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
----------------------------- ----------------------------
2001 2000 2001 2000
----------- ------------ ----------- -----------
Sales and revenues
Sales of manufactured products...................... $ 1,516 $ 1,841 $ 4,658 $ 6,240
Finance and insurance revenue....................... 59 72 194 205
Other income........................................ 11 11 35 33
---------- ---------- ---------- ---------
Total sales and revenues........................ 1,586 1,924 4,887 6,478
---------- ---------- ---------- ---------
Costs and expenses
Cost of products and services sold.................. 1,307 1,528 4,068 5,184
Postretirement benefits expense..................... 44 48 137 157
Engineering and research expense.................... 58 66 188 213
Sales, general and administrative expense........... 135 107 393 357
Interest expense.................................... 42 37 125 105
Other expense....................................... 7 16 34 69
---------- ---------- ---------- ---------
Total costs and expenses........................ 1,593 1,802 4,945 6,085
---------- ---------- ---------- ---------
Income (loss) before income taxes........... (7) 122 (58) 393
Income tax (expense) benefit................ 9 (26) 28 (129)
---------- --------- ---------- ---------
Net income (loss)................................... $ 2 $ 96 $ (30) $ 264
========= ========= ========= =========
Earnings (loss) per share
Basic........................................... $ 0.03 $ 1.62 $ (0.51) $ 4.32
Diluted......................................... $ 0.03 $ 1.60 $ (0.51) $ 4.26
Average shares outstanding (millions)
Basic........................................... 59.5 59.4 59.5 61.1
Diluted......................................... 60.2 60.1 59.5 61.9
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
3
STATEMENT OF FINANCIAL CONDITION (Unaudited)
Millions of dollars
- ---------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
--------------------------------------------------------
July 31 October 31 July 31
2001 2000 2000
----------------- ---------------- ----------------
ASSETS
Current assets
Cash and cash equivalents................................ $ 392 $ 297 $ 532
Marketable securities.................................... 24 57 20
Receivables, net......................................... 707 1,035 1,286
Inventories.............................................. 659 648 718
Deferred tax asset, net.................................. 192 198 213
Other assets............................................. 173 139 145
-------------- ------------ --------------
Total current assets............................................ 2,147 2,374 2,914
-------------- ------------ --------------
Marketable securities........................................... 34 37 84
Finance and other receivables, net.............................. 1,051 1,467 909
Property and equipment, net..................................... 1,885 1,778 1,604
Investments and other assets.................................... 166 137 178
Restricted cash and marketable securities....................... 405 97 10
Prepaid and intangible pension assets........................... 308 297 314
Deferred tax asset, net......................................... 693 664 600
-------------- ------------ --------------
Total assets ................................................. $ 6,689 $ 6,851 $ 6,613
============== ============ ==============
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt... $ 424 $ 482 $ 131
Accounts payable, principally trade...................... 876 1,091 904
Other liabilities........................................ 742 742 721
-------------- ------------ --------------
Total current liabilities....................................... 2,042 2,315 1,756
-------------- ------------ --------------
Debt: Manufacturing operations................................. 916 437 538
Financial services operations............................ 1,384 1,711 1,873
Postretirement benefits liability............................... 682 660 682
Other liabilities............................................... 386 414 365
-------------- ------------ --------------
Total liabilities........................................ 5,410 5,537 5,214
-------------- ------------ --------------
Commitments and contingencies
Shareowners' equity
Series D convertible junior preference stock.................... 4 4 4
Common stock (75.3 million shares issued)....................... 2,139 2,139 2,139
Retained earnings (deficit)..................................... (176) (143) (40)
Accumulated other comprehensive loss............................ (179) (177) (195)
Common stock held in treasury, at cost
(15.9 million, 15.9 million
and 16.1 million shares held)....................... (509) (509) (509)
-------------- ------------ --------------
Total shareowners' equity................................ 1,279 1,314 1,399
-------------- ------------ --------------
Total liabilities and shareowners' equity....................... $ 6,689 $ 6,851 $ 6,613
============== ============ ==============
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
4
STATEMENT OF CASH FLOW (Unaudited)
Millions of dollars
- ---------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
---------------------------------------
Nine Months Ended July 31
--------------------------------------
2001 2000
------------------- ----------------
Cash flow from operations
Net income (loss)................................................................. $ (30) $ 264
Adjustments to reconcile net income (loss) to cash provided by operations:
Depreciation and amortization.............................................. 166 158
Deferred income taxes...................................................... (17) 103
Other, net................................................................. 46 (11)
Change in operating assets and liabilities, net of effects of acquisition:
Receivables................................................................ 251 575
Inventories................................................................ 43 (91)
Prepaid and other current assets........................................... (32) 2
Accounts payable........................................................... (232) (505)
Other liabilities.......................................................... (90) (176)
--------------- ---------------
Cash provided by operations................................................... 105 319
--------------- ---------------
Cash flow from investment programs
Purchases of retail notes and lease receivables................................... (719) (1,027)
Collections/sales of retail notes and lease receivables........................... 1,206 1,029
Purchases of marketable securities................................................ (76) (186)
Sales or maturities of marketable securities...................................... 112 309
Restricted investments............................................................ (315) -
Capital expenditures.............................................................. (212) (248)
Payments for acquisition, net of cash acquired.................................... (60) -
Proceeds from sale-leasebacks..................................................... 58 81
Property and equipment leased to others........................................... (43) (62)
Investment in affiliates.......................................................... 6 6
Capitalized interest and other.................................................... (21) (27)
--------------- ---------------
Cash used in investment programs.............................................. (64) (125)
--------------- ---------------
Cash flow from financing activities
Issuance of debt.................................................................. 578 207
Principal payments on debt........................................................ (229) (69)
Net (decrease) increase in notes and debt outstanding under bank revolving credit
facility and commercial paper programs......................................... (295) 108
Purchases of common stock......................................................... - (151)
--------------- ---------------
Cash provided by financing activities......................................... 54 95
--------------- ---------------
Cash and cash equivalents
Increase during the period.................................................... 95 289
At beginning of the period.................................................... 297 243
--------------- ---------------
Cash and cash equivalents at end of the period.................................... $ 392 $ 532
=============== ===============
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
5
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note A. Summary of Accounting Policies
Navistar International Corporation is a holding company whose principal operating subsidiary is
International Truck and Engine Corporation (International). As used hereafter, "company" or "Navistar" refers to
Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal
industry segments: truck, engine (collectively called "manufacturing operations"), and financial services. The
consolidated financial statements include the results of the company's manufacturing operations and its wholly
owned financial services subsidiaries. The effects of transactions between the manufacturing and financial
services operations have been eliminated to arrive at the consolidated totals.
The accompanying unaudited financial statements have been prepared in accordance with accounting
policies described in the 2000 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 2000 amounts have been reclassified to conform with the presentation used in the 2001 financial
statements.
Discussion of Navistar's adoption of Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," and Statement of Financial Accounting Standards No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," are disclosed in
Notes E and J, respectively.
Note B. Supplemental Cash Flow Information
Consolidated interest payments during the first nine months of 2001 and 2000 were $109 million and $95
million, respectively. Consolidated tax payments made during the first nine months of 2001 and 2000 were $4
million and $28 million, respectively.
Note C. Income Taxes
The benefit of Net Operating Loss (NOL) carryforwards is recognized as a deferred tax asset in the
Statement of Financial Condition, while the Statement of Income includes income taxes calculated at the statutory
rate. The amount reported does not represent cash payment of income taxes except for certain state income,
foreign income and withholding and federal alternative minimum taxes. In the Statement of Financial Condition,
the deferred tax asset is reduced by the amount of deferred tax expense or increased by a deferred tax benefit
recorded during the year. Until the company has utilized its significant NOL carryforwards, the cash payment of
United States (U.S.) federal income taxes will be minimal.
Income tax expense during the third quarter of 2001 was reduced by $6 million for research and
development tax credits that will be taken against future income tax payments related to research and development
activities in the current year. Income tax expense in the third quarter of 2000 was reduced by $20 million for
research and development tax credits as further described in the 2000 Annual Report on Form 10-K.
6
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note D. Inventories
Inventories are as follows:
July 31 October 31 July 31
Millions of dollars 2001 2000 2000
- ----------------------------------------------------------------------------------------------------------------------
Finished products.............................................. $ 421 $ 394 $ 425
Work in process................................................ 48 42 50
Raw materials and supplies..................................... 190 212 243
------------- -------------- --------------
Total inventories....................................... $ 659 $ 648 $ 718
============= ============== ==============
Note E. Financial Instruments
Adoption of SFAS 133
On November 1, 2000, the company adopted Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended (SFAS 133). In November 2000, Navistar
recorded an immaterial cumulative transition adjustment to earnings primarily related to foreign currency
derivatives. Additionally, the company recorded an immaterial cumulative transition adjustment in other
comprehensive income for derivatives that had been used as cash flow type hedges.
Accounting for Derivatives and Hedging Activities
The company uses derivative financial instruments as part of its overall interest rate and foreign
currency risk management strategy as further described under Item 7A of the 2000 Annual Report on Form 10-K.
The company is exposed to interest rate risk relating to changes in market interest rates. As part of
its overall strategy to manage the level of exposure to the risk of interest rates adversely affecting net
interest income or expense, the company uses interest rate swap agreements, interest rate caps, and forward
contracts. These derivatives are generally designated and qualify as cash flow hedges.
The company uses forward starting swaps and forward interest rate locks to hedge the cash flows on sold
retail notes as well as to make possible financing under other sold note arrangements and to facilitate
financings with other parties in asset backed markets.
The company is exposed to foreign currency risk relating to changes in certain foreign currency exchange
rates. As part of its overall strategy to manage the level of exposure to exchange rate risk, the company uses
forward contracts. These derivatives are generally designated and qualify as cash flow hedges.
On the date Navistar enters into a derivative contract, management designates the derivative as either a
hedging or non-hedging instrument. Additionally, management distinguishes between fair value hedging
instruments, cash flow hedging instruments, and other derivative instruments.
The company documents and accounts for derivative and hedging activities in accordance with the
provisions of SFAS 133. In general, SFAS 133 requires that an entity recognize all derivatives as assets or
liabilities in the statement of financial position and measure them at fair value. When certain criteria are
met, it also provides for matching the timing of gain or loss recognition on the derivative hedging instrument
with the recognition of (a) changes in the fair value or cash flows of the hedged asset or liability attributable
to the hedged risk or (b) the earnings effect of the hedged forecasted transaction. Changes in the
fair value of derivatives that are not designated as or which do not qualify as hedges for accounting purposes
are reported in earnings.
7
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note E. Financial Instruments (continued)
As of July 31, 2001, the company held German mark forward contracts (maturing through 2002) with
notional amounts of $14 million related to the forecasted purchase of equipment and interest rate swaps (maturing
through 2005) with notional amounts of $26 million to match floating rate debt to fixed rate receivables. These
instruments are both classified as cash flow hedges and resulted in an immaterial charge to other comprehensive
income for the first nine months of 2001. Forecasted reclassifications from other comprehensive income into
earnings are not expected to be material for the next 12 months. Ineffectiveness on these contracts was not
material for the nine months ended July 31, 2001.
The company has other derivatives classified as non-hedging, which are described in Note 11 of the 2000
Annual Report on Form 10-K.
As of July 31, 2001, Navistar Financial Corporation (NFC) had three interest rate swap agreements and
three interest rate caps outstanding. One of these swap agreements is classified as a cash flow hedge derivative
instrument. The other instruments are classified as non-hedging derivative instruments. The changes in fair
value of these instruments as of July 31, 2001, were not material.
At July 31, 2001, $31 million of a Mexican subsidiary's receivables were pledged as collateral for bank
borrowings.
In December 2000, NFC renegotiated its revolving credit facility and added a short-term liquidity
facility. The new revolving credit facility provides for aggregate borrowings of $820 million and will mature in
November 2005. Under this new revolving credit facility, Navistar's three Mexican finance subsidiaries will be
permitted to borrow up to $100 million in the aggregate, which will be guaranteed by the company and NFC. The
short-term liquidity facility, which provided for aggregate borrowings of $80 million, was terminated in June
2001.
8
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Earnings Per Share
Earnings (loss) per share was computed as follows:
Three Months Ended July 31 Nine Months Ended July 31
Millions of dollars,
----------------------------- ----------------------------
Except share and per share data 2001 2000 2001 2000
- ----------------------------------------------------
-------------- ----------- ------------- -----------
Net income (loss)................................... $ 2 $ 96 $ (30) $ 264
========= ========= ========= =========
Average shares outstanding (millions)
Basic......................................... 59.5 59.4 59.5 61.1
Dilutive effect of options outstanding
and other dilutive securities....... 0.7 0.7 - 0.8
--------- --------- --------- ---------
Diluted....................................... 60.2 60.1 59.5 61.9
========= ========= ========= =========
Earnings (loss) per share
Basic......................................... $ 0.03 $ 1.62 $ (0.51) $ 4.32
Diluted....................................... $ 0.03 $ 1.60 $ (0.51) $ 4.26
The computation of diluted shares outstanding for the nine months ended July 31, 2001, excludes
incremental shares of 0.5 million related to employee stock options and other dilutive securities. These shares
are excluded due to their anti-dilutive effect as a result of the company's loss for the first nine months of
2001.
Note G. Comprehensive Income
Navistar's total comprehensive income (loss) was as follows:
Three Months Ended Nine Months Ended
July 31 July 31
----------------------------- -----------------------------
Millions of dollars 2001 2000 2001 2000
- ----------------------------------------------------
------------ -------------- ------------ ------------
Net income (loss)................................... $ 2 $ 96 $ (30) $ 264
Other comprehensive income (loss)................... (1) (2) (2) 2
--------- --------- --------- ---------
Total comprehensive income (loss)............. $ 1 $ 94 $ (32) $ 266
========= ========= ========= =========
Included in other comprehensive loss for the nine months ended July 31, 2001, is a $3 million charge,
with no change from the previous quarter, for derivatives that had been designated as cash flow type hedges in
accordance with SFAS 133, as further described in Note E.
9
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note H. Segment Data
Reportable operating segment data is as follows:
Financial
Millions of dollars Truck Engine Services Total
- --------------------------------------------------- -------------- -- --------------- -- --------------- -- -------------
For the quarter ended July 31, 2001
-----------------------------------------------------------------------
External revenues............................... $ 1,094 $ 422 $ 65 $ 1,581
Intersegment revenues........................... - 124 14 138
--------- --------- -------- --------
Total revenues............................. $ 1,094 $ 546 $ 79 $ 1,719
========= ========= ======== ========
Segment profit (loss)........................... $ (54) $ 64 $ 19 $ 29
For the nine months ended July 31, 2001
-----------------------------------------------------------------------
External revenues............................... $ 3,355 $ 1,303 $ 214 $ 4,872
Intersegment revenues........................... - 393 46 439
--------- --------- -------- --------
Total revenues............................. $ 3,355 $ 1,696 $ 260 $ 5,311
========= ========= ======== ========
Segment profit (loss)........................... $ (193) $ 173 $ 68 $ 48
As of July 31, 2001
-----------------------------------------------------------------------
Segment assets.................................. $ 1,899 $ 1,261 $ 2,392 $ 5,552
For the quarter ended July 31, 2000
-----------------------------------------------------------------------
External revenues............................... $ 1,431 $ 410 $ 74 $ 1,915
Intersegment revenues........................... - 153 24 177
--------- --------- -------- --------
Total revenues............................. $ 1,431 $ 563 $ 98 $ 2,092
========= ========= ======== ========
Segment profit.................................. $ 44 $ 64 $ 24 $ 132
For the nine months ended July 31, 2000
-----------------------------------------------------------------------
External revenues............................... $ 4,945 $ 1,295 $ 213 $ 6,453
Intersegment revenues........................... - 513 69 582
--------- --------- -------- --------
Total revenues............................. $ 4,945 $ 1,808 $ 282 $ 7,035
========= ========= ======== ========
Segment profit.................................. $ 182 $ 201 $ 69 $ 452
As of July 31, 2000
-----------------------------------------------------------------------
Segment assets.................................. $ 1,903 $ 882 $ 2,498 $ 5,283
10
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note H. Segment Data (continued)
Reconciliation to the consolidated financial statements as of and for the three months and nine months
ended July 31 is as follows:
Three Months Ended Nine Months Ended
July 31 July 31
-------------------------------- ----------------------------
Millions of dollars 2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Segment sales and revenues........................ $ 1,719 $ 2,092 $ 5,311 $ 7,035
Other income...................................... 5 9 15 25
Intercompany...................................... (138) (177) (439) (582)
-------- -------- -------- --------
Consolidated sales and revenues................... $ 1,586 $ 1,924 $ 4,887 $ 6,478
======== ======== ======== ========
Segment profit.................................... $ 29 $ 132 $ 48 $ 452
Corporate items................................... (30) (14) (101) (66)
Manufacturing net interest income (expense)....... (6) 4 (5) 7
-------- -------- -------- --------
Consolidated pretax income (loss) ................ $ (7) $ 122 $ (58) $ 393
======== ======== ======== ========
As of July 31
----------------------------
2001 2000
----------------------------
Segment assets.................................... $ 5,552 $ 5,283
Cash and marketable securities.................... 247 437
Deferred taxes.................................... 885 813
Corporate intangible pension assets............... 25 121
Other corporate and eliminations.................. (20) (41)
-------- --------
Consolidated assets............................... $ 6,689 $ 6,613
======== ========
Note I. Restructuring Charge
In October 2000, the company incurred charges for restructuring, asset write-downs, loss on anticipated
sale of business and other exit costs totaling $306 million as part of an overall plan to restructure its
manufacturing and corporate operations ("Plan of Restructuring"). The following are the major restructuring,
integration and cost reduction initiatives included in the Plan of Restructuring:
o Replacement of current steel cab trucks with a new line of high performance next generation vehicles
(NGV) and a concurrent realignment of the company's truck manufacturing facilities
o Closure of certain operations and exit of certain activities
o Launch of the next generation technology diesel engines
o Consolidation of corporate operations
o Realignment of the bus and truck dealership network and termination of various dealership contracts
Of the total pretax restructuring charge of $306 million, $124 million represented non-cash charges.
Through July 31, 2001, approximately $156 million of the charge has been incurred, and $12 million of curtailment
loss related to the company's postretirement benefit plans was reclassified as a noncurrent postretirement
liability. The remaining restructuring liability of $138 million is expected to be funded from existing cash
balances and internally generated cash flows from operations.
11
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note I. Restructuring Charge (continued)
The specific actions included in the Plan of Restructuring are expected to be substantially complete by
November 2001. Components of the restructuring charge are as follows:
Total Charges Amount Balance
(Millions of dollars) Incurred July 31, 2001
- ------------------------------------------------- -------------- --------------- -------------------
Severance and other benefits $ 104 $ (42) $ 62
Inventory write-downs 20 (20) -
Other asset write-downs and losses 93 (93) -
Lease terminations 33 (1) 32
Loss on anticipated sale of business 17 - 17
Dealer termination and exit costs 39 (12) 27
-------------- --------------- -------------------
Total $ 306 $ (168) $ 138
============== =============== ===================
The Plan of Restructuring includes the reduction of approximately 2,100 employees from the workforce,
primarily in North America. During the quarter, approximately $8 million was paid for severance and other
benefits, and employee headcount was reduced by approximately 200. As of July 31, 2001, approximately $30
million has been paid for severance and other benefits for the reduction of approximately 1,600 employees, and
$12 million of curtailment loss has been reclassified as a noncurrent postretirement liability. The severance
and other benefits balance mainly represents costs related to future payments over the next two years for
headcount reductions already incurred and the remaining reduction of approximately 500 employees, which will be
substantially completed by late 2001 when the majority of the NGV products will be in production.
Lease termination costs include the future obligations under long-term non-cancelable lease agreements
at facilities being vacated following workforce reductions. This charge primarily consists of the estimated
lease costs, net of probable sublease income, associated with the cancellation of the company's corporate office
lease at NBC Tower in Chicago, Illinois, which expires in 2010. As of July 31, 2001, approximately $1 million has
been incurred for lease termination costs.
The Plan of Restructuring included the effect of the anticipated sale of Harco National Insurance
Company (Harco), which is reflected as a discontinued operation in NFC's stand-alone financial statements because
Harco represents a major line of business and a reportable operating segment of NFC. However, because Harco is
neither a major line of business nor a separate operating segment of Navistar, the planned sale of Harco did not
qualify for discontinued operations presentation in accordance with Accounting Principles Board Opinion No. 30,
and accordingly, the anticipated loss on disposal was included as a component of the restructuring charge.
Additionally, due to the anticipated sale of Harco within the fiscal year the net investment in Harco has been
classified as other current assets for all periods presented in the Statement of Financial Condition.
Dealer termination and exit costs include the termination of certain dealer contracts in connection with
the realignment of the company's bus distribution network, and other litigation costs to implement the
restructuring initiatives. As of July 31, 2001, approximately $12 million has been paid for dealer terminations
and exit costs, of which $5 million was incurred during the third quarter.
12
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note J. Sale of Receivables
On April 1, 2001 the company adopted Statement of Financial Accounting Standards No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The adoption of this
statement has not had and is not expected to have a material effect on the company's results of operations,
financial condition or cash flows.
NFC securitizes and sells certain retail and wholesale receivables through Navistar Financial Retail
Receivables Corporation (NFRRC), Navistar Financial Securities Corporation (NFSC), Truck Retail Accounts
Corporation (TRAC) and Truck Engine Receivables Financing Corporation (TERFCO), all special purpose, wholly-owned
subsidiaries of NFC. NFRRC, NFSC, TRAC and TERFCO have limited recourse on the sold receivables. The terms of
receivable sales generally require NFC to maintain cash reserves with the trusts and conduits as credit
enhancement. These cash reserves are restricted under the terms of the securitized sales agreements. The
maximum exposure under all receivable sale recourse provisions at July 31, 2001 was $436 million; however,
management believes the recorded reserves for losses are adequate.
NFC continues to service the receivables, for which a servicing fee is received. Servicing fees are
earned on a level yield basis over the terms of the related sold receivables. Servicing fees are typically set
at 1.0% of average outstanding net receivable balances, representing NFC's estimated costs to service the
receivables.
Gains or losses on sales of receivables are dependent upon the purchase price being allocated between
the carrying value of the receivables sold and the retained interests based upon their relative fair values. Fair
values are estimated based upon the present value of future expected cash flows using assumptions for prepayment
speeds and current market interest rates.
These assumptions use management's best estimates commensurate with the risks involved. Gains or losses
are credited or charged to finance and insurance revenue in the period in which the sales occur. An allowance
for credit losses is provided prior to the receivable sale and is reclassified as part of retained interest upon
sale.
Finance receivable balances do not include receivables sold by NFC to public and private investors with
limited recourse provisions. Outstanding sold receivable balances are as follows, in millions:
July 31 October 31 July 31
2001 2000 2000
----------------- --------------- ---------------
Retail notes.............................. $ 2,223 $ 1,730 $ 1,976
Wholesale notes........................... 671 883 959
Retail accounts........................... 140 80 -
------- ------ --------
Total................................ $ 3,034 $ 2,693 $ 2,935
======= ====== ========
13
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note J. Sale of Receivables (continued)
Additional financial data for gross serviced finance receivables as of July 31, 2001 is as follows, in
millions:
Retail Wholesale
Notes Leases Notes Accounts
------------ ------------ -------------- --------------
------------
Gross serviced finance receivables.......... $ 2,898 $ 540 $ 844 $ 304
Gross serviced finance receivables with
installments past due.................... 35 13 14 28
Credit losses net of recoveries............. 15 1 - -
During the first nine months of 2001, NFC sold $1,365 million of retail notes, net of unearned finance
income, through NFRRC. Aggregate net gains of $21 million were recognized on these sales. Key economic
assumptions used in measuring these gains and the related retained interest at July 31, 2001, were a prepayment
speed of 1.4 to 1.6, a weighted average remaining life of 28 months and a residual cash flows discount rate of
7.85% to 9.61%.
At July 31, 2001, NFSC has in place a revolving wholesale note trust that provides for the funding of
$1,012 million of eligible wholesale notes. TRAC and TERFCO have in place revolving retail account conduits that
each provide for the funding of $100 million of eligible retail accounts.
When receivables are sold, NFC retains interest in the securitized receivables in the form of
interest-only strips, servicing rights, cash reserve accounts and subordinated certificates. The carrying amount
of these retained interests approximate fair value and were $417 million, $317 million and $335 million at July
31, 2001, October 31, 2000 and July 31, 2000, respectively. These amounts are included in finance and other
receivables in the statement of financial condition.
The following table summarizes certain cash flows received from (paid to) securitization trusts/conduits
during the nine months ended July 31, 2001, in millions:
Proceeds from initial sales of receivables......................................................... $ 1,390
Proceeds from subsequent sales of receivables into revolving facilities............................ 3,823
Servicing fees received............................................................................ 24
All other cash received from trusts................................................................ 112
Purchase of delinquent or foreclosed receivables................................................... (73)
Cash used for pool buybacks........................................................................ (188)
Note K. New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 141 (SFAS 141), "Business Combinations," Statement of Financial Accounting Standards No. 142 (SFAS
142), "Goodwill and Other Intangible Assets," and Statement of Financial Accounting Standards No. 143 (SFAS 143),
"Accounting for Asset Retirement Obligations." SFAS 141 applies to all business combinations initiated after
June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001. SFAS 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002. The company is evaluating the
impact on the company's financial position, results of operations or cash flows.
14
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note L. Condensed Consolidating Guarantor and Non-Guarantor Financial Information
The following tables set forth the unaudited condensed consolidating statements of financial condition,
statements of income and statements of cash flow as of July 31, 2001 and 2000 and for the nine months ended July
31, 2001 and 2000. The following information is included as a result of the guarantee of the $400 million Senior
Notes by International, exclusive of its subsidiaries. International is a direct wholly-owned subsidiary of
NIC. International, exclusive of its subsidiaries, also guarantees NIC's obligations under its 7% senior notes
due 2003 and 8% senior subordinated notes due 2008. None of NIC's other subsidiaries guarantee any of these
notes. Each of the guarantees is full and unconditional. Separate financial statements and other disclosures
concerning International have not been presented because management believes that such information is not
material to investors. NIC includes the consolidated financial results of the parent company only, with all of
its wholly-owned subsidiaries accounted for under the equity method. International, for purposes of this
disclosure only, includes the consolidated financial results of its wholly-owned subsidiaries accounted for under
the equity method. "Non-Guarantor Companies and Eliminations" includes the consolidated financial results of all
other non-guarantor subsidiaries including the elimination entries for all intercompany transactions. All
applicable corporate expenses have been allocated appropriately among the guarantor and non-guarantor
subsidiaries.
The parent company files a consolidated U.S. federal income tax return which includes International and
its U.S. subsidiaries. International has a tax allocation agreement (Tax Agreement) with the parent company
which requires International to compute its separate federal income tax expense based on its adjusted book
income. Any resulting tax liability is paid to the parent company. In addition, under the Tax Agreement,
International is required to pay to the parent company, any tax payments received from its subsidiaries. The
effect of the Tax Agreement is to allow the parent company, rather than International, to utilize U.S. operating
income/losses and NIC operating loss carryforwards.
15
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note L. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
Non-Guarantor
Companies and
NIC International Eliminations Consolidated
-------------- ---------------- ------------------ ---------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED JULY 31, 2001
Sales and revenues....................................... $ 9 $ 3,898 $ 980 $ 4,887
----------- ------------ ------------ ------------
Cost of products and services sold....................... - 3,509 559 4,068
All other operating expenses............................. (54) 719 212 877
------------ ------------ ------------ ------------
Total costs and expenses............................. (54) 4,228 771 4,945
------------ ------------ ------------ ------------
Equity in nonconsolidated subsidiaries................... (121) 154 (33) -
Income (loss) before income taxes........................ (58) (176) 176 (58)
Income tax (expense) benefit............................. 28 (3) 3 28
------------ ------------ ------------ ------------
Net income (loss)........................................ $ (30) $ (179) $ 179 $ (30)
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JULY 31, 2001
ASSETS
Cash and marketable securities........................... $ 228 $ 5 $ 217 $ 450
Receivables, net......................................... 7 23 1,728 1,758
Inventories.............................................. - 371 288 659
Property and equipment, net.............................. - 1,088 797 1,885
Investment in affiliates................................. (878) 931 (53) -
Deferred tax asset and other assets...................... 873 274 790 1,937
------------ ------------ ------------ ------------
Total assets......................................... 230 2,692 3,767 6,689
------------ ------------ ------------ ------------
LIABILITIES AND SHAREOWNERS' EQUITY
Debt..................................................... 821 22 1,881 2,724
Postretirement benefits liability........................ - 751 95 846
Amounts due (from) to affiliates......................... (1,944) 1,503 441 -
Other liabilities........................................ 74 1,343 423 1,840
------------ ------------ ------------ ------------
Total liabilities.................................... (1,049) 3,619 2,840 5,410
------------ ------------ ------------ ------------
Shareowners' equity...................................... 1,279 (927) 927 1,279
------------ ------------ ------------ ------------
Total liabilities and shareowners' equity................ $ 230 $ 2,692 $ 3,767 $ 6,689
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED JULY 31, 2001
Cash provided by (used in) operations.................... $ (278) $ 56 $ 327 $ 105
------------ ------------ ------------ ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables.... - - 487 487
Net (increase) decrease in marketable securities......... 39 - (3) 36
Capital expenditures..................................... - (169) (43) (212)
Other investing activities............................... (18) 79 (436) (375)
------------ ------------ ------------ ------------
Cash provided by (used in) investment programs........... 21 (90) 5 (64)
------------ ------------ ------------ ------------
Cash flow from financing activities
Net borrowings (repayments) of debt...................... 377 16 (339) 54
------------ ------------ ------------ ------------
Cash and cash equivalents
Increase (decrease) during the period.................... 120 (18) (7) 95
At beginning of the year................................. 64 23 210 297
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period............... $ 184 $ 5 $ 203 $ 392
============ ============ ============ ============
16
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note L. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
Non-Guarantor
Companies and
NIC International Eliminations Consolidated
-------------- ---------------- ------------------ ---------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED JULY 31, 2000
Sales and revenues....................................... $ 14 $ 5,666 $ 798 $ 6,478
------------ ------------ ------------ ------------
Cost of products and services sold....................... - 4,768 416 5,184
All other operating expenses............................. (48) 727 222 901
------------ ------------ ------------ ------------
Total costs and expenses............................. (48) 5,495 638 6,085
------------ ------------ ------------ ------------
Equity in nonconsolidated subsidiaries................... 331 157 (488) -
Income before income taxes............................... 393 328 (328) 393
Income tax (expense) benefit............................. (129) (124) 124 (129)
------------ ------------ ------------ ------------
Net income............................................... $ 264 $ 204 $ (204) $ 264
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JULY 31, 2000
ASSETS
Cash and marketable securities........................... $ 432 $ 6 $ 198 $ 636
Receivables, net......................................... 6 152 2,037 2,195
Inventories.............................................. - 456 262 718
Property and equipment, net.............................. - 896 708 1,604
Investment in affiliates................................. (626) 731 (105) -
Deferred tax asset and other assets...................... 746 299 415 1,460
------------ ------------ ------------ ------------
Total assets......................................... 558 2,540 3,515 6,613
------------ ------------ ------------ ------------
LIABILITIES AND SHAREOWNERS' EQUITY
Debt..................................................... 444 4 2,094 2,542
Postretirement benefits liability........................ - 836 (31) 805
Amounts due (from) to affiliates......................... (1,327) 1,126 201 -
Other liabilities........................................ 42 1,229 596 1,867
------------ ------------ ------------ ------------
Total liabilities.................................... (841) 3,195 2,860 5,214
------------ ------------ ------------ ------------
Shareowners' equity...................................... 1,399 (655) 655 1,399
------------ ------------ ------------ ------------
Total liabilities and shareowners' equity................ $ 558 $ 2,540 $ 3,515 $ 6,613
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED JULY 31, 2000
Cash provided by operations.............................. $ 166 $ 136 $ 17 $ 319
------------ ------------ ------------ ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables.... - - 2 2
Net (increase) decrease in marketable securities......... 140 - (17) 123
Capital expenditures..................................... - (202) (46) (248)
Other investing activities............................... 2 68 (72) (2)
------------ ------------ ------------ ------------
Cash provided by (used in) investment programs........... 142 (134) (133) (125)
------------ ------------ ------------ ------------
Cash flow from financing activities
Net borrowings (repayments) of debt...................... 95 (3) 154 246
Purchase of common stock and other....................... (151) - - (151)
------------ ------------ ------------ ------------
Cash provided by (used in) financing activities.......... (56) (3) 154 95
------------ ------------ ------------ ------------
Cash and cash equivalents
Increase (decrease) during the period.................... 252 (1) 38 289
At beginning of the year................................. 101 7 135 243
------------ ------------ ------------ ------------
Cash and cash equivalents at end of period................. $ 353 $ 6 $ 173 $ 532
============ ============ ============ ============
17
Navistar International Corporation and Consolidated Subsidiaries
Additional Financial Information
The following additional financial information is provided based upon the continuing interest of certain
shareholders and creditors.
Navistar International Corporation (with financial services operations on an equity basis)
in millions of dollars:
Three Months Ended Nine Months Ended
July 31 July 31
----------------------------- -----------------------------
Condensed Statement of Income 2001 2000 2001 2000
- ----------------------------------------------------------
------------ ------------ ------------ ------------
Sales of manufactured products............................ $ 1,516 $ 1,841 $ 4,658 $ 6,240
Other income.............................................. 7 10 16 26
---------- ---------- ---------- ----------
Total sales and revenues............................ 1,523 1,851 4,674 6,266
---------- ---------- ---------- ----------
Cost of products sold..................................... 1,301 1,519 4,046 5,155
Postretirement benefits expense........................... 43 48 136 157
Engineering and research expense.......................... 58 66 188 213
Sales, general and administrative expense................. 116 94 333 314
Other expense............................................. 32 31 97 116
---------- ---------- ---------- ----------
Total costs and expenses............................ 1,550 1,758 4,800 5,955
---------- ---------- ---------- ----------
Income (loss) before income taxes
Manufacturing operations............................ (27) 93 (126) 311
Financial services operations....................... 20 29 68 82
---------- ---------- ---------- ----------
Income (loss) before income taxes.............. (7) 122 (58) 393
Income tax (expense) benefit................... 9 (26) 28 (129)
---------- ---------- ---------- ----------
Net income (loss)......................................... $ 2 $ 96 $ (30) $ 264
========== ========== ========== ==========
July 31 October 31 July 31
Condensed Statement of Financial Condition 2001 2000 2000
- ----------------------------------------------------------
---------------- ----------------- -----------------
Cash, cash equivalents and marketable securities.......... $ 370 $ 294 $ 498
Inventories............................................... 576 597 676
Property and equipment, net............................... 1,570 1,464 1,267
Equity in nonconsolidated subsidiaries.................... 371 386 389
Other assets.............................................. 1,036 1,095 905
Deferred tax asset, net................................... 878 862 815
-------------- --------------- --------------
Total assets...................................... $ 4,801 $ 4,698 $ 4,550
============== =============== ==============
Accounts payable, principally trade....................... $ 844 $ 1,087 $ 872
Postretirement benefits liability......................... 846 773 805
Other liabilities......................................... 1,832 1,524 1,474
Shareowners' equity....................................... 1,279 1,314 1,399
-------------- --------------- --------------
Total liabilities and shareowners' equity......... $ 4,801 $ 4,698 $ 4,550
============== =============== ==============
18
Navistar International Corporation and Consolidated Subsidiaries
Additional Financial Information
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 2001 2000
- --------------------------------------------------------------------------------------
-------------- --------------
Cash flow from operations
Net income (loss) .................................................................... $ (30) $ 264
Adjustments to reconcile net income (loss) to cash used in operations:
Depreciation and amortization.................................................. 115 114
Deferred income taxes.......................................................... (17) 103
Equity in earnings of investees, net of dividends received..................... - (32)
Other, net..................................................................... 57 (23)
Change in operating assets and liabilities, net of effects of acquisition......... (339) (678)
----------- -----------
Cash used in operations............................................................... (214) (252)
----------- -----------
Cash flow from investment programs
Purchases of marketable securities.................................................... (64) (135)
Sales or maturities of marketable securities.......................................... 103 275
Capital expenditures.................................................................. (212) (246)
Payments for acquisition, net of cash acquired........................................ (60) -
Proceeds from sale-leasebacks......................................................... 58 81
Receivable from financial services operations......................................... 169 607
Investment in affiliates.............................................................. 2 5
Capitalized interest and other........................................................ (22) (28)
----------- -----------
Cash (used in) provided by investment programs........................................ (26) 559
----------- -----------
Cash provided by (used in) financing activities....................................... 353 (54)
----------- -----------
Cash and cash equivalents
Increase during the period............................................................ 113 253
At beginning of the period............................................................ 213 167
----------- -----------
Cash and cash equivalents at end of the period........................................ $ 326 $ 420
=========== ===========
19
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Certain statements under this caption that are not purely historical constitute "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. These
forward-looking statements are based on current management expectations as of the date made. The company assumes
no obligation to update any forward-looking statements. Navistar International Corporation's actual results may
differ significantly from the results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed under the caption "Business Environment."
Third Quarter Ended July 31, 2001
----------------------------------
The company reported net income of $2 million, or $0.03 per diluted common share for the third quarter
ended July 31, 2001. For the comparable quarter last year, net income was $96 million or $1.60 per diluted
common share. This change is primarily due to continued weak, new and used truck pricing and lower new truck
shipments. Net income for the third quarter of 2001 benefited from $6 million of research and development tax
credits. Net income for the third quarter of 2000 included the benefit of a $20 million research and development
tax credit.
The truck segment's profit for the third quarter of 2001 decreased by $98 million and revenues decreased
$337 million compared to the same period last year. The truck segment's profit and revenue decreases are
primarily the result of reduced industry wide shipments and lower market pricing.
The engine segment's profit for the third quarter of 2001 remained consistent with last year at $64
million, while revenues decreased $17 million. The decrease in the engine segment's revenues is primarily the
result of unfavorable sales mix.
The financial services segment's profit for the third quarter of 2001 was $19 million, which was $5
million lower than the same period last year. The change in the financial services segment's profit is primarily
due to higher retail losses and lower average wholesale and account balances. The change in the financial
services segment's revenue is primarily due to changes in finance and insurance revenue discussed below.
Sales and Revenues. Sales and revenues for the third quarter of 2001 totaled $1,586 million, 18% lower than the
$1,924 million reported for the comparable quarter in 2000.
United States (U.S.) and Canadian industry retail sales of Class 5 through 8 trucks totaled 79,600 units
in the third quarter of 2001, which is 29% lower than the 112,300 units sold during this period in 2000. Class 8
heavy truck sales of 42,400 units during the third quarter of 2001 were 37% lower than the 2000 level of 67,100
units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, decreased 18% to 37,200 units.
Industry sales of school buses, which accounted for 19% of the medium truck market, decreased 20% to 7,000 units.
Market share for the third quarter of 2001 increased to 26.7% from 25.2% reported in the same period of
2000. This increase was the result of strength in the medium truck market due in part to the launch of the High
Performance vehicles.
Shipments of mid-range diesel engines by the company to other OEMs during the third quarter of 2001
totaled 80,200 units, an 11% increase from the same period of 2000. This increase resulted primarily from the
inclusion of Maxion International Motores, S.A. (Maxion) in the consolidated financial results for 2001. In the
first quarter of 2001, Maxion became a wholly owned subsidiary of the company.
20
Finance and insurance revenue of $59 million in the third quarter of 2001 decreased 18% from 2000. This
decrease is primarily a result of lower average serviced wholesale note and account balances.
Costs and Expenses. Manufacturing gross margin rose to 14.2% of sales for the third quarter of 2001 from 13.9%
in the second quarter of 2001. Manufacturing gross margin was 17.5% for the third quarter of 2000. This
decrease from prior year is primarily due to the impact of lower volumes and pressure on pricing.
Postretirement benefits expense decreased $4 million from the third quarter of 2000 to $44 million. This
decrease is due to lower supplemental trust profit sharing provisions in 2001 related to lower profits.
Engineering and research expense decreased $8 million from the third quarter of 2000 to $58 million. This
decrease primarily reflects a reduction in the amount of spending on the company's Next Generation Vehicle (NGV)
and Next Generation Diesel (NGD) programs.
Sales, general and administrative expense increased 26% to $135 million in the third quarter of 2001
from $107 million for the comparable quarter in 2000. This increase is due to an increase in the provision for
losses on receivables driven by an increase in repossession frequency and pricing pressure in the used truck
market.
Interest expense increased $5 million from the third quarter of 2000 to $42 million, primarily due to
the increase in the outstanding balance of the company's debt as a result of the debt issuance that occurred in
May 2001.
Nine Months Ended July 31, 2001
-------------------------------
The company reported a net loss of $30 million, or $0.51 per diluted common share for the first nine
months of 2001, primarily due to continued weak, new and used truck pricing and lower new truck shipments. Net
income was $264 million, or $4.26 per diluted common share for the comparable period of 2000. Net income for the
first nine months of 2001 and 2000 included the benefits of the previously mentioned tax related items of $6
million and $20 million, respectively. Excluding the impact of these tax adjustments, the company had a net loss
of $36 million and net income of $244 million, respectively.
The company's manufacturing operations reported a loss before income taxes of $126 million compared with
pretax income of $311 million in the first nine months of 2000. The truck segment's profit for the first nine
months of 2001 decreased by $375 million and revenues decreased by $1,590 million compared to the same period
last year. The truck segment's profit and revenue decreases are primarily the result of reduced industry wide
shipments and lower market pricing.
The engine segment's profit for the first nine months of 2001 decreased by 14% compared to a revenue
decrease of 6%. The decreases in the engine segment's profits and revenues are partially attributable to
decreases in total shipments of mid-range diesel engines. Lower profits are also attributable to unfavorable
sales mix, higher employee benefit expenses and increases in start up costs.
The financial services segment's profit for the first nine months of 2001 remained consistent with 2000,
while revenues decreased 8%. The change in the financial services segment's revenue is primarily due to changes
in finance and insurance revenue discussed below.
Sales and Revenues. Sales and revenues for the first nine months of 2001 totaled $4,887 million, 25% lower than
the $6,478 million reported for the comparable period of 2000.
21
U.S. and Canadian industry retail sales of Class 5 through 8 trucks totaled 239,800 units for the first
nine months of 2001, which is 31% lower than the 346,600 units sold during this period in 2000. Class 8 heavy
truck sales of 126,300 units during the first nine months of 2001 were 39% lower than the 2000 level of 206,300
units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, decreased 19% to 113,500
units. Industry sales of school buses, which accounted for 19% of the medium truck market, decreased 18% to
21,700 units.
Market share for the first nine months of 2001 slightly declined to 25.9% from the 26.2% reported in
2000.
Shipments of mid-range diesel engines by the company to other OEMs during the first nine months of 2001
totaled 239,000 units, a 5% increase from the same period of 2000. This increase resulted primarily from the
inclusion of Maxion in the consolidated financial results for 2001. In the first quarter of 2001, Maxion became
a wholly owned subsidiary of the company.
Finance and insurance revenue of $194 million during the first nine months of 2001 decreased 5% from
2000. This decrease is primarily a result of lower average serviced wholesale note and account balances.
Costs and Expenses. Manufacturing gross margin for the first nine months of 2001 was 13.1% compared with 17.4%
in 2000. This decrease is primarily due to the impact of lower volumes and pressure on pricing.
Postretirement benefits expense decreased $20 million from the first nine months of 2000 to $137
million. This decrease is due to lower supplemental trust profit sharing provisions in 2001 related to lower
profits.
Engineering and research expense decreased $25 million for the first nine months of 2001 to $188 million
compared to the same period in 2000. This decrease is primarily due to a reduction in the amount of spending on
the company's NGV and NGD programs.
Sales, general and administrative expense increased 10% to $393 million for the nine months ended July
31, 2001 from $357 million for the comparable period in 2000. This increase is due to an increase in the
provision for losses on receivables driven by an increase in repossession frequency and pricing pressure in the
used truck market.
Interest expense increased $20 million for the first nine months of 2001 to $125 million, primarily due
to the increase in NFC's weighted average interest rate on all debt, an increase in the outstanding balance of
the revolving retail warehouse facility and an increase in the outstanding balance of the company's debt as a
result of the issuance that occurred in May 2001.
Restructuring Charge
In October 2000, the company incurred charges for restructuring, asset write-downs, loss on anticipated
sale of business and other exit costs totaling $306 million as part of an overall plan to restructure its
manufacturing and corporate operations ("Plan of Restructuring"). The following are the major restructuring,
integration and cost reduction initiatives included in the Plan of Restructuring:
o Replacement of current steel cab trucks with a new line of high performance next generation vehicles
(NGV) and a concurrent realignment of the company's truck manufacturing facilities
o Closure of certain operations and exit of certain activities
o Launch of the next generation technology diesel engines
o Consolidation of corporate operations
o Realignment of the bus and truck dealership network and termination of various dealership contracts
22
Of the total pretax restructuring charge of $306 million, $124 million represented non-cash charges. Through July 31,
2001, approximately $156 million of the charge has been incurred, and $12 million of curtailment loss related to
the company's postretirement benefit plans was reclassified as a noncurrent postretirement liability. The
remaining restructuring liability of $138 million is expected to be funded from existing cash balances and
internally generated cash flows from operations.
The specific actions included in the Plan of Restructuring are expected to be substantially complete by
November 2001. Components of the restructuring charge are as follows:
Total Charges Amount Incurred Balance
(Millions of dollars) July 31, 2001
- ----------------------------------------------------- -------------- ----------------- -----------------------
Severance and other benefits $ 104 $ (42) $ 62
Inventory write-downs 20 (20) -
Other asset write-downs and losses 93 (93) -
Lease terminations 33 (1) 32
Loss on anticipated sale of business 17 - 17
Dealer termination and exit costs 39 (12) 27
-------------- ----------------- -----------------------
Total $ 306 $ (168) $ 138
============== ================= =======================
The Plan of Restructuring includes the reduction of approximately 2,100 employees from the workforce,
primarily in North America. During the quarter, approximately $8 million was paid for severance and other
benefits, and employee headcount was reduced by approximately 200. As of July 31, 2001, approximately $30
million has been paid for severance and other benefits for the reduction of approximately 1,600 employees, and
$12 million of curtailment loss has been reclassified as a noncurrent postretirement liability. The severance
and other benefits balance mainly represents costs related to future payments over the next two years for
headcount reductions already incurred and the remaining reduction of approximately 500 employees, which will be
substantially completed by late 2001 when the majority of the NGV products will be in production.
Lease termination costs include the future obligations under long-term non-cancelable lease agreements
at facilities being vacated following workforce reductions. This charge primarily consists of the estimated
lease costs, net of probable sublease income, associated with the cancellation of the company's corporate office
lease at NBC Tower in Chicago, Illinois, which expires in 2010. As of July 31, 2001, approximately $1 million has
been incurred for lease termination costs.
The Plan of Restructuring included the effect of the anticipated sale of Harco National Insurance
Company (Harco), which is reflected as a discontinued operation in Navistar Financial Corporation's (NFC)
stand-alone financial statements because Harco represents a major line of business and a reportable operating
segment of NFC. However, because Harco is neither a major line of business nor a separate operating segment of
Navistar, the planned sale of Harco did not qualify for discontinued operations presentation in accordance with
Accounting Principles Board Opinion No. 30, and accordingly, the anticipated loss on disposal was included as a
component of the restructuring charge. Additionally, due to the anticipated sale of Harco within the fiscal year
the net investment in Harco has been classified as other current assets for all periods presented in the
Statement of Financial Condition.
Dealer termination and exit costs include the termination of certain dealer contracts in connection with
the realignment of the company's bus distribution network, and other litigation costs to implement the
restructuring initiatives. As of July 31, 2001, approximately $12 million has been paid for dealer terminations
and exit costs, of which $5 million was incurred during the third quarter.
23
Liquidity and Capital Resources
Cash flow is generated from the manufacture and sale of trucks, mid-range diesel engines and their
associated service parts as well as from product financing and insurance coverage provided to the company's
dealers and retail customers by the financial services segment. The company's current debt ratings have made
sales of finance receivables the most economic source of funding for NFC. Insurance operations are self-funded.
The company had working capital of $105 million at July 31, 2001, compared to $59 million at October 31,
2000. Cash provided by operations during the first nine months of 2001 totaled $105 million. The company had a
net loss of $30 million, which was more than offset by $212 million of non-cash items, principally depreciation
and amortization. Also included was a net change in operating assets and liabilities of $60 million.
The net use of cash resulting from the change in operating assets and liabilities included a $251 million
decrease in accounts receivable primarily due to a net decrease in wholesale note and account balances. This was
more than offset by a $232 million decrease in accounts payable primarily due to a decrease in production levels,
and a $90 million decrease in other liabilities primarily due to decreased employee compensation.
Investment programs used $64 million in cash including $315 million for restricted investments, which
represents restricted marketable securities used as collateral in NFC's revolving retail warehouse facility, a
net increase in property and equipment leased to others of $43 million and capital expenditures of $212 million.
Capital expenditures were made primarily for the NGV and NGD programs and for a school bus facility in Tulsa,
Oklahoma. These were partially offset by a net decrease in retail notes and lease receivables of $487 million, a
net decrease in marketable securities of $36 million and $58 million of proceeds from sale-leasebacks.
Investment programs also used $60 million of cash to purchase the remaining 50% interest in Maxion.
Cash provided by financing activities of $54 million resulted from a net increase in long-term debt of
$349 million primarily related to the private placement of $400 million 9 3/8% Senior Notes in May 2001. This
was partially offset by a net decrease of $295 million in notes and debt outstanding under the bank revolving
credit facility and other commercial paper programs.
NFC has traditionally obtained funds to provide financing to the company's dealers and retail customers
from sales of finance receivables, commercial paper, short and long-term bank borrowings, medium and long-term
debt and equity capital. As of July 31, 2001, NFC's funding consisted of sold finance receivables of $3,034
million, bank and other borrowings of $1,041 million, subordinated debt of $100 million, capital lease
obligations of $370 million and equity of $313 million.
Through the asset-backed public market and private placement sales, NFC has been able to fund fixed rate
retail note receivables at rates offered to companies with higher investment grade ratings. During the first
nine months of 2001, NFC sold a total of $1,365 million of retail notes, net of unearned finance income, through
Navistar Financial Retail Receivables Corporation (NFRRC), a special purpose wholly owned subsidiary of NFC.
Aggregate net gains of $21 million were recognized on these sales. As of July 31, 2001 the remaining shelf
registration available to NFRRC for the public issuance of asset-backed securities was $618 million. Also, as of
July 31, 2001, Navistar Financial Securities Corporation (NFSC), a special purpose, wholly owned subsidiary of
NFC, has in place a revolving wholesale note trust that provides for the funding of $1,012 million of eligible
wholesale notes, of which $671 million has been utilized. In the third quarter of 2001, NFC lowered the
outstanding variable funding certificates held by NFSC from $75 million to zero.
24
At July 31, 2001, available funding under NFC's bank revolving credit facilities, the revolving retail
warehouse facility and the revolving wholesale note trust was $899 million. When combined with unrestricted cash
and cash equivalents, $940 million was available to fund the general business purposes of NFC.
In November 2000, NFC established Truck Engine Receivables Financing Corporation, a special purpose wholly
owned subsidiary of NFC, for the purpose of securitizing engine accounts receivable. In November 2000, NFC
securitized all of its unsecured trade receivables generated by the sale of diesel engines and engine service
parts from Navistar to Ford Motor Company. The transaction provides for funding of $100 million and expires in
November 2005. As of July 31, 2001, NFC has utilized $71 million of this facility.
Truck Retail Accounts Corporation, a special purpose, wholly owned subsidiary of NFC, has in place a
revolving retail account conduit that provides for the funding of $100 million of eligible retail accounts. As
of July 31, 2001, NFC has utilized $69 million of this facility. The facility expires in August 2002 with an
option for renewal.
In December 2000, NFC renegotiated its revolving credit facility and added a short-term liquidity
facility. The new revolving credit facility provides for aggregate borrowings of $820 million and will mature in
November 2005. Under this new revolving credit facility, Navistar's three Mexican finance subsidiaries will be
permitted to borrow up to $100 million in the aggregate, which will be guaranteed by the company and NFC. The
short-term liquidity facility, which provided for aggregate borrowings of $80 million, was terminated in June
2001.
There have been no material changes in the company's hedging strategies or derivative positions since
October 31, 2000. Further disclosure may be found in Note E to the financial statements and in the company's
2000 Annual Report on Form 10-K.
Cash flow from the company's manufacturing operations, financial services operations and financing
capacity is currently sufficient to cover planned investment in the business. The company had outstanding
capital commitments of $221 million at July 31, 2001, primarily for the NGV and NGD programs.
In May 2001, the company completed the private placement of $400 million 9 3/8% Senior Notes due in 2006.
The proceeds of the Senior Notes are to be used for debt repayment, to fund ongoing capital development programs
and for general capital purposes. International, exclusive of its subsidiaries, will initially guarantee the
payment of the principal, premium and interest on these notes, as well as the existing $100 million 7% senior
notes due 2003 and the $250 million 8% senior subordinated notes due 2008.
In May 2001, Standard and Poor's affirmed the company's and NFC's senior debt ratings of BBB- as well as
the company's and NFC's subordinated debt ratings of BB+. They also assigned a BBB- rating to the senior
unsecured notes that the company issued in May 2001. Moody's confirmed the company's and NFC's subordinated debt
ratings of Ba2, but lowered the company's and NFC's senior debt ratings from Baa3 to Ba1. Fitch IBCA affirmed
the company's senior debt rating at BBB- and the subordinated debt rating at BB. Additionally, Fitch IBCA
downgraded the senior debt rating for NFC from BBB to BBB- and its subordinated debt rating from BBB- to BB.
It is the opinion of management that, in the absence of significant unanticipated cash demands, current
and forecasted cash flow as well as anticipated financing actions will provide sufficient funds to meet operating
requirements and capital expenditures. Management believes that collections on the outstanding receivables
portfolios as well as funds available from various funding sources will permit the financial services operations
to meet the financing requirements of International's dealers and retail customers.
25
New Accounting Pronouncements
On April 1, 2001 the company adopted Statement of Financial Accounting Standards No. 140, "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". The adoption of this
statement has not had and is not expected to have a material effect on the company's results of operations,
financial condition or cash flows. Further disclosure may be found in Note J to the financial statements.
In June 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 141 (SFAS 141), "Business Combinations," Statement of Financial Accounting Standards No. 142 (SFAS
142), "Goodwill and Other Intangible Assets," and Statement of Financial Accounting Standards No. 143 (SFAS 143),
"Accounting for Asset Retirement Obligations." SFAS 141 applies to all business combinations initiated after
June 30, 2001. SFAS 142 is effective for fiscal years beginning after December 15, 2001. SFAS 143 is effective
for financial statements issued for fiscal years beginning after June 15, 2002. The company is evaluating the
impact on the company's financial position, results of operations or cash flows.
Business Environment
Sales of Class 5 through 8 trucks historically have been cyclical, with demand affected by such economic
factors as industrial production, construction, demand for consumer durable goods, interest rates and the
earnings and cash flow of dealers and customers. Truck sales in the third quarter were hindered by a number of
factors including high inventories of new and used trucks as well as driver shortages and high fuel prices. The
demand for new trucks reflected these adverse conditions, reducing the company's U.S. and Canadian order backlog
at July 31, 2001, to 18,200 units, significantly lower than the 27,100 units at July 31, 2000. The company will
continually evaluate order receipts and backlog throughout the year and will balance production with demand as
appropriate. To control costs and align production schedules with demand, the company reduced its production
schedules during the quarter through shutdown weeks at its Garland and Springfield Assembly Plants. In the
fourth quarter of this year, the company plans to increase production of Class 8 heavy trucks at its Chatham
assembly plant. This will result in the recall of nearly 200 workers.
Reflecting the continued industry-wide decline in new truck orders, the company lowered its industry
projections for 2001. The company currently projects 2001 U.S. and Canadian Class 8 heavy truck demand to be
144,000 units down from the previous forecast of 181,600 units. Class 5, 6, and 7 medium truck demand remains
unchanged at 108,000 units, but demand for school buses is forecast at 28,000 units, down from 32,000 units.
The company launched the industry's first High Performance TrucksTM in February 2001. The launch of the
new International(R)4000, 7000 and 8000 Series trucks, which are built for specific applications to improve
customer profitability, represents the most comprehensive product launch in the history of International.
In March 2001, Green Diesel Technology(TM), available in an International(R)530E engine, was certified for use
in school buses by the U.S. Environmental Protection Agency and the California Air Resources Board. The
technology, which surpasses emissions standards while maintaining an engine with diesel power, provides a
cost-effective, clean-air solution for school districts.
In June 2001, the company opened a new school bus manufacturing facility in Tulsa, Oklahoma. The nearly
1-million-square-foot plant currently employs more than 400 workers to assemble the International integrated
conventional school bus. An integrated chassis design combines the chassis, bus body and school bus part
components to deliver customer value in the areas of improved visibility, ergonomics and operating economy.
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In August 2001, the company finalized plans to form a joint venture with Ford. The joint venture, named
Blue Diamond Truck, S. de R.L. de C.V., will initially produce Class 6 and 7 medium commercial trucks that will
be marketed independently under the Ford brand and Navistar's International(R)brand. The trucks will be produced
at Navistar's plant in Escobedo, Mexico. In subsequent years, Blue Diamond plans to expand the range of
commercial trucks for both companies.
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Navistar International Corporation and Consolidated Subsidiaries
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the company's market risk exposure related to foreign currency risk
since October 31, 2000, as reported in the 2000 Annual Report on Form 10-K. However, an evaluation of
interest rate risk for the fair value of interest rate sensitive assets and liabilities as of July 31,
2001, determined that a hypothetical instantaneous 10% adverse change in interest rates would decrease the
net fair market value of these instruments by approximately $22 million.
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 20, 2000, Commission File No. 1-9618.
Item 2. Changes in Securities and Use of Proceeds
Payments of cash dividends and the repurchase of common stock are currently limited due to restrictions
contained in the company's $400 million Senior Notes, $250 million Senior Subordinated Notes and $19
million Note Purchase Agreement. The company has not paid dividends on the common stock since 1980 and
does not expect to pay cash dividends on the common stock in the foreseeable future.
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-5
(b) Reports on Form 8-K:
A current report on Form 8-K was filed with the Commission on
May 10, 2001, in which the company announced its plans to
issue $300 million in new five-year senior notes.
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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, 2001
29