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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2003
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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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 August 31, 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 --
Three Months and Nine Months Ended July 31, 2003 and 2002................. 2
Statements of Consolidated Financial Condition --
July 31, 2003; October 31, 2002; and July 31, 2002........................ 3
Statements of Consolidated Cash Flow --
Nine Months Ended July 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
Signature.............................................................................21
Part I - Financial Information
Item 1. Financial Statements
Navistar Financial Corporation and Subsidiaries
- ---------------------------------------------------------------------------------------------
Statements of Consolidated Income and Retained Earnings (Unaudited)
- ------------------------------------------------ ---------------------- ---------------------
Three Months Ended Nine Months Ended
July July July July
Millions of Dollars 2003 2002 2003 2002
- ------------------------------------------------ --------- ------------ ---------- ----------
Revenues
Retail Notes and Finance Leases. . . . $12.5 $12.3 $34.9 $38.4
Income Related to Sales of Finance
Receivables. . . . . . . . . . 28.2 3.1 63.6 36.6
Operating Leases. . . . . . . . . 14.7 19.3 51.2 57.5
Wholesale Notes. . . . . . . . . 8.6 7.5 23.5 20.6
Accounts. . . . . . . . . . . . 4.0 4.1 13.1 14.1
Servicing Fees. . . . . . . . . . 6.5 6.3 19.1 18.1
Other Revenue. . . . . . . . . . 1.2 2.2 4.4 7.2
--------- ------------ ---------- ---------
Total. . . . . . . . . . . 75.7 54.8 209.8 192.5
Expenses
Cost of Borrowing
Interest Expense. . . . . . 12.0 14.0 38.1 43.5
Other. . . . . . . . . . 2.3 2.1 6.2 6.0
Credit, Collection and Administrative. . 10.7 10.5 31.9 30.7
Provision for Credit Losses. . . . . 4.0 5.1 11.9 15.6
Depreciation on Operating Leases. . . . 10.9 13.9 35.5 41.7
Other Expense. . . . . . . . . . 1.2 0.6 3.3 1.8
--------- ------------ ---------- ----------
Total. . . . . . . . . . . 41.1 46.2 126.9 139.3
Income Before Taxes. . . . . . . . . 34.6 8.6 82.9 53.2
Income Tax Expense. . . . . . . . . 12.3 2.9 31.6 20.3
--------- ------------ ---------- ----------
Income from Continuing Operations. . . . 22.3 5.7 51.3 32.9
Gain on Disposal of Discontinued Operations,
(net tax of $0.0, $0.0, $0.0 and $0.5) . - - - 0.7
--------- ------------ ---------- ----------
Net Income. . . . . . . . 22.3 5.7 51.3 33.6
Retained Earnings
Beginning of Period. . . . . . . 216.1 191.3 197.1 163.4
Dividends Paid. . . . . . . . . . (5.0) - (15.0) -
--------- ------------ ---------- ----------
End of Period. . . . . . . . . $ 233.4 $197.0 $233.4 $ 197.0
========= ============ ========== ==========
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
- ------------------------------------------------------------------------------------
Statements of Consolidated Financial Condition (Unaudited)
- ------------------------------------------------------------------------------------
July October July
Millions of Dollars 2003 2002 2002
- ------------------------------------------------ ----------- ---------- ------------
ASSETS
Cash and Cash Equivalents. . . . . . . $5.2 $32.0 $57.4
Finance Receivables
Finance Receivables Held for Sale. . . . 533.6 1,006.7 702.3
Other Finance Receivables. . . . . . 242.5 294.3 96.2
Allowance for Losses. . . . . . . . (15.1) (16.0) (13.6)
----------- ---------- ------------
Finance Receivables, net. . . . . 761.0 1,285.0 784.9
Amounts Due from Sales of Receivables. . . . 456.7 357.7 488.9
Net Investment in Operating Leases. . . . . 192.5 248.2 263.6
Repossessions. . . . . . . . . . . 30.0 26.0 33.8
Restricted Marketable Securities. . . . . 430.1 104.6 255.0
Other Assets. . . . . . . . . . . . 39.1 53.4 34.3
----------- ---------- ------------
Total Assets . . . . . . . . . $ 1,914.6 $2,106.9 $ 1,917.9
=========== ========== ============
LIABILITIES AND SHAREOWNER'S EQUITY
Net Accounts Payable to Affiliates. . . . . $ 26.2 $ 52.2 $ 51.3
Senior and Subordinated Debt. . . . . . . 1,348.5 1,562.5 1,376.7
Other Liabilities. . . . . . . . . . 138.5 127.4 124.4
----------- ---------- ------------
Total Liabilities. . . . . . . . 1,513.2 1,742.1 1,552.4
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. . . . . . . . . . 233.4 197.1 197.0
Accumulated Other Comprehensive Loss. . . . (3.0) (3.3) (2.5)
----------- ---------- ------------
Total Shareowner's Equity. . . . . . 401.4 364.8 365.5
----------- ---------- ------------
Total Liabilities and Shareowner's Equity. . $ 1,914.6 $ 2,106.9 $ 1,917.9
=========== ========== ============
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
- ----------------------------------------------------------------------------------------------------
Statements of Consolidated Cash Flow (Unaudited)
- ----------------------------------------------------------------------------------------------------
Nine Months Ended
July July
Millions of Dollars 2003 2002
Cash Flow From Operations
Net Income $ 51.3 $ 33.6
Adjustments to reconcile net income to cash provided from operations:
Gains on sales of receivables (59.3) (28.8)
Depreciation, amortization and accretion 43.8 47.2
Provision for credit losses 11.9 15.6
Net change in accounts payable to affiliates (26.0) 37.1
Other 33.4 35.5
------- -------
Total 55.1 140.2
Cash Flow From Investing Activities
Originations of finance receivables held for sale (764.6) (712.5)
Proceeds from sales of finance receivables held for sale 1,347.2 999.0
Net change in restricted marketable securities (325.5) (41.4)
Collections of retail notes and finance lease receivables,
net of change in unearned finance income 36.9 50.8
Repurchase of sold retail receivables (163.5) (165.0)
Net change in wholesale notes and accounts receivables 51.8 139.1
Change in amounts due from sales of receivables (39.5) (124.9)
Purchase of equipment leased to others (25.1) (51.7)
Sale of equipment leased to others 45.5 23.6
Receipts from derivative contracts 3.1 2.3
Payments on derivative contracts (15.0) (3.7)
Proceeds from sale of discontinued operations - 63.3
------- -------
Total 151.3 178.9
Cash Flow From Financing Activities
Net change in bank revolving credit facility usage (147.0) (324.0)
Proceeds from issuance of convertible debt - 169.5
Debt issuance costs on convertible debt - (6.2)
Proceeds from long-term debt 28.4 70.4
Principal payments on long-term debt (99.6) (193.7)
Dividends paid to International (15.0) -
-------- -------
Total (233.2) (284.0)
Change in Cash and Cash Equivalents (26.8) 35.1
Cash and Cash Equivalents, Beginning of Period 32.0 22.3
------- -------
Cash and Cash Equivalents, End of Period $ 5.2 $57.4
Supplementary disclosure of cash flow information:
Interest paid $ 37.3 $ 46.3
Income taxes paid, net of refunds $ 9.4 $ 16.4
Noncash investing activities:
Transfers to repossessions $ 72.7 $ 72.3
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 and
the accounting policies adopted in the first, second, and third quarters 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 April 2003, the FASB issued Statement of Financial Accounting Standards No. 149
(`SFAS 149"), Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This Statement amends and clarifies financial accounting and reporting for
derivative instruments, including certain derivative instruments embedded in other
contracts. SFAS 149 is effective for contracts entered into or modified after June 30,
2003, and for hedging relationships designated after June 30, 2003. Prior to the
issuance of SFAS 149, the Corporation reported net cash received from and paid on
derivatives contracts in "other" under adjustments to reconcile net income to cash
provided from operations. Currently, the Corporation reports cash received from, or
paid on, derivative contracts consistently with the underlying assets under investing
activities on its Statements of Consolidated Cash Flow. There is no material effect on
the financial statement as a result of this adoption.
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 Nine Months
Ended July 31 Ended July 31
Millions of Dollars 2003 2002 2003 2002
Net income. . . . . . . . . . . . . . . . . $ 22.3 $ 5.7 $ 51.3 $ 33.6
Change in net unrealized gain on derivative . . . 0.2 - 0.3 0.6
Total comprehensive income . . . . . . . . $ 22.5 $ 5.7 $ 51.6 $ 34.2
4. FINANCE RECEIVABLES
Finance receivables are summarized as follows:
July 31, October 31, July 31,
Millions of Dollars 2003 2002 2002
Retail notes, net of unearned income $ 410.5 $ 827.1 $ 519.9
Finance leases, net of unearned income 123.1 179.6 182.4
Wholesale notes 34.3 37.8 17.8
Accounts:
Retail 140.1 181.1 7.3
Wholesale 68.1 75.4 71.1
Total accounts 208.2 256.5 78.4
Total finance receivables 776.1 1,301.0 798.5
Less: Allowance for losses 15.1 16.0 13.6
Total finance receivables, net $ 761.0 $ 1,285.0 $ 784.9
Finance receivables held for sale consisted of $533.6 million, $1,006.7 million, and
$702.3 million in retail notes and finance leases, net of unearned income, as of July
31, 2003, October 31, 2002, and July 31, 2002, respectively.
5. ALLOWANCE FOR LOSSES
The allowance for losses is summarized as follows for the fiscal period ended:
July 31, October 31, July 31,
Millions of Dollars 2003 2002 2002
Allowance for losses, beginning of period $ 16.0 $ 13.3 $ 13.3
Provision for credit losses 11.9 20.5 15.6
Net losses charged to allowance (5.0) (5.3) (3.4)
Transfers to finance receivables sold (7.8) (12.5) (11.9)
Allowance for losses, end of period $ 15.1 $ 16.0 $ 13.6
The average outstanding balance of impaired finance receivables was not material for the
nine months ended July 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 nine months ended July 31, 2003 and 2002 or for the year ended October 31, 2002 was
not material.
Balances with payments past due over 90 days on owned finance receivables, including
held for sale, totaled $3.6 million as of July 31, 2003.
6. SENIOR AND SUBORDINATED DEBT
Senior and subordinated debt outstanding is summarized as follows:
July 31, October 31, July 31,
Millions of Dollars 2003 2002 2002
Bank revolving credit facility, at variable rates,
due December 2005 $ 435.0 $ 582.0 $ 368.0
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 236.6 307.8 337.3
Convertible debt, 4.75%, due April 2009 176.9 172.7 171.4
Total senior and subordinated debt $1,348.5 $ 1,562.5 $ 1,376.7
As of July 31, 2003, October 31, 2002, and July 31, 2002 the Corporation had unaccreted
discount of $43.1 million, $47.3 million, and $48.6 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 counterparty 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 counterparty credit exposure is limited to the positive fair
value of contracts at the reporting date. As of July 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 July 31, 2003, the notional amounts and fair values of the Corporation's
derivative financial instruments are summarized as follows:
Inception Maturity Instrument Notional Fair Value
(Millions of Dollars)
October 2000 November 2012 Interest rate cap $ 500.0 $ (3.8)
November 2012 Interest rate cap 500.0 3.8
December 2000 January 2004 Interest rate swap* 5.2 (0.1)
July 2001 April 2006 Interest rate swap 29.5 (1.6)
November 2001 June 2004 Interest rate swap* 100.8 (0.9)
July 2006 Interest rate swap* 114.3 1.1
November 2002 March 2007 Interest rate swap* - -
February 2003 July 2005 Forward starting swap* 300.0 (0.7)
April 2003 July 2005 Forward starting swap* 100.0 (0.2)
* 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 July 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, 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
overcollateralizations 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 July 31, 2003 was $456.7 million. The allowance for losses allocated to sold
receivables totaled $14.9 million, $14.0 million, and $16.4 million at July 31, 2003,
October 31, 2002, and July 31, 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:
July 31, October 31, July 31,
Millions of Dollars 2003 2002 2002
Cash held and invested by trusts $ 123.0 $ 105.6 $ 180.4
Subordinated retained interests in wholesale notes 198.1 138.9 143.3
Subordinated retained interests in retail notes and
finance leases 86.4 96.4 143.0
Interest-only receivables 49.2 16.8 22.2
Total amounts due from sales of receivables $ 456.7 $ 357.7 $ 488.9
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.
Key economic assumptions used in measuring the interest-only receivables at the date of
the sale for sales of retail notes and finance leases completed during the quarter ended
July 31 were:
2003 2002
Prepayment speed (annual rate) 1.4 1.4
Weighted average life 41 months 40 months
Interest-only receivable discount rate 4.93% 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 July 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.
July 31, October 31, July 31,
Millions of Dollars 2003 2002 2002
Retail notes, net of unearned income $ 1,873.8 $ 1,521.8 $ 1,805.2
Finance leases, net of unearned income 38.4 - -
Wholesale notes 872.7 801.4 696.8
Retail accounts 94.6 126.9 163.8
Total sold finance receivables, net $ 2,879.5 $ 2,450.1 $ 2,665.8
Serviced portfolio balances are summarized below.
July 31, October 31, July 31,
Millions of Dollars 2003 2002 2002
Gross serviced receivables
Retail notes $ 2,517.4 $ 2,529.1 $ 2,573.5
Finance leases 178.3 205.7 209.8
Wholesale notes 907.0 839.2 714.6
Accounts 302.8 383.4 242.2
Total gross serviced receivables 3,905.5 3,957.4 3,740.1
Net investment in operating leases 192.5 248.2 263.6
Total serviced portfolio $ 4,098.0 $ 4,205.6 $ 4,003.7
Additional financial data for gross serviced portfolio as of July 31, 2003 and for the
nine 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) $ 10.5 $ 2.1 $ 3.7 $ 2.5
Credit losses (net of recoveries) 11.0 0.8 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:
Nine Months
Ended July 31
Millions of Dollars 2003 2002
Proceeds from sales of finance receivables
held for sale $ 1,347.2 $ 999.0
Proceeds from sales of finance receivables into
revolving facilities 3,748.9 3,385.3
Servicing fees received 19.6 18.1
Repurchase of receivables in breach of terms (1) (24.0) (120.4)
Cash used in exercise of purchase option (139.5) (44.6)
All other cash received from trusts 127.4 179.3
(1) The Corporation, as servicer, covenants that it will not amend the terms of the
receivables. A breach of this covenant requires the Corporation to repurchase the
receivables from the trust/conduit.
The following table summarizes income related to sales of finance receivables:
Three Months Nine Months
Ended July 31 Ended July 31
Millions of Dollars 2003 2002 2003 2002
Gains on sales of receivables $ 26.1 $ 1.9 $ 59.3 $ 28.8
Excess spread 2.6 2.9 10.8 12.2
Derivative gains (losses) (1.0) (2.4) (7.8) (5.7)
Interest income from retained securities
and other 0.5 0.7 1.3 1.3
Total income related to
sales of finance receivables $ 28.2 $ 3.1 $ 63.6 $ 36.6
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 July 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 July 31, (Millions of Dollars)
2004 $ 1.8
2005 1.6
2006 1.5
Total $ 4.9
The total operating lease expense for the nine month period ended July 31, 2003 and 2002
was $1.8 million and $1.6 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 July
31, 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 July 31, 2003:
Type of Funding Maturity Amount of Guaranty Outstanding Balance
(Millions of Dollars)
Revolving credit facility December 2005 $ 100.0 $ 32.0
Medium term note* November 2004 47.5 47.5
Revolving credit facility* March 2006 10.6 10.6
Revolving credit facility* July 2006 19.0 19.0
* Peso-denominated
Guarantees of Derivatives
As of July 31, 2003, the Corporation had guaranteed derivative contracts for 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 July 31, 2003:
Guaranteed Outstanding Fair
Instrument Maturity Notional Balance Value
(Millions of Dollars)
Interest rate swaps and
cross currency swaps* April 2004 $ 50.4 $ 44.8 $ 0.4
* 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 $0.6
million as of July 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.
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
Third Quarter 2003 Compared with Third Quarter 2002
Net income was $22.3 million for the third quarter of 2003. Net income increased $16.6
million compared with net income of $5.7 million for the third quarter of 2002. The
increase in earnings was primarily due to higher gains on sales of receivables. During the
third quarter of fiscal 2003, the Corporation sold $500.0 million of retail notes and leases
for a pre-tax gain of $26.1 million. During the third quarter of fiscal 2002, the
Corporation sold $112.0 million of retail notes for a pre-tax gain of $1.9 million.
Fiscal Nine Months Period 2003 Compared with 2002
Net income was $51.3 million for the first nine months of fiscal 2003, an increase of $17.7
million compared with net income of $33.6 million for the first nine months of fiscal 2002.
The increase in earnings was primarily due to greater gains on sales of receivables during
the first nine months of fiscal 2003, compared with the same period of fiscal 2002. In the
first nine months of fiscal 2003, the Corporation sold $1,350.0 million of retail
receivables for a pre-tax gain of $59.3 million. During the same period of fiscal 2002, the
Corporation sold $1,000.0 million of retail receivables for a pre-tax gain of $28.8
million. These gains were slightly offset by a pre-tax loss on derivatives of $7.8 million
and $5.7 million during the first nine months of fiscal 2003 and 2002, respectively.
Financial Condition
Finance Volume and Finance Market Share
During the first nine months of fiscal 2003, the Corporation's net retail notes and leases
originations were $789.7 million, compared with $764.2 million during the same period of
fiscal 2002. Net serviced retail notes and leases balances were $2,638.3 million and
$2,776.1 million as of July 31, 2003 and 2002, respectively. The Corporation's finance
market share of new International trucks sold in the U.S. decreased to 15.1% at July 31,
2003 compared to 20.2% at July 31, 2002, primarily due to the financing of a purchase by a
large truck customer in fiscal 2002, which was not present in fiscal 2003.
The Corporation provided 96.0% of the wholesale financing of new trucks sold to
International's dealers during the first nine months of fiscal 2003 and 2002. Wholesale note
originations were $2,239.2 million for the first nine months of fiscal 2003, compared with
$1,976.1 million for the same period of fiscal 2002. Serviced wholesale notes balances were
$907.0 million and $714.6 million as of July 31, 2003 and 2002, respectively. The increases
in wholesale notes balances and originations are a result of dealers' anticipated sales due
to an increase in industry orders.
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 0.78% as of July 31,
2003, compared with 0.80% as of July 31, 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, and medium and long-term debt. 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 nine months
of fiscal 2003 and 2002, the Corporation sold $1,350.0 million and $1,000.0 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 July 31, 2003, the remaining
shelf registration available to NFRRC for the public issuance of asset-backed securities was
$1,150.0 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 July 31,
2003, the Corporation had utilized $94.6 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 July 31, 2003, the Corporation was not
utilizing any of this facility. The facility expired in August 2003. The Corporation is in
the process of obtaining refinancing for the retail accounts.
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
$1,224.0 million of eligible wholesale notes. As of July 31, 2003, it is comprised of three
$200.0 million tranches of investor certificates maturing in 2003, 2004 and 2008, two $212.0
million tranches of investor certificates maturing in 2005 and 2006, and variable funding
certificates with a maximum capacity of $200.0 million maturing in January 2004. During the
third quarter, a $212.0 million tranche was issued in anticipation of the maturity, on
August 25, 2003, of a $200.0 million tranche of investor certificates. As of July 31, 2003,
the Corporation had utilized $872.7 million of the revolving wholesale note trust.
As of July 31, 2003, cash available to fund finance receivables under the bank revolving
credit facilities, the revolving retail warehouse facility and the revolving wholesale note
trust was $886.8 million. When combined with unrestricted cash and cash equivalents, $892.0
million was available to fund the general business purposes of the Corporation.
The weighted average borrowing rate on all debt outstanding for the first nine months of
fiscal 2003 decreased to 3.67% from 4.05% 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 nine months of fiscal 2003, cash and cash equivalents decreased $26.8
million to $5.2 million. For the first nine months of fiscal 2003, the Corporation
generated $55.1 million and $151.3 million from operating and investing activities,
respectively. The Corporation also utilized $233.2 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 $151.3 million. The Corporation's
primary source of cash during the first nine 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 $93.6 million. This includes cash proceeds of
$1,347.2 million, offset by cash utilization from a net change in restricted marketable
securities of $325.5 million, repurchase of sold retail receivables of $163.5 million, and
originations of finance receivables held for sale of $764.6 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 nine months of fiscal 2003 was
$233.2 million. During the first nine months of fiscal 2003, the Corporation reduced its
utilization of the bank revolving credit facility by $147.0 million and made payments on
long-term debt of $99.6 million.
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. 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 April 2003, the FASB issued Statement of Financial Accounting Standards No. 149 (`SFAS
149"), Amendment of Statement 133 on Derivative Instruments and Hedging Activities. This
Statement amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other contracts. SFAS 149
is effective for contracts entered into or modified after June 30, 2003, and for hedging
relationships designated after June 30, 2003. Prior to the issuance of SFAS 149, the
Corporation reported net cash received from and paid on derivatives contracts in "other"
under adjustments to reconcile net income to cash provided from operations. Currently, the
Corporation reports cash received from, or paid on, derivative contracts consistently with
the underlying assets under investing activities on its Statements of Consolidated Cash
Flow. There is no material effect on the financial statement as a result of this adoption.
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.
The company currently projects 2003 U.S. and Canadian Class 8 heavy truck demand to be
156,000 units, down 4% from 2002. Class 6 and 7 medium truck demand, excluding school
buses, is forecast at 72,700 units, approximately the same as 2002. Demand for school buses
is expected to be 27,500 units, consistent with 2002. Mid-range diesel engine shipments by
the company to OEMs in 2003 are expected to be 335,000 units, 6% 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, along with
other management of the Corporation, evaluated the Corporation's disclosure controls and
procedures (as defined in rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of
1934, as amended) as of July 31, 2003. Based on that evaluation, the principal executive
officer and principal financial officer of the Corporation concluded that, as of July 31,
2003, the disclosure controls and procedures in place at the Corporation were (1) designed to
ensure that material information relating to the Corporation is made known to them to allow
timely decisions regarding required disclosure and (2) effective, in that such disclosure
controls and procedures provide reasonable assurance that information required to be
disclosed by the Corporation 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 is in the process of formalizing and documenting the procedures
already in place.
Changes in Internal Controls
The Corporation has not made any change to its internal control over financial reporting (as
defined in rule 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter ended
July 31, 2003 that have materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
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.
Effective August 1, 2003, Paul Martin replaced Ronald D. Markle as Vice President and
Controller.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3 Articles of Incorporation and By-Laws.........................E-1
4 Instruments Defining Rights of Security Holders,
including Indentures..........................................E-2
10 Material Contracts............................................E-3
31.1 CEO Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.................E-4
31.2 CFO Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.................E-6
32.1 CEO Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.................E-8
32.2 CFO Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.................E-9
(b) No reports on Form 8-K were filed during the quarter ended July 31, 2003.
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
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 September 12, 2003 /s/ Paul Martin
Paul Martin
Vice President and Controller
(Principal Accounting Officer)