| Item 1. Financial Statements: | |||
| Statements of Consolidated Income and Retained Earnings -- | |||
| Three Months and Six Months Ended April 30, 2003 and 2002 | 2 | ||
| Statements of Consolidated Financial Condition -- | |||
| April 30, 2003; October 31, 2002; and April 30, 2002 | 3 | ||
| Statements of Consolidated Cash Flow -- | |||
| Six Months Ended April 30, 2003 and 2002 | 4 | ||
| Notes to Consolidated Financial Statements | 5 | ||
| Item 2. Management´s Discussion and Analysis | |||
| of Operations and Financial Condition | 14 | ||
| Item 4. Controls and Procedures | 19 | ||
| Item 1. Legal Proceedings | 20 | ||
| Item 5. Other Information | 20 | ||
| Item 6. Exhibits and Reports on Form 8-K | 20 | ||
| 99.1 CEO Certification Pursuant to | |||
| 18 U.S.C. Section 1350, as adopted pursuant | |||
| to Section 906 of the Sarbanes-Oxley Act of 2002 | E- | 1 | |
| 99.2 CFO Certification Pursuant to | |||
| 18 U.S.C. Section 1350, as adopted pursuant | |||
| to Section 906 of the Sarbanes-Oxley Act of 2002 | E- | 2 | |
| Signature | 20 | ||
| Certifications | 21 | ||
| Three Months Ended | Six Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| April | April | April | April | ||||||
| Millions of Dollars | 2003 | 2002 | 2003 | 2002 | |||||
| Revenues | |||||||||
| Retail Notes and Finance Leases | $ 12.6 | $ 15.3 | $ 22.4 | $ 26.1 | |||||
| Income Related to Sales of Finance Receivables | (3.4 | ) | 11.4 | 35.4 | 33.5 | ||||
| Operating Leases | 18.6 | 20.4 | 36.5 | 38.2 | |||||
| Wholesale Notes | 7.4 | 6.6 | 14.9 | 13.1 | |||||
| Accounts | 4.8 | 4.6 | 9.1 | 10.0 | |||||
| Servicing Fees | 6.4 | 5.5 | 12.6 | 11.8 | |||||
| Other Revenue | 1.4 | 1.9 | 3.2 | 5.0 | |||||
Total | 47.8 |
65.7 |
134.1 |
137.7 |
|||||
| Expenses | |||||||||
| Cost of Borrowing | |||||||||
| Interest Expense | 12.6 | 15.0 | 26.1 | 29.5 | |||||
| Other | 2.1 | 2.0 | 3.9 | 3.9 | |||||
| Credit, Collection and Administrative | 11.1 | 10.2 | 21.2 | 20.2 | |||||
| Provision for Credit Losses | 3.7 | 6.2 | 7.9 | 10.5 | |||||
| Depreciation on Operating Leases | 11.9 | 14.5 | 24.6 | 27.8 | |||||
| Other Expense | 0.1 | 0.4 | 2.1 | 1.2 | |||||
Total | 41.5 |
48.3 |
85.8 |
93.1 |
|||||
| Income Before Taxes | 6.3 | 17.4 | 48.3 | 44.6 | |||||
| Income Tax Expense | 4.2 | 6.9 | 19.3 | 17.4 | |||||
Income from Continuing Operations | 2.1 |
10.5 |
29.0 |
27.2 |
|||||
| Gain on Disposal of Discontinued Operations, | |||||||||
| (net of tax of $0.0, $0.0, $0.0 and $0.5) | - | - | - | 0.7 | |||||
Net Income | 2.1 |
10.5 |
29.0 |
27.9 |
|||||
| Retained Earnings | |||||||||
| Beginning of Period | 219.0 | 180.8 | 197.1 | 163.4 | |||||
| Dividends Paid | (5.0) |
- |
(10.0) |
- |
|||||
| End of Period | $ 216.1 |
$ 191.3 |
$ 216.1 |
$ 191.3 |
|||||
| April 2003 | October 2002 | April 2002 | |||||
|---|---|---|---|---|---|---|---|
| Millions of Dollars | |||||||
| ASSETS | |||||||
| Cash and Cash Equivalents | $ 53.7 | $ 32.0 | $ 91.1 | ||||
| Finance Receivables | |||||||
| Finance Receivables Held For Sale | 745.9 | 1,006.7 | 437.8 | ||||
| Other Finance Receivables | 280.9 | 307.0 | 202.4 | ||||
| Allowance for Losses | (17.1) | (16.0) | (11.6) | ||||
Finance Receivables, net | 1,009.7 |
1,297.7 |
628.6 |
||||
| Amounts Due from Sales of Receivables | 313.3 | 345.0 | 401.1 | ||||
| Net Investment in Operating Leases | 203.7 | 248.2 | 280.2 | ||||
| Repossessions | 39.0 | 26.0 | 61.8 | ||||
| Restricted Marketable Securities | 237.7 | 104.6 | 542.6 | ||||
| Other Assets | 34.7 |
53.4 |
39.4 |
||||
| Total Assets | $ 1,891.8 |
$ 2,106.9 |
$ 2,044.8 |
||||
| LIABILITIES AND SHAREOWNER´S EQUITY | |||||||
| Net Accounts Payable to Affiliates | $ 24.9 | $ 52.2 | $ 80.9 | ||||
| Senior and Subordinated Debt | 1,356.4 | 1,562.5 | 1,482.5 | ||||
| Other Liabilities | 126.6 |
127.4 |
121.6 |
||||
| Total Liabilities | 1,507.9 | 1,742.1 | 1,685.0 | ||||
| Shareowner´s Equity | |||||||
| Capital Stock (Par value $1.00, 1,600,000 shares | |||||||
| issued and outstanding) and Paid-In Capital | 171.0 | 171.0 | 171.0 | ||||
| Retained Earnings | 216.1 | 197.1 | 191.3 | ||||
| Accumulated Other Comprehensive Loss | (3.2) |
(3.3) |
(2.5) |
||||
| Total Shareowner´s Equity | 383.9 |
364.8 |
359.8 |
||||
| Total Liabilities and Shareowner´s Equity | $ 1,891.8 |
$ 2,106.9 |
$ 2,044.8 |
||||
| Six Months Ended | |||||
|---|---|---|---|---|---|
| Millions of Dollars | April 2003 | April 2002 | |||
| Cash Flow From Operations | |||||
| Net Income | $ 29.0 | $ 27.9 | |||
| Adjustment to reconcile net income to | |||||
| cash provided from operations: | |||||
| Gains on sales of receivables | (33.2 | ) | (23.5 | ) | |
| Depreciation, amortization and accretion | 30.0 | 31.0 | |||
| Provision for credit losses | 7.9 | 10.5 | |||
| Net change in accounts payable to affiliates | (27.3 | ) | 66.7 | ||
| Other | 15.4 |
4.1 |
|||
| Total | 21.8 |
116.7 |
|||
| Cash Flow From Investing Activities | |||||
| Originations of finance receivables held for sale | (448.2 | ) | (436.5 | ) | |
| Proceeds from sales of finance receivables held for sale | 849.9 | 892.7 | |||
| Net change in restricted marketable securities | (133.1 | ) | (328.9 | ) | |
| Collections of retail notes and finance lease receivables, | |||||
| net of change in unearned finance income | (44.6 | ) | 24.2 | ||
| Repurchase of sold retail receivables | (83.5 | ) | (45.0 | ) | |
| Net change in wholesale notes and accounts receivables | 26.6 | 44.6 | |||
| Change in amounts due from sales of receivables | 31.7 | (60.9 | ) | ||
| Purchase of equipment leased to others | (16.1 | ) | (44.7 | ) | |
| Sale of equipment leased to others | 36.0 | 13.9 | |||
| Proceeds from sale of discontinued operations | - |
63.3 |
|||
| Total | 218.7 |
122.7 |
|||
| Cash Flow From Financing Activities | |||||
| Net change in bank revolving credit facility usage | (171.0 | ) | (303.0 | ) | |
| Proceeds from issuance of convertible debt | - | 175.1 | |||
| Debt issuance costs on convertible debt | - | (5.6 | ) | ||
| Proceeds from long-term debt | 28.4 | 31.2 | |||
| Principal payments on long-term debt | (66.2 | ) | (68.3 | ) | |
| Dividends paid to International | (10.0) |
- |
|||
| Total | (218.8) |
(170.6) |
|||
| Change in Cash and Cash Equivalents | 21.7 | 68.8 | |||
| Cash and Cash Equivalents, Beginning of Period | 32.0 |
22.3 |
|||
| Cash and Cash Equivalents, End of Period | $ 53.7 |
$ 91.1 |
|||
| Supplementary disclosure of cash flow information: | |||||
| Interest paid | $ 27.6 | $ 30.5 | |||
| Income taxes paid , net of refunds | $ 7.0 | $ 11.6 | |||
| Noncash investing activities: | |||||
| Transfers to repossessions | $ 55.1 | $ 51.5 | |||
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Navistar Financial Corporation and its wholly-owned subsidiaries
("Corporation"). International Truck and Engine Corporation ("International"), which is wholly owned by Navistar International
Corporation ("Navistar"), is the parent company of the Corporation.
The accompanying unaudited financial statements have been prepared in accordance with accounting policies described in the
Corporation´s 2002 Annual Report on Form 10-K and the accounting policy adopted in the first quarter of fiscal year 2003, and
should be read in conjunction with the disclosures therein. The accounting policy adopted in the first quarter of fiscal year
2003 was a result of the adoption of Statement of Position 01-6.
In November 2002, the Corporation adopted Statement of Position 01-6, Accounting by Certain Entities that Lend to or Finance the
Activities of Others. The Statement requires that certain finance receivables be classified as held for sale. The Corporation
classifies certain finance receivables as held for sale. Finance receivables held for sale are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income.
In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45 (“FIN 45”), Guarantor´s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45
requires that additional disclosures be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Provisions related to
recognizing a liability at inception do not apply to a subsidiary´s guarantee of debt owed to a third party by either its
parent or another subsidiary of that parent. The initial recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15, 2002. The Corporation provided disclosures about
guarantees in Note 9.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46
addresses consolidation requirements of variable interest entities. Transferors to qualifying special purpose entities
(“QSPE´s”) subject to the reporting requirements of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, are excluded from the scope of this interpretation. The Corporation currently sells
receivables to entities meeting the requirements of QSPE´s.
In the opinion of management, these interim financial statements reflect all adjustments, consisting of normal recurring items,
necessary to present fairly the results of operations, financial condition and cash flow for the interim periods presented.
Interim results are not necessarily indicative of results to be expected for any other interim period or for the full year.
Certain amounts in the prior period financial statements have been reclassified to conform with current period presentations.
2. DISCONTINUED OPERATIONS
On November 30, 2001, the Corporation completed the sale of all of the stock of Harco National Insurance Company ("Harco"), a
wholly-owned insurance subsidiary, to IAT Reinsurance Syndicate Ltd., a Bermuda reinsurance company. Cash proceeds of $63.3
million were received. The Harco insurance segment was accounted for as a discontinued operation, and accordingly, amounts in
the consolidated financial statements and notes thereto, for all periods affected, have been restated to reflect discontinued
operations accounting.
3. COMPREHENSIVE INCOME
The Corporation´s total comprehensive income was as follows:
| Three Months | Six Months | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Ended April 30 | Ended April 30 | ||||||||
| Millions of Dollars |
2003 |
2002 |
2003 |
2002 |
|||||
| Net income | $ 2.1 | $ 10.5 | 29.0 | $ 27.9 | |||||
| Change in net unrealized gain on derivative | - |
(0.1) |
0.1 |
0.6 |
|||||
| Total comprehensive income | $ 2.1 |
$ 10.4 |
$ 29.1 |
$ 28.5 |
|||||
4. FINANCE RECEIVABLES
Finance receivables are summarized as follows:
| Millions of Dollars |
April 30, 2003 |
October 31, 2002 |
April 30, 2002 | ||||
|---|---|---|---|---|---|---|---|
| Retail notes, net of unearned income | 599.8 | $ 827.1 | $ 249.4 | ||||
| Finance leases, net of unearned income | 146.1 | 179.6 | 188.4 | ||||
| Wholesale notes | 52.9 | 50.5 | 51.2 | ||||
| Accounts: | |||||||
| Retail | 158.5 | 181.1 | 75.7 | ||||
| Wholesale | 69.5 |
75.4 |
75.5 |
||||
| Total accounts | 228.0 |
256.5 |
151.2 |
||||
| Total finance receivables | 1,026.8 | 1,313.7 | 640.2 | ||||
| Less: Allowance for losses | 17.1 |
16.0 |
11.6 |
||||
| Total finance receivables, net | $1,009.7 |
$1,297.7 |
$ 628.6 |
||||
Finance receivables held for sale consisted of $745.9 million, $1,006.7 million, and $437.8 million in retail notes and finance
leases, net of unearned income, as of April 30, 2003, October 31, 2002, and April 30, 2002, respectively.
5. ALLOWANCE FOR LOSSES
The allowance for losses is summarized as follows for the fiscal period ended:
| Millions of Dollars |
April 30, 2003 |
October 31, 2002 |
April 30, 2002 | ||||
|---|---|---|---|---|---|---|---|
| Allowance for losses, beginning of period | $ 16.0 | $ 13.3 | $ 13.3 | ||||
| Provision for credit losses | 7.9 | 20.5 | 10.5 | ||||
| Net losses charged to allowance | (2.9) | (5.3) | (0.3) | ||||
| Transfers to finance receivables sold | (3.9) |
(12.5) |
(11.9) |
||||
| Allowance for losses, end of period | $ 17.1 |
$ 16.0 |
$ 11.6 |
||||
The average outstanding balance of impaired finance receivables was not material during the quarter ended April 30, 2003 and
2002 or for the year ended October 31, 2002. Interest income that would have been recognized on impaired finance receivables
during the six months ended April 30, 2003 and 2002 or for the year ended October 31, 2002 was not material.
Balance, including installments, past due over 90 days on owned finance receivables, including held for sale, totaled $8.1
million as of April 30, 2003.
6. SENIOR AND SUBORDINATED DEBT
Senior and subordinated debt outstanding is summarized as follows:
| Millions of Dollars |
April 30, 2003 |
October 31, 2002 |
April 30, 2002 | ||||
|---|---|---|---|---|---|---|---|
| Bank revolving credit facility, at variable rates, | |||||||
| due December 2005 | $ 411.0 | $ 582.0 | $ 389.0 | ||||
| Revolving retail warehouse facility, at variable | |||||||
| rates, due October 2005 | 500.0 | 500.0 | 500.0 | ||||
| Borrowings secured by operating leases, 3.71% | |||||||
| to 6.65%, due serially through December 2010 | 270.0 | 307.8 | 323.3 | ||||
| Convertible debt, 4.75%, due April 2009 | 175.4 | 172.7 | 170.2 | ||||
| Senior subordinated notes, 9%, matured June 2002 | - |
- |
100.0 |
||||
| Total senior and subordinated debt | $1,356.4 |
$1,562.5 |
$1,482.5 |
||||
As of April 30, 2003, October 31, 2002, and April 30, 2002 the Corporation had unaccreted discount of $44.6 million, $47.3
million, and $49.8 million respectively, related to the convertible debt.
The Corporation uses derivative financial instruments as part of its overall interest rate risk management strategy as further
described under Footnote 13 of the 2002 Annual Report on Form 10-K.
The Corporation manages its 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 forward contracts, interest rate swaps, and interest
rate caps. 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. The Corporation 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. The Corporation does not require collateral or other security to
support derivative financial instruments with credit risk. The Corporation´s counter-party credit exposure is limited to the
positive fair value of contracts at the reporting date. As of April 30, 2003, the Corporation´s derivative financial
instruments had a negative net fair value. Notional amounts of derivative financial instruments do not represent exposure to
credit loss.
As of April 30, 2003, the notional amounts and fair values of the Corporation´s derivatives are summarized as follows:
| Inception |
Maturity |
Instrument |
Notional |
Fair Value | |||||
|---|---|---|---|---|---|---|---|---|---|
| (Millions | of | Dollars) | |||||||
| October 2000 | November 2012 | Interest rate cap | $500.0 | $(2.5 | ) | ||||
| November 2012 | Interest rate cap | 500.0 | 2.5 | ||||||
| December 2000 | January 2004 | Interest rate swap* | 8.4 | (0.2 | ) | ||||
| July 2001 | April 2006 | Interest rate swap | 30.2 | (2.0< | |||||