| Item 1. Financial Statements: | |||
| Statements of Consolidated Income and Retained Earnings -- | |||
| Three Months and Six Months Ended April 30, 2003 and 2002 | 2 | ||
| Statements of Consolidated Financial Condition -- | |||
| April 30, 2003; October 31, 2002; and April 30, 2002 | 3 | ||
| Statements of Consolidated Cash Flow -- | |||
| Six Months Ended April 30, 2003 and 2002 | 4 | ||
| Notes to Consolidated Financial Statements | 5 | ||
| Item 2. Management´s Discussion and Analysis | |||
| of Operations and Financial Condition | 14 | ||
| Item 4. Controls and Procedures | 19 | ||
| Item 1. Legal Proceedings | 20 | ||
| Item 5. Other Information | 20 | ||
| Item 6. Exhibits and Reports on Form 8-K | 20 | ||
| 99.1 CEO Certification Pursuant to | |||
| 18 U.S.C. Section 1350, as adopted pursuant | |||
| to Section 906 of the Sarbanes-Oxley Act of 2002 | E- | 1 | |
| 99.2 CFO Certification Pursuant to | |||
| 18 U.S.C. Section 1350, as adopted pursuant | |||
| to Section 906 of the Sarbanes-Oxley Act of 2002 | E- | 2 | |
| Signature | 20 | ||
| Certifications | 21 | ||
| Three Months Ended | Six Months Ended | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| April | April | April | April | ||||||
| Millions of Dollars | 2003 | 2002 | 2003 | 2002 | |||||
| Revenues | |||||||||
| Retail Notes and Finance Leases | $ 12.6 | $ 15.3 | $ 22.4 | $ 26.1 | |||||
| Income Related to Sales of Finance Receivables | (3.4 | ) | 11.4 | 35.4 | 33.5 | ||||
| Operating Leases | 18.6 | 20.4 | 36.5 | 38.2 | |||||
| Wholesale Notes | 7.4 | 6.6 | 14.9 | 13.1 | |||||
| Accounts | 4.8 | 4.6 | 9.1 | 10.0 | |||||
| Servicing Fees | 6.4 | 5.5 | 12.6 | 11.8 | |||||
| Other Revenue | 1.4 | 1.9 | 3.2 | 5.0 | |||||
Total | 47.8 |
65.7 |
134.1 |
137.7 |
|||||
| Expenses | |||||||||
| Cost of Borrowing | |||||||||
| Interest Expense | 12.6 | 15.0 | 26.1 | 29.5 | |||||
| Other | 2.1 | 2.0 | 3.9 | 3.9 | |||||
| Credit, Collection and Administrative | 11.1 | 10.2 | 21.2 | 20.2 | |||||
| Provision for Credit Losses | 3.7 | 6.2 | 7.9 | 10.5 | |||||
| Depreciation on Operating Leases | 11.9 | 14.5 | 24.6 | 27.8 | |||||
| Other Expense | 0.1 | 0.4 | 2.1 | 1.2 | |||||
Total | 41.5 |
48.3 |
85.8 |
93.1 |
|||||
| Income Before Taxes | 6.3 | 17.4 | 48.3 | 44.6 | |||||
| Income Tax Expense | 4.2 | 6.9 | 19.3 | 17.4 | |||||
Income from Continuing Operations | 2.1 |
10.5 |
29.0 |
27.2 |
|||||
| Gain on Disposal of Discontinued Operations, | |||||||||
| (net of tax of $0.0, $0.0, $0.0 and $0.5) | - | - | - | 0.7 | |||||
Net Income | 2.1 |
10.5 |
29.0 |
27.9 |
|||||
| Retained Earnings | |||||||||
| Beginning of Period | 219.0 | 180.8 | 197.1 | 163.4 | |||||
| Dividends Paid | (5.0) |
- |
(10.0) |
- |
|||||
| End of Period | $ 216.1 |
$ 191.3 |
$ 216.1 |
$ 191.3 |
|||||
| April 2003 | October 2002 | April 2002 | |||||
|---|---|---|---|---|---|---|---|
| Millions of Dollars | |||||||
| ASSETS | |||||||
| Cash and Cash Equivalents | $ 53.7 | $ 32.0 | $ 91.1 | ||||
| Finance Receivables | |||||||
| Finance Receivables Held For Sale | 745.9 | 1,006.7 | 437.8 | ||||
| Other Finance Receivables | 280.9 | 307.0 | 202.4 | ||||
| Allowance for Losses | (17.1) | (16.0) | (11.6) | ||||
Finance Receivables, net | 1,009.7 |
1,297.7 |
628.6 |
||||
| Amounts Due from Sales of Receivables | 313.3 | 345.0 | 401.1 | ||||
| Net Investment in Operating Leases | 203.7 | 248.2 | 280.2 | ||||
| Repossessions | 39.0 | 26.0 | 61.8 | ||||
| Restricted Marketable Securities | 237.7 | 104.6 | 542.6 | ||||
| Other Assets | 34.7 |
53.4 |
39.4 |
||||
| Total Assets | $ 1,891.8 |
$ 2,106.9 |
$ 2,044.8 |
||||
| LIABILITIES AND SHAREOWNER´S EQUITY | |||||||
| Net Accounts Payable to Affiliates | $ 24.9 | $ 52.2 | $ 80.9 | ||||
| Senior and Subordinated Debt | 1,356.4 | 1,562.5 | 1,482.5 | ||||
| Other Liabilities | 126.6 |
127.4 |
121.6 |
||||
| Total Liabilities | 1,507.9 | 1,742.1 | 1,685.0 | ||||
| Shareowner´s Equity | |||||||
| Capital Stock (Par value $1.00, 1,600,000 shares | |||||||
| issued and outstanding) and Paid-In Capital | 171.0 | 171.0 | 171.0 | ||||
| Retained Earnings | 216.1 | 197.1 | 191.3 | ||||
| Accumulated Other Comprehensive Loss | (3.2) |
(3.3) |
(2.5) |
||||
| Total Shareowner´s Equity | 383.9 |
364.8 |
359.8 |
||||
| Total Liabilities and Shareowner´s Equity | $ 1,891.8 |
$ 2,106.9 |
$ 2,044.8 |
||||
| Six Months Ended | |||||
|---|---|---|---|---|---|
| Millions of Dollars | April 2003 | April 2002 | |||
| Cash Flow From Operations | |||||
| Net Income | $ 29.0 | $ 27.9 | |||
| Adjustment to reconcile net income to | |||||
| cash provided from operations: | |||||
| Gains on sales of receivables | (33.2 | ) | (23.5 | ) | |
| Depreciation, amortization and accretion | 30.0 | 31.0 | |||
| Provision for credit losses | 7.9 | 10.5 | |||
| Net change in accounts payable to affiliates | (27.3 | ) | 66.7 | ||
| Other | 15.4 |
4.1 |
|||
| Total | 21.8 |
116.7 |
|||
| Cash Flow From Investing Activities | |||||
| Originations of finance receivables held for sale | (448.2 | ) | (436.5 | ) | |
| Proceeds from sales of finance receivables held for sale | 849.9 | 892.7 | |||
| Net change in restricted marketable securities | (133.1 | ) | (328.9 | ) | |
| Collections of retail notes and finance lease receivables, | |||||
| net of change in unearned finance income | (44.6 | ) | 24.2 | ||
| Repurchase of sold retail receivables | (83.5 | ) | (45.0 | ) | |
| Net change in wholesale notes and accounts receivables | 26.6 | 44.6 | |||
| Change in amounts due from sales of receivables | 31.7 | (60.9 | ) | ||
| Purchase of equipment leased to others | (16.1 | ) | (44.7 | ) | |
| Sale of equipment leased to others | 36.0 | 13.9 | |||
| Proceeds from sale of discontinued operations | - |
63.3 |
|||
| Total | 218.7 |
122.7 |
|||
| Cash Flow From Financing Activities | |||||
| Net change in bank revolving credit facility usage | (171.0 | ) | (303.0 | ) | |
| Proceeds from issuance of convertible debt | - | 175.1 | |||
| Debt issuance costs on convertible debt | - | (5.6 | ) | ||
| Proceeds from long-term debt | 28.4 | 31.2 | |||
| Principal payments on long-term debt | (66.2 | ) | (68.3 | ) | |
| Dividends paid to International | (10.0) |
- |
|||
| Total | (218.8) |
(170.6) |
|||
| Change in Cash and Cash Equivalents | 21.7 | 68.8 | |||
| Cash and Cash Equivalents, Beginning of Period | 32.0 |
22.3 |
|||
| Cash and Cash Equivalents, End of Period | $ 53.7 |
$ 91.1 |
|||
| Supplementary disclosure of cash flow information: | |||||
| Interest paid | $ 27.6 | $ 30.5 | |||
| Income taxes paid , net of refunds | $ 7.0 | $ 11.6 | |||
| Noncash investing activities: | |||||
| Transfers to repossessions | $ 55.1 | $ 51.5 | |||
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Navistar Financial Corporation and its wholly-owned subsidiaries
("Corporation"). International Truck and Engine Corporation ("International"), which is wholly owned by Navistar International
Corporation ("Navistar"), is the parent company of the Corporation.
The accompanying unaudited financial statements have been prepared in accordance with accounting policies described in the
Corporation´s 2002 Annual Report on Form 10-K and the accounting policy adopted in the first quarter of fiscal year 2003, and
should be read in conjunction with the disclosures therein. The accounting policy adopted in the first quarter of fiscal year
2003 was a result of the adoption of Statement of Position 01-6.
In November 2002, the Corporation adopted Statement of Position 01-6, Accounting by Certain Entities that Lend to or Finance the
Activities of Others. The Statement requires that certain finance receivables be classified as held for sale. The Corporation
classifies certain finance receivables as held for sale. Finance receivables held for sale are carried at the lower of cost or
estimated market value in the aggregate. Net unrealized losses are recognized through a valuation allowance by charges to income.
In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45 (“FIN 45”), Guarantor´s
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45
requires that additional disclosures be made by a guarantor in its interim and annual financial statements about its
obligations under certain guarantees that it has issued. It also requires a guarantor to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. Provisions related to
recognizing a liability at inception do not apply to a subsidiary´s guarantee of debt owed to a third party by either its
parent or another subsidiary of that parent. The initial recognition and measurement provisions of FIN 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for
financial statements of interim or annual periods ending after December 15, 2002. The Corporation provided disclosures about
guarantees in Note 9.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46
addresses consolidation requirements of variable interest entities. Transferors to qualifying special purpose entities
(“QSPE´s”) subject to the reporting requirements of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities, are excluded from the scope of this interpretation. The Corporation currently sells
receivables to entities meeting the requirements of QSPE´s.
In the opinion of management, these interim financial statements reflect all adjustments, consisting of normal recurring items,
necessary to present fairly the results of operations, financial condition and cash flow for the interim periods presented.
Interim results are not necessarily indicative of results to be expected for any other interim period or for the full year.
Certain amounts in the prior period financial statements have been reclassified to conform with current period presentations.
2. DISCONTINUED OPERATIONS
On November 30, 2001, the Corporation completed the sale of all of the stock of Harco National Insurance Company ("Harco"), a
wholly-owned insurance subsidiary, to IAT Reinsurance Syndicate Ltd., a Bermuda reinsurance company. Cash proceeds of $63.3
million were received. The Harco insurance segment was accounted for as a discontinued operation, and accordingly, amounts in
the consolidated financial statements and notes thereto, for all periods affected, have been restated to reflect discontinued
operations accounting.
3. COMPREHENSIVE INCOME
The Corporation´s total comprehensive income was as follows:
| Three Months | Six Months | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Ended April 30 | Ended April 30 | ||||||||
| Millions of Dollars |
2003 |
2002 |
2003 |
2002 |
|||||
| Net income | $ 2.1 | $ 10.5 | 29.0 | $ 27.9 | |||||
| Change in net unrealized gain on derivative | - |
(0.1) |
0.1 |
0.6 |
|||||
| Total comprehensive income | $ 2.1 |
$ 10.4 |
$ 29.1 |
$ 28.5 |
|||||
4. FINANCE RECEIVABLES
Finance receivables are summarized as follows:
| Millions of Dollars |
April 30, 2003 |
October 31, 2002 |
April 30, 2002 | ||||
|---|---|---|---|---|---|---|---|
| Retail notes, net of unearned income | 599.8 | $ 827.1 | $ 249.4 | ||||
| Finance leases, net of unearned income | 146.1 | 179.6 | 188.4 | ||||
| Wholesale notes | 52.9 | 50.5 | 51.2 | ||||
| Accounts: | |||||||
| Retail | 158.5 | 181.1 | 75.7 | ||||
| Wholesale | 69.5 |
75.4 |
75.5 |
||||
| Total accounts | 228.0 |
256.5 |
151.2 |
||||
| Total finance receivables | 1,026.8 | 1,313.7 | 640.2 | ||||
| Less: Allowance for losses | 17.1 |
16.0 |
11.6 |
||||
| Total finance receivables, net | $1,009.7 |
$1,297.7 |
$ 628.6 |
||||
Finance receivables held for sale consisted of $745.9 million, $1,006.7 million, and $437.8 million in retail notes and finance
leases, net of unearned income, as of April 30, 2003, October 31, 2002, and April 30, 2002, respectively.
5. ALLOWANCE FOR LOSSES
The allowance for losses is summarized as follows for the fiscal period ended:
| Millions of Dollars |
April 30, 2003 |
October 31, 2002 |
April 30, 2002 | ||||
|---|---|---|---|---|---|---|---|
| Allowance for losses, beginning of period | $ 16.0 | $ 13.3 | $ 13.3 | ||||
| Provision for credit losses | 7.9 | 20.5 | 10.5 | ||||
| Net losses charged to allowance | (2.9) | (5.3) | (0.3) | ||||
| Transfers to finance receivables sold | (3.9) |
(12.5) |
(11.9) |
||||
| Allowance for losses, end of period | $ 17.1 |
$ 16.0 |
$ 11.6 |
||||
The average outstanding balance of impaired finance receivables was not material during the quarter ended April 30, 2003 and
2002 or for the year ended October 31, 2002. Interest income that would have been recognized on impaired finance receivables
during the six months ended April 30, 2003 and 2002 or for the year ended October 31, 2002 was not material.
Balance, including installments, past due over 90 days on owned finance receivables, including held for sale, totaled $8.1
million as of April 30, 2003.
6. SENIOR AND SUBORDINATED DEBT
Senior and subordinated debt outstanding is summarized as follows:
| Millions of Dollars |
April 30, 2003 |
October 31, 2002 |
April 30, 2002 | ||||
|---|---|---|---|---|---|---|---|
| Bank revolving credit facility, at variable rates, | |||||||
| due December 2005 | $ 411.0 | $ 582.0 | $ 389.0 | ||||
| Revolving retail warehouse facility, at variable | |||||||
| rates, due October 2005 | 500.0 | 500.0 | 500.0 | ||||
| Borrowings secured by operating leases, 3.71% | |||||||
| to 6.65%, due serially through December 2010 | 270.0 | 307.8 | 323.3 | ||||
| Convertible debt, 4.75%, due April 2009 | 175.4 | 172.7 | 170.2 | ||||
| Senior subordinated notes, 9%, matured June 2002 | - |
- |
100.0 |
||||
| Total senior and subordinated debt | $1,356.4 |
$1,562.5 |
$1,482.5 |
||||
As of April 30, 2003, October 31, 2002, and April 30, 2002 the Corporation had unaccreted discount of $44.6 million, $47.3
million, and $49.8 million respectively, related to the convertible debt.
The Corporation uses derivative financial instruments as part of its overall interest rate risk management strategy as further
described under Footnote 13 of the 2002 Annual Report on Form 10-K.
The Corporation manages its exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with
variable rate debt. This is accomplished by selling fixed rate receivables on a fixed rate basis and by utilizing derivative
financial instruments. These derivative financial instruments may include forward contracts, interest rate swaps, and interest
rate caps. The fair value of these instruments is estimated based on quoted market prices and is subject to market risk as the
instruments may become less valuable due to changes in market conditions or interest rates. The Corporation manages exposure to
counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be
expected to fully perform under the terms of such agreements. The Corporation does not require collateral or other security to
support derivative financial instruments with credit risk. The Corporation´s counter-party credit exposure is limited to the
positive fair value of contracts at the reporting date. As of April 30, 2003, the Corporation´s derivative financial
instruments had a negative net fair value. Notional amounts of derivative financial instruments do not represent exposure to
credit loss.
As of April 30, 2003, the notional amounts and fair values of the Corporation´s derivatives are summarized as follows:
| Inception |
Maturity |
Instrument |
Notional |
Fair Value | |||||
|---|---|---|---|---|---|---|---|---|---|
| (Millions | of | Dollars) | |||||||
| October 2000 | November 2012 | Interest rate cap | $500.0 | $(2.5 | ) | ||||
| November 2012 | Interest rate cap | 500.0 | 2.5 | ||||||
| December 2000 | January 2004 | Interest rate swap* | 8.4 | (0.2 | ) | ||||
| July 2001 | April 2006 | Interest rate swap | 30.2 | (2.0 | ) | ||||
| November 2001 | June 2004 | Interest rate swap* | 138.7 | (1.5 | ) | ||||
| July 2006 | Interest rate swap* | 147.1 | 1.9 | ||||||
| November 2002 | March 2007 | Interest rate swap* | - | - | |||||
| February 2003 | February 2005 | Forward starting swap* | 500.0 | (4.2 | ) | ||||
| February 2003 | July 2005 | Forward starting swap* | 300.0 | (1.6 | ) | ||||
| April 2003 | July 2005 | Forward starting swap* | 100.0 | (0.5 | ) | ||||
* 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. As of April 30, 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.
During the second quarter of fiscal 2003, the Corporation entered into several forward starting swap contracts, with aggregate
notional amounts of $900.0 million, in connection with anticipated sales of retail notes and finance leases. The Corporation
recognized a pre-tax loss of $6.3 million during the second quarter of fiscal 2003 related to these contracts. The purpose of
these swaps is to limit the Corporation´s interest rate risk exposure during the period it is accumulating receivables for the
anticipated sales of receivables.
8. SALES OF RECEIVABLES
The Corporation securitizes and sells receivables through Navistar Financial Retail Receivables Corporation, Navistar Financial
Securities Corporation, Truck Retail Accounts Corporation and Truck Engine Receivables Financing Corporation, 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 April 30, 2003 was $313.3
million. The allowance for losses allocated to sold receivables totaled $12.9 million, $14.0 million, and $18.4 million at
April 30, 2003, October 31, 2002, and April 30, 2002, respectively.
The SPC´s retained 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 Amounts Due from Sales
of Receivables:
| Millions of Dollars |
April 30, 2003 |
October 31, 2002 |
April 30, 2002 | ||||
|---|---|---|---|---|---|---|---|
| Cash held and invested by trusts | $ 110.8 | 105.6 | $ 153.6 | ||||
| Subordinated retained interests in wholesale notes | 125.9 | 126.2 | 126.7 | ||||
| Subordinated retained interests in retail notes and | |||||||
| finance leases | 44.0 | 96.4 | 93.1 | ||||
| Interest-only receivables | 32.6 |
16.8 |
27.7 |
||||
| Total amounts due from sales of receivables | $ 313.3 |
$ 345.0 |
$ 401.1 |
||||
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.
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 April 30 were:
| 2003 |
2002 |
||||
| Prepayment speed (annual rate) | 1.4 | 1.4 – 1.6 | |||
| Weighted average life | 40 months | 40 months | |||
| Interest-only receivable discount rate | 5.35 | % | 6.93 | % | |
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 April 30, 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.
| Millions of Dollars |
April 30, 2003 |
October 31, 2002 |
April 30, 2002 | ||||
|---|---|---|---|---|---|---|---|
| Retail notes, net of unearned income | $1,718.2 | $1,521.8 | $2,078.4 | ||||
| Finance leases, net of unearned income | 23.3 | - | - | ||||
| Wholesale notes | 856.9 | 788.7 | 693.6 | ||||
| Retail accounts | 131.2 |
126.9 |
200.0 |
||||
| Total sold finance receivables, net | $2,729.6 |
$2,437.4 |
$2,972.0 |
||||
Serviced portfolio balances are summarized below.
| Millions of Dollars |
April 30, 2003 |
October 31, 2002 |
April 30, 2002 | ||||
|---|---|---|---|---|---|---|---|
| Gross serviced receivables | |||||||
| Retail notes | $2,522.4 | $2,529.1 | $2,516.3 | ||||
| Finance leases | 192.6 | 205.7 | 217.8 | ||||
| Wholesale notes | 909.8 | 839.2 | 744.8 | ||||
| Accounts | 359.2 |
383.4 |
351.2 |
||||
| Total gross serviced receivables | 3,984.0 | 3,957.4 | 3,830.1 | ||||
| Net investment in operating leases | 203.7 |
248.2 |
280.2 |
||||
| Total serviced portfolio | $4,187.7 |
$4,205.6 |
$4,110.3 |
||||
Additional financial data for gross serviced portfolio as of April 30, 2003 and for the six months then ended is summarized
below.
| Retail | Finance and | Wholesale | |||||||
| Millions of Dollars |
Notes |
Operating Leases |
Notes |
Accounts |
|||||
| Balances with payments | |||||||||
| past due over 60 days(1) | $17.5 | $4.9 | $4.2 | $5.9 | |||||
| Credit losses (net of recoveries) | 7.3 | 0.5 | 0.1 | - | |||||
(1) Includes rent past due over 60 days for Operating Leases
Certain cash flows received from (paid to) securitization trusts/conduits were as follows:
| Six Months | |||||
|---|---|---|---|---|---|
| Ended April 30 | |||||
| Millions of Dollars |
2003 |
2002 |
|||
| Proceeds from sales of finance receivables | |||||
| held for sale | $ 849.9 | $ 892.7 | |||
| Proceeds from sales of finance receivables into | |||||
| revolving facilities | 2,410.7 | 2,239.9 | |||
| Servicing fees received | 12.5 | 11.8 | |||
| Repurchase of receivables in breach of terms | (19.7 | ) | - | ||
| Cash used in exercise of purchase option | (63.8 | ) | (45.0 | ) | |
| All other cash received from trusts | 88.1 | 123.3 | |||
The following table summarizes income related to sales of finance receivables:
| Three Months | Six Months | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| Ended April 30 | Ended April 30 | ||||||||
| Millions of Dollars |
2003 |
2002 |
2003 |
2002 |
|||||
| Gains on sales of receivables | $ 0.7 | $ 8.4 | $ 33.2 | $ 26.9 | |||||
| Excess spread | 3.1 | 4.2 | 8.2 | 9.3 | |||||
| Derivative gains (losses) | (7.6 | ) | (1.7 | ) | (6.8 | ) | (3.3 | ) | |
| Interest income from retained securities | |||||||||
| and other | 0.4 |
0.5 |
0.8 |
0.6 |
|||||
| Total income related to | |||||||||
| sales of finance receivables | $ (3.4) |
$ 11.4 |
$ 35.4 |
33.5 |
|||||
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 April 30, 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 April 30, |
(Millions of Dollars) | ||
|---|---|---|---|
| 2004 | $2.0 | ||
| 2005 | 1.7 | ||
| 2006 | 1.5 | ||
| 2007 | 0.4 |
||
| Total | $5.6 |
||
The total operating lease expense for the six month period ended April 30, 2003 and 2002 was $1.2 million and $1.0 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 April 30, 2003, the Corporation has four 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. The Corporation has no recourse as guarantor in case of default.
The following table summarizes the borrowings as of April 30, 2003:
| Type of Funding |
Maturity |
Amount of Guaranty |
Outstanding Balance | ||||
|---|---|---|---|---|---|---|---|
| (Millions | of | Dollars) | |||||
| Revolving credit facility | December 2005 | $100.0 | $40.0 | ||||
| Medium term note* | November 2004 | 48.5 | 48.5 | ||||
| Revolving credit facility* | March 2006 | 58.3 | 18.7 | ||||
| Revolving credit facility* | May 2006 | 19.4 | 19.4 | ||||
* Peso-denominated
As of April 30, 2003, the Corporation had guaranteed derivative contracts for foreign currency forwards, interest rate swaps, and
cross currency swaps related to SOFOL and Arrendadora. The Corporation is liable up to the fair market value of these derivative
contracts only in cases of default by SOFOL and Arrendadora.
The following table summarizes the guaranteed derivative contracts as of April 30, 2003:
| Guaranteed | Outstanding | Fair | |||||||
|---|---|---|---|---|---|---|---|---|---|
| Instrument |
Maturity |
Notional |
Balance |
Value | |||||
| (Millions | of | Dollars) | |||||||
| Foreign currency forwards* | July 2003 | $25.0 | $10.0 | $0.7 | |||||
| Interest rate swaps and | |||||||||
| cross currency swaps* | April 2004 | 51.5 | 49.0 | 1.1 | |||||
* Peso-denominated
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 April 30, 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 June 2003, the Corporation sold $393.7 million of retail note and finance lease receivables. The gain recognized on the sale was
$20.7 million.
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:
— Sales of Receivables
— 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
Second Quarter 2003 Compared with Second Quarter 2002
Net income was $2.1 million for the second quarter of 2003, which includes an adjustment in income tax expense to reflect the annual
expected effective tax rate. Net income decreased $8.4 million compared with net income of $10.5 million for the second quarter of
2002. The decrease in earnings was primarily due to lower gains on sales of receivables. During the second quarter of fiscal 2003,
the Corporation sold $25.7 million of retail notes and leases for a pre-tax gain of $0.7 million. During the second quarter of fiscal
2002, the Corporation sold $388.0 million of retail notes for a pre-tax gain of $8.4 million. Additionally, during the second
quarter of fiscal 2003, the Corporation entered into several forward starting swap contracts, with aggregate notional amounts of $900.0 million, in connection with
anticipated sales of retail notes and finance leases. The purpose of these contracts is to limit the Corporation´s interest rate
risk exposure during the period it accumulates receivables for the anticipated sales. The Corporation recognized a pre-tax loss of
$7.6 million during the second quarter of fiscal 2003 related to derivatives compared to a pre-tax loss of $1.7 million during the second
quarter of fiscal 2002. The decrease in earnings was offset, in part, by the lower cost of borrowing and lower credit losses during
the second quarter of fiscal 2003 compared with 2002.
Fiscal Six Months Period 2003 Compared with 2002
Net income was $29.0 million for the first six months of fiscal 2003, an increase of $1.1 million compared with net income of $27.9
million for the first six months of fiscal 2002. The increase in earnings was primarily due to greater gains on sales of receivables
and lower credit losses during the first six months of fiscal 2003, compared with the same period of fiscal 2002, partially offset by
the loss incurred related to the forward starting swap contracts entered into in connection with the anticipated sales of
receivables. In the first six months of fiscal 2003, the Corporation sold $850.0 million of retail receivables for a pre-tax gain of
$33.2 million. During the same period of fiscal 2002, the Corporation sold $888.0 million of retail receivables for a pre-tax gain
of $26.9 million. The Corporation recognized a pre-tax loss on derivatives of $6.8 million during the first six months of fiscal
2003 compared to a pre-tax loss of $3.3 million during the same period of fiscal 2002.
Financial Condition
Finance Volume and Finance Market Share
During the first six months of fiscal 2003, the Corporation´s net retail notes and leases originations were $464.3 million, compared
with $481.2 million during the same period of fiscal 2002. Net serviced retail notes and leases balances were $2,691.1 million and
$2,796.4 million as of April 30, 2003 and 2002, respectively. The Corporation´s finance market share of new International trucks
sold in the U.S. decreased to 16.9% at April 30, 2003 compared to 20.7% at April 30, 2002, primarily due to the financing of a
purchase by a large truck customer in the first quarter of fiscal 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 during the first six months
of fiscal 2003 and 2002. Wholesale note originations were $1,454.9 million for the first six months of fiscal 2003, compared with
$1,264.1 million for the same period of fiscal 2002. Serviced wholesale notes balances were $909.8 million and $744.8 million as of
April 30, 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 0.76% as of April 30, 2003, compared with 0.77% as of April 30, 2002.
Funds 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 sells retail notes and finance leases through Navistar
Financial Retail Receivables Corporation ("NFRRC"), a special purpose, wholly-owned subsidiary of the Corporation. During the first
six months of fiscal 2003 and 2002, the Corporation sold $850.0 million and $888.0 million, respectively, of retail notes and finance
leases to an owner trust which, in turn, issued asset-backed securities that were sold to investors. As of April 30, 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 to Ford Motor Company. The facility matures in 2006. As of April 30, 2003, the Corporation had
utilized $100.0 million of this facility.
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 April 30, 2003, the Corporation
had utilized $32.7 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 April 30, 2003,
the Corporation had utilized $856.4 million of the revolving wholesale note trust.
As of April 30, 2003, cash available to fund retail notes, wholesale notes, and leases under the bank revolving credit facilities,
the revolving retail warehouse facility and the revolving wholesale note trust was $730.4 million. When combined with unrestricted
cash and cash equivalents, $784.1 million was available to fund the general business purposes of the Corporation.
The weighted average borrowing rate on all debt outstanding for the first six months of fiscal 2003 decreased to 3.68% from 4.02% for
the same period in 2002. The decrease in the Corporation´s weighted average borrowing rate is primarily a result of lower LIBOR
rates.
Liquidity and Cash Flow
During the first six months of fiscal 2003, cash and cash equivalents increased $21.7 million to $53.7 million. For the first six
months of fiscal 2003, the Corporation generated $21.8 million and $218.7 million from operating and investing activities,
respectively. The Corporation also utilized $218.8 million in financing activities during this period. See also the Statements of
Consolidated Cash Flow on page 4.
Total cash generated from investing activities was $218.7 million. The Corporation´s primary source of cash during the first six
months of fiscal 2003 was proceeds from sales of finance receivables held for sale. The aggregate source of cash flow related to the
sale of finance receivables held for sale was $268.6 million. This includes cash proceeds of $849.9 million, offset by cash
utilization from a net change in restricted marketable securities of $133.1 million and originations of finance receivables held for
sale of $448.2 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 used in financing activities during the first six months of fiscal 2003 was $218.8 million. During the first six months
of fiscal 2003, the Corporation reduced its utilization of the bank revolving credit facility by $171.0 million.
In November 2002, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 45 (“FIN 45”), Guarantor´s Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. FIN 45 requires that additional
disclosures be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that
it has issued. It also requires a guarantor to recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken in issuing the guarantee. Provisions related to recognizing a liability at inception do not apply to a
subsidiary´s guarantee of debt owed to a third party by either its parent or another subsidiary of that parent. The initial
recognition and measurement provisions of FIN 45 are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The disclosure requirements are effective for financial statements of interim or annual periods ending after
December 15, 2002. The Corporation provided disclosures about guarantees in Note 9.
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 addresses
consolidation requirements of variable interest entities. Transferors to qualifying special purpose entities (“QSPE´s”) subject to
the reporting requirements of FASB Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities, are excluded from the scope of this interpretation. The Corporation currently sells receivables to entities meeting
the requirements of QSPE´s.
Subsequent Events
In June 2003, the Corporation sold $393.7 million of retail note and lease receivables. The gain recognized on the sale was $20.7
million.
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 6% 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.
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.
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.
There were no material pending legal proceedings other than ordinary, routine litigation incidental to the business of the
Corporation.
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.
No reports on Form 8-K were filed during the quarter ended April 30, 2003.
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 June 13, 2003 | /s/ Ronald D. Markle | ||
| Ronald D. Markle | |||
| Vice President and Controller | |||
| (Principal Accounting Officer) | |||
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 June 13, 2003
/s/ Phyllis E. Cochran
Phyllis E. Cochran
(Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to Navistar Financial Corporation and
will be retained by Navistar Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon
request.
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
A signed original of this written statement required by Section 906 has been provided to Navistar Financial Corporation and
will be retained by Navistar Financial Corporation and furnished to the Securities and Exchange Commission or its staff upon
request.