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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended January 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-4146-1
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NAVISTAR FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-2472404
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2850 West Golf Road Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code 847-734-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days Yes X No
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of February 28, 2003, the number of shares outstanding of the registrant's
common stock was 1,600,000.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF INTERNATIONAL TRUCK AND ENGINE
CORPORATION AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1)(a)
AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Statements of Consolidated Income and Retained Earnings --
Quarter Ended January 31, 2003 and 2002....................... 2
Statements of Consolidated Financial Condition --
January 31, 2003; October 31, 2002; and January 31, 2002...... 3
Statements of Consolidated Cash Flow --
Quarter Ended January 31, 2003 and 2002....................... 4
Notes to Consolidated Financial Statements.................... 5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition.........................14
Item 4. Controls and Procedures.......................................19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.............................................20
Item 5. Other Information.............................................20
Item 6. Exhibits and Reports on Form 8-K..............................20
99.1 CEO Certification Pursuant to
18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.............E-1
99.2 CFO Certification Pursuant to
18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.............E-2
Signature ..............................................................19
Certifications ..............................................................20
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Navistar Financial Corporation and Subsidiaries
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Statements of Consolidated Income and Retained Earnings (Unaudited)
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Quarter Ended January January
Millions of Dollars 2003 2002
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Revenues
Retail Notes and Finance Leases....................$ 9.8 $ 10.8
Income Related to Sales of Finance Receivables..... 38.8 22.1
Operating Leases................................... 17.9 17.8
Wholesale Notes.................................... 7.5 6.5
Accounts........................................... 4.3 5.4
Servicing Fees..................................... 6.2 6.3
Other Revenue...................................... 1.8 3.1
Total.............................................. 86.3 72.0
Expenses
Cost of Borrowing
Interest Expense................................... 13.5 14.5
Other.............................................. 1.8 1.9
Credit, Collection and Administrative.............. 10.1 10.0
Provision for Credit Losses........................ 4.2 4.3
Depreciation on Operating Leases................... 12.7 13.3
Other Expense...................................... 2.0 0.8
Total.............................................. 44.3 44.8
Income Before Taxes................................ 42.0 27.2
Income Tax Expense................................. 15.1 10.5
Income from Continuing Operations.................. 26.9 16.7
Gain on Disposal of Discontinued Operations,
(net of tax of $0.0 and $0.5)...................... - 0.7
Net Income ........................................ 26.9 17.4
Retained Earnings
Beginning of Period................................ 197.1 163.4
Dividends Paid..................................... (5.0) -
End of Period......................................$ 219.0 $ 180.8
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
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Statements of Consolidated Financial Condition (Unaudited)
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January October January
Millions of Dollars 2003 2002 2002
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- ---------------------------------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents.............................$ 22.9 $ 32.0 $ 44.5
Finance Receivables
Finance Receivables Held For Sale........... 444.9 1,006.7 580.1
Other Finance Receivables................... 301.6 307.0 168.9
Allowance for Losses........................ (13.4) (16.0) (13.7)
Finance Receivables, net.............. 733.1 1,297.7 735.3
Amounts Due from Sales of Receivables................. 350.1 345.0 408.0
Net Investment in Operating Leases.................... 226.2 248.2 273.8
Repossessions......................................... 33.6 26.0 67.9
Restricted Marketable Securities...................... 504.8 104.6 455.6
Net Accounts Receivable from Affiliates............... 3.8 - -
Other Assets.......................................... 41.6 53.4 33.9
Total Assets..........................................$ 1,916.1 $ 2,106.9 $ 2,019.0
LIABILITIES AND SHAREOWNER'S EQUITY
Net Accounts Payable to Affiliates....................$ - $ 52.2 $ 86.1
Senior and Subordinated Debt.......................... 1,400.9 1,562.5 1,454.7
Other Liabilities..................................... 128.4 127.4 128.8
Total Liabilities..................................... 1,529.3 1,742.1 1,669.6
Shareowner's Equity
Capital Stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and Paid-In Capital........... 171.0 171.0 171.0
Retained Earnings..................................... 219.0 197.1 180.8
Accumulated Other Comprehensive Loss.................. (3.2) (3.3) (2.4)
Total Shareowner's Equity............................. 386.8 364.8 349.4
Total Liabilities and Shareowner's Equity.............$ 1,916.1 $ 2,106.9 $ 2,019.0
See Notes to Consolidated Financial Statements.
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Navistar
Financial Corporation and its wholly-owned subsidiaries ("Corporation").
International Truck and Engine Corporation ("International"), which is
wholly owned by Navistar International Corporation ("Navistar"), is the
parent company of the Corporation.
The accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the Corporation's 2002
Annual Report on Form 10-K, except for the accounting policy adopted in the
first quarter of fiscal year 2003, and should be read in conjunction with
the disclosures therein.
In November 2002, the Corporation adopted Statement of Position 01-6,
Accounting by Certain Entities that Lend to or Finance the Activities of
Others,. The Statement requires that certain finance receivables be
classified as held for sale. The Corporation classifies certain finance
receivables as held for sale. Finance receivables held for sale are carried
at the lower of cost or estimated market value in the aggregate. Net
unrealized losses are recognized through a valuation allowance by charges
to income.
In November 2002, the Financial Accounting Standards Board ("FASB") issued
Interpretation No. 45 ("FIN 45"), Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others. FIN 45 requires that additional disclosures be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires a
guarantor to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and measurement provisions of FIN 45 are applicable on
a prospective basis to guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Corporation
provided disclosures about guarantees in Note 9.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46 addresses consolidation
requirements of variable interest entities. Transferors to qualifying
special purpose entities ("QSPE") subject to the reporting requirements of
FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, are excluded from the scope of
this interpretation. The Corporation currently sells receivables to
entities meeting the requirements of QSPE's.
In the opinion of management, these interim financial statements reflect
all adjustments, consisting of normal recurring items, necessary to present
fairly the results of operations, financial condition and cash flow for the
interim periods presented. Interim results are not necessarily indicative
of results to be expected for any other interim period or for the full
year. Certain amounts in the prior period financial statements have been
reclassified to conform with current period presentations.
2. DISCONTINUED OPERATIONS
On November 30, 2001, the Corporation completed the sale of all of the
stock of Harco National Insurance Company ("Harco"), a wholly-owned
insurance subsidiary, to IAT Reinsurance Syndicate Ltd., a Bermuda
reinsurance company. Cash proceeds of $63.3 million were received. The
Harco insurance segment was accounted for as a discontinued operation, and
accordingly, amounts in the consolidated financial statements and notes
thereto, for all periods affected, have been restated to reflect
discontinued operations accounting.
3. COMPREHENSIVE INCOME
The Corporation's total comprehensive income for the quarter ended January
31 was:
Millions of Dollars 2003 2002
Net income $ 26.9 $ 17.4
Change in net unrealized gain on derivatives .1 0.7
Total comprehensive income $ 27.0 $ 18.1
4. FINANCE RECEIVABLES
Finance receivables are summarized as follows:
January 31, October 31, January 31,
Millions of Dollars 2003 2002 2002
Retail notes, net of unearned income $ 294.4 $ 827.1 $ 366.6
Finance leases, net of unearned income 150.5 179.6 213.5
Wholesale notes 67.5 50.5 36.1
Accounts:
Retail 158.4 181.1 55.2
Wholesale 75.7 75.4 77.6
Total accounts 234.1 256.5 132.8
Total finance receivables 746.5 1,313.7 749.0
Less: Allowance for losses 13.4 16.0 13.7
Total finance receivables, net $ 733.1 $ 1,297.7 $ 735.3
Finance receivables held for sale consisted of $444.9 million, $1,006.7
million, and $580.1 million in retail notes and finance leases, net of
unearned income, as of January 31, 2003, October 31, 2002, and January 31,
2002, respectively.
5. ALLOWANCE FOR LOSSES
The allowance for losses is summarized as follows for the fiscal period
ended:
January 31, October 31, January 31,
Millions of Dollars 2003 2002 2002
Allowance for losses, beginning of period $ 16.0 $ 13.3 $ 13.3
Provision for credit losses 4.2 20.5 4.3
Net losses charged to allowance (1.9) (5.3) -
Transfers to finance receivables sold (4.9) (12.5) (3.9)
Allowance for losses, end of period $ 13.4 $ 16.0 $ 13.7
The average outstanding balance of impaired finance receivables was not
material during the quarter ended January 31, 2003 and 2002 or for the year
ended October 31, 2002. Interest income that would have been recognized on
impaired finance receivables during the quarters ended January 31, 2003 and
2002 or for the year ended October 31, 2002 was not material.
Principal past due over 90 days on owned finance receivables, including
held for sale, totaled $13.1 million as of January 31, 2003.
6. SUBORDINATED AND SENIOR DEBT
Senior and subordinated debt outstanding is summarized as follows:
January 31, October 31, January 31,
Millions of Dollars 2003 2002 2002
Bank revolving credit facility, at variable rates,
due December 2005 $ 426.0 $ 582.0 $ 499.0
Revolving retail warehouse facility, at variable
rates, due October 2005 500.0 500.0 500.0
Borrowings secured by operating leases, 3.71%
to 6.65%, due serially through December 2010 300.8 307.8 355.7
Convertible debt, 4.75%, due April 2009 174.1 172.7 -
Senior subordinated notes, 9%, due June 2002 - - 100.0
Total senior and subordinated debt $ 1,400.9 $ 1,562.5 $ 1,454.7
As of January 31, 2003 and October 31, 2002, the Corporation had unaccreted
discount of $45.9 million and $47.3 million, respectively, related to the
convertible debt.
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation uses derivative financial instruments as part of its
overall interest rate risk management strategy as further described under
Footnote 13 of the 2002 Annual Report on Form 10-K.
The Corporation manages its exposure to fluctuations in interest rates by
limiting the amount of fixed rate assets funded with variable rate debt.
This is accomplished by selling fixed rate receivables on a fixed rate
basis and by utilizing derivative financial instruments. These derivative
financial instruments may include forward contracts, interest rate swaps,
and interest rate caps. The fair value of these instruments is estimated
based on quoted market prices and is subject to market risk as the
instruments may become less valuable due to changes in market conditions or
interest rates. The Corporation manages exposure to counter-party credit
risk by entering into derivative financial instruments with major financial
institutions that can be expected to fully perform under the terms of such
agreements. The Corporation does not require collateral or other security
to support derivative financial instruments with credit risk. The
Corporation's counter-party credit exposure is limited to the positive fair
value of contracts at the reporting date. As of January 31, 2003, the
Corporation's derivative financial instruments had a negative net fair
value. Notional amounts of derivative financial instruments do not
represent exposure to credit loss.
As of January 31, 2003, the notional amounts and fair values of the
Corporation's derivatives are summarized as follows:
......... ......... (Millions of Dollars)
Inception Maturity Instrument Notional Fair Value
November 1999 February 2003 Interest rate swap* $ 24.9 $ 1.5
October 2000 November 2012 Interest rate cap 500.0 (3.5)
November 2012 Interest rate cap 500.0 3.5
December 2000 January 2004 Interest rate swap* 15.1 (0.6)
July 2001 April 2006 Interest rate swap 30.9 (2.0)
November 2001 June 2004 Interest rate swap* 179.0 (2.1)
July 2006 Interest rate swap* 179.0 2.8
November 2002 March 2007 Interest rate swap* - -
* Accounted for as non-hedging instruments.
The fair values of all derivatives are recorded in Other Liabilities on the
Statements of Consolidated Financial Condition.
In November 2002, the Corporation 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 the Corporation from interest rate volatility. The notional amount
of this swap is calculated as the difference between the actual pool
balances and the projected pool balances. At January 31, 2003, the notional
amount was zero. The outcome of the swap results in the Corporation 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, the
Corporation has retained interest rate exposure on this difference. This
transaction is accounted for as non-hedging derivative instrument.
8. SALES OF RECEIVABLES
The Corporation 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, wholly-owned subsidiaries ("SPC's") of the Corporation. 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 the Corporation's balance
sheet and the investor's interests in the related trust or conduit are not
reflected as liabilities.
The SPC's have limited recourse on the sold receivables. The SPC's assets
are available to satisfy the creditors' claims prior to such assets
becoming available for the SPC's own uses or to the Corporation or
affiliated companies. The terms of receivable sales generally require the
Corporation 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 the Corporation is restricted under the terms
of the securitized sales agreements. The maximum exposure under all
receivable sale recourse provisions as of January 31, 2003 was $350.1
million. The allowance for losses allocated to sold receivables is recorded
in Other Liabilities in the Corporation's Statements of Financial Condition
and totaled $16.6 million, $14.0 million, and $16.3 million at January 31,
2003, October 31, 2002, and January 31, 2002, respectively.
The SPC's residual interests in the related trusts or assets held by the
trusts are reflected on the Corporation's Statement of Consolidated
Financial Condition in Amounts Due From Sales of Receivables. The following
is a summary of retained interests included in Amounts Due from Sales of
Receivables:
January 31, October 31, January 31,
Millions of Dollars 2003 2002 2002
Cash held and invested by trusts $ 141.9 $ 105.6 $ 166.7
Subordinated retained interests in wholesale notes 126.4 126.2 127.2
Subordinated retained interests in retail notes and
finance leases 40.6 96.4 91.9
Interest only receivables 41.2 16.8 22.2
Total amounts due from sales of receivables $ 350.1 $ 345.0 $ 408.0
Subordinated retained interests in wholesale notes consist principally of
wholesale notes or marketable securities. Subordinated retained interests
in retail notes and finance leases consist principally of collections held
as cash and marketable securities. Due to the short-term nature of these
assets, their fair value approximates carrying value.
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, the
Corporation estimates the fair value of the interest-only receivables on a
quarterly basis. The fair value of the interest-only receivables is based
on updated estimates of prepayment speeds and discount rates.
8. SALES OF RECEIVABLES (continued)
Key economic assumptions used in measuring the interest only receivables at
the date of the sale for sales of retail notes and finance leases completed
during the quarter ended January 31 were:
2003 2002
Prepayment speed (annual rate) 1.2 - 1.4 1.2 - 1.4
Weighted average life 41 months 41 months
Interest only receivable discount rate 5.35% 6.41%
The impact of hypothetical 10% and 20% adverse changes in these assumptions
would have no material effect on the fair value of the interest-only
receivables as of January 31, 2003. These sensitivities are hypothetical
and should be used with caution. The effect of a variation of a particular
assumption on the fair value of the interest only receivables is calculated
without changing any other assumption; in reality, changes in one factor
may result in changes in another.
Sold receivables balances are summarized below.
January 31, October 31, January 31,
Millions of Dollars 2003 2002 2002
Retail notes, net of unearned income $ 2,016.3 $ 1,521.8 $ 2,041.9
Finance leases, net of unearned income 25.2 - -
Wholesale notes 764.0 788.7 713.4
Retail accounts 102.9 126.9 200.0
Total sold finance receivables, net $ 2,908.4 $ 2,437.4 $ 2,955.3
Serviced portfolio balances are summarized below.
January 31, October 31, January 31,
Millions of Dollars 2003 2002 2002
Gross serviced receivables
Retail notes $ 2,552.0 $ 2,529.1 $ 2,612.1
Finance leases 200.4 205.7 248.5
Wholesale notes 831.5 839.2 749.5
Accounts 337.0 383.4 332.8
Total gross serviced receivables 3,920.9 3,957.4 3,942.9
Net investment in operating leases 226.2 248.2 273.8
Total serviced portfolio $ 4,147.1 $ 4,205.6 $ 4,216.7
8. SALES OF RECEIVABLES (continued)
Additional financial data for gross serviced portfolio as of January 31,
2003 and for the quarter then ended is summarized below.
Retail Finance and Wholesale
Millions of Dollars Notes Operating Leases Notes Accounts
Principal past due over 60 days $ 18.9 $ 4.1 $ 0.7 $ 6.0
Credit losses (net of recoveries) 3.5 0.4 0.1 -
The following table summarizes certain cash flows received from (paid to)
securitization trusts/conduits during the quarter ended January 31:
Millions of Dollars 2003 2002
Proceeds from sales of finance receivables held for sale $ 824.2 $ 499.9
Proceeds from sales of finance receivables into
revolving facilities 1,111.1 1,128.8
Servicing fees received 6.2 6.3
Repurchase of sold retail receivables (17.5) (13.5)
Cash used in exercise of purchase option - -
All other cash received from trusts 49.7 45.2
During the first quarter of 2003, the Corporation sold $824.3 million of
retail receivables for a pretax gain of $32.5 million, or $20.8 million net
of tax. During the first quarter of 2002, the Corporation sold $500.0
million of retail receivables for a pre-tax gain of $17.2 million, or $11.0
million net of tax.
The following table summarizes, for the quarter ended January 31, income
related to sales of finance receivables:
Millions of Dollars 2003 2002
Gains on sales of receivables $ 32.5 $ 17.2
Excess spread 5.1 5.1
Swap gains (losses) .8 (.3)
Interest income from retained securities and other .4 .1
Total income related to sales of finance receivables $ 38.8 $ 22.1
9. COMMITMENTS AND CONTINGENCIES
Leases
The Corporation is obligated under non-cancelable operating leases for the
majority of its office facilities. These leases are generally renewable and
provide that property taxes and maintenance costs are to be paid by the
lessee. As of January 31, 2003, future minimum lease commitments under
non-cancelable operating leases with remaining terms in excess of one year
are as follows:
Twelve month period ended January 31, (Millions of Dollars)
2004 $ 2.0
2005 1.8
2006 1.5
2007 0.7
Total $ 6.0
The total operating lease expense for the three month period ended January
31, 2003 and 2002 was $0.6 million and $0.6 million, respectively.
Guarantees of Debt
The Corporation periodically guarantees the outstanding debt of affiliates.
The guarantees allow for diversification of funding sources for the
affiliates. As of January 31, 2003, the Corporation has four outstanding
guarantees related to Navistar's three Mexican finance subsidiaries,
Servicios Financieros Navistar, S.A. de C.V.("SOFOL"), Arrendadora
Financiera Navistar, S.A. de C.V.("Arrendadora"),and Navistar Comercial
S.A. de C.V. ("Comercial"). The Corporation has no recourse as guarantor in
case of default.
The Corporation has an $820.0 million contractually committed bank
revolving credit facility that will mature in December 2005. Under the
revolving credit agreement, SOFOL, Arrendadora and Comercial are permitted
to borrow up to $100.0 million in the aggregate, which is guaranteed by the
Corporation. As of January 31, 2003, the outstanding balance on this
portion of the bank revolving credit facility was $28.0 million.
On October 21, 2002, the Corporation entered into an agreement to guarantee
the 200.0 million peso-denominated bank facility of SOFOL and Arrendadora,
as co-borrowers The due date of the longest loan maturity is January 31,
2006. As of January 31, 2003, the total outstanding balance of the debt was
equivalent to $18.3 million in U.S. dollars (equivalent to 200.0 million
pesos).
On May 27, 2002, the Corporation entered into an agreement to guarantee the
dollar- and/or peso-denominated medium term notes of SOFOL and Arrendadora,
as co-borrowers, up to the amount of 600.0 million pesos (equivalent to
$55.0 million in U.S. dollars). The due date of the longest loan maturity
is March 10, 2006. As of January 31, 2003, the total outstanding balance of
the debt was equivalent to $24.3 million in U.S. dollars.
9. COMMITMENTS AND CONTINGENCIES (continued)
Guarantees of Debt (continued)
On November 18, 2001, the Corporation entered into an agreement to
guarantee the 500.0 million peso-denominated bank credit facility of SOFOL.
The due date of the longest loan maturity is November 18, 2004. As of
January 31, 2003, the outstanding balance of peso-denominated debt was
$45.8 million in U.S. dollars (equivalent to 500.0 million pesos).
Other
The Corporation has entered into an agreement for the repurchase of
equipment. Under this agreement, which matures in August 2004, the
Corporation would be required to make a maximum potential future payment of
$11.9 million. Under the provisions of this agreement, the Corporation can
liquidate the repurchased assets to recover all or a portion of the
payment. The Corporation has potential exposure to the extent that there is
a difference between the fair value of the repurchased asset and the
guaranteed repurchase amount. The Corporation's current exposure under this
agreement is estimated to be immaterial.
As part of its sales agreement with IAT Reinsurance Syndicate Ltd. ("IAT"),
the Corporation has agreed to guarantee the adequacy of Harco's loss
reserves as of November 30, 2001, the close date of the sale. There is no
limit to the potential amount of future payments required under this
agreement, which is scheduled to expire November 2008. As security for its
obligation under this agreement, the Corporation has escrowed $5.0 million,
which is included in Other Assets in the Consolidated Statements of
Financial Condition. The escrowed funds will become available for use in
February 2004. The carrying amount of the Corporation's liability under
this guarantee is estimated at $2.0 million as of January 31, 2003 and is
included in Other Liabilities in the Consolidated Statements of Financial
Condition. Management believes this reserve is adequate to cover any future
potential payments to IAT.
10. SUBSEQUENT EVENTS
In February 2003, the Corporation entered into two forward starting swap
agreements, with notional amounts of $500.0 million and $300.0 million, in
connection with anticipated sales of retail notes and finance leases. The
purpose of these swaps is to limit the Corporation's interest rate exposure
during the period it is accumulating receivables for the anticipated sales
of receivables.
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Certain statements under this caption purely constitute "forward-looking
statements" under the Securities Reform Act. Navistar Financial
Corporation's ("Corporation") 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 heading "Business Outlook."
Overview
Navistar Financial Corporation, was incorporated in Delaware in 1949 and is
a wholly-owned subsidiary of International Truck and Engine Corporation
("International"), which is a wholly-owned subsidiary of Navistar
International Corporation ("Navistar"). As used herein, the "Corporation"
refers to Navistar Financial Corporation and its wholly-owned subsidiaries
unless the context otherwise requires.
The Corporation is a commercial financing organization that provides
wholesale, retail and lease financing in the United States for sales of new
and used trucks sold by International and International's dealers. The
Corporation also finances wholesale accounts and selected retail accounts
receivable of International. Sales of new products (including trailers) of
other manufacturers are also financed regardless of whether they are
designed or customarily sold for use with International's truck products.
Critical Accounting Policies
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires the use of
estimates, judgments, and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the periods presented. In
preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. The significant
accounting principles which management believes are the most important to
aid in fully understanding the Corporation's financial results are:
|X| Sales of Receivables
|X| Allowance for Losses
Details regarding the Corporation's use of these policies and the related
estimates are described in the Corporation's 2002 Annual Report on Form
10-K.
Results of Continuing Operations
First Quarter 2003 Compared with First Quarter 2002
Net income was $26.9 million in the first quarter of 2003, up $9.5 million
or 55% compared with net income of $17.4 million in the first quarter of
2002. The increase in earnings was primarily attributable to a greater gain
on the sale of retail receivables. During the first quarter of 2003, the
Corporation sold $824.3 million of retail receivables for a pretax gain of
$32.5 million, or $20.8 million net of tax. During the first quarter of
2002, the Corporation sold $500.0 million of retail receivables for a
pre-tax gain of $17.2 million, or $11.0 million net of tax. The increase in
the amount of receivables sold was primarily due to higher retail note
originations in the second half of fiscal 2002 compared with fiscal 2001,
inclusion of finance leases in the fiscal 2003 sale, and the timing of our
sales in fiscal 2002 compared with fiscal 2001.
Financial Condition
Finance Volume and Finance Market Share
During the first quarter of fiscal 2003, the Corporation's net retail notes
and leases originations were $203.1 million, compared with $210.1 million
in first quarter fiscal 2002. Net serviced retail notes and leases balances
were $2,712.6 million and $2,895.8 million in the first quarter of 2003 and
2002, respectively. The Corporation's finance market share of new
International trucks sold in the U.S. decreased to 17.1% in the first
quarter of fiscal 2003 from 23.0% in the first quarter of fiscal 2002,
primarily due to the financing of a purchase by a large truck customer in
the first quarter of 2002, which was not present in the first quarter of
fiscal 2003.
The Corporation provided 96.0% of the wholesale financing of new trucks
sold to International's dealers in the first quarter of fiscal 2003 and
2002. Wholesale notes originations were $719.5 million for the quarter
ended January 31, 2003, compared with $584.1 million in the same period of
fiscal 2002. Serviced wholesale notes balances were $831.5 million and
$749.5 million in the first quarter of 2003 and 2002, respectively.
Allowance for Losses
The allowance is maintained at an amount management considers appropriate
in relation to the outstanding portfolio based on factors such as overall
portfolio credit risk quality, historical loss experience, and current
economic conditions. Finance receivables and investments in operating
leases are charged off to the allowance for losses when amounts due from
the customers are determined to be uncollectible.
Allowance for losses, including the portion allocated to sold notes, as a
percentage of net serviced finance receivables and investments in operating
leases was 0.77% in the first quarter of fiscal 2003, compared with 0.75%
in the first quarter of fiscal 2002.
Funds and Liquidity Management
The Corporation has traditionally obtained the funds to provide financing
to International's dealers and retail customers from sales of finance
receivables, commercial paper, short and long-term bank borrowings, medium
and long-term debt and equity capital. The Corporation's current debt
ratings have made sales of finance receivables the most economical source
of funding.
Credit Ratings
The Corporation's current debt ratings are as follows: Standard Fitch
Moody's and Poor's
Senior unsecured debt BB Ba3 BB-
Subordinated debt B+ B2 B
Outlook Negative Stable Stable
In December 2002, Fitch IBCA, Standard and Poor's, and Moody's lowered the
Corporation's senior unsecured and subordinated debt ratings. Fitch IBCA
lowered the Corporation's senior unsecured debt to BB from BB+ and the
subordinated debt rating to B+ from BB-. Standard and Poor's lowered the
Corporation's senior unsecured debt rating to BB- from BB and the
subordinated debt rating to B from B+. Moody's lowered the Corporation's
senior unsecured debt rating to Ba3 from Ba1 and the subordinated debt
rating to B2 from Ba2.
Funding Facilities
Receivable sales are a significant source of funding. Through the
asset-backed public market and private placement sales, the Corporation has
been able to fund fixed rate retail notes and finance leases at rates which
are more economical than those available to the Corporation in the public
unsecured bond market. The Corporation sold retail notes and finance leases
through Navistar Financial Retail Receivables Corporation ("NFRRC"). During
the first quarter of fiscal 2003 and 2002, the Corporation sold $824.3
million and $500.0 million of retail notes and finance leases to an owner
trust which, in turn, issued asset-backed securities that were sold to
investors. As of January 31, 2003, the remaining shelf registration
available to NFRRC for the public issuance of asset-backed securities was
$1,650.0 million.
Truck Engine Receivables Financing Corporation, a special purpose,
wholly-owned subsidiary of the Corporation, has in place a trust that
provides for the funding of $100.0 million of unsecured trade receivables
generated by the sale of diesel engines and engine service parts from
International ("International") to Ford Motor Company. The facility matures
in 2006. As of January 31, 2003, the Corporation had utilized $100.0
million of this facility.
Funding Facilities (continued)
Truck Retail Accounts Corporation, a special purpose, wholly-owned
subsidiary of the Corporation, has in place a revolving retail account
conduit that provides for the funding of $100.0 million of eligible retail
accounts. As of January 31, 2003, the Corporation had utilized $2.9 million
of this facility. The facility expires in August 2003 and is renewable upon
mutual consent of the parties.
Navistar Financial Securities Corporation, a special purpose, wholly-owned
subsidiary of the Corporation, has in place a revolving wholesale note
trust that provides for the funding of $1,012.0 million of eligible
wholesale notes. It is comprised of three $200.0 million tranches of
investor certificates maturing in 2003, 2004 and 2008, a $212.0 million
tranche of investor certificates maturing in 2005 and variable funding
certificates with a maximum capacity of $200.0 million maturing in January
2004. As of January 31, 2003, the Corporation had utilized $763.6 million
of the revolving wholesale note trust.
As of January 31, 2003, available funding under the bank revolving credit
facilities, the revolving retail warehouse facility and the revolving
wholesale note trust was $852.5 million. When combined with unrestricted
cash and cash equivalents, $875.4 million was available to fund the general
business purposes of the Corporation.
The weighted average borrowing rate on all debt outstanding during the
first quarter of 2003 decreased to 3.78% from 3.89% for the same period in
2002. The decrease in the Corporation's weighted average interest rate is
primarily a result of lower LIBOR rates.
Liquidity and Cash Flows
During the first quarter of 2003, cash and cash equivalents decreased $9.1
million from $32.0 million at the end of fiscal year 2002. For the first
quarter ended January 31, 2003, the Corporation used $15.6 million to fund
operating activities and generated $174.3 million from investing
activities. The Corporation also utilized $167.8 million in financing
activities during the quarter. See also the Statements of Consolidated Cash
Flow on page 4.
Total cash used to fund operating activities was $15.6 million during first
quarter of 2003. The Corporation used cash primarily to decrease the net
amount payable to affiliates.
Total cash generated from investing activities was $174.3 million. The
Corporation's primary source of cash during the first quarter of 2003 was
proceeds from sales of finance receivables held for sale. The aggregate
investing cash flow related to the sale of finance receivables held for
sale was $227.8 million. This includes cash proceeds of $824.2 million,
offset by cash utilization resulting from a net change in restricted
marketable securities of $400.2 million and originations of finance
receivables held for sale of $196.2 million. See Footnote 1 of the 2002
Annual Report on Form 10-K for further descriptions of the Corporation's
Restricted Marketable Securities.
Total cash utilization from financing activities during first quarter of
2003 was $167.8 million. During the first quarter of 2003, the
Corporation's primary use of cash was due to $156.0 million less
utilization of the bank revolving credit facility than at the end of fiscal
year 2002.
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 requires that additional disclosures be made by a
guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires a
guarantor to recognize, at inception of a guarantee, a liability for the
fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and measurement provisions of FIN 45 are applicable on
a prospective basis to guarantees issued or modified after December 31,
2002. The disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002. The Corporation
provided disclosures about guarantees in Note 9.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities. FIN 46 addresses consolidation
requirements of variable interest entities. Transferors to qualifying
special purpose entities ("QSPE") subject to the reporting requirements of
FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities are excluded from the scope of
this interpretation. The Corporation currently sells receivables to
entities meeting the requirements of QSPE's.
Subsequent Events
In February 2003, the Corporation entered into two forward starting swap
agreements, with notional amounts of $500.0 million and $300.0 million, in
connection with anticipated sales of retail notes and finance leases. The
purpose of these swaps is to limit the Corporation's interest rate exposure
during the period it is accumulating receivables for the anticipated sale
of receivables.
Business Outlook
Certain statements, which involve risks and uncertainties, constitute
"forward-looking statements" under the Securities Reform Act. The
Corporation's actual results may differ significantly from the results
discussed in such forward-looking statements.
Navistar currently projects 2003 U.S. and Canadian Class 8 heavy truck
demand to be down 4% from 2002. Class 6 and 7 medium truck demand,
excluding school buses, is forecasted to be 13% higher than in 2002. Demand
for school buses is expected to be consistent with 2002. Mid-range diesel
engine shipments by the company to original equipment manufacturers in 2003
are expected to be 10% higher than 2002.
Management believes that collections on the outstanding finance receivables
portfolio plus cash available from the Corporation's various funding
sources will permit the Corporation to meet the financing requirements of
International's dealers and retail customers through 2003 and beyond.
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Corporation's principal executive officer and principal financial
officer evaluated the Corporation's disclosure controls and procedures (as
defined in rule 13a-14(c) and 15d-14(c) under the Securities Exchange Act
of 1934, as amended) as of a date within 90 days before the filing of this
quarterly report (the "Evaluation Date"). Based on that evaluation, the
principal executive officer and principal financial officer of the
Corporation concluded that, as of the Evaluation Date, the disclosure
controls and procedures in place at the Corporation were adequate to ensure
that information required to be disclosed by the Corporation, including its
consolidated subsidiaries, in reports that the Corporation files or submits
under the Exchange Act, is recorded, processed, summarized and reported on
a timely basis in accordance with applicable rules and regulations.
Although the Corporation's principal executive officer and principal
financial officer believe the Corporation's existing disclosure controls
and procedures are adequate to enable the Corporation to comply with its
disclosure obligations, the Corporation intends to formalize and document
the procedures already in place and establish a disclosure committee.
Changes in Internal Controls
The Corporation has not made any significant changes to its internal
controls subsequent to the Evaluation Date. The Corporation has not
identified any significant deficiencies or material weaknesses or other
factors that could significantly affect these controls, and therefore, no
corrective action was taken.
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material pending legal proceedings other than ordinary,
routine litigation incidental to the business of the Corporation.
ITEM 5. OTHER INFORMATION
Effective March 1, 2003, Phyllis E. Cochran became Chief Executive Officer
and General Manager of the Corporation upon the retirement of John J.
Bongiorno, President and Chief Executive Officer.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the quarter ended January 31,
2003.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Navistar Financial Corporation
(Registrant)
Date March 14, 2003 /s/Ronald D. Markle
Ronald D. Markle
Vice President and Controller
(Principal Accounting Officer)
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
CERTIFICATIONS
I, Phyllis E. Cochran, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Navistar
Financial Corporation, subsidiary of International Truck and Engine
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date March 14, 2003
/s/Phyllis E. Cochran
Phyllis E. Cochran
(Principal Executive Officer)
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
CERTIFICATIONS
I, Andrew J. Cederoth, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Navistar
Financial Corporation, subsidiary of International Truck and Engine
Corporation;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date March 14, 2003
/s/Andrew J. Cederoth
Andrew J. Cederoth
(Principal Financial Officer)