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Form 10k-Annual 2003<br>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 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
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
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__
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. __
As of November 30, 2003, the number of shares outstanding of the
registrant's common stock was 1,600,000.
Documents Incorporated by Reference
Portions of the Proxy Statement to be delivered to shareowners in connection
with the 2004 Annual Meeting of Shareowners (Part III)
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF INTERNATIONAL TRUCK AND
ENGINE CORPORATION, WHICH IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR
INTERNATIONAL CORPORATION, AND MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION I(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM
WITH THE REDUCED DISCLOSURE FORMAT.
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NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX
Page
PART I
Item 1 Business (A)..................................................2
Item 2 Properties (A)................................................2
Item 3 Legal Proceedings.............................................2
Item 4 Submission of Matters to a Vote of Security Holders (A).......2
PART II
Item 5 Market for the Registrant's Common Equity and Related
Stockholder Matters...........................................2
Item 6 Selected Financial Data (A)...................................2
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations (A).......................3
Item 7A Quantitative and Qualitative Disclosures About Market Risk....8
Item 8 Financial Statements and Supplementary Data...................9
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..........................37
Item 9A. Controls and Procedures......................................37
PART III
Item 10 Directors and Executive Officers of the Registrant (A).......37
Item 11 Executive Compensation (A)...................................37
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters (A)...........37
Item 13 Certain Relationships and Related Transactions (A)...........37
Item 14 Principal Accountant Fees and Services.......................37
PART IV
Item 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K..........................................38
SIGNATURES.............................................................39
(A) Omitted or amended as the registrant is a wholly-owned subsidiary of
International Truck and Engine Corporation, which is a wholly-owned
subsidiary of Navistar International Corporation, and meets the conditions
set forth in General Instructions I (1) (a) and (b) of Form 10-K and is,
therefore, filing this Form with the reduced disclosure format.
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PART I
Item 1. Business
The registrant, Navistar Financial Corporation ("NFC"), 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.
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. 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.
Item 2. Properties
The Corporation's properties principally consist of office equipment and
leased office space in Rolling Meadows, Illinois; Duluth, Georgia and
Frisco, Texas. The office equipment owned and in use by the Corporation is
not significant in relation to the total assets of the Corporation.
Item 3. Legal Proceedings
There were no material pending legal proceedings other than ordinary,
routine litigation incidental to the business of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See the index page of this Report for explanation.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
As of October 31, 2003, International owned all shares of NFC's issued and
outstanding capital stock. No shares are reserved for officers and
employees, or for options, warrants, conversions and other rights. NFC paid
dividends of $50.0 million, $0.0 million and $26.0 million to International
during fiscal 2003, 2002 and 2001, respectively.
Item 6. Selected Financial Data
Intentionally omitted. See the index page of this Report for explanation.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Forward-looking statements
This Form 10-K contains forward-looking statements within the meaning of
Section 27A of the Securities Act, Section 21E of the Exchange Act, and the
Private Securities Litigation Reform Act of 1995 that are subject to risks
and uncertainties. You should not place undue reliance on those statements
because they are subject to numerous uncertainties and factors relating to
our operations and business environment, all of which are difficult to
predict and many of which are beyond our control, and such forward-looking
statements only speak as of the date of this Form 10-K. Forward-looking
statements include information concerning our possible or assumed future
results of operations, including descriptions of our business strategy.
These statements often include words such as "believe," "expect,"
"anticipate," "intend," "plan," "estimate" or similar expressions. These
statements are based on assumptions that we have made in light of our
experience in the industry as well as our perceptions of historical trends,
current conditions, expected future developments and other factors we
believe are appropriate under the circumstances. As you read and consider
this Form 10-K, you should understand that these statements are not
guarantees of performance or results. They involve risks, uncertainties and
assumptions. Although we believe that these forward-looking statements are
based on reasonable assumptions, you should be aware that many factors could
affect our actual financial results or results of operations and could cause
actual results to differ materially from those in the forward-looking
statements.
Results from Continuing Operations
Results from continuing operations over the last three years were as follows:
Millions of Dollars 2003 2002 2001
Revenue $ 266.7 $ 246.7 $ 304.4
Cost of borrowing 57.5 66.1 102.1
Income before taxes 101.5 60.8 72.3
Income from continuing operations 59.9 34.9 46.2
Return on average equity 15.5% 9.8% 14.8%
In fiscal 2003, income from continuing operations was $59.9 million, an
increase of $25.0 million and $13.7 million compared with 2002 and 2001,
respectively. The increase in earnings was primarily due to higher sales of
finance receivables in fiscal 2003, compared with fiscal 2002 and 2001.
Income related to sales of finance receivables was $76.4 million in 2003,
compared with $37.3 million and $42.9 million in 2002 and 2001,
respectively. Included in income related to sales of finance receivables
are gains on the sales of retail notes and finance leases receivables. In
fiscal 2003, the Corporation sold $1,705.0 million of finance receivables
for a pre-tax gain of $77.3 million. In fiscal 2002, the Corporation sold
$1,000.0 million of finance receivables for a pre-tax gain of $28.8
million. The higher gains on sales resulted primarily from greater sales
volume of receivables and lower borrowing costs in the asset-backed market.
Borrowing costs decreased 13.0% in 2003 to $57.5 million from $66.1 million
in 2002 primarily due to lower average receivable funding requirements and
lower average interest rates. The Corporation's weighted average interest
rate on all debt was 4.9% in 2003, 5.4% in 2002 and 5.7% in 2001. The
decrease in the Corporation's weighted average interest rate is primarily a
result of lower LIBOR rates. The ratio of debt to equity was 4:1, 4:1, and
5:1 as of October 31, 2003, 2002 and 2001, respectively.
Provision for losses on receivables totaled $15.8 million in 2003, a
reduction of $4.7 million from the $20.5 million recognized in 2002. The
decrease in 2003 was primarily due to overall improvement in portfolio
performance and improved recoveries in the used truck markets.
Allowance for losses related to the serviced portfolio was 0.76% of net
serviced balances as of October 31, 2003 in comparison to 0.75% of net
serviced balances as of October 31, 2002.
Financing Condition
Financing Volume and Finance Market Share
In fiscal 2003, the Corporation's net retail notes and finance leases
originations were $1,112.7 million, compared with $1,001.0 million in fiscal
2002, an increase of 11.2% from 2002. Net serviced retail notes and finance
leases balances were $2,506.5 million and $2,528.5 million as of October 31,
2003 and 2002, respectively. The Corporation's finance market share of new
International trucks sold in the U.S. decreased to 15.7% at October 31, 2003
compared to 19.1% at October 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% of the wholesale financing of new trucks sold
to International's dealers in fiscal 2003 and 96% in 2002. Wholesale note
originations were $3,168.7 million in fiscal 2003, compared with $2,955.3
million fiscal 2002, an increase of 7.2%. Serviced wholesale notes balances
were $860.7 million and $839.2 million as of October 31,2003 and 2002,
respectively.
Funds Management
The Corporation has traditionally obtained the funds to provide financing to
International's dealers and retail customers from sales of finance
receivables, 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
In December 2002, Fitch IBCA, Standard and Poor's, and Moody's lowered the
Corporation's senior unsecured and subordinated debt ratings. The
Corporation's debt ratings as of October 31, 2003 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
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 fiscal 2003 and 2002, the Corporation sold $1,705.0 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 October 31, 2003, the remaining shelf registration available
to NFRRC for the public issuance of asset-backed securities was $600.0 million.
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 $1,024.0 million of eligible wholesale
notes. As of October 31, 2003, it is comprised of two $200.0 million
tranches of investor certificates maturing in 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 October 31, 2003,
the Corporation had utilized $814.7 million of the revolving wholesale note
trust.
Truck Engine Receivables Financing Co., 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 revolving facility expires in 2005 and contractually
matures in 2006. As of October 31, 2003, the Corporation had utilized
$100.0 million of this facility.
Truck Retail Accounts Corporation, a special purpose wholly-owned subsidiary
of the Corporation had in place a revolving retail account conduit that
provided for the funding of retail accounts. The facility expired in August
2003. The Corporation is in the process of obtaining a new facility for
retail accounts.
Truck Retail Instalment Paper Corp., a special purpose wholly-owned
subsidiary of the Corporation, issued $500.0 million of senior and
subordinated floating rate asset-backed notes on October 16, 2000, which
will expire in October 2005. The proceeds were used to establish a
revolving retail warehouse facility to fund the Corporation's retail notes
and retail leases, other than fair market value leases.
The Corporation also had an $820.0 million contractually committed bank
revolving credit facility that will mature in December 2005. As of October
31, 2003, facilities available to fund finance receivables under the various
facilities was $1,066.4 million.
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 included below. See the Notes to the
Financial Statements for a more detailed description of these and other
accounting policies.
o Allowance for Losses
The allowance for losses is established through a charge to the
provision for losses. The allowance is an estimate of the amount
required to absorb losses on the existing portfolio of finance
receivables and operating leases that may become uncollectible. 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 lease investments
are charged off to the allowance for losses when amounts due from the
customers are determined to be uncollectible.
Under various agreements, International and its dealers may be liable
for a portion of customer losses or may be required to repurchase the
repossessed collateral at the receivable principal value. The
Corporation's losses are net of these benefits.
o Sales of Receivables
The Corporation securitizes finance receivables through qualifying
special purpose entities ("QSPE's"), which then issue securities to
public and private investors. The Corporation sells receivables to the
QSPE's with limited recourse. Gains or losses on sales of receivables
are credited or charged to financing revenue in the periods in which
the sales occur. Retained interests, which include interest-only
receivables, cash reserve accounts, and subordinated certificates, are
recorded at fair value in the periods in which the sales occur.
Management estimates the prepayment speed for the receivables sold and
the discount rate used to determine the present value of the
interest-only receivable 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 retained interests on a quarterly
basis. The fair value of the interest-only receivable is based on
updated estimates of prepayment speeds and discount rates.
o Net Investments in Operating Leases
The Corporation has investments in the residual values of its leasing
portfolio. The residual values represent estimates of the values of
the assets at the end of the lease contracts and are initially recorded
based on estimates of future market values. Realization of the
residual values is dependent on the Corporation's future ability to
market the vehicles under then prevailing conditions. Management
reviews residual values periodically to determine that recorded amounts
are appropriate and the operating lease assets have not been impaired.
Each of these assets is depreciated on a straight-line basis over the
term of the lease in an amount necessary to reduce the leased vehicle
to its estimated residual value at the end of the lease term.
o Repossessions
Losses arising from the repossession of collateral supporting finance
receivables and operating leases are recognized upon repossession.
Repossessed assets are recorded at the lower of historical cost or fair
value and are reclassified from finance receivables or operating leases
to repossessions with the related adjustments recorded in provision for
credit losses.
o Pension and Other Postretirement Benefits
The Corporation provides postretirement benefits to a substantial
portion of its employees. Costs associated with postretirement
benefits include pension and postretirement health care expenses for
employees, retirees and surviving spouses and dependents. The
Corporation's employee pension and postretirement heath care expenses
are dependent on management's assumptions used by actuaries in
calculating such amounts. These assumptions include discount rates,
health care cost trend rates, inflation, long-term return on plan
assets, retirement rates, mortality rates and other factors. Health care
cost trend assumptions are developed based on historical cost data,
the near-term outlook, and an assessment of likely long-term trends.
The inflation assumption is based on an evaluation of external market
indicators. Retirement and mortality rates are based primarily on
actual plan experience.
The Corporation's approach to establishing the discount rate assumption
reflects an investment strategy that effectively settles a portion of
its pension liability by investing in a bond portfolio that generates
monthly cash flows equal to the projected monthly benefits. This
portion of the liability is weighted using a discount rate based on the
October 31, 2003 effective yield on the dedicated bond investment
portfolio. The remaining non-dedicated portion of the liability used
the average of the October 31, 2003 yields on the Merrill Lynch Ten
Year + High Quality Corporate Bond Index and Moody's AA Corporate Bond
Index, both adjusted for active management premiums. For the other
benefits, the discount rate is based on the Merrill Lynch Ten Year +
High Quality Corporate Bond Index and Moody's AA Corporate Bond Index
with a provision for active management premiums.
Based on this approach, at October 31, 2003, the Corporation lowered
the discount rate for pension plans to 5.8% from 7.2% at October 31,
2002. The discount rate for the other benefits was lowered from 7.1%
at October 31, 2002 to 6.6% at October 31, 2003.
The Corporation determines its expected return on plan asset
assumptions by evaluating both historical returns as well as estimates
of future returns. Specifically, the Corporation analyzed the average
historical broad market returns over a 100 year period for equities and
over a 30 year period for fixed income securities, adjusted these
returns for a premium due to the active management of its investment
funds, and adjusted the computed amount for any expected changes in the
long-term outlook for the equity and fixed income markets. The
Corporation's expected return on assets was based on expected equity
and fixed income returns weighted by the percentage of assets allocated
to each plan.
As a result, the Corporation revised downward its estimate of the
long-term rate of return on assets for both its pension and
postretirement health benefits for 2003 to 9.0% from 9.8% and 11.0%,
respectively, in 2002 and 9.8% and 10.8%, respectively, in 2001.
Cumulative gains and losses and plan amendments related to
postretirement benefits are amortized over the average remaining
service life of active participants.
See Note 10 to the Financial Statements for more information regarding
costs and assumptions for employee retirement benefits.
New Accounting Standards
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 11.
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.
Navistar currently projects 2004 U.S. and Canadian Class 8 heavy truck
demand to be 191,000 units, up 19.9% from 2003. Class 6 and 7 medium truck
demand, excluding school buses, is forecast at 86,000 units, up 14.9% from
2003. Demand for school buses is expected to be 27,500 units, down 5.8%
from 2003. Mid-range diesel engine shipments by the company to OEMs in 2004
are expected to be 349,200 units, 5.0% higher than 2003.
Management believes that collections on the outstanding finance receivables
portfolio plus facilities 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 2004 and beyond.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Corporation is exposed to market risk primarily due to fluctuations in
interest rates. Interest rate risk arises from the funding of a portion of
the Corporation's fixed rate receivables with floating rate debt. The
Corporation has managed exposure to interest rate changes by funding
floating rate receivables with floating rate debt and fixed rate receivables
with fixed rate debt, floating rate debt and equity capital. Management has
reduced the net exposure, which results from the funding of fixed rate
receivables with floating rate debt by generally selling fixed rate
receivables on a fixed rate basis and by utilizing derivative financial
instruments when appropriate. The Corporation does not use derivative
financial instruments for trading purposes.
The Corporation measures its interest rate risk by estimating the net amount
by which the fair value of all interest rate sensitive assets and
liabilities, including derivative financial instruments, would be impacted
by selected hypothetical changes in market interest rates. Fair value is
estimated using a discounted cash flow analysis. Assuming a hypothetical
instantaneous 10% adverse change in interest rates as of October 31, 2003,
the estimated fair value of the net assets would decrease by approximately
$1.9 million. The Corporation's interest rate sensitivity analysis assumes
a parallel shift in interest rate yield curves. The model, therefore, does
not reflect the potential impact of changes in the relationship between
short-term and long-term interest rates.
Item 8. Financial Statements and Supplementary Data
Page
Index
Consolidated Financial Statements:
Statements of Consolidated Income and Retained Earnings
Fiscal years ended October 31, 2003, 2002 and 2001... 10
Statements of Consolidated Comprehensive Income for the
Fiscal years ended October 31, 2003, 2002 and 2001... 10
Statements of Consolidated Financial Condition
October 31, 2003 and 2002 ........................... 11
Statements of Consolidated Cash Flow
Fiscal years ended October 31, 2003, 2002 and 2001... 12
Notes to Consolidated Financial Statements............ 13
Statement of Financial Reporting Responsibility.......... 34
Independent Auditors' Report............................. 35
Supplementary Financial Data (unaudited)................. 36
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Navistar Financial Corporation and Subsidiaries
Statements of Consolidated Income and Retained Earnings
Millions of Dollars
For the years ended October 31 2003 2002 2001
Revenues
Retail Notes and Finance Leases $ 46.5 $ 55.6 $ 57.4
Income Related to Sales of Finance
Receivables 76.4 37.3 42.9
Operating Leases 64.5 76.2 80.3
Wholesale Notes 31.0 27.6 46.2
Accounts 17.7 18.9 28.4
Servicing Fees 25.2 23.0 26.6
Other Revenue 5.4 8.1 22.6
Total 266.7 246.7 304.4
Expenses
Cost of Borrowing
Interest Expense 49.8 58.0 92.9
Other 7.7 8.1 9.2
Credit, Collection and Administrative 42.7 41.0 41.2
Provision for Credit Losses 15.8 20.5 27.8
Depreciation on Operating Leases 45.0 55.4 56.6
Other Expense 4.2 2.9 4.4
Total 165.2 185.9 232.1
Income Before Taxes 101.5 60.8 72.3
Income Tax Expense 41.6 25.9 26.1
Income from Continuing Operations 59.9 34.9 46.2
Gain (loss) on Disposal of Discontinued Operations,
(net tax of $1.5, $0.7 and $(5.1)) (2.4) (1.2) 8.3
Net Income 57.5 33.7 54.5
Retained Earnings
Beginning of Year 197.1 163.4 134.9
Dividends Paid (50.0) - (26.0)
End of Year $204.6 $197.1 $163.4
Statements of Consolidated Comprehensive Income
Millions of Dollars
For the years ended October 31 2003 2002 2001
Net Income $ 57.5 $ 33.7 $ 54.5
Other Comprehensive Loss:
Net Unrealized Gains (Losses) on Investments
(net of tax of $0.8, ($0.2) and $0.6) (1.2) 0.3 (1.6)
Minimum Pension Liability Adjustment
(net of tax of $4.3, $0.3 and $0.0) (6.9) (0.5) -
Total (8.1) (0.2) (1.6)
Comprehensive Income $ 49.4 $ 33.5 $ 52.9
See Notes to Consolidated Financial Statements.
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Navistar Financial Corporation and Subsidiaries
Statements of Consolidated Financial Condition
Millions of Dollars
As of October 31 2003 2002
ASSETS
Cash and Cash Equivalents $ - $ 32.0
Finance Receivables
Finance Receivables Held for Sale 519.9 1,006.7
Other Finance Receivables 347.3 294.3
Allowance for Losses (12.9) (16.0)
Finance Receivables, net 854.3 1,285.0
Amounts Due from Sales of Receivables 368.9 363.8
Net Investment in Operating Leases 191.1 248.2
Restricted Marketable Securities 505.6 104.6
Other Assets 39.9 61.3
Total Assets $1,959.8 $2,094.9
LIABILITIES AND SHAREOWNER'S EQUITY
Net Accounts Payable to Affiliates $ 4.2 $ 52.2
Senior and Subordinated Debt 1,461.9 1,562.5
Other Liabilities 129.5 115.4
Total Liabilities 1,595.6 1,730.1
Shareowner's Equity
Capital Stock (par value $1.00, 1,600,000 shares
issued and outstanding) and Paid-In Capital 171.0 171.0
Retained Earnings 204.6 197.1
Accumulated Other Comprehensive Loss (11.4) (3.3)
Total Shareowner's Equity 364.2 364.8
Total Liabilities and Shareowner's Equity 1,959.8 $2,094.9
See Notes to Consolidated Financial Statements.
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Navistar Financial Corporation and Subsidiaries
Statements of Consolidated Cash Flow
Millions of Dollars
For the years ended October 31 2003 2002 2001
Cash Flow From Operations
Net Income $ 57.5 $ 33.7 $ 54.5
Adjustments to reconcile net income to
cash provided from operations:
(Gain) loss on disposal of
discontinued operations, net of tax 2.4 1.2 (8.3)
Gains on sales of receivables (77.3) (28.8) (25.4)
Depreciation, amortization and accretion 56.0 63.8 62.0
Provision for credit losses 15.8 20.5 27.8
Net change in accounts payable to
affiliates (48.0) 38.0 (252.2)
Net change in accrued income taxes 14.5 3.4 17.1
Other 20.8 (2.7) (10.7)
Total 41.7 129.1 (135.2)
Cash Flow From Investing Activities
Originations of finance receivables
held for sale (1,112.7) (1,001.0) (898.9)
Proceeds from sales of finance
receivables held for sale 1,701.1 999.0 1,362.3
Net change in restricted marketable
securities (401.0) 109.0 (128.5)
Collections of retail notes and finance
leases receivables, net of change in
unearned finance income 105.7 78.7 44.5
Repurchase of sold retail receivables (208.5) (214.3) (97.9)
Net change in wholesale notes and
accounts receivables (53.0) (58.8) 153.8
Change in amounts due from sales
of receivables 52.6 30.9 (21.9)
Purchase of equipment leased to others (40.0) (59.9) (110.2)
Sale of equipment leased to others 52.1 33.5 61.0
Receipts from derivative contracts 4.1 3.7 0.9
Payments on derivative contracts (17.9) (4.4) (1.9)
Proceeds from sale of discontinued operations - 63.3 0.0
Total 82.5 (20.3) 363.2
Cash Flow From Financing Activities
Net change in bank revolving credit
facility usage (11.0) (110.0) (203.0)
Proceeds from issuance of convertible debt - 169.5 -
Debt issuance costs on convertible debt - (6.3) -
Proceeds from long-term debt 28.4 70.4 121.3
Principal payments on long-term debt (123.6) (222.7) (139.6)
Dividends paid to International (50.0) - (26.0)
Total (156.2) (99.1) (247.3)
Change in Cash and Cash Equivalents (32.0) 9.7 (19.3)
Cash and Cash Equivalents, Beginning of Period 32.0 22.3 41.6
Cash and Cash Equivalents, End of Period $ - $ 32.0 $ 22.3
Supplementary disclosure of cash flow information:
Interest paid $ 51.6 $ 62.1 $ 94.5
Income taxes paid, net of refunds $ 20.4 $ 22.0 $ 16.0
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
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. All significant intercompany balances
and transactions have been eliminated.
Nature of Operations
The Corporation is a commercial financing organization that provides retail,
wholesale and lease financing of products sold by International and its
dealers within the United States. 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.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Revenue on Receivables
Revenue from finance receivables is recognized using the interest method.
Revenue on operating leases is recognized on a straight-line basis over the
life of the lease. Recognition of revenue is suspended when management
determines the collection of future income is not probable. Income
recognition is resumed if collection doubts are removed.
Sales of Receivables
The Corporation securitizes finance receivables through qualifying special
purpose entities ("QSPE's"), which then issue securities to public and
private investors. The Corporation sells receivables to the QSPE's with
limited recourse. Gains or losses on sales of receivables are credited or
charged to financing revenue in the periods in which the sales occur.
Retained interests, which include interest-only receivables, cash reserve
accounts, and subordinated certificates, are recorded at fair value in the
periods in which the sales occur.
Management estimates the prepayment speed for the receivables sold and the
discount rate used to determine the present value of the interest-only
receivable 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 retained interests
on a quarterly basis. The fair value of the interest-only receivable is
based on updated estimates of prepayment speeds and discount rates.
Income Taxes
Navistar and its subsidiaries file a consolidated federal income tax return,
which includes International and the Corporation. Federal income taxes for
the Corporation are computed on a separate return basis and are payable to
International.
Cash and Cash Equivalents
Cash and cash equivalents are defined as short-term, highly liquid
investments with original maturities of 90 days or less.
Finance Receivables
Finance receivables that management has the intent and ability to hold are
reported at their outstanding principal.
The accrual of interest on impaired loans is discontinued when, in
management's opinion, the borrower may be unable to meet payments as they
become due. When interest accrual is discontinued, all unpaid accrual
interest is reversed. Interest income is subsequently recognized only to
the extent cash payments are received.
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.
Allowance for Losses
The allowance for losses is established through a charge to the provision
for losses. The allowance is an estimate of the amount required to absorb
losses on the existing portfolio of finance receivables and operating leases
that may become uncollectible. 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
lease investments are charged off to the allowance for losses when amounts
due from the customers are determined to be uncollectible.
Under various agreements, International and its dealers may be liable for a
portion of customer losses or may be required to repurchase the repossessed
collateral at the receivable principal value. The Corporation's losses are
net of these benefits.
Restricted Marketable Securities
On October 16, 2000, Truck Retail Instalment Paper Corp. ("TRIP"), a special
purpose wholly-owned subsidiary of the Corporation, issued $500.0 of senior
and subordinated floating rate asset-backed notes. The proceeds were used
to establish a revolving retail warehouse facility to fund the Corporation's
retail notes and finance leases. The Corporation is required to maintain the
revolving retail warehouse facility with collateral in the amount of
$500.0. In the event that retail note and lease balances pledged to the
revolving retail warehouse facility fall below $500.0, the excess proceeds
are invested in marketable securities, which are restricted and have
maturities of three months or less. Due to the short-term nature of these
marketable securities, their fair value approximates carrying value.
Net Investments in Operating Leases
The Corporation has investments in the residual values of its leasing
portfolio. The residual values represent estimates of the values of the
assets at the end of the lease contracts and are initially recorded based on
estimates of future market values. Realization of the residual values is
dependent on the Corporation's future ability to market the vehicles under
then prevailing conditions. Management reviews residual values periodically
to determine that recorded amounts are appropriate and the operating lease
assets have not been impaired. Each of these assets is depreciated on a
straight-line basis over the term of the lease in an amount necessary to
reduce the leased vehicle to its estimated residual value at the end of the
lease term.
Repossessions
Losses arising from the repossession of collateral supporting finance
receivables and operating leases are recognized upon repossession.
Repossessed assets are recorded at the lower of historical cost or fair
value and are reclassified from finance receivables or operating leases to
repossessions with the related adjustments recorded in provision for credit
losses.
Derivative Financial Instruments
The Corporation recognizes all derivatives as assets or liabilities in the
statement of financial condition and measures them at fair value in
accordance with Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities", as amended.
This statement standardizes the accounting for derivative instruments by
requiring that an entity recognize all derivatives as assets or liabilities
in the statement of financial condition and measure them at fair value.
When certain criteria are met, the timing of gain or loss recognition on the
derivative instrument is matched with the recognition of (a) the changes in
the fair value or cash flows of the hedged asset or liability attributable
to the hedged risk or (b) the earnings effect of the hedged forecasted
transaction.
All derivative financial instruments, such as forward contracts, interest
rate swaps and interest rate caps, are held for purposes other than
trading. The Corporation's policy prohibits the use of derivative financial
instruments for speculative purposes. The Corporation generally uses
derivative financial instruments to reduce its exposure to interest rate
volatility.
The Corporation may use forward contracts to limit its interest rate risk
exposure on the notes and certificates related to an expected sale of
receivables. The Corporation may use interest rate swaps or caps to reduce
exposure to interest rate changes when it sells fixed rate receivables on a
variable rate basis.
All derivative instruments are recorded at their fair value. For those
instruments, which do not qualify for hedge accounting, changes in fair
value are recognized in net income.
New Accounting Standards
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 were effective
for financial statements of interim or annual periods ending after December
15, 2002. The Corporation provided disclosures about guarantees in Note 11.
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.
Reclassification
Certain prior year amounts have been reclassified to conform with the
presentation used in the 2003 financial statements.
2. TRANSACTIONS WITH AFFILIATED COMPANIES
Wholesale Notes, Wholesale Accounts and Retail Accounts
In accordance with the agreements between the Corporation and International
relating to financing of wholesale notes, wholesale accounts and retail
accounts, the Corporation receives interest income from International at
agreed upon interest rates applied to the average outstanding balances less
interest amounts paid by dealers on wholesale notes and wholesale accounts.
Substantially all revenue earned on wholesale accounts and retail accounts
is received from International. Aggregate revenue collected from
International was $36.9 in 2003, $32.2 in 2002 and $51.3 in 2001.
Retail Notes and Lease Financing
In accordance with agreements between the Corporation and International,
International may be liable for certain losses on finance receivables and
investments in operating leases and may be required to repurchase the
repossessed collateral at the receivable principal value. Losses recorded
by International were $24.1 in 2003, $38.2 in 2002 and $37.3 in 2001.
Support Agreements
Under provisions of certain public and private financing arrangements,
agreements with International and Navistar provide that the Corporation's
consolidated income before interest expense and income taxes will be
maintained at not less than 125% of its consolidated interest expense. No
income maintenance payments were required during the three-year period ended
October 31, 2003.
Administrative Expenses
The Corporation pays a fee to International for data processing and other
administrative services based on the actual cost of services performed. The
amount of the fee was $1.9 in 2003, $2.2 in 2002 and $2.5 in 2001.
Accounts Payable
Accounts payable to affiliates, which the Corporation is obligated to repay
upon request, were $4.2, $52.2, and $14.2 as of October 31, 2003, 2002, and
2001, respectively. Accounts payable to affiliates reduced debt levels and
resulted in a reduction in borrowing costs of $0.1, $2.1 and $3.9 for fiscal
2003, 2002, and 2001, respectively.
Note Receivable
On October 8, 2002, the Corporation received a $19.0 note receivable from
Navistar due October 31, 2003. Navistar paid off the note receivable in
November 2002. The Corporation earned interest at a rate of 7.75%,
collected monthly. In fiscal 2003, the Corporation recognized $0.2 in
interest revenue related to this transaction. The balance of the note
receivable was included in Other Assets in the Statements of Consolidated
Financial Condition.
3. 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. ("IAT"), a Bermuda reinsurance
company. Cash proceeds of $63.3 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.
As part of its sales agreement with IAT, the Corporation has agreed to
guarantee the adequacy of Harco's loss reserves. The Corporation has
provided disclosures about this guarantee in Note 11.
Below are the components of the gain (loss) on disposal recorded in the
Statements of Consolidated Income and Retained Earnings.
2003 2002 2001 2000 Total
Gains (loss) on sale $ - $ - $13.1 $(11.9) $ 1.2
Severance and other exit costs (3.9) (1.9) 0.3 (3.8) (9.3)
Curtailment loss - - - (1.2) (1.2)
Pretax gain (loss) on disposal (3.9) (1.9) 13.4 (16.9) (9.3)
Deferred tax (expense) benefit 1.5 0.7 (5.1) 6.4 3.5
Total gain (loss) on disposal of
discontinued operations $(2.4)$ (1.2) $ 8.3 $(10.5) $(5.8)
The cumulative pretax loss on disposal of Harco was $9.3 and includes the
gain on sale of $1.2, $9.3 of severance and other exit costs, including
adjustments to the loss reserve, and $1.2 of curtailment loss associated
with the related reduction of employees from the Corporation's
postretirement benefit plans.
4. FINANCE RECEIVABLES
The Corporation's primary business is to provide wholesale, retail and lease
financing for new and used trucks sold by International and International's
dealers, and as a result, the Corporation's receivables and leases have
significant concentration in the trucking industry. On a geographic basis,
there is not a disproportionate concentration of credit risk in any area of
the United States. The Corporation retains as collateral an ownership
interest in the equipment associated with leases and a security interest in
the equipment associated with wholesale notes and retail notes.
Finance receivable balances, net of unearned finance income, as of October
31 are summarized as follows:
2003 2002
Retail notes, net of unearned income $ 404.5 $ 827.1
Finance leases, net of unearned income 115.4 179.6
Wholesale notes 46.0 37.8
Accounts:
Retail 217.9 181.1
Wholesale 83.4 75.4
Total accounts 301.3 256.5
Total finance receivables 867.2 1,301.0
Less: Allowance for losses 12.9 16.0
Total finance receivables, net 854.3 $1,285.0
Contractual maturities of finance receivables, including unearned finance
income, as of October 31, 2003, are summarized as follows:
Retail Finance Wholesale
Notes Leases Notes Accounts
Due in fiscal year:
2004 $134.6 $19.3 $27.5 $301.3
2005 115.8 27.3 18.5 -
2006 83.5 29.0 - -
2007 51.9 32.7 - -
2008 44.3 18.5 - -
Due after 2008 13.2 3.9 - -
Gross finance receivables 443.3 130.7 46.0 301.3
Unearned finance income (38.8) (15.3) - -
Net finance receivables $404.5 $ 115.4 $ 46.0 $ 301.3
The actual cash collections from finance receivables may vary from the
contractual cash flows because of sales, prepayments, extensions and
renewals. The contractual maturities, therefore, should not be regarded as
a forecast of future collections.
Finance receivables held for sale consisted of $519.9 and $1,006.7 in retail
notes and finance leases, net of unearned income, as of fiscal year ended
2003 and 2002, respectively.
5. ALLOWANCE FOR LOSSES
The allowance for losses is summarized as follows for the fiscal year ended
October 31:
2003 2002 2001
Allowance for losses, beginning of period $ 16.0 $ 13.3 $ 12.9
Provision for credit losses 15.8 20.5 27.8
Net losses charged to allowance (4.2) (5.3) (11.7)
Transfers to finance receivables sold (14.7) (12.5) (15.7)
Allowance for losses, end of period $ 12.9 $ 16.0 $13.3
The average outstanding balance of impaired finance receivables was not
material for the fiscal year ended October 31, 2003. Interest income that
would have been recognized on impaired finance receivables during the fiscal
years 2003, 2002, and 2001 were not material.
Balances with payments past due over 90 days on owned finance receivables,
including held for sale, totaled $5.8 as of October 31, 2003.
6. REPOSSESSIONS
The Corporation, as servicer, liquidates repossessions related to sold
receivables on behalf of the owner trusts. The Corporation advances the
value of these repossessions and reports them on its Statements of
Consolidated Financial Condition as part of Amounts Due from Sales of
Receivables. In addition, the company has repossessions related to notes
not sold to the owner trusts.
The Corporation's repossessions are summarized as follows for the fiscal
year ended October 31:
2003 2002
Acquisitions
Owned $ 43.0 $35.5
Sold 39.4 52.8
Total $ 82.4 $88.3
Repossessions, end of period
Owned $ 9.8 $ 7.9
Sold 11.3 18.1
Total $ 21.1 $26.0
7. INVESTMENT IN OPERATING LEASES
Investments in operating leases at year-end were as follows:
2003 2002
Vehicles and other equipment, at cost $311.8 $373.9
Less: Accumulated depreciation (120.7) (125.7)
Net investment in operating leases $191.1 $248.2
Future minimum rentals on operating leases are as follows: 2004, $62.5;
2005, $38.1; 2006, $24.1; 2007, $12.3; 2008, $7.6 and $3.6 thereafter.
8. TAXES ON INCOME
Taxes on income from continuing operations for the years ended October 31
are summarized as follows:
2003 2002 2001
Current:
Federal $ 20.8 $ 11.6 $ 14.5
State and Local 3.7 3.9 5.6
Total Current 24.5 15.5 20.1
Deferred (primarily Federal) 15.6 9.7 11.1
Less: Amount from Discontinued Operations (1.5) (0.7) 5.1
Total income tax expense
from continuing operations $ 41.6 $ 25.9 $ 26.1
A reconciliation of the statutory federal income tax rate from continuing
operations is as follows:
2003 2002 2001
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes net of federal income taxes 2.5 4.2 3.6
Original issue discount 2.0 5.3 -
Other 1.6 (1.9) (2.5)
Effective income tax rate 41.1% 42.6% 36.1%
NFC and its domestic subsidiaries are included in Navistar's consolidated
federal income tax returns. State income tax returns are generally filed on
a separate basis. In accordance with its intercompany tax sharing agreement
with Navistar, all federal income tax liabilities or credits are allocated
to NFC and its domestic subsidiaries as if it filed a separate return.
Total tax payments made during 2003, 2002 and 2001 were $20.4, $22.0, and
$16.0, respectively.
The net deferred tax liability from continuing operations is included in
Other Liabilities on the Statements of Financial Condition. The components
of deferred tax assets and liabilities from continuing operations as of
October 31 are as follows:
2003 2002
Deferred tax assets:
Other postretirement benefit $ 9.8 $ 5.1
Allowance for bad debts 8.8 9.8
Other 9.5 9.3
Total deferred tax assets 28.1 24.2
Deferred tax liabilities:
Pension expense (2.1) (2.4)
Lease transactions (47.9) (40.1)
Sale of receivables (15.6) (7.1)
Total deferred tax liabilities (65.6) (49.6)
Net deferred tax liabilities $(37.5) $(25.4)
9. SENIOR AND SUBORDINATED DEBT
Senior and subordinated debt outstanding as of October 31 is summarized as
follows:
2003 2002
Bank revolving credit facility, at
variable rates, due December 2005 $571.0 $582.0
Revolving retail warehouse facility, at
variable rates, due October 2005 500.0 500.0
Borrowings secured by operating leases,
3.71% to 6.65%, due serially through
December 2010 212.5 307.8
Convertible debt, 4.75%, due April 2009 178.4 172.7
Total senior and subordinated debt $1,461.9 $1,562.5
The Corporation had an $820.0 contractually committed bank revolving credit
facility that will mature in December 2005. Under the revolving credit
agreement, Navistar's three Mexican finance subsidiaries, which are wholly
owned subsidiaries of Navistar, are permitted to borrow up to $100.0 in the
aggregate. Under the terms of the bank revolving credit facility, the
Corporation is required to maintain a debt to tangible net worth ratio of no
greater than 7.0 to 1.0, an income before income taxes to interest expense
and dividend on Redeemable Preferred Stock ratio of not less than 1.25 to
1.0, and a twelve month rolling combined retail/lease loss to liquidation
ratio of no greater than .045 to 1.0. The bank revolving credit agreement
permits security interests in substantially all of the Corporation's assets
to the participants in the credit agreement. Compensating cash balances are
not required under the bank revolving credit facility. Facility fees are
paid quarterly regardless of usage.
Truck Retail Instalment Paper Corp. ("TRIP"), a special purpose wholly-owned
subsidiary of the Corporation, issued $500.0 of senior and subordinated
floating rate asset-backed notes on October 16, 2000. The proceeds were
used to establish a revolving retail warehouse facility to fund the
Corporation's retail notes and retail leases, other than fair market value
leases.
The Corporation enters into secured borrowing agreements involving vehicles
subject to finance and operating leases with retail customers. The balances
are classified under senior and subordinated debt as borrowings secured by
leases. In connection with the securitizations and secured borrowing
agreements of certain of its leasing portfolio assets, the Corporation and
its subsidiary, Harco Leasing Company, Inc. ("HLC"), have established
Navistar Leasing Company ("NLC"), a Delaware business trust. NLC holds
legal title to leased vehicles and is the lessor on substantially all leases
originated by the Corporation. The assets of NLC have been and will continue
to be allocated into various beneficial interests issued by NLC. HLC owns
one such beneficial interest in NLC and HLC has transferred other beneficial
interests issued by NLC to purchasers under secured borrowing agreements and
securitizations. Neither the beneficial interests held by purchasers under
secured borrowing agreements or the assets represented thereby, nor legal
interest in any assets of NLC, are available to HLC, the Corporation or its
creditors.
On March 25, 2002, the Corporation issued $220.0 of 4.75% subordinated
exchangeable notes. The Corporation received $169.5, before expenses, and
Navistar received $50.5, which was equal to the fair market value of the
conversion option at issuance. The Corporation used the proceeds for general
business purposes, including working capital. As of October 31, 2003 and
2002, the Corporation had unaccreted discount of $41.6 and $47.3,
respectively, related to the exchangeable notes.
The notes are exchangeable before maturity into Navistar common stock at an
initial exchange price of $55.73 per share, subject to adjustment under the
terms of the notes. The notes will mature on April 1, 2009, unless exchanged
or redeemed at an earlier date.
The Corporation may redeem some or all of the notes on or after April 1,
2005. In addition, the holders may require the Corporation to repurchase the
notes before April 1, 2009 under certain circumstances. The notes are
general unsecured obligations of the Corporation and are subordinated in
right of payment to the Corporation's existing and future senior
indebtedness. The notes are also effectively subordinated to the
Corporation's secured indebtedness and other liabilities, including trade
payables.
The weighted average interest rate on total debt, including short-term debt
and the effect of discounts and related amortization, was 4.9% in 2003, 5.4%
in 2002 and 5.7% in 2001.
The aggregate annual contractual maturities and required payments of senior
and subordinated debt are as follows:
Fiscal year ended October 31
2004 $ 88.5
2005 564.3
2006 611.2
2007 15.8
2008 3.6
Thereafter 220.1
Total $ 1,503.5
10. POSTRETIREMENT BENEFITS
The Corporation provides postretirement benefits to its employees. Costs
associated with postretirement benefits include pension and postretirement
health care expenses for employees, retirees and surviving spouses and
dependents.
Generally, the pension plans are non-contributory. The Corporation's policy
is to fund its pension plans in accordance with applicable United States
government regulations. As of October 31, 2003, all legal funding
requirements had been met.
Postretirement Expense
Net periodic benefit cost included in the Statements of Consolidated Income
is composed of the following:
Pension Benefits Other Benefits
2003 2002 2001 2003 2002 2001
Service costs for benefits
earned during the period $ 0.5 $0.7 $ 0.7 $ 0.3 $ 0.5 $ 0.5
Interest cost on obligation 3.9 3.8 3.9 1.6 1.5 1.6
Net amortization costs
and other 0.7 0.3 0.2 0.5 0.3 0.4
Less expected return on assets (4.4) (5.2) (5.4) (0.5) (0.7) (0.9)
Net postretirement
(income) expense $ 0.7 $(0.4) $(0.6) $1.9 $ 1.6 $ 1.6
"Amortization costs" include amortization of cumulative gains and losses
over the expected remaining service life of employees, amortization of the
initial transition liability over 15 years, and amortization of plan
amendments. Plan amendments are recognized over the expected remaining
service life of employees.
The funded status of the Corporation's plans as of October 31, 2003 and 2002
and a reconciliation with amounts recognized in the Statements of
Consolidated Financial Condition are as follows:
Pension Benefits Other Benefits
2003 2002 2003 2002
Change in benefit obligation
Benefit obligation at beginning
of year $ 56.3 $ 53.6 $ 24.0 $ 20.5
Service Cost 0.5 0.7 0.3 0.5
Interest on obligation 3.9 3.8 1.6 1.5
Actuarial net loss (gain) 10.5 1.8 0.3 2.2
Benefits paid (3.7) (3.6) (1.5) (0.7)
Benefit obligation at end of year $ 67.5 $ 56.3 $ 24.7 $ 24.0
Change in plan assets
Fair value of plan assets at
beginning of year $ 49.9 $ 54.1 $ 6.1 $ 6.6
Actual return on plan assets 7.9 (1.0) 0.7 (0.6)
Employer contribution - - 0.1 0.4
Benefits paid (3.3) (3.2) (0.5) (0.3)
Fair value of plan assets at
end of year $ 54.5 $ 49.9 $ 6.4 $ 6.1
Funded status $ (13.0) $ (6.4) $(18.3) $ (17.9)
Unrecognized actuarial net
(gain) loss 15.9 10.5 9.2 9.8
Unrecognized prior service cost 0.2 0.3 - -
Net amount recognized $ 3.1 $ 4.4 $ (9.1) $ (8.1)
Pension Benefits Other Benefits
2003 2002 2003 2002
Amounts recognized in the
Statements of Consolidated
Financial Condition
consists of:
Prepaid benefit cost $ - $ 6.4 $ - $ -
Accrued benefit liability (11.5) (5.2) (9.1) (8.1)
Accumulated reduction in
shareowner's equity 14.6 3.2 - -
Net amount recognized $ 3.1 $ 4.4 $(9.1) $(8.1)
The accumulated reduction in shareowner's equity is recorded in the
Statements of Consolidated Financial Condition.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plan with accumulated benefit
obligations in excess of plan assets were $67.5, $64.9, and $54.5,
respectively, as of October 31, 2003, and $5.2, $5.2, and $0.0,
respectively, as of October 31, 2002.
The weighted average rate assumptions used in determining expenses and
benefit obligations were:
Pension Benefits Other Benefits
2003 2002 2001 2003 2002 2001
Discount rate used to determine
present value of benefit
obligation at year-end 5.8% 7.2% 7.4% 6.6% 7.1% 7.4%
Expected long-term rate of
return on plan assets at
beginning of year 9.0% 9.8% 9.8% 9.0% 11.0% 10.8%
Expected rate of increase in
future compensation levels 3.5% 3.5% 3.5% N/A N/A N/A
In 2003, the Corporation reduced the expected long-term rate of return
assumption on plan assets for the pension and postretirement benefit plans
to 9.0%. For 2004, the weighted average rate of increase in the per capita
cost of covered health care benefits is projected to be 11.0%. The rate is
projected to decrease to 5.0% by the year 2009 and remain at that level each
year thereafter. The effect of changing the health care cost trend rate is
as follows:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
Effect on total of service and interest cost
Components $ 0.3 $ (0.3)
Effect on postretirement benefit obligation 2.9 (2.5)
11. 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 October 31, 2003, future minimum lease commitments under
non-cancelable operating leases with remaining terms in excess of one year
are as follows:
Year Ended October 31,
2004 $1.9
2005 1.5
2006 1.1
Total $4.5
The total operating lease expense for the fiscal year ended October 31 was
$2.3 in 2003, $2.2 in 2002 and $2.0 in 2001.
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 October 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
("Commercial"). The Corporation has no recourse as guarantor in case of
default.
The following table summarizes the borrowings as of October 31, 2003:
Type of Funding Maturity Amt of Guaranty Outstanding Bal
Medium term note* November 2004 $ 45.2 $ 45.2
Revolving credit facility December 2005 100.0 37.0
Revolving credit facility* March 2006 6.5 6.5
Revolving credit facility* October 2006 18.1 18.1
* Peso-denominated
Guarantees of Derivatives
As of October 31, 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
October 31, 2003:
Guaranteed Outstanding Fair
Instrument Maturity Notional Balance Value
Foreign currency forwards October 2004 $ 25.0 $ - $ -
Interest rate swaps and
cross currency swaps April 2004 $ 48.0 $ 48.0 $ (5.9)
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. 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, 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, 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 $4.5 as of
October 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.
12. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 2003 and
2002 was 2,000,000, of which 1,600,000 shares were issued and outstanding.
International owns all issued and outstanding capital stock. No shares are
reserved for officers and employees, or for options, warrants, conversions
and other rights.
The components of accumulated other comprehensive income (loss), net of
taxes, are as follows:
Net Unrealized Minimum Accumulated Other
Losses on Pension Comprehensive
Investments Liability Loss
Balance as of October 31, 2000 $ - $(1.5) $ (1.5)
Change in 2001 (1.6) - (1.6)
Balance as of October 31, 2001 (1.6) (1.5) (3.1)
Change in 2002 0.3 (0.5) (0.2)
Balance as of October 31, 2002 (1.3) (2.0) (3.3)
Change in 2003 (1.2) (6.9) (8.1)
Balance as of October 31, 2003 $(2.5) $(8.9) $(11.4)
13. DERIVATIVE FINANCIAL INSTRUMENTS
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 October 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 October 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
October 2000 November 2012 Interest rate cap $500.0 $(3.7)
November 2012 Interest rate cap 500.0 3.7
December 2000 January 2004 Interest rate swap* 3.1 (0.1)
July 2001 April 2006 Interest rate swap 28.7 (1.4)
November 2001 June 2004 Interest rate swap* 67.0 (0.4)
July 2006 Interest rate swap* 94.0 0.8
November 2002 March 2007 Interest rate swap* - (0.3)
September 2003 December 2005 Forward starting swap* 50.0 0.1
October 2003 April 2008 Interest rate swap* - -
* Accounted for as non-hedging instruments.
The fair values of all derivatives are recorded in Other Liabilities on the
Statements of Consolidated Financial Condition.
In October 2000, the Corporation entered into a $500.0 retail revolving
facility as a method to fund retail notes and finance leases prior to the
sale of receivables. Under the agreements of this facility, the Corporation
sells fixed rate retail notes or finance leases to the conduit and pays
investors a floating rate of interest. As required by the rating agencies,
the Corporation purchased an interest rate cap to protect investors against
rising interest rates. To offset the economic cost of this cap, the
Corporation sold an identical interest rate cap. These transactions are
accounted for as hedging derivative instruments.
In December 2000, the Corporation entered into an agreement for the fast
pay/slow pay differential with respect to an interest rate swap agreement.
Under the terms of the agreement, the Corporation will make or receive
payments based on the variance between the actual net principal balance and
the amortizing notional schedule and on changes in interest rates. The
purpose of the fast pay/slow pay agreement is to ensure adequate cash flows
to the conduit. This transaction is accounted for as a non-hedging
derivative instrument.
In July 2001, the Corporation entered into an interest rate swap agreement
to fix a portion of its floating rate revolving debt. This transaction is
accounted for as a cash flow hedge, and consequently, to the extent that the
hedge is effective, gains and losses on the derivative are recorded in other
comprehensive income. There has been no ineffectiveness related to this
derivative since inception.
In November 2001, the Corporation entered into two interest rate swap
agreements in connection with a sale of retail note receivables. The
purpose of the swaps 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 net outcome,
after applying the effect of these swaps, 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. These
transactions are accounted for as non-hedging derivative instruments.
In November 2002, the Corporation entered into an interest rate swap
agreement in connection with a sale of retail notes and finance leases
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. 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.
In September 2003, the Corporation entered into a forward starting swap
contract, with a notional amount of $50.0, in connection with anticipated
sales of retail notes and finance leases. The Corporation recognized a
pre-tax gain of $0.1 during the fourth quarter of fiscal 2003 related to
this contract. The purpose of this swap is to limit the Corporation's
interest rate risk exposure during the period it is accumulating receivables
for an anticipated sale.
In October 2003, the Corporation entered into an interest rate swap
agreement in connection with a sale of retail notes and finance leases
receivables. The purpose and structure of this swap agreement is similar to
the swap agreement entered into in November 2002. This transaction is
accounted for as non-hedging derivative instrument.
14. SALES OF RECEIVABLES
The Corporation securitizes and sells receivables through Navistar Financial
Retail Receivables Corporation ("NFRRC"), Navistar Financial Securities
Corporation ("NFSC"), Truck Retail Accounts Corporation ("TRAC") and Truck
Engine Receivables Financing Co. ("TERFCO"), all special purpose,
wholly-owned subsidiaries ("SPC's") of the Corporation. The sales of
receivables in each securitization constitute sales under accounting
principles generally accepted in the United States of America, with the
result that the sold receivables are removed from the Corporation's balance
sheet and the investor's interests in the related trust or conduit are not
reflected as liabilities.
In fiscal 2003, the Corporation sold $1,705.0 of retail notes and finance
leases receivables, net of unearned finance income, through NFRRC in three
separate sales. The Corporation sold $850.0 of finance receivables during
the six-month period ended April 2003 and $500.0 during the three-month
period ended July 2003 to owner trusts which, in turn, issued asset-backed
securities that were sold to investors. In October 2003, the Corporation
sold $355.0 of finance receivables to owner trusts which, in turn, issued
$550.0 of asset-backed securities. Aggregate gains of $77.3 were recognized
on the sales. The remaining $195.0 was funded with receivables in the first
quarter of fiscal 2004, with gains of $7.0 recognized on the sale.
As of October 31, 2003, NFSC has in place a revolving wholesale note trust
that provides for the funding of up to $1,024.0 of eligible wholesale notes.
The trust is comprised of two $200.0 tranches of investor certificates
maturing in 2004 and 2008, two $212.0 tranches of investor certificates
maturing in 2005 and 2006, and variable funding certificates with a maximum
capacity of $200.0 maturing in January 2004. During the third quarter, a
$212.0 tranche was issued in anticipation of the maturity, on August 25,
2003, of a $200.0 tranche of investor certificates. As of October 31, 2003,
the Corporation had utilized $814.7 of the revolving wholesale note trust.
TRAC had in place a revolving retail account conduit that provided for the
funding of retail accounts. The facility expired in August 2003. The
Corporation is in the process of obtaining a new facility for retail
accounts.
As of October 31, 2003, TERFCO has in place a revolving trust that provides
for the funding of up to $100.0 of eligible Ford Motor Company accounts
receivables. This facility, which will expire in 2005, was fully utilized as
of October 31, 2003.
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 October 31, 2003 was $368.9. The allowance for losses
allocated to sold receivables totaled $17.1 and $14.0 at October 31, 2003
and October 31, 2002. These amounts are implicitly included in
interest-only receivables.
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:
2003 2002
Cash held and invested by trusts $ 124.6 $ 105.7
Subordinated retained interests in
wholesale notes 145.8 137.2
Subordinated retained interests in
retail notes and finance leases 34.8 84.1
Interest-only receivables 52.4 18.7
Other amounts due related to repossessions 11.3 18.1
Total amounts due from sales of receivables $ 368.9 $ 363.8
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 determine the present value of the interest-only
receivables in order to calculate the gain or loss. Estimates of prepayment
speeds, expected credit losses, 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
retained interests 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 fiscal year ended October 31 were:
2003 2002 2001
Prepayment speed (annual rate) 1.2 - 1.4 1.4 - 1.6 1.4 - 1.6
Weighted average life 41 months 41 months 41 months
Expected credit losses 0.93% 0.75% 1.30%
Interest-only receivable
discount rate 4.93% - 5.72% 6.41% - 6.93% 7.85% - 8.35%
The impact of a 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 October 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.
2003 2002
Retail notes, net of unearned income $ 1,947.4 $ 1,521.8
Finance leases, net of unearned income 39.2 -
Wholesale notes 814.7 801.4
Retail accounts 100.0 126.9
Total sold finance receivables, net $ 2,901.3 $ 2,450.1
Serviced portfolio balances are summarized below.
2003 2002
Net serviced receivables
Retail notes $ 2,351.9 $ 2,348.9
Finance leases 154.6 179.6
Wholesale notes 860.7 839.2
Accounts 401.3 383.4
Total net serviced receivables 3,768.5 3,751.1
Net investment in operating leases 191.1 248.2
Total serviced portfolio $ 3,959.6 $ 3,999.3
Static pool losses are calculated by summing the actual and projected future
credit losses and dividing them by the original balance of each pool of
assets. The amount shown below for each year is calculated based on all
securitizations occurring in that year.
2003 2002 2001
Actual and Projected Credit Losses (%) as of:
October 31, 2003 0.93% 0.83% 0.74%
October 31, 2002 0.75 1.30
October 31, 2001 1.30
Additional financial data for gross serviced portfolio as of October 31,
2003 is summarized below.
Retail Finance and Wholesale
Notes Operating Leases Notes Accounts
Gross serviced receivables $ 2,588.8 $ 365.8 $ 860.7 $ 401.3
Balances with payments
past due over 60 days (1) 10.1 1.2 2.0 5.2
Credit losses (net of recoveries) 12.6 1.6 1.6 -
(1) Includes rent past due over 60 days for Operating Leases
Certain cash flows received from (paid to) securitization trusts/conduits
were as follows for fiscal years:
2003 2002 2001
Proceeds from sales of finance receivables
held for sale $ 1,701.1 $ 999.00 $ 1,362.3
Proceeds from sales of finance receivables
into revolving facilities 4,938.1 4,883.0 5,063.8
Servicing fees received 26.5 27.2 32.1
Repurchase of receivables in breach of terms (1) (69.0) (128.9) -
Cash used in exercise of purchase option (139.5) (85.4) (97.9)
Servicing advances, net of reimbursements,
related to repossessions 6.8 27.7 16.7
Cash received upon release from reserve accounts 83.4 125.1 117.4
All other cash received from trusts 103.9 94.1 63.0
(1) The Corporation, as servicer, covenants that it will not amend the terms
of the receivables. Refinances and extensions, which change the finance
yield, require the Corporation to repurchase the receivables from the
trust/conduit.
The following table summarizes income related to sales of finance
receivables:
2003 2002 2001
Gains on sales of receivables $77.3 $28.8 $25.4
Excess spread 6.0 15.9 12.3
Derivative gains (losses) (8.7) (9.1) (3.9)
Interest income from retained securities
and other 1.8 1.7 9.1
Total income related to
sales of finance receivables $76.4 $37.3 $ 42.9
15. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and estimated fair values of the Corporation's
financial instruments as of October 31 were as follows:
2003 2002
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Finance receivables
Retail notes $404.5 $404.7 $ 827.1 $ 844.8
Wholesale notes and accounts 347.3 347.3 294.3 294.3
Amounts due from sales of
receivables 368.9 368.9 363.8 363.8
Marketable securities 505.6 505.6 104.6 104.6
Financial liabilities
Senior and subordinated debt 1,461.9 1,462.9 1,562.5 1,524.2
Derivative financial instruments (1.3) (1.3) 7.2 7.2
The carrying amount of cash and cash equivalents approximates fair value.
The fair value of retail notes is estimated by discounting the future
contractual cash flows using an estimated discount rate reflecting interest
rates currently being offered for notes with similar terms. For wholesale
notes and retail and wholesale accounts, all of which reprice monthly, the
carrying amounts approximate fair value as a result of the short-term nature
of the receivables.
The fair values of cash deposits included in amounts due from sales of
receivables approximate their carrying values due to their short-term nature
and variable interest rate terms. The subordinated retained interests in
wholesale and retail receivables principally consist of wholesale notes or
marketable securities, retail accounts and certain cash collections on
finance receivables. Due to the short-term nature of these assets the fair
value approximates carrying value. The fair value of the interest only
receivables is derived using updated assumptions for prepayment speed,
expected credit losses and market rates.
For fixed rate debt, the fair value is estimated based on quoted market
prices where available and, where not available, on quoted market prices of
debt with similar characteristics. For variable rate debt the fair values
approximate their carrying value.
The estimated fair values for all other financial instruments approximate
their carrying values due to the short-term nature or variable interest
terms inherent in the financial instruments.
16. LEGAL PROCEEDINGS
The Corporation is subject to various claims arising in the ordinary course
of business, and is party to various legal proceedings, which constitute
ordinary routine litigation incidental to the business of the Corporation.
In the opinion of the Corporation's management, none of these proceedings or
claims are material to the business or the financial condition of the
Corporation.
17. ADDITIONAL INFORMATION
Navistar maintains a website with the address
www.internationaldelivers.com. The Corporation is not including the
information contained on Navistar's website as a part of, or incorporating
it by reference into, this Annual Report on Form 10-K. The Corporation
makes available, free of charge, through Navistar's website its Annual
Report on Form 10-K, quarterly reports on Form 10-Q and current reports on
Form 8-K, and amendments to these reports, as soon as reasonably practicable
after the Corporation electronically files such material with, or furnishes
such material to, the Securities and Exchange Commission.
The Corporation complies with the Code of Ethics posted on Navistar's
website. This Code of Ethics applies to all employees, directors and
officers, including the chief executive officer and chief financial
officer. The Corporation intends to disclose any amendments to, or waivers
from, its Code of Ethics that are required to be publicly disclosed pursuant
to the rules of the Securities and Exchange Commission.
The Board of Directors of Navistar documented its governance practices in
adopting the Board Corporate Governance Guidelines. The governance
guidelines, as well as the charters for the key committees of the board
(Finance Committee, Audit Committee, and the Compensation and Governance
Committee) may also be viewed on Navistar's website. Copies of such
documents will be sent to shareholders free of charge upon written request
of the corporate secretary at the address shown on the cover page of this
Form 10-K.
18. SUBSEQUENT EVENTS
In November 2003, the Corporation sold $195.0 of receivables with gains of
$7.0 recognized on the sale.
- --------------------------------------------------------------------------------
Navistar Financial Corporation and Subsidiaries
- --------------------------------------------------------------------------------
Statement of Financial Reporting Responsibility
- --------------------------------------------------------------------------------
Management of Navistar Financial Corporation and its subsidiaries is
responsible for the preparation and for the integrity and objectivity of the
accompanying financial statements and other financial information in this
report. The financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
include amounts that are based on management's estimates and judgments.
The accompanying financial statements have been audited by Deloitte & Touche
LLP, independent auditors. Management has made available to Deloitte &
Touche LLP all the Corporation's financial records and related data, as well
as the minutes of Directors' meetings. Management believes that all
representations made to Deloitte & Touche LLP during its audit were valid
and appropriate.
Management is responsible for establishing and maintaining a system of
internal controls throughout its operations that provides reasonable
assurance as to the integrity and reliability of the financial statements,
the protection of assets from unauthorized use and the execution and
recording of transactions in accordance with management's authorization.
The system of internal controls, which provides for appropriate division of
responsibility, is supported by written policies and procedures that are
updated by management as necessary. The system is tested and evaluated
regularly by the parent company's internal auditors as well as by the
independent auditors in connection with their annual audit of the financial
statements. The independent auditors conduct their audit in accordance with
auditing standards generally accepted in the United States of America and
perform such tests of transactions and balances as they deem necessary.
Management considers the recommendations of its internal auditors and
independent auditors concerning the Corporation's system of internal
controls and takes the necessary actions that are cost-effective in the
circumstances to respond appropriately to the recommendations presented.
Management believes that the Corporation's system of internal controls
accomplishes the objectives set forth in the first sentence of this
paragraph.
December 18, 2003 /s/Phyllis E. Cochran
Phyllis E. Cochran
President and Chief Executive Officer
December 18, 2003 /s/Paul Martin
Paul Martin
Vice President and Controller
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Navistar Financial Corporation and Subsidiaries
- ------------------------------------------------------------------------------
Independent Auditors' Report
- ------------------------------------------------------------------------------
Navistar Financial Corporation:
We have audited the accompanying consolidated financial statements of
Navistar Financial Corporation (the "Corporation") and its subsidiaries as
of October 31, 2003 and 2002 and for each of the three years in the period
ended October 31, 2003, listed in Item 8. These financial statements are
the responsibility of the Corporation's management. Our responsibility is
to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Navistar Financial
Corporation and its subsidiaries as of October 31, 2003 and 2002 and the
results of their operations and their cash flow for each of the three years
in the period ended October 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
December 18, 2003
Chicago, Illinois
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SUPPLEMENTARY FINANCIAL DATA
MILLIONS OF DOLLARS
QUARTERLY FINANCIAL INFORMATION (unaudited)
2003
1ST 2ND 3RD 4TH Fiscal
Quarter Quarter Quarter Quarter Year
Results of Continuing Operations
Revenues $86.3 $47.8 $75.7 $56.9 $266.7
Interest expense 13.5 12.6 12.0 11.7 49.8
Provision for credit losses 4.2 3.7 4.0 3.9 15.8
Income from Continuing
Operations 26.9 2.1 22.3 8.6 59.9
Gain (Loss) on Disposal of
Discontinued Operations - - - (2.4) (2.4)
Net Income 26.9 2.1 22.3 6.2 57.5
2002
1ST 2ND 3RD 4TH Fiscal
Quarter Quarter Quarter Quarter Year
Results of Continuing Operations
Revenues $72.0 $65.7 $54.8 $54.2 $246.7
Interest expense 14.5 15.0 14.0 14.5 58.0
Provision for credit losses 4.3 6.2 5.1 4.9 20.5
Income from Continuing
Operations 16.7 10.5 5.7 2.0 34.9
Gain (Loss) on Disposal of
Discontinued Operations 0.7 - - (1.9) (1.2)
Net Income 17.4 10.5 5.7 0.1 33.7
2001
1ST 2ND 3RD 4TH Fiscal
Quarter Quarter Quarter Quarter Year
Results of Continuing Operations
Revenues $84.3 $82.3 $69.6 $68.2 $304.4
Interest expense 30.0 24.8 20.8 17.3 92.9
Provision for credit losses 6.5 7.6 6.1 7.6 27.8
Income from Continuing
Operations 12.8 12.8 9.3 11.3 46.2
Gain (Loss) on Disposal of
Discontinued Operations - - - 8.3 8.3
Net Income 12.8 12.8 9.3 19.6 54.5
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Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None
Item 9A. 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
effectiveness of 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 ("the Exchange Act")) as of October 31, 2003. Based on
that evaluation, the principal executive officer and principal financial
officer of the Corporation concluded that, as of October 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
In connection with the ongoing review of the Corporation's internal
controls over financial reporting (as defined in rule 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal year ended October 31, 2003, the
Corporation identified and implemented an improvement to its internal
controls over financial reporting in the area of certain account balance
reconciliation processes in response to changes in the business and the
environment.
PART III
Items 10, 11, 12 and 13
Intentionally omitted. See the index page of this Report for explanation.
Item 14. Principal Accountant Fees and Services
Amounts in thousands 2003 2002
Audit Fees
Basic Audit Fees $ 158.6 $133.4
Audit Related Fees 179.0 251.9
Total Audit Fees $ 337.6 $385.3
Tax Fees $ - $ -
All Other Fees $ - $ -
Audit Committee pre-approval policy
Information required by Item 14 of this Form and the audit committee's
pre-approval policies and procedures regarding the engagement of the
principle accountant are incorporated herein by reference from Navistar's
definitive Proxy Statement for the February 17, 2004, Annual Meeting of
Shareowners under the caption "Audit Committee Report - Independent Auditor
Fees".
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Exhibits, Including Those Incorporated By Reference,
and Financial Statement Schedules
Exhibits Index:
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
15 Financial Statement Schedules...............E-9
21 Subsidiaries of the Registrant..............E-12
24 Power of Attorney...........................E-13
31.1CEO Certification Pursuant to
Rule 13a-14(a) and 15d-14(a)................E-14
31.2CFO Certification Pursuant to
Rule 13a-14(a) and 15d-14(a)................E-16
32 CEO and CFO Certifications Pursuant to
Section 1350 of Chapter 63 of Title 18 of
the Unites States Code......................E-18
Financial Statements
See Index to Financial Statements in Item 8.
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended October 31,
2003.
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SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) 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)
By: /s/PAUL MARTIN December 18, 2003
Paul Martin
Vice President and Controller
(Principal Accounting Officer)