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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, 2004
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 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. __
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
As of January 31, 2005, 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) 3
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters............................ 3
Item 6 Selected Financial Data (A)............................ 3
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 11
Item 8 Financial Statements and Supplementary Data............ 12
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.................... 44
Item 9A. Controls and Procedures................................ 44
Item 9B. Other Information...................................... 44
PART III
Item 10 Directors and Executive Officers of the Registrant (A). 45
Item 11 Executive Compensation (A)............................. 45
Item 12 Security Ownership of Certain Beneficial Owners
and Management and Related Stockholder Matters (A)..... 45
Item 13 Certain Relationships and Related Transactions (A)..... 45
Item 14 Principal Accountant Fees and Services................. 45
PART IV
Item 15 Exhibits, Financial Statement Schedules and
Reports on Form 8-K.................................... 46
SIGNATURES........................................................ 47
(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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13
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.
Periodic Reports Access
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.
Item 2. Properties
The Corporation's properties principally consist of office equipment and
leased office space in Schaumburg, Illinois; 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
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.
On February 9, 2005, the Corporation received a notice from the staff of the
United States Securities and Exchange Commission stating that it was
conducting an informal inquiry into the Corporation's restatement of
financial results for the fiscal years 2002 and 2003 and the first three
quarters of fiscal 2004 ("restatement period"). The staff has requested that
the Corporation voluntarily produce documents and information related to the
restatement period. The Corporation is fully cooperating with this request.
Given the preliminary nature of the matter, the Corporation is not able to
predict what impact, if any, this inquiry will have on the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See the index page of this report for an explanation.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
As of October 31, 2004, 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 did
not pay any dividends in fiscal 2004 or 2002. NFC paid $50.0 million in
dividends to International during fiscal 2003.
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.
Restatement
The accompanying management's discussion and analysis gives effect to the
restatement of the consolidated financial statements for the years ended
October 31, 2003 and 2002, as discussed in Note 2 to Consolidated Financial
Statements.
Off-Balance Sheet Arrangements
The Corporation enters into guarantees and sales of receivables that
appropriately are not reflected on our balance sheet, which have or will have
an effect on our financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Guarantees
The Corporation periodically guarantees the outstanding debt of affiliates.
The guarantees allow for diversification of funding sources for the
affiliates. As of October 31, 2004, the Corporation has numerous 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. As of October 31, 2004, the Corporation's maximum exposure under
these guarantees is the total amount outstanding at that date, $134.4 million.
On July 30, 2004, the Corporation, through NFRRC, sold retail note receivables
to a conduit. In order to match fund the fixed rate receivables with the
variable rate debt of the conduit, the conduit entered into an interest rate
swap agreement on the anticipated cash flows from the receivables. NFC,
as servicer, has indemnified the conduit for the impact any variance in those
cash flows has on the swap settlement. As of October 31, 2004, the
Corporation has not recorded any liability related to this indemnification.
Sales of Receivables
The Corporation securitizes and sells receivables through Navistar Financial
Retail Receivable 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, to fund its business
operations. The securitization market provides the Corporation with a
cost-effective source of funding. In a typical securitization transaction,
the Corporation sells a pool of finance receivables to a SPC that establishes
a qualifying special purpose entities ("QSPE") consistent with the
requirements of Statements of Financial Accounting Standards ("SFAS") No. 140
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". The SPC then transfers the receivables to
the QSPE, generally a trust, in exchange for proceeds from interest-bearing
securities, commonly called asset-backed securities ("ABS"). These
securities are issued by the QSPE and are secured by future collections on
the sold receivables. The sales of receivables in each securitization
constitute sales under accounting principles generally accepted in the United
States of America, with the result that the sold receivables are removed from
the Corporation's balance sheet and the investor's interests in the related
trust or conduit are not reflected as liabilities.
The Corporation often retains interests in the securitized receivables. The
retained interests may include senior and subordinated securities, undivided
interests in wholesale receivables, restricted cash held for the benefit of
the QSPE's, and interest-only strips. The Corporation's retained interests
will be the first to absorb any credit losses on the sold receivables because
the Corporation retains the most subordinated interests in the QSPE,
including subordinated securities, the right to receive excess spread
(interest-only strip) and any residual or remaining interests of the QSPE
after all asset-backed securities are repaid in full. The Corporation's
exposure to credit losses on the sold receivables is limited to its retained
interests. 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 Corporation is under no obligation
to repurchase any sold receivable that becomes delinquent in payment or
otherwise is in default. The holders of the asset-backed securities have no
recourse to the Corporation or its other assets for credit losses on sold
receivables and have no ability to require the Corporation to repurchase
their securities. The Corporation does not guarantee any securities issued
by OSPE's. The Corporation, as seller and the servicer of the finance
receivables is obligated to provide certain representations and warranties
regarding the receivables. Should any receivables fail to meet these
representations and warranties, the Corporation, as servicer, is required to
repurchase the receivables.
Risks to Future Sales of Receivables
The Corporation relies heavily on securitization for cost effective funding
of its operations. The Corporation's ability to sell its receivables may be
dependent on the following factors: the volume and credit quality of
receivables available for sale, the performance of previously sold
receivables, general demand for the type of receivables the Corporation
offers, market capacity for the Corporation sponsored investments, accounting
and regulatory changes, the Corporation's debt ratings and the Corporation's
ability to maintain back-up liquidity facilities for certain securitization
programs. If as a result of any of these or other factors, the cost of
securitized funding significantly increased or securitized funding were no
longer available to the Corporation, the Corporation's operations, financial
condition and liquidity could be adversely impacted.
Contractual Obligations
The following table provides aggregate information about the Corporation's
outstanding contractual obligations and other long-term liabilities as of
October 31, 2004:
Due in Fiscal 2005 2006-2007 2008-2009 After 2010 Total
Senior and Subordinated Debt $570.5 $739.1 $15.1 $0.5 $1,325.2
Operating Leases............. 2.0 2.9 1.9 4.8 11.6
Total................. 572.5 742.0 17.0 5.3 1,336.8
The table above does not include interest obligations because the Corporation
does not have any fixed interest payments. The Corporation's interest
obligations are based on current interest rates and outstanding amounts.
Results from Continuing Operations
Results from continuing operations for the last three years were as follows:
As Restated
Millions of Dollars 2004 2003 2002
Gains on sales of receivables $25.9 $46.3 $16.4
Income related to sales of finance receivables 53.5 66.9 35.4
Cost of borrowing 48.7 57.5 66.1
Income before taxes 102.3 98.8 67.7
Income from continuing operations 61.1 57.9 39.1
Other Financial Data:
Return on average equity 15.8% 16.4% 11.4%
Retail notes and finance lease
receivables sold,
net of unearned finance income $1,120.0 $1,705.0 $1,000.0
The gains on sales of receivables in 2004 were lower than in 2003 primarily
because of lower receivable sales volume and higher rates on the asset-backed
securities. In 2004, the Corporation sold $1,120.0 million of retail notes
and finance lease receivables compared to $1,705.0 million in 2003. The gains
on sales of receivables on the sales in 2003 were higher than in 2002 primarily
because of higher sales volume and lower rates on the asset-backed securities.
Borrowing costs decreased 15.3% in 2004 to $48.7 million and 13.0% in 2003 to
$57.5 million primarily due to lower average receivable funding requirements
and lower average interest rates. The Corporation's weighted average
interest rate on senior and subordinated debt was 3.1% in 2004, 3.6% in 2003
and 4.0% in 2002. The decrease in the Corporation's weighted average
interest rate is primarily a result of lower LIBOR. The ratio of debt to
equity was 3.1:1 and 4.1:1 as of October 31, 2004 and 2003, respectively.
Provision for losses on receivables totaled $8.2 million in 2004, a reduction
of $7.6 million from the $15.8 million recognized in 2003. The decrease in
provision was primarily due to overall improvement in portfolio performance
and improved recoveries in the used truck markets.
Financing Condition
Financing Volume and Finance Market Share
In fiscal 2004, the Corporation's net retail note and finance lease
originations were $1,385.6 million, compared with $1,112.7 million in fiscal
2003, an increase of 24.5% from 2003. The Corporation's finance market share
of new International trucks sold in the U.S. decreased slightly to 15.5% at
October 31, 2004 compared to 15.7% at October 31, 2003; however, net serviced
retail notes and finance leases balances were $2,757.7 million and $2,506.5
million as of October 31, 2004 and 2003, respectively. Originations
increased despite relatively constant finance market share primarily as a
result of higher sales volume by International's dealers.
In fiscal 2003, the Corporation's net retail note and finance lease
originations were $1,112.7 million, an increase of 11.0% from 2002.
Originations increased despite relatively constant finance market share
primarily as a result of higher sales volume.
The Corporation provided 95% of the wholesale financing of new trucks sold to
International's dealers in fiscal 2004 and 96% in 2003. Wholesale note
originations were $4,312.4 million in fiscal 2004, compared with $3,168.7
million fiscal 2003, an increase of 36.1%. Serviced wholesale notes balances
were $1,305.2 million and $860.7 million as of October 31, 2004 and 2003,
respectively. These increases reflect International's higher sales to its
dealers in the United States.
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
The Corporation's debt ratings as of October 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. The Corporation sells
receivables to SPC's. Through the asset-backed public market and private
placement sales, the Corporation has been able to fund its operating needs at
rates, which are more economical than those available to the Corporation in
the public unsecured bond market. These SPC's are separate corporate
entities and their assets will be available, first and foremost, to satisfy
the claims of their creditors.
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 2004 and 2003, the
Corporation sold $1,120.0 million and $1,705.0 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, 2004,
the remaining shelf registration available to NFRRC for the public issuance
of asset-backed securities was $4,000.0 million.
Navistar Financial Securities Corporation ("NFSC"), a special purpose,
wholly-owned subsidiary of the Corporation, has in place, as of October 31,
2004, a revolving wholesale note trust that provides for the funding of up to
$1,186.3 million of eligible wholesale notes. The trust is comprised of a
$200.0 million tranche of investor certificates maturing in 2008, three
$212.0 million tranches of investor certificates maturing in 2005, 2006, and
2007, variable funding certificates with a maximum capacity of $200.0 million
maturing in February 2005 and a seller certificate of $150.3 million. As of
October 31, 2004, the Corporation had utilized $1,132.3 million of the
revolving wholesale note trust.
During the second quarter of 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 being sold accounts
are removed from the Corporation's balance sheet and the investor's interests
are not reflected as liabilities. As of October 31, 2004, this facility was
fully utilized.
Truck Engine Receivables Financing Co. ("TERFCO"), 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. This facility, which will expire in
2005, was fully utilized as of October 31, 2004.
Truck Retail Instalment Paper Corp. ("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, which was
fully utilized as of October 31, 2004. The notes 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 retains a repurchase option against
the retail notes and leases sold into TRIP. Due to the nature of the
repurchase option, TRIP's assets and liabilities are consolidated.
In June 2004, International Truck Leasing Corporation ("ITLC"), a special
purpose, wholly-owned subsidiary of the Corporation, was established to
provide for the funding of certain leases. As of October 31, 2004, $20.0
million had been funded through this subsidiary. 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.
The Corporation also has an $820.0 million contractually committed bank
revolving credit facility that will mature in December 2005. As of October
31, 2004, the Corporation utilized $697.0 million of this facility, $25.0
million of which was utilized by Navistar's Mexican finance subsidiaries.
Navistar assumed the $220.0 million of 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 $170.0 million in
cash. Navistar's assumption of the Corporation's debt resulted in an $11.9
million increase in paid-in capital.
The failure of the Corporation and its affiliates to complete their
respective Annual Reports on Form 10-K and deliver those reports and related
required information to their respective lenders by January 29, 2005, has
resulted in one or more defaults under the revolving credit and TRAC
agreements. On January 31, 2005, the Corporation received a waiver of the
existing defaults under both agreements. The waiver permits the Corporation
to incur additional borrowings under the agreements through February 28,
2005.
In the event that the Corporation has not cured any defaults by February 28,
2005, it will again no longer be able to incur additional indebtedness under
the agreements unless it shall have obtained subsequent waivers. In the
event that the Corporation does not cure any defaults by March 1, 2005
(unless it shall have obtained an additional waiver), an event of default
shall have occurred under the credit and TRAC agreements and the
administrative agent or the lenders will have the ability to terminate the
facilities and demand immediate payment of all amounts outstanding under the
agreements. Such a demand for payment would result in defaults under
numerous other credit facilities and other agreements of the Corporation and
its affiliates. The Corporation believes that the defaults will be cured
prior to the expiration of the waivers through the delivery of the Annual
Reports on Form 10-K and the related information.
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
Consolidated Financial Statements for a more detailed description of 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 operating leases 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 amount of
losses the Corporation records in its bad debt provision are net of the
amounts received under these agreements.
o Sales of Receivables
The Corporation securitizes finance receivables through sales to 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
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. The accretion of the discount related to the
retained interests is recognized on an effective yield basis.
Management estimates the prepayment speed for the receivables sold, the
discount rate used to determine the present value of the interest-only
receivable and the anticipated net losses on the receivables in order to
calculate the gain or loss. The method for calculating the gain or loss
aggregates the receivables in a homogenous pool. Estimates are based on
historical experience, anticipated future portfolio performance,
market-based discount rates 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
present value estimates of expected cash flows using management's key
assumptions of prepayment speeds, discount rates and net losses.
o Net Investments in Equipment on Operating Leases
Included in the net investments in equipment on operating leases are
trucks, tractors and trailers leased to customers under operating
leases. Included in this value are estimates of the residual values of
the equipment. The residual values represent estimates of the values of
the assets at the end of the lease contracts and are initially
determined 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 reclassified from finance receivables or
investment in equipment on operating leases to repossessions and
reported in Other Assets on the Statements of Consolidated Financial
Condition. They are recorded at the lower of historical cost or fair
value, with the related adjustments recorded in the allowance for credit
losses.
o Pension and Other Postretirement Benefits
The Corporation provides defined benefit, postretirement benefits to a
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.
See Note 11 to the Consolidated Financial Statements for more
information regarding costs and assumptions for postretirement benefits.
New Accounting Pronouncements
In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments". In September 2004, the FASB issued
FSP EITF-03-1-1, "Effective Date of Paragraphs 10-20 of EITF 03-1", which
deferred the effective date of paragraphs 10-20 of EITF 03-1. EITF 03-1
paragraph 21 requires specific disclosure for all investments in an unrealized
loss position for which other than temporary impairments have not been
recognized. The Corporation has included this disclosure in Footnote 15
Sales of Receivables.
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 QSPE's
subject to the reporting requirements of 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.
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.
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
2005 U.S. and Canadian Class 8 heavy truck demand to be 262,000 units, up
19.1% from 2004. Class 6 and 7 medium truck demand, excluding school buses,
is forecast at 100,000 units, unchanged from 2004.
Demand for school buses is expected to be 27,500 units, up 5.0% from 2004.
Mid-range diesel engine shipments by Navistar to OEMs in 2005 are expected to
be 365,400 units, 2.1% higher than 2004.
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 2005 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, primarily swaps, 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, 2004,
the estimated fair value of the net assets would decrease by approximately
$6.3 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, 2004, 2003 (as restated)
and 2002 (as restated)...................................... 14
Statements of Consolidated Comprehensive Income for the
Fiscal years ended October 31, 2004, 2003 (as restated)
and 2002 (as restated)......................................... 14
Statements of Consolidated Financial Condition
October 31, 2004 and 2003 (as restated) ....................... 15
Statements of Consolidated Cash Flow
Fiscal years ended October 31, 2004, 2003 (as restated)
and 2002 (as restated)......................................... 16
Notes to Consolidated Financial Statements...................... 17
Report of Independent Registered Public Accounting Firm............ 42
Supplementary Financial Data (unaudited)........................... 48
- -------------------------------------------------------------------------------
Navistar Financial Corporation and Subsidiaries
Statements of Consolidated Income and Retained Earnings
Millions of Dollars
As Restated
(See Note 2)
For the years ended October 31 2004 2003 2002
Revenues
Retail Notes and Finance Leases $ 47.6 $51.6 $59.0
Income Related to Sales of Finance Receivables 53.5 66.9 35.4
Operating Leases 51.2 64.5 76.2
Wholesale Notes 33.5 31.0 27.6
Accounts 22.4 17.7 18.9
Servicing Income 27.4 25.4 26.8
Other Revenue 3.5 5.4 8.2
Total 239.1 262.5 252.1
Expenses
Cost of Borrowing
Interest Expense 40.9 49.8 58.0
Other 7.8 7.7 8.1
Credit, Collection and Administrative 39.8 41.2 39.5
Provision for Credit Losses 8.2 15.8 20.5
Depreciation on Operating Leases 38.1 45.0 55.4
Other Expense 2.0 4.2 2.9
Total 136.8 163.7 184.4
Income Before Taxes 102.3 98.8 67.7
Income Tax Expense 41.2 40.9 28.6
Income from Continuing Operations 61.1 57.9 39.1
Loss on Disposal of Discontinued Operations,
(net tax of $0.0, $1.5 and $0.7) - (2.4) (1.2)
Net Income 61.1 55.5 37.9
Retained Earnings
Beginning of Year 184.9 179.4 141.5
Dividends Paid - (50.0) -
End of Year $246.0 $184.9 $179.4
Statements of Consolidated Comprehensive Income
Millions of Dollars
As Restated
(See Note 2)
For the years ended October 31 2004 2003 2002
Net Income $ 61.1 $ 55.5 $ 37.9
Other Comprehensive Loss:
Net Unrealized Gains (Losses) on Investments
(net of tax of $0.8, $0.8 and ($2.9)) (1.3) (1.2) 4.7
Minimum Pension Liability Adjustment
(net of tax of $0.3, $4.3 and $0.3) (0.5) (6.9) (0.5)
Total (1.8) (8.1) 4.2
Comprehensive Income $ 59.3 $ 47.4 $ 42.1
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Navistar Financial Corporation and Subsidiaries
Statements of Consolidated Financial Condition
Millions of Dollars
As Restated
(See Note 2)
As of October 31 2004 2003
ASSETS
Cash and Cash Equivalents $ 10.4 $ -
Finance Receivables
Finance Receivables 814.8 519.9
Other Finance Receivables 461.0 347.3
Allowance for Losses (6.7) (12.9)
Finance Receivables, net 1,269.1 854.3
Amounts Due from Sales of Receivables 383.4 349.0
Net Investment in Equipment on Operating Leases 148.9 191.1
Restricted Marketable Securities 63.0 505.6
Other Assets 33.5 52.3
Total Assets $1,908.3 $1,952.3
LIABILITIES AND SHAREOWNER'S EQUITY
Net Accounts Payable to Affiliates $ 43.5 $ 3.2
Senior and Subordinated Debt 1,325.2 1,461.9
Other Liabilities 116.0 134.8
Total Liabilities 1,484.7 1,599.9
Commitments and Contingencies - -
Shareowner's Equity
Capital Stock (par value $1.00, 1,600,000 shares
issued and outstanding) and Paid-In Capital 182.9 171.0
Retained Earnings 246.0 184.9
Accumulated Other Comprehensive Loss (5.3) (3.5)
Total Shareowner's Equity 423.6 352.4
Total Liabilities and Shareowner's Equity $1,908.3 $1,952.3
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
Navistar Financial Corporation and Subsidiaries
Statements of Consolidated Cash Flow
Millions of Dollars
As Restated
(See Note 2)
For the years ended October 31 2004 2003 2002
Cash Flow From Operations
Net Income $ 61.1 $55.5 $ 37.9
Adjustments to reconcile net income to
cash provided from operations:
Loss on disposal of discontinued
operations, net of tax - 2.4 1.2
Gains on sales of receivables (25.9) (46.3) (16.4)
Depreciation, amortization and accretion 18.7 27.9 39.9
Provision for credit losses 8.2 15.8 20.5
Net change in accounts payable to
affiliates 40.3 (48.0) 37.0
Net change in accounts payable to others (19.2) 4.2 8.4
Net change in accrued income taxes (3.3) 13.6 9.0
Net change in accrued interest (1.4) (1.7) (4.2)
Other 16.4 14.8 (0.8)
Total 94.9 38.2 132.5
Cash Flow From Investing Activities
Originations of finance receivables (1,385.6) (1,112.7) (1,001.0)
Proceeds from sales of finance receivables 1,118.6 1,701.1 999.0
Proceeds from sales of retail accounts 100.0 - -
Net change in restricted marketable
securities 442.6 (401.0) 109.0
Collections of retail notes and finance
leases receivables,net of change in
unearned finance income 130.4 105.7 78.7
Repurchase of sold retail receivables (158.5) (208.5) (214.3)
Net change in wholesale notes and
accounts receivables (213.6) (53.0) (58.8)
Net change in amounts due from sales
of receivables 5.5 56.1 27.5
Purchase of equipment on operating leases (29.5) (40.0) (59.9)
Sale of equipment on operating leases 33.6 52.1 33.5
Receipts from derivative contracts 0.9 4.1 3.7
Payments on derivative contracts (0.5) (17.9) (4.4)
Proceeds from sale of discontinued operations - - 63.3
Total 43.9 86.0 (23.7)
Cash Flow From Financing Activities
Net change in bank revolving credit
facility usage 101.0 (11.0) (110.0)
Debt issuance costs on convertible debt - - (6.3)
Proceeds from issuance of convertible debt - - 169.5
Proceeds from long-term debt 42.9 28.4 70.4
Principal payments on long-term debt (102.3) (123.6) (222.7)
Assumption of debt by Navistar (170.0) - -
Dividends paid to International - (50.0) -
Total (128.4) (156.2) (99.1)
Change in Cash and Cash Equivalents 10.4 (32.0) 9.7
Cash and Cash Equivalents, Beginning of Period - 32.0 22.3
Cash and Cash Equivalents, End of Period $ 10.4 $ - $32.0
Supplementary disclosure of cash flow information:
Interest paid $ 42.3 $ 51.6 $ 62.1
Income taxes paid, net of refunds $ 38.9 $ 20.4 $ 22.0
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 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 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. The discount accretion
related to the retained interests is recognized on an effective yield basis.
Management estimates the prepayment speed for the receivables sold, the
discount rate used to determine the present value of the interest-only
receivable and the anticipated net losses on the receivables in order to
calculate the gain or loss. The method for calculating the gain or loss
aggregates the receivables in a homogenous pool. Estimates are based on
historical experience, anticipated future portfolio performance, market-based
discount rates 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
interest-only receivables is based on present value estimates of expected
cash flows using management's key assumptions of prepayment speeds, discount
rates and net losses.
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 accrued
interest is reversed. Interest income is subsequently recognized only to the
extent cash payments are received.
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 amount of losses the
Corporation records as part of bad debt provision are net of the amounts
received under these agreements.
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 Equipment on Operating Leases
The Corporation has investments in trucks, tractors and trailers that are
leased to customers under operating lease agreements. The residual values of
the equipment 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 equipment on 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 equipment on operating
leases to repossessions, which is reported on the Statements of Consolidated
Financial Condition as part of Other Assets, with the related adjustments
recorded in allowance for losses.
Derivative Financial Instruments
The Corporation recognizes all derivatives as assets or liabilities in the
Statements of Consolidated 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
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 income.
New Accounting Standards
In March 2004, the Emerging Issues Task Force ("EITF") reached a final
consensus on EITF 03-1, "The Meaning of Other-Than-Temporary Impairment and
Its Application to Certain Investments". In September 2004, the FASB issued
FSP EITF 03-1-1, "Effective Date of Paragraphs 10-20 of EITF 03-1 which
deferred the effective date of paragraphs 10-20 of EITF 03-1. EITF 03-1
paragraph 21 requires specific disclosure for all investments in an
unrealized loss position for which other than temporary impairments have not
been recognized. The Corporation has included this disclosure in Footnote 15
Sales of Receivables.
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
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 immaterial; 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.
2. RESTATEMENT
In December 2004, the Corporation determined to restate its consolidated
financial statements for the years ended October 31, 2003 and 2002 primarily
to correct the Corporation's previous accounting for: (i) the securitization
of its retail notes and finance lease receivables; (ii) deferred taxes
related to retail note and finance lease securitization transactions and
secured borrowings to fund operating and finance leases; and (iii) an
agreement to repurchase equipment.
The restatement recognizes income from the interest-only receivables on an
effective yield basis and incorporates anticipated credit losses into the
Corporation's interest-only receivables. The retained interests are recorded
at fair value where the estimates of future cash flows take into effect
current business and market conditions.
Also as a part of the correction of the securitization accounting, the
Corporation reviewed its tax treatment and deferred tax assets related to
these securitizations as well as for its secured borrowings related to
operating and finance leases. As a result, a decrease to deferred tax liability
of $16.2 was recorded in 2003. Tax liabilities are included in Other
Liabilities.
The Corporation made an additional adjustment to recognize a residual value
guarantee of $11.9 in Other Assets and a corresponding increase in Other
Liabilities for the repurchase of equipment.
As part of the restatement, the Corporation recorded a ($21.9) cumulative
adjustment to beginning Retained Earnings and a $7.9 adjustment to
Accumulated Other Comprehensive Loss as of November 1, 2001 reflecting the
impact of the error for retail note securitizations originating in prior
periods. The effects of the restatements on the consolidated financial
statements for the years ended October 31, 2003 and 2002 are summarized below:
Income Statement 2002 2002
Previously Reported Adjustment Restated
Retail Notes and Finance Leases $ 55.6 $3.4 $59.0
Income Related to Sales of Finance
Receivables 37.3 (1.9) 35.4
Servicing Income 23.0 3.8 26.8
Credit, Collection and Administrative 41.0 (1.5) 39.5
Income Before Taxes 60.8 6.9 67.7
Income Tax Expense 25.9 2.7 28.6
Income from Continuing Operations 34.9 4.2 39.1
Net Income 33.7 4.2 37.9
Comprehensive Income 33.5 8.6 42.1
Balance Sheet 2003 2003
Previously Reported Adjustment Restated
Amounts Due from Sales of Receivables $368.9 $(19.9) $349.0
Other Assets 39.9 12.4 52.3
Total Assets 1,959.8 (7.5) 1,952.3
Net Accounts Payable to Affiliates 4.2 (1.0) 3.2
Other Liabilities 129.5 5.3 134.8
Retained Earnings 204.6 (19.7) 184.9
Accumulated Other Comprehensive Loss (11.4) 7.9 (3.5)
Total Shareowner's Equity 364.2 (11.8) 352.4
Income Statement 2003 2003
Previously Reported Adjustment Restated
Retail Notes and Finance Leases $ 46.5 $5.1 $51.6
Income Related to Sales of
Finance Receivables 76.4 (9.5) 66.9
Servicing Income 25.2 0.2 25.4
Credit, Collection and Administrative 42.7 (1.5) 41.2
Income Before Taxes 101.5 (2.7) 98.8
Income Tax Expense 41.6 (0.7) 40.9
Income from Continuing Operations 59.9 (2.0) 57.9
Net Income 57.5 (2.0) 55.5
Comprehensive Income 49.4 (2.0) 47.4
3. 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 revenues earned on wholesale accounts and retail accounts
are received from International. Aggregate interest revenue collected from
International was $40.1 in 2004, $36.9 in 2003 and $32.2 in 2002. The
interest revenues are reported in Wholesale Notes and Accounts revenues on
the Statement of Consolidated Income.
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 equipment on operating leases and may be required to
repurchase the repossessed collateral at the receivable principal value.
Losses recorded by International on its financial statements were $10.4 in
2004, $24.1 in 2003 and $38.2 in 2002.
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, 2004.
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 2004, $1.9 in 2003 and $2.2 in 2002. The fee
is reported in Credit, Collection and Administrative expenses on the Statement
of Consolidated Income.
Accounts Payable
Accounts payable to affiliates, which the Corporation is obligated to repay
upon request, were $43.5 and $3.2 as of October 31, 2004 and 2003,
respectively.
Assumption of Debt
Navistar assumed the $220.0 of 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
in cash. Navistar's assumption of the Corporation's debt resulted in an
$11.9 increase in paid-in capital for the Corporation.
4. 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 12.
The components of gain (loss) on disposal recorded in the Statements of
Consolidated Income and Retained Earnings are as follows:
2004 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)
5. 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:
2004 2003
Retail notes, net of unearned income $ 712.3 $ 404.5
Finance leases, net of unearned income 102.5 115.4
Wholesale notes 172.9 46.0
Accounts:
Retail 209.3 217.9
Wholesale 78.8 83.4
Total accounts 288.1 301.3
Total finance receivables 1,275.8 867.2
Less: Allowance for losses 6.7 12.9
Total finance receivables, net $1,269.1 $ 854.3
Contractual maturities of finance receivables, including unearned finance
income, as of October 31, 2004, are summarized as follows:
Retail notes Finance leases Wholesale notes Accounts
Due in fiscal year:
2005............... $212.9 $12.2 $91.1 $288.1
2006............... 177.4 22.7 81.8 -
2007............... 144.6 28.1 - -
2008............... 125.6 22.8 - -
2009............... 92.4 26.6 - -
Thereafter........... 36.5 3.5 - -
Gross finance
receivables 789.4 115.9 172.9 288.1
Unearned finance income (77.1) (13.4 - -
Finance receivables,
net of unearned
income $712.3 $102.5 $172.9 $ 288.1
The actual cash collections from finance receivables may vary from the
contractual cash flows because of sales, prepayments, extensions,
delinquencies, credit losses, and renewals. The contractual maturities,
therefore, should not be regarded as a forecast of future collections.
6. ALLOWANCE FOR LOSSES
The allowance for losses is summarized as follows for the fiscal years ended
October 31:
2004 2003 2002
Allowance for losses, beginning of period $ 12.9 $ 16.0 $ 13.3
Provision for credit losses 8.2 15.8 20.5
Net losses charged to allowance (6.6) (4.2) (5.3)
Transfers to finance receivables sold (7.8) (14.7) (12.5)
Allowance for losses, end of period $ 6.7 $ 12.9 $16.0
The average outstanding balance of impaired finance receivables was not
material for the fiscal year ended October 31, 2004. Interest income that
would have been recognized on impaired finance receivables during the fiscal
years 2004, 2003, and 2002 were not material.
Balances with payments past due over 90 days on owned finance receivables
totaled $5.5 as of October 31, 2004.
7. REPOSSESSIONS
The Corporation has repossessions related to defaulted owned receivables and
leases that are reported on the Statements of Consolidated Financial
Condition as part of Other Assets. It liquidates those repossessions to
recover the credit losses on its portfolio. In addition, the Corporation, as
servicer of receivables sold into securitization vehicles, liquidates
repossessions related to defaulted sold receivables and leases on behalf of
the owner trusts. The Corporation advances the value of these repossessions
to the trusts and reports them on the Statements of Consolidated Financial
Condition as part of Amounts Due from Sales of Receivables.
The Corporation's repossessions are summarized as follows for the fiscal year
ended October 31:
2004 2003
Acquisitions
Owned ....... $ 20.9 $43.0
Sold ....... 20.8 39.4
Total............ $ 41.7 $82.4
Repossessions, end of period
Owned....... $ 8.2 $9.8
Sold........ 6.1 11.3
Total........... $ 14.3 $21.1
8. INVESTMENT IN EQUIPMENT ON OPERATING LEASES
Investments in equipment on operating leases at year-end were as follows:
2004 2003
Vehicles and other equipment, at cost..... $268.3 $311.8
Less: Accumulated depreciation............ (119.4) (120.7)
Net investment in equipment
on operating leases.............. $148.9 $191.1
Future minimum rentals on operating leases are as follows: 2005, $41.1; 2006,
$28.1; 2007, $15.9; 2008, $10.0; 2009, $6.1 and $3.2 thereafter.
9. INCOME TAXES
Taxes on income from continuing operations for the years ended October 31 are
summarized as follows:
2004 2003 2002
Current:
Federal ........................ $ 27.8 $ 20.0 $ 27.2
State and local................. 6.2 3.6 4.1
Total current............. 33.4 23.6 31.3
Deferred (primarily federal).......... 7.8 15.8 (3.4)
Less: Amount from discontinued operations - (1.5) (0.7)
Total income tax expense from
continuing operations.......... $ 41.2 $ 40.9 $ 28.6
A reconciliation of the statutory federal income tax rate from continuing
operations is as follows:
2004 2003 2002
Statutory federal income tax rate 35.0% 35.0% 35.0%
State income taxes net of federal
income taxes $ 3.9 $ 3.3 $ 3.8
Original issue discount 1.2 2.1 1.6
Sale of subsidiaries - - 1.7
Other 0.1 1.0 0.1
Effective income tax rate 40.2% 41.4% 42.2%
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 2004, 2003 and 2002 were $39.6, $20.8, and $21.7,
respectively.
Recent tax law changes were enacted under the American Jobs Creation Act of
2004 which create a temporary incentive for U.S. corporations to repatriate
accumulated income earned abroad by providing an 85 percent dividends
received deduction for certain dividends from controlled foreign
corporations. The deduction is subject to a number of limitations as well as
uncertainty as to how to interpret numerous provisions in the Act. NFC has
negligible overseas investments and therefore does not intend to implement a
one-time repatriation of foreign earnings.
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:
2004 2003
Deferred tax assets:
Pension and other postretirement benefits $ 8.3 $ 7.7
Bad debts 2.5 6.4
Other 4.4 6.2
Total deferred tax assets $ 15.2 $20.3
Deferred tax liabilities:
Lease transactions $(12.8) $(12.3)
Securitization of receivables (26.9) (25.0)
Market valuation adjustments (2.8) (3.1)
Other (0.8) (1.3)
Total deferred tax liabilities $(43.3) $(41.7)
Net deferred tax liabilities $(28.1) $(21.4)
10. SENIOR AND SUBORDINATED DEBT
Senior and subordinated debt outstanding as of October 31 is summarized as
follows:
2004 2003
Bank revolving credit facility, at variable rates,
due December 2005.............................. $ 672.0 $ 571.0
Revolving retail warehouse facility, at variable
rates, due October 2005........................ 500.0 500.0
Borrowings secured by operating and finance
leases, 3.37% to 6.65%, due serially through
April 2010..................................... 153.2 212.5
Convertible debt, 4.75%, due April 2009 - 178.4
Total senior and subordinated debt............. $1,325.2 $1,461.9
The Corporation has 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.
The failure of the Corporation and its affiliates to complete their
respective Annual Reports on Form 10-K and deliver those reports and related
required information to their respective lenders by January 29, 2005, has
resulted in one or more defaults under the revolving credit agreement. On
January 31, 2005, the Corporation received a waiver of the existing defaults
under the credit agreement. The waiver permits the Corporation to incur
additional borrowings under the agreement through February 28, 2005.
In the event that the Corporation has not cured any defaults by February 28,
2005, it will again no longer be able to incur additional indebtedness under
the credit agreement unless it shall have obtained a subsequent waiver. In
the event that the Corporation does not cure any defaults by March 1, 2005
(unless it shall have obtained an additional waiver), an event of default
shall have occurred under the credit agreement and the administrative agent
or the lenders will have the ability to terminate the credit facility and
demand immediate payment of all amounts outstanding under the credit
agreement. Such a demand for payment would result in defaults under numerous
other credit facilities and other agreements of the Corporation and its
affiliates. The Corporation believes that the defaults will be cured prior
to the expiration of the waiver through the delivery of the Annual Reports on
Form 10-K and the related information.
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. This
facility is used primarily during the period prior to a securitization of
retail notes and finance leases.
The Corporation enters into secured borrowing agreements involving vehicles
subject to operating and finance 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.
International Truck Leasing Corporation ("ITLC"), a special purpose,
wholly-owned subsidiary of the Corporation, was established in June 2004 to
provide the Corporation with another vehicle to obtain borrowings secured by
leases. ITLC's assets are available to satisfy its creditors' claims prior
to such assets becoming available for ITLC's use or to the Corporation or
affiliated companies.
Navistar assumed the $220.0 of 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
in cash. Navistar's assumption of the Corporation's debt resulted in an
$11.9 increase in paid-in capital for the Corporation.
The weighted average interest rate on total debt, including short-term debt
and the effect of discounts and related amortization, was 3.1% in 2004, 3.6%
in 2003 and 4.0% in 2002.
The aggregate annual contractual maturities and required payments of senior
and subordinated debt are as follows:
Fiscal year ended October 31
2005....................$ 570.5
2006.................... 715.9
2007.................... 23.2
2008.................... 10.6
2009.................... 4.5
Thereafter.............. 0.5
Total..............$1,325.2
11. 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. The Corporation utilizes an October 31 measurement date for all
of its defined benefit plans.
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, 2004, all legal funding
requirements had been met. The Corporation does not expect to make
contributions to its pension plans in 2005.
Postretirement Expense
Net periodic benefit cost included in the Statements of Consolidated Income
is composed of the following:
Pension Benefits Other Benefits
2004 2003 2002 2004 2003 2002
Service costs for benefits
earned during the period $0.5 $0.5 $0.7 $0.3 $0.3 $0.5
Interest cost on obligation 3.8 3.9 3.9 1.4 1.6 1.5
Amortization of cumulative losses 1.1 0.6 0.2 0.3 0.7 0.3
Amortization of prior
service costs 0.1 0.1 0.1 - - -
Other - (0.5) 0.6 - (0.1) -
Less expected return on assets (4.8) (4.4) (5.2) (0.6) (0.5) (0.7)
Net postretirement
(income) expense $0.7 $ 0.2 $ 0.3 $1.4 $ 2.0 $1.6
Cumulative gains and losses and Plan amendments are amortized over the
expected remaining service life of employees.
Defined contribution plans cover a substantial portion of the Corporation's
employees. Under the defined contribution plans, Navistar makes annual
contributions to each participant's retirement account based on an
age-weighted percentage of the participant's eligible compensation for the
calendar year. The plans also contain a 401(k) feature and provide for a
company match; currently 50% of the first 6% of pretax salary contributions
are made on behalf of the participant.
Defined contribution expense pursuant to these plans was $0.5, $0.4 and $0.4
in 2004, 2003, and 2002, respectively, which approximates the amount funded
by Navistar.
The funded status of the Corporation's plans as of October 31, 2004 and 2003
and reconciliation with amounts recognized in the Statements of Consolidated
Financial Condition are as follows:
Pension Benefits Other Benefits
2004 2003 2004 2003
Change in benefit obligation
Benefit obligation at beginning
of year $ 67.5 $ 56.3 $24.7 $24.0
Service Cost 0.5 0.5 0.3 0.3
Interest on obligation 3.8 3.9 1.4 1.6
Actuarial net loss (gain) 1.5 10.5 (0.4) 0.3
Plan participants' contributions - - 0.2 0.2
Benefits paid (3.8) (3.7) (1.6) (1.7)
Benefit obligation at end of year $ 69.5 $ 67.5 $24.6 $24.7
Pension Benefits Other Benefits
2004 2003 2004 2003
Change in plan assets
Fair value of plan assets at
beginning of year $ 54.5 $ 49.9 $ 6.4 $ 6.1
Actual return on plan assets 4.2 7.9 0.2 0.7
Employer contribution - - 0.3 0.1
Benefits paid (3.4) (3.3) (0.5) (0.5)
Fair value of plan assets at
end of year $ 55.3 $ 54.5 $ 6.4 $ 6.4
Funded status................ $(14.2) $(13.0) $(18.2) $(18.3)
Unrecognized actuarial net
(gain) loss........... 17.9 17.0 8.8 9.2
Unrecognized prior service cost 0.2 0.2 - -
Net amount recognized........ $ 3.9 $ 4.2 $ (9.4) $ (9.1)
Pension Benefits Other Benefits
2004 2003 2004 2003
Amounts recognized in the
Statements of Consolidated
Financial Condition
consists of:
Accrued benefit liability....... $(11.5) $ (10.4) $ (9.4) $ (9.1)
Intangible asset 0.2 0.2 - -
Accumulated reduction in
shareowner's equity.......... 15.2 14.4 - -
Net amount recognized..... $ 3.9 $ 4.2 $ (9.4) $ (9.1)
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 $69.5, $66.8, and $55.3,
respectively, as of October 31, 2004, and $67.5, $64.9, and $54.5,
respectively, as of October 31, 2003.
The weighted average rate assumptions used in determining benefit obligations
were:
Pension Benefits Other Benefits
2004 2003 2004 2003
Discount rate used to determine
present value of benefit
obligation at year-end.......... 5.6% 5.8% 6.0% 6.6%
Expected rate of increase in
future compensation levels........ 3.5% 3.5% N/A N/A
The weighted average rate assumptions used in determining net benefit cost
were:
Pension Benefits Other Benefits
2004 2003 2002 2004 2003 2002
Discount rate............... 5.8% 7.2% 7.4% 6.5 % 7.1% 7.4%
Expected long-term rate of
return on plan assets at
beginning of year....... 9.0% 9.0% 9.8% 9.0% 9.0% 11.0%
Expected rate of increase
in future compensation
levels................ 3.5% 3.5% 3.5% N/A N/A N/A
The Corporation determines its expected return on plan asset assumption by
evaluating both historical returns as well as estimates of future returns.
The Corporation considers its current asset mix as well as its targeted asset
mix when establishing its expected return on plan assets.
The following table sets forth the weighted average percentage of plan assets
by category as of October 31:
Pension Benefits Other Benefits
Asset Category Target Range 2004 2003 Target Range 2004 2003
Equity securities
Navistar common stock... - - 9% 10%
Other equity securities. 48% 47% 67% 67%
Hedge Funds............. - - 9% 8%
Total equity securities 45-55% 48% 47% 75-85% 85% 85%
Debt securities........... 52% 51% 14% 13%
Other, including cash..... - 2% 1% 2%
Total debt securities.....
and other........ 45-55% 52% 53% 15-25% 15% 15%
The Corporation's investment strategy is consistent with its policy to
maximize returns while considering overall investment risk and the funded
status of the plans relative to its benefit obligations. The Corporation's
investment strategy takes into account the long-term nature of the benefit
obligations, the liquidity needs of the plans, and the expected risk/return
tradeoffs of the asset classes in which the plans may choose to invest.
Asset allocations are established through an investment policy, which is
updated periodically and reviewed by a fiduciary committee and the board of
directors. The Corporation believes that returns on common stock over the
long term will be higher than returns from fixed-income securities as the
historical broad market indices have shown. Equity and fixed-income
investments are made across a broad range of industries and companies to
provide protection against the impact of volatility in any single industry or
company. Under our policy, hedge funds are limited to no more than 15% of
total assets. The long-term performance of our funds generally has
outperformed our long-term return assumptions.
For 2005, the weighted average rate of increase in the per capita cost of
covered health care benefits is projected to be 9.8%. 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............... $ 0.2 $ (0.2)
Effect on postretirement benefit
obligation............................. 2.8 (2.4)
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 healthcare plans that provide
prescription drug benefits that are at least actuarially equivalent to
Medicare Part D. This subsidy covers a defined portion of an individual
beneficiary's annual covered prescription drug costs, and is exempt from
federal taxation.
In May 2004, the FASB issued FSP 106-2, which provides guidance on the
accounting for the effects of the Act. The corporation adopted the
provisions of FSP 106-2 in the third quarter of 2004, retroactive to December
8, 2003. The retroactive application of the Medicare subsidy reduced the
corporation's 2004 postretirement benefits expense by $0.4 million. The
Corporation reduced accumulated postretirement benefit obligation ("APBO") by
$3.7 million at October 31, 2004 and $2.9 million at December 8, 2003 for the
subsidy related to benefits attributed to past service. The Corporation used
a 6.5% discount rate to value the related APBO at December 8, 2003, which was
0.1 percentage point lower than the discount rate used at October 31, 2003,
and caused a $0.2 million increase in the APBO as of that date.
The following estimated benefit payments are payable from the plans to
participants:
Estimated Benefit Payments
Pension Postretirement
Millions of Dollars Benefits Benefits
Year
2005................... $ 4.5 $1.7
2006................... 4.6 1.6
2007................... 4.7 1.6
2008................... 4.8 1.7
2009................... 4.9 1.7
2010 through 2014...... 24.5 9.1
12. 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, 2004, future minimum lease commitments under
non-cancelable operating leases with remaining terms in excess of one year
are as follows:
Year Ended October 31,
2005 $2.0
2006 1.8
2007 1.1
2008 1.0
2009 0.9
Thereafter 4.8
Total $11.6
The total operating lease expense for the fiscal year ended October 31 was
$1.9 in 2004, $2.3 in 2003 and $2.2 in 2002.
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, 2004, the Corporation has numerous 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. As of
October 31, 2004, the Corporation's maximum exposure under these guarantees
is $134.4, the total amount outstanding at that date.
The following table summarizes the borrowings as of October 31, 2004:
Type of Funding Maturity Amount of Outstanding
Guaranty Balance
Revolving credit facility(2) December 2005 $100.0 $ 25.0
Medium term note(1) November 2004 43.3 43.3
Revolving credit facility(1) October 2007 17.3 17.3
Revolving credit facility(1),(3) Indefinite 20.8 19.7
Revolving credit facility(1),(3) Indefinite 17.3 11.9
Revolving credit facility(1) June 2005 6.5 6.5
Revolving credit facility(1),(4) June 2005 4.3 2.0
Revolving credit facility(1) March 2005 8.7 8.7
Total $218.2 $134.4
(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 October 31, 2004, 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, 2004:
Outstanding Fair
Instrument Maturity Notional Value
Interest rate swaps and
cross currency swaps* May 2007 $ 54.4 $ -
* Peso-denominated
The Corporation used the foreign currency conversion rate of 11.5 : 1 to
convert peso-denominated guarantees to United States dollars.
On July 30, 2004, the Corporation, through Navistar Financial Retail
Receivables Corporation ("NFRRC"), sold retail note receivables to a
conduit. In order to match fund the fixed rate receivables with the variable
rate debt of the conduit, the conduit entered into an interest rate swap
agreement on the anticipated cash flows from the receivables. NFC, as
servicer, has indemnified the conduit for the impact any variance in those cash
flows has on the swap settlement. The Corporation is accounting for this
guarantee as a derivative instrument and as of October 31, 2004, has not
recorded any liability related to this indemnification.
Other
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 $0.6 as of October 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.
13. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 2004 and
2003 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, 2001 $ 1.9 $ (1.5) $ 0.4
Change in 2002 4.7 (0.5) 4.2
----- ------ ------
Balance as of October 31, 2002 6.6 (2.0) 4.6
Change in 2003 (1.2) (6.9) (8.1)
----- ------ ------
Balance as of October 31, 2003 5.4 (8.9) (3.5)
Change in 2004 (1.3) (0.5) (1.8)
----- ------ ------
Balance as of October 31, 2004 $ 4.1 $ (9.4) $ (5.3)
===== ====== ======
14. 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, 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 October 31, 2004, 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 $ (0.8)
October 2000 November 2012 Interest rate cap 500.0 0.8
July 2001 April 2006 Interest rate swap 20.5 (0.5)
November 2002 March 2007 Interest rate swap* 19.7 -
October 2003 April 2008 Interest rate swap* - 0.2
July 2004 September 2008 Interest rate swap* - -
August 2004 July 2006 Forward starting swaps* 100.0 (0.5)
September 2004 July 2006 Forward starting swaps* 50.0 -
September 2004 July 2006 Forward starting swaps* 50.0 -
October 2004 July 2006 Forward starting swaps* 200.0 -
* 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 (TRIP) 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 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 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 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.
In August through October 2004, the Corporation, in connection with
anticipated sale of retail notes receivables, entered into forward starting
swap agreements with a total notional value of $400.0. The purpose of these
derivative instruments is to swap floating rate debt to a fixed rate to
protect against sharp moves in interest rates between the date of the swap
and the anticipated receivable sale date. These derivatives are accounted
for as a non-hedging derivative instrument with changes in fair value
recognized in income. These derivatives were closed on November 3, 2004.
On July 30, 2004, the Corporation, through Navistar Financial Retail
Receivables Corporation ("NFRRC"), sold retail note receivables to a
conduit. In order to match fund the fixed rate receivables with the variable
rate debt of the conduit, the QSPE entered into an interest rate swap
agreement on the anticipated cash flows from the receivables. NFC, as
servicer, has indemnified the QSPE for the impact any variance in those cash
flows has on the swap settlement. The Corporation is accounting for this
guarantee as a derivative instrument and as of October 31, 2004 has not
recorded any liability related to this indemnification.
In fiscal 2004, forward starting swap losses were $3.8, compared with $8.7 in
2003 and $9.1 in 2002. The losses are recorded in Income Related to Sales of
Finance Receivables.
15. SALES OF RECEIVABLES
The Corporation securitizes and sells receivables through 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 2004, the Corporation sold $195.0 of finance receivables during the
quarter ended January 2004, $600.0 during the quarter ended April 2004, and
$325.0 during the quarter ended July 2004 to trusts and conduits which, in
turn, issued asset-backed securities that were sold to investors. The
Corporation sold the retail notes and finance leases receivables, net of
unearned finance income, through NFRRC. Pre-tax gains of $25.9 were
recognized on the sales. In fiscal 2003, the Corporation sold $1,705.0 of
finance receivables to trusts which, in turn, issued asset-backed
securities. Aggregate gains of $46.3 were recognized on the sales. In
fiscal 2002, the Corporation sold $1,000.0 of finance receivables to trusts
which, in turn, issued asset-backed securities. Aggregate gains of $16.4
were recognized on the sales.
As of October 31, 2004, NFSC has in place a revolving wholesale note trust
that provides for the funding of up to $1,186.3 of eligible wholesale notes.
The trust is comprised of a $200.0 tranche of investor certificates maturing
in 2008, three $212.0 tranches of investor certificates maturing in 2005,
2006, and 2007, variable funding certificates with a maximum capacity of
$200.0 maturing in February 2005 and a seller certificate of $150.3. As of
October 31, 2004, the Corporation had utilized $1,132.3 of the revolving
wholesale note trust.
During the second quarter of 2004, TRAC 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 October 31, 2004, this facility was fully utilized.
As of October 31, 2004, 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, 2004. TERFCO is a separate corporate entity, and its assets
will be available first and foremost to satisfy the claims of the creditors
of TERFCO.
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, 2004 was $383.4.
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:
2004 2003
Cash held and invested by trusts $ 127.8 $ 134.6
Subordinated retained interests in wholesale notes 155.5 147.6
Interest-only receivables 89.1 68.5
Other amounts due 11.0 (1.7)
Total amounts due from sales of receivables $ 383.4 $ 349.0
Subordinated retained interests in wholesale notes consist principally of
wholesale notes or marketable securities. Due to the short-term nature of
these assets, their fair value approximates carrying value.
EITF 03-1 paragraph 21 requires specific disclosure for all investments in an
unrealized loss position for which other than temporary impairments have not
been recognized. The Corporation's only temporary impairment relates to
interest-only receivables. The interest-only receivable fair value and
unrealized loss is disclosed below:
Less than 12 Months
Fair Value Unrealized Losses
Interest-only receivables $ 16.1 $ 1.7
The corporation has the intent and ability to hold these investments until
maturity or market price recovery.
Management estimates the prepayment speed for the receivables sold, expected
net credit losses 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, anticipated future portfolio performance
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 utilizing updated estimates of these
factors.
The impact of a hypothetical 10% adverse change in these assumptions would
have no material effect on the fair value of the retained interests as of
October 31, 2004. 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 retained interests is calculated without changing any other
assumption. In reality, changes in one factor may result in changes in
another.
Key economic assumptions used in measuring the retained interests at the date
of the sale for sales of retail notes and finance leases completed during the
fiscal year ended October 31 were:
2004 2003 2002
Prepayment speed (average monthly ABS) 1.2 - 1.4 1.2 - 1.4 1.2 - 1.4
Weighted average life 43 months 43 months 41 months
Expected net credit losses 0.55% 0.76% 0.68%
Interest-only receivable discount rate 15.2%-15.3% 15.5%-18.1% 16.9%-18.2%
Reserve account discount rate 3.2%-4.1% 3.1%-4.4% 5.1%-5.6%
Static pool losses are calculated by summing the actual and projected future
net credit losses and dividing them by the original balance of the notes and
leases in each pool of assets. The amount shown below for each year is
calculated based on all securitizations occurring in that year.
2004 2003 2002
Actual and Projected Net Credit Losses (%) as of:
October 31, 2004 0.55% 0.43% 0.21%
October 31, 2003 0.76 0.68
October 31, 2002 0.68
The financial data for gross serviced portfolio as of October 31 is
summarized below.
Retail &
2004 Finance Lease Wholesale Accounts Total
Serviced portfolio $2,757.7 $1,305.2 $ 488.1 $4,551.0
Less sold receivables 1,942.9 1,132.3 200.0 3,275.2
Owned portfolio $ 814.8 $ 172.9 $ 288.1 $1,275.8
Retail &
2003 Finance Lease Wholesale Accounts Total
Serviced portfolio $2,506.5 $ 860.7 $ 401.3 $3,768.5
Less sold receivables 1,986.6 814.7 100.0 2,901.3
Owned portfolio $ 519.9 $ 46.0 $ 301.3 $ 867.2
Additional financial data for gross serviced portfolio as of October 31, 2004
is summarized below.
Retail Finance and Wholesale
Notes Operating Leases Notes Accounts
Gross serviced receivables $2,867.8 $ 428.3 $1,305.6 $488.9
Balances with payments
past due over 60 days (1) 8.8 1.2 1.1 6.7
Credit losses (net of recoveries) 10.1 0.4 0.8 1.1
(1) Includes rent past due over 60 days for Operating Leases
Certain cash flows received from (paid to) securitization trusts/conduits
were as follows for fiscal years:
2004 2003 2002
Proceeds from sales of finance receivables $1,118.6 $1,701.1 $ 999.0
Proceeds from sales of finance receivables into
revolving facilities 6,371.8 4,938.1 4,883.0
Servicing fees received 30.3 27.5 26.9
Repurchase of receivables in breach of terms (1) (28.0) (69.0) (128.9)
2004 2003 2002
Cash used in exercise of call options (86.9) (139.5) (85.4)
Servicing advances, net of reimbursements,
related to repossessions 5.2 6.8 27.7
Cash received upon release from reserve accounts 90.9 83.4 125.1
All other cash received from trusts 89.5 103.9 94.1
(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:
2004 2003 2002
Gains on sales of receivables $25.9 $46.3 $16.4
Discount accretion 28.4 28.1 23.9
Fair value adjustment (0.4) (2.1) (1.0)
Derivative gains (losses) (3.8) (8.7) (9.1)
Interest income and other 3.4 3.3 5.2
Total income related to
sales of finance receivables $53.5 $66.9 $35.4
16. 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:
2004 2003
Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Finance receivables
Retail notes and finance leases $814.8 $784.7 $519.9 $538.6
Wholesale notes 173.3 173.3 46.0 46.0
Restricted Marketable securities 63.0 63.0 505.6 505.6
2004 2003
Carrying Fair Carrying Fair
Value Value Value Value
Financial liabilities:
Senior and subordinated debt 1,325.2 1,312.7 1,461.9 1,462.9
Derivative financial instruments 0.2 0.2 (1.3) (1.3)
The carrying amount of cash and cash equivalents approximates fair value.
The fair value of retail notes and finance leases 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, which reprice monthly, the carrying amounts approximate
fair value as a result of the short-term nature of the receivables.
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.
17. 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.
On February 9, 2005, the Corporation received a notice from the staff of the
United States Securities and Exchange Commission stating that it was
conducting an informal inquiry into the Corporation's restatement of
financial results for the fiscal years 2002 and 2003 and the first three
quarters of fiscal 2004 ("restatement period"). The staff has requested that
the Corporation voluntarily produce documents and information related to the
restatement period. The Corporation is fully cooperating with this request.
Given the preliminary nature of the matter, the Corporation is not able to
predict what impact, if any, this inquiry will have on the Corporation.
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Navistar Financial Corporation and Subsidiaries
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Report of Independent Registered Public Accounting Firm
- -------------------------------------------------------------------------------
Navistar Financial Corporation,
Its Directors and Shareowners:
We have audited the Statement of Financial Condition of Navistar Financial
Corporation and its subsidiaries (the "Corporation") as of October 31, 2004
and 2003, and the related Statements of Income, Comprehensive Income and Cash
Flow for each of the three years in the period ended October 31, 2004. These
consolidated financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement. An audit includes consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. 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 at October 31, 2004 and 2003, and the results of their
operations and their cash flow for each of the three years in the period
ended October 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, the
accompanying 2003 and 2002 financial statements have been restated.
/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
February 14, 2005
Chicago, Illinois
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SUPPLEMENTARY FINANCIAL DATA
MILLIONS OF DOLLARS
QUARTERLY FINANCIAL INFORMATION (unaudited)
Previously Reported 2004
1ST 2ND 3RD
Quarter Quarter Quarter
Results
Revenues $47.5 $69.5 $56.8
Interest expense 11.7 11.4 8.8
Provision for credit losses 1.1 3.3 2.1
Net income 7.9 20.1 15.0
Restated 2004
1ST 2ND 3RD
Quarter Quarter Quarter
Results
Revenues $51.8 $71.0 $53.3
Interest expense 11.7 11.4 8.8
Provision for credit losses 1.1 3.3 2.1
Net income 9.1 20.6 12.4
2004
4TH Fiscal
Quarter Year
Results
Revenues $63.0 $239.1
Interest expense 9.0 40.9
Provision for credit losses 1.7 8.2
Net income 19.0 61.1
Previously Reported 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
Restated 2003
1ST 2ND 3RD 4TH Fiscal
Quarter Quarter Quarter Quarter Year
Results of continuing operations
Revenues $76.9 $52.5 $69.2 $63.9 $262.5
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 19.1 6.4 16.5 15.9 57.9
Gain (loss) on disposal of
discontinued operations - - - (2.4) (2.4)
Net income 19.1 6.4 16.5 13.5 55.5
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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, reviewed and tested
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, 2004. Based on that evaluation, the
principal executive officer and principal financial officer of the
Corporation concluded that, as of October 31, 2004, there were material
weaknesses in the Corporation's disclosure controls and procedures related to
(1) a misapplication of GAAP related to securitization accounting and an
associated lack of timely resolution of outstanding reconciling items in
certain collection accounts; and (2) the lack of sufficient specialized
securitization accounting personnel. The material weakness related to the
misapplication of GAAP and resolution of outstanding reconciling items have
been corrected in these statements.
Management had previously interpreted and applied Statement of Financial
Accounting Standards No. 140, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, a replacement of FASB
Statement 125" and Emerging Issues Task Force ("EITF") No. 99-20,
"Recognition of Interest Income and Impairment on Purchased and Retained
Beneficial Interests in Securitized Financial Assets, " in error related to
the Corporation's securitization of retail note and finance lease
receivables. The Corporation also corrected its tax treatment and deferred
tax assets related to these securitizations as well as for its secured
borrowings related to operating and finance leases. As a result, the
Corporation is restating its financial statements for the two fiscal years
ended October 31, 2003 and 2002. The Corporation will restate its interim
periods for 2004 in its 2005 quarterly reports.
The principal executive officer and principal financial officer of the
Corporation concluded, based on the weaknesses noted above, as of October 31,
2004, the disclosure controls and procedures in place at the Corporation were
not effective. Management has strengthened its controls and procedures over
the application of accounting standards and is in the process of adding
specialized securitization accounting personnel. Therefore management
believes that the circumstances resulting in the misapplication of GAAP will
not reoccur.
Changes in Internal Control over Financial Reporting
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) and in response to the material weaknesses identified, the
Corporation has increased executive management education in securitization
accounting, made improvements to its securitization accounting reconciliation
process and added additional levels of review in its financial reporting
processes. The Corporation intends to supplement its current accounting
resources with personnel knowledgeable in securitization accounting.
Item 9B. Other Information
None.
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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
Aggregate fees billed to the Corporation for the fiscal years ended October
31, 2004 and 2003 by the Corporation's principal accounting firm, Deloitte &
Touche LLP.
Amounts in thousands 2004 2003
Audit Fees
Basic Audit Fees (a) $ 918.6 $ 138.6
Audit Related Fees(b) 192.5 199.0
Total Audit Fees $1,111.1 $ 337.6
Tax Fees $ - $ -
All Other Fees $ - $ -
(a)Includes fees for the restatement of the Corporation's financial
statements for fiscal years 2003 and 2002.
(b)Includes fees for (i) examination reports on the
Corporation's minimum servicing standards for its securitization
transactions, (ii) Sarbanes Oxley Section 404 readiness, and
(iii) data verification and agreed-upon procedures related to
asset securitizations.
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
principal accountant are incorporated herein by reference from Navistar's
definitive Proxy Statement for the March 23, 2005, Annual Meeting of
Shareowners under the caption "Audit Committee Report - Independent Auditor
Fees".
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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-12
21 Subsidiaries of the Registrant..............E-15
24 Power of Attorney...........................E-16
31.1 CEO Certification Pursuant to
Rule 13a-14(a) and 15d-14(a)................E-17
31.2 CFO Certification Pursuant to
Rule 13a-14(a) and 15d-14(a)................E-19
32 CEO and CFO Certifications Pursuant to
Section 1350 of Chapter 63
of Title 18 of the Unites States Code.......E-21
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, 2004.
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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 February 14, 2005
Paul Martin
Vice President and Controller
(Principal Accounting Officer)