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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from To
Commission file number 1-9618
NAVISTAR INTERNATIONAL CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3359573
--------------------------------- ----------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4201 Winfield Road, P.O. Box 1488
Warrenville, Illinois 60555
-------------------------------------------------------
(Address of principal executive offices, Zip Code)
Registrant's telephone number, including area code (630) 753-5000
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days. Yes X No ___
----
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be
filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes ___ No ___
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 28, 2003, the number of shares outstanding of the registrant's common stock was
68,236,620.
PAGE 2
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
INDEX
---------
Page
Reference
---------
Part I. Financial Information:
Item 1. Financial Statements
Statement of Income
Three Months Ended January 31, 2003 and 2002.............................. 3
Statement of Financial Condition
January 31, 2003, October 31, 2002 and January 31, 2002................... 4
Statement of Cash Flow
Three Months Ended January 31, 2003 and 2002.............................. 5
Notes to Financial Statements........................................................ 6
Additional Financial Information..................................................... 23
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 25
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..................................................... 33
Item 4. Controls and Procedures.................................................. 33
Part II. Other Information:
Item 1. Legal Proceedings........................................................ 34
Item 2. Changes in Securities and Use of Proceeds................................ 35
Item 6. Exhibits and Reports on Form 8-K......................................... 36
Signature ........................................................................... 37
Certifications....................................................................... 38
PAGE 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
STATEMENT OF INCOME (Unaudited)
Millions of dollars, except per share data
- ---------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-----------------------------------------
Three Months Ended
January 31
-----------------------------------------
2003 2002
------------------ -----------------
Sales and revenues
Sales of manufactured products............................................... $ 1,481 $ 1,382
Finance and insurance revenue................................................ 92 77
Other income .............................................................. 5 6
--------------- ---------------
Total sales and revenues............................................. 1,578 1,465
--------------- ---------------
Costs and expenses
Cost of products and services sold........................................... 1,420 1,248
Loss on sale of business..................................................... - (1)
Postretirement benefits expense.............................................. 83 58
Engineering and research expense............................................. 57 64
Selling, general and administrative expense.................................. 124 133
Interest expense............................................................. 38 39
Other expense .............................................................. 11 11
--------------- ---------------
Total costs and expenses............................................. 1,733 1,552
--------------- ---------------
Loss from continuing operations before income taxes.......................... (155) (87)
Income tax benefit........................................................... (57) (34)
--------------- ---------------
Loss from continuing operations....................................... (98) (53)
Loss from discontinued operations............................................ (1) (3)
--------------- ---------------
Net loss ................................................................... $ (99) $ (56)
=============== ===============
- ---------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share
Continuing operations................................................ $ (1.47) $ (0.88)
Discontinued operations.............................................. (0.02) (0.05)
-------------- --------------
Net loss...................................................... $ (1.49) $ (0.93)
=============== ===============
Diluted earnings (loss) per share
Continuing operations................................................ $ (1.47) $ (0.88)
Discontinued operations.............................................. (0.02) (0.05)
-------------- --------------
Net loss...................................................... $ (1.49) $ (0.93)
=============== ===============
Average shares outstanding (millions)
Basic .............................................................. 66.4 59.8
Diluted.............................................................. 66.4 59.8
- ---------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 4
STATEMENT OF FINANCIAL CONDITION (Unaudited)
Millions of dollars
- ---------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-------------------------------------------------------
January 31 October 31 January 31
2003 2002 2002
---------------- ----------------- ----------------
ASSETS
Current assets
Cash and cash equivalents............................... $ 504 $ 620 $ 432
Marketable securities................................... 19 - 10
Receivables, net........................................ 839 1,054 704
Inventories............................................. 602 595 651
Deferred tax asset, net................................. 253 242 151
Other assets............................................ 132 97 118
-------------- -------------- --------------
Total current assets............................................ 2,349 2,608 2,066
-------------- -------------- --------------
Marketable securities........................................... 515 116 465
Finance and other receivables, net.............................. 858 1,214 1,057
Property and equipment, net..................................... 1,337 1,479 1,670
Investments and other assets.................................... 336 177 191
Prepaid and intangible pension assets........................... 62 63 273
Deferred tax asset, net......................................... 1,345 1,286 866
-------------- -------------- --------------
Total assets .................................................. $ 6,802 $ 6,943 $ 6,588
============== ============== ==============
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt.. $ 371 $ 358 $ 369
Accounts payable, principally trade..................... 927 1,020 887
Other liabilities....................................... 979 1,021 768
-------------- -------------- --------------
Total current liabilities....................................... 2,277 2,399 2,024
-------------- -------------- --------------
Debt: Manufacturing operations................................ 890 747 907
Financial services operations........................... 1,447 1,651 1,387
Postretirement benefits liability............................... 1,368 1,354 811
Other liabilities............................................... 531 541 381
-------------- -------------- --------------
Total liabilities....................................... 6,513 6,692 5,510
-------------- -------------- --------------
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) ........................... 2,121 2,146 2,139
Retained earnings (deficit)..................................... (892) (721) (232)
Accumulated other comprehensive loss............................ (719) (705) (339)
Common stock held in treasury, at cost
(7.1 million, 14.8 million and 15.3 million shares held) (225) (473) (494)
-------------- -------------- --------------
Total shareowners' equity............................... 289 251 1,078
-------------- -------------- --------------
Total liabilities and shareowners' equity....................... $ 6,802 $ 6,943 $ 6,588
============== ============== ==============
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 5
STATEMENT OF CASH FLOW (Unaudited)
Millions of dollars
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------------
Three Months Ended
January 31
------------------------------------------
2003 2002
----------------- -----------------
Cash flow from operations
Net loss ........................................................................ $ (99) $ (56)
Adjustments to reconcile net loss to cash used in operations:
Depreciation and amortization.............................................. 57 55
Deferred income taxes...................................................... (73) (31)
Postretirement benefits funding in excess of expense.................... (17) (8)
Other, net................................................................. (70) (48)
Change in operating assets and liabilities:
Receivables................................................................ 7 150
Inventories................................................................ (9) (8)
Prepaid and other current assets........................................... (40) (13)
Accounts payable........................................................... (86) (220)
Other liabilities.......................................................... (11) 25
--------------- ---------------
Cash used in operations....................................................... (341) (154)
--------------- ---------------
Cash flow from investment programs
Purchases of retail notes and lease receivables................................... (280) (255)
Collections/sales of retail notes and lease receivables........................... 858 457
Purchases of marketable securities................................................ (428) (244)
Sales or maturities of marketable securities...................................... 10 32
Proceeds from sale of business.................................................... - 62
Capital expenditures.............................................................. (48) (70)
Property and equipment leased to others........................................... 11 (10)
Capitalized interest and other.................................................... 12 (10)
--------------- ---------------
Cash provided by (used in) investment programs................................ 135 (38)
--------------- ---------------
Cash flow from financing activities
Issuance of debt.................................................................. 218 31
Principal payments on debt........................................................ (81) (51)
Net decrease in notes and debt outstanding under bank revolving credit facility
and commercial paper programs.............................................. (193) (190)
Proceeds from sale of stock to benefit plans...................................... 175 -
Premiums on call options, net..................................................... (25) -
Debt issuance costs and other financing activities................................ (4) 12
--------------- ---------------
Cash provided by (used in) financing activities............................... 90 (198)
--------------- ---------------
Cash and cash equivalents
Decrease during the period.................................................... (116) (390)
At beginning of the period.................................................... 620 822
--------------- ---------------
Cash and cash equivalents at end of the period.................................... $ 504 $ 432
=============== ===============
- -------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 6
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note A. Summary of Accounting Policies
Navistar International Corporation (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 and its wholly
owned financial services subsidiaries. The effects of transactions between the manufacturing and financial
services operations have been eliminated to arrive at the consolidated totals.
The accompanying unaudited financial statements have been prepared in accordance with accounting policies
described in the 2002 Annual Report on Form 10-K and should be read in conjunction with the disclosures therein.
In the opinion of management, these interim financial statements reflect all adjustments, consisting of
normal recurring accruals, necessary to present fairly the financial position, results of operations and cash
flow for the periods presented. Interim results are not necessarily indicative of results for the full year.
Certain 2002 amounts have been reclassified to conform with the presentation used in the 2003 financial
statements.
The disposal of the domestic truck business in Brazil has been accounted for as discontinued operations in
accordance with Statement of Financial Accounting Standards No. 144 (SFAS 144), "Accounting for the Impairment or
Disposal of Long - Lived Assets." Accordingly, the operating results of this business have been classified as
"Discontinued operations" and prior periods have been restated. See Note I for further information.
Note B. New Accounting Pronouncements
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 elaborates on the disclosures to 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. 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 company has provided
disclosures about guarantees in Note K.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148),
"Accounting for Stock-Based Compensation - Transition and Disclosure," which amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation." SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee compensation. It also requires
prominent disclosures in both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002, and the interim disclosure provisions are
effective for interim periods beginning after December 15, 2002. The company will provide the required interim
disclosures beginning in the quarter ending April 30, 2003.
PAGE 7
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note B. New Accounting Pronouncements (continued)
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities." This interpretation addresses consolidation requirements of variable interest entities. Transferors
to qualified special purpose entities (QSPEs) 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 company currently sells receivables to entities meeting the requirements
of QSPEs.
Note C. Supplemental Cash Flow Information
Consolidated interest payments during the first three months of 2003 and 2002 were $39 million and $41
million, respectively. Consolidated tax payments made during the first three months of 2003 and 2002 were not
significant.
Note D. Income Taxes
The Statement of Income reflects the tax benefit of current Net Operating Losses (NOL), net of valuation
reserves, while the cumulative benefit of NOL carryforwards is recognized as a deferred tax asset 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.
Note E. Inventories
Inventories are as follows:
January 31 October 31 January 31
Millions of dollars 2003 2002 2002
- -------------------------------------------------------------------------------------------------------------------
Finished products.............................................. $ 349 $ 313 $ 418
Work in process................................................ 70 65 34
Raw materials and supplies..................................... 183 217 199
------------- ------------- -------------
Total inventories...................................... $ 602 $ 595 $ 651
============= ============= =============
Note F. 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.
NFC securitizes and sells receivables through Navistar Financial Retail Receivables Corporation (NFRRC),
Navistar Financial Securities Corporation (NFSC), Truck Retail Accounts Corporation (TRAC) and Truck Engine
Receivables Financing Corporation (TERFCO), all special purpose corporations (SPCs) and wholly owned subsidiaries
of NFC. The sales of 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 investor's interests in the related trust or conduit are not reflected as liabilities.
PAGE 8
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Sales of Receivables (continued)
NFRRC, NFSC, TRAC and TERFCO have limited recourse on the sold receivables and their assets are available to
satisfy the claims of their creditors prior to such assets becoming available for their own uses or to NFC or
affiliated companies. The terms of receivable sales generally require NFC to provide credit enhancements in the
form of over collateralizations and/or cash reserves with the trusts and conduits. The use of such cash reserves
by NFC is restricted under the terms of the securitized sales agreements. The maximum exposure under all
receivable sale recourse provisions as of January 31, 2003, was $350 million. The allowance for losses allocated
to sold receivables totaled $17 million, $14 million and $16 million at January 31, 2003, October 31, 2002 and
January 31, 2002, respectively.
The SPC's residual interests in the related trusts or assets held by the trusts are included in Finance and
other receivables on the Statement of Financial Condition. The carrying amounts of these retained interests
approximate fair value and were $350 million, $345 million and $408 million at January 31, 2003, October 31, 2002
and January 31, 2002, respectively.
Management estimates the prepayment speed for the receivables sold and the discount rate used to present
value the interest-only receivables in order to calculate the gain or loss. Estimates of prepayment speeds and
discount rates are based on historical experience and other factors and are made separately for each
securitization transaction. In addition, NFC estimates the fair value of the interest-only receivables on a
quarterly basis. The fair value of the interest-only receivables is based on updated estimates of prepayment
speeds and discount rates.
Key economic assumptions used in measuring the interest-only receivables at the date of the sale for sales
of retail notes and finance leases completed during the quarter ended January 31, 2003, were a prepayment speed
of 1.2 to 1.4, a weighted average life of 41 months and an interest-only receivables discount rate of 5.35%. For
those sales completed during the quarter ended January 31, 2002, the assumptions used were a prepayment speed of
1.2 to 1.4, a weighted average life of 41 months and an interest-only receivables discount rate of 6.41%.
Sold receivable balances are summarized below.
January 31 October 31 January 31
Millions of dollars 2003 2002 2002
---------------------------------------------------- ---------------- -- -------------- --- ---------------
Retail notes, net of unearned income............... $ 2,016 $ 1,522 $ 2,042
Finance leases, net of unearned income............. 25 - -
Wholesale notes.................................... 764 788 713
Retail accounts.................................... 103 127 200
--------- --------- ---------
Total..................................... $ 2,908 $ 2,437 $ 2,955
======== ======== ========
Serviced portfolio balances are summarized below.
January 31 October 31 January 31
Millions of dollars 2003 2002 2002
---------------------------------------------------- ---------------- -- -------------- --- ---------------
Gross serviced receivables:
Retail notes.................................. $ 2,552 $ 2,529 $ 2,612
Finance leases................................ 200 206 248
Wholesale notes............................... 832 839 750
Accounts 337 384 333
--------- --------- ---------
Total gross serviced receivables.......... 3,921 3,958 3,943
-------- -------- --------
Net investment in operating leases................. 226 248 274
--------- --------- ---------
Total serviced portfolio.................. $ 4,147 $ 4,206 $ 4,217
======== ======== ========
PAGE 9
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Sales of Receivables (continued)
Additional financial data for the gross serviced portfolio as of January 31, 2003, and for the quarter then
ended is as follows:
Finance and
Retail Operating Wholesale
Millions of dollars Notes Leases Notes Accounts
- -------------------------------------------------- ------------ -- ---------------- -- ------------- --- ------------
Principal past due over 60 days............. $ 19 $ 4 $ 1 $ 6
Credit losses, net of recoveries............ 4 - - -
The following table summarizes certain cash flows received from (paid to) securitization trusts/conduits
during the quarter ended January 31.
Millions of dollars 2003 2002
- ------------------------------------------------------------------------------------------- ----------- -- -----------
Proceeds from sales of finance receivables................................................ $ 824 $ 500
Proceeds from sales of finance receivables into revolving facilities...................... 1,111 1,129
Servicing fees received................................................................... 6 6
Repurchase of sold retail receivables..................................................... (18) (14)
All other cash received from trusts....................................................... 50 45
During the first quarter of 2003, NFC sold $824 million of retail notes and finance leases for a pre-tax
gain of $33 million, or $21 million, net of tax. During the first quarter of 2002, NFC sold $500 million of
retail receivables for a pre-tax gain of $17 million, or $11 million, net of tax.
Note G. Debt
In December 2002, the company completed the private placement of $190 million of new senior convertible bonds
due 2007. The bonds were priced to yield 2.5% with a conversion premium of 30% on a closing price of $26.70.
Simultaneous with the issuance of the convertible bonds, the company entered into two call option derivative
contracts, the consequences of which will allow the company to minimize share dilution upon conversion of the
convertible debt from the conversion price of the bond up to a 100% premium over the share price at issuance. The
net premium paid for the call options was $25 million. In February 2003, $100 million of the net proceeds from the
$190 million offering was used to repay the aggregate principal amount of the 7% senior notes due February 2003.
The remaining funds were used to repay other existing debt, replenish cash balances that were used to repay other
debt that matured in fiscal 2002 and to pay fees and expenses related to the offering.
PAGE 10
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note H. Restructuring and Other Non-recurring Charges
2000 and 2002 Restructuring Charges
- -----------------------------------
In October 2000, the company incurred charges for restructuring, asset write-downs and other exit costs
eventually totaling $308 million, after $2 million in net adjustments in 2001 and 2002, as part of an overall
plan to restructure its manufacturing and corporate operations (2000 Plan of Restructuring). The major
restructuring, integration and cost reduction initiatives, which were substantially complete as of November 30,
2001, included in the 2000 Plan of Restructuring are as follows:
o 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
o Closure of certain operations
o Launch of the next generation technology diesel engines (NGD)
o Consolidation of corporate operations
o Realignment of the bus and truck dealership network and termination of various dealerships' contracts
In October 2002, the company's board of directors approved a separate restructuring plan (2002 Plan of
Restructuring) and the company incurred charges for restructuring, asset and inventory write-downs and other exit
costs totaling $372 million. In addition, the company incurred non-recurring charges of $170 million related to
its V-6 diesel engine program and $60 million in losses (net of tax) from discontinued operations associated with
its exit of the Brazil domestic truck market (see Note I).
The following are the major restructuring, integration and cost reduction initiatives included in the 2002
Plan of Restructuring:
o Closure of facilities 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
o Offer of an early retirement program to certain union represented employees
o Completion of the launch of the HPV and NGD product programs
Of the 2002 pre-tax restructuring, other non-recurring charges and adjustments of $544 million, $157
million represented non-cash charges.
Through January 31, 2003, approximately $581 million in charges related to the 2000 and 2002 Plans of
Restructuring and the 2002 non-recurring charges have been incurred. Curtailment losses of $169 million related
to the company's postretirement benefit plans have been reclassified as a non-current postretirement benefits
liability. The remaining restructuring and other non-recurring charges liability of $271 million is expected to
be funded from existing cash balances and internally generated cash flows from operations.
PAGE 11
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note H. Restructuring and Other Non-recurring Charges (continued)
2000 and 2002 Restructuring Charges (continued)
- -----------------------------------------------
A description of the significant components of the 2000 and 2002 restructuring charges are as follows:
The 2000 Plan of Restructuring included the reduction of approximately 1,900 employees from the workforce,
primarily in North America. At October 31, 2002, the remaining $18 million balance of the total net charge of
$75 million was adjusted as part of the $94 million charge for severance and benefits related to the 2002
restructuring charge. Pursuant to the 2002 Plan of Restructuring, an additional 3,500 positions will be
eliminated throughout the company, primarily in North America. During the quarter ended January 31, 2003,
approximately $12 million was paid for severance and other benefits to approximately 1,800 employees as a result
of the two Plans of Restructuring. The severance and other benefits balance represents costs related to future
payments due to the company's contractual severance obligations.
Lease termination costs related to the 2000 Plan of Restructuring include future obligations under long-term
non-cancelable lease agreements at facilities being vacated following workforce reductions. This charge
primarily consisted of the estimated lease costs, net of probable sublease income, associated with the
cancellation of the company's corporate office lease at NBC Tower in Chicago, Illinois, which expires in 2010.
As of January 31, 2003, $9 million of the total net charge of $38 million has been incurred for lease termination
costs, of which $1 million was incurred during the quarter.
The 2000 Plan of Restructuring included the effect of the sale of Harco National Insurance Company (Harco).
On November 30, 2001, NFC completed the sale of Harco to IAT Reinsurance Syndicate Ltd. (IAT), a Bermuda
reinsurance company. Payments related to exit costs of approximately $2 million were incurred during the
quarter.
Dealer termination costs related to the 2000 Plan of Restructuring include the termination of certain dealer
contracts in connection with the realignment of the company's bus distribution network, and other litigation
costs to implement the 2000 restructuring initiatives. Other exit costs principally include $25 million of
contractually obligated exit and closure costs incurred as a result of the planned closure of both the Chatham
Assembly Plant and the Springfield Body Plant. As of January 31, 2003, $24 million of the total net charge of
$68 million has been paid for dealer termination and other exit costs, of which $2 million was incurred during
the quarter.
Other Non-Recurring Charges
- ---------------------------
In addition to the 2002 Plan of Restructuring charges, the company recorded non-recurring charges of $170
million primarily related to the discontinuance of the company's V-6 diesel engine program with Ford Motor
Company (Ford). In October 2002, Ford advised the company that their current business case for a V-6 diesel
engine in the specified vehicles was not viable and it has discontinued its program for the use of these
engines. Ford is seeking to cancel the V-6 supply contract. As a result, the company has determined that the
timing of the commencement of the V-6 diesel engine program is neither reasonably predictable nor probable. The
non-recurring pre-tax charge of $167 million in 2002 included the write-off of deferred pre-production costs, the
write-down to fair value of certain V-6 diesel engine-related fixed assets that were abandoned, an accrual for
future lease obligations under non-cancelable operating leases for certain V-6 diesel engine assembly assets that
will not be used by the company, an accrual for amounts contractually owed to suppliers related to the V-6 diesel
engine program and the write-down to fair value of certain other assets.
PAGE 12
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note H. Restructuring and Other Non-recurring Charges (continued)
Other Non-Recurring Charges (continued)
- ---------------------------------------
The company is currently working with Ford to negotiate a reimbursement of its investment and development
costs as well as any amounts owed to the company's suppliers. While the company believes that it is legally
entitled to such reimbursement under the agreement, Ford has not agreed to any such reimbursement of the
company's investment and development costs. No anticipated recovery has been recorded as part of the $167 million
pre-tax charge. As of January 31, 2003, of the total net charge of $170 million, $74 million has been incurred
primarily related to the write-off or write-down to fair value of fixed assets and for the payment of lease
obligations of which $8 million was incurred during the quarter.
Components of the company's restructuring plans and other non-recurring charges, including the plans
initiated in both 2002 and 2000, are shown in the following table.
Balance October Balance
31, Amount January 31,
Millions of dollars 2002 Incurred 2003
----------------------------------------------- ----------------- -------------- ----------------
Severance and other benefits................. $ 112 $ (12) $ 100
Lease terminations........................... 30 (1) 29
Loss on sale of business..................... 4 (2) 2
Dealer terminations and other exit costs..... 46 (2) 44
Other non-recurring charges.................. 104 (8) 96
------ ------ ------
Total................................... $ 296 $ (25) $ 271
====== ====== ========
Note I. Discontinued Operations
In October 2002, the company announced its decision to discontinue the domestic truck business in Brazil
(Brazil Truck) effective October 31, 2002. In connection with this discontinuance, the company recorded a loss
on disposal of $46 million in fiscal 2002. The loss related to the write-down of assets to fair value,
contractual settlement costs for the termination of the dealer contracts, severance and other benefits costs, and
the write-off of Brazil Truck's cumulative translation adjustment due to the company's substantial liquidation of
its investment in Brazil Truck. The disposal of Brazil Truck has been accounted for as discontinued operations
in accordance with SFAS 144. Accordingly, the operating results of Brazil Truck have been classified as
"Discontinued operations" and prior periods have been restated.
Note J. Financial Instruments
The company uses derivative financial instruments as part of its overall interest rate and foreign currency
risk management strategy as further described under Item 7A and in Note 13 to the 2002 Annual Report on Form 10-K.
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
PAGE 13
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note J. Financial Instruments (continued)
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 January 31, 2003, NFC's
derivative financial instruments had a negative net fair value. Notional amounts of derivative financial
instruments do not represent exposure to credit loss.
At January 31, 2003, the notional amounts and fair values of the company's derivatives are presented in the
following table, in millions. The fair values of all these derivatives are recorded in other assets or other
liabilities on the Statement of Financial Condition.
Inception Date Maturity Date Derivative Type Notional Amount Fair Value
- ------------------------------------------------------------------------------- ---------------------------------------
January 1999 - November February 2003 - Interest Rate Swaps $ 467 $ (2)
2002 March 2007
October 2000 - November October 2003 - Interest Rate Caps 1,015 -
2002 November 2012
November 2002 May 2003 Foreign Currency Forward 10 -
Contracts
In November 2002, NFC entered into an interest rate swap agreement in connection with a sale of retail notes
and lease receivables. The purpose of the swap was to convert the floating rate portion of the asset-backed
securities issued into fixed rate interest to match the interest basis of the receivables pool sold to the owner
trust and to protect NFC from interest rate volatility. The notional amount of this swap is calculated as the
difference between the actual pool balances and the projected pool balances. At January 31, 2003, the notional
amount was zero. The outcome of the swap results in NFC paying a fixed rate of interest on the projected balance
of the pool. To the extent that actual pool balances differ from projected balances, NFC has retained interest
rate exposure on this difference. This transaction is accounted for as a non-hedging derivative instrument.
In addition to those instruments described above, the company entered into two call option derivative
contracts in connection with the issuance of the $190 million senior convertible notes in December 2002. The
purchased call option and written call option will allow the company to minimize share dilution associated with
the convertible debt from the conversion price of the bond up to a 100% premium over the share price at
issuance. In accordance with EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock," the company has recorded these instruments in permanent equity,
and will not recognize subsequent changes in fair value as long as the instruments remain classified as equity.
The net premium paid for the call options was $25 million.
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.
In connection with the $400 million 9 3/8% Senior Notes due 2006 that were issued by the company in May
2001, International provided a full and unconditional guarantee of this indebtedness along with guarantees on the
$100 million 7% Senior Notes due 2003 and the $250 million 8% Senior Subordinated Notes due 2008 that were issued
by the company in February 1998. International has also provided a guarantee on the $190 million 2 1/2% Senior
Convertible Notes due 2007 that were issued by the company in December 2002.
The company provided a guarantee on the $19 million 9.95% Senior Notes due 2011 that International issued in
June 2001. As of January 31, 2003, the outstanding balance on this debt was $18 million.
The company 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 three months ended January 31, 2003.
The company guarantees a total of $393 million of lines of credit made available to its Mexican finance
subsidiaries by third parties and NFC. At January 31, 2003, outstanding loans under the lines of credit totaled
$117 million. The lines of credit have various maturity dates with June 2007 being the longest maturity date
from a third party.
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 obligation under these leases as of
January 31, 2003, totaled approximately $716 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 out through 2013. As of January
31, 2003, the total remaining obligation under these leases is approximately $29 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.
NFC has an $820 million contractually committed bank revolving credit facility that will mature in December
2005. Under this agreement, the company's Mexican finance subsidiaries are permitted to borrow up to $100
million in the aggregate. Such borrowings by the Mexican finance subsidiaries are guaranteed by the company and
NFC. As of January 31, 2003, the outstanding balance on this portion of the facility was $28 million.
In October 2002, NFC entered into an agreement to guarantee the 200 million peso-denominated bank facility
of two of the company's Mexican finance subsidiaries. The due date of the longest loan maturity is January
2006. As of January 31, 2003, the total outstanding balance of the debt was equivalent to $18 million.
PAGE 15
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note K. Guarantees (continued)
In May 2002, NFC entered into an agreement to guarantee the dollar- and/or peso-denominated medium term
notes of two of the Mexican finance subsidiaries up to the amount of 600 million pesos, equivalent to $55
million. The due date of the longest loan maturity is March 2006. As of January 31, 2003, the total outstanding
balance of the debt was equivalent to $24 million.
In November 2001, NFC entered into an agreement to guarantee the 500 million peso-denominated bank credit
facility of one of the Mexican finance subsidiaries. The due date of the longest loan maturity is November
2004. As of January 31, 2003, the outstanding balance of peso-denominated debt was $46 million.
As part of its sales agreement with IAT, NFC has agreed to guarantee the adequacy of Harco's loss reserves
as of November 30, 2001, the closing date of the sale. There is no limit to the potential amount of future
payments required under this agreement, which is scheduled to expire in November 2008. As security for its
obligation under this agreement, NFC has escrowed $5 million, which will become available for use in February
2004. The carrying amount of the liability under this guarantee is estimated at $2 million as of January 31,
2003. Management believes this reserve is adequate to cover any future potential payments to IAT.
At January 31, 2003, the Canadian operating subsidiary was contingently liable for $280 million of retail
customers' contracts and $38 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, credit guarantees and
buyback programs with various expiration dates that total approximately $22 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 three months ended January 31, 2003, were as follows:
Millions of dollars
-------------------------------------------------------------------------------------------------
Balance, beginning of period............................................... $ 185
Change in liability for warranties issued during the period................ 39
Change in liability for preexisting warranties............................. 2
Payments made.............................................................. (44)
-------------
Balance, end of period..................................................... $ 182
=============
PAGE 16
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
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. In the opinion of the company's management, none of these
proceedings or claims is material to the business or the financial condition 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
have 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, or
shipped to, each site 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
its 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.
Note M. Segment Data
Reportable operating segment data is as follows:
Financial
Millions of dollars Truck Engine Services Total
- ------------------------------------------------- ---------------- ------------------ ---------------- -----------------
For the quarter ended January 31, 2003
----------------------------------------------------------------------
External revenues............................... $ 1,091 $ 390 $ 94 $ 1,575
Intersegment revenues........................... - 110 8 118
--------- --------- --------- ---------
Total revenues............................. $ 1,091 $ 500 $ 102 $ 1,693
========= ========= ========= =========
Segment profit (loss)........................... $ (96) $ (35) $ 48 $ (83)
As of January 31, 2003
----------------------------------------------------------------------
Segment assets.................................. $ 1,600 $ 963 $ 2,252 $ 4,815
For the quarter ended January 31, 2002
----------------------------------------------------------------------
External revenues............................... $ 942 $ 440 $ 80 $ 1,462
Intersegment revenues........................... - 97 9 106
--------- --------- -------- --------
Total revenues............................. $ 942 $ 537 $ 89 $ 1,568
========= ========= ======== ========
Segment profit (loss)........................... $ (111) $ 42 $ 31 $ (38)
As of January 31, 2002
----------------------------------------------------------------------
Segment assets.................................. $ 1,745 $ 1,025 $ 2,385 $ 5,155
PAGE 17
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 quarters ended January 31 is as
follows:
Millions of dollars 2003 2002
- ------------------------------------------------------------------------ ----------------------- ----------------------
Segment sales and revenues.......................................... $ 1,693 $ 1,568
Other income........................................................ 3 3
Intercompany........................................................ (118) (106)
------------ ------------
Consolidated sales and revenues..................................... $ 1,578 $ 1,465
============ ============
Segment loss........................................................ $ (83) $ (38)
Restructuring adjustment............................................ - 1
Corporate items..................................................... (56) (37)
Manufacturing net interest expense.................................. (16) (13)
------------ ------------
Consolidated pre-tax loss from continuing operations................ $ (155) $ (87)
============ ============
Segment assets...................................................... $ 4,815 $ 5,155
Cash and marketable securities...................................... 355 284
Deferred taxes...................................................... 1,598 1,017
Corporate intangible pension assets................................. 12 72
Other corporate and eliminations.................................... 22 60
------------ ------------
Consolidated assets................................................. $ 6,802 $ 6,588
============ ============
Note N. Common Shareowners' Equity
In November 2002, the company completed the sale of a total of 7,755,030 shares of its common stock, par
value $0.10 per share, at a price of $22.566 per share, for an aggregate purchase price of $175 million to the
three employee benefit plan trusts of International. The securities were offered and sold in reliance upon the
exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 and Rule 506 under
Regulation D. The proceeds from the sale of the stock will be used to fund the company's retirement plans in
2003.
Note O. Comprehensive Income
The components of comprehensive loss are as follows:
For the Three Months Ended
January 31
-------------------------------------
Millions of dollars 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Net loss ...................................................... $ (99) $ (56)
Other comprehensive loss....................................... (14) -
------------- -------------
Total comprehensive loss............................... $ (113) $ (56)
============= =============
PAGE 18
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note P. Earnings Per Share
Earnings (loss) per share was computed as follows:
For the Three Months Ended
January 31
-------------------------------------
Millions of dollars, except share and per share data 2003 2002
- ---------------------------------------------------------------------------------------------------------------------
Loss from continuing operations............................................ $ (98) $ (53)
Loss from discontinued operations.......................................... (1) (3)
--------------- ----------------
Net loss........................................................... $ (99) $ (56)
=============== ================
Average shares outstanding (millions)
Basic ............................................................ 66.4 59.8
Diluted 66.4 59.8
Basic earnings (loss) per share
Continuing operations...................................................... $ (1.47) $ (0.88)
Discontinued operations.................................................... (0.02) (0.05)
-------------- --------------
Net loss........................................................... $ (1.49) $ (0.93)
================== ================
Diluted earnings (loss) per share
Continuing operations...................................................... $ (1.47) $ (0.88)
Discontinued operations.................................................... (0.02) (0.05)
-------------- --------------
Net loss........................................................... $ (1.49) $ (0.93)
================== ===============
The computation of diluted shares outstanding for the three months ended January 31, 2003 and 2002, excludes
incremental shares of 6.9 million and 1.0 million, respectively, related to employee stock options, convertible
debt and other dilutive securities. These shares are excluded due to their anti-dilutive effect as a result of
the company's losses for the first quarters of 2003 and 2002.
PAGE 19
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note Q. Condensed Consolidating Guarantor and Non-Guarantor Financial Information
The following tables set forth the condensed consolidating Statements of Financial Condition as of January
31, 2003 and 2002, and the Statements of Income and Cash Flow for the three months ended January 31, 2003 and
2002. The following information is included as a result of the guarantee of the 9 3/8% senior notes due
2006 by International, exclusive of its subsidiaries. International is a direct wholly owned subsidiary of NIC.
International, exclusive of its subsidiaries, also guarantees NIC's obligations under its 7% senior notes due
2003, 2 1/2% senior convertible notes due 2007, and 8% senior subordinated notes due 2008. None of NIC's other
subsidiaries guarantee any of these notes. Each of the guarantees is full and unconditional. Separate financial
statements and other disclosures concerning International have not been presented because management believes
that such information is not material to investors. NIC includes the consolidated financial results of the
parent company only, with all of its wholly owned subsidiaries accounted for under the equity method.
International, for purposes of this disclosure only, includes the consolidated financial results of its wholly
owned subsidiaries accounted for under the equity method. "Non-Guarantor Companies and Eliminations" includes
the consolidated financial results of all other non-guarantor subsidiaries including the elimination entries for
all intercompany transactions. All applicable corporate expenses have been allocated appropriately among the
guarantor and non-guarantor subsidiaries.
NIC files a consolidated U.S. federal income tax return which includes International and its U.S.
subsidiaries. International has a tax allocation agreement (Tax Agreement) with 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 NIC, 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 Q. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
Non-Guarantor
Companies and
Millions of dollars NIC International Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JANUARY 31, 2003
---------------------------------------------------------------------------------------
Sales and revenues..................................... $ 1 $ 1,146 $ 431 $ 1,578
------------ ------------ ------------ ------------
Cost of products and services sold..................... 3 1,134 283 1,420
All other operating expenses........................... (6) 271 48 313
------------ ------------ ------------ ------------
Total costs and expenses........................... (3) 1,405 331 1,733
------------ ------------ ------------ ------------
Equity in income (loss) of non-consolidated (160) 85 75 -
------------ ------------ ------------ ------------
subsidiaries...........................................
Income (loss) from continuing operations before income (156) (174) 175 (155)
taxes
Income tax expense (benefit)........................... (57) 13 (13) (57)
------------ ------------ ------------ ------------
Income (loss) from continuing operations............... (99) (187) 188 (98)
------------ ------------ ------------ ------------
Loss from discontinued operations...................... - - (1) (1)
------------ ------------ ------------ ------------
Net income (loss)...................................... $ (99) $ (187) $ 187 $ (99)
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JANUARY 31, 2003
-------------------------------------------------------------------------------
Assets
Cash and marketable securities......................... $ 244 $ 11 $ 783 $ 1,038
Receivables, net....................................... 6 187 1,504 1,697
Inventories............................................ - 344 258 602
Property and equipment, net............................ - 783 554 1,337
Investment in affiliates............................... (2,758) 757 2,001 -
Deferred tax asset and other assets.................... 1,601 156 371 2,128
------------ ------------ ------------ ------------
Total assets....................................... $ (907) $ 2,238 $ 5,471 $ 6,802
============ ============ ============ ============
Liabilities and shareowners' equity
Debt .................................................. $ 940 $ 19 $ 1,749 $ 2,708
Postretirement benefits liability...................... - 1,462 154 1,616
Amounts due (from) to affiliates....................... (2,384) 2,281 103 -
Other liabilities...................................... 248 1,482 459 2,189
------------ ------------ ------------ ------------
Total liabilities.................................. (1,196) 5,244 2,465 6,513
------------ ------------ ------------ ------------
Shareowners' equity (deficit).......................... 289 (3,006) 3,006 289
------------ ------------ ------------ ------------
Total liabilities and shareowners' equity.............. $ (907) $ 2,238 $ 5,471 $ 6,802
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE THREE MONTHS ENDED JANUARY 31, 2003
------------------------------------------------------------------------------------------
Cash provided by (used in) operations.................. $ (493) $ 44 $ 108 $ (341)
------------ ------------ ------------ ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables.. - - 578 578
Net increase in marketable securities.................. - - (418) (418)
Capital expenditures................................... - (42) (6) (48)
Other investing activities............................. (3) 3 23 23
------------ ------------ ------------ ------------
Cash provided by (used in) investment programs......... (3) (39) 177 135
------------ ------------ ------------ ------------
Cash flow from financing activities
Net borrowings (repayments) of debt.................... 152 (2) (206) (56)
Other financing activities............................. 173 - (27) 146
------------ ------------ ------------ ------------
Cash provided by (used in) financing activities........ 325 (2) (233) 90
------------ ------------ ------------ ------------
Cash and cash equivalents
Increase (decrease) during the period.................. (171) 3 52 (116)
At beginning of the period............................. 415 8 197 620
------------ ------------ ------------ ------------
Cash and cash equivalents at end of the period...........$ 244 $ 11 $ 249 $ 504
============ ============ ============ ============
PAGE 21
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note Q. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
Non-Guarantor
Companies and
Millions of dollars NIC International Eliminations Consolidated
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THREE MONTHS ENDED JANUARY 31, 2002
-----------------------------------------------------------------------------------
Sales and revenues....................................... $ 2 $ 1,124 $ 339 $ 1,465
------------ ------------ ------------ ------------
Cost of products and services sold....................... - 1,042 206 1,248
Loss on sale of business................................. - - (1) (1)
All other operating expenses............................. (6) 239 72 305
------------ ------------ ------------ ------------
Total costs and expenses............................. (6) 1,281 277 1,552
------------ ------------ ------------ ------------
Equity in income (loss) of non-consolidated subsidiaries. (98) 56 42 -
------------ ------------ ------------ ------------
Income (loss) from continuing operations before income (90) (101) 104 (87)
taxes
Income tax expense (benefit)............................. (34) 6 (6) (34)
------------ ------------ ------------ ------------
Income (loss) from continuing operations................. (56) (107) 110 (53)
------------ ------------ ------------ ------------
Loss from discontinued operations........................ - - (3) (3)
------------ ------------ ------------ ------------
Net income (loss)........................................ $ (56) $ (107) $ 107 $ (56)
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JANUARY 31, 2002
-------------------------------------------------------------------------------
Assets
Cash and marketable securities........................... $ 263 $ 8 $ 636 $ 907
Receivables, net......................................... 6 63 1,692 1,761
Inventories.............................................. - 344 307 651
Property and equipment, net.............................. - 890 780 1,670
Investment in affiliates................................. (1,327) 931 396 -
Deferred tax asset and other assets...................... 1,012 267 320 1,599
------------ ------------ ------------ ------------
Total assets......................................... $ (46) $ 2,503 $ 4,131 $ 6,588
============ ============ ============ ============
Liabilities and shareowners' equity
Debt..................................................... $ 821 $ 21 $ 1,821 $ 2,663
Postretirement benefits liability........................ - 977 97 1,074
Amounts due (from) to affiliates......................... (2,024) 1,645 379 -
Other liabilities........................................ 79 1,245 449 1,773
------------ ------------ ------------ ------------
Total liabilities.................................... (1,124) 3,888 2,746 5,510
------------ ------------ ------------ ------------
Shareowners' equity (deficit)............................ 1,078 (1,385) 1,385 1,078
------------ ------------ ------------ ------------
Total liabilities and shareowners' equity................ $ (46) $ 2,503 $ 4,131 $ 6,588
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE THREE MONTHS ENDED JANUARY 31, 2002
------------------------------------------------------------------------------------------
Cash provided by (used in) operations.................... $ (448) $ 71 $ 223 $ (154)
------------ ------------ ------------ ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables.... - - 202 202
Net (increase) decrease in marketable securities......... 30 - (242) (212)
Capital expenditures..................................... - (62) (8) (70)
Other investing activities............................... 1 (7) 48 42
------------ ------------ ------------ ------------
Cash provided by (used in) investment programs........... 31 (69) - (38)
------------ ------------ ------------ ------------
Cash flow from financing activities
Net repayments of debt................................... - - (210) (210)
Other financing activities............................... 12 - - 12
------------ ------------ ------------ ------------
Cash provided by (used in) financing activities.......... 12 - (210) (198)
------------ ------------ ------------ ------------
Cash and cash equivalents
Increase (decrease) during the period.................... (405) 2 13 (390)
At beginning of the period............................... 658 6 158 822
------------ ------------ ------------ ------------
Cash and cash equivalents at end of the period.............$ 253 $ 8 $ 171 $ 432
============ ============ ============ ============
PAGE 22
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note R. Subsequent Events
In February 2003, NFC entered into two forward starting swap agreements with notional amounts of $500
million and $300 million in connection with anticipated sales of retail notes and finance leases. The purpose of
these swaps is to limit NFC's interest rate exposure during the period it is accumulating receivables for the
anticipated sales of receivables. These are accounted for as non-hedging derivative instruments.
In February 2003, the company used $100 million of the proceeds from the December 2002 issuance of senior
convertible bonds to repay the aggregate principal amount of the 7% senior notes due February 2003.
PAGE 23
Navistar International Corporation and Consolidated Subsidiaries
Additional Financial Information (Unaudited)
The following additional financial information is provided based upon the continuing interest of certain
shareholders and creditors.
Navistar International Corporation (with financial services operations on an equity basis)
Millions of dollars
Three Months Ended
January 31
-----------------------------------------
Condensed Statement of Income 2003 2002
- ------------------------------------------------------------------------------ ---------------- -----------------
----------------
Sales of manufactured products............................................... $ 1,481 $ 1,382
Other income................................................................. 3 3
------------- -------------
Total sales and revenues................................................. 1,484 1,385
------------- -------------
Cost of products sold........................................................ 1,403 1,233
Postretirement benefits expense.............................................. 83 57
Engineering and research expense............................................. 57 64
Selling, general and administrative expense.................................. 108 116
Other expense................................................................ 36 34
------------- -------------
Total costs and expenses................................................. 1,687 1,504
------------- -------------
Income (loss) from continuing operations before income taxes:
Manufacturing operations................................................. (203) (119)
Financial services operations............................................ 48 32
------------- -------------
Loss from continuing operations before income taxes.................. (155) (87)
Income tax benefit................................................... (57) (34)
------------- -------------
Loss from continuing operations.......................................... (98) (53)
Loss from discontinued operations............................................ (1) (3)
------------- -------------
Net loss ................................................................... $ (99) $ (56)
============= =============
January 31 October 31 January 31
Condensed Statement of Financial Condition 2003 2002 2002
- ----------------------------------------------------------------- ---------------- ----------------- ----------------
Cash, cash equivalents and marketable securities................ $ 473 $ 549 $ 369
Inventories..................................................... 567 566 587
Property and equipment, net..................................... 1,089 1,208 1,370
Equity in non-consolidated subsidiaries......................... 474 448 425
Other assets.................................................... 814 683 954
Deferred tax asset, net......................................... 1,597 1,526 1,013
------------- ------------- -------------
Total assets............................................ $ 5,014 $ 4,980 $ 4,718
============= ============= =============
Accounts payable, principally trade............................. $ 891 $ 970 $ 836
Postretirement benefits liability............................... 1,602 1,618 1,062
Debt............................................................ 1,022 897 950
Other liabilities............................................... 1,210 1,244 792
Shareowners' equity............................................. 289 251 1,078
------------- ------------- -------------
Total liabilities and shareowners' equity............... $ 5,014 $ 4,980 $ 4,718
============= ============= =============
PAGE 24
Navistar International Corporation and Consolidated Subsidiaries
Additional Financial Information (Unaudited)
Navistar International Corporation (with financial services operations on an equity basis)
Millions of dollars
Three Months Ended
January 31
-----------------------------------------
Condensed Statement of Cash Flow 2003 2002
- --------------------------------------------------------------------------- ---------------- -----------------
Cash flow from operations
Net loss .................................................................. $ (99) $ (56)
Adjustments to reconcile net loss to cash used in operations:
Depreciation and amortization....................................... 41 39
Deferred income taxes............................................... (75) (30)
Postretirement benefits funding in excess of expense................ (17) (8)
Equity in earnings of investees, net of dividends received.......... (29) (27)
Other, net.......................................................... (35) (23)
Change in operating assets and liabilities................................. (155) (168)
------------- -------------
Cash used in operations.................................................... (369) (273)
------------- -------------
Cash flow from investment programs
Purchases of marketable securities......................................... (28) -
Sales or maturities of marketable securities............................... 10 30
Capital expenditures....................................................... (47) (69)
Receivable from financial services operations.............................. 56 (83)
Investment in affiliates................................................... 2 1
Capitalized interest and other............................................. 11 (10)
------------- -------------
Cash provided by (used in) investment programs............................. 4 (131)
------------- -------------
Cash provided by (used in) financing activities............................ 271 (3)
------------- -------------
Cash and cash equivalents
Decrease during the period................................................. (94) (407)
At beginning of the period................................................. 549 766
------------- -------------
Cash and cash equivalents at end of the period............................. $ 455 $ 359
============= =============
PAGE 25
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Certain statements under this caption that are not purely historical constitute "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. These
forward-looking statements are based on current management expectations as of the date made. The company assumes
no obligation to update any forward-looking statements. Navistar International Corporation's actual results may
differ significantly from the results discussed in such forward-looking statements. Factors that might cause
such a difference include, but are not limited to, those discussed under the captions "Restructuring and Other
Non-Recurring Charges" and "Business Environment." Additional information regarding factors that could cause
actual results to differ materially from those in the forward-looking statements is contained from time to time
in the company's filings with the Securities and Exchange Commission.
RESULTS OF OPERATIONS
The company reported a net loss of $99 million, or a $1.49 loss per diluted common share for the first
quarter ended January 31, 2003, primarily due to higher postretirement benefits expense, higher costs associated
with the delay of the V-6 engine program, lower engine shipments and higher start-up costs related to the
introduction of the new 6.0 liter (6.0L) V-8 engine. For the comparable quarter last year, the net loss was $56
million, or a $0.93 loss per diluted common share.
The truck segment's loss for the first quarter of 2003 decreased $15 million and revenues increased $149
million compared to the same period last year. The truck segment's improvements are primarily the result of
higher shipments driven by increased industry demand.
The engine segment's loss for the first three months of 2003 was $35 million, a $77 million decrease
compared to the same period in 2002. The engine segment's revenues were $500 million in the first quarter of
2003, 7% lower than the comparable quarter in 2002. The decreases in the engine segment's profits and revenues
for 2003 are primarily the result of lower shipments, higher costs associated with the delay of the V-6 engine
program and start-up costs related to the introduction of the new 6.0L V-8 engine.
The financial services segment's profit for the first quarter of 2003 was $48 million, a $17 million
increase over the comparable period in 2002. The increase is primarily the result of a higher gain on the sale
of retail receivables.
Sales and Revenues. Sales and revenues for the first quarter of 2003 totaled $1,578 million, 8% higher than the
$1,465 million reported for the same quarter in 2002.
United States (U.S.) and Canadian industry retail sales of Class 5 through 8 trucks totaled 64,600 units in
the first quarter of 2003, 6% higher than the 60,800 units sold during this period in 2002. Class 8 heavy truck
sales of 36,200 units during the first quarter of 2003 were 9% higher than the 2002 level of 33,300 units.
Industry sales of Class 5, 6 and 7 medium trucks, including school buses, increased 3% to 28,400 units. Industry
sales of school buses, which accounted for 22% of the medium truck market, increased 13% to 6,200 units.
The company's market share in the combined U.S. and Canadian Class 5 through 8 truck market for the first
quarter of 2003 increased slightly to 26.5% from 26.4% in the same period of 2002.
Total engine shipments for the first three months of 2003 reached 77,700 units, which is 14% lower than the
90,800 units shipped in the first quarter of 2002. Shipments of mid-range diesel engines by the company to other
original equipment manufacturers (OEMs) during the first quarter of 2003 totaled 63,400 units, a 19% decrease
from the same period of 2002.
PAGE 26
Finance and insurance revenue was $92 million for the first quarter of 2003, a $15 million increase from
2002 revenue of $77 million. The increase in 2003 is primarily attributable to a greater gain on the sale of
retail receivables.
Costs and expenses. Manufacturing gross margin was 5.3% for the first quarter of 2003, a decrease from the 10.8%
reported for the same period in 2002. The decrease is primarily due to higher costs associated with the delay of
the V-6 engine program, lower volumes, the V-8 engine start-up costs previously described and exchange rate
effects.
Postretirement benefits expense increased $25 million from the first quarter of 2002 to $83 million. This
increase is due to higher interest expense resulting from higher pension and health care obligations, which were
the result of the change in discount rates and the 2002 restructuring activities. The increase is also caused by
lower returns on assets, resulting from asset losses in 2002 and a lower expected rate of return in 2003. In
addition, higher amortization expense due to significant losses in 2002 contributed to the increase.
Engineering and research expense for the first three months of 2003 decreased $7 million to $57 million
compared to the same period in 2002 due to the completion of new product introduction and controlled spending.
Selling, general and administrative expense decreased 7% to $124 million in the first quarter of 2003 from
$133 million for the comparable quarter in 2002. This is due to a decrease in the provision for losses on
receivables driven by a decrease in repossession frequency.
Restructuring and Other Non-recurring Charges
2000 and 2002 Restructuring Charges
- -----------------------------------
In October 2000, the company incurred charges for restructuring, asset write-downs and other exit costs
eventually totaling $308 million, after $2 million in net adjustments in 2001 and 2002, as part of an overall
plan to restructure its manufacturing and corporate operations (2000 Plan of Restructuring). The major
restructuring, integration and cost reduction initiatives, which were substantially complete as of November 30,
2001, included in the 2000 Plan of Restructuring are as follows:
o 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
o Closure of certain operations
o Launch of the next generation technology diesel engines (NGD)
o Consolidation of corporate operations
o Realignment of the bus and truck dealership network and termination of various dealerships' contracts
In October 2002, the company's board of directors approved a separate restructuring plan (2002 Plan of
Restructuring) and the company incurred charges for restructuring, asset and inventory write-downs and other exit
costs totaling $372 million. In addition, the company incurred non-recurring charges of $170 million related to
its V-6 diesel engine program and $60 million in losses (net of tax) from discontinued operations associated with
its exit of the Brazil domestic truck market (see Note I to the Financial Statements).
PAGE 27
The following are the major restructuring, integration and cost reduction initiatives included in the 2002
Plan of Restructuring:
o Closure of facilities 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
o Offer of an early retirement program to certain union represented employees
o Completion of the launch of the HPV and NGD product programs
Of the 2002 pre-tax restructuring, other non-recurring charges and adjustments of $544 million, $157 million
represented non-cash charges.
Through January 31, 2003, approximately $581 million in charges related to the 2000 and 2002 Plans of
Restructuring and the 2002 non-recurring charges have been incurred. Curtailment losses of $169 million related
to the company's postretirement benefit plans have been reclassified as a non-current postretirement benefits
liability. The remaining restructuring and other non-recurring charges liability of $271 million is expected to
be funded from existing cash balances and internally generated cash flows from operations.
A description of the significant components of the 2000 and 2002 restructuring charges are as follows:
The 2000 Plan of Restructuring included the reduction of approximately 1,900 employees from the workforce,
primarily in North America. At October 31, 2002, the remaining $18 million balance of the total net charge of
$75 million was adjusted as part of the $94 million charge for severance and benefits related to the 2002
restructuring charge. Pursuant to the 2002 Plan of Restructuring, an additional 3,500 positions will be
eliminated throughout the company, primarily in North America. During the quarter ended January 31, 2003,
approximately $12 million was paid for severance and other benefits to approximately 1,800 employees as a result
of the two Plans of Restructuring. The severance and other benefits balance represents costs related to future
payments due to the company's contractual severance obligations.
Lease termination costs related to the 2000 Plan of Restructuring include future obligations under long-term
non-cancelable lease agreements at facilities being vacated following workforce reductions. This charge
primarily consisted of the estimated lease costs, net of probable sublease income, associated with the
cancellation of the company's corporate office lease at NBC Tower in Chicago, Illinois, which expires in 2010.
As of January 31, 2003, $9 million of the total net charge of $38 million has been incurred for lease termination
costs, of which $1 million was incurred during the quarter.
The 2000 Plan of Restructuring included the effect of the sale of Harco National Insurance Company (Harco).
On November 30, 2001, Navistar Financial Corporation (NFC) completed the sale of Harco to IAT Reinsurance
Syndicate Ltd., a Bermuda reinsurance company. Payments related to exit costs of approximately $2 million were
incurred during the quarter.
Dealer termination costs related to the 2000 Plan of Restructuring include the termination of certain dealer
contracts in connection with the realignment of the company's bus distribution network, and other litigation
costs to implement the 2000 restructuring initiatives. Other exit costs principally include $25 million of
contractually obligated exit and closure costs incurred as a result of the planned closure of both the Chatham
Assembly Plant and the Springfield Body Plant. As of January 31, 2003, $24 million of the total net charge of
$68 million has been paid for dealer termination and other exit costs, of which $2 million was incurred during
the quarter.
PAGE 28
Other Non-Recurring Charges
- ---------------------------
In addition to the 2002 Plan of Restructuring charges, the company recorded non-recurring charges of $170
million primarily related to the discontinuance of the company's V-6 diesel engine program with Ford Motor
Company (Ford). In October 2002, Ford advised the company that their current business case for a V-6 diesel
engine in the specified vehicles was not viable and it has discontinued its program for the use of these
engines. Ford is seeking to cancel the V-6 supply contract. As a result, the company has determined that the
timing of the commencement of the V-6 diesel engine program is neither reasonably predictable nor probable. The
non-recurring pre-tax charge of $167 million in 2002 included the write-off of deferred pre-production costs, the
write-down to fair value of certain V-6 diesel engine-related fixed assets that were abandoned, an accrual for
future lease obligations under non-cancelable operating leases for certain V-6 diesel engine assembly assets that
will not be used by the company, an accrual for amounts contractually owed to suppliers related to the V-6 diesel
engine program and the write-down to fair value of certain other assets.
The company is currently working with Ford to negotiate a reimbursement of its investment and development
costs as well as any amounts owed to the company's suppliers. While the company believes that it is legally
entitled to such reimbursement under the agreement, Ford has not agreed to any such reimbursement of the
company's investment and development costs. No anticipated recovery has been recorded as part of the $167 million
pre-tax charge. As of January 31, 2003, of the total net charge of $170 million, $74 million has been incurred
primarily related to the write-off or write-down to fair value of fixed assets and for the payment of lease
obligations of which $8 million was incurred during the quarter.
The actions to implement the 2002 restructuring initiatives are expected to generate at least $70 million in
annual savings for the company, due to the reduction of manufacturing fixed costs. The company realized
approximately $10 million of these benefits in the first quarter of 2003 and expects to realize modestly higher
savings throughout the rest of the year. Full annualized savings will be realized in late 2003, once the
restructuring initiatives are fully implemented.
Components of the company's restructuring plans and other non-recurring charges, including the plans
initiated in both 2002 and 2000, are shown in the following table.
Balance October Balance
31, Amount January 31,
Millions of dollars 2002 Incurred 2003
----------------------------------------------- ----------------- -------------- ----------------
Severance and other benefits................. $ 112 $ (12) $ 100
Lease terminations........................... 30 (1) 29
Loss on sale of business..................... 4 (2) 2
Dealer terminations and other exit costs..... 46 (2) 44
Other non-recurring charges.................. 104 (8) 96
------ ------ ------
Total................................... $ 296 $ (25) $ 271
====== ====== ========
Liquidity and Capital Resources
Cash flow is generated from the manufacture and sale of trucks and mid-range diesel engines and their
associated service parts as well as from product financing provided to the company's dealers and retail customers
by the financial services segment. The company's current debt ratings have made sales of finance receivables the
most economical source of funding for NFC.
The company had working capital of $72 million at January 31, 2003, compared to $209 million at October 31,
2002. Cash used in operations during the first quarter of 2003 totaled $341 million resulting from a net loss of
$99 million, a net change in operating assets and liabilities of $139 million and $103 million of non-cash items.
PAGE 29
The net use of cash resulting from the change in operating assets and liabilities included an $86 million
decrease in accounts payable primarily due to lower truck and engine production levels in the first quarter.
Also included was a decrease in other liabilities primarily due to a reduction in the restructuring liability as
a result of cash payments during the quarter.
Cash provided by investment programs resulted from a net decrease in retail notes and lease receivables of
$578 million. This was partially offset by a net increase in marketable securities of $418 million.
Cash provided by financing activities resulted from the sale of 7,755,030 shares of the company's common
stock for an aggregate purchase price of $175 million as well as from a net increase in long-term debt of $137
million, which includes $190 million of new senior convertible bonds due 2007. These were partially offset by
net premiums paid on call options on the company's stock of $25 million and a net decrease of $193 million in
notes and debt outstanding under the bank revolving credit facility and other commercial paper programs.
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, medium and long-term
debt and equity capital. As of January 31, 2003, NFC's funding consisted of sold finance receivables of $2,908
million, bank and other borrowings of $926 million, convertible debt of $174 million, secured borrowings of $301
million and equity of $387 million.
NFC securitizes and sells receivables through Navistar Financial Retail Receivables Corporation (NFRRC),
Navistar Financial Securities Corporation (NFSC), Truck Retail Accounts Corporation (TRAC) and Truck Engine
Receivables Financing Corporation (TERFCO), all special purpose 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 investor's 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 quarter of 2003, NFC sold $824 million of retail notes and finance leases,
net of unearned finance income, for a pre-tax gain of $33 million. The receivables were sold through NFRRC to an
owner trust which, in turn, issued asset-backed securities that were sold to investors. At January 31, 2003, the
remaining shelf registration available to NFRRC for the public issuance of asset-backed securities was $1,650
million.
TERFCO has in place a trust that provides for the funding of $100 million of unsecured trade receivables
generated by the sale of diesel engines and engine service parts from International to Ford. The facility
matures in 2006. As of January 31, 2003, NFC had utilized $100 million of this facility.
TRAC has in place a revolving retail account conduit that provides for the funding of $100 million of
eligible retail accounts. As of January 31, 2003, NFC has utilized $3 million of this facility. The facility
expires in August 2003 and is renewable upon mutual consent of the parties.
As of January 31, 2003, NFSC has in place a revolving wholesale note trust that provides for the funding of
$1,012 million of eligible wholesale notes, of which $764 million has been utilized.
At January 31, 2003, available funding under NFC's bank revolving credit facilities, the revolving retail
warehouse facility and the revolving wholesale note trust was $853 million. When combined with unrestricted cash
and cash equivalents, $875 million was available to fund the general business purposes of NFC.
PAGE 30
There have been no material changes in the company's hedging strategies or derivative positions since
October 31, 2002, except for the purchased and written call options associated with the issuance of the $190
million convertible notes. Further disclosure may be found in Note J to the Financial Statements and in the
company's 2002 Annual Report on Form 10-K.
In November 2002, the company completed the sale of a total of 7,755,030 shares of its common stock, par
value $0.10 per share, at a price of $22.566 per share, for an aggregate purchase price of $175 million to the
three employee benefit plan trusts of International. The securities were offered and sold in reliance upon the
exemption from securities registration afforded by Section 4(2) of the Securities Act of 1933 and Rule 506 under
Regulation D. The proceeds from the sale of the stock will be used to fund the company's retirement plans in
2003.
In December 2002, Fitch IBCA lowered the company's and NFC's senior unsecured debt ratings to BB from BB+.
They also lowered the company's and NFC's senior subordinated debt ratings to B+ from BB-. Also in December
2002, Standard and Poor's lowered the company's and NFC's senior unsecured debt ratings to BB- from BB and the
company's senior subordinated debt rating to B from B+. In December 2002, Moody's also lowered the company's
senior unsecured debt rating to Ba3 from Ba1 and the company's and NFC's senior subordinated debt ratings to B2
from Ba2.
In December 2002, the company completed the private placement of $190 million of new senior convertible bonds
due 2007. The bonds were priced to yield 2.5% with a conversion premium of 30% on a closing price of $26.70.
Simultaneous with the issuance of the convertible bonds, the company entered into two call option derivative
contracts, the consequences of which will allow the company to eliminate share dilution upon conversion of the
convertible debt from the conversion price of the bond up to a 100% premium over the share price at issuance. In
February 2003, $100 million of the net proceeds from the $190 million offering was used to repay the aggregate
principal amount of the 7% senior notes due February 2003. The remaining funds were used to repay other existing
debt, replenish cash balances that were used to repay other debt that matured in fiscal 2002 and to pay fees and
expenses related to the offering.
Cash flow from the company's manufacturing operations, financial services operations and financing capacity
is currently sufficient to cover planned investment in the business. The company had outstanding capital
commitments of $173 million at January 31, 2003, primarily for the HPV, NGD and other new engine programs.
It is the opinion of management that, in the absence of significant unanticipated cash demands, current and
forecasted cash flow as well as anticipated financing actions will provide sufficient funds to meet operating
requirements and capital expenditures. Currently, under limitations in various debt agreements, the company is
generally unable to incur material amounts of additional debt. The company is generally allowed under these
limitations to refinance debt as it matures.
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.
PAGE 31
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
2002 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, 2002.
Income Taxes
The Statement of Financial Condition at January 31, 2003, includes a deferred tax asset of $1,598 million,
net of valuation allowances of $110 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. For more information, refer to Management's Discussion and Analysis of
Financial Condition and Results of Operations and Note 3 in the company's 2002 Annual Report on Form 10-K.
New Accounting Pronouncements
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 elaborates on the disclosures to 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. 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 company has provided
disclosures about guarantees in Note K to the Financial Statements.
In December 2002, the FASB issued Statement of Financial Accounting Standards No. 148 (SFAS 148),
"Accounting for Stock-Based Compensation - Transition and Disclosure," which amends FASB Statement No. 123,
"Accounting for Stock-Based Compensation." SFAS 148 provides alternative methods of transition for a voluntary
change to the fair value based method of accounting for stock-based employee compensation. It also requires
prominent disclosures in both annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported results. The provisions of SFAS
148 are effective for fiscal years ending after December 15, 2002, and the interim disclosure provisions are
effective for interim periods beginning after December 15, 2002. The company will provide the required interim
disclosures beginning in the quarter ending April 30, 2003.
In January 2003, the FASB issued Interpretation No. 46 (FIN 46), "Consolidation of Variable Interest
Entities." This interpretation addresses consolidation requirements of variable interest entities. Transferors
to qualified special purpose entities (QSPEs) 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 company currently sells receivables to entities meeting the requirements
of QSPEs.
PAGE 32
Business Environment
Sales of Class 5 through 8 trucks have historically been cyclical, with demand affected by such economic
factors as industrial production, construction, demand for consumer durable goods, interest rates and the
earnings and cash flow of dealers and customers. Truck sales in the first quarter were hindered by a number of
factors including the overall state of the economy, rising insurance costs, tightened credit availability and
increased fuel prices. The company's U.S. and Canadian order backlog at January 31, 2003, is 19,300 units,
consistent with January 31, 2002. Historically, retail deliveries have been impacted by the rate at which new
truck orders are received. Therefore, in order to manage through the current downturn, the company continually
evaluates order receipts and backlog throughout the year by balancing production with demand as appropriate. An
industry-wide slowdown in orders for medium-duty trucks resulted in the temporary layoff of 250 workers at the
company's Springfield Assembly Plant in the first quarter.
The company currently projects 2003 U.S. and Canadian Class 8 heavy truck demand to be 156,000 units, down
4% from 2002. Class 6 and 7 medium truck demand, excluding school buses, is forecast at 82,000 units, 13% higher
than in 2002. Demand for school buses is expected to be 27,500 units, consistent with 2002. Mid-range diesel
engine shipments by the company to OEMs in 2003 are expected to be 346,000 units, 10% higher than 2002.
PAGE 33
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 2002 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 January 31,
2003, the net fair value of these instruments would decrease by approximately $27 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.
There have been no material changes in the company's foreign currency risk since October 31, 2002, as
reported in the 2002 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Evaluation of disclosure controls and procedures
------------------------------------------------
The company's principal executive officer and principal financial officer evaluated the company's
disclosure controls and procedures (as defined in rule 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934, as amended (the Exchange Act)) as of a date within 90 days before the filing of
this quarterly report (the Evaluation Date). Based on that evaluation, the principal executive
officer and principal financial officer of the company concluded that, as of the Evaluation Date, the
disclosure controls and procedures in place at the company were adequate to ensure that information
required to be disclosed by the company, including its consolidated subsidiaries, in reports that the
company files or submits under the Exchange Act, is recorded, processed, summarized and reported on a
timely basis in accordance with applicable rules and regulations. Although the company's principal
executive officer and principal financial officer believe the company's existing disclosure controls
and procedures are adequate to enable the company to comply with its disclosure obligations, the
company intends to formalize and document the procedures already in place and establish a disclosure
committee.
Changes in internal controls
----------------------------
The company has not made any significant changes to its internal controls subsequent to the Evaluation
Date. The company has not identified any significant deficiencies or material weaknesses or other
factors that could significantly affect these controls, and therefore, no corrective action was taken.
PAGE 34
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. In the opinion of the company's
management, none of these proceedings or claims are material to the business or the financial
condition of the company.
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 is
seeking to set aside the verdict and will appeal any adverse judgment. The company intends to
cooperate in these efforts. The company believes that Caterpillar may assert claims against the
company regarding this and other aspects of fuel system technology that it may claim is used in the
company's new engines. In January 2002, Caterpillar sued the company in the Circuit Court in Peoria
County, Illinois, and the company counter claimed against Caterpillar each alleging the other breached
the purchase agreement pursuant to which Caterpillar supplied fuel systems for the company's prior
version of diesel engines. The alleged breaches involve Caterpillar's refusal to supply the new fuel
system and the company's subsequent replacement of Caterpillar as the supplier of such systems for the
company's new version of diesel engines. The company believes that it has meritorious defenses to any
such claims Caterpillar has asserted or may assert against the company and will defend vigorously any
such actions. Based upon the information developed to date, the company believes that the proceedings
or claims will not have a material adverse impact on the business, results of operations or financial
condition of the company.
PAGE 35
Navistar International Corporation and Consolidated Subsidiaries
PART II - OTHER INFORMATION (continued)
---------------------------------------
Item 2. Changes in 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 1,228 shares was deferred as
payment for the 2002 annual retainer and meeting fees. In each case, the shares were acquired at
prices ranging from $23.955 to $30.305, 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.
In November 2002, the company sold an aggregate amount of 7,755,030 shares of common stock in three
separate sales; 4,653,018 shares to the International Non-Contributory Retirement Plan Trust,
1,551,006 shares to the International Retirement Plan for Salaried Employees Trust, and 1,551,006
shares to the International Retiree Health Benefit Trust, for an aggregate purchase price of $175
million, and per share purchase price of $22.566. Each trust is a funding trust for an employee
benefit plan sponsored by International. The company appointed Jennison Associates LLC (Jennison) as
investment manager for each trust with respect to the company stock, and Jennison has been given
discretionary authority regarding voting and disposition of the stock. The company, has, however,
retained the power to revoke or change the appointment of Jennison. The company intends to use the
proceeds from the offering to fund the company's retirement plans in 2003. The offer and sale of the
securities was exempt from the registration requirements of the Securities Act of 1933, as amended,
pursuant to Section 4(2) thereof and Regulation D promulgated thereunder. On December 6, 2002, the
company filed a registration statement for the resale of the securities, which registration statement
was declared effective on January 10, 2003.
In December 2002, the company completed an offering of $190 million in aggregate principal amount of
2.50% Senior Convertible Notes due 2007. The notes are general unsecured obligations of the company
and are convertible, at the option of the holder, into shares of the common stock of the company at a
conversion price of $34.71. International has guaranteed, on a senior unsecured basis, the company's
obligations under the notes. Interest is payable on the notes semiannually in arrears on June 15 and
December 15 of each year commencing on June 15, 2003. The initial purchaser of the notes was Credit
Suisse First Boston. From the aggregate offering price of $190 million, the company received
$186,200,000. The company used the proceeds from the offering as follows: (i) to repay the aggregate
principal amount of the 7% Senior Notes due February 2003; (ii) to repay other existing debt; (iii) to
replenish cash balances that were used to repay other debt that matured in fiscal 2002; and (iv) to
pay fees and expenses related to the offering. The offer and sale of the notes were exempt from the
registration requirements of the Securities Act of 1933, as amended, pursuant to Rule 144A promulgated
thereunder. On February 25, 2003, the company filed a registration statement for the resale of the
notes and the shares of common stock issuable upon conversion of the notes.
Payments of cash dividends and the repurchase of common stock are currently limited due to
restrictions contained in the company's $400 million Senior Notes, $250 million Senior Subordinated
Notes and $19 million Note Purchase Agreement. The company has not paid dividends on the common stock
since 1980 and does not expect to pay cash dividends on the common stock in the foreseeable future.
PAGE 36
Navistar International Corporation and Consolidated Subsidiaries
PART II - OTHER INFORMATION (continued)
---------------------------------------
Item 6. Exhibits and reports on Form 8-K
10-Q Page
---------
(a) Exhibits:
3. Articles of Incorporation and By-Laws E-1
4. Instruments Defining the Rights of Security Holders, Including
Indentures E-2
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-6
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-7
(b) Reports on Form 8-K:
The company filed a current report on Form 8-K with the Commission on November 8, 2002, in which the company announced the sale of common stock to three of the
employee benefit plan trusts of International Truck and Engine Corporation.
The company furnished a current report on Form 8-K with the Commission on November 21, 2002, in
which the company provided information regarding timing of and access to its fourth quarter 2002
earnings release conference call.
The company furnished a current report on Form 8-K with the Commission on December 2, 2002, in
which the company announced a voluntary plan through which shareholders owning fewer than 100
shares may either sell their holdings or purchase shares to bring them up to 100.
The company filed a current report on Form 8-K with the Commission on December 3, 2002, in which the company released its fourth quarter 2002 earnings.
The company filed a current report on Form 8-K with the Commission on December 11, 2002,
in which the company announced plans to issue $190 million in senior convertible .bonds.
The company filed a current report on Form 8-K with the Commission on December 11, 2002,
in which the company announced that the current president and chief operating officer, Daniel C. Ustian, was elected chief executive officer effective February 19, 2003.
The company filed a current report on Form 8-K with the Commission on December 11, 2002,
in which the company announced the pricing of the $190 million new senior convertible bonds to be sold in a private placement.
The company furnished a current report on Form 8-K with the Commission on January 17, 2003,
in which the company provided information regarding timing of and access to its first quarter 2003 earnings release conference call.
PAGE 37
SIGNATURE
---------------
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
NAVISTAR INTERNATIONAL CORPORATION
- -----------------------------------
(Registrant)
/s/ Mark T. Schwetschenau
- ----------------------------------
Mark T. Schwetschenau
Vice President and Controller
(Principal Accounting Officer)
March 14, 2003
PAGE 38
CERTIFICATION
-------------
I, Daniel C. Ustian, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Navistar International Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there
were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/ Daniel C. Ustian
- -----------------------------------------------
Daniel C. Ustian
President and Chief Executive Officer
(Principal Executive Officer)
PAGE 39
CERTIFICATION
-------------
I, Robert C. Lannert, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Navistar International Corporation;
2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit
to state a material fact necessary to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial information included in this quarterly
report, fairly present in all material respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material information relating to the
registrant, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within
90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls
and procedures based on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the
registrant's auditors and the audit committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal controls which could adversely
affect the registrant's ability to record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other employees who have a
significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there
were significant changes in internal controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: March 14, 2003
/s/ Robert C. Lannert
- ----------------------------------------------
Robert C. Lannert
Vice Chairman and Chief Financial Officer
(Principal Financial Officer)