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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 July 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 August 29, 2003, the number of shares outstanding of the registrant's common stock was
68,695,891.
PAGE 2
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
INDEX
---------
Page
Reference
---------
Part I. Financial Information:
Item 1. Financial Statements
Statement of Income
Three Months and Nine Months Ended July 31, 2003 and 2002.............................. 3
Statement of Financial Condition
July 31, 2003, October 31, 2002 and July 31, 2002...................................... 4
Statement of Cash Flow
Nine Months Ended July 31, 2003 and 2002............................................... 5
Notes to Financial Statements.................................................................... 6
Additional Financial Information................................................................. 26
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................ 28
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.............................................................. 39
Item 4. Controls and Procedures........................................................... 39
Part II. Other Information:
Item 1. Legal Proceedings................................................................. 40
Item 2. Changes in Securities and Use of Proceeds......................................... 40
Item 6. Exhibits and Reports on Form 8-K.................................................. 41
Signature 42
PAGE 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
STATEMENT OF INCOME (Unaudited)
Millions of dollars, except per share data
- --------------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-----------------------------------------------------------------
Three Months Ended Nine Months Ended
July 31 July 31
-----------------------------------------------------------------
2003 2002 2003 2002
-------------- --------------- -------------- ---------------
Sales and revenues
Sales of manufactured products.............................. $ 1,810 $ 1,524 $ 5,097 $ 4,502
Finance and insurance revenue............................... 81 61 226 210
Other income 3 6 13 16
--------- --------- --------- ---------
Total sales and revenues............................ 1,894 1,591 5,336 4,728
--------- --------- --------- ---------
Costs and expenses
Cost of products and services sold.......................... 1,579 1,355 4,587 3,985
Postretirement benefits expense............................. 71 58 225 174
Engineering and research expense............................ 57 61 175 190
Selling, general and administrative expense................. 120 115 366 376
Interest expense............................................ 33 39 104 115
Other expense 2 2 20 19
--------- --------- --------- ---------
Total costs and expenses............................ 1,862 1,630 5,477 4,859
--------- --------- --------- ---------
Income (loss) from continuing operations before
income taxes ..................................... 32 (39) (141) (131)
Income tax expense (benefit)................................ 13 (23) (50) (60)
--------- --------- --------- ---------
Income (loss) from continuing operations............ 19 (16) (91) (71)
Loss from discontinued operations........................... (1) - (4) (5)
--------- --------- --------- ---------
Net income (loss)........................................... $ 18 $ (16) $ (95) $ (76)
========= ========= ========= =========
- --------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share
Continuing operations............................... $ 0.27 $ (0.26) $ (1.35) $ (1.18)
Discontinued operations............................. (0.01) (0.01) (0.06) (0.09)
--------- --------- --------- ---------
Net income (loss)............................ $ 0.26 $ (0.27) $ (1.41) $ (1.27)
========= ========= ========= =========
Diluted earnings (loss) per share
Continuing operations............................... $ 0.26 $ (0.26) $ (1.35) $ (1.18)
Discontinued operations............................. (0.01) (0.01) (0.06) (0.09)
--------- --------- --------- ---------
Net income (loss)............................ $ 0.25 $ (0.27) $ (1.41) $ (1.27)
========= ========= ========= =========
Average shares outstanding (millions)
Basic ............................................. 68.5 60.6 67.7 60.2
Diluted 74.8 60.6 67.7 60.2
- --------------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 4
STATEMENT OF FINANCIAL CONDITION (Unaudited)
Millions of dollars
- ---------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-----------------------------------------------------
July 31 October 31 July 31
2003 2002 2002
---------------- ---------------- --------------
ASSETS
Current assets
Cash and cash equivalents............................... $ 187 $ 620 $ 547
Marketable securities................................... 125 - 10
Receivables, net........................................ 818 1,046 608
Inventories............................................. 536 595 714
Deferred tax asset, net................................. 256 242 154
Other assets............................................ 261 120 169
--------- ---------- ---------
Total current assets............................................ 2,183 2,623 2,202
--------- ---------- ---------
Marketable securities........................................... 439 116 256
Finance and other receivables, net.............................. 935 1,209 1,264
Property and equipment, net..................................... 1,304 1,479 1,514
Investments and other assets.................................... 328 167 210
Prepaid and intangible pension assets........................... 59 63 277
Deferred tax asset, net......................................... 1,346 1,286 851
--------- ---------- ---------
Total assets ................................................. $ 6,594 $ 6,943 $ 6,574
========= ========== =========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt.. $ 229 $ 358 $ 399
Accounts payable, principally trade..................... 892 1,020 932
Other liabilities....................................... 1,012 1,021 708
--------- ---------- ---------
Total current liabilities....................................... 2,133 2,399 2,039
--------- ---------- ---------
Debt: Manufacturing operations................................ 871 747 789
Financial services operations........................... 1,418 1,651 1,417
Postretirement benefits liability............................... 1,362 1,354 915
Other liabilities............................................... 517 541 366
--------- ---------- ---------
Total liabilities....................................... 6,301 6,692 5,526
--------- ---------- ---------
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)..................................... (890) (721) (261)
Accumulated other comprehensive loss............................ (725) (705) (361)
Common stock held in treasury, at cost
(6.8 million, 14.8 million and 14.8 million shares held) (217) (473) (473)
--------- ---------- ---------
Total shareowners' equity............................... 293 251 1,048
--------- ---------- ---------
Total liabilities and shareowners' equity....................... $ 6,594 $ 6,943 $ 6,574
========= ========== =========
- --------------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
PAGE 5
STATEMENT OF CASH FLOW (Unaudited)
Millions of dollars
- -------------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------------
Nine Months Ended July 31
------------------------------------------
2003 2002
----------------- -----------------
Cash flow from operations
Net loss ........................................................................ $ (95) $ (76)
Adjustments to reconcile net loss to cash used in operations:
Depreciation and amortization.............................................. 156 169
Deferred income taxes...................................................... (78) (22)
Postretirement benefits funding less than expense.......................... 15 38
Other, net................................................................. (109) (87)
Change in operating assets and liabilities:
Receivables................................................................ 38 219
Inventories................................................................ 58 (62)
Prepaid and other current assets........................................... (82) (47)
Accounts payable........................................................... (125) (167)
Other liabilities.......................................................... 2 (7)
--------------- ---------------
Cash used in operations....................................................... (220) (42)
--------------- ---------------
Cash flow from investment programs
Purchases of retail notes and lease receivables................................... (991) (1,020)
Collections/sales of retail notes and lease receivables........................... 1,426 1,011
Purchases of marketable securities................................................ (673) (90)
Sales or maturities of marketable securities...................................... 225 88
Proceeds from sale of business.................................................... - 63
Capital expenditures.............................................................. (131) (157)
Proceeds from sale-leasebacks..................................................... - 164
Property and equipment leased to others........................................... 26 (24)
Capitalized interest and other.................................................... (8) (4)
--------------- ---------------
Cash provided by (used in) investment programs................................ (126) 31
--------------- ---------------
Cash flow from financing activities
Issuance of debt.................................................................. 218 290
Principal payments on debt........................................................ (264) (238)
Net decrease in notes and debt outstanding under bank revolving credit
facility and commercial paper programs........................................ (192) (327)
Proceeds from sale of stock to benefit plans...................................... 175 -
Premiums on call options, net..................................................... (25) -
Debt issuance costs and other financing activities................................ 1 11
--------------- ---------------
Cash used in financing activities............................................. (87) (264)
--------------- ---------------
Cash and cash equivalents
Decrease during the period.................................................... (433) (275)
At beginning of the period.................................................... 620 822
--------------- ---------------
Cash and cash equivalents at end of the period.................................... $ 187 $ 547
=============== ===============
- -------------------------------------------------------------------------------------------------------------------------------
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 condition, 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.
As a result of the 2002 Plan of Restructuring as further described in Note H, substantially all of the
participants of the company's pension plans are inactive. Accordingly, effective February 1, 2003, cumulative
unrecognized gains and losses related to pension benefits are amortized over the remaining life expectancy of the
participants in the plans. This resulted in a $17 million reduction in pension expense for the nine months ended
July 31, 2003. The company previously recognized these costs over the remaining service life of active
participants.
PAGE 7
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note A. Summary of Accounting Policies (continued)
Statement of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for Stock-Based Compensation"
and Statement of Financial Accounting Standards No. 148 (SFAS 148), "Accounting for Stock-Based Compensation -
Transition and Disclosure," encourage, but do not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The company has chosen to continue to account for stock-based
compensation in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations. Accordingly, no compensation cost has been recognized for fixed stock
options because the exercise prices of the stock options equal the market value of the company's common stock at
the date of grant. Further disclosure about the company's stock compensation plans can be found in Note 20 to
the company's 2002 Annual Report on Form 10-K. The following table illustrates the effect on the company's net
income (loss) and earnings (loss) per share if the company had applied the fair value recognition provision of
SFAS 123 in accordance with the disclosure provisions of SFAS 148.
Three Months Ended Nine Months Ended
July 31 July 31
-------------------------- -------------------------
Millions of dollars 2003 2002 2003 2002
- ----------------------------------------------------------- -------------------------- -------------------------
Net income (loss), as reported............................ $ 18 $ (16) $ (95) $ (76)
Add: Interest expense on 2.5% senior convertible debt
for dilutive purposes (net of tax)................ 1 - - -
--------- -------- -------- --------
Adjusted net income (loss) available to common
shareholders plus assumed conversions.............. 19 (16) (95) (76)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects............................ (3) (3) (8) (8)
--------- --------- --------- ---------
Pro forma net income (loss)............................... $ 16 $ (19) $ (103) $ (84)
========= ========= ========= =========
Earnings (loss) per share:
Basic - as reported $ 0.26 $ (0.27) $ (1.41) $ (1.27)
Basic - pro forma $ 0.23 $ (0.32) $ (1.53) $ (1.41)
Diluted - as reported $ 0.25 $ (0.27) $ (1.41) $ (1.27)
Diluted - pro forma $ 0.21 $ (0.32) $ (1.53) $ (1.41)
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.
PAGE 8
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, "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 Statement of Financial Accounting
Standards 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.
In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities," which amends and clarifies accounting and reporting for
certain derivative instruments. This statement is effective for contracts entered into or modified after June
30, 2003, and for hedging relationships designated after June 30, 2003, and is to be applied prospectively. The
company currently reports cash received from, or paid to, derivative contracts consistent with the underlying
assets on its Statement of Cash Flow.
In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity," which establishes standards for how
an issuer classifies and measures certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and
otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The company
is evaluating the impact of this new standard on its financial condition, results of operations and cash flows.
Note C. Supplemental Cash Flow Information
Consolidated interest payments during the first nine months of 2003 and 2002 were $115 million and $125
million, respectively. Consolidated tax payments made during the first nine months of 2003 were $15 million and
were not significant for the same period in 2002.
Note D. Income Taxes
The Statement of Income reflects the tax expense of current operations, which is principally used to reduce
the cumulative benefit of NOL carryforwards reported as a deferred tax asset in the Statement of Financial
Condition. Cash payment of income taxes may be required for certain state and international operations, however,
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:
July 31 October 31 July 31
Millions of dollars 2003 2002 2002
- ----------------------------------------------------------------------------------------------------------------------
Finished products.............................................. $ 310 $ 313 $ 349
Work in process................................................ 58 65 112
Raw materials and supplies..................................... 168 217 253
------------- -------------- -------------
Total inventories...................................... $ 536 $ 595 $ 714
============= ============== =============
PAGE 9
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
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.
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 use 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 July 31, 2003, was $457 million. The allowance for losses allocated to
sold receivables totaled $15 million, $14 million and $16 million at July 31, 2003, October 31, 2002 and July 31,
2002, respectively.
The SPCs' retained 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 $457 million, $358 million and $489 million at July 31, 2003, October 31, 2002
and July 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.
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 July 31, 2003, were a prepayment speed of
1.4, a weighted average life of 41 months and an interest-only receivables discount rate of 4.93%. For those
sales completed during the quarter ended July 31, 2002, the assumptions used were a prepayment speed of 1.4, a
weighted average life of 40 months and an interest-only receivables discount rate of 6.93%.
Sold receivable balances are summarized below.
July 31 October 31 July 31
Millions of dollars 2003 2002 2002
---------------------------------------------------- ---------------- -- -------------- --- ---------------
Retail notes, net of unearned income............... $ 1,874 $ 1,522 $ 1,805
Finance leases, net of unearned income............. 38 - -
Wholesale notes.................................... 873 801 697
Retail accounts.................................... _ 95 127 164
--------- --------- ---------
Total..................................... $ 2,880 $ 2,450 $ 2,666
======== ======== ========
PAGE 10
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Sales of Receivables (continued)
Serviced portfolio balances are summarized below.
July 31 October 31 July 31
Millions of dollars 2003 2002 2002
---------------------------------------------------- ---------------- -- -------------- --- ---------------
Gross serviced receivables:
Retail notes.................................. $ 2,518 $ 2,529 $ 2,573
Finance leases................................ 178 206 210
Wholesale notes............................... 907 839 715
Accounts 303 384 242
--------- --------- ---------
Total gross serviced receivables.......... 3,906 3,958 3,740
Net investment in operating leases................. 192 248 264
--------- --------- ---------
Total serviced portfolio.................. $ 4,098 $ 4,206 $ 4,004
======== ======== ========
Additional financial data for the gross serviced portfolio as of July 31, 2003, and for the nine months
then ended is summarized below:
Finance and
Retail Operating Wholesale
Millions of dollars Notes Leases Notes Accounts
- ------------------------------------------------------- ----------- --- --------------- -- -------------- -- ------------
Balances with payments past due over 60 days......... $ 11 $ 2 $ 4 $ 3
Credit losses, net of recoveries..................... 11 1 - -
Certain cash flows received from (paid to) securitization trusts/conduits were as follows:
Nine Months Ended
July 31
---------------------------
Millions of dollars 2003 2002
- ------------------------------------------------------------ ----------- -- ------------
Proceeds from sales of finance receivables................. $ 1,347 $ 999
Proceeds from sales of finance receivables into
revolving facilities.................................. 3,749 3,385
Servicing fees received.................................... 20 18
Repurchase of receivables in breach of terms............... (24) (120)
Cash used in exercise of purchase option................... (140) (45)
All other cash received from trusts........................ 127 179
Note G. Debt
In December 2002, the company completed the private placement of $190 million of 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's Cayman Islands subsidiary 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 11
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 $309 million, after $3 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 July 31, 2003, approximately $619 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 $232 million is expected to
be funded from existing cash balances and internally generated cash flows from operations.
PAGE 12
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 is 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 nine months ended July 31, 2003,
approximately $31 million was paid for severance and other benefits to approximately 1,500 employees as a result
of the two Plans of Restructuring, of which $7 million was paid in the third quarter. 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 July 31, 2003, $11 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. During the nine months ended July 31, 2003, $3 million of payments related to exit costs
were incurred of which $1 million was 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 July 31, 2003, $26 million of the total net charge of $68
million has been paid for dealer termination and other exit costs, of which $1 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 its current business case for a V-6 diesel engine
in the specified vehicles was not viable and discontinued its program for the use of these engines. As a result,
the company determined that the timing of the commencement of the V-6 diesel engine program was 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 13
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 worked 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 believed that it was legally entitled to such
reimbursement under the agreement, Ford did not agree 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
July 31, 2003, of the total net charge of $170 million, $89 million has been incurred primarily related to the
write-off or write-down to fair value of fixed assets and for the payment of supplier settlements and lease
obligations of which $12 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 July
31 Amount 31 2003
Millions of dollars 2002 Incurred
----------------------------------------------- ----------------- -------------- ----------------
Severance and other benefits................. $ 112 $ (31) $ 81
Lease terminations........................... 30 (3) 27
Loss on sale of business..................... 4 (3) 1
Dealer terminations and other exit costs..... 46 (4) 42
Other non-recurring charges.................. 104 (23) 81
------ ------- --------
Total................................... $ 296 $ (64) $ 232
====== ======= =========
In April 2003, the company reached a comprehensive agreement with Ford concerning termination of its V-6
diesel engine program. The terms of the agreement include compensation to neutralize certain current and future
V-6 diesel engine program related costs not accrued for as part of the 2002 non-recurring charge, resolution of
ongoing pricing related to the company's V-8 diesel engine program and a release by the parties of all of their
obligations under the V-6 diesel engine contract. The company will continue as Ford's exclusive supplier of V-8
diesel engines through 2012 for use in its over 8,500 lb. gross vehicle weight pick-up trucks, vans and SUVs for
North America.
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.
PAGE 14
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note J. Financial Instruments
The company uses derivative financial instruments as part of its overall interest rate and foreign currency
risk management strategy 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 or other security to support
derivative financial instruments with credit risk. NFC's counter-party credit exposure is limited to the
positive fair value of contracts at the reporting date. As of July 31, 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 July 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 liabilities on the
Statement of Financial Condition.
Inception Date Maturity Date Derivative Type Notional Amount Fair Value
- ------------------------------------------------------------------------------- ---------------------------------------
January 1999 - October 2003 - Interest Rate Swaps $ 308 $ (3)
April 2003 March 2007
October 2000 - October 2003 - Interest Rate Caps 1,014 -
July 2003 November 2012
February 2003 - July 2005 Forward Starting Swaps 400 (1)
April 2003
April 2003 October 2003 Cross Currency Swaps 20 -
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 July 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 the projected balances, NFC has retained
interest rate exposure on this difference. This transaction is accounted for as a non-hedging derivative
instrument and gains and losses are recorded in other income.
PAGE 15
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note J. Financial Instruments (continued)
In addition to those instruments described above, the company's Cayman Islands subsidiary 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.
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
$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 2.5% 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 July 31, 2003, the outstanding balance on this debt was $17 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 nine months ended July 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 July 31, 2003, outstanding loans under the lines of credit totaled
$112 million. The lines of credit have various maturity dates with July 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 maximum obligations under these leases as
of July 31, 2003, totaled approximately $667 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 2014. As of July 31,
2003, the total remaining obligation under these leases is approximately $45 million.
PAGE 16
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note K. Guarantees (continued)
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 excess of the guaranteed lease residual
value over the fair value of the 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 July 31, 2003, the outstanding balance on this portion of the facility was $32 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 July 2006.
As of July 31, 2003, the total outstanding balance of the debt was $19 million, or 200 million pesos.
In May 2002, NFC entered into an agreement to guarantee the peso-denominated line of credit of two of the
Mexican finance subsidiaries up to the amount of 116 million pesos, equivalent to $11 million. The due date of
the longest loan maturity is March 2006. As of July 31, 2003, the total outstanding balance of the debt was $11
million, or 116 million pesos.
In November 2001, NFC entered into an agreement to guarantee the 500 million peso-denominated medium term
note of one of the Mexican finance subsidiaries. The due date is November 2004. As of July 31, 2003, the
outstanding balance of peso-denominated debt was $48 million, or 500 million pesos.
As of July 31, 2003, NFC had guaranteed derivative contracts for foreign currency forwards, interest rate
swaps and cross currency swaps related to two of the company's Mexican finance subsidiaries. NFC is liable up to
the fair market value of these derivative contracts only in cases of default by the two Mexican finance
subsidiaries. The notional amount available on this date under these derivative contracts is $50 million in
interest rate swaps and cross currency swaps. As of July 31, 2003, there was an outstanding balance of $45
million related to interest rate swaps and cross currency swaps, and the fair market value of the outstanding
balance was immaterial.
As part of the sale of Harco to 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 $1 million as of July 31, 2003. Management
believes this reserve is adequate to cover any future potential payments to IAT.
At July 31, 2003, the Canadian operating subsidiary was contingently liable for $319 million of retail
customers' contracts and $40 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.
PAGE 17
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note K. Guarantees (continued)
In addition, the company entered into various guarantees for purchase commitments, credit guarantees and
buyback programs with various expiration dates that total approximately $90 million. In the ordinary course of
business, the company also provides routine indemnifications and other guarantees whose terms range in duration
and often are not explicitly defined. The company does not believe these will have a material impact on the
results of operations or financial condition of the company.
Product Warranty
- ----------------
Provisions for estimated expenses related to product warranty are made at the time products are sold. These
estimates are established using historical information about the nature, frequency and average cost of warranty
claims. Management actively studies trends of warranty claims and takes action to improve vehicle quality and
minimize warranty claims. Management believes that the warranty reserve is appropriate; however, actual claims
incurred could differ from the original estimates, requiring adjustments to the reserve.
Changes in the product warranty accrual for the nine months ended July 31, 2003, were as follows:
Millions of dollars
-------------------------------------------------------------------------------------------------
Balance, beginning of period............................................... $ 185
Change in liability for warranties issued during the period................ 104
Change in liability for preexisting warranties............................. (7)
Payments made.............................................................. (130)
-------------
Balance, end of period..................................................... $ 152
=============
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.
PAGE 18
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note L. Legal Proceedings and Environmental Matters (continued)
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. In June 2003, Sturman appealed this decision. In May 2003, in Federal Court in
Columbia, South Carolina, Caterpillar sued the company, its supplier of injectors and joint venture partner
Siemens Diesel Systems Technology, LLC and Sturman for patent infringement, alleging that certain Caterpillar
patents are infringed 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 disputes over the price paid by the company to
Caterpillar for fuel injectors delivered, 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 the claims Caterpillar has asserted 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 19
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note M. Segment Data
Reportable operating segment data is as follows:
Financial
Millions of dollars Truck Engine Services Total
- ------------------------------------------------- ---------------- ------------------ ---------------- -----------------
For the quarter ended July 31, 2003
----------------------------------------------------------------------
External revenues............................... $ 1,307 $ 503 $ 82 $ 1,892
Intersegment revenues........................... - 124 8 132
--------- --------- --------- ---------
Total revenues............................. $ 1,307 $ 627 $ 90 $ 2,024
========= ========= ========= =========
Segment profit.................................. $ 22 $ 29 $ 41 $ 92
For the nine months ended July 31, 2003
----------------------------------------------------------------------
External revenues............................... $ 3,654 $ 1,444 $ 230 $ 5,328
Intersegment revenues........................... - 360 25 385
--------- --------- --------- ---------
Total revenues............................. $ 3,654 $ 1,804 $ 255 $ 5,713
========= ========= ========= =========
Segment profit (loss)........................... $ (96) $ 41 $ 101 $ 46
As of July 31, 2003
----------------------------------------------------------------------
Segment assets.................................. $ 1,623 $ 985 $ 2,253 $ 4,861
For the quarter ended July 31, 2002
----------------------------------------------------------------------
External revenues............................... $ 1,106 $ 418 $ 64 $ 1,588
Intersegment revenues........................... - 115 8 123
--------- --------- --------- ---------
Total revenues............................. $ 1,106 $ 533 $ 72 $ 1,711
========= ========= ========= =========
Segment profit (loss)........................... $ (64) $ 61 $ 15 $ 12
For the nine months ended July 31, 2002
----------------------------------------------------------------------
External revenues............................... $ 3,191 $ 1,311 $ 218 $ 4,720
Intersegment revenues........................... - 330 26 356
--------- --------- --------- ---------
Total revenues............................. $ 3,191 $ 1,641 $ 244 $ 5,076
========= ========= ========= =========
Segment profit (loss).......................... $ (220) $ 164 $ 70 $ 14
As of July 31, 2002
----------------------------------------------------------------------
Segment assets.................................. $ 1,914 $ 991 $ 2,282 $ 5,187
PAGE 20
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note M. Segment Data (continued)
Reconciliation to the consolidated financial statements as of and for the three months and nine months ended
July 31 is as follows:
Three Months Ended Nine Months Ended
July 31 July 31
---------------------------- -----------------------------
Millions of dollars 2003 2002 2003 2002
- ------------------------------------------------------ ------------- ----------- ------------ ------------
Segment sales and revenues........................... $ 2,024 $ 1,711 $ 5,713 $ 5,076
Other income......................................... 2 3 8 8
Intercompany......................................... (132) (123) (385) (356)
---------- ---------- ---------- ----------
Consolidated sales and revenues...................... $ 1,894 $ 1,591 $ 5,336 $ 4,728
========== ========== ========== ==========
Segment profit.....................................(l $ 92 $ 12 $ 46 $ 14
Corporate items...................................... (46) (37) (145) (105)
Manufacturing net interest expense................... (14) (14) (42) (40)
---------- ---------- ---------- ----------
Consolidated pre-tax income (loss) from continuing
operations........................................... $ 32 $ (39) $ (141) $ (131)
========== ========== ========== ==========
Segment assets....................................... $ 4,861 $ 5,187
Cash and marketable securities....................... 203 362
Deferred taxes....................................... 1,602 1,005
Corporate intangible pension assets.................. 9 76
Other corporate and eliminations..................... (81) (56)
---------- ----------
Consolidated assets.................................. $ 6,594 $ 6,574
========== ==========
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 held in
Treasury, par value $0.10 per share, at a price of $22.566 per share, for an aggregate purchase price of $175
million to 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 primarily to fund the company's
retirement plans in 2003.
Note O. Comprehensive Income
The components of comprehensive income (loss) for the three and nine months ended July 31 are as follows:
Three Months Ended Nine Months Ended
July 31 July 31
--------------------------- ----------------------------
Millions of dollars 2003 2002 2003 2002
- -------------------------------------------------------- ------------ ------------- ------------ -------------
Net income (loss)...................................... $ 18 $ (16) $ (95) $ (76)
Other comprehensive loss............................... (2) (28) (20) (22)
-------- -------- -------- --------
Total comprehensive income (loss) ............. $ 16 $ (44) $ (115) $ (98)
======== ======== ======== ========
PAGE 21
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note P. Earnings Per Share
Earnings (loss) per share was computed as follows:
Three Months Ended Nine Months Ended
July 31 July 31
----------------------------- -----------------------------
Millions of dollars, 2003 2002 2003 2002
except share and per share data
- -------------------------------------------------------------------------------------- -----------------------------
Income (loss) from continuing operations................ $ 19 $ (16) $ (91) $ (71)
Add: Interest expense on 2.5% senior convertible debt
for dilutive purposes (net of tax)............... 1 - - -
---------- --------- --------- ---------
Adjusted income (loss) from continuing operations....... 20 (16) (91) (71)
Loss from discontinued operations....................... (1) - (4) (5)
---------- ---------- ---------- ----------
Net income (loss) available to common shareholders
plus assumed conversions......................... $ 19 $ (16) $ (95) $ (76)
========== ========= ========= =========
Average shares outstanding (millions)
Basic ......................................... 68.5 60.6 67.7 60.2
Diluted 74.8 60.6 67.7 60.2
Basic earnings (loss) per share
Continuing operations................................... $ 0.27 $ (0.26) $ (1.35) $ (1.18)
Discontinued operations................................. (0.01) (0.01) (0.06) (0.09)
---------- ---------- ---------- ----------
Net income (loss)............................... $ 0.26 $ (0.27) $ (1.41) $ (1.27)
=========== ============ ============ ============
Diluted earnings (loss) per share
Continuing operations................................... $ 0.26 $ (0.26) $ (1.35) $ (1.18)
Discontinued operations................................. (0.01) (0.01) (0.06) (0.09)
---------- ---------- ---------- ----------
Net income (loss)............................... $ 0.25 $ (0.27) $ (1.41) $ (1.27)
=========== ============ ============ ===========
The computation of diluted shares outstanding for the three months ended July 31, 2003 and 2002, and for the
nine months ended July 31, 2003 and 2002, excludes incremental shares of 3.9 million, 4.5 million, 8.8 million
and 2.1 million, respectively, related to employee stock options, convertible debt and other dilutive
securities. These shares are excluded due to their anti-dilutive effect.
PAGE 22
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 July 31,
2003 and 2002, and October 31, 2002, and the Statements of Income and Cash Flow for the nine months ended July
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 2.5% 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 23
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 NINE MONTHS ENDED JULY 31, 2003
- -----------------------------------------------------------------------------------
Sales and revenues............................................ $ 2 $ 4,030 $ 1,304 $ 5,336
------------- ------------- ------------- ------------
Cost of products and services sold............................ 58 3,744 785 4,587
All other operating expenses.................................. (18) 771 137 890
------------- ------------- ------------- ------------
Total costs and expenses.................................. 40 4,515 922 5,477
------------- ------------- ------------- ------------
Equity in income (loss) of non-consolidated subsidiaries...... (103) 322 (219) -
------------- ------------- ------------- ------------
Income (loss) from continuing operations before income taxes.. (141) (163) 163 (141)
Income tax expense (benefit).................................. (50) 37 (37) (50)
------------- ------------- ------------- ------------
Income (loss) from continuing operations...................... (91) (200) 200 (91)
------------- ------------- ------------- ------------
Loss from discontinued operations............................. (4) - - (4)
-------------- ------------- ------------- ------------
Net income (loss)............................................. $ (95) $ (200) $ 200 $ (95)
============= ============= ============= ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JULY 31, 2003
- ----------------------------------------------------------------------------
Assets
Cash and marketable securities................................ $ 80 $ 6 $ 665 $ 751
Receivables, net.............................................. 6 64 1,683 1,753
Inventories................................................... - 318 218 536
Property and equipment, net................................... - 788 516 1,304
Investment in affiliates...................................... (2,705) 949 1,756 -
Deferred tax asset and other assets........................... 1,611 189 450 2,250
------------- ------------- ------------- ------------
Total assets.............................................. $ (1,008) $ 2,314 $ 5,288 $ 6,594
============= ============= ============= ============
Liabilities and Shareowners' Equity
Debt ......................................................... $ 840 $ 17 $ 1,661 $ 2,518
Postretirement benefits liability............................. - 1,485 (123) 1,362
Amounts due to (from) affiliates.............................. (2,432) 2,401 31 -
Other liabilities............................................. 291 1,438 692 2,421
------------- ------------- ------------- ------------
Total liabilities......................................... (1,301) 5,341 2,261 6,301
------------- ------------- ------------- ------------
Shareowners' equity (deficit)................................. 293 (3,027) 3,027 293
------------- ------------- ------------- ------------
Total liabilities and shareowners' equity..................... $ (1,008) $ 2,314 $ 5,288 $ 6,594
============= ============= ============= ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED JULY 31, 2003
- --------------------------------------------------------------------------------------
Cash provided by (used in) operations......................... $ (565) $ 91 $ 254 $ (220)
------------- ------------- ------------- ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables......... - - 435 435
Net increase in marketable securities......................... (53) - (395) (448)
Capital expenditures.......................................... - (107) (24) (131)
Other investing activities.................................... (2) 19 1 18
------------- ------------- ------------- ------------
Cash provided by (used in) investment programs................ (55) (88) 17 (126)
------------- ------------- ------------- ------------
Cash flow from financing activities
Net borrowings (repayments) of debt........................... 52 (4) (286) (238)
Other financing activities.................................... 180 (1) (28) 151
------------- -------------- ------------- ------------
Cash provided by (used in) financing activities............... 232 (5) (314) (87)
------------- ------------- ------------- ------------
Cash and cash equivalents
Decrease during the period.................................... (388) (2) (43) (433)
At beginning of the period.................................... 415 8 197 620
------------- ------------- ------------- ------------
Cash and cash equivalents at end of the period................ $ 27 $ 6 $ 154 $ 187
============= ============= ============= ============
PAGE 24
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 NINE MONTHS ENDED JULY 31, 2002
- -----------------------------------------------------------------------------------
Sales and revenues........................................... $ 5 $ 3,661 $ 1,062 $ 4,728
------------- ------------- ------------- ------------
Cost of products and services sold........................... (28) 3,336 677 3,985
All other operating expenses................................. (17) 707 184 874
------------- ------------- ------------- ------------
Total costs and expenses................................. (45) 4,043 861 4,859
------------- ------------- ------------- ------------
Equity in income (loss) of non-consolidated subsidiaries..... (181) 130 51 -
------------- ------------- ------------- ------------
Income (loss) from continuing operations before income taxes. (131) (252) 252 (131)
Income tax expense (benefit)................................. (60) 7 (7) (60)
------------- ------------- ------------- ------------
Income (loss) from continuing operations..................... (71) (259) 259 (71)
------------- ------------- ------------- ------------
Loss from discontinued operations............................ (5) - - (5)
------------- ------------- ------------- ------------
Net income (loss)............................................ $ (76) $ (259) $ 259 $ (76)
============= ============= ============= ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JULY 31, 2002
- ----------------------------------------------------------------------------
Assets
Cash and marketable securities............................... $ 328 $ 7 $ 478 $ 813
Receivables, net............................................. 6 110 1,756 1,872
Inventories.................................................. - 373 341 714
Property and equipment, net.................................. - 760 754 1,514
Investment in affiliates..................................... (1,292) 999 293 -
Deferred tax asset and other assets.......................... 999 304 358 1,661
------------- ------------- ------------- ------------
Total assets............................................. $ 41 $ 2,553 $ 3,980 $ 6,574
============= ============= ============= ============
Liabilities and shareowners' equity
Debt ........................................................ $ 821 $ 21 $ 1,763 $ 2,605
Postretirement benefits liability............................ - 1,019 103 1,122
Amounts due to (from) affiliates............................. (1,928) 1,818 110 -
Other liabilities............................................ 100 1,238 461 1,799
------------- ------------- ------------- ------------
Total liabilities........................................ (1,007) 4,096 2,437 5,526
------------- ------------- ------------- ------------
Shareowners' equity (deficit)................................ 1,048 (1,543) 1,543 1,048
------------- ------------- ------------- ------------
Total liabilities and shareowners' equity.................... $ 41 $ 2,553 $ 3,980 $ 6,574
============= ============= ============= ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED JULY 31, 2002
- --------------------------------------------------------------------------------------
Cash provided by (used in) operations........................ $ (304) $ (42) $ 304 $ (42)
------------- ------------- ------------- ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables........ - - (9) (9)
Net (increase) decrease in marketable securities............. 40 - (42) (2)
Capital expenditures......................................... - (129) (28) (157)
Other investing activities................................... (139) 172 166 199
------------- ------------- ------------- ------------
Cash provided by (used in) investment programs............... (99) 43 87 31
------------- ------------- ------------- ------------
Cash flow from financing activities
Net repayments of debt....................................... - - (275) (275)
Other financing activities................................... 73 - (62) 11
------------- ------------- ------------- ------------
Cash provided by (used in) financing activities.............. 73 - (337) (264)
------------- ------------- ------------- ------------
Cash and cash equivalents
Increase (decrease) during the period........................ (330) 1 54 (275)
At beginning of the period................................... 658 6 158 822
------------- ------------- ------------- ------------
Cash and cash equivalents at end of the period............... $ 328 $ 7 $ 212 $ 547
============= ============= ============= ============
PAGE 25
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 FINANCIAL CONDITION AS OF OCTOBER 31, 2002
- -------------------------------------------------------------------------------
Assets
Cash and marketable securities........................... $ 415 $ 8 $ 313 $ 736
Receivables, net......................................... 6 104 2,158 2,268
Inventories.............................................. - 300 295 595
Property and equipment, net.............................. - 770 709 1,479
Investment in affiliates................................. (2,539) 720 1,819 -
Deferred tax asset and other assets...................... 1,476 101 288 1,865
------------ ------------ ------------ ------------
Total assets......................................... $ (642) $ 2,003 $ 5,582 $ 6,943
============ ============ ============ ============
Liabilities and shareowners' equity
Debt..................................................... $ 788 $ 21 $ 1,947 $ 2,756
Postretirement benefits liability........................ - 1,483 149 1,632
Amounts due to (from) affiliates......................... (1,872) 1,817 55 -
Other liabilities........................................ 191 1,472 641 2,304
------------ ------------ ------------ ------------
Total liabilities.................................... (893) 4,793 2,792 6,692
------------ ------------ ------------ ------------
Shareowners' equity (deficit)............................ 251 (2,790) 2,790 251
------------ ------------ ------------ ------------
Total liabilities and shareowners' equity................ $ (642) $ 2,003 $ 5,582 $ 6,943
============ ============ ============ ============
Note R. Subsequent Events
In May 2003, the company announced that as a result of discussions with the National Automobile, Aerospace
and Agricultural Implement Workers of Canada, or CAW, it has reached a conditional understanding on a plan that
would keep the company's Chatham, Ontario heavy truck assembly plant open if certain financial and operating
conditions were met including obtaining financial support from the Government of Canada and the Province of
Ontario. As of July 31, 2003, these conditions had not been met and accordingly no adjustments were made to the
2002 Plan of Restructuring. In September 2003, the company finalized negotiations with the Government of Canada
and the Province of Ontario that provided the company with investment and financial support sufficient to meet
the company's financial requirements and conditions. Accordingly, the company's board of directors has approved
the decision to keep the Chatham, Ontario heavy truck assembly plant open and maintain a production schedule of
heavy trucks. The impact of this decision will result in the reversal of a portion of the 2002 restructuring
charge.
In September 2003, the company accelerated the sign-up period for an early retirement window program offered
to certain eligible, long-service United Auto Worker union employees. The purpose of the window program is to
enable the company to address the changing staffing needs of the business. The expected dates for retirement
under the program have not been changed, but the earlier sign-up period requires the company to account for the
program in the fourth quarter of 2003.
The company is in the process of quantifying the impact of these decisions which will be reflected in the
company's 2003 fourth quarter results.
PAGE 26
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 Nine Months Ended
July 31 July 31
--------------------------------- --------------------------------
Condensed Statement of Income 2003 2002 2003 2002
- ----------------------------------------------------- ---------------- --------------- ---------------- --------------
Sales of manufactured products...................... $ 1,811 $ 1,524 $ 5,098 $ 4,502
Other income........................................ 2 3 9 8
------------- ------------- ------------- -------------
Total sales and revenues........................ 1,813 1,527 5,107 4,510
------------- ------------- ------------- -------------
Cost of products sold............................... 1,566 1,338 4,542 3,937
Postretirement benefits expense..................... 69 58 222 173
Engineering and research expense.................... 57 61 175 190
Selling, general and administrative expense......... 104 97 318 321
Other expense....................................... 26 27 92 90
------------- ------------- ------------- -------------
Total costs and expenses........................ 1,822 1,581 5,349 4,711
------------- ------------- ------------- -------------
Income (loss) from continuing operations
before income taxes:
Manufacturing operations.................... (9) (54) (242) (201)
Financial services operations............... 41 15 101 70
------------- ------------- ------------- -------------
Income (loss) from continuing
operations before income taxes..... 32 (39) (141) (131)
Income tax expense (benefit).............. 13 (23) (50) (60)
------------- ------------- ------------- -------------
Income (loss) from continuing
operations ........................ 19 (16) (91) (71)
Loss from discontinued operations................... (1) - (4) (5)
------------- ------------- ------------- --------------
Net income (loss) .................................. $ 18 $ (16) $ (95) $ (76)
============= ============= ============= =============
July 31 October 31 July 31
Condensed Statement of Financial Condition 2003 2002 2002
- ----------------------------------------------------------------- ---------------- ----------------- ----------------
Cash, cash equivalents and marketable securities................ $ 278 $ 549 $ 454
Inventories..................................................... 504 566 675
Property and equipment, net..................................... 1,094 1,208 1,227
Equity in non-consolidated subsidiaries......................... 500 448 445
Other assets.................................................... 892 683 980
Deferred tax asset, net......................................... 1,602 1,526 1,003
------------- ------------- -------------
Total assets............................................ $ 4,870 $ 4,980 $ 4,784
============= ============= =============
Accounts payable, principally trade............................. $ 850 $ 970 $ 880
Postretirement benefits liability............................... 1,639 1,618 1,109
Debt............................................................ 904 897 921
Other liabilities............................................... 1,184 1,244 826
Shareowners' equity............................................. 293 251 1,048
------------- ------------- -------------
Total liabilities and shareowners' equity............... $ 4,870 $ 4,980 $ 4,784
============= ============= =============
PAGE 27
Navistar International Corporation and Consolidated Subsidiaries
Additional Financial Information (Unaudited) (continued)
Navistar International Corporation (with financial services operations on an equity basis)
Millions of dollars
Nine Months Ended
July 31
-----------------------------------------
Condensed Statement of Cash Flow 2003 2002
- -------------------------------------------------------------------------- ---------------- -----------------
Cash flow from operations
Net loss ................................................................. $ (95) $ (76)
Adjustments to reconcile net loss to cash used in operations:
Depreciation and amortization....................................... 114 121
Deferred income taxes............................................... (80) (22)
Postretirement benefits funding less than expense................... 15 38
Equity in earnings of investees, net of dividends received.......... (53) (41)
Other, net.......................................................... (53) (71)
Change in operating assets and liabilities................................. (184) (270)
------------- -------------
Cash used in operations.................................................... (336) (321)
------------- -------------
Cash flow from investment programs
Purchases of marketable securities......................................... (348) (29)
Sales or maturities of marketable securities............................... 225 69
Capital expenditures....................................................... (130) (154)
Proceeds from sale-leasebacks.............................................. - 164
Receivable from financial services operations.............................. 39 (60)
Investment in affiliates................................................... 5 2
Capitalized interest and other............................................. (6) (5)
------------- -------------
Cash used in investment programs........................................... (215) (13)
------------- -------------
Cash provided by financing activities...................................... 158 22
------------- -------------
Cash and cash equivalents
Decrease during the period................................................. (393) (312)
At beginning of the period................................................. 549 766
------------- -------------
Cash and cash equivalents at end of the period............................. $ 156 $ 454
============= =============
PAGE 28
Navistar International Corporation and Consolidated Subsidiaries
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
Third Quarter Ended July 31, 2003
- ---------------------------------
The company reported net income of $18 million, or $0.25 per diluted common share for the third quarter
ended July 31, 2003, primarily due to higher truck and engine volumes and an increase in finance revenues. For
the comparable quarter last year, the net loss was $16 million, or a $0.27 loss per diluted common share.
The truck segment's profit for the third quarter of 2003 was $22 million, an $86 million increase compared
to the same period in 2002. The truck segment's improvements are primarily the results of higher shipments and
lower production costs.
The engine segment's profit for the third quarter of 2003 was $29 million, a $32 million decrease compared
to the same period in 2002. The decrease is primarily due to start-up costs associated with the new 6.0 liter
(6.0L) V-8 engine. The engine segment's revenues were $627 million in the third quarter of 2003, 18% higher than
the comparable quarter in 2002. This increase is mainly driven by higher shipments due to strong demand for the
new 6.0L V-8 engine.
The financial services segment's profit increased $26 million from the third quarter of 2002 to $41 million
primarily due to greater gains on sales of receivables. During the third quarter of 2003, the financial services
segment sold $500 million of retail notes and leases for a pre-tax gain of $26 million. During the third quarter
of 2002, $112 million of retail notes were sold for a pre-tax gain of $2 million. Revenues for the financial
services segment increased $18 million compared to the same period last year.
Sales and Revenues. Sales and revenues for the third quarter of 2003 totaled $1,894 million, 19% higher than the
$1,591 million reported for the comparable quarter in 2002.
United States (U.S.) and Canadian industry retail sales of Class 5 through 8 trucks totaled 77,700 units in
the third quarter of 2003, which is 3% lower than the 79,900 units sold during this period in 2002. Class 8 heavy
truck sales of 44,100 units during the third quarter of 2003 were 4% lower than the 2002 level of 46,100 units.
Industry sales of Class 5, 6 and 7 medium trucks, including school buses, of 33,600 units were comparable to the
third quarter of 2002. Industry sales of school buses, which accounted for 24% of the medium truck market, were
17% higher than the 2002 level of 7,000 units.
The company's market share in the combined U.S. and Canadian Class 5 through 8 truck market for the third
quarter of 2003 increased to 24.6% from 24.2% reported in the same period in 2002.
PAGE 29
Navistar International Corporation and Consolidated Subsidiaries
Results of Operations (continued)
Total engine shipments for the quarter ended July 31, 2003, reached 97,900 units, which is 11% higher than
the 88,500 units shipped in the same quarter last year. Shipments of mid-range diesel engines by the company to
other original equipment manufacturers (OEMs) during the third quarter of 2003 totaled 82,200 units, a 12%
increase from the same period in 2002.
Finance and insurance revenue of $81 million in the third quarter of 2003 increased 33% from 2002. This
increase was attributable to greater gains on the sales of receivables as previously discussed.
Costs and expenses. Manufacturing gross margin was 13.5% of sales for the third quarter of 2003 compared with
12.2% for the same period in 2002. This increase is due to improved pricing and cost reduction initiatives
included in the 2002 Plan of Restructuring. Specifically, the closure of the Springfield, Ohio body plant and a
manufacturing production line within one of the company's plants contributed to the margin improvement.
Postretirement benefits expense increased $13 million from the third quarter of 2002 to $71 million. This
increase is the result of higher pension and health care obligations combined with lower returns on invested
assets. In addition, higher amortization expense due to significant losses in 2002 contributed to the increase.
These increases were partia