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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___ to ___
Commission File Number 001-04146
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NAVISTAR FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-2472404
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2850 West Golf Road Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code 847-734-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange
Act of 1934 during the preceding 12 months and (2) has been subject to
such filing requirements for the past 90 days Yes X No____
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes X No ___
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents
and reports required to be filed by Sections 12, 13 or 15 (d) of the
Securities Exchange Act of 1934 subsequent to the distribution of
securities under a plan confirmed by a court. Yes No
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 31, 2004, the number of shares outstanding of the
registrant's common stock was 1,600,000.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF INTERNATIONAL TRUCK AND
ENGINE CORPORATION, WHICH IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR
INTERNATIONAL CORPORATION, AND MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H (1) (a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING THIS
FORM WITH THE REDUCED DISCLOSURE FORMAT.
- --------------------------------------------------------------------------------
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements: Page
Statements of Consolidated Income and Retained Earnings --
Three Months and Nine Months Ended July 31, 2004 and 2003.......2
Statements of Consolidated Financial Condition --
July 31, 2004; October 31, 2003; and July 31, 2003..............3
Statements of Consolidated Cash Flow --
Nine Months Ended July 31, 2004 and 2003........................4
Notes to Consolidated Financial Statements......................5
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition..........................13
Item 4. Controls and Procedures........................................20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings..............................................21
Item 5. Other Information..............................................21
Item 6. Exhibits and Reports on Form 8-K...............................21
Signature................................................................22
- --------------------------------------------------------------------------------
Part I - Financial Information
Item 1. Financial Statements
Navistar Financial Corporation and Subsidiaries
Statements of Consolidated Income and Retained Earnings (Unaudited)
Three Months Ended Nine Months Ended
July July July July
Millions of Dollars 2004 2003 2004 2003
Revenues
Retail Notes and Finance Leases.......$ 7.8 $12.5 $ 25.2 $ 34.9
Income Related to Sales of Finance
Receivables.......................... 13.1 28.2 44.0 63.6
Operating Leases...................... 12.4 14.7 39.9 51.2
Wholesale Notes....................... 9.0 8.6 24.1 23.5
Accounts.............................. 5.3 4.0 16.5 13.1
Servicing Fees........................ 8.0 6.5 20.8 19.1
Other Revenue......................... 1.2 1.2 3.3 4.4
----- ----- ----- -----
Total................................ 56.8 75.7 173.8 209.8
Expenses
Cost of Borrowing
Interest Expense..................... 8.8 12.0 31.9 38.1
Other................................ 1.6 2.3 6.2 6.2
Credit, Collection and Administrative. 10.1 10.7 28.2 31.9
Provision for Credit Losses........... 2.1 4.0 6.5 11.9
Depreciation on Operating Leases...... 9.6 10.9 29.7 35.5
Other Expense......................... 0.4 1.2 1.4 3.3
----- ----- ----- -----
Total................................ 32.6 41.1 103.9 126.9
Income Before Taxes.................... 24.2 34.6 69.9 82.9
Income Tax Expense..................... 9.2 12.3 26.9 31.6
----- ----- ----- -----
Net Income...........................$15.0 $22.3 $ 43.0 $ 51.3
====== ====== ====== ======
Retained Earnings
Beginning of Period..................$232.6 $216.1 $204.6 $197.1
Dividends Paid....................... - (5.0) - (15.0)
----- ----- ----- -----
End of Period........................$247.6 $233.4 $247.6 $233.4
====== ====== ====== ======
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Navistar Financial Corporation and Subsidiaries
Statements of Consolidated Financial Condition (Unaudited)
July 31, October 31, July 31,
Millions of Dollars 2004 2003 2003
ASSETS
Cash and Cash Equivalents.................... $ 77.7 $ - $ 5.2
Finance Receivables
Finance Receivables Held for Sale......... 419.7 519.9 533.6
Other Finance Receivables................. 299.0 347.3 242.5
Allowance for Losses...................... (7.0) (12.9) (15.1)
------ ------ ------
Finance Receivables, net............ 711.7 854.3 761.0
Amounts Due from Sales of Receivables........ 445.9 368.9 460.3
Net Investment in Operating Leases........... 158.2 191.1 192.5
Restricted Marketable Securities............. 419.1 505.6 430.1
Other Assets................................. 27.6 39.9 50.6
------- ------- -------
Total Assets.............................. $1,840.2 $1,959.8 $1,899.7
======== ======== =======
LIABILITIES AND SHAREOWNER'S EQUITY
Net Accounts Payables to Affiliates.......... $ 9.6 $ 4.2 $ 26.2
Senior and Subordinated Debt................. 1,292.6 1,461.9 1,348.5
Other Liabilities............................ 116.6 129.5 123.6
------- ------- -------
Total Liabilities......................... 1,418.8 1,595.6 1,498.3
Shareowner's Equity
Capital Stock (par value $1.00, 1,600,000
shares issued and outstanding) and
Paid-In Capital........................... 182.9 171.0 171.0
Retained Earnings............................ 247.6 204.6 233.4
Accumulated Other Comprehensive Loss......... (9.1) (11.4) (3.0)
------- ------- -------
Total Shareowner's Equity.................. 421.4 364.2 401.4
Total Liabilities and Shareowner's Equity.... $1,840.2 $1,959.8 $1,899.7
======== ======== ========
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Navistar Financial Corporation and Subsidiaries
Statements of Consolidated Cash Flow (Unaudited)
Nine Months Ended
July July
Millions of Dollars 2004 2003
Cash Flow From Operations
Net income........................................... $ 43.0 $ 51.3
Adjustments to reconcile net income
to cash provided from operations:
Gains on sales of receivables..................... (39.8) (59.3)
Depreciation, amortization and accretion.......... 37.3 43.8
Provision for credit losses....................... 6.5 11.9
Net change in accounts payable to affiliates...... 5.4 (26.0)
Net change in accrued income taxes................ (4.9) 21.9
Other............................................. 2.1 7.9
------ ------
Total.......................................... 49.6 51.5
------ ------
Cash Flow From Investing Activities
Originations of finance receivables held for sale.... (963.3) (764.6)
Net proceeds from sales of finance receivables
held for sale.................................... 1,118.6 1,347.2
Net proceeds from sales of retail accounts........... 100.0 -
Net change in restricted marketable securities....... 86.5 (325.5)
Collections of retail notes and finance lease receivables,
net of change in unearned finance income.......... 97.7 53.7
Repurchase of sold retail receivables................ (152.8) (163.5)
Net change in wholesale notes and accounts
receivables........................................ (51.7) 51.8
Net change in amounts due from sales of receivables.. (49.6) (52.7)
Purchase of equipment leased to others............... (22.0) (25.1)
Sale of equipment leased to others................... 25.4 45.5
Receipts from derivative contracts................... 0.8 3.1
Payments on derivative contracts..................... (0.5) (15.0)
------- -------
Total.......................................... 189.1 154.9
======= =======
Cash Flow From Financing Activities
Net change in bank revolving credit facility usage... 60.0 (147.0)
Proceeds from long-term debt......................... 31.3 28.4
Principal payments on long-term debt................. (82.3) (99.6)
Dividends paid to International...................... - (15.0)
Assumption of debt by Navistar International
Corporation........................................ (170.0) -
------- -------
Total.......................................... (161.0) (233.2)
======= =======
Change in Cash and Cash Equivalents..................... 77.7 (26.8)
Cash and Cash Equivalents, Beginning of Period.......... - 32.0
------- -------
Cash and Cash Equivalents, End of Period................ $ 77.7 $5.2
======= =======
Supplementary disclosure of cash flow information:
Interest paid........................................ $ 33.2 $ 37.3
Income taxes paid, net of refunds.................... $ 32.9 $ 9.4
Supplementary disclosure of non-cash financing activity:
Additional paid in capital resulting from assumption
of debt by Navistar International Corporation........ $ 11.9 $ -
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Navistar
Financial Corporation and its wholly-owned subsidiaries
("Corporation"). International Truck and Engine Corporation
("International"), which is wholly owned by Navistar International
Corporation ("Navistar"), is the parent company of the Corporation.
The accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the Corporation's
2003 Annual Report on Form 10-K and should be read in conjunction with
the disclosures therein.
In January 2003, the Financial Accounting Standards Board ("FASB")
issued Interpretation No. 46, "Consolidation of Variable Interest
Entities". This interpretation addresses consolidation requirements
of variable interest entities ("VIE's"). In December 2003, the FASB
revised this Interpretation to clarify the application of Accounting
Research Bulletin No. 51, "Consolidated Financial Statements", to
certain entities in which equity investors do not have the
characteristics of a controlling financial interest for the entity to
finance its activities without additional financial support. This
Interpretation, as revised, is effective for periods ending after
December 15, 2003. The Corporation determined that it does not have
an interest in a VIE, as defined within this Interpretation.
Transferors to qualifying special purpose entities ("QSPE's") subject
to the reporting requirements of Statements of Financial Accounting
Standards ("SFAS") 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities", are excluded
from the scope of this interpretation. The Corporation currently
sells receivables to entities meeting the requirements of QSPE's.
Therefore, this Interpretation has no impact on the Corporation's
results of operations, financial condition, and cash flows.
In December 2003, the FASB issued a revision to SFAS 132, "Employers'
Disclosure about Pensions and Other Postretirement Benefits". This
Statement retains the disclosures previously required by SFAS 132 but
adds additional disclosure requirements about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension
plans and other defined benefit postretirement plans. It also calls
for the required information to be provided separately for pension
plans and for other postretirement benefit plans. The Corporation
assessed the assets, obligations, cash flows, and net periodic benefit
cost for pension plans and for other postretirement benefit plans and
determined the amounts to be inmmaterial; therefore, related disclosures
have been omitted.
On December 8, 2003, the President signed the Medicare Prescription
Drug, Improvement and Modernization Act of 2003 ("the Act") into law.
The Act introduces a voluntary prescription drug benefit under
Medicare as well as a federal subsidy to sponsors of retiree health
care plans that provide prescription drug benefits that are at least
actuarially equivalent to Medicare Part D. In May 2004, the FASB issued
FSP 106-2, "Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug, Improvement and Modernization Act of 2003",
which requires the commencement of accounting recognition for the
effects of the Act no later than the Corporation's quarter ending
October 31, 2004. The Corporation implemented the accounting guidance
related to the effects of the Act during the quarter ended July 31,
2004. The cumulative effect of accounting for the subsidy as of the
date of the Act through the date of implementation resulted in an
immaterial reduction to the Corporation's postretirement benefit
expenses and liabilities.
In the opinion of management, these interim financial statements
reflect all adjustments, consisting of normal recurring items,
necessary to present fairly the results of operations, financial
condition and cash flow for the interim periods presented. Interim
results are not necessarily indicative of results to be expected for
any other interim period or for the full year. Certain amounts in the
prior period financial statements have been reclassified to conform
with current period presentations.
2. COMPREHENSIVE INCOME
The Corporation's total comprehensive income was:
Three Months Nine Months
Ended July 31 Ended July 31
Millions of Dollars 2004 2003 2004 2003
Net income........................... $ 15.0 $ 22.3 $ 43.0 $ 51.3
Change in net unrealized gains (losses)
on investments (net of tax of $1.0,
($0.1), ($1.4), and ($0.2))........ (1.6) 0.2 2.3 0.3
------ ------ ------ ------
Total comprehensive income........ $ 13.4 $ 22.5 $ 45.3 $ 51.6
====== ====== ====== ======
3. FINANCE RECEIVABLES
Finance receivables are summarized as follows:
July 31, October 31, July 31,
Millions of Dollars 2004 2003 2003
Retail notes, net of unearned income.... $ 320.9 $ 404.5 $ 410.5
Finance leases, net of unearned income.. 98.8 115.4 123.1
Wholesale notes......................... 87.3 46.0 34.3
Accounts:
Retail............................... 133.5 217.9 140.1
Wholesale............................ 78.2 83.4 68.1
------ ------ ------
Total accounts..................... 211.7 301.3 208.2
------ ------ ------
Total finance receivables....... 718.7 867.2 776.1
Less: Allowance for losses...... 7.0 12.9 15.1
------ ------ ------
Total finance receivables, net.. $ 711.7 $ 854.3 $ 761.0
====== ====== ======
Finance receivables held for sale consisted of $419.7 million, $519.9
million, and $533.6 million in retail notes and finance leases, net of
unearned income, as of July 31, 2004, October 31, 2003, and July 31,
2003, respectively.
4. ALLOWANCE FOR LOSSES
The change in allowance for losses is summarized as follows:
July 31, October 31, July 31,
Millions of Dollars 2004 2003 2003
Allowance for losses, beginning of period $ 12.9 $ 16.0 $ 16.0
Provision for credit losses.............. 6.5 15.8 11.9
Net losses charged to allowance.......... (4.1) (4.2) (5.0)
Allocated to finance receivables sold.... (8.3) (14.7) (7.8)
------ ------ -----
Allowance for losses, end of period... $ 7.0 $ 12.9 $ 15.1
====== ====== ======
The average outstanding balance of impaired finance receivables was
not material for the fiscal periods ended July 31, 2004, October 31,
2003, and July 31, 2003. Interest income that would have been
recognized on impaired finance receivables during the nine months
ended July 31, 2004 and 2003 or for the year ended October 31, 2003
was not material.
Balances with payments past due over 90 days on owned finance
receivables, including held for sale, totaled $11.3 million as of July
31, 2004.
5. SENIOR AND SUBORDINATED DEBT
Senior and subordinated debt outstanding is summarized as follows:
July 31, October 31, July 31,
Millions of Dollars 2004 2003 2003
Bank revolving credit facility, at
variable rates, due December 2005...... $ 631.0 $ 571.0 $ 435.0
Revolving retail warehouse facility,
at variable rates, due October 2005.... 500.0 500.0 500.0
Borrowings secured by operating leases,
3.45% to 6.65%, due serially through
April 2010............................. 161.6 212.5 236.6
Convertible debt, 4.75%, due April 2009. - 178.4 176.9
------- ------- -------
Total senior and subordinated debt..... $1,292.6 $1,461.9 $1,348.5
======= ======= =======
Navistar assumed the $220.0 million 4.75 percent convertible
subordinated debt due in 2009 from the Corporation in June 2004. As
compensation for the assumption of this debt, the Corporation paid
Navistar approximately $170.0 million in cash. Navistar's assumption
of the Corporation's debt resulted in an $11.9 million increase in
additional paid in capital for the Corporation.
6. DERIVATIVE FINANCIAL INSTRUMENTS
The Corporation uses derivative financial instruments as part of its
overall interest rate risk management strategy as further described
under Note 13 of the 2003 Annual Report on Form 10-K.
The Corporation manages its exposure to fluctuations in interest rates
by limiting the amount of fixed rate assets funded with variable rate
debt. This is accomplished by selling fixed rate receivables on a
fixed rate basis and by utilizing derivative financial instruments.
These derivative financial instruments may include forward contracts,
interest rate swaps, and interest rate caps. The fair value of these
instruments is estimated based on quoted market prices and is subject
to market risk as the instruments may become less valuable due to
changes in market conditions or interest rates. The Corporation
manages exposure to counterparty credit risk by entering into
derivative financial instruments with major financial institutions
that can be expected to fully perform under the terms of such
agreements. The Corporation does not require collateral or other
security to support derivative financial instruments with credit
risk. The Corporation's counterparty credit exposure is limited to
the positive fair value of contracts at the reporting date. As of
July 31, 2004, the Corporation's derivative financial instruments
had a negative net fair value. Notional amounts of derivative
financial instruments do not represent exposure to credit loss.
As of July 31, the notional amounts and fair values of the
Corporation's derivative financial instruments are summarized as
follows:
Inception Maturity Instrument Notional Fair Value
(Millions of Dollars)
October 2000 November 2012 Interest rate cap $500.0 $ (1.3)
November 2012 Interest rate cap 500.0 1.3
July 2001 April 2006 Interest rate swap 25.0 (0.7)
November 2002 March 2007 Interest rate swap* 28.4 -
October 2003 April 2008 Interest rate swap* - (0.1)
July 2004 September 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.
On July 30, 2004, the Corporation entered into a Receivable Purchase
Agreement. The Corporation is the Servicer of the Receivable Purchase
Agreement. The other parties to the Agreement entered into an interest
rate swap agreement. Although the Corporation is not a party to the
swap agreement, the Corporation's role as Servicer creates an obligation
for net amounts owed to the Agent under the swap agreement.
In fiscal 2004, forward starting swap losses were $3.3 million,
compared with $7.7 million in prior year.
7. SALES OF RECEIVABLES
During the first nine months of fiscal 2004, the Corporation sold
$1,120.0 million of retail notes and leases for a pre-tax gain of $39.8
million compared to the first nine months of fiscal 2003, when the
Corporation sold $1,350.0 million of retail receivables for a pre-tax
gain of $59.3 million.
The Corporation's 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. The
fair value of the interest-only receivable is based on estimates of
prepayment speeds and discount rates. The Corporation evaluates the
fair value of its retained interests quarterly and makes adjustments to
these values when it deems permanent changes in its assumptions have
changed.
The following table summarizes income related to sales of finance
receivables:
Three Months Nine Months
Ended July 31 Ended July 31
Millions of Dollars 2004 2003 2004 2003
Gains on sales of receivables..... $ 7.8 $26.1 $39.8 $59.3
Excess spread..................... 4.9 2.6 8.9 10.8
Fair value adjustment............. - - (2.4) -
Derivative losses................. 0.2 (1.0) (3.3) (7.8)
Interest income from retained
securities and other........... 0.2 0.5 1.0 1.3
----- ----- ----- -----
Total income related to
sales of finance receivables... $13.1 $28.2 $44.0 $63.6
===== ===== ===== =====
8. COMMITMENTS AND CONTINGENCIES
Leases
The Corporation is obligated under non-cancelable operating leases for
the majority of its office facilities. These leases are generally
renewable and provide that property taxes and maintenance costs are to
be paid by the lessee. As of July 31, 2004, future minimum lease
commitments under non-cancelable operating leases with remaining terms
in excess of one year are as follows:
Twelve months period ended July 31(Millions of Dollars)
2005................................. $ 1.9
2006................................. 1.9
2007................................. 0.4
2008................................. 0.4
2009................................. 0.2
Thereafter........................... 0.1
------
Total........................... $ 4.9
======
The total operating lease expense for the nine months ended July 31,
2004 and 2003 and for the year ended October 31, 2003 was $1.3
million, $1.8 million and $2.3 million, respectively.
Guarantees of Debt
The Corporation periodically guarantees the outstanding debt of
affiliates. The guarantees allow for diversification of funding
sources for the affiliates. As of July 31, 2004, the Corporation has
multiple guarantees related to Navistar's three Mexican finance
subsidiaries, Servicios Financieros Navistar, S.A. de C.V. ("SOFOL"),
Arrendadora Financiera Navistar, S.A. de C.V. ("Arrendadora") and
Navistar Comercial S.A. de C.V. The Corporation has no recourse as
guarantor in case of default.
The following table summarizes the borrowings as of July 31, 2004:
Type of Funding Maturity Amount of Outstanding
Guaranty Balance
(Millions of Dollars)
Revolving credit facility(2) December 2005 $100.0 $21.0
Medium term note(1) November 2004 43.8 43.8
Revolving credit facility(1) July 2007 17.5 17.5
Revolving credit facility(1),(3) Indefinite 21.0 21.0
Revolving credit facility(1),(3) Indefinite 17.5 3.7
Revolving credit facility(1) August 2004 6.6 6.6
Revolving credit facility(1),(4) June 2005 4.4 -
------
Total $113.6
======
(1)Peso-denominated
(2)Revolving credit facility guaranteed jointly with Navistar
(3)The bank reviews the terms of this facility monthly. This
facility may be used for as long as all the conditions and terms
are met.
(4)Contract review date June 2005
Guarantees of Derivatives
As of July 31, 2004, the Corporation had guaranteed derivative
contracts for interest rate swaps and cross currency swaps related to
SOFOL and Arrendadora. The Corporation is liable up to the fair market
value of these derivative contracts only in cases of default by SOFOL
and Arrendadora.
The following table summarizes the guaranteed derivative contracts as
of July 31, 2004:
Outstanding Fair
Instrument Maturity Notional Value
(Millions of Dollars)
Interest rate swaps and
cross currency swaps* May 2007 $ 65.2 $ 0.2
* Peso-denominated
Other
The Corporation has entered into an agreement for the repurchase of
equipment. Under this agreement, which matures in August 2004, the
Corporation would be required to make a maximum potential future
payment of $11.9 million. Under the provisions of this agreement, the
Corporation can liquidate the repurchased assets to recover all or a
portion of the payment. The Corporation has potential exposure to the
extent that there is a difference between the fair value of the
repurchased asset and the guaranteed repurchase amount. The
Corporation's current exposure under this agreement is estimated to be
immaterial.
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. As part of its sales agreement with IAT,
the Corporation has agreed to guarantee the adequacy of Harco's loss
reserves. There is no limit to the potential amount of future payments
required by the Corporation related to this reserve. The sales
agreement is scheduled to expire November 2008. The carrying amount of
the Corporation's liability under this guarantee is estimated at $4.5
million as of July 31, 2004 and is included in Other Liabilities in the
Consolidated Statements of Financial Condition. Management believes
this reserve is adequate to cover any future potential payments to IAT.
- --------------------------------------------------------------------------------
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
Certain statements under this caption purely constitute "forward-looking
statements" 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. Navistar
Financial Corporation's ("Corporation") actual results may differ
significantly from the results discussed in such forward-looking
statements. 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-Q.
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-Q, 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. Factors that
might cause such a difference include, but are not limited to, those
discussed under the heading "Business Outlook".
Overview
The Corporation was incorporated in Delaware in 1949 and is a
wholly-owned subsidiary of International Truck and Engine Corporation
("International"), which is a wholly-owned subsidiary of Navistar
International Corporation ("Navistar"). As used herein, the
"Corporation" refers to Navistar Financial Corporation and its
wholly-owned subsidiaries unless the context otherwise requires.
The Corporation is a commercial financing organization that provides
wholesale, retail and lease financing in the United States for sales of
new and used trucks sold by International and International's dealers.
The Corporation also finances wholesale accounts and selected retail
accounts receivable of International. Sales of new products (including
trailers) of other manufacturers are also financed regardless of whether
they are designed or customarily sold for use with International's truck
products.
The Corporation also services finance receivables it originates and
purchases. The Corporation's sources of revenues are from sales of its
receivables, servicing of its sold receivables, earnings from investments
and interest earned from its financing programs under wholesale and other
dealer loan financing programs.
The Corporation is exposed to market risk primarily due to fluctuations
in interest rates during the accumulation period prior to a sale of
finance receivables. Interest rate risk arises when funding 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
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.
Business Outlook
Navistar currently projects fiscal 2004 U.S. and Canadian Class 8 heavy
truck demand to be 211,000 units, up 32.5% from 2003. Class 6 and 7
medium truck demand, excluding school buses, is forecast at 93,000 units,
up 24.3% from 2003. Demand for school buses is expected to be 26,000
units, down 10.9% from 2003. Mid-range diesel engine shipments by
Navistar to OEMs in fiscal 2004 are expected to be 349,200 units, 5.1%
higher than 2003.
Critical Accounting Policies
The consolidated financial statements are prepared in conformity with
accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires the use
of estimates, judgments, and assumptions that affect the reported amounts
of assets and liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the periods presented.
In preparing these financial statements, management has made its best
estimates and judgments of certain amounts included in the financial
statements, giving due consideration to materiality. The significant
accounting principles which management believes are the most important to
aid in fully understanding the Corporation's financial results are:
|X| Sales of Receivables
|X| Allowance for Losses
Details regarding the Corporation's use of these policies and the related
estimates are described in the Corporation's 2003 Annual Report on Form
10-K.
Results of Operations
Fiscal Nine- Month Period 2004 Compared with 2003
Year-to-date net income was $43.0 million for 2004, compared with $51.3
million for the same period of 2003. During the first nine months of
fiscal 2004, the Corporation sold $1,120.0 million of retail notes and
leases for a pre-tax gain of $39.8 million compared to the first nine
months of fiscal 2003, when the Corporation sold $1,350.0 million of
retail receivables for a pre-tax gain of $59.3 million. The decrease in
gains on sales of receivables is primarily due to lower volume and a
decline in average portfolio yield due to increased competition. Lease
portfolio yield dropped during fiscal 2004 as liquidations of older higher
yielding leases were replaced with acquisitions of lower yielding leases.
The decrease in revenue was partly offset by reductions in expenses.
During the fiscal nine-month period in 2004, the Corporation experienced
improved portfolio performance and pricing in the used truck market. The
credit loss provision is funded based on the Corporation's belief that
its portfolio performance and pricing will continue, barring any adverse
impact on the economy and the trucking industry. 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.
Financial Condition
Finance Volume and Finance Market Share
The Corporation's finance market share of new International trucks sold
in the U.S. increased to 15.5% at July 31, 2004 from 15.1% at July 31,
2003 primarily due to increased originations. During the first nine
months of fiscal 2004, the Corporation's net retail notes and finance
leases originations were $963.3 million, compared with $764.6 million
during the same period of fiscal 2003. This increase reflects the
continued improvement in the Class 6-8 truck market in which
International participates. Net serviced retail notes and finance leases
balances were $2,606.6 million and $2,445.8 million as of July 31, 2004
and 2003, respectively.
Wholesale note originations increased 28.1% to $2,868.1 million during the
first nine months of fiscal 2004, compared with $2,239.2 million for the
same period of fiscal 2003. Serviced wholesale note balances increased 19.6%
to $1,084.6 million as of July 31, 2004 from $907.0 million as of July 31,
2003. The increase in wholesale note balances and originations reflects an
increase in International orders and retail deliveries.
Finance Volume and Finance Market Share
The Corporation has seen an improvement in its truck repossession
activities. Total year to date repossessions for fiscal 2004 were
1,180 units, compared with 1,919 units in 2003. Serviced repossession
balance also decreased significantly from $31.7 million, as of July 31,
2003, to $20.2 million, as of July 31, 2004, as a result of the lower
acquisition of repossessed vehicles.
Funds Management
The Corporation has traditionally obtained the funds to provide financing
to International's dealers and retail customers from sales of finance
receivables, commercial paper, short and long-term bank borrowings, and
medium and long-term debt. The Corporation's current debt ratings have
made sales of finance receivables the most economical source of funding.
Credit Ratings
The Corporation's debt ratings as of July 31, 2004 are as follows:
Standard
Fitch Moody's and Poor's
Senior unsecured debt BB Ba3 BB-
Subordinated debt B+ B2 B
Outlook Stable 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 the first nine months of 2004 and 2003, the Corporation sold
$1,120 million and $1,350.0 million, respectively, of retail notes and
finance leases to owner trusts which, in turn, issued asset-backed
securities that were sold to investors. As of July 31, 2004, there was
no remaining shelf registration available to NFRRC. On August 13, 2004,
a $4.0 billion shelf registration filed by NFRRC became effective.
In June 2004, International Truck Leasing Corp. ("ITLC"), a special
purpose, wholly-owned subsidiary of the Corporation, was established to
provide for the funding of certain leases. ITLC's assets are available
to satisfy its creditors' claims prior to such assets becoming available
for ITLC's uses or to the Corporation or affiliated companies.
Truck Engine Receivables Financing Corporation, a special purpose,
wholly-owned subsidiary of the Corporation, has in place a trust that
provides for the funding of $100.0 million of unsecured trade receivables
generated by the sale of diesel engines and engine service parts from
International to Ford Motor Company. The facility matures in 2006. As
of July 31, 2004, the Corporation had utilized $81.2 million of this
facility.
During the second quarter of fiscal 2004, Truck Retail Accounts
Corporation ("TRAC"), a special purpose, wholly-owned subsidiary of the
Corporation, obtained financing for its retail accounts with a bank
conduit that provides for the funding of up to $100.0 million of eligible
retail accounts. The revolving retail account facility expires in April
2005. The sales of retail accounts under TRAC constitute sales under
generally accepted accounting principles in the United States of America,
with the result that the sold accounts are removed from the Corporation's
balance sheet and the investor's interests are not reflected as
liabilities. TRAC is a separate corporate entity, and its assets will be
available first and foremost to satisfy the claims of the creditors of
TRAC. As of July 31, 2004, the Corporation had utilized $93.5 million of
this facility.
Navistar Financial Securities Corporation ("NFSC"), a special purpose,
wholly-owned subsidiary of the Corporation, has in place a revolving
wholesale note trust that provides for the funding of up to $1,236.0
million of eligible wholesale notes. As of July 31, 2004, it comprised
two $200.0 million tranches of investor certificates maturing in 2004 and
2008, three $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 February 2005. NFSC also has retained
interest in marketable securities that could be used to fund $169.6
million in additional eligible wholesale notes. As of July 31, 2004, the
Corporation had utilized $997.3 million of the revolving wholesale note
trust.
Truck Retail Instalment Paper Corporation ("TRIP"), 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. 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, during the accumulation period prior to a
receivable sale. There were $130.2 million in retail notes and leases at
the end of the third quarter 2004, compared with $500.0 million at the
end of the third quarter 2003. This difference was a result of a conduit
sale in the third quarter of 2004.
The Corporation also has $820.0 million contractually committed bank
revolving credit facility that will mature in December 2005. As of July
31, 2004, $652.0 million of this facility was utilized.
As of July 31, 2004, the aggregate available, including unrestricted
cash, to fund finance receivables under all the various facilities was
$1,049.1 million.
Navistar assumed the $220.0 million 4.75 percent convertible subordinated
debt due in 2009 from the Corporation in June 2004. As compensation for
the assumption of this debt, the Corporation paid Navistar approximately
$170.0 million in cash. Navistar's assumption of the Corporation's debt
resulted in an $11.9 million increase in additional paid in capital for
the Corporation.
The weighted average borrowing rate on all debt outstanding for the first
nine months of fiscal 2004 decreased to 3.11% from 3.67% for the same
period in 2003. The decrease in the Corporation's weighted average
borrowing rate is primarily a result of lower LIBOR rates.
Management believes that collections on the outstanding finance
receivables portfolio plus cash available from the Corporation's various
funding sources will permit the Corporation to meet the financing
requirements of International's dealers and retail customers through 2004
and beyond.
New Accounting Pronouncements
The consolidated financial statements include the accounts of Navistar
Financial Corporation and its wholly-owned subsidiaries ("Corporation").
International Truck and Engine Corporation ("International"), which is
wholly owned by Navistar International Corporation ("Navistar"), is the
parent company of the Corporation.
The accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the Corporation's 2003
Annual Report on Form 10-K and should be read in conjunction with the
disclosures therein.
In December 2003, the FASB issued a revision to SFAS 132, "Employers'
Disclosure about Pensions and Other Postretirement Benefits". This
Statement retains the disclosures previously required by SFAS 132 but
adds additional disclosure requirements about the assets, obligations,
cash flows, and net periodic benefit cost of defined benefit pension
plans and other defined benefit postretirement plans. It also calls for
the required information to be provided separately for pension plans and
for other postretirement benefit plans. The Corporation assessed the
assets, obligations, cash flows, and net periodic benefit cost for pension
plans and for other postretirement benefit plans and determined the amounts
to be immaterial; therefore, related dislosures have been omitted.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities". This interpretation addresses consolidation
requirements of variable interest entities ("VIEs"). In December 2003,
the FASB revised this Interpretation to clarify the application of
Accounting Research Bulletin No. 51, "Consolidated Financial Statements",
to certain entities in which equity investors do not have the
characteristics of a controlling financial interest for the entity to
finance its activities without additional financial support. This
Interpretation, as revised, is effective for periods ending after
December 15, 2003. The Corporation determined that it does not have an
interest in a VIE, as defined within this Interpretation. Transferors to
qualifying special purpose entities ("QSPE's") subject to the reporting
requirements of FASB Statement No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", are
excluded from the scope of this interpretation. The Corporation
currently sells receivables to entities meeting the requirements of
QSPE's. Therefore, this Interpretation has no impact on the Corporation's
results of operations, financial condition, and cash flows.
On December 8, 2003, the President signed the Medicare Prescription Drug,
Improvement and Modernization Act of 2003 ("the Act") into law. The Act
introduces a voluntary prescription drug benefit under Medicare as well
as a federal subsidy to sponsors of retiree health care plans that
provide prescription drug benefits that are at least actuarially
equivalent to Medicare Part D. In May 2004, the FASB issued FSP 106-2,
"Accounting and Disclosure Requirements Related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003", which
requires the commencement of accounting recognition for the effects of the
Act no later than the Corporation's quarter ending October 31, 2004. The
Corporation implemented the accounting guidance related to the effects of
the Act during the quarter ended July 31, 2004. The cumulative effect of
accounting for the subsidy as of the date of the Act through the date of
implementation resulted in an immaterial reduction to the Corporation's
postretirement benefit expenses and liabilities.
- --------------------------------------------------------------------------------
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The Corporation's principal executive officer and principal financial
officer, along with other management of the Corporation, evaluated the
Corporation's disclosure controls and procedures (as defined in rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as
amended) as of July 31, 2004. Based on that evaluation, the principal
executive officer and principal financial officer of the Corporation
concluded that, as of July 31, 2004, 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 Control over Financial Reporting
The Corporation has not made any change to its internal control over
financial reporting (as defined in rule 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter ended July 31, 2004 that have
materially affected, or are reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
================================================================================
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There were no material pending legal proceedings other than ordinary,
routine litigation incidental to the business of the Corporation.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
3 Articles of Incorporation and By-Laws................E-1
4 Instruments Defining Rights of Security Holders,
including Indentures.................................E-2
10 Material Contracts...................................E-4
31.1 CEO Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002........E-12
31.2 CFO Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002........E-14
32 CEO and CFO Certifications Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002........E-16
(b) Reports on Form 8-K filed during the quarter ended July 31, 2004:
The Corporation filed a current report on Form 8-K with the
Commission on May 12, 2004 to announce Navistar's intent to
assume the Corporation's $220.0 million 4.75 percent convertible
subordinated debt.
- --------------------------------------------------------------------------------
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Navistar Financial Corporation
(Registrant)
Date: September 10, 2004 /s/ PAUL MARTIN
Paul Martin
Vice President and Controller
(Principal Accounting Officer)