17.40 - 26.66 1,213 7.6 23.58 494 23.81
27.96 - 37.50 152 6.3 34.18 98 36.66
43.75 - 61.88 126 2.6 49.51 126 49.51
- 45 -
NOTES TO FINANCIAL STATEMENTS
(Continued)
18. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------------- ----------------- ----------------- -----------------
(Millions of dollars,
except per share data) 1998 1997 1998 1997 1998 1997 1998 1997
- --------------------------------------------------------------------------------------------------------------
Sales and revenues...... $1,727 $1,296 $2,042 $1,551 $1,874 $1,586 $2,242 $1,938
====== ====== ====== ====== ====== ====== ====== ======
Manufacturing
gross margin.......... 13.4% 13.6% 14.4% 13.8% 14.5% 13.8% 18.2% 15.2%
====== ====== ====== ====== ====== ====== ====== ======
Net income ............ $ 38 $ 15 $ 67 $ 30 $ 50 $ 35 $ 144 $ 70
Earnings per share
Basic ............ $ .43 $ .10 $ .90 $ .31 $ .73 $ .38 $ 2.16 $ .87
Diluted ............ $ .42 $ .10 $ .89 $ .31 $ .72 $ .38 $ 2.14 $ .85
Market price range
- Common Stock........
High ............ $28 $10 3/8 $35 7/8 $11 3/8 $34 $21 5/16 $28 1/2 $29 1/2
Low ............ $20 1/16 $ 9 $27 1/4 $ 9 1/8 $26 1/8 $11 1/4 $17 $17 1/4
- 46 -
SUPPLEMENTAL FINANCIAL INFORMATION AS OF OCTOBER 31
AND FOR THE YEARS THEN ENDED (Unaudited)
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Condensed Statement of Income 1998 1997 1996
- ------------------------------------------------------------------------------
Sales of manufactured products...... $7,629 $6,147 $5,508
Other income........................ 49 44 42
------ ------ ------
Total sales and revenues....... 7,678 6,191 5,550
------ ------ ------
Cost of products sold............... 6,464 5,274 4,818
Postretirement benefits............. 174 214 219
Engineering and research expense.... 192 124 129
Marketing and administrative expense 390 332 282
Other expenses...................... 137 83 80
------ ------ ------
Total costs and expenses............ 7,357 6,027 5,528
------ ------ ------
Income before income taxes
Manufacturing operations.......... 321 164 22
Financial services operations..... 89 78 83
------ ------ ------
Income before income taxes...... 410 242 105
Income tax expense.................. 111 92 40
------ ------ ------
Net income.......................... $ 299 $ 150 $ 65
====== ====== ======
Selected Statements
of Financial Condition
and Cash Flow Data 1998 1997
- ------------------------------------ ------ ------
Cash, cash equivalents
and marketable securities......... $ 904 $ 802
Total assets........................ $4,326 $4,111
Total liabilities................... $3,557 $3,091
1998 1997 1996
------ ------ ------
Capital expenditures................ $ (305) $ (172) $ (117)
Depreciation and amortization....... 123 97 90
Change in operating assets
and liabilities................... 331 263 (189)
Cash provided by operations......... 492 438 -
Cash (used in) provided
by investment programs............ (588) (241) 39
Cash used in financing activities... (76) (76) (48)
- 47 -
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA
- ------------------------------------------------------------------------------
For the Years Ended October 31
(Millions of dollars,
except per share data,
units shipped and percentages) 1998 1997 1996 1995 1994
- ------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Total sales and revenues....... $7,885 $6,371 $5,754 $6,342 $5,337
Income of continuing operations 299 150 65 164 102
Net income .................... 299 150 65 164 82
Income of continuing operations
per share
Basic .................... 4.16 1.66 .49 1.83 .99
Diluted.................... 4.11 1.65 .49 1.83 .99
Earnings per share
Basic ..................... 4.16 1.66 .49 1.83 .72
Diluted..................... 4.11 1.65 .49 1.83 .72
Average number of shares
outstanding (millions)
Basic....................... 69.1 73.1 73.7 74.2 74.5
Diluted .................... 70.0 73.6 73.8 74.3 74.6
- ------------------------------------------------------------------------------
FINANCIAL DATA
Total assets................... $6,178 $5,516 $5,326 $5,566 $5,047
Debt
Manufacturing operations.... 450 92 115 127 127
Financial services
operations................ 1,672 1,224 1,305 1,330 1,091
------ ------ ------ ------ ------
Total debt..................... 2,122 1,316 1,420 1,457 1,218
Shareowners' equity............ 769 1,020 916 870 817
Total manufacturing operations
debt as a percent of total
manufacturing capitalization. 36.9% 8.3% 11.2% 12.7% 13.4%
Return on equity (a)........... 38.9% 14.7% 7.1% 18.9% 12.5%
- ------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Capital expenditures........... $ 305 $ 172 $ 117 $ 139 $ 87
Engineering and
research expense............. 192 124 129 113 97
- ------------------------------------------------------------------------------
OPERATING DATA
United States and
Canadian market share (b).... 28.9% 28.6% 27.5% 26.7% 27.0%
Unit shipments worldwide
Trucks ...................... 127,500 104,400 95,200 112,200 95,000
OEM engines.................. 213,700 184,000 163,200 154,200 130,600
Service parts sales............ $ 848 $ 806 $ 760 $ 730 $ 714
(a) Return on equity is calculated based on income of continuing operations.
(b) Based on retail deliveries of medium trucks (Classes 5, 6 and 7),
including school buses, and heavy trucks (Class 8).
- 48 -