form10q-3q05
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-Q
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(X)
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QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended July 31, 2005
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OR
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(
)
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TRANSITION
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
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SECURITIES
EXCHANGE ACT OF 1934
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For
the transition period from
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To
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Commission
file number 1-9618
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NAVISTAR
INTERNATIONAL CORPORATION
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(Exact
name of registrant as specified in its charter)
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Delaware
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36-3359573
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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4201
Winfield Road, P.O. Box 1488
Warrenville,
Illinois 60555
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(Address
of principal executive offices, Zip Code)
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Registrant's
telephone number, including area code (630) 753-5000
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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
___
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Indicate
by check mark whether the registrant is an accelerated filer (as
defined
in Rule12b-2 of the Act.) Yes X
No
__
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Indicate
by check mark whether the registrant is a shell company (as defined
in
Rule12b-2 of the Act.) Yes
No
X .
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APPLICABLE
ONLY TO ISSUERS INVOLVED
IN
BANKRUPTCY PROCEEDINGS DURING
THE
PRECEDING FIVE YEARS
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|
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 ___
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APPLICABLE
ONLY TO CORPORATE ISSUERS:
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|
As
of August 31, 2005, the number of shares outstanding of the registrant's
common stock was 70,106,556.
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PAGE
2
NAVISTAR
INTERNATIONAL CORPORATION
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AND
CONSOLIDATED SUBSIDIARIES
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INDEX
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Page
Reference
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Part
I. Financial
Information:
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Item
1. Condensed
Consolidated Financial Statements
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Statement
of Income
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Three
and Nine Months Ended July 31, 2005 and 2004 (restated)
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Statement
of Financial Condition
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July
31, 2005, October 31, 2004 and July 31, 2004 (restated)
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Statement
of Cash Flow
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Nine
Months Ended July 31, 2005 and 2004 (restated)
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Notes
to the Financial Statements
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Additional
Financial Information
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Item
2. Management's
Discussion and Analysis of Financial
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Condition
and Results of Operations
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Item
3. Quantitative
and Qualitative Disclosures
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About
Market Risk
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Item
4. Controls
and Procedures
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Part
II. Other
Information:
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Item
1. Legal
Proceedings
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Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds
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Item
6. Exhibits
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Signature
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PART
I - FINANCIAL INFORMATION
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ITEM
1. Condensed Consolidated Financial
Statements
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|
STATEMENT
OF INCOME (Unaudited)
Millions
of dollars, except per share data
|
|
|
|
|
|
|
|
|
|
|
|
|
Navistar
International Corporation
and
Consolidated Subsidiaries
|
|
|
|
|
|
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
As
Restated
|
|
|
|
*
As
Restated
|
|
Sales
and revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of manufactured products
|
|
$
|
2,923
|
|
$
|
2,294
|
|
$
|
8,318
|
|
$
|
6,456
|
|
Finance
revenue
|
|
|
60
|
|
|
55
|
|
|
180
|
|
|
182
|
|
Other
income
|
|
|
11
|
|
|
-
|
|
|
24
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales and revenues
|
|
|
2,994
|
|
|
2,349
|
|
|
8,522
|
|
|
6,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products and services sold
|
|
|
2,474
|
|
|
1,953
|
|
|
7,149
|
|
|
5,582
|
|
Restructuring
and other non-recurring charges
|
|
|
-
|
|
|
(5
|
)
|
|
-
|
|
|
(1
|
)
|
Postretirement
benefits expense
|
|
|
59
|
|
|
43
|
|
|
178
|
|
|
162
|
|
Engineering
and research expense
|
|
|
91
|
|
|
66
|
|
|
254
|
|
|
181
|
|
Selling,
general and administrative expense
|
|
|
210
|
|
|
174
|
|
|
584
|
|
|
473
|
|
Interest
expense
|
|
|
51
|
|
|
31
|
|
|
126
|
|
|
96
|
|
Other
expense
|
|
|
12
|
|
|
5
|
|
|
26
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
2,897
|
|
|
2,267
|
|
|
8,317
|
|
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Income
before income taxes
|
|
|
97
|
|
|
82
|
|
|
205
|
|
|
134
|
|
Income
tax expense
|
|
|
33
|
|
|
32
|
|
|
70
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
64
|
|
$
|
50
|
|
$
|
135
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
$
|
0.72
|
|
$
|
1.93
|
|
$
|
1.27
|
|
Diluted
|
|
$
|
0.83
|
|
$
|
0.66
|
|
$
|
1.78
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Average
shares outstanding (millions)
|
|
|
|
|
|
|
|
|
|
|
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|
Basic
|
|
|
70.1
|
|
|
69.9
|
|
|
70.1
|
|
|
69.6
|
|
Diluted
|
|
|
79.9
|
|
|
80.0
|
|
|
80.1
|
|
|
80.2
|
|
|
|
See
Notes to Financial Statements.
|
*
See Note Q to the Financial Statements. |
STATEMENT
OF FINANCIAL CONDITION (Unaudited)
Millions
of dollars
|
|
|
|
|
|
Navistar
International Corporation
and
Consolidated Subsidiaries
|
|
|
|
|
|
|
|
July
31
2005
|
|
October
31
2004
|
|
July
31
2004
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
*
As
Restated
|
|
Current
assets
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
593
|
|
$
|
605
|
|
$
|
478
|
|
Marketable
securities
|
|
|
719
|
|
|
182
|
|
|
6
|
|
Receivables,
net
|
|
|
962
|
|
|
1,215
|
|
|
850
|
|
Inventories
|
|
|
1,064
|
|
|
790
|
|
|
856
|
|
Deferred
tax asset, net
|
|
|
169
|
|
|
207
|
|
|
152
|
|
Other
assets
|
|
|
224
|
|
|
168
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
3,731
|
|
|
3,167
|
|
|
2,525
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
523
|
|
|
73
|
|
|
424
|
|
Finance
and other receivables, net
|
|
|
1,108
|
|
|
1,222
|
|
|
878
|
|
Property
and equipment, net
|
|
|
1,533
|
|
|
1,444
|
|
|
1,405
|
|
Investments
and other assets
|
|
|
516
|
|
|
374
|
|
|
327
|
|
Prepaid
and intangible pension assets
|
|
|
90
|
|
|
73
|
|
|
70
|
|
Deferred
tax asset, net
|
|
|
1,266
|
|
|
1,239
|
|
|
1,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
8,767
|
|
$
|
7,592
|
|
$
|
6,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
|
|
|
Notes
payable and
current maturities of long-term debt
|
|
$
|
1,170
|
|
$
|
823
|
|
$
|
271
|
|
Accounts
payable,
principally trade
|
|
|
1,383
|
|
|
1,462
|
|
|
1,161
|
|
Other
liabilities
|
|
|
996
|
|
|
965
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
3,549
|
|
|
3,250
|
|
|
2,276
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt:
Manufacturing
operations
|
|
|
1,359
|
|
|
1,258
|
|
|
1,268
|
|
Financial services operations
|
|
|
1,361
|
|
|
787
|
|
|
1,253
|
|
Postretirement
benefits liability
|
|
|
1,426
|
|
|
1,382
|
|
|
1,391
|
|
Other
liabilities
|
|
|
384
|
|
|
384
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
8,079
|
|
|
7,061
|
|
|
6,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity
|
|
|
|
|
|
|
|
|
|
|
Series
D convertible junior preference stock
|
|
|
4
|
|
|
4
|
|
|
4
|
|
Common
stock and additional paid in capital
(75.3
million shares issued)
|
|
|
2,078
|
|
|
2,096
|
|
|
2,087
|
|
Retained
earnings (deficit)
|
|
|
(470
|
)
|
|
(604
|
)
|
|
(762
|
)
|
Accumulated
other comprehensive loss
|
|
|
(756
|
)
|
|
(789
|
)
|
|
(782
|
)
|
Common
stock held in treasury, at cost
|
|
|
|
|
|
|
|
|
|
|
(5.2
million, 5.3 million and 5.5 million shares held)
|
|
|
(168
|
)
|
|
(176
|
)
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareowners’ equity
|
|
|
688
|
|
|
531
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners’ equity
|
|
$
|
8,767
|
|
$
|
7,592
|
|
$
|
6,919
|
|
|
|
|
|
|
|
|
|
|
|
See
Notes to Financial Statements.
|
*
See Note Q to the Financial Statements. |
STATEMENT
OF CASH FLOW (Unaudited)
Millions
of dollars
|
|
|
|
|
|
Navistar
International Corporation
and
Consolidated Subsidiaries
|
|
|
|
|
|
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
*
As
Restated
|
|
Cash
flow from operating activities
|
|
|
|
|
|
Net
income
|
|
$
|
135
|
|
$
|
88
|
|
Adjustments
to reconcile net income to cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
168
|
|
|
149
|
|
Deferred
income taxes
|
|
|
20
|
|
|
18
|
|
Postretirement
benefits funding less than (in excess of) expense
|
|
|
45
|
|
|
(173
|
)
|
Gains
on sales of receivables
|
|
|
(14
|
)
|
|
(26
|
)
|
Other,
net
|
|
|
(20
|
)
|
|
(89
|
)
|
Change
in operating assets and liabilities, net of effect of
acquisitions:
|
|
|
|
|
|
|
|
Receivables
|
|
|
79
|
|
|
(45
|
)
|
Inventories
|
|
|
(246
|
)
|
|
(240
|
)
|
Prepaid
and other current assets
|
|
|
(34
|
)
|
|
(30
|
)
|
Accounts
payable
|
|
|
(50
|
)
|
|
51
|
|
Other
liabilities
|
|
|
3
|
|
|
61
|
|
|
|
|
|
|
|
Cash
provided by (used in) operating activities
|
|
|
86
|
|
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investment programs
|
|
|
|
|
|
|
|
Purchases
of retail notes and lease receivables
|
|
|
(1,240
|
)
|
|
(1,192
|
)
|
Collections/sales
of retail notes and lease receivables
|
|
|
1,537
|
|
|
1,360
|
|
Purchases
of marketable securities
|
|
|
(1,676
|
)
|
|
(235
|
)
|
Sales
or maturities of marketable securities
|
|
|
688
|
|
|
401
|
|
Capital
expenditures
|
|
|
(107
|
)
|
|
(103
|
)
|
Property
and equipment leased to others
|
|
|
21
|
|
|
4
|
|
Acquisitions
and investment in affiliates
|
|
|
(229
|
)
|
|
(1
|
)
|
Other
investment programs
|
|
|
(83
|
)
|
|
(16
|
)
|
|
|
|
|
|
|
Cash
provided by (used in) investment programs
|
|
|
(1,089
|
)
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
Issuance
of debt
|
|
|
1,029
|
|
|
165
|
|
Principal
payments on debt
|
|
|
(111
|
)
|
|
(194
|
)
|
Net
increase in notes and debt outstanding under bank revolving credit
facility and commercial paper programs
|
|
|
80
|
|
|
56
|
|
Premium
on call options, net
|
|
|
-
|
|
|
(22
|
)
|
Other
financing activities
|
|
|
(7
|
)
|
|
24
|
|
|
|
|
|
|
|
Cash
provided by financing activities
|
|
|
991
|
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
Increase
(decrease) during the period
|
|
|
(12
|
)
|
|
11
|
|
At
beginning of the period
|
|
|
605
|
|
|
467
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of the period
|
|
$
|
593
|
|
$
|
478
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
cash flow information
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
122
|
|
$
|
113
|
|
Income
taxes paid, net of refunds
|
|
$
|
18
|
|
$
|
16
|
|
|
|
See
Notes to Financial Statements.
|
*
See Note Q to the Financial Statements. |
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
A. Summary of Accounting Policies
Navistar
International Corporation (NIC) 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, majority owned
dealers and its wholly owned financial services subsidiaries. The effects of
transactions between the manufacturing, dealer 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 2004 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 necessary to present fairly the financial position, results of
operations and cash flow for the periods presented. In the current quarter,
the
company recorded charges of $14 million related to a foundry operation,
including $11 million to correct the location’s inventory balances based upon
physical counts conducted during the third quarter. This inventory adjustment
was charged to the current period because the company was not able to determine
the prior period to which the adjustment may have related. For the nine month
period, the inventory charge described above combined with the correction of
certain other accounting errors ($7 million) and other adjustments related
to
changes in estimates ($15 million) for this location totaled approximately
$33
million. The errors primarily involved capitalized costs that should have been
expensed in the prior periods in which they occurred.
Interim
results are not necessarily indicative of results for the full year. Certain
2004 and 2005 amounts have been reclassified to conform with the presentation
used in the 2005 financial statements in this report.
Statement
of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based
Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation -
Transition and Disclosure,” encourage, but do not require, companies to record
compensation cost for stock-based employee compensation plans at fair value.
The
company has chosen to continue to account for stock-based compensation in
accordance with Accounting Principles Board Opinion No. 25, “Accounting for
Stock Issued to Employees,” and related interpretations. Accordingly, no
compensation cost has been recognized for fixed stock options because the
exercise prices of the stock options equal the market value of the company’s
common stock at the date of grant. The following table illustrates the effect
on
the company’s net income and earnings per share if the company had applied the
fair value recognition provision of SFAS No. 123 in accordance with the
disclosure provisions of SFAS No. 148.
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
Millions
of dollars, except per share data
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income, as reported
|
|
$
|
64
|
|
$
|
50
|
|
$
|
135
|
|
$
|
88
|
|
Add:
Interest expense on 2.5% senior convertible and 4.75% subordinated
exchangeable debt for dilutive purposes (net of tax)
|
|
|
2
|
|
|
3
|
|
|
7
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
net income available to common shareholders plus assumed
conversions
|
|
|
66
|
|
|
53
|
|
|
142
|
|
|
95
|
|
Deduct:
Total stock-based employee compensation expense determined under
fair
value based method for all awards net of related tax
effects
|
|
|
(2
|
)
|
|
(3
|
)
|
|
(8
|
)
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
|
Pro
forma net income
|
|
$
|
64
|
|
$
|
50
|
|
$
|
134
|
|
$
|
85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
- as reported
|
|
$
|
0.91
|
|
$
|
0.72
|
|
$
|
1.93
|
|
$
|
1.27
|
|
Basic
- pro forma
|
|
$
|
0.88
|
|
$
|
0.68
|
|
$
|
1.81
|
|
$
|
1.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
- as reported
|
|
$
|
0.83
|
|
$
|
0.66
|
|
$
|
1.78
|
|
$
|
1.19
|
|
Diluted
- pro forma
|
|
$
|
0.80
|
|
$
|
0.62
|
|
$
|
1.67
|
|
$
|
1.06
|
|
PAGE
7
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
B. New Accounting Pronouncements
In
December 2004, the Financial Accounting Standards Board (FASB) issued SFAS
No.
123 (revised 2004), “Share-Based Payment.” This Statement generally requires the
recognition of the cost of employee services received in exchange for an award
of equity instruments. This cost is based on the grant date fair value of the
equity award and will be recognized over the period during which the employee
is
required to provide service in exchange for the award. The effective
date
for the company is the beginning of the first fiscal quarter of 2006.
The
company is still evaluating its share-based payment programs and the related
impact this Statement may have on its results of operations, financial condition
or cash flows.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. The Statement clarifies that abnormal inventory
costs
should be recognized in the period in which they occur. This Statement is
effective for inventory costs incurred during fiscal years beginning after
June
15, 2005. The company will adopt this Statement in fiscal 2006 but has not
yet
determined the effect, if any, this Statement may have on its results of
operations, financial condition or cash flows.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,”
to amend Accounting Principles Board Opinion No. 29,
“Accounting for Nonmonetary Transactions”(APB
No.
29). The Statement eliminates the exception from fair value measurement for
nonmonetary exchanges of similar products in APB No. 29 and replaces it with
an
exception for exchanges that do not have commercial substance. This Statement
will be applied prospectively for nonmonetary asset exchanges occurring in
fiscal periods beginning after June 15, 2005. The company does not expect this
statement will have a material impact on its results of operations, financial
condition or cash flows.
In
December 2004, the FASB issued two FASB Staff Positions (FSPs) that provide
accounting guidance on how companies should account for the effects of the
American Jobs Creation Act of 2004 (the Act) that was signed into law on October
22, 2004. The Act could affect how companies report their deferred income tax
balances. The first FSP is FSP FAS 109-1 (FSP 109-1); the second is FSP FAS
109-2 (FSP 109-2). In FSP 109-1, the FASB concludes that the tax relief (special
tax deduction for domestic manufacturing) from the Act should be accounted
for
as a "special deduction" instead of a tax rate reduction. The company continues
to evaluate the impact, if any, this FSP may have on its results of operations,
financial condition or cash flows. FSP 109-2 gives a company additional time
to
evaluate the effects of the Act on any plan for reinvestment or repatriation
of
foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income
Taxes.” However, the company must provide certain disclosures if it chooses to
utilize the additional time granted by the FASB. The company has completed
its
evaluation and does not intend to repatriate foreign earnings.
In
March
2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for
Conditional Asset Retirement Obligations.” This Interpretation addresses diverse
accounting practices that developed with respect to the timing of liability
recognition for legal obligations associated with the retirement of a tangible
long-lived asset when the timing and (or) method of settlement of the obligation
are conditional on a future event. FIN No. 47 concludes that an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liability's fair value can be
reasonably estimated. This Interpretation is effective no later than the end
of
fiscal years ending after December 15, 2005. The company does not have any
such
asset retirement obligations at this time. The company expects that this
Interpretation will have no impact on the company’s results of operations,
financial condition or cash flows.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
to replace Accounting Principles Board Opinion No. 20, “Accounting Changes” and
SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This
Statement provides guidance on the accounting for and reporting of accounting
changes and error corrections. It also establishes the required methods by
which
entities should include accounting changes or error corrections in previously
issued financial statements. This Statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. Early adoption is permitted for accounting changes and corrections of
errors made in fiscal years beginning after the date this Statement was issued.
The company intends to adopt this Statement for fiscal 2006.
PAGE
8
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
C. Business Combinations
In
April
2005, the company acquired MWM
Motores Diesel Ltda (MWM), a Brazilian entity. MWM produces a broad line of
medium and high-speed diesel engines in the 50 to 310 horsepower range for
use
in pick-ups, trucks, vans, light and semi-heavy trucks, as well as agricultural,
marine and electric generator applications. The
acquisition was effective April 1, 2005, therefore, the company’s Condensed
Consolidated Financial Statements include the operating results of MWM as of
that date. For the three months ended July 31, 2005, MWM contributed $7 million
in profit. The Administrative Council for Economic Defense (CADE), the Brazilian
antitrust regulatory authority, must review and approve the acquisition, and
that review is still pending. Only minimal synergies can be achieved prior
to
CADE approval and CADE may require divestiture of assets or impose other
conditions on the acquisition. This uncertainty inhibits the company from
completing certain aspects of the purchase accounting associated with the
acquisition of MWM. Once CADE finalizes its review, management will evaluate
its
engine operations within Brazil, decide how to best utilize its resources to
meet the needs of its customers and complete the accounting associated with
the
acquisition.
Note
D. Postretirement Benefits
Postretirement
Benefits Expense
The
company provides postretirement benefits to a substantial portion of its
employees. Costs associated with postretirement benefits include pension and
postretirement healthcare expenses for employees, retirees and surviving spouses
and dependents. In addition, as part of the 1993 restructured healthcare and
life insurance plans, profit sharing payments to the Retiree Supplemental
Benefit Trust (Trust) are required.
The
cost
of postretirement benefits is segregated as a separate component on the
Statement of Income and is as follows:
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
Millions
of dollars
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
expense
|
|
$
|
17
|
|
$
|
14
|
|
$
|
52
|
|
$
|
52
|
|
Other
benefits expense
|
|
|
42
|
|
|
32
|
|
|
126
|
|
|
108
|
|
Profit
sharing provision to Trust
|
|
|
-
|
|
|
(3
|
)
|
|
-
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
Net
postretirement benefits expense
|
|
$
|
59
|
|
$
|
43
|
|
$
|
178
|
|
$
|
162
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
9
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
D. Postretirement Benefits (continued)
Net
periodic postretirement benefits expense included on the Statement of Income
is
composed of the following:
|
|
Pension
Expense
|
|
|
|
|
|
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
Millions
of dollars
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
costs for benefits earned during the period
|
|
$
|
6
|
|
$
|
3
|
|
$
|
18
|
|
$
|
17
|
|
Interest
on obligation
|
|
|
55
|
|
|
58
|
|
|
166
|
|
|
174
|
|
Amortization
of cumulative losses
|
|
|
15
|
|
|
12
|
|
|
44
|
|
|
37
|
|
Amortization
of prior service cost
|
|
|
2
|
|
|
1
|
|
|
6
|
|
|
4
|
|
Other
|
|
|
6
|
|
|
7
|
|
|
19
|
|
|
20
|
|
Less
expected return on assets
|
|
|
(67
|
)
|
|
(67
|
)
|
|
(201
|
)
|
|
(200
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
pension expense
|
|
$
|
17
|
|
$
|
14
|
|
$
|
52
|
|
$
|
52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
“Other”
in the above table includes the expense related to yearly lump-sum payments
to
retirees required by negotiated labor contracts, expense related to defined
contribution plans and other postretirement benefit costs.
|
|
Other
Benefits Expense
|
|
|
|
|
|
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
Millions
of dollars
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Service
costs for benefits earned during the period
|
|
$
|
4
|
|
$
|
3
|
|
$
|
13
|
|
$
|
10
|
|
Interest
on obligation
|
|
|
36
|
|
|
34
|
|
|
108
|
|
|
105
|
|
Amortization
of cumulative losses
|
|
|
15
|
|
|
10
|
|
|
45
|
|
|
31
|
|
Other
|
|
|
-
|
|
|
(1
|
)
|
|
-
|
|
|
3
|
|
Less
expected return on assets
|
|
|
(13
|
)
|
|
(14
|
)
|
|
(40
|
)
|
|
(41
|
)
|
|
|
|
|
|
|
|
|
|
|
Net
other benefits expense
|
|
$
|
42
|
|
$
|
32
|
|
$
|
126
|
|
$
|
108
|
|
|
|
|
|
|
|
|
|
|
|
Employer
Contributions
The
company previously disclosed in its financial statements for the year ended
October 31, 2004 that it expected to contribute approximately $20 million to
its
pension plans in 2005. Current expectations regarding 2005 pension plan
contributions have not changed since that time. As of July 31, 2005, $15 million
of contributions have been made to the company’s qualified pension plans.
The
company also makes contributions to partially fund retiree healthcare benefits.
As of July 31, 2005, $4 million of contributions have been made to the company’s
retiree healthcare plans and the company anticipates contributing an additional
$2 million in 2005 for a total contribution of $6 million.
Note
E. Income Taxes
The
Statement of Income reflects tax expense which primarily reduces the cumulative
benefit of NOL carryforwards currently recognized as a deferred tax asset,
net
of valuation allowances, in the Statement of Financial Condition. Cash payment
of income taxes may be required for certain state income, foreign income and
withholding and federal alternative minimum taxes. Until the company has
utilized its significant NOL carryforwards, the cash payment of United States
(U.S.) federal and state income taxes will be minimal.
PAGE
10
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
F. Inventories
Inventories
are as follows:
|
|
July
31
|
|
October
31
|
|
July
31
|
|
Millions
of dollars
|
|
2005
|
|
2004
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finished
products
|
|
$
|
675
|
|
$
|
505
|
|
$
|
539
|
|
Work
in process
|
|
|
57
|
|
|
47
|
|
|
69
|
|
Raw
materials and supplies
|
|
|
332
|
|
|
238
|
|
|
248
|
|
|
|
|
|
|
|
|
|
Total
inventories
|
|
$
|
1,064
|
|
$
|
790
|
|
$
|
856
|
|
|
|
|
|
|
|
|
|
Note
G. Sales of Receivables
Navistar
Financial Corporation’s (NFC) primary business is to provide wholesale, retail
and lease financing for new and used trucks sold by International and
International’s dealers and, as a result, NFC’s finance receivables and leases
have significant concentration in the trucking industry. NFC retains as
collateral an ownership interest in the equipment associated with leases and
a
security interest in equipment associated with wholesale notes and retail
notes.
The
following table summarizes NFC’s sale of retail notes and leases for the three
months and nine months ended July 31, 2005 and 2004, in millions of dollars.
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of retail receivables
|
|
$
|
385
|
|
$
|
325
|
|
$
|
1,559
|
|
$
|
1,120
|
|
Gain
on sales of retail receivables
|
|
|
3
|
|
|
3
|
|
|
14
|
|
|
26
|
|
Note
H. Debt
In
March
2005, the company sold $400 million in Senior Notes due 2012 (original notes).
The original notes were sold in a Rule 144A and Regulation S private
unregistered offering and were priced to yield 6.25%. In June 2005, the company
offered to exchange these original notes for a like amount of the company’s new
6.25%, Series B, Senior Notes due 2012 (exchange notes). The exchange notes
were
registered under the Securities Act. The terms of the exchange notes issued
in
the exchange offer are substantially identical to the original notes, except
that the transfer restrictions and registration rights provisions relating
to
the original notes will not apply to the exchange notes. The exchange notes
are
guaranteed on a senior unsecured basis by the company’s principal operating
subsidiary, International Truck and Engine Corporation. The exchange notes
are
the company’s senior unsecured obligation and rank in right of payment behind
all of the company’s future secured debt and equally in right of payment to all
of the company’s existing and future senior unsecured debt. The company
exchanged in excess of 99.9% of the original notes for the exchange notes when
the exchange offer expired on July 27, 2005.
In
the
third quarter of fiscal 2005, NFC refinanced its $820 million revolving credit
facility which was going to become due in December 2005 with a new $1,200
million revolving credit facility that becomes due in December 2010. Likewise,
one of NFC’s related affiliates, Truck Retail Installment Paper Corporation
(TRIP), entered into a new revolving retail facility with a capacity of $500
million that will expire in June 2010, to replace the $500 million facility
that
will expire in August 2005.
In
July
2005, the company repurchased $18 million of its 4.75% Subordinated Exchangeable
Notes due 2009 and $7 million of its 9.375% Senior Notes due 2006. The effect
of
these repurchases on operating income was negligible. The repurchase of the
4.75% Subordinated Exchangeable Notes due 2009 reduced the number of shares
included in the calculation of diluted earnings per share, beginning in July,
by
approximately 323,000 shares.
PAGE
11
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
I. Restructuring and Other Non-recurring Charges
Restructuring
Charges
In
2000
and 2002, the company’s board of directors approved separate plans to
restructure its manufacturing and corporate operations. The company incurred
charges for severance and other benefits, curtailment losses, lease
terminations, asset and inventory write-downs and other exit costs relating
to
these plans. The following are the major restructuring, integration and cost
reduction initiatives originally included in the 2000 and 2002 Plans of
Restructuring (Plans of Restructuring):
· |
Replacement
of steel cab trucks with a new line of High Performance Vehicles
(HPV) and
a concurrent realignment of the company’s truck manufacturing facilities
|
· |
Launch
of the next generation technology diesel engines
(NGD)
|
· |
Consolidation
of corporate operations
|
· |
Realignment
of the bus and truck dealership network and termination of various
dealerships’ contracts
|
· |
Closure
of certain facilities and operations and exit of certain activities
including the Chatham, Ontario heavy truck assembly facility, the
Springfield, Ohio body plant and a manufacturing production line
within
one of the company’s plants
|
· |
Offer
of early retirement and voluntary severance programs to certain union
represented employees
|
The
Plans
of Restructuring originally called for a reduction in workforce of approximately
5,400 employees, primarily in North America, resulting in charges totaling
$169
million. The decision, in 2003, to keep open the Chatham facility along with
changes in staffing requirements at other manufacturing facilities lowered
the
total number of employee reductions to 4,200. The change in expected employee
reductions along with an evaluation of the severance reserves related to the
HPV
and NGD product programs resulted in a net reversal to the previously recorded
severance and other benefits reserves totaling $50 million.
A
curtailment loss of $157 million was recorded in 2002 relating to the company’s
postretirement plans. This loss was the result of an early retirement program
for represented employees at the company’s Springfield and Indianapolis plants
and the planned closure of the Chatham facility. Subsequently, the decision
to
keep open the Chatham facility, the offer of an early retirement and voluntary
severance program to certain employees at the Chatham facility, and the
completion of the sign-up period for the early retirement window program offered
to certain eligible, long serviced UAW employees, resulted in a net reduction
of
$3 million to the previously recorded curtailment loss. The curtailment
liability has been classified as a postretirement benefits liability on the
Statement of Financial Condition.
Lease
termination charges include estimated lease costs, net of probable sublease
income, under long-term non-cancelable lease agreements. These charges primarily
relate to the lease at the company’s previous corporate office in Chicago,
Illinois, which expires in 2010.
Dealer
termination costs include the termination of certain dealer contracts in
connection with the realignment of the company’s bus distribution network. Other
exit costs include contractually obligated exit and closure costs associated
with facility closures and an accrual for the loss on sale of Harco National
Insurance Company. As of July 31, 2005, $54 million of the total net charge
of
$66 million has been incurred.
PAGE
12
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
I. Restructuring and Other Non-recurring Charges
(continued)
Other
Non-Recurring Charges
In
October 2002, Ford Motor Company (Ford) advised the company that its current
business case for a V-6 diesel engine in the specified vehicles was not viable
and discontinued its program for the use of these engines. Accordingly, the
company recorded charges of $170 million for the write-off of deferred
pre-production costs, the write-down of fixed assets that were abandoned, lease
obligations under non-cancelable operating leases, and accruals for amounts
contractually owed to suppliers. In 2003, the company recorded an adjustment
of
$11 million for additional amounts contractually owed to suppliers related
to
the V-6 diesel engine program. In April 2003, the company reached a
comprehensive agreement with Ford concerning the termination of its V-6 diesel
engine program. The terms of the agreement include compensation to neutralize
certain current and future V-6 diesel engine program related costs not accrued
for as part of the 2002 non-recurring charge, resolution of ongoing pricing
related to the company’s V-8 diesel engine program and a release by the parties
of all of their obligations under the V-6 diesel engine contract. The company,
under current agreements, will continue as Ford’s exclusive supplier of V-8
diesel engines through 2012. The agreement with Ford does not have a material
net impact on the Statement of Financial Condition or the Statement of Income
for the periods covered in this report.
Summary
Through
July 31, 2005, the company has recorded cumulative charges of $818 million
relating to the Plans of Restructuring and other non-recurring charges.
The
remaining components of the company’s Plans of Restructuring and other
non-recurring charges are shown in the following table.
Millions
of dollars
|
|
Balance
October 31
2004
|
|
Amount
Incurred
|
|
Balance
July
31
2005
|
|
|
|
|
|
|
|
|
|
Lease
terminations
|
|
$
|
21
|
|
$
|
(4
|
)
|
$
|
17
|
|
Dealer
terminations and other charges
|
|
|
12
|
|
|
-
|
|
|
12
|
|
Other
non-recurring charges
|
|
|
64
|
|
|
(7
|
)
|
|
57
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
97
|
|
$
|
(11
|
)
|
$
|
86
|
|
|
|
|
|
|
|
|
|
The
remaining liability of $86 million is expected to be funded from existing cash
balances and internally generated cash flows from operations. The total cash
outlay for the remainder of 2005 is expected to be $4 million with the remaining
obligation of $82 million, primarily related to non-recurring charges and
long-term non-cancelable lease agreements, to be settled in 2006 and beyond.
The
company is in the process of completing certain aspects of the Plans of
Restructuring and will continue to evaluate the remaining restructuring reserves
as the plans are executed. As a result, there may be additional adjustments
to
the reserves noted above. Since the company-wide restructuring plans are an
aggregation of many individual components requiring judgments and estimates,
actual costs have differed from estimated amounts.
PAGE
13
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
J. Financial Instruments
The
company uses derivative financial instruments as part of its overall interest
rate and foreign currency risk management strategy.
The
financial services operations manage exposure to fluctuations in interest rates
by limiting the amount of fixed rate assets funded with variable rate debt.
This
is accomplished by selling fixed rate receivables on a fixed rate basis and
by
utilizing derivative financial instruments. These derivative financial
instruments may include interest rate swaps, interest rate caps and forward
contracts. The fair value of these instruments is estimated based on quoted
market prices and is subject to market risk as the instruments may become less
valuable due to changes in market conditions or interest rates. NFC manages
exposure to counter-party credit risk by entering into derivative financial
instruments with major financial institutions that can be expected to fully
perform under the terms of such agreements. NFC does not require collateral
or
other security to support derivative financial instruments with credit risk.
NFC’s
counter-party credit exposure is limited to the positive fair value of contracts
at the reporting date. As of July 31, 2005, NFC’s derivative financial
instruments had a positive net fair value. Notional amounts of derivative
financial instruments do not represent exposure to credit loss.
At
July
31, 2005, the notional amounts and fair values of the company’s derivative
financial
instruments
are
presented in the following table, in millions of dollars. The fair values of
all
these derivative financial instruments are recorded in other assets or other
liabilities on the Statement of Financial Condition.
Inception
Date
|
|
Maturity
Date
|
|
Derivative
Type
|
|
Notional
Amount
|
|
Fair
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
2003 -
April
2005
|
|
|
April
2008 -
September
2009
|
|
|
Interest
rate swaps*
|
|
$
|
16
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July
2001 -
June
2004
|
|
|
April
2006 -
June
2011
|
|
|
Interest
rate swaps
|
|
|
929
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October
2000 -
September
2001
|
|
|
October
2009 -
November
2012
|
|
|
Interest
rate caps
|
|
|
2,065
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*Accounted
for as non-hedging instruments.
PAGE
14
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
K. Guarantees
The
company and its subsidiaries occasionally provide guarantees that could obligate
them to make future payments if the primary entity fails to perform under its
contractual obligations. The company has not recorded a liability for these
guarantees. The company has no recourse as guarantor in case of
default.
International
provides a full and unconditional guarantee on the $400
million 9.375% Senior Notes
due
2006, the $250 million 7.5% Senior Notes due 2011, the $400 million 6.25% Senior
Notes due 2012 and the $190 million 2.5% Senior Convertible Notes due 2007.
NIC
also provides a guarantee on the $19 million 9.95% Senior Notes due 2011. As
of
July 31, 2005, the outstanding balance on the 9.95% Senior Notes and the 9.375%
Senior Notes was $13 million and $393 million, respectively.
NIC
and
International are obligated under certain agreements with public and private
lenders of NFC to maintain the subsidiary’s income before interest expense and
income taxes at not less than 125% of its total interest expense. No income
maintenance payments were required for the nine months ended July 31,
2005.
NIC
guarantees lines of credit made available to its Mexican finance subsidiaries
by
third parties and NFC. NFC guarantees the borrowings of the Mexican finance
subsidiaries. The following table summarizes the borrowings as of July 31,
2005,
in millions of dollars.
Entity
|
|
Amount
of Guaranty
|
|
Outstanding
Balance
|
|
Maturity
dates extend to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NIC
|
|
$
|
393
|
(1)
|
$
|
99
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
NFC
|
|
|
145
|
|
|
127
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
NIC
and NFC
|
|
|
100
|
|
|
10
|
|
|
2010
|
|
(1)
Included in this amount is $260 million of un-drawn guarantees. Pursuant
to an intercompany guarantee made by NIC in favor of NFC, NIC has agreed to
guarantee, either directly to third party banks or indirectly through NFC,
an
un-drawn amount of $260 million.
The
company also guarantees many of the operating leases of its operating
subsidiaries. The leases have various expiration dates that extend through
June
2014. The remaining maximum obligation under these leases as of July 31, 2005,
totaled approximately $495 million.
The
company and International also guarantee real estate operating leases of
International and of the subsidiaries of the company. The leases have various
maturity dates extending through 2019. As of July 31, 2005, the total remaining
obligation under these leases is approximately $43 million.
The
company and NFC have issued residual value guarantees in connection with various
operating leases. The amount of the guarantees is undeterminable because in
some
instances, neither the company nor NFC is responsible for the entire amount
of
the guaranteed lease residual. The company’s and NFC’s guarantees are contingent
upon the fair value of the leased assets at the end of the lease term. The
difference between this fair value and the guaranteed lease residual represents
the amount of the company’s and NFC’s exposure.
PAGE
15
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
K. Guarantees (continued)
As
of
July 31, 2005, NFC had guaranteed derivative contracts for interest rate swaps
and cross currency swaps related to two of the company’s Mexican finance
subsidiaries. NFC is liable up to the fair market value of these derivative
contracts only in cases of default by the two Mexican finance subsidiaries.
As
of July 31, 2005, there was an outstanding notional balance of $59 million
related to interest rate swaps and cross currency swaps, and the fair market
value of the outstanding balance was immaterial.
At
July
31, 2005, the company’s Canadian operating subsidiary was contingently liable
for $513 million of retail customers’ contracts and $26 million of retail leases
that are financed by a third party. The Canadian operating subsidiary is
responsible for the residual values of these financing arrangements. These
contract amounts approximate the resale market value of the collateral
underlying the note liabilities.
In
addition, the company entered into various guarantees for purchase commitments,
insurance loss reserves, credit guarantees and buyback programs with various
expiration dates that total approximately $87 million. In the ordinary course
of
business, the company also provides routine indemnifications and other
guarantees whose terms range in duration and often are not explicitly defined.
The company does not believe these will have a material impact on the results
of
operations or financial condition of the company.
Product
Warranty
Provisions
for estimated expenses related to product warranty are made at the time products
are sold. These estimates are established using historical information about
the
nature, frequency and average cost of warranty claims. Management actively
studies trends of warranty claims and takes action to improve vehicle quality
and minimize warranty claims. Management believes that the warranty reserve
is
appropriate; however, actual claims incurred could differ from the original
estimates, requiring adjustments to the reserve.
Changes
in the product warranty accrual for the nine months ended July 31, 2005, were
as
follows:
Millions
of dollars
|
|
|
|
|
|
|
|
Balance,
beginning of period
|
|
$
|
286
|
|
Change
in liability for warranties issued during the period
|
|
|
171
|
|
Change
in liability for pre-existing warranties
|
|
|
20
|
|
Payments
made
|
|
|
(199
|
)
|
|
|
|
|
Balance,
end of period
|
|
$
|
278
|
|
|
|
|
|
Note
L. Legal Proceedings and Environmental Matters
The
company and its subsidiaries are subject to various claims arising in the
ordinary course of business, and are parties to various legal proceedings that
constitute ordinary routine litigation incidental to the business of the company
and its subsidiaries. The majority of these claims and proceedings relate to
commercial, product liability and warranty matters. In the opinion of the
company’s management, the disposition of these proceedings and claims, including
those discussed below, after taking into account established reserves and the
availability and limits of the company’s insurance coverage, will not have a
material adverse effect on the business or the financial results of the
company.
The
company has been named a potentially responsible party (PRP), in conjunction
with other parties, in a number of cases arising under an environmental
protection law, the Comprehensive Environmental Response, Compensation and
Liability Act, popularly known as the Superfund law. These cases involve sites
that allegedly received wastes from current or former company locations. Based
on information available to the company which, in most cases, consists of data
related to quantities and characteristics of material generated at current
or
former
PAGE
16
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
L. Legal Proceedings and Environmental Matters (continued)
company
locations, material allegedly shipped by the company to these disposal sites,
as
well as cost estimates from PRPs and/or federal or state regulatory agencies
for
the cleanup of these sites, a reasonable estimate is calculated of the company's
share, if any, of the probable costs and is provided for in the financial
statements. These obligations are generally recognized no later than completion
of the remedial feasibility study and are not discounted to their present value.
The company reviews all accruals on a regular basis and believes that, based
on
these calculations, its share of the potential additional costs for the cleanup
of each site will not have a material effect on the company's financial
results.
Two
sites
formerly owned by the company, Wisconsin Steel in Chicago, Illinois and Solar
Turbines in San Diego, California, were identified as having soil and
groundwater contamination. While investigations and cleanup activities continue
at both sites, the company anticipates that all necessary costs to complete
the
cleanup have been adequately reserved.
In
December 2003, the United States Environmental Protection
Agency (US EPA) issued a Notice of Violation to the company in conjunction
with
the operation of its engine casting facility in Indianapolis, Indiana.
Specifically, the US EPA alleged that the company violated applicable
environmental regulations
by failing to obtain the necessary permit in connection with the construction
of
certain equipment and complying with the best available control technology
for
emissions from such equipment. The company is currently in discussions with
the
US EPA and believes that its discussions will result in capital improvements
together with monetary sanctions which will not be material.
Various
claims and controversies have arisen between the company and its former fuel
system supplier, Caterpillar Inc. (Caterpillar), regarding the ownership and
validity of certain patents covering fuel system technology used in the
company's new version of diesel engines that were introduced in February 2002.
In June 1999, in Federal Court in Peoria, Illinois, Caterpillar sued Sturman
Industries, Inc. (Sturman), the company’s joint venture partner in developing
fuel system technology, alleging that technology invented and patented by
Sturman and licensed to the company, belongs to Caterpillar. After a trial,
on
July 18, 2002, the jury returned a verdict in favor of Caterpillar finding
that
this technology belongs to Caterpillar under a prior contract between
Caterpillar and Sturman. Sturman appealed the adverse judgment, and the jury’s
verdict was reversed by the appellate court on October 28, 2004 and remanded
to
the district court for retrial. The company is cooperating with Sturman in
this
effort. In May 2003, in Federal Court in Columbia, South Carolina, Caterpillar
sued the company, its supplier of fuel injectors and joint venture, Siemens
Diesel Systems Technology, L.L.C., and Sturman for patent infringement alleging
that the Sturman fuel system technology patents and certain Caterpillar patents
are infringed in the company’s new engines. The company believes that it has
meritorious defenses to the claims of infringement of the Sturman patents as
well as the Caterpillar patents and will vigorously defend such claims. In
January 2002, Caterpillar sued the company in the Circuit Court in Peoria
County, Illinois, alleging the company breached the purchase agreement pursuant
to which Caterpillar supplied fuel systems for the company’s prior version of
diesel engines. Caterpillar’s claims involve a 1990 agreement to reimburse
Caterpillar for costs associated with the delayed launch of the company’s V-8
diesel engine program. Reimbursement of the delay costs was made by a surcharge
of $8.08 on each injector purchased and the purchase of certain minimum
quantities of spare parts. In 1999, the company concluded that, in accordance
with the 1990 agreement, it had fully reimbursed Caterpillar for its delay
costs
and stopped paying the surcharge and purchasing the minimum quantities of spare
parts. Caterpillar is asserting that the surcharge and the spare parts purchase
requirements continue throughout the life of the contract and has sued the
company to recover these amounts, plus interest. Caterpillar also asserts that
the company failed to purchase all of its fuel injector requirements under
the
contract and, in collusion with Sturman, failed to pursue a future fuel systems
supply relationship with Caterpillar. The company believes that it has
meritorious defenses to Caterpillar’s claims.
Along
with other vehicle manufacturers, the company and certain of its subsidiaries
have been subject to an increase in the number of asbestos-related claims in
recent years. Management believes that such claims will not have a material
adverse affect on the company’s financial results. In general these claims
relate to illnesses alleged to have resulted from asbestos exposure from
component parts found in older vehicles, although some cases relate to the
presence of asbestos in company facilities. In these claims the company is
not
the sole defendant, and the claims name as defendants numerous manufacturers
and
suppliers of a wide variety of products allegedly containing asbestos.
Management has strongly disputed these claims, and it has been
the
PAGE
17
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
L. Legal Proceedings and Environmental Matters (continued)
company’s
policy to defend against them vigorously. Historically, the actual damages
paid
out to claimants have not been material to the company’s results of operations
and financial condition. However, management believes the company and other
vehicle manufacturers are being more aggressively targeted, largely as a result
of bankruptcies of manufacturers of asbestos and products containing asbestos.
It is possible that the number of these claims will continue to grow, and that
the costs for resolving asbestos related claims could become significant in
the
future.
On
October 13, 2004, the company received a request from the staff of the
Securities and Exchange Commission (SEC) to voluntarily produce certain
documents and information related to the company’s accounting practices with
respect to defined benefit pension plans and other postretirement benefits.
The
company is fully cooperating with this request. Based on the status of the
inquiry, the company is not able to predict the final outcome.
On
January 31, 2005, the company announced that it would restate its financial
results for fiscal years 2002 and 2003 and the first three quarters of fiscal
2004. The SEC notified the company on February 9, 2005, that it was conducting
an informal inquiry into the company’s restatement. On March 17, 2005, the
company was advised by the SEC that the status of the inquiry had been changed
to a formal investigation. The company is fully cooperating with the SEC on
this
investigation. Based on the status of the investigation, the company is not
able
to predict the final outcome.
Note
M. Segment Data
Reportable
operating segment data is as follows:
Millions
of dollars
|
|
Truck
|
|
Engine
|
|
Financial
Services
|
|
Total
|
|
|
|
|
|
|
|
|
For
the quarter ended July 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$
|
2,211
|
|
$
|
712
|
|
$
|
65
|
|
$
|
2,988
|
|
Intersegment
revenues
|
|
|
-
|
|
|
181
|
|
|
16
|
|
|
197
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
2,211
|
|
$
|
893
|
|
$
|
81
|
|
$
|
3,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
$
|
113
|
|
$
|
13
|
|
$
|
26
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended July 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$
|
6,355
|
|
$
|
1,963
|
|
$
|
190
|
|
$
|
8,508
|
|
Intersegment
revenues
|
|
|
-
|
|
|
515
|
|
|
44
|
|
|
559
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
6,355
|
|
$
|
2,478
|
|
$
|
234
|
|
$
|
9,067
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
$
|
262
|
|
$
|
9
|
|
$
|
88
|
|
$
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of July 31, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
$
|
2,173
|
|
$
|
1,564
|
|
$
|
2,827
|
|
$
|
6,564
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the quarter ended July 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$
|
1,789
|
|
$
|
504
|
|
$
|
56
|
|
$
|
2,349
|
|
Intersegment
revenues
|
|
|
-
|
|
|
159
|
|
|
10
|
|
|
169
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
1,789
|
|
$
|
663
|
|
$
|
66
|
|
$
|
2,518
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
$
|
85
|
|
$
|
34
|
|
$
|
26
|
|
$
|
145
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For
the nine months ended July 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External
revenues
|
|
$
|
4,936
|
|
$
|
1,521
|
|
$
|
185
|
|
$
|
6,642
|
|
Intersegment
revenues
|
|
|
-
|
|
|
440
|
|
|
29
|
|
|
469
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenues
|
|
$
|
4,936
|
|
$
|
1,961
|
|
$
|
214
|
|
$
|
7,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
$
|
164
|
|
$
|
71
|
|
$
|
86
|
|
$
|
321
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of July 31, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
$
|
1,781
|
|
$
|
1,091
|
|
$
|
2,153
|
|
$
|
5,025
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
18
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
M. Segment Data (continued)
Reconciliation
to the consolidated financial statements as of and for the three and nine months
ended July 31 is as follows:
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
Millions
of dollars
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
sales and revenues
|
|
$
|
3,185
|
|
$
|
2,518
|
|
$
|
9,067
|
|
$
|
7,111
|
|
Other
income
|
|
|
6
|
|
|
-
|
|
|
14
|
|
|
5
|
|
Intercompany
|
|
|
(197
|
)
|
|
(169
|
)
|
|
(559
|
)
|
|
(469
|
)
|
|
|
|
|
|
|
|
|
|
|
Consolidated
sales and revenues
|
|
$
|
2,994
|
|
$
|
2,349
|
|
$
|
8,522
|
|
$
|
6,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
profit
|
|
$
|
152
|
|
$
|
145
|
|
$
|
359
|
|
$
|
321
|
|
Restructuring
adjustment
|
|
|
-
|
|
|
5
|
|
|
-
|
|
|
1
|
|
Corporate
items
|
|
|
(38
|
)
|
|
(51
|
)
|
|
(109
|
)
|
|
(146
|
)
|
Manufacturing
net interest expense
|
|
|
(17
|
)
|
|
(17
|
)
|
|
(45
|
)
|
|
(42
|
)
|
|
|
|
|
|
|
|
|
|
|
Consolidated
pre-tax income
|
|
$
|
97
|
|
$
|
82
|
|
$
|
205
|
|
$
|
134
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
assets
|
|
$
|
6,564
|
|
$
|
5,025
|
|
|
|
|
|
|
|
Cash
and marketable securities
|
|
|
634
|
|
|
281
|
|
Deferred
taxes
|
|
|
1,435
|
|
|
1,442
|
|
|
|
|
|
|
|
Corporate
intangible pension assets
|
|
|
1
|
|
|
3
|
|
Other
corporate and eliminations
|
|
|
133
|
|
|
168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated
assets
|
|
$
|
8,767
|
|
$
|
6,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note
N. Comprehensive Income
The
components of comprehensive income are as follows:
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
Millions
of dollars
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
64
|
|
$
|
50
|
|
$
|
135
|
|
$
|
88
|
|
Other
comprehensive income (loss)
|
|
|
13
|
|
|
(8
|
)
|
|
33
|
|
|
(4
|
)
|
|
|
|
|
|
|
|
|
|
|
Total
comprehensive income
|
|
$
|
77
|
|
$
|
42
|
|
$
|
168
|
|
$
|
84
|
|
|
|
|
|
|
|
|
|
|
|
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
O. Earnings Per Share
Earnings
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
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
64
|
|
$
|
50
|
|
$
|
135
|
|
$
|
88
|
|
Add:
Interest expense on 2.5% senior convertible and 4.75% subordinated
exchangeable debt for dilutive purposes (net of tax)
|
|
|
2
|
|
|
3
|
|
|
7
|
|
|
7
|
|
|
|
|
|
|
|
|
|
|
|
Net
income available to common shareholders plus assumed
conversions
|
|
$
|
66
|
|
$
|
53
|
|
$
|
142
|
|
$
|
95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
70.1
|
|
|
69.9
|
|
|
70.1
|
|
|
69.6
|
|
Convertible
debt
|
|
|
9.5
|
|
|
9.5
|
|
|
9.5
|
|
|
9.5
|
|
Stock
options
|
|
|
0.3
|
|
|
0.6
|
|
|
0.5
|
|
|
1.1
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
79.9
|
|
|
80.0
|
|
|
80.1
|
|
|
80.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
$
|
0.72
|
|
$
|
1.93
|
|
$
|
1.27
|
|
Diluted
|
|
$
|
0.83
|
|
$
|
0.66
|
|
$
|
1.78
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Slight
changes within the diluted shares outstanding are the result of an increase
or
decrease in the amount of exercisable employee stock options which are affected
by fluctuations in the company’s stock price.
Note
P. Condensed Consolidating Guarantor and Non-Guarantor Financial
Information
The
following tables set forth the condensed consolidating Statements of Financial
Condition as of July 31, 2005 and 2004, and the Statements of Income and Cash
Flow for the nine months ended July 31, 2005 and 2004. The following information
is included as a result of International’s guarantees, exclusive of its
subsidiaries, of NIC’s indebtedness under its 9.375% Senior Notes due 2006, 2.5%
Senior Convertible Notes due 2007, 7.5% Senior Notes due 2011 and 6.25% Senior
Notes due 2012. International is a direct wholly owned subsidiary of NIC. 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.
NIC
files
a consolidated U.S. federal income tax return that includes International and
its U.S. subsidiaries. International has a tax allocation agreement (Tax
Agreement) with NIC which requires International to compute its separate federal
income tax expense based on its adjusted book income. Any resulting tax
liability is paid to NIC. In addition, under the Tax Agreement, International
is
required to pay to NIC 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.
PAGE
20
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
P. Condensed Consolidating Guarantor and Non-Guarantor Financial Information
(continued)
Millions
of dollars
|
|
NIC
|
|
International
|
|
Non-Guarantor
Companies and Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED JULY
31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and revenues
|
|
$
|
8
|
|
$
|
6,402
|
|
$
|
2,112
|
|
$
|
8,522
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products and services sold
|
|
|
5
|
|
|
5,964
|
|
|
1,180
|
|
|
7,149
|
|
All
other operating expenses
|
|
|
(25
|
)
|
|
842
|
|
|
351
|
|
|
1,168
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
(20
|
)
|
|
6,806
|
|
|
1,531
|
|
|
8,317
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of non-consolidated subsidiaries
|
|
|
177
|
|
|
464
|
|
|
(641
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
205
|
|
|
60
|
|
|
(60
|
)
|
|
205
|
|
Income
tax expense (benefit)
|
|
|
70
|
|
|
61
|
|
|
(61
|
)
|
|
70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
135
|
|
$
|
(1
|
)
|
$
|
1
|
|
$
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JULY 31,
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and marketable securities
|
|
$
|
552
|
|
$
|
9
|
|
$
|
1,274
|
|
$
|
1,835
|
|
Receivables,
net
|
|
|
1
|
|
|
239
|
|
|
1,830
|
|
|
2,070
|
|
Inventories
|
|
|
-
|
|
|
486
|
|
|
578
|
|
|
1,064
|
|
Property
and equipment, net
|
|
|
-
|
|
|
719
|
|
|
814
|
|
|
1,533
|
|
Investment
in affiliates
|
|
|
(2,562
|
)
|
|
1,752
|
|
|
810
|
|
|
-
|
|
Deferred
tax asset and other assets
|
|
|
1,391
|
|
|
238
|
|
|
636
|
|
|
2,265
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
(618
|
)
|
$
|
3,443
|
|
$
|
5,942
|
|
$
|
8,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareowners’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
1,459
|
|
$
|
13
|
|
$
|
2,418
|
|
$
|
3,890
|
|
Postretirement
benefits liability
|
|
|
-
|
|
|
1,369
|
|
|
238
|
|
|
1,607
|
|
Amounts
due to (from) affiliates
|
|
|
(2,866
|
)
|
|
3,692
|
|
|
(826
|
)
|
|
-
|
|
Other
liabilities
|
|
|
101
|
|
|
1,453
|
|
|
1,028
|
|
|
2,582
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
(1,306
|
)
|
|
6,527
|
|
|
2,858
|
|
|
8,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareowners’
equity (deficit)
|
|
|
688
|
|
|
(3,084
|
)
|
|
3,084
|
|
|
688
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners’ equity
|
|
$
|
(618
|
)
|
$
|
3,443
|
|
$
|
5,942
|
|
$
|
8,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED JULY
31,
2005
|
|
Cash
provided by (used in) operating activities
|
|
$
|
(426
|
)
|
$
|
162
|
|
$
|
350
|
|
$
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investment programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases,
net of collections, of finance receivables
|
|
|
-
|
|
|
-
|
|
|
297
|
|
|
297
|
|
Net
decrease in marketable securities
|
|
|
(20
|
)
|
|
-
|
|
|
(968
|
)
|
|
(988
|
)
|
Capital
expenditures
|
|
|
-
|
|
|
(41
|
)
|
|
(66
|
)
|
|
(107
|
)
|
Other
investing activities
|
|
|
(7
|
)
|
|
(216
|
)
|
|
(68
|
)
|
|
(291
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
used in investment programs
|
|
|
(27
|
)
|
|
(257
|
)
|
|
(805
|
)
|
|
(1,089
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowing (repayments) of debt
|
|
|
401
|
|
|
(2
|
)
|
|
599
|
|
|
998
|
|
Other
financing activities
|
|
|
3
|
|
|
79
|
|
|
(89
|
)
|
|
(7
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by financing activities
|
|
|
404
|
|
|
77
|
|
|
510
|
|
|
991
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) during the period
|
|
|
(49
|
)
|
|
(18
|
)
|
|
55
|
|
|
(12
|
)
|
At
beginning of the period
|
|
|
406
|
|
|
22
|
|
|
177
|
|
|
605
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of the period
|
|
$
|
357
|
|
$
|
4
|
|
$
|
232
|
|
$
|
593
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
21
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
P. Condensed Consolidating Guarantor and Non-Guarantor Financial Information
(continued)
Millions
of dollars
|
|
NIC
|
|
International
|
|
Non-Guarantor
Companies and Eliminations
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENT OF INCOME FOR THE NINE MONTHS ENDED JULY
31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and revenues
|
|
$
|
1
|
|
$
|
5,132
|
|
$
|
1,514
|
|
$
|
6,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products and services sold
|
|
|
(31
|
)
|
|
4,709
|
|
|
904
|
|
|
5,582
|
|
Restructuring
and other non-recurring charges
|
|
|
-
|
|
|
(4
|
)
|
|
3
|
|
|
(1
|
)
|
All
other operating expenses
|
|
|
(12
|
)
|
|
701
|
|
|
243
|
|
|
932
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
(43
|
)
|
|
5,406
|
|
|
1,150
|
|
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in income (loss) of non-consolidated subsidiaries
|
|
|
90
|
|
|
258
|
|
|
(348
|
)
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
134
|
|
|
(16
|
)
|
|
16
|
|
|
134
|
|
Income
tax expense (benefit)
|
|
|
46
|
|
|
27
|
|
|
(27
|
)
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
88
|
|
$
|
(43
|
)
|
$
|
43
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JULY 31,
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and marketable securities
|
|
$
|
166
|
|
$
|
14
|
|
$
|
728
|
|
$
|
908
|
|
Receivables,
net
|
|
|
1
|
|
|
138
|
|
|
1,589
|
|
|
1,728
|
|
Inventories
|
|
|
-
|
|
|
421
|
|
|
435
|
|
|
856
|
|
Property
and equipment, net
|
|
|
-
|
|
|
761
|
|
|
644
|
|
|
1,405
|
|
Investment
in affiliates
|
|
|
(2,741
|
)
|
|
989
|
|
|
1,752
|
|
|
-
|
|
Deferred
tax asset and other assets
|
|
|
1,462
|
|
|
211
|
|
|
349
|
|
|
2,022
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
(1,112
|
)
|
$
|
2,534
|
|
$
|
5,497
|
|
$
|
6,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
and shareowners’ equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
|
|
$
|
1,058
|
|
$
|
15
|
|
$
|
1,719
|
|
$
|
2,792
|
|
Postretirement
benefits liability
|
|
|
-
|
|
|
1,348
|
|
|
208
|
|
|
1,556
|
|
Amounts
due to (from) affiliates
|
|
|
(2,633
|
)
|
|
3,063
|
|
|
(430
|
)
|
|
-
|
|
Other
liabilities
|
|
|
96
|
|
|
1,326
|
|
|
782
|
|
|
2,204
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
(1,479
|
)
|
|
5,752
|
|
|
2,279
|
|
|
6,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareowners’
equity (deficit)
|
|
|
367
|
|
|
(3,218
|
)
|
|
3,218
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners’ equity
|
|
$
|
(1,112
|
)
|
$
|
2,534
|
|
$
|
5,497
|
|
$
|
6,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONDENSED
CONSOLIDATING STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED JULY
31,
2004
|
|
Cash
provided by (used in) operating activities
|
|
$
|
(275
|
)
|
$
|
(19
|
)
|
$
|
58
|
|
$
|
(236
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investment programs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases,
net of collections, of finance receivables
|
|
|
-
|
|
|
-
|
|
|
168
|
|
|
168
|
|
Net
increase in marketable securities
|
|
|
22
|
|
|
-
|
|
|
144
|
|
|
166
|
|
Capital
expenditures
|
|
|
-
|
|
|
(72
|
)
|
|
(31
|
)
|
|
(103
|
)
|
Other
investing activities
|
|
|
-
|
|
|
55
|
|
|
(68
|
)
|
|
(13
|
)
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) investment programs
|
|
|
22
|
|
|
(17
|
)
|
|
213
|
|
|
218
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from financing activities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
borrowing (repayment) of debt
|
|
|
218
|
|
|
(2
|
)
|
|
(211
|
)
|
|
5
|
|
Other
financing activities
|
|
|
(17
|
)
|
|
31
|
|
|
10
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by (used in) financing activities
|
|
|
201
|
|
|
29
|
|
|
(201
|
)
|
|
29
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
(decrease) during the period
|
|
|
(52
|
)
|
|
(7
|
)
|
|
70
|
|
|
11
|
|
At
beginning of the period
|
|
|
218
|
|
|
21
|
|
|
228
|
|
|
467
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of the period
|
|
$
|
166
|
|
$
|
14
|
|
$
|
298
|
|
$
|
478
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
22
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
Q: Restatement of Prior Period Financial Statements
In
December 2004, NFC determined that it would restate its consolidated financial
statements for the first three quarters of fiscal 2004 and the fiscal years
ended October 31, 2003 and 2002 due to certain misapplications of GAAP. The
primary area where it was determined that GAAP was incorrectly applied was
in
the accounting for retail note securitizations. As a result of NFC’s
restatement, the company concluded that it was necessary to restate its
financial statements for the same periods. In the course of preparing the
restatement of its consolidated financial statements, the company determined
that it was appropriate to make other adjustments as well. These adjustments
were primarily related to trade payables at the company’s Mexican truck assembly
facility, accruals relating to employee plans and the consolidation of majority
owned truck dealerships. In the restatement of the first three quarters of
fiscal 2004 and the fiscal years ended October 31, 2003 and 2002 adjustments
were recorded to properly reflect stock option exercises satisfied using
treasury stock at average cost, as opposed to fair market value. This adjustment
resulted in a reclassification between common stock held in treasury and
retained earnings (deficit) on the Statement of Financial Condition but had
no
effect on total shareowners’ equity.
The
significant effects of the restatements on the consolidated financial statements
for the three months and nine months ended July 31, 2004, primarily due to
the
consolidation of majority owned truck dealerships and the accounting for retail
note securitizations at NFC, are included below. The amounts shown below have
minor differences to the unaudited Selected Quarterly Financial Data disclosed
in Note 22 to the company’s Annual Report on Form 10-K. The changes represent
timing within the quarters and do not change year-end amounts.
|
|
Navistar
International Corporation
and
Consolidated Subsidiaries
|
|
|
|
|
|
STATEMENT
OF INCOME
|
|
Three
Months Ended
July
31, 2004
|
|
Nine
Months Ended
July
31, 2004
|
|
|
|
|
|
|
|
Millions
of dollars
|
|
As
Previously Reported
|
|
As
Restated
|
|
As
Previously Reported [1]
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of manufactured products
|
|
$
|
2,301
|
|
$
|
2,294
|
|
$
|
6,362
|
|
$
|
6,456
|
|
Finance
revenue
|
|
|
59
|
|
|
55
|
|
|
179
|
|
|
182
|
|
Other
income
|
|
|
-
|
|
|
-
|
|
|
9
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales and revenues
|
|
|
2,360
|
|
|
2,349
|
|
|
6,550
|
|
|
6,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
and expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products and services sold
|
|
|
1,984
|
|
|
1,953
|
|
|
5,563
|
|
|
5,582
|
|
Restructuring
and other non-recurring charges
|
|
|
(5
|
)
|
|
(5
|
)
|
|
(1
|
)
|
|
(1
|
)
|
Postretirement
benefits expense
|
|
|
46
|
|
|
43
|
|
|
165
|
|
|
162
|
|
Engineering
and research expense
|
|
|
66
|
|
|
66
|
|
|
181
|
|
|
181
|
|
Selling,
general and administrative expense
|
|
|
151
|
|
|
174
|
|
|
405
|
|
|
473
|
|
Interest
expense
|
|
|
29
|
|
|
31
|
|
|
90
|
|
|
96
|
|
Other
expense
|
|
|
4
|
|
|
5
|
|
|
20
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
2,275
|
|
|
2,267
|
|
|
6,423
|
|
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
85
|
|
|
82
|
|
|
127
|
|
|
134
|
|
Income
tax expense
|
|
|
29
|
|
|
32
|
|
|
39
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
56
|
|
$
|
50
|
|
$
|
88
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.80
|
|
$
|
0.72
|
|
$
|
1.27
|
|
$
|
1.27
|
|
Diluted
|
|
$
|
0.73
|
|
$
|
0.66
|
|
$
|
1.19
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
shares outstanding (millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
69.9
|
|
|
69.9
|
|
|
69.6
|
|
|
69.6
|
|
Diluted
|
|
|
80.0
|
|
|
80.0
|
|
|
80.2
|
|
|
80.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1]
In
addition to the adjustments noted above, pre-third quarter results were adjusted
to reflect the retroactive impact of adopting FSP 106-2, Accounting and
Disclosure Requirements Related to the Medicare and Prescription Drug Act of
2003, in the third quarter of fiscal 2004.
PAGE 23
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
Q: Restatement of Prior Period Financial Statements
(continued)
|
|
Navistar
International Corporation
and
Consolidated Subsidiaries
|
|
|
|
|
|
STATEMENT
OF FINANCIAL CONDITION
|
|
As
of
July
31, 2004
|
|
|
|
|
|
Millions
of dollars
|
|
As
Previously Reported
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
Current
assets
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
473
|
|
$
|
478
|
|
Marketable
securities
|
|
|
6
|
|
|
6
|
|
Receivables,
net
|
|
|
749
|
|
|
850
|
|
Inventories
|
|
|
787
|
|
|
856
|
|
Deferred
tax asset, net
|
|
|
152
|
|
|
152
|
|
Other
assets
|
|
|
186
|
|
|
183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,353
|
|
|
2,525
|
|
|
|
|
|
|
|
|
|
Marketable
securities
|
|
|
424
|
|
|
424
|
|
Finance
and other receivables, net
|
|
|
878
|
|
|
878
|
|
Property
and equipment, net
|
|
|
1,333
|
|
|
1,405
|
|
Investments
and other assets
|
|
|
348
|
|
|
327
|
|
Prepaid
and intangible pension assets
|
|
|
70
|
|
|
70
|
|
Deferred
tax asset, net
|
|
|
1,466
|
|
|
1,290
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
6,872
|
|
$
|
6,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREOWNERS' EQUITY
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current
liabilities
|
|
|
|
|
|
|
|
Notes
payable and current maturities of long-term debt
|
|
$
|
259
|
|
$
|
271
|
|
Accounts
payable, principally trade
|
|
|
1,134
|
|
|
1,161
|
|
Other
liabilities
|
|
|
856
|
|
|
844
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
2,249
|
|
|
2,276
|
|
|
|
|
|
|
|
|
|
Debt: Manufacturing
operations
|
|
|
1,071
|
|
|
1,268
|
|
Financial
services operations
|
|
|
1,253
|
|
|
1,253
|
|
Postretirement
benefits liability
|
|
|
1,391
|
|
|
1,391
|
|
Other
liabilities
|
|
|
517
|
|
|
364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,481
|
|
|
6,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareowners'
equity
|
|
|
|
|
|
|
|
Series
D convertible junior preference stock
|
|
|
4
|
|
|
4
|
|
Common
stock and additional paid in capital (75.3 million shares
issued)
|
|
|
2,087
|
|
|
2,087
|
|
Retained
earnings (deficit)
|
|
|
(770
|
)
|
|
(762
|
)
|
Accumulated
other comprehensive loss
|
|
|
(784
|
)
|
|
(782
|
)
|
Common
stock held in treasury, at cost (5.5 million shares held)
|
|
|
(146
|
)
|
|
(180
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
shareowners' equity
|
|
|
391
|
|
|
367
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners' equity
|
|
$
|
6,872
|
|
$
|
6,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
24
Navistar
International Corporation and Consolidated Subsidiaries
Notes
to
Financial Statements (Unaudited)
Note
R. Subsequent Events
On
August
22, 2005, the company announced that its operating company, International Truck
and Engine Corporation, finalized its all-cash agreement to acquire Workhorse
Custom Chassis (Workhorse) and Uptime Parts. Workhorse is a leading U.S.
manufacturer of chassis for motor homes and commercial step-van vehicles.
Workhorse
operations, which produced more than 18,000 chassis in 2004, are carried out
at
a 209,000 square-foot state-of-the-art facility in Union City, IN.
Uptime
Parts,
headquartered in West Chicago, IL,
is a
U.S. parts distribution network that supplies commercial fleets and RV dealers.
The acquired companies had combined sales of $480 million in calendar year
2004.
The
acquisition supports the company's overall growth strategy by strategically
investing in businesses that are in growing markets.
The
operating synergies between Workhorse and International's products, along with
International's diesel competencies and engine portfolio, should allow the
combined companies to offer a more complete line of products to existing
customers.
On
August
1, 2005 and August 5, 2005 the company canceled the fixed-for-floating interest
rate swap agreements on the 7.50% $250 million fixed rate notes. The swaps
reduced the company’s interest expense by $7 million since their inception in
June 2004. The swaps had a negative fair value at the date of cancellation
of
less than $1 million.
Navistar
International Corporation and Consolidated Subsidiaries
Additional
Financial Information (Unaudited)
The
following additional financial information is provided based upon the continuing
interest of certain shareowners and creditors to assist them in understanding
our core manufacturing business. The financial information for fiscal 2004
has
been restated in connection with the events mentioned in Note Q to the Financial
Statements.
Navistar
International Corporation (with financial services operations on an equity
basis)
Condensed
Statement of Income
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
Millions
of dollars
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Restated
|
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of manufactured products
|
|
$
|
2,923
|
|
$
|
2,292
|
|
$
|
8,318
|
|
$
|
6,456
|
|
Other
income
|
|
|
6
|
|
|
-
|
|
|
14
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Total
sales and revenues
|
|
|
2,929
|
|
|
2,292
|
|
|
8,332
|
|
|
6,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products sold
|
|
|
2,465
|
|
|
1,942
|
|
|
7,120
|
|
|
5,545
|
|
Restructuring
and other non-recurring charges
|
|
|
-
|
|
|
(5
|
)
|
|
-
|
|
|
(1
|
)
|
Postretirement
benefits expense
|
|
|
58
|
|
|
42
|
|
|
175
|
|
|
160
|
|
Engineering
and research expense
|
|
|
91
|
|
|
66
|
|
|
254
|
|
|
181
|
|
Selling,
general and administrative expense
|
|
|
191
|
|
|
161
|
|
|
532
|
|
|
432
|
|
Other
expense
|
|
|
54
|
|
|
31
|
|
|
135
|
|
|
99
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
2,859
|
|
|
2,237
|
|
|
8,216
|
|
|
6,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
operations
|
|
|
70
|
|
|
55
|
|
|
116
|
|
|
45
|
|
Financial
services operations
|
|
|
27
|
|
|
27
|
|
|
89
|
|
|
89
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes
|
|
|
97
|
|
|
82
|
|
|
205
|
|
|
134
|
|
Income
tax expense
|
|
|
33
|
|
|
32
|
|
|
70
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
64
|
|
$
|
50
|
|
$
|
135
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
Condensed
Statement of Financial Condition
|
|
July
31
|
|
October
31
|
|
July
31
|
|
Millions
of dollars
|
|
2005
|
|
2004
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
Restated
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash,
cash equivalents and marketable securities
|
|
$
|
731
|
|
$
|
737
|
|
$
|
371
|
|
Inventories
|
|
|
1,053
|
|
|
779
|
|
|
824
|
|
Property
and equipment, net
|
|
|
1,414
|
|
|
1,283
|
|
|
1,233
|
|
Equity
in non-consolidated subsidiaries
|
|
|
604
|
|
|
549
|
|
|
512
|
|
Other
assets
|
|
|
1,346
|
|
|
1,129
|
|
|
926
|
|
Deferred
tax asset, net
|
|
|
1,433
|
|
|
1,445
|
|
|
1,442
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
6,581
|
|
$
|
5,922
|
|
$
|
5,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable, principally trade
|
|
$
|
1,411
|
|
$
|
1,436
|
|
$
|
1,175
|
|
Postretirement
benefits liability
|
|
|
1,584
|
|
|
1,544
|
|
|
1,534
|
|
Debt
|
|
|
1,803
|
|
|
1,329
|
|
|
1,299
|
|
Other
liabilities
|
|
|
1,095
|
|
|
1,082
|
|
|
933
|
|
Shareowners’
equity
|
|
|
688
|
|
|
531
|
|
|
367
|
|
|
|
|
|
|
|
|
|
Total
liabilities and shareowners’ equity
|
|
$
|
6,581
|
|
$
|
5,922
|
|
$
|
5,308
|
|
|
|
|
|
|
|
|
|
PAGE
26
Navistar
International Corporation and Consolidated Subsidiaries
Additional
Financial Information (Unaudited)
Navistar
International Corporation (with financial services operations on an equity
basis)
Condensed
Statement of Cash Flow
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
As
Restated
|
|
Cash
flow from operating activities
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
135
|
|
$
|
88
|
|
Adjustments
to reconcile net income to cash provided by (used in) operating
activities:
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
163
|
|
|
136
|
|
Deferred
income taxes
|
|
|
9
|
|
|
22
|
|
Postretirement
benefits funding less than (in excess of) expense
|
|
|
45
|
|
|
(173
|
)
|
Equity
in earnings of investees, net of dividends received
|
|
|
(54
|
)
|
|
(56
|
)
|
Other,
net
|
|
|
(36
|
)
|
|
(95
|
)
|
Change
in operating assets and liabilities, net of effect of
acquisitions
|
|
|
(353
|
)
|
|
(137
|
)
|
|
|
|
|
|
|
Cash
used in operating activities
|
|
|
(91
|
)
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flow from investment programs
|
|
|
|
|
|
|
|
Purchases
of marketable securities
|
|
|
(712
|
)
|
|
(225
|
)
|
Sales
or maturities of marketable securities
|
|
|
685
|
|
|
302
|
|
Capital
expenditures
|
|
|
(105
|
)
|
|
(102
|
)
|
Receivable
from financial services operations
|
|
|
65
|
|
|
(13
|
)
|
Investment
in affiliates
|
|
|
(228
|
)
|
|
(1
|
)
|
Other
investment programs
|
|
|
(84
|
)
|
|
(14
|
)
|
|
|
|
|
|
|
Cash
used in investment programs
|
|
|
(379
|
)
|
|
(53
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by financing activities
|
|
|
436
|
|
|
195
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
|
|
|
Decrease
during the period
|
|
|
(34
|
)
|
|
(73
|
)
|
At
beginning of the period
|
|
|
556
|
|
|
444
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of the period
|
|
$
|
522
|
|
$
|
371
|
|
|
|
|
|
|
|
Navistar
International Corporation and Consolidated Subsidiaries
Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Navistar
International Corporation is a holding company and its principal operating
subsidiary is International Truck and Engine Corporation (International).
Navistar operates in three principal industry segments: truck, engine
(collectively called “manufacturing operations”) and financial services. The
company’s principal operations are located in the U.S., Canada, Mexico, and
Brazil. In this discussion and analysis, “company”, “Navistar”, “we” or “our”
refers to Navistar International Corporation and its consolidated
subsidiaries.
The
company is currently focused on four key areas: great products, delivering
on
our commitments, cost and growth. The company will focus on offering new
products based on current product platforms while delivering on commitments
to
our customers as well as our shareowners. The company anticipates growth in
the
truck and engine segments through new products and new markets while continuing
to focus on ways to improve the cost structure to help the company succeed
in a
competitive marketplace.
In
the
third quarter of 2005, the company remained focused on these key objectives.
The
company continued to deliver on its commitments by reporting a solid quarterly
profit on sales and revenues of approximately $3 billion. Gross margin improved
over the prior year, however, higher material costs continue to have a negative
impact on margins. The company announced during the quarter that it entered
into
a joint venture with Mahindra & Mahindra of India to produce and market
light, medium and heavy commercial vehicles in India and other export markets.
This agreement is another step in the company’s growth strategy. Furthering the
company’s growth strategy was the company’s announcement that its operating
company, International Truck and Engine Corporation, had entered into an
agreement to acquire Workhorse Custom Chassis, a U.S. manufacturer of chassis
for motor homes and commercial step-van vehicles and Uptime Parts, a U.S. parts
distribution network that supplies commercial fleets and RV dealers. The
acquisition would support the company's overall growth strategy by strategically
investing in businesses that are in growing markets. The acquisition was not
finalized as of the end of the third quarter and had no impact on the financial
results presented within this discussion.
Restatement
of Prior Period Financial Statements
The
accompanying management’s discussion and analysis gives effect to the
restatement of the consolidated financial statements for the three and nine
months ended July 31, 2004, as discussed in Note Q to the consolidated financial
statements.
Results
of Operations
The
following table illustrates the key financial indicators that management uses
to
assess the consolidated financial results for the three months and nine months
ended July 31, 2005 and 2004.
Key
Financial Indicators:
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions
of dollars, except per share data and margin)
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
and revenues
|
|
$
|
2,994
|
|
$
|
2,349
|
|
$
|
8,522
|
|
$
|
6,647
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of products and services sold
|
|
|
2,474
|
|
|
1,953
|
|
|
7,149
|
|
|
5,582
|
|
Total
expenses
|
|
|
423
|
|
|
314
|
|
|
1,168
|
|
|
931
|
|
|
|
|
|
|
|
|
|
|
|
Total
costs and expenses
|
|
|
2,897
|
|
|
2,267
|
|
|
8,317
|
|
|
6,513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
64
|
|
$
|
50
|
|
$
|
135
|
|
$
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
earnings per share
|
|
$
|
0.83
|
|
$
|
0.66
|
|
$
|
1.78
|
|
$
|
1.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
gross margin
|
|
|
15.7
|
%
|
|
15.3
|
%
|
|
14.4
|
%
|
|
14.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PAGE
28
Navistar
International Corporation and Consolidated Subsidiaries
Results
of Operations (continued)
The
company continued to improve earnings and sales and revenues over the comparable
periods last year as a result of better operating results from the company’s
truck segment. These improved results were primarily due to higher sales volume
and improved pricing. The events that impacted the performance of the company’s
three operating segments will be analyzed, in detail, later in this
discussion.
Gross
margin from manufacturing operations in the third quarter of 2005 was 15.7%,
a
slight improvement over the third quarter a year ago. Gross margin for the
nine
months ended also showed a slight improvement over the prior year. Improvements
in pricing, performance and volumes were offset in part by higher material
prices, incremental expenses associated with component supply issues and
one-time charges associated with one of the company’s foundry operations within
the engine segment.
Over
the
comparable three-month period last year, total expenses increased $109 million
as a result of higher expenses across all categories. Engineering expense
increased $25 million due to costs associated with 2007 emissions compliance
within the company’s engine segment and costs associated with other development
programs including the new LH truck program. Selling, general and administrative
expense increased $36 million driven by the addition of wholly owned dealers
and
incremental spending within the truck and engine segments. Postretirement
expense stayed consistent with prior 2005 fiscal quarters but was $16 million
higher than last year. In addition to several smaller factors, the company
realized less postretirement expense associated with the amortization of
cumulative losses in the third quarter of 2004 when compared to the third
quarter of 2005. Interest expense increased $20 million as a result of the
company’s increased debt.
The
following sections analyze the company’s third quarter operating results as they
relate to its three principal segments: truck, engine, and financial
services.
Truck
The
truck
segment manufactures and distributes a full line of Class 6 through 8
diesel-powered trucks and school buses in the common carrier, private carrier,
government/service, leasing, construction, energy/petroleum and student
transportation markets. The company recently entered the Class 5 truck market
with the introduction of its Low Cab Forward (LCF) product in 2005. The truck
segment also provides customers with proprietary products needed to support
the
Internationalâ
truck
and the IC™bus
lines, together with a wide selection of other standard truck and trailer
aftermarket parts. Sales of Class 6 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
as
well as the earnings and cash flow of dealers and customers. In addition, the
Class 6 through 8 truck markets in the U.S. and Canada are highly competitive.
The intensity of this competition results in price discounting and margin
pressures throughout the industry. Even though sales volume has improved, the
company is still experiencing competitive pricing pressure on its new truck
sales, especially in the medium truck market. In addition to the influence
of
price, market position is driven by product quality, engineering, styling,
utility and distribution.
PAGE
29
Navistar
International Corporation and Consolidated Subsidiaries
Results
of Operations (continued)
Truck
(continued)
The
following table highlights the truck segment’s financial and industry results
for the three months and nine months ended July 31, 2005 and 2004.
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Results
(Millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
2,211
|
|
$
|
1,789
|
|
$
|
6,355
|
|
$
|
4,936
|
|
Segment
profit
|
|
|
113
|
|
|
85
|
|
|
262
|
|
|
164
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industry
data (in units) [1]:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
and Canadian sales (Class 6 through 8)
|
|
|
107,200
|
|
|
90,300
|
|
|
308,300
|
|
|
248,100
|
|
Class
8 heavy truck
|
|
|
75,200
|
|
|
58,700
|
|
|
206,800
|
|
|
154,400
|
|
Class
6 and 7 medium truck [2]
|
|
|
25,300
|
|
|
25,100
|
|
|
82,000
|
|
|
73,700
|
|
School
buses
|
|
|
6,700
|
|
|
6,500
|
|
|
19,500
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company
data (in units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
and Canadian sales (Class 6 through 8)
|
|
|
28,100
|
|
|
24,900
|
|
|
84,300
|
|
|
69,200
|
|
Class
8 heavy truck
|
|
|
14,400
|
|
|
11,600
|
|
|
39,800
|
|
|
28,100
|
|
Class
6 and 7 medium truck [2]
|
|
|
9,500
|
|
|
9,400
|
|
|
32,300
|
|
|
29,300
|
|
School
buses
|
|
|
4,200
|
|
|
3,900
|
|
|
12,200
|
|
|
11,800
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Order
backlog (in units)
|
|
|
|
|
|
|
|
|
26,100
|
|
|
27,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall
U.S. and Canada market share
(Class
6 through 8 and school buses)
|
|
|
26.2
|
%
|
|
27.6
|
%
|
|
27.3
|
%
|
|
27.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
[1]
Industry data derived from materials produced by Ward’s
Communications.
[2]
The
company does not meaningfully participate in the Class 5 medium truck
market.
The
truck
segment’s improved financial performance in 2005 is the result of increased
sales volume within medium and heavy truck, improved pricing and continued
cost
reductions within its manufacturing processes. While truck segment operating
results improved, higher material costs and engineering expenses for the new
LH
heavy truck program negatively impacted profit margins. The company’s overall
market share in the third quarter and for the nine months ended decreased
slightly over the comparable period last year. Market share was adversely
impacted by the industry growth within the Class 8 heavy truck market, a market
in which the company has its smallest market share. The
company’s year-to-date share growth within the Class 8 heavy truck market is
reflective of the company’s recommitment to the market and our dealer
distribution strategy.
Year-to
date market share within medium truck was slightly ahead of the prior year
and
school bus market share was up over three percentage points. The medium truck
market continues to experience pricing competition. The company’s U.S. and
Canadian order backlog is consistent with prior fiscal quarters but is down
slightly from the comparable period last year. A softening in medium truck
orders could not be offset by increased orders for heavy trucks and school
buses.
The
company forecast currently projects fiscal 2005 U.S. and Canadian Class 8 heavy
truck demand to be 273,000 units, up 24% from fiscal 2004. Class 6 and 7 medium
truck demand, excluding school buses, is forecast to be 109,000 units, up 9%
from 2004. Demand for school buses is expected to be 26,000 units, which is
essentially unchanged from 2004.
PAGE
30
Navistar
International Corporation and Consolidated Subsidiaries
Results
of Operations (continued)
Engine
The
engine segment designs and manufactures diesel engines in the 50-325 horsepower
range for use primarily in the company’s Class 6 and 7 medium trucks, school
buses and selected Class 8 heavy truck models. The company’s diesel engines are
also produced for original equipment manufacturers (OEMs), principally Ford
Motor Company (Ford). This segment also sells engines for industrial and
agricultural applications. In addition, the engine segment provides customers
with proprietary products needed to support the Internationalâ
engine
lines, together with a wide selection of other standard engine and aftermarket
parts.
The
following table highlights the engine segment’s financial results and sales data
for the three months and nine months ended July 31, 2005 and 2004.
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Results
(Millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
893
|
|
$
|
663
|
|
$
|
2,478
|
|
$
|
1,961
|
|
Segment
profit
|
|
|
13
|
|
|
34
|
|
|
9
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
data (in units):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
engine sales
|
|
|
133,400
|
|
|
101,700
|
|
|
366,900
|
|
|
302,300
|
|
OEM
sales
|
|
|
111,800
|
|
|
83,000
|
|
|
306,100
|
|
|
248,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
engine segment’s sales for the three months ended July 31, 2005 improved 35%
over the comparable period in 2004, primarily due to higher sales volumes,
however net income was lower. The increase in engine sales, period over period,
resulted from higher V-8 shipments and engine sales by MWM. The engine segment’s
lower profit for the three and nine months ended July 31, 2005, is primarily
the
result of increased engineering costs related to 2007 emissions compliance
and
one-time costs at one of its foundry operations, partially offset by MWM’s
operating profit.
In
the
current quarter, the company recorded $14 million in charges related to a
foundry operation, including $11 million to correct the location’s inventory
balances based upon physical counts conducted during the third quarter. This
inventory adjustment was charged to the current period because the company
was
not able to determine the prior period to which the adjustment may have related.
For the nine month period, the inventory charge described above combined with
the correction of certain other accounting errors ($7 million) and other
adjustments related to changes in estimates ($15 million) for this location
totaled approximately $33 million. The errors primarily involved capitalized
costs that should have been expensed in the prior periods in which they
occurred. Extensive reviews, coupled with certain personnel changes and the
reinforcement of policies and procedures, have been completed to ensure that
the
location’s financial records have been brought into alignment with company
policies and Generally Accepted Accounting Principals (GAAP).
The
company’s V-8 shipments to Ford accounted for 76% of all year-to-date OEM engine
sales as compared to 86% in the comparable period. The apparent decrease in
the
Ford V-8 shipment percentage is the result of increased sales to other OEMs.
Shipments of V-8 engines to Ford are up 9% year-to-date when compared to 2004.
Increased sales to other OEMs are attributable to OEM engine sales by
MWM.
The
company continues to forecast that OEM shipments of mid-range diesel engines
in
fiscal 2005 are expected to be 430,800 units, 20% higher than fiscal 2004.
Financial
Services
The
financial services segment provides wholesale, retail and lease financing for
sales of new and used trucks sold by the company and its dealers in the U.S.
and
Mexico. The financial services segment also finances the company’s wholesale
accounts and selected retail accounts receivable. Sales of new products
(including trailers) of other manufacturers are also financed regardless of
whether they are designed or customarily sold for use with the company's truck
products.
PAGE
31
Navistar
International Corporation and Consolidated Subsidiaries
Results
of Operations (continued)
Financial
Services (continued)
The
following table highlights the financial services segment’s financial results
for the three months and nine months ended July 31, 2005 and 2004.
|
|
Three
Months Ended
July
31
|
|
Nine
Months Ended
July
31
|
|
|
|
|
|
|
|
|
|
2005
|
|
2004
|
|
2005
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
Results
(Millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
81
|
|
$
|
66
|
|
$
|
234
|
|
$
|
214
|
|
Segment
profit
|
|
|
26
|
|
|
26
|
|
|
88
|
|
|
86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of retail receivables
|
|
$
|
385
|
|
$
|
325
|
|
$
|
1,559
|
|
$
|
1,120
|
|
Gain
on sales of retail receivables
|
|
|
3
|
|
|
3
|
|
|
14
|
|
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
increase in segment profit for the nine months ended July 31, 2005 is mainly
due
to higher wholesale note revenue arising from higher dealer inventory balances,
the servicing income related to the higher total serviced portfolio balance
and
higher generation of retail account activity. Partially offsetting these
favorable items are reductions in interest rate spreads on owned receivables,
lower operating lease balances and lower gains on sales of finance receivables.
Sales volumes on receivables reflect a timing difference between
quarters.
Restructuring
and Other Non-recurring Charges
Restructuring
In
2000
and 2002, the company’s board of directors approved two separate plans to
restructure its manufacturing and corporate operations (Plans of Restructuring).
The company incurred charges for severance and other benefits, curtailment
losses, lease terminations, asset and inventory write-downs and other exit
costs
relating to the major restructuring, integration and cost reduction initiatives
originally included in the Plans of Restructuring. A detailed discussion of
the
charges and initiatives can be found in Note I to the financial
statements.
Other
Non-Recurring Charges
The
company entered into an agreement with Ford to develop and manufacture a V-6
diesel engine to be used in specific Ford vehicles. In October 2002, Ford
advised the company that its current business case for a V-6 diesel engine
in
the specified vehicles was not viable and discontinued its program for the
use
of these engines. Accordingly, in 2002, the company recorded charges for the
write-off of deferred pre-production costs, the write-down of fixed assets
that
were abandoned, lease obligations under non-cancelable operating leases, and
accruals for amounts contractually owed to suppliers. In April 2003, the company
reached a comprehensive agreement with Ford concerning termination of its V-6
diesel engine program. The terms of the agreement include compensation to
neutralize certain current and future V-6 diesel engine program related costs
not accrued for as part of the 2002 non-recurring charge, resolution of ongoing
pricing related to the company’s V-8 diesel engine program and a release by the
parties of all of their obligations under the V-6 diesel engine contract. The
company, under current agreements, will continue as Ford’s exclusive supplier of
V-8 diesel engines through 2012.
PAGE
32
Navistar
International Corporation and Consolidated Subsidiaries
Restructuring
and Other Non-recurring Charges (continued)
Status
Through
July 31, 2005, the company has recorded cumulative charges of $818 million
relating to the Plans of Restructuring and non-recurring charges. The
initiatives for the Plans of Restructuring are expected to generate at least
$70
million of annualized savings for the company, primarily from lower salary
and
benefit costs and plant operating costs. The company will continue to realize
these benefits in 2005 and beyond.
The
remaining components of the company’s Plans of Restructuring and other
non-recurring charges are shown in the following table.
Millions
of dollars
|
|
Balance
October 31
2004
|
|
Amount
Incurred
|
|
Balance
July
31
2005
|
|
|
|
|
|
|
|
|
|
Lease
terminations
|
|
$
|
21
|
|
$
|
(4
|
)
|
$
|
17
|
|
Dealer
terminations and other charges
|
|
|
12
|
|
|
-
|
|
|
12
|
|
Other
non-recurring charges
|
|
|
64
|
|
|
(7
|
)
|
|
57
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
97
|
|
$
|
(11
|
)
|
$
|
86
|
|
|
|
|
|
|
|
|
|
The
remaining liability of $86 million is expected to be funded from existing cash
balances and internally generated cash flows from operations. The total cash
outlay for the remainder of 2005 is expected to be $4 million with the remaining
obligation of $82 million, primarily related to non-recurring charges and
long-term non-cancelable lease agreements, to be settled in 2006 and beyond.
The
company is in the process of completing certain aspects of the Plans of
Restructuring and will continue to evaluate the remaining restructuring reserves
as the plans are executed. As a result, there may be additional adjustments
to
the reserves noted above. Since the company-wide restructuring plans are an
aggregation of many individual components requiring judgments and estimates,
actual costs have differed from estimated amounts.
Liquidity
and Capital Resources
Cash
Requirements
The
company generates cash flow from the manufacture and sale of trucks, mid-range
diesel engines and service parts. In addition, cash flow is generated from
product financing provided to the company’s dealers and retail customers by the
financial services segment. It is the opinion of management that, in the absence
of significant unanticipated cash demands, current and forecasted cash flow
from
the company’s manufacturing operations, financial services operations and
financing capacity will provide sufficient funds to meet anticipated operating
requirements, capital expenditures, equity investments and strategic
acquisitions. Management of the company’s financial services operations 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. The manufacturing operations are generally able to incur
material amounts of additional debt due to their current levels of performance.
PAGE
33
Navistar
International Corporation and Consolidated Subsidiaries
Liquidity
and Capital Resources (continued)
Sources
and Uses of Cash
|
|
Nine
Months Ended
|
|
Millions
of dollars
|
|
July
31, 2005
|
|
|
|
|
|
|
|
|
|
Cash
flow from operating activities
|
|
$
|
86
|
|
Cash
flow from investment programs
|
|
|
(1,089
|
)
|
Cash
flow from financing activities
|
|
|
991
|
|
|
|
|
|
Total
cash flow
|
|
$
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning balance
|
|
$
|
605
|
|
Cash
and cash equivalents, ending balance
|
|
$
|
593
|
|
|
|
|
|
|
Outstanding
capital commitments
|
|
$
|
154
|
|
The
company had working capital of $182 million at July 31, 2005. The company had
experienced negative working capital through the first two quarters of fiscal
2005 due to various funding facilities of NFC and its affiliates maturing in
2005. In the third quarter, NFC and its affiliates refinanced certain facilities
which positively impacted working capital since they are now classified as
non-current. Slightly offsetting this was the classification of the company’s
9.375% Senior Notes due June 2006 as current. Working capital as of July 31,
2004 was $249 million. Cash provided by operating activities during the nine
months ended totaled $86 million, reflecting net income of $135 million, a
decrease in accounts receivables of $79 million and $168 million of depreciation
and amortization, a non-cash item. These amounts were offset by a $50 million
decrease in accounts payable due to a net decrease in wholesale notes and
account balances and a $246 million increase in inventory related to higher
truck and engine production volumes as well as constraints within the supply
base. Cash used in investment programs of $1,089 million includes a net decrease
in retail notes and lease receivables of $297 million related to the timing
of
the sale of finance receivables, offset by $988 million used for investments
in
marketable securities and $312 million used to invest in MWM (a Brazilian engine
manufacturer) and additional truck dealerships. Cash provided by financing
activities primarily resulted from a net increase in debt of $998
million.
In
March
2005, the company sold $400 million in Senior Notes due 2012 (original notes).
The original notes were sold in a Rule 144A and Regulation S private
unregistered offering and were priced to yield 6.25%. In June 2005, the company
offered to exchange these original notes for a like amount of the company’s new
6.25%, Series B, Senior Notes due 2012 (exchange notes). The exchange notes
were
registered under the Securities Act. The terms of the exchange notes issued
in
the exchange offer are substantially identical to the original notes, except
that the transfer restrictions and registration rights provisions relating
to
the original notes will not apply to the exchange notes. The exchange notes
are
guaranteed on a senior unsecured basis by the company’s principal operating
subsidiary, International Truck and Engine Corporation. The exchange notes
are
the company’s senior unsecured obligation and rank in right of payment behind
all of the company’s future secured debt and equally in right of payment to all
of the company’s existing and future senior unsecured debt. The company
exchanged in excess of 99.9% of the original notes for the exchange notes when
the exchange offer expired on July 27, 2005.
In
the
third quarter of fiscal 2005, NFC refinanced its $820 million revolving credit
facility which was going to become due in December 2005 with a new $1,200
million revolving credit facility that becomes due in December 2010. Likewise,
one of NFC’s related affiliates, Truck Retail Installment Paper Corporation
(TRIP), entered into a new revolving retail facility with a capacity of $500
million that will expire in June 2010, to replace the $500 million facility
that
will expire in August 2005.
In
July
2005, the company repurchased $18 million of its 4.75% Subordinated Exchangeable
Notes due 2009 and $7 million of its 9.375%
Senior Notes due 2006.
The
effect of these repurchases on operating income was negligible. The repurchase
of the 4.75% Subordinated Exchangeable Notes due 2009 reduced the number of
shares included in the calculation of diluted earnings per share, beginning
in
July, by approximately 323,000 shares.
There
have been no material changes in the company’s hedging strategies or derivative
positions since October 31, 2004. Further disclosure may be found in Note J
to
the Financial Statements.
PAGE
34
Navistar
International Corporation and Consolidated Subsidiaries
Liquidity
and Capital Resources (continued)
Financial
Services
The
financial services segment, mainly Navistar Financial Corporation (NFC), has
traditionally obtained the 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 and medium and long-term debt. As of July 31,
2005, NFC’s funding consisted of sold finance receivables of $4,294 million,
bank and other borrowings of $1,698 million and secured borrowings of $128
million. NFC securitizes and sells receivables through Navistar Financial Retail
Receivables Corporation (NFRRC), Navistar Financial Securities Corporation
(NFSC), Truck Retail Accounts Corporation (TRAC), Truck Engine Receivables
Financing Corporation (TERFCO) and Truck
Retail Installment Paper Corporation (TRIP),
all
special purpose corporations and wholly owned subsidiaries of NFC. The sales
of
finance receivables in each securitization constitute sales under accounting
principles generally accepted in the United States of America, with the result
that the sold receivables are removed from NFC’s balance sheet and the
investors’ interests in the related trust or conduit are not reflected as
liabilities.
Through
the asset-backed public market and private placement sales, NFC has been able
to
fund fixed rate retail notes and finance leases at rates which are more
economical than those available to NFC in the unsecured public bond market.
During the first nine months of 2005, NFC sold $1,559 million of retail notes
and finance leases, net of unearned finance income, for a pre-tax gain of $14
million. The receivables were sold through NFRRC to an owner trust which, in
turn, issued asset-backed securities that were sold to investors. At July 31,
2005, the remaining shelf registration available to NFRRC for the public
issuance of asset-backed securities was $2,504 million.
The
following are the funding facilities, in millions, that NFC and its related
affiliates have in place as of July 31, 2005.
Company
|
|
Instrument
type
|
|
Total
Amount
|
|
Purpose
of funding
|
|
Amount
utilized
|
|
Matures
or expires
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TERFCO
|
|
Trust
|
|
$
|
100
|
|
|
Unsecured
Ford trade receivables
|
|
$
|
50
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NFSC
|
|
Revolving
wholesale note trust
|
|
$
|
1,479
|
|
|
Eligible
wholesale notes
|
|
$
|
1,191
|
|
|
2005
through
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRAC
|
|
Revolving
retail account conduit
|
|
$
|
100
|
|
|
Eligible
retail accounts
|
|
$
|
95
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRIP
|
|
Revolving
retail facility
|
|
$
|
500
|
|
|
Retail
notes and leases
|
|
$
|
-
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TRIP
|
|
Revolving
retail facility
|
|
$
|
500
|
|
|
Retail
notes and leases
|
|
$
|
500
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NFC
|
|
Revolving
credit facilities
|
|
$
|
1,200
|
|
|
Retail
notes and leases
|
|
$
|
708
|
(1)
|
2010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
$10
million of this amount is utilized by NIC’s Mexican finance
subsidiaries. |
As
of
July
31,
2005,
the
aggregate amount available to fund finance receivables under the various
facilities was $1,334 million.
Pension
and Other Postretirement Benefits
Generally,
the company’s pension plans are non-contributory. The company’s policy is to
fund its pension plans in accordance with applicable U.S. and Canadian
government regulations and to make additional payments as funds are available
to
achieve full funding of the accumulated benefit obligation. Other benefits
obligations are primarily funded in accordance with the legal agreement, which
governs the Voluntary Employees Beneficiary Association (VEBA).
PAGE
35
Navistar
International Corporation and Consolidated Subsidiaries
Critical
Accounting Policies
The
company has identified critical accounting policies that, as a result of the
judgments, uncertainties, uniqueness and complexities of the underlying
accounting standards and operations involved, could result in material changes
to its financial condition or results of operations under different conditions
or using different assumptions. The company’s most critical accounting policies
are related to sales allowances, sales of receivables, product warranty, product
liability, pension and other postretirement benefits, allowance for losses
and
impairment of long-lived assets. Details regarding the company’s use of these
policies are described in the 2004 Annual Report on Form 10-K filed with the
Securities and Exchange Commission. There have been no material changes to
these
policies since October 31, 2004.
Off-Balance
Sheet Arrangements
The
company enters into various arrangements not reflected on its balance sheet
that
have or could have an effect on our financial condition, results of operations,
liquidity, capital expenditures or capital resources. The principal off-balance
sheet arrangements that the company enters into are guarantees, sales of
receivables and postretirement benefits. Details regarding the company’s use of
these arrangements are described in the 2004 Annual Report on Form 10-K filed
with the Securities and Exchange Commission. There have been no material changes
to these arrangements since October 31, 2004.
Contractual
Obligations
In
March
2005, the company sold $400 million in Senior Notes due 2012 (original notes).
The original notes were sold in a Rule 144A and Regulation S private
unregistered offering and were priced to yield 6.25%. In June 2005, the company
offered to exchange these original notes for a like amount of the company’s new
6.25%, Series B, Senior Notes due 2012 (exchange notes). The exchange notes
were
registered under the Securities Act. The terms of the exchange notes issued
in
the exchange offer are substantially identical to the original notes, except
that the transfer restrictions and registration rights provisions relating
to
the original notes will not apply to the exchange notes. The exchange notes
are
guaranteed on a senior unsecured basis by the company’s principal operating
subsidiary, International Truck and Engine Corporation. The exchange notes
are
the company’s senior unsecured obligation and rank in right of payment behind
all of the company’s future secured debt and equally in right of payment to all
of the company’s existing and future senior unsecured debt. The company
exchanged in excess of 99.9% of the original notes for the exchange notes when
the exchange offer expired on July 27, 2005.
In
the
third quarter of fiscal 2005, NFC refinanced its $820 million revolving credit
facility which was going to become due in December 2005 with a new $1,200
million revolving credit facility that becomes due in December 2010. Likewise,
one of NFC’s related affiliates, Truck Retail Installment Paper Corporation
(TRIP), entered into a new revolving retail facility with a capacity of $500
million that will expire in June 2010, to replace the $500 million facility
that
will expire in August 2005.
In
July
2005, the company repurchased $18 million of its 4.75% Subordinated Exchangeable
Notes due 2009 and $7 million of its 9.375% Senior Notes due 2006. The effect
of
these repurchases on operating income was negligible. The repurchase of the
4.75% Subordinated Exchangeable Notes due 2009 reduced the number of shares
included in the calculation of diluted earnings per share, beginning in July,
by
approximately 323,000 shares.
Income
Taxes
The
Statement of Financial Condition at July 31, 2005, includes a deferred tax
asset
of $1,435 million, net of valuation allowances of $74 million. The company
performs extensive analysis to determine the amount of the deferred tax asset.
Such analysis is based on the premise that the company is, and will continue
to
be, a going concern and that it is more likely than not that deferred tax
benefits will be realized through the generation of future taxable income.
PAGE
36
Navistar
International Corporation and Consolidated Subsidiaries
New
Accounting Pronouncements
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), “Share-Based
Payment.” This Statement generally requires the recognition of the cost of
employee services received in exchange for an award of equity instruments.
This
cost is based on the grant date fair value of the equity award and will be
recognized over the period during which the employee is required to provide
service in exchange for the award. The effective date for the company
is
the beginning of the first fiscal quarter of 2006. The company is still
evaluating its share-based payment programs and the related impact, if any,
this
Statement may have on its results of operations, financial condition or cash
flows.
In
November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” to clarify the
accounting for abnormal amounts of idle facility expense, freight, handling
costs and wasted material. The Statement clarifies that abnormal inventory
costs
should be recognized in the period in which they occur. This Statement is
effective for inventory costs incurred during fiscal years beginning after
June
15, 2005. The company will adopt this Statement in fiscal 2006 but has not
yet
determined the effect, if any, this Statement may have on its results of
operations, financial condition or cash flows.
In
December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,”
to amend Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary
Transactions” (APB No. 29). The Statement eliminates the exception from fair
value measurement for nonmonetary exchanges of similar products in APB No.
29
and replaces it with an exception for exchanges that do not have commercial
substance. This Statement shall be applied prospectively for nonmonetary asset
exchanges occurring in fiscal periods beginning after June 15, 2005. The company
does not expect this statement will have a material impact on its results of
operations, financial condition or cash flows.
In
December 2004, the FASB issued two FASB Staff Positions (FSPs) that provide
accounting guidance on how companies should account for the effects of the
American Jobs Creation Act of 2004 (the Act) that was signed into law on October
22, 2004. The Act could affect how companies report their deferred income tax
balances. The first FSP is FSP FAS 109-1 (FSP 109-1); the second is FSP FAS
109-2 (FSP 109-2). In FSP 109-1, the FASB concludes that the tax relief (special
tax deduction for domestic manufacturing) from the Act should be accounted
for
as a "special deduction" instead of a tax rate reduction. The company continues
to evaluate the impact, if any, this FSP may have on its results of operations,
financial condition or cash flows. FSP 109-2 gives a company additional time
to
evaluate the effects of the Act on any plan for reinvestment or repatriation
of
foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income
Taxes.” However, the company must provide certain disclosures if it chooses to
utilize the additional time granted by the FASB. The company has completed
its
evaluation and does not intend to repatriate foreign earnings.
In
March
2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for
Conditional Asset Retirement Obligations.” This Interpretation addresses diverse
accounting practices that developed with respect to the timing of liability
recognition for legal obligations associated with the retirement of a tangible
long-lived asset when the timing and (or) method of settlement of the obligation
are conditional on a future event. FIN No. 47 concludes that an entity is
required to recognize a liability for the fair value of a conditional asset
retirement obligation when incurred if the liability's fair value can be
reasonably estimated. This Interpretation is effective no later than the end
of
fiscal years ending after December 15, 2005. The company does not have any
such
asset retirement obligations at this time. The company expects that this
Interpretation will have no impact on the company’s results of operations,
financial condition or cash flows.
In
May
2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,”
to replace Accounting Principles Board Opinion No. 20, “Accounting Changes” and
SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This
Statement provides guidance on the accounting for and reporting of accounting
changes and error corrections. It also establishes the required methods by
which
entities should include accounting changes or error corrections in previously
issued financial statements. This Statement is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. Early adoption is permitted for accounting changes and corrections of
errors made in fiscal years beginning after the date this Statement was issued.
The company intends to adopt this Statement for fiscal 2006.
PAGE
37
Navistar
International Corporation and Consolidated Subsidiaries
Forward
Looking Statements
This
Form
10-Q contains forward-looking statements within the meaning of Section 27A
of
the Securities Act, Section 21E of the Exchange Act and the Private Securities
Litigation Reform Act of 1995 that are subject to risks and uncertainties.
You
should not place undue reliance on those statements because they are subject
to
numerous uncertainties and factors relating to our operations and business
environment, all of which are difficult to predict and many of which are beyond
our control, and such forward-looking statements only speak as of the date
of
this Form 10-Q. Forward-looking statements include information concerning our
possible or assumed future results of operations, including descriptions of
our
business strategy. These statements often include words such as "believe,"
"expect," "anticipate," "intend," "plan," "estimate" or similar expressions.
These statements are based on assumptions that we have made in light of our
experience in the industry as well as our perceptions of historical trends,
current conditions, expected future developments and other factors we believe
are appropriate under the circumstances. As you read and consider this Form
10-Q, you should understand that these statements are not guarantees of
performance or results. They involve risks, uncertainties and assumptions.
Although we believe that these forward-looking statements are based on
reasonable assumptions, you should be aware that many factors could affect
our
actual financial results or results of operations and could cause actual results
to differ materially from those in the forward-looking statements. For a further
description of these factors, see Exhibit 99.1 to Form 10-K for the year ended
October 31, 2004, filed with the SEC on February 15, 2005.
Navistar
International Corporation and Consolidated Subsidiaries
|
|
Item
3.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
|
|
|
The
company’s primary market risks include fluctuations in interest rates and
currency exchange rates as further described in Item 7A of the 2004
Annual
Report on Form 10-K.
Interest
rate risk is the risk that the company will incur economic losses
due to
adverse changes in interest rates. The company measures its interest
rate
risk by estimating the net amount by which the fair value of all
of its
interest rate sensitive assets and liabilities would be impacted
by
selected hypothetical changes in market interest rates. Fair value
is
estimated using a discounted cash flow analysis. Assuming a hypothetical
instantaneous 10% adverse change in interest rates as of July 31,
2005,
the net fair value of these instruments would decrease by approximately
$34 million. The company’s interest rate sensitivity analysis assumes a
parallel shift in interest rate yield curves. The model, therefore,
does
not reflect the potential impact of changes in the relationship between
short-term and long-term interest rates.
The
company is exposed to changes in the price of commodities used in
its
manufacturing operations. Due to the amount of steel used in its
production of truck cabs, buses and engines, the company is exposed
to
steel price fluctuations. During the first three quarters of fiscal
2005,
steel prices were higher than fiscal 2004, but steel prices have
recently
leveled off. The year-to-date impacet of steel price increases, net
of
recovery through pricing, has been approximately $85 million. The
company
expects the full year impact from steel to be at least $100
million.
Foreign
currency risk is the risk that the company will incur economic losses
due
to adverse changes in foreign currency exchange rates. The company’s
primary exposures to foreign currency exchange fluctuations are the
Canadian dollar/U.S. dollar, Mexican peso/U.S. dollar and Brazilian
real/U.S. dollar. The potential reduction in future earnings from
a
hypothetical instantaneous 10% adverse change in quoted foreign currency
spot rates applied to foreign currency sensitive instruments would
be
approximately $7 million at July 31, 2005.
|
|
|
|
|
Item
4.
|
Controls
and Procedures
|
|
|
|
Evaluation
of disclosure controls and procedures
The
company’s principal executive officer and principal financial officer,
along with other management of the company, evaluated the effectiveness
of
the company’s disclosure controls and procedures (as defined in rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as
amended (the Exchange Act)) as of July 31, 2005. Based on that evaluation,
the principal executive officer and principal financial officer of
the
company concluded that, as of July 31, 2005, there were weaknesses
in the
disclosure controls and procedures within the company’s finance
subsidiary, NFC, related to the lack of a sufficient quantity of
specialized accounting personnel. Because of the weakness noted within
the
finance subsidiary, the principal executive officer and principal
financial officer of the company concluded that the disclosure controls
and procedures in place at the company were not effective. Management
of
the company’s finance subsidiary is in the process of adding additional
specialized accounting personnel.
Changes
in internal controls over financial reporting
The
company has not made any significant changes to its internal control
over
financial reporting (as defined in rule 13a-15(f) and 15d-15(f) under
the
Exchange Act) during the fiscal quarter ended July 31, 2005 that
have
materially affected, or are reasonably likely to materially affect,
the
company’s internal control over financial reporting except for the changes
in controls at one of the company’s foundry operations at which control
issues were identified and corrected during the third quarter. Based
on a
thorough review of the accounting records at this facility that was
completed during the third quarter, the company determined that improved
controls were needed in the areas of inventory accounting and account
reconciliation and review. Improvements in controls were made by
replacing
certain personnel, aligning the location’s accounting practices with
corporate policies and GAAP and increasing the level of analysis
and
review over the location’s financial statements.
|
Navistar
International Corporation and Consolidated Subsidiaries
|
|
PART
II - OTHER INFORMATION
|
Item
1.
|
Legal
Proceedings
|
|
|
|
The
company and its subsidiaries are subject to various claims arising
in the
ordinary course of business, and are parties to various legal proceedings
that constitute ordinary routine litigation incidental to the business
of
the company and its subsidiaries. The majority of these claims and
proceedings relate to commercial, product liability and warranty
matters.
In the opinion of the company’s management, the disposition of these
proceedings and claims, including those discussed below, after taking
into
account established reserves and the availability and limits of the
company’s insurance coverage, will not have a material adverse affect on
the business or the financial condition of the company.
In
December 2003, the United States Environmental Protection
Agency (US EPA) issued a Notice of Violation to the company in conjunction
with the operation of its engine casting facility in Indianapolis,
Indiana. Specifically, the US EPA alleged that the company violated
applicable environmental regulations
by failing to obtain the necessary permit in connection with the
construction of certain equipment and complying with the best available
control technology for emissions from such equipment. The company
is
currently in discussions with the US EPA and believes that its discussions
will result in capital improvements together with monetary sanctions
which
will not be material.
Various
claims and controversies have arisen between the company and its
former
fuel system supplier, Caterpillar Inc. (Caterpillar), regarding the
ownership and validity of certain patents covering fuel system technology
used in the company's new version of diesel engines that were introduced
in February 2002. In June 1999, in Federal Court in Peoria, Illinois,
Caterpillar sued Sturman Industries, Inc. (Sturman), the company’s joint
venture partner in developing fuel system technology, alleging that
technology invented and patented by Sturman and licensed to the company,
belongs to Caterpillar. After a trial, on July 18, 2002, the jury
returned
a verdict in favor of Caterpillar finding that this technology belongs
to
Caterpillar under a prior contract between Caterpillar and Sturman.
Sturman appealed the adverse judgment, and the jury’s verdict was reversed
by the appellate court on October 28, 2004 and remanded to the district
court for retrial. The company is cooperating with Sturman in this
effort.
In May 2003, in Federal Court in Columbia, South Carolina, Caterpillar
sued the company, its supplier of fuel injectors and joint venture,
Siemens Diesel Systems Technology, L.L.C., and Sturman for patent
infringement alleging that the Sturman fuel system technology patents
and
certain Caterpillar patents are infringed in the company’s new engines.
The company believes that it has meritorious defenses to the claims
of
infringement of the Sturman patents as well as the Caterpillar patents
and
will vigorously defend such claims. In January 2002, Caterpillar
sued the
company in the Circuit Court in Peoria County, Illinois, alleging
the
company breached the purchase agreement pursuant to which Caterpillar
supplied fuel systems for the company’s prior version of diesel engines.
Caterpillar’s claims involve a 1990 agreement to reimburse Caterpillar for
costs associated with the delayed launch of the company’s V-8 diesel
engine program. Reimbursement of the delay costs was made by a surcharge
of $8.08 on each injector purchased and the purchase of certain minimum
quantities of spare parts. In 1999, the company concluded that, in
accordance with the 1990 agreement, it had fully reimbursed Caterpillar
for its delay costs and stopped paying the surcharge and purchasing
the
minimum quantities of spare parts. Caterpillar is asserting that
the
surcharge and the spare parts purchase requirements continue throughout
the life of the contract and has sued the company to recover these
amounts, plus interest. Caterpillar also asserts that the company
failed
to purchase all of its fuel injector requirements under the contract
and,
in collusion with Sturman, failed to pursue a future fuel systems
supply
relationship with Caterpillar. The company believes that it has
meritorious defenses to Caterpillar’s claims.
Along
with other vehicle manufacturers, the company and certain of its
subsidiaries have been subject to an increase in the number of
asbestos-related claims in recent years. Management believes that
such
claims will not have a material adverse affect on the company’s financial
condition or results of operations. In general these claims relate
to
illnesses alleged to have resulted from asbestos exposure from component
parts found in older vehicles, although some cases relate to the
presence
of asbestos in company facilities. In these claims the company is
not the
sole defendant, and the claims name as defendants numerous manufacturers
and suppliers of a wide variety of products allegedly containing
asbestos.
Management has strongly disputed these claims, and it has been the
company’s policy to defend against them vigorously. Historically, the
actual damages paid out to claimants have not been material to the
company’s results of operations and financial condition. However,
management believes
|
|
|
|
Navistar
International Corporation and Consolidated Subsidiaries
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
Item
1.
|
Legal
Proceedings (continued)
|
|
the
company and other vehicle manufacturers are being more aggressively
targeted, largely as a result of bankruptcies of manufacturers of
asbestos
and products containing asbestos. It is possible that the number
of these
claims will continue to grow, and that the costs for resolving asbestos
related claims could become significant in the future.
On
October 13, 2004, the company received a request from the staff of
the SEC
to voluntarily produce certain documents and information related
to the
company’s accounting practices with respect to defined benefit pension
plans and other postretirement benefits. The company is fully cooperating
with this request. Based on the status of the inquiry, the company
is not
able to predict the final outcome.
On
January 31, 2005, the company announced that it would restate its
financial results for fiscal years 2002 and 2003 and the first three
quarters of fiscal 2004. The SEC notified the company on February
9, 2005,
that it was conducting an informal inquiry into the company’s restatement.
On March 17, 2005, the company was advised by the SEC that the status
of
the inquiry had been changed to a formal investigation. The company
is
fully cooperating with the SEC on this investigation. Based on the
status
of the investigation, the company is not able to predict the final
outcome.
|
|
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
|
|
|
Directors
of the company who are not employees receive an annual retainer and
meeting fees payable at their election in shares of common stock
of the
company or in cash. Currently the board of directors mandates that
at
least one-fourth of the annual retainer be paid in the form of common
stock of the company. For the period covered by this report, receipt
of
approximately 1,272 shares were deferred as payment for the fiscal
year
2005 annual retainer and meeting fees. In each case, the shares were
acquired at prices ranging from $30.195 to $34.03 per share, which
represented the fair market value of such shares on the date of
acquisition. Exemption from registration of the shares is claimed
by the
company under Section 4(2) of the Securities Act of 1933, as
amended.
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
due 2006, $250 million Senior Notes due 2011, $400 million Senior
Notes
due 2012 and $19 million Senior Notes. 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.
|
Navistar
International Corporation and Consolidated Subsidiaries
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
6.
|
Exhibits
|
Page
|
|
|
|
|
|
|
|
(a) Exhibits:
|
|
|
|
|
|
3. Articles
of Incorporation and By-Laws
|
|
|
|
|
|
4. Instruments
Defining the Rights of Security Holders, Including
Indentures
|
|
|
|
|
|
10. Material
Contracts
|
|
|
|
|
|
11. Computation
of Earnings per Share (incorporated by reference from Note O to the
Financial Statements)
|
|
|
|
|
|
31.1 CEO
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
31.2
CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act
of
2002.
|
|
|
|
|
|
32.1 CEO
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
|
|
|
|
32.2 CFO
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
|
|
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)
Date:
September 9, 2005
|
|
|
|
/s/
Mark T. Schwetschenau
|
|
|
|
Mark
T. Schwetschenau
|
|
Senior
Vice President and Controller
|
|
(Principal
Accounting Officer)
|
|