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 July 31, 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 August 31, 1999, the number of shares outstanding of the
registrant's common stock was 63,583,518.
PAGE 2
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
INDEX
-----
Page
Reference
---------
Part I. Financial Information:
Item 1. Financial Statements
Statement of Income
Three Months and Nine Months Ended July 31, 1999
and 1998................................................ 3
Statement of Financial Condition
July 31, 1999, October 31, 1998 and July 31, 1998......... 4
Statement of Cash Flow
Nine Months Ended July 31, 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................................... 20
Item 6. Exhibits and Reports on Form 8-K.................... 20
Signature ......................................................... 21
PAGE 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
STATEMENT OF INCOME (Unaudited)
- --------------------------------------------------------------------------------------------
Millions of dollars, except per share data
- --------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------------------
Three Months Ended Nine Months Ended
July 31 July 31
----------------------- ----------------------
1999 1998 1999 1998
---------- ---------- ---------- ----------
Sales and revenues
Sales of manufactured products............ $ 1,797 $ 1,804 $ 5,849 $ 5,456
Finance and insurance revenue............. 67 57 188 149
Other income.............................. 14 13 52 38
---------- ---------- ---------- ---------
Total sales and revenues.............. 1,878 1,874 6,089 5,643
---------- ---------- ---------- ---------
Costs and expenses
Cost of products and services sold........ 1,480 1,550 4,848 4,707
Postretirement benefits................... 45 40 159 128
Engineering and research expense.......... 73 43 197 124
Marketing and administrative expense...... 112 99 361 294
Interest expense.......................... 32 31 99 77
Other expenses............................ 11 30 47 63
---------- ---------- ---------- ---------
Total costs and expenses.............. 1,753 1,793 5,711 5,393
---------- ---------- ---------- ---------
Income before income taxes........ 125 81 378 250
Income tax benefit (expense)...... 130 (31) 34 (95)
---------- ---------- ---------- ---------
Net income................................ 255 50 412 155
Less dividends on Series G Preferred stock - - - 11
---------- ---------- ---------- ---------
Net income applicable to common stock..... $ 255 $ 50 $ 412 $ 144
========== ========== ========== =========
Earnings per share
Basic................................. $ 3.94 $ .73 $ 6.27 $ 2.05
Diluted............................... $ 3.86 $ .72 $ 6.16 $ 2.02
Average shares outstanding (millions)
Basic................................. 64.9 68.6 65.8 69.9
Diluted............................... 66.2 69.5 66.9 70.9
<FN>
See Notes to Financial Statements.
</FN>
PAGE 4
STATEMENT OF FINANCIAL CONDITION (Unaudited)
- -----------------------------------------------------------------------------------------------
Millions of dollars
- -----------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------------------
July 31 October 31 July 31
1999 1998 1998
------------ ------------ ------------
ASSETS
- ----------------------------------------------
Cash and cash equivalents..................... $ 237 $ 390 $ 269
Marketable securities......................... 389 674 556
------------ ------------ ------------
626 1,064 825
Receivables, net.............................. 1,976 2,146 1,583
Inventories................................... 743 505 553
Property, net of accumulated depreciation and
amortization of $1,111, $976 and $925 ..... 1,266 1,106 1,007
Investments and other assets.................. 273 207 193
Prepaid and intangible pension assets......... 243 238 344
Deferred tax asset, net....................... 966 912 842
------------ ------------ ------------
Total assets $ 6,093 $6,178 $ 5,347
============ ============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
- ----------------------------------------------
Liabilities
Accounts payable, principally trade........... $ 993 $ 1,273 $ 1,051
Debt: Manufacturing operations................ 473 450 440
Financial services operations........... 1,587 1,672 1,122
Postretirement benefits liability............. 980 934 911
Other liabilities............................. 1,030 1,080 1,033
------------ ------------ ------------
Total liabilities..................... 5,063 5,409 4,557
------------ ------------ ------------
Commitments and contingencies
Shareowners' equity
Series D convertible junior preference stock.. 4 4 4
Common stock (75.3 million shares issued)..... 2,139 2,139 2,138
Common stock held in treasury, at cost........ (340) (214) (184)
Retained earnings (deficit)................... (431) (829) (971)
Accumulated other comprehensive loss.......... (342) (331) (197)
------------ ------------ ------------
Total shareowners' equity............. 1,030 769 790
------------ ------------ ------------
Total liabilities and shareowners' equity..... $ 6,093 $ 6,178 $ 5,347
============ ============ ============
<FN>
See Notes to Financial Statements.
</FN>
PAGE 5
STATEMENT OF CASH FLOW (Unaudited)
- -------------------------------------------------------------------------------
For the Nine Months Ended July 31 (Millions of dollars)
- -------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
1999 1998
-------- --------
Cash flow from operations
Net income..................................... $ 412 $ 155
Adjustments to reconcile net income
to cash used in operations:
Depreciation and amortization........... 143 119
Deferred income taxes................... 132 95
Deferred tax asset valuation
allowance adjustment ................. (178) -
Postretirement benefits funding
less than (in excess of) expense...... 40 (283)
Other, net.............................. (37) (32)
Change in operating assets and liabilities:
Receivables............................. (18) 155
Inventories............................. (243) (59)
Prepaid and other current assets........ (11) (10)
Accounts payable........................ (287) (101)
Other liabilities....................... (42) 149
-------- --------
Cash (used in) provided by operations.......... (89) 188
-------- --------
Cash flow from investment programs
Purchase of retail notes
and lease receivables........................ (1,044) (919)
Collections/sales of retail notes
and lease receivables ...................... 1,236 1,000
Purchase of marketable securities.............. (309) (469)
Sales or maturities of marketable securities... 595 274
Capital expenditures........................... (214) (180)
Property and equipment leased to others........ (81) (111)
Investment in affiliates....................... (55) (5)
Other investment programs, net................. (23) (2)
-------- --------
Cash provided by (used in)
investment programs.......................... 105 (412)
-------- --------
Cash flow from financing activities
Issuance of debt............................... 111 440
Principal payments on debt..................... (120) (110)
Net decrease in notes and debt outstanding
under bank revolving credit facility
and commercial paper programs ............. (57) (137)
Mexican credit facility........................ 23 73
Repurchase of common stock..................... (126) (159)
Proceeds from reissuance of Treasury shares.... - 28
Redemption of Series G Preferred Stock......... - (240)
Dividends paid................................. - (11)
-------- --------
Cash used in financing activities.............. (169) (116)
-------- --------
Cash and cash equivalents
Decrease during the period................. (153) (340)
At beginning of the year................... 390 609
-------- --------
Cash and cash equivalents
at end of the period......................... $ 237 $ 269
======== ========
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. (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 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 nine months of 1999 and
1998 were $94 million and $73 million, respectively. Consolidated tax payments
made during the first nine months of 1999 were $12 million. Consolidated tax
payments made during the same period last year were not material.
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 C. Income Taxes (continued)
As a result of continued strong industry demand, the continued successful
implementation of the company's manufacturing strategy, changes in the company's
operating structure, and other positive operating indicators, management
reviewed its projected future taxable income and evaluated the impact of these
changes on its deferred tax asset valuation allowance. This review was completed
during the third quarter of 1999 and resulted in a reduction to the deferred tax
asset valuation allowance of $178 million which reduced income tax expense
during the third quarter of 1999.
Note D. Inventories
Inventories are as follows:
July 31 October 31 July 31
Millions of dollars 1999 1998 1998
- -------------------------------------------------------------------------------
Finished products................. $ 340 $ 223 $ 253
Work in process................... 197 69 114
Raw materials and supplies........ 206 213 186
----------- ------------ -----------
Total inventories................. $ 743 $ 505 $ 553
=========== ============ ===========
Note E. Financial Instruments
In November 1998, NFC sold fixed rate retail receivables to a
multi-seller asset-backed commercial paper conduit sponsored by a major
financial institution on a variable rate basis. For the protection of investors,
NFC issued an interest rate cap. The notional amount of the cap amortizes based
on the expected outstanding principal balance of the sold retail receivables.
Under the terms of the cap agreement, NFC will make payments if interest rates
exceed certain levels. As of July 31, 1999 the cap had a notional amount of $399
million and a fair value of $2 million.
In June 1999, NFC sold $715 million of retail notes, net of $124 million 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 was a party to forward treasury locks, with
notional amounts of $500 million. These locks were entered into to reduce
exposure to future change in interest rates. These positions were closed with
pricing of the sale and the immaterial gain was included in the gain on the sale
of receivables.
In September 1999, NFC entered into a total of $150 million of forward
treasury locks in anticipation of a November 1999 sale of retail receivables.
These locks were entered into to reduce exposure to future changes in interest
rates. NFC intends to close these positions on the pricing date of the sale. Any
resulting gain or loss will be included in the gain or loss on the sale of
receivables recognized in November 1999.
PAGE 8
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note E. Financial Instruments (continued)
As of July 31, 1999, the company held German mark and Japanese yen
forward contracts with respective notional amounts of $42 million and $13
million related to committed capital equipment purchases. The company held
Canadian dollar forward contracts with notional amounts of $85 million and other
derivative contracts with notional amounts of $18 million. The unrealized net
gain on these contracts was not material.
At quarter end, $31 million of a Mexican finance subsidiary's receivables
were pledged as collateral for bank borrowings.
Note F. Earnings Per Share
Earnings per share was computed as follows:
Three Months Ended Nine Months Ended
July 31 July 31
----------------------- ----------------------
Millions of dollars,
except per share data 1999 1998 1999 1998
- ----------------------------- ---------- ---------- ---------- ----------
Net income................... $ 255 $ 50 $ 412 $ 155
Less dividends on
Series G Preferred Stock... - - - 11
---------- ---------- ---------- ---------
Net income applicable
to common stock
(Basic and Diluted)...... $ 255 $ 50 $ 412 $ 144
========== ========== ========== =========
Average shares
outstanding (millions)
Basic.................... 64.9 68.6 65.8 69.9
Dilutive effect of
options outstanding
and other dilutive
securities............. 1.3 .9 1.1 1.0
---------- ---------- ---------- ---------
Diluted.................. 66.2 69.5 66.9 70.9
========== ========== ========== =========
Earnings per share
Basic.................... $ 3.94 $ .73 $ 6.27 $ 2.05
Diluted.................. $ 3.86 $ .72 $ 6.16 $ 2.02
Unexercised employee stock options to purchase .1 million and .3 million
shares of Navistar common stock during the three months ended July 31, 1999 and
1998, respectively, and to purchase .2 million and .4 million shares of Navistar
common stock during the nine months ended July 31, 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.
PAGE 9
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
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
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 Nine Months Ended
July 31 July 31
---------------------- ----------------------
Millions of dollars 1999 1998 1999 1998
- ---------------------- ---------- ---------- ---------- ----------
Net income............ $ 255 $ 50 $ 412 $ 155
Other comprehensive
income (loss)...... (2) (4) (11) (2)
---------- ---------- ---------- ----------
Total comprehensive
income........... $ 253 $ 46 $ 401 $ 153
========== ========== ========== ==========
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," which amended SFAS No. 133. This statement defers,
for one year, the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to those fiscal years beginning after June
15, 2000.
PAGE 10
Navistar International Corporation and Consolidated Subsidiaries
Supplemental Financial Information
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Three Months Ended Nine Months Ended
July 31 July 31
----------------------- ---------------------
Condensed Statement of Income 1999 1998 1999 1998
- ------------------------------------ ---------- ---------- ---------- ----------
Sales of manufactured products...... $ 1,797 $ 1,804 $ 5,849 $ 5,456
Other income........................ 12 12 40 35
--------- ---------- ---------- ----------
Total sales and revenues........ 1,809 1,816 5,889 5,491
--------- ---------- ---------- ----------
Cost of products sold............... 1,469 1,542 4,822 4,686
Postretirement benefits............. 45 40 159 128
Engineering and research expense.... 73 43 197 124
Marketing and administrative expense 100 94 322 271
Other expenses...................... 28 46 102 104
--------- ---------- ---------- ----------
Total costs and expenses........ 1,715 1,765 5,602 5,313
--------- ---------- ---------- ----------
Income before income taxes
Manufacturing operations........ 94 51 287 178
Financial services operations... 31 30 91 72
--------- ---------- ---------- ----------
Income before income taxes.. 125 81 378 250
Income tax benefit (expense) 130 (31) 34 (95)
--------- ---------- ---------- ----------
Net income.......................... $ 255 $ 50 $ 412 $ 155
========= ========== ========== ==========
July 31 October 31 July 31
Condensed Statement of Financial Condition 1999 1998 1998
- ------------------------------------------- ---------- ---------- ----------
Cash, cash equivalents
and marketable securities............... $ 467 $ 904 $ 670
Inventories................................ 722 490 537
Property and equipment, net................ 993 883 788
Equity in nonconsolidated subsidiaries..... 381 327 324
Other assets............................... 808 810 829
Deferred tax asset, net.................... 966 912 842
---------- ---------- ----------
Total assets....................... $ 4,337 $ 4,326 $ 3,990
========== ========== ==========
Accounts payable, principally trade........ $ 950 $ 1,233 $ 949
Postretirement benefits liability.......... 972 927 903
Other liabilities.......................... 1,385 1,397 1,348
Shareowners' equity........................ 1,030 769 790
---------- ---------- ----------
Total liabilities
and shareowners' equity.......... $ 4,337 $ 4,326 $ 3,990
========== ========== ==========
PAGE 11
Navistar International Corporation and Consolidated Subsidiaries
Supplemental Financial Information (continued)
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Nine Months Ended
July 31
-------------------------
Condensed Statement of Cash Flow 1999 1998
- --------------------------------------------------- ---------- ----------
Cash flow from operations
Net income......................................... $ 412 $ 155
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization............... 109 94
Deferred income taxes....................... 132 95
Deferred tax asset valuation allowance
adjustment............................... (178) -
Postretirement benefits funding less than
(in excess of) expense................... 40 (283)
Equity in earnings of investees, net of
dividends received....................... (17) (4)
Other, net.................................. (19) (10)
Change in operating assets and liabilities......... (552) 44
---------- ----------
Cash (used in) provided by operations.............. (73) 91
---------- ----------
Cash flow from investment programs
Purchase of marketable securities.................. (254) (421)
Sales or maturities of marketable securities....... 536 221
Capital expenditures............................... (214) (180)
Receivable from financial services operations...... 28 (8)
Investment in affiliates........................... (57) (5)
Other investment programs, net..................... (20) 5
---------- ----------
Cash provided by (used in) investment programs..... 19 (388)
---------- ----------
Cash flow used in financing activities............. (101) (35)
---------- ----------
Cash and cash equivalents
Decrease during the period......................... (155) (332)
At beginning of the year........................... 351 573
---------- ----------
Cash and cash equivalents at end of the period..... $ 196 $ 241
========== ==========
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."
Third Quarter Ended July 31, 1999
---------------------------------
The company reported net income of $255 million, or $3.86 per diluted
common share for the third quarter ended July 31, 1999, compared with net income
of $50 million, or $0.72 per diluted common share for the comparable quarter
last year. Net income for the third quarter of 1999 included the benefit of a
$178 million reduction in the company's deferred tax asset valuation allowance.
The company's manufacturing operations reported income before income
taxes of $94 million compared with pretax income of $51 million in the third
quarter of 1998 reflecting improved gross margins on sales of manufactured
products. The financial services operations' pretax income for the third quarter
of 1999 was $31 million, consistent with the $30 million reported in the prior
year.
Sales and Revenues. U.S. and Canadian industry retail sales of Class 5 through 8
trucks totaled 120,500 units in the third quarter of 1999, which is 20% higher
than the 100,400 units sold during this period in 1998. Class 8 heavy truck
sales of 76,600 units during the third quarter of 1999 were 27% higher than the
1998 level of 60,200 units. Industry sales of Class 5, 6 and 7 medium trucks,
including school buses, increased 9% to 43,800 units. Industry sales of school
buses, which accounted for 18% of the medium truck market, increased slightly.
Sales and revenues for the third quarter of 1999 totaled $1,878 million,
consistent with the $1,874 million reported for the comparable quarter in 1998.
Sales of trucks, mid-range diesel engines and service parts for the third
quarter of 1999 totaled $1,797 million compared with $1,804 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. Additionally, short term
disruptions associated with realigning work assignments to meet production
schedule changes and process improvements resulted in the loss of some
production and a backlog of trucks not ready for shipment to customers. This
resulted in a decrease in market share from 27.9% in 1998 to 22.1% in 1999.
(Sources: American Automobile Manufacturers Association, Canadian Vehicle
Manufacturers Association, and R.L. Polk & Company.)
PAGE 13
Shipments of mid-range diesel engines by the company to other original
equipment manufacturers (OEMs) during the third quarter of 1999 totaled 68,500
units, a 44% 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.
Finance and insurance revenue of $67 million in the third quarter of 1999
increased 18% from 1998, primarily as a result of increased wholesale and retail
financing activities and increased operating lease balances.
Nine Months Ended July 31, 1999
-------------------------------
Pretax income for the first nine months of 1999 was $378 million compared
with $250 million reported for the same period of 1998. The company's
manufacturing operations reported income before income taxes of $287 million
during this period, compared with $178 million reported in 1998 reflecting
higher sales of manufactured products and improved gross margins on those sales.
The financial services operations' pretax income for the first nine months of
1999 was $91 million, an increase from the $72 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 nine
months of 1999 totaled 348,100 units, an increase from the 289,200 units sold
during this period in 1998. Class 8 heavy truck sales of 210,100 units during
the first nine months of 1999 were 24% higher than the 1998 level of 169,900
units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses,
increased 16% to 138,000 units. Industry sales of school buses, which accounted
for 19% of the medium truck market, increased 5%.
Sales and revenues during the first nine months of 1999 totaled $6,089
million, an increase of 8% from 1998. Sales of trucks, mid-range diesel engines
and service parts for the first nine months of 1999 totaled $5,849 million
compared with $5,456 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 5%, the company's
market share for the first nine months of 1999 decreased to 25.9% from the 29.8%
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 198,900 mid-range diesel engines to other OEMs during
the first nine months of 1999 which was a 36% increase from the same period of
1998 due to higher shipments to Ford Motor Company.
Finance and insurance revenue increased $39 million to $188 million
compared to the same period of 1998 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.
PAGE 14
Costs and expenses. Manufacturing gross margin was 18.3% of sales for the third
quarter of 1999 compared with 14.5% for the same period in 1998. This increase
is primarily due to improved pricing and operating efficiencies. Manufacturing
gross margin for the first nine months of 1999 was 17.6% compared with 14.1% in
1998. This increase is primarily due to lower unit costs, improved pricing and
improved operating efficiencies.
Consolidated marketing and administrative expense increased to $112
million in the third quarter of 1999 from $99 million in the third quarter of
1998 and increased to $361 million for the first nine months of 1999 from $294
million in the first nine months of 1998. These increases were primarily due to
marketing programs and the operational implementation of the company's
integrated truck and engine strategies ($13 million and $52 million,
respectively).
Postretirement benefits expense increased to $45 million in the third
quarter of 1999 from $40 million in the third quarter of 1998, primarily due to
higher retiree healthcare expense. Postretirement benefits expense increased to
$159 million for the first nine months of 1999 from $128 million for the first
nine months of 1998, primarily due to higher retiree healthcare expense and
higher supplemental trust profit sharing provisions related to higher profits
($17 million and $12 million, respectively).
Engineering and research expense increased $30 million from the third
quarter of 1998 to $73 million and increased $73 million from the first nine
months of 1998 to $197 million. Approximately 75% of these increases reflects
the company's continuing investment in its next generation vehicle (NGV) and
next generation diesel (NGD) programs.
Other expenses for both the three months and nine months ended July 31,
1998 included $14 million of expenses related to the secondary public offering
of 19.9 million shares of the company's common stock which was completed in June
1998.
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 nine months of 1999 totaled $89
million primarily from a net change in operating assets and liabilities of $601
million offset by net income of $412 million. In addition, there was a $100
million net change in noncash items consisting of a $178 million reversal of a
portion of the deferred tax asset valuation allowance offset by $132 million of
deferred taxes and $146 million of other items, principally depreciation. The
net change in operating assets and liabilities included a $287 million decrease
in accounts payable primarily from the seasonality of truck production and a
$243 million increase in inventories primarily from a backlog of trucks not
ready for shipment to customers and an increase in used truck inventory.
PAGE 15
Investment programs provided $105 million in cash primarily reflecting a
net decrease in retail notes and lease receivables of $192 million and a net
decrease in marketable securities of $286 million. Other investment activities
used $81 million for property and equipment leased to others and $214 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, Mexico plant.
Financing activities used cash of $169 million during the first nine
months of 1999 primarily for the repurchase of $126 million of common stock.
Cash was also used to reduce notes and debt outstanding under the bank revolving
credit facility and other commercial paper programs by $57 million, offset by
$23 million of borrowings under the Mexican credit facility.
Navistar Financial Corporation (NFC) has traditionally obtained the funds
to provide financing to Transportation's dealers and retail customers from sales
of finance receivables, commercial paper, short and long-term bank borrowings,
medium and long-term debt and equity capital. As of July 31, 1999, NFC's funding
consisted of sold finance receivables of $2,550 million, bank and other
borrowings of $1,137 million, subordinated debt of $100 million, capital lease
obligations of $286 million and equity of $282 million.
Through the asset-backed markets, NFC has been able to fund fixed rate
retail note receivables at rates offered to companies with investment grade
ratings. During the first nine months of 1999, NFC sold $1,260 million of retail
notes through Navistar Financial Retail Receivables Corporation (NFRRC), a
wholly owned subsidiary of NFC. As of July 31, 1999, the remaining shelf
registration available to NFRRC for the public issuance of asset-backed
securities was $2,257 million. Also, as of July 31, 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 July 31, 1999, available funding under NFC's bank revolving credit
facility and the asset-backed commercial paper facility was $220 million, of
which $18 million was used to back short-term debt. The remaining $202 million,
when combined with unrestricted cash and cash equivalents, made $209 million
available to fund the general business purposes of NFC.
In November 1998, NFC sold fixed rate retail receivables to a
multi-seller asset-backed commercial paper conduit sponsored by a major
financial institution on a variable rate basis. For the protection of investors,
NFC issued an interest rate cap. The notional amount of the cap amortizes based
on the expected outstanding principal balance of the sold retail receivables.
Under the terms of the cap agreement, NFC will make payments if interest rates
exceed certain levels. As of July 31, 1999, the cap had a notional amount of
$399 million and a fair value of $2 million.
In June 1999, NFC sold $715 million of retail notes, net of $124 million
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 was a party to forward treasury locks, with
notional amounts of $500 million. These locks were entered into to reduce
exposure to future change in interest rates. These positions were closed with
pricing of the sale and the immaterial gain was included in the gain on the sale
of receivables.
PAGE 16
In September 1999, NFC entered into a total of $150 million of forward
treasury locks in anticipation of a November 1999 sale of retail receivables.
These locks were entered into to reduce exposure to future changes in interest
rates. NFC intends to close these positions on the pricing date of the sale. Any
resulting gain or loss will be included in the gain or loss on the sale of
receivables recognized in November 1999.
As of July 31, 1999 the company held German mark and Japanese yen forward
contracts with respective notional amounts of $42 million and $13 million
related to committed capital equipment purchases. The company held Canadian
dollar forward contracts with notional amounts of $85 million and other
derivative contracts with notional amounts of $18 million. The unrealized net
gain on these contracts was not material.
At quarter end, $31 million of a Mexican finance subsidiary's receivables
were pledged as collateral for bank borrowings.
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 $376 million at July 31,
1999, primarily for the NGV and NGD programs.
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 July 31, 1999, the company estimates that it was approximately 97%
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 the end of September 1999, which is prior to any anticipated impact
on its operating systems.
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 76% 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 readiness and contingency planning process was
approximately 88% complete as of July 31, 1999 with completion expected by the
end of September 1999. On site assessments were conducted for 154 critical
suppliers with favorable results.
PAGE 17
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 $21 million has been expensed and approximately $6 million has
been capitalized through July 31, 1999. The remaining costs are estimated to be
incurred through fiscal year 2000.
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 has been completed. Review,
cataloging and testing will continue prior to activation in December 1999.
In addition to a central command center, command centers have been
defined for the business locations, along with the necessary procedures and
staffing to manage pre and post Year 2000 activities. Checklists have been
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. The infrastructure of the command centers is in
place.
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.
New Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133," which amended SFAS No. 133. This statement defers,
for one year, the effective date of SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to those fiscal years beginning after June
15, 2000.
PAGE 18
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 a quarterly 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 between 430,000 and 460,000 units. As a
result of this increase, the continued successful implementation of the
company's manufacturing strategy, changes in the company's operating structure,
and other positive operating indicators, management reviewed its projected
future taxable income and evaluated the impact of these changes on its deferred
tax asset valuation allowance. This review was completed during the third
quarter of 1999 and resulted in a reduction to the deferred tax asset valuation
allowance of $178 million which has been recorded as a reduction in income tax
expense.
Business Environment
Sales of Class 5 through 8 trucks have historically been cyclical, with
demand affected by such economic factors as industrial production, construction,
demand for consumer durable goods, interest rates 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 third quarter of 1999, although
a decrease in the number of new truck orders has decreased the company's order
backlog to 53,700 units at July 31, 1999 from 68,600 units at July 31, 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 Navistar's near term capacity. Process improvements
and capacity expansions are being implemented to enhance the company's ability
to meet customer demand for its products.
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 between 263,000 and
285,000 units. Class 5, 6 and 7 medium truck demand, excluding school buses, is
forecast between 135,000 and 142,000 units. Demand for school buses is forecast
between 32,000 and 33,000 units, consistent with 1998. Mid-range diesel engine
shipments by the company to original equipment manufacturers in 1999 are
expected to be 285,600 units, 34% higher than in 1998.
PAGE 19
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 20
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 6. Exhibits and reports on Form 8-K
10-Q Page
---------
(a) Exhibits:
3. Articles of Incorporation
and By-Laws. E-1
4. Instruments Defining
The Rights of Security
Holders, Including Indentures E-2
10. Material Contracts E-4
(b) Reports on Form 8-K:
No reports on Form 8-K were filed for the three months
ended July 31, 1999.
PAGE 21
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NAVISTAR INTERNATIONAL CORPORATION
- ----------------------------------
(Registrant)
/s/ Mark T. Schwetschenau
- ----------------------------------
Mark T. Schwetschenau
Vice President and Controller
(Principal Accounting Officer)
September 13, 1999