PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9618
NAVISTAR INTERNATIONAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3359573
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611
-------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 836-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a
plan confirmed by a court. Yes No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 31, 1999, the number of shares outstanding of the registrant's
common stock was 65,276,869.
PAGE 2
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
INDEX
-----
Page
Reference
---------
Part I. Financial Information:
Item 1. Financial Statements:
Statement of Income --
Three Months and Six Months
Ended April 30, 1999 and 1998.................... 3
Statement of Financial Condition --
April 30, 1999, October 31, 1998 and April 30, 1998 4
Statement of Cash Flow --
Six Months Ended April 30, 1999 and 1998........... 5
Notes to Financial Statements.......................... 6
Supplemental Financial Information..................... 10
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.......... 12
Part II. Other Information:
Item 1. Legal Proceedings.............................. 19
Item 4. Submission of Matters to a Vote
of Security Holders.......................... 19
Item 6. Exhibits and Reports on Form 8-K............... 19
Signature ............................................ 20
PAGE 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
STATEMENT OF INCOME (Unaudited)
-------------------------------------------------------------------------------
Millions of dollars, except per share data
-------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-----------------------------------------
Three Months Ended Six Months Ended
April 30 April 30
------------------ ----------------
1999 1998 1999 1998
------ ------ ------ ------
Sales and revenues
Sales of manufactured
products ........................ $2,215 $1,981 $4,052 $3,653
Finance and insurance revenue ..... 59 47 121 92
Other income ...................... 13 14 38 24
------ ------ ------ ------
Total sales and revenues ........ 2,287 2,042 4,211 3,769
------ ------ ------ ------
Costs and expenses
Cost of products
and services sold ............... 1,824 1,703 3,368 3,157
Postretirement benefits ........... 65 43 114 88
Engineering and research expense .. 66 46 124 81
Marketing and
administrative expense .......... 123 97 249 195
Interest expense .................. 35 29 67 46
Other expenses .................... 20 16 36 33
------ ------ ------ ------
Total costs and expenses ........ 2,133 1,934 3,958 3,600
------ ------ ------ ------
Income before income taxes .... 154 108 253 169
Income tax expense ............ 58 41 96 64
------ ------ ------ ------
Net income ........................ 96 67 157 105
Less dividends
on Series G Preferred stock ..... - 4 - 11
------ ------ ------ ------
Net income applicable
to common stock ................. $ 96 $ 63 $ 157 $ 94
====== ====== ====== ======
Earnings per share
Basic ........................ $ 1.44 $ .90 $ 2.37 $ 1.32
Diluted ...................... $ 1.42 $ .89 $ 2.33 $ 1.30
Average shares outstanding
(millions)
Basic ........................ 66.2 69.2 66.3 70.6
Diluted ...................... 67.5 70.5 67.3 71.7
See Notes to Financial Statements.
PAGE 4
STATEMENT OF FINANCIAL CONDITION (Unaudited)
- --------------------------------------------------------------------------------
Millions of dollars
- --------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------
April 30 October 31 April 30
1999 1998 1998
---------- ---------- ----------
ASSETS
- ------------------------------------------
Cash and cash equivalents ................ $ 181 $ 390 $ 453
Marketable securities .................... 406 674 491
------ ------ ------
587 1,064 944
Receivables, net ......................... 2,611 2,146 2,044
Inventories .............................. 646 505 576
Property, net of accumulated
depreciation and amortization
of $1,069, $976 and $930 ............... 1,186 1,106 968
Investments and other assets ............. 294 207 205
Prepaid and intangible pension assets .... 243 238 341
Deferred tax asset, net ................. 834 912 871
------ ------ ------
Total assets ............................. $6,401 $6,178 $5,949
====== ====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
- ------------------------------------------
Liabilities
Accounts payable, principally trade ...... $1,307 $1,273 $1,214
Debt: Manufacturing operations ........... 477 450 464
Financial services operations ...... 1,702 1,672 1,592
Postretirement benefits liability ........ 967 934 910
Other liabilities ........................ 1,063 1,080 977
------ ------ ------
Total liabilities .................... 5,516 5,409 5,157
------ ------ ------
Commitments and contingencies
Shareowners' equity
Series D convertible
junior preference stock ................ $ 4 $ 4 $ 4
Common stock (75.3, 75.3 and 55.4 million
shares issued) ......................... 2,140 2,139 1,750
Class B Common stock
(19.9 million shares issued
at April 30, 1998) ..................... - - 388
Common stock held in treasury, at cost ... (236) (214) (138)
Retained earnings (deficit) .............. (683) (829) (1,019)
Accumulated other comprehensive loss ..... (340) (331) (193)
------ ------ ------
Total shareowners' equity ............ 885 769 792
------ ------ ------
Total liabilities and shareowners' equity. $6,401 $6,178 $5,949
====== ====== ======
See Notes to Financial Statements.
PAGE 5
STATEMENT OF CASH FLOW (Unaudited)
------------------------------------------------------------------------------
For the Six Months Ended April 30 (Millions of dollars)
------------------------------------------------------------------------------
Navistar International
Corporation and
Consolidated Subsidiaries
-------------------------
1999 1998
------ ------
Cash flow from operations
Net income ............................... $ 157 $ 105
Adjustments to reconcile net income
to cash used in operations:
Depreciation and amortization .......... 97 79
Deferred income taxes .................. 87 64
Postretirement benefits funding in excess
of expense ........................... 25 (283)
Other, net ............................. (29) (17)
Change in operating assets and liabilities:
Receivables ............................ (308) (192)
Inventories ............................ (139) (81)
Prepaid and other current assets ....... (25) (11)
Accounts payable ....................... 10 80
Other liabilities ...................... (21) 91
------ ------
Cash used in operations .................. (146) (165)
------ ------
Cash flow from investment programs
Purchase of retail notes and lease
receivables ............................ (670) (576)
Collections/sales of retail notes
and lease receivables ................. 544 520
Purchase of marketable securities ........ (142) (355)
Sales or maturities of marketable
securities ............................. 409 223
Capital expenditures ..................... (121) (124)
Property and equipment leased to others .. (39) (88)
Investment in affiliates ................. (46) (2)
Other investment programs, net ........... (26) -
------ ------
Cash used in investment programs ......... (91) (402)
------ ------
Cash flow from financing activities
Issuance of debt ......................... 73 441
Principal payments on debt ............... (106) (61)
Net increase in notes and debt
outstanding under bank revolving credit
facility and commercial paper programs . 60 312
Mexican credit facility .................. 24 54
Repurchase of common stock ............... (26) (84)
Redemption of Series G Preferred Stock ... - (240)
Dividends paid ........................... - (11)
Other, net ............................... 3 -
------ ------
Cash provided by financing activities .... 28 411
------ ------
Cash and cash equivalents
Decrease during the period ............. (209) (156)
At beginning of the year ............... 390 609
------ ------
Cash and cash equivalents
at end of the period ................... $ 181 $ 453
====== ======
See Notes to Financial Statements.
PAGE 6
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note A. Summary of Accounting Policies
Navistar International Corporation is a holding company whose principal
operating subsidiary is Navistar International Transportation Corp. 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 accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the 1998 Annual Report on Form
10-K and should be read in conjunction with the disclosures therein.
In the opinion of management, these interim financial statements reflect
all adjustments, consisting of normal recurring accruals, necessary to present
fairly the financial position, results of operations and cash flow for the
periods presented. Interim results are not necessarily indicative of results for
the full year. Certain 1998 amounts have been reclassified to conform with the
presentation used in the 1999 financial statements.
Effective February 1, 1999, the functional currency of the company's
Mexican subsidiaries changed from the U.S. dollar to the Mexican peso because
Mexico is no longer considered a highly inflationary economy. The effect of this
change was not material.
Note B. Supplemental Cash Flow Information
Consolidated interest payments during the first six months of 1999 and
1998 were $68 million and $42 million, respectively. Consolidated tax payments
made during the first six months of 1999 were $10 million, and were not material
for the same period last year.
Note C. Income Taxes
The benefit of Net Operating Loss (NOL) carryforwards is recognized as a
deferred tax asset in the Statement of Financial Condition, while the Statement
of Income includes income taxes calculated at the statutory rate. The amount
reported does not represent cash payment of income taxes except for certain
state income, foreign withholding and federal alternative minimum taxes which
are not material. In the Statement of Financial Condition, the deferred tax
asset is reduced by the amount of deferred tax expense or increased by a
deferred tax benefit recorded during the year. Until the company has utilized
its significant NOL carryforwards, the cash payment of federal income taxes will
be minimal.
PAGE 7
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note D. Inventories
Inventories are as follows:
April 30 October 31 April 30
Millions of dollars 1999 1998 1998
- -------------------------------------------------------------------------------
Finished products.............. $ 320 $ 223 $ 261
Work in process................ 114 69 141
Raw materials and supplies..... 212 213 174
-------- -------- --------
Total inventories.............. $ 646 $ 505 $ 576
======== ======== ========
Note E. Financial Instruments
The company purchases collateralized mortgage obligations (CMOs) that
have predetermined fixed-principal payment patterns which are relatively
certain. At April 30, 1999 these instruments totaled $72 million and the
unrecognized gain was not material. At quarter end, $63 million of a Mexican
subsidiary's receivables were pledged as collateral for bank borrowings.
In November 1998, Navistar Financial Corporation (NFC) sold fixed rate
retail receivables on a variable rate basis. For the protection of investors,
NFC issued an interest rate cap. Under the terms of the agreement, NFC will make
payments if interest rates exceed certain levels. The notional amount of the cap
amortizes based on the expected outstanding principal balance of the sold retail
receivables. As of April 30, 1999, the notional amount was $490 million and the
interest rate cap had a fair value of $2 million.
In June 1999, NFC sold $715 million of retail notes, net of unearned
finance income, recognizing a gain of $6 million on the sale. The proceeds of
$685 million, net of underwriting fees and credit enhancements, were used by NFC
for general working capital purposes.
In anticipation of its June 1999 sale of retail receivables, NFC held
forward treasury locks with notional amounts of $500 million. These positions
were closed in conjunction with the pricing of the sale and the resulting gain
was not material. In addition, the company held Canadian dollar forward
contracts with notional amounts of $40 million and other derivative contracts
with notional amounts of $5 million. The unrealized net loss on these contracts
was not material.
PAGE 8
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Earnings Per Share
Earnings per share was computed as follows:
Three Months Ended Six Months Ended
April 30 April 30
------------------ -------------------
Millions of dollars,
except share and per share data 1999 1998 1999 1998
- -------------------------------- -------- -------- -------- --------
Net income....................... $ 96 $ 67 $ 157 $ 105
Less dividends on
Series G Preferred Stock.... - 4 - 11
-------- -------- -------- --------
Net income applicable
to common stock
(Basic and Diluted).......... $ 96 $ 63 $ 157 $ 94
========= ======== ======== ========
Average shares outstanding
(millions)..................
Basic..................... 66.2 69.2 66.3 70.6
Dilutive effect
of options outstanding
and other dilutive
securities............ 1.3 1.3 1.0 1.1
-------- -------- -------- --------
Diluted................... 67.5 70.5 67.3 71.7
======== ======== ======== ========
Earnings per share
Basic....................... $ 1.44 $ .90 $ 2.37 $ 1.32
Diluted..................... $ 1.42 $ .89 $ 2.33 $ 1.30
Unexercised employee stock options to purchase .1 million and .3 million
shares of Navistar common stock during the three months ended April 30, 1999 and
1998, respectively, and to purchase .2 million and .5 million shares of Navistar
common stock during the six months ended April 30, 1999 and 1998, respectively,
were excluded from the computation of diluted shares outstanding because the
exercise prices were greater than the average market price of Navistar common
stock. Additionally, the diluted calculation excludes the effects of the
conversion of the Series G preferred stock as such conversion would produce
anti-dilutive results. Subsequent to April 30, 1999, $40 million of cash was
used to repurchase .8 million shares of common stock through June 9, 1999.
Note G. Preferred Share Purchase Rights Plan
On April 20, 1999, the company's board of directors adopted a shareholder
rights plan ("Rights Plan") and declared a rights dividend of one preferred
share purchase right (a "Right") for each outstanding share of common stock,
(the "Common Shares"), of the company to shareowners of record as of the close
of business on May 3, 1999. Subject to the terms of the Rights Plan, each Right
entitles the registered holder to purchase from the company one one-thousandth
of a share of Series A Junior Participating Preferred Stock, of the Company (the
"Preferred Shares") at a price of $175 per one one-thousandth of a Preferred
Share, subject to adjustment. The Rights are exercisable only if a person or
group (an "Acquiring Person"), acquires 15% or more of the outstanding Common
PAGE 9
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note G. Preferred Share Purchase Rights Plan (continued)
Shares and commences a tender offer for 15% or more of the outstanding Common
Shares. Upon any such occurrence, each Right will entitle its holder (other than
the Acquiring Person and certain related parties) to purchase, at the Right's
then current exercise price, a number of Common Shares having a market value of
two times such price. Similarly, in the event the company is acquired in a
merger or other business combination and is not the surviving corporation, each
Right (other than Rights owned by the Acquiring Person and certain related
parties) shall thereafter be exercisable for a number of shares of common stock
of the acquiring company having a market value of two times the exercise price
of the Right. Subject to certain conditions, the Rights are redeemable by the
company's board of directors for $0.01 per Right and are exchangeable for Common
Shares. The Rights have no voting power and initially expire on May 3, 2009.
Note H. New Accounting Pronouncements
Effective November 1, 1998, Navistar adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which establishes
standards for reporting and display of comprehensive income and its components.
Financial statements for prior periods have been reclassified as required by
this statement. Navistar's total comprehensive income was as follows:
Three Months Ended Six Months Ended
April 30 April 30
------------------ -------------------
Millions of dollars 1999 1998 1999 1998
- --------------------------------- -------- -------- -------- --------
Net income $ 96 $ 67 $ 157 $ 105
Other comprehensive income (loss) - 1 (9) 2
-------- -------- -------- --------
Total comprehensive income $ 96 $ 68 $ 148 $ 107
======== ======== ======== ========
Note I. Subsequent Events
In March 1999, the company announced that it had finalized a joint
venture with a Brazilian diesel engine producer to manufacture diesel engines in
South America. In April 1999, the company announced that it will invest $250
million to produce new high technology diesel engines in Huntsville, Alabama.
On June 7, 1999 the company announced that employees represented by Local
127 of the Canadian Auto Workers voted to ratify a new three-year labor
agreement nearly five months ahead of schedule. The new contract is now
effective and extends through June 1, 2002. Increased labor and pension costs
are expected to be offset by work rule changes that provide increased
manufacturing flexibility.
PAGE 10
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Supplemental Financial Information
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Three Months Ended Six Months Ended
April 30 April 30
------------------ -------------------
Condensed Statement of Income 1999 1998 1999 1998
- ------------------------------------- -------- -------- -------- --------
Sales of manufactured products........ $ 2,215 $ 1,981 $ 4,052 $ 3,653
Other income.......................... 9 12 28 22
-------- -------- -------- --------
Total sales and revenues.............. 2,224 1,993 4,080 3,675
-------- -------- -------- --------
Cost of products sold................. 1,819 1,696 3,353 3,144
Postretirement benefits............... 65 43 114 88
Engineering and research expense...... 66 46 124 81
Marketing and administrative expense.. 107 88 222 177
Other expenses........................ 39 31 74 58
-------- -------- -------- --------
Total costs and expenses.............. 2,096 1,904 3,887 3,548
-------- -------- -------- --------
Income before income taxes
Manufacturing operations............ 128 89 193 127
Financial services operations....... 26 19 60 42
-------- -------- -------- --------
Income before income taxes........ 154 108 253 169
Income tax expense................ 58 41 96 64
-------- -------- -------- --------
Net income............................ $ 96 $ 67 $ 157 $ 105
======== ======= ======== ========
Condensed Statement April 30 October 31 April 30
of Financial Condition 1999 1998 1998
- ---------------------- --------- ---------- --------
Cash, cash equivalents
and marketable securities........... $ 432 $ 904 $ 750
Receivables, net...................... 883 441 390
Inventories........................... 626 490 562
Property and equipment, net........... 936 883 764
Equity in nonconsolidated subsidiaries 344 327 327
Other assets.......................... 458 368 484
Deferred tax asset, net............... 834 913 871
-------- -------- --------
Total assets..................... $ 4,513 $ 4,326 $ 4,148
======== ======== ========
Accounts payable, principally trade... $ 1,255 1,233 $ 1,142
Postretirement benefits liabilities... 959 927 902
Other liabilities..................... 1,414 1,397 1,312
Shareowners' equity................... 885 769 792
-------- -------- --------
Total liabilities
and shareowners' equity...... $ 4,513 $ 4,326 $ 4,148
======== ======== ========
PAGE 11
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Supplemental Financial Information (continued)
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Six Months Ended
April 30
------------------------
Condensed Statement of Cash Flow 1999 1998
- ----------------------------------------------- -------- --------
Cash flow from operations
Net income..................................... $ 157 $ 105
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization................ 75 64
Deferred income taxes........................ 87 64
Postretirement benefits funding
in excess of expense....................... 25 (283)
Equity in earnings of investees,
net of dividends received.................. (16) -
Other, net..................................... (25) (7)
Change in operating assets and liabilities .... (147) 102
-------- --------
Cash provided by operations.................... 156 45
-------- --------
Cash flow from investment programs
Purchase of marketable securities.............. (110) (330)
Sales or maturities of marketable securities... 375 196
Capital expenditures........................... (121) (124)
Receivable from financial services operations (455) (8)
Investment in affiliates....................... (46) (2)
Other investment programs, net ................ (11) -
-------- --------
Cash used in investment programs............... (368) (268)
-------- --------
Cash flow from financing activities............ 5 36
-------- --------
Cash and cash equivalents
Decrease during the period..................... (207) (187)
At beginning of the year....................... 351 573
-------- --------
Cash and cash equivalents at end of the period. $ 144 $ 386
======== ========
PAGE 12
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
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 heading "Business Environment."
Second Quarter Ended April 30, 1999
-----------------------------------
The company reported net income of $96 million, or $1.42 per diluted
common share for the second quarter ended April 30, 1999, compared with net
income of $67 million, or $0.89 per diluted common share for the comparable
quarter last year.
The company's manufacturing operations reported income before income
taxes of $128 million compared with pretax income of $89 million in the second
quarter of 1998 reflecting higher sales of trucks and engines. The financial
services operations' pretax income for the second quarter of 1999 was $26
million compared with $19 million in the prior year reflecting an increased
volume of trucks financed.
Sales and Revenues. Second quarter 1999 industry retail sales of Class 5 through
8 trucks totaled 122,200 units, which is 21% higher than the 100,700 units sold
during this period in 1998. Class 8 heavy truck sales of 71,500 units during the
second quarter of 1999 were 25% higher than the 1998 level of 57,200 units.
Industry sales of Class 5, 6 and 7 medium trucks, including school buses,
increased 16% to 50,600 units. Industry sales of school buses, which accounted
for 20% of the medium truck market, increased 5%.
Sales and revenues for the second quarter of 1999 totaled $2,287 million,
12% higher than the $2,042 million reported for the comparable quarter in 1998.
Sales of trucks, mid-range diesel engines and service parts for the second
quarter of 1999 totaled $2,215 million compared with $1,981 million reported for
the same period in 1998.
The company's market share was constrained by the fact that continued
industry demand for heavy trucks outstripped capacity. This resulted in a
decrease in market share from 30.7% in 1998 to 28.6% in 1999. The company's
retail deliveries in the combined United States and Canadian Class 5 through 8
truck market increased 13% over the prior year. (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 (OEMs) during the second quarter of 1999 totaled 72,200
units, a 29% increase from the same period of 1998. This increase resulted from
higher shipments to Ford Motor Company to meet consumer demand for the light
trucks and vans which use this engine.
PAGE 13
Service parts sales of $223 million in the second quarter of 1999
increased 3% from the prior year's level.
Finance and insurance revenue of $59 million in the second quarter of
1999 increased 26% from 1998, primarily as a result of increased wholesale and
retail financing activities and increased operating lease balances.
Six Months Ended April 30, 1999
-------------------------------
Pretax income for the first six months of 1999 was $253 million compared
with $169 million reported for the same period of 1998. The company's
manufacturing operations reported income before income taxes of $193 million
during this period, compared with $127 million reported in 1998. The financial
services operations' pretax income for the first six months of 1999 was $60
million, an increase from the $42 million reported in 1998. This change
primarily reflects an increase in finance receivable balances and a legal
settlement in favor of the company's insurance subsidiary.
Industry retail sales of Class 5 through 8 trucks during the first six
months of 1999 totaled 227,500 units, an increase from the 188,800 units sold
during this period in 1998. Class 8 heavy truck sales of 133,400 units during
the first six months of 1999 were 22% higher than the 1998 level of 109,600
units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses,
increased 19% to 94,100 units. Industry sales of school buses, which accounted
for 20% of the medium truck market, increased 6%.
Sales and revenues during the first six months of 1999 totaled $4,211
million, an increase of 12% from 1998. Sales of trucks, mid-range diesel engines
and service parts for the first half of 1999 totaled $4,052 million compared
with $3,653 million reported for the same period in 1998.
Although the company's retail deliveries in the combined United States
and Canadian class 5 through 8 truck market increased by 9%, the company's
market share for the first six months of 1999 decreased to 27.9% from the 30.8%
reported in 1998. The company's market share was constrained by the fact that
continued industry demand for heavy trucks outstripped capacity.
The company shipped 130,300 mid-range diesel engines to other OEMs during
the first six months of 1999 which was a 32% increase from the same period of
1998 due to higher shipments to Ford Motor Company. Service parts sales were 4%
higher than in the same period of 1998.
Finance and insurance revenue increased $29 million to $121 million for the
first half of 1999 primarily as a result of increased wholesale and retail
financing activities and increased operating lease balances. The increase in
other income is primarily due to a legal settlement in favor of the company's
insurance subsidiary.
Costs and expenses. Manufacturing gross margin was 17.9% of sales for the second
quarter of 1999 compared with 14.4% for the same period in 1998. This increase
is primarily due to lower unit costs and improved operating efficiencies.
Manufacturing gross margin for the first six months of 1999 was 17.2% compared
with 13.9% in 1998. This increase is primarily due to lower unit costs, improved
pricing and improved operating efficiencies.
PAGE 14
Consolidated marketing and administrative expense increased to $123
million in the second quarter of 1999 from $97 million in the second quarter of
1998 and increased to $249 million for the first half of 1999 from $195 million
in the first half of 1998. These increases were primarily due to the marketing
and operational implementation of the company's integrated truck and engine
strategies ($17 million and $36 million, respectively).
Postretirement benefits expense increased to $65 million in the second
quarter of 1999 from $43 million in the second quarter of 1998 and increased to
$114 million for the first half of 1999 from $88 million for the first half of
1998. These increases primarily reflect higher retiree healthcare expense ($6
million and $10 million, respectively) and higher supplemental trust profit
sharing provisions ($12 million and $16 million, respectively) related to higher
profits.
Engineering and research expense increased $20 million from the second
quarter of 1998 and increased $43 million from the first half of 1998 to $124
million for the first half of 1999. Approximately 75% and 65%, respectively, of
these increases reflect the company's continuing investment in its next
generation vehicle (NGV) and next generation diesel (NGD) programs.
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 the company'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 funding
for the company. Insurance operations are self-funded.
Cash used in operations during the first six months of 1999 totaled $146
million primarily from a net change in operating assets and liabilities of $483
million offset by net income of $157 million, $87 million of noncash deferred
taxes and $93 million of other noncash items, principally depreciation. The net
change in operating assets and liabilities included a $308 million increase in
receivables primarily due to the increase in wholesale note and account
acquisitions over liquidations of $299 million. The $139 million increase in
inventories resulted primarily from higher production volume.
Investment programs used $91 million in cash primarily reflecting a net
increase in retail notes and lease receivables of $126 million. Other investment
activities used $39 million for property and equipment leased to others and $121
million to fund capital expenditures primarily for the NGV and NGD programs, for
increased mid-range diesel engine capacity, and for increased capacity,
infrastructure, and facility enhancements at the Escobedo plant. These were
offset by a net decrease in marketable securities of $267 million.
Cash provided by financing activities resulted from a net increase of $60
million in notes and debt outstanding under the bank revolving credit facility
and other commercial paper programs. Cash was also provided by $24 million of
borrowings under the Mexican credit facility and a $33 million net decrease in
long-term debt. $26 million of cash was used to repurchase .5 million shares of
common stock during the second quarter. Subsequent to April 30, 1999 an
additional $40 million of cash was used to repurchase .8 million shares through
June 9, 1999.
PAGE 15
Through the asset-backed markets, Navistar Financial Corporation (NFC) has
been able to fund fixed rate retail note receivables at rates offered to
companies with investment grade ratings. During the first six months of 1999,
NFC sold $545 million of retail notes through Navistar Financial Retail
Receivables Corporation (NFRRC) to a multi-seller asset-backed commercial paper
conduit sponsored by a major financial institution.
As of April 30, 1999, Navistar Financial Securities Corporation, a
wholly-owned subsidiary of NFC, had a revolving wholesale note trust that
provides for the funding of $600 million of eligible wholesale notes.
At April 30, 1999, available funding under the NFC's bank revolving
credit facility and the asset-backed commercial paper facility was $72 million,
of which $15 million was used to back short-term debt. The remaining $57
million, when combined with unrestricted cash and cash equivalents, made $70
million available to fund the general business purposes of NFC.
The company purchases collateralized mortgage obligations (CMOs) that
have predetermined fixed-principal payment patterns which are relatively
certain. At April 30, 1999 these instruments totaled $72 million and the
unrecognized gain was not material. At quarter end, $63 million of a Mexican
subsidiary's receivables were pledged as collateral for bank borrowings.
In November 1998, NFC sold fixed rate retail receivables on a variable rate
basis. For the protection of investors, NFC issued an interest rate cap. Under
the terms of the agreement, NFC will make payments if interest rates exceed
certain levels. The notional amount of the cap amortizes based on the expected
outstanding principal balance of the sold retail receivables. As of April 30,
1999 the notional amount was $490 million and the interest rate cap had a fair
value of $2 million.
In June 1999, NFC sold $715 million of retail notes, net of unearned
finance income, through NFRRC. A gain of $6 million was recognized on the sale,
which will be reflected in NFC's third quarter revenues. Following the June 1999
sale of retail receivables, the remaining shelf registration available to NFRRC
for the public issuance of asset-backed securities was $2,257 million.
In anticipation of its June 1999 sale of retail receivables, NFC held
forward treasury locks with notional amounts of $500 million. These positions
were closed in conjunction with the pricing of the sale and the resulting gain
was not material. In addition, the company held Canadian dollar forward
contracts with notional amounts of $40 million and other derivative contracts
with notional amounts of $5 million. The unrealized net loss on these contracts
was not material.
Cash flow from the company's manufacturing and financial services
operations is currently sufficient to cover planned investment in the business.
The company had outstanding capital commitments of $190 million at April 30,
1999, primarily for the NGV and NGD programs.
PAGE 16
In May 1999, Moody's and Duff and Phelps raised the company's senior debt
ratings from Ba1 and BB+ to Baa3 and BBB-, respectively and raised the company's
subordinated debt ratings from Ba3 and BB- to Ba2 and BB, respectively. NFC's
senior debt ratings increased from Ba1 and BBB- to Baa3 and BBB, respectively.
NFC's subordinated debt ratings were also raised from Ba3 and BB+ to Ba2 and
BBB-, respectively.
It is the opinion of management that, in the absence of significant
unanticipated cash demands, current and forecasted cash flow will provide a
basis for financing operating requirements and capital expenditures. Management
believes that collections on the outstanding receivables portfolios as well as
funds available from various sources will permit the financial services
operations to meet the financing requirements of the company's dealers and
customers.
Year 2000
As of April 30, 1999, the company estimates that it was approximately 87%
complete with the conversion or compliance checking of its internal systems
including significant applications. The company has completed multiple
integration tests of major systems, with continuation of these efforts scheduled
through September 1999. Navistar currently anticipates that the modifications
and testing process of all significant applications will be substantially
complete by September 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 approximately 72% of these suppliers.
Based on these responses, the company believes that the majority of these
suppliers are making acceptable progress toward Year 2000 readiness. The
supplier assurance process is expected to be substantially complete by July 1999
and contingency plans are being developed for all suppliers with emphasis on
those identified as critical. Assessments of select critical suppliers are
planned to continue through July 1999.
The company continues to work with its independent dealers on their year
2000 readiness and to monitor their progress. Compliance of all certified dealer
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 $35 million, including $25
million of estimated expense and $10 million of capital expenditures.
Approximately $17 million has been expensed and approximately $5 million has
been capitalized through April 30, 1999. The remaining costs are estimated to be
incurred through fiscal year 2000.
PAGE 17
As part of its continuous assessment process, each of the business
locations has identified the critical processes that are essential for
day-to-day operations. Contingency plans are being developed that define how the
company will continue to operate these critical business processes in the event
of a Year 2000 problem. These plans are to identify when contingent actions
should be taken and to ensure that the resources necessary for response are in
place. Preliminary detailed contingency planning is scheduled for completion by
July 1999, allowing time for review, cataloging and testing prior to activation
in December 1999.
In addition to a central Navistar command center, command centers are
being defined for the business locations, along with the necessary procedures
and staffing to manage pre and post Year 2000 activities. Checklists are being
developed as part of the contingency plans that will allow the command centers
to communicate, quickly identify any Year 2000 problems, and to initiate
corrective actions promptly. Implementation of the command centers is expected
to begin in August 1999.
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 have been 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, and the ability
to locate and correct all relevant computer codes and embedded technology, as
well as other 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.
Income Taxes
The deferred tax assets are net of valuation allowances since it is more
likely than not that some portion of the deferred tax asset may not be realized
in the future through the generation of taxable income. Analysis has
historically been performed on an annual basis 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 using a
number of alternatives to evaluate financial results in economic cycles at
various industry volume conditions based upon the company's existing operating
structure. Continued strong demand in the United States and Canada led the
company to raise its forecast for industry demand for heavy and medium trucks
and school buses to a combined total of 415,000 units. As a result of this
increase and the continued successful implementation of the company's
manufacturing strategy, changes in the company's operating structure, and other
positive operating indicators, management has initiated a review of its
projected future taxable income and has begun to evaluate the impact of these
changes on its deferred tax asset valuation allowance. This review may result in
a significant reduction to the allowance. The company expects to complete its
evaluation during the third quarter.
PAGE 18
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 the second quarter of 1999 although a
decrease in the number of new truck orders has decreased the company's order
backlog to 55,700 units at April 30, 1999 from 64,300 units at April 30, 1998.
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 balances production with demand as
appropriate.
Strong demand for International brand trucks coupled with record
industry demand continues to outpace the capacity of certain of Navistar's
suppliers. Accordingly, constraints have been placed on the company's ability to
meet certain customers' demands because of component parts availability.
Continued economic strength in the United States and Canada has led the
company to increase its demand estimates. The company currently projects 1999
United States and Canadian Class 8 heavy truck demand to be 250,000 units, an 8%
increase from 1998. Class 5, 6 and 7 medium truck demand, excluding school
buses, is forecast at 133,000 units, a 5% increase from 1998. Demand for school
buses is forecast at 32,000 units, consistent with 1998. Mid-range diesel engine
shipments by the company to original equipment manufacturers in 1999 are
expected to be 273,900 units, 28% higher than in 1998. The company's service
parts sales are projected to grow 10% to approximately $935 million.
In March 1999, the company announced that it had finalized a joint
venture with a Brazilian diesel engine producer to manufacture diesel engines in
South America. In April 1999, the company announced that it will invest $250
million to produce new high technology diesel engines in Huntsville, Alabama.
On June 7, 1999 the company announced that employees represented by Local
127 of the Canadian Auto Workers voted to ratify a new three-year labor
agreement nearly five months ahead of schedule. The new contract is now
effective and extends through June 1, 2002. Increased labor and pension costs
are expected to be offset by work rule changes that provide increased
manufacturing flexibility.
PAGE 19
Navistar International Corporation and Consolidated Subsidiaries
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
Incorporated herein by reference from Item 3 - "Legal Proceedings"
in the company's definitive Form 10-K dated December 22, 1998,
Commission File No. 1-9618.
Item 4. Submission of Matters to a Vote of Security Holders
The company's Annual Meeting of Shareowners was held on February
23, 1999. The following three nominees were elected to the Board
of Directors to serve three year terms expiring at the 2002 Annual
Meeting of Shareowners. There were no broker nonvotes nor
abstentions for any of the nominees. The number of votes cast for,
or withheld, for each nominee for director was as follows:
Shares Voted Shares
Nominees "FOR" "WITHHELD"
-------- ----------- ----------
William F. Andrews 58,199,088 1,084,414
John D. Correnti 58,204,919 1,078,583
Allen J. Krowe 58,220,559 1,062,943
The names of the remaining directors who did not stand for
election at the Annual Meeting and whose terms of office as
directors continue after such meeting are John R. Horne, Robert
C. Lannert, Y. Marc Belton, Jerry E. Dempsey, Dr. Abbie J.
Griffin, Michael N. Hammes, Walter J. Laskowski and William F.
Patient.
Item 6. Exhibits and Reports on Form 8-K
10-Q Page
-----------
(a) Exhibits:
3. Articles of Incorporation and By-Laws. E-1
4. Instruments Defining The Rights
of Security Holders,
Including Indentures E-2
(b) Reports on Form 8-K:
The company filed a current report on Form 8-K with the
Commission on April 20, 1999 in which the company
announced the adoption of a preferred share purchase
rights plan and included a press release relating, among
other things, to the adoption of the rights plan.
PAGE 20
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NAVISTAR INTERNATIONAL CORPORATION
- ----------------------------------
(Registrant)
/s/ Mark T. Schwetschenau
- -----------------------------------
Mark T. Schwetschenau
Vice President and Controller
(Principal Accounting Officer)
June 11, 1999