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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, 1994
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 708-734-4275
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
As of December 31, 1994, the number of shares outstanding of the registrant's
common stock was 1,600,000.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL
TRANSPORTATION CORP. AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1) (a) AND (b) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
FORM 10-K
Year Ended October 31, 1994
INDEX
10-K Page
PART I
Item 1. Business (A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties (A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Item 4. Submission of Matters to a Vote of
Security Holders (A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 6. Selected Financial Data (A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (A) . . . . . . . . . . . . . . . . . . . . . . 3
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . 8
Independent Auditors' Report. . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 38
PART III
Item 10. Directors and Executive Officers of the
Registrant (A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 11. Executive Compensation (A) . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Item 13. Certain Relationships and Related
Transactions (A). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
SIGNATURES - Principal Accounting Officer . . . . . . . . . . . . . . . . . . . . . . . . 39
- Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
POWER OF ATTORNEY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
(A)- Omitted or amended as the registrant is a wholly-owned subsidiary of
Navistar International Transportation Corp. and meets the conditions
set forth in General Instructions J(1) (a) and (b) of Form 10-K and
is, therefore, filing this Form with reduced disclosure format.
i
PART I
Item 1. Business
The registrant, Navistar Financial Corporation ("NFC") was incorporated
in Delaware in 1949 and is a wholly-owned subsidiary of Navistar International
Transportation Corp. ("Transportation"), which is wholly-owned by 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 provides wholesale, retail, and to a lesser extent, lease
financing in the United States for sales of new and used trucks sold by Trans-
portation and Transportation's dealers. The Corporation also finances
wholesale accounts and selected retail accounts receivable of Transportation.
To a minor extent, sales of new products (including trailers) of other
manufacturers are also financed regardless of whether designed or customarily
sold for use with Transportation truck products. Harco National Insurance
Company, NFC's wholly-owned insurance subsidiary, provides commercial physical
damage and liability insurance coverage to Transportation's dealers and retail
customers, and to the general public through the independent insurance agency
system.
Item 2. Properties
The Corporation uses leased facilities to carry out most of the
administrative and finance sales activities.
Item 3. Legal Proceedings
During 1992, auditors of the Illinois Department of Revenue ("Department")
began an income tax audit of NFC for the fiscal years ended October 31, 1989,
1990 and 1991. On February 1, 1994 the Department issued a Notice of
Deficiency to NFC for approximately $11.9 million. The Department has taken
the position that nearly 100% of NFC's income during these years should be
attributed to and taxed by Illinois. NFC maintains that the Department's
interpretation and application of the law is incorrect and improper, and that
the Department's intended result is constitutionally prohibited. NFC's
outside counsel is of the opinion that it is more likely than not that NFC's
position will prevail such that the Department's action will not have a
material impact on NFC's earnings and financial position.
In May 1993, a jury issued a verdict in favor of Vernon Klein Truck &
Equipment, Inc. and against Transportation and the Corporation in the amount
of $10.8 million in compensatory damages and $15 million in punitive damages.
Transportation appealed the verdict and, in November 1994, the Court of
Appeals of the State of Oklahoma reversed the verdict and entered judgment in
favor of Transportation on virtually all aspects of the case.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See the index page of this Report for
explanation.
PART II
Page
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Item 6. Selected Financial Data
Intentionally omitted. See the index page to this Report
for explanation.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
As a result of the continued improvement in the economy during fiscal
1994, industry retail sales of Class 5 through 8 trucks surpassed 1993 by 18%.
The Corporation's financing of customers' purchases of new International
trucks during fiscal 1994 increased 18% compared to the prior year. During
1994, rising interest rates resulted in increased costs to fund retail note
acquisitions. Competition, coupled with liquidity in the commercial financing
markets, limited the Corporation's ability to increase customer finance rates
commensurate with the increase in funding costs, and as a result margins on
retail financing were lower in fiscal 1994. The strong truck industry and
economy continued to improve the financial strength of the International
dealers and customers and NFC's portfolio quality remained high during 1994.
The components of net income for the three years ended October 31 are as
follows:
1994 1993 1992
($ Millions)
Income before income taxes:
Finance operations . . . . . . . . . . . . . . . . . . . . . . . . $49.9 $51.6 $36.6
Insurance operations . . . . . . . . . . . . . . . . . . . . . . . 5.3 1.1 9.8
Supplemental Trust contribution. . . . . . . . . . . . . . . . . . - (3.7) -
Income before taxes and cumulative effect. . . . . . . . . . . . 55.2 49.0 46.4
Taxes on income. . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 17.7 16.9
Cumulative effect of changes in
accounting policy. . . . . . . . . . . . . . . . . . . . . . . - 8.8 -
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $34.0 $22.5 $29.5
Income before taxes in 1994 was $55 million, a 12% increase from $49
million in 1993, which included a $3.7 million pretax charge for the
Corporation's portion of the Supplemental Trust contribution. Finance
operations' income in 1994 was $1.7 million lower than 1993 as a result of
lower margins on retail financing as rising interest costs could not be offset
fully by increased retail note pricing. The decline in retail note income was
offset in part by an increased volume of wholesale financing to support the
increased demand for trucks. The Corporation's insurance subsidiary's income
increased $4.2 million over 1993 as a result of improved underwriting results
on truck liability insurance. The increase in income before income taxes
between 1993 and 1992 was primarily the result of higher gains on sales of
retail notes, partially offset by higher loss experience in the insurance
subsidiary and the Supplemental Trust contribution. The more significant
elements of revenue and expense impacting net income for these years are
discussed in the following paragraphs.
Total revenue for 1994 was $210 million compared with $232 million and
$228 million in 1993 and 1992, respectively. Retail note and lease financing
revenue decreased to $69 million in 1994 from $102 million in 1993 as a higher
proportion of retail notes were financed through the sale of the receivables.
When receivables are sold only the net gains on the sales, rather than the
individual components of revenue and expense, are reported in the Statement
of Consolidated Income. During 1994, the Corporation gained access to the
strong, reliable and economically attractive asset backed securitized market
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
and significantly increased the sales of retail notes. Retail note and lease
financing revenue was unchanged between 1993 and 1992.
Wholesale note revenue increased 22% in 1994 to $39 million and increased
13% in 1993 primarily as a result of higher average note balances in support
of increased demand for Transportation truck products. In addition, revenue
in 1994 increased from higher average yields relating to a higher prime
interest rate. In December 1990, the Corporation sold $300 million of
wholesale notes to a revolving sales trust. This revolving wholesale
arrangement provides for the continuous sale of notes by the Corporation on
a daily basis. Gains on wholesale notes sold to the trust are not material
as a result of their short maturities.
Revenue from accounts increased in 1994 to $22 million from $18 million
and $15 million in 1993 and 1992, respectively. The increase in 1994 and 1993
resulted from higher average balances in support of increased demand for
Transportation truck products. In addition, revenue in 1994 increased from
higher average yields relating to a higher prime interest rate.
Servicing fee income increased to $17 million in 1994 from $11 million
in 1993 and $9 million in 1992 as a result of higher levels of sold note
receivable balances.
Insurance premiums earned by Harco decreased 11% to $51 million in 1994
from $57 million in 1993 and 5% in 1993 from 1992. The decrease in 1994 and
1993 reflects a reduction in written premiums in response to adverse loss
experience in 1993 and to increased competition. Harco's investment income
decreased to $8 million in 1994 compared with $10 million in 1993 and $13
million in 1992. The decrease in 1994 resulted from lower yields on invested
asset balances. The decrease in 1993 resulted from lower realized gains on
sales of marketable securities caused by the stabilization of interest rates
during 1993 and a decline in the yield on investments resulting from the lower
market interest rates available on new investments.
Interest expense decreased 16% in 1994 to $63 million from $75 million
and $82 million in 1993 and 1992, respectively. The decrease between 1994 and
1993 was the result of reduced debt required to finance the lower level of
owned retail receivables, offset in part by higher interest rates. The
decline in interest expense between 1993 and 1992 was primarily the result of
lower interest rates. The ratio of debt to equity decreased to 4.8:1 at
October 31, 1994 from 5.5:1 at October 31, 1993 and 1992.
On July 1, 1993, Navistar implemented a restructured retiree health care
and life insurance plan ("the Plan"), as discussed in note 11 to the
Consolidated Financial Statements. As part of the Plan, Navistar contributed
$300 million to pre-fund Plan benefit liabilities and common stock valued at
$513 million to a Supplemental Benefit Trust to help pay for Plan benefits in
the future. The Corporation recognized $3.7 million of expense as its portion
of the Supplemental Benefit Trust contribution.
The provision for losses on receivables totaled $2.3 million in 1994
compared with $1.5 million in 1993 and $3.6 million in 1992. The increase in
the provision in 1994 reflects higher serviced portfolio balances and higher
losses on retail notes and wholesale accounts. Finance receivables are
written off against the allowance for losses as soon as they are determined
to be uncollectible based on a review of each problem obligor. Truck note and
account write-offs, including those on sold notes, totaled $.9 million in
1994, $.7 million in 1993, and $3.2 million in 1992. At October 31, 1994, the
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Corporation's allowance for losses equaled .65% of net financing receivables,
including sold receivables, compared with .69% and .77% as of October 31, 1993
and 1992, respectively. The allowance is maintained at a level which
management considers appropriate in relation to the outstanding receivables
balance, taking into consideration loss experience, current economic
conditions and other factors.
Insurance claims and underwriting expense decreased to $54 million in
1994 from $65 million and $62 million in 1993 and 1992, respectively. The
decline in expense in 1994 resulted from a $9 million decrease in losses
incurred in Harco's truck physical damage and liability insurance lines.
Additionally, insurance operating expenses decreased $3 million in 1994 over
1993, primarily as a result of decreased commission costs associated with
lower volumes of premiums written through general agents in 1994. The
increase in insurance claims and underwriting expense in 1993 resulted from
increased losses sustained in Harco's truck physical damage and liability
insurance lines.
Liquidity and Funds Management
The Corporation's operations are substantially dependent upon the
production and sale of Transportation's truck products. Navistar Financial
has traditionally obtained the funds to provide financing to Transportation's
dealers and retail customers from commercial paper, short- and long-term bank
borrowings, medium- and long-term debt issues, sales of receivables and equity
capital. The current debt ratings of the Corporation, detailed below, have
made bank borrowings and sales of finance receivables the most economical
sources of cash. The Corporation's insurance operations generate their funds
through internal operations and have no external borrowings.
The Corporation's serviced receivables portfolio, which includes sold
receivables, totaled $2.5 billion at October 31, 1994 up from $2.2 billion and
$1.8 billion at October 31, 1993 and 1992, respectively. During 1994, the
Corporation supplied 93% of the wholesale financing of new trucks sold to
Transportation's dealers, compared with 90% for 1993 and 89% for 1992.
Acquisitions of retail notes and leases, net of unearned financed, increased
19% to $916 million in 1994 after a 17% increase to $770 million in 1993 from
$659 million in 1992. The higher levels of acquisitions reflect increased
sales by Transportation, especially of heavy trucks. The Corporation's share
of the retail financing of new trucks manufactured by Transportation and sold
in the United States was 15.3% in 1994 and 1993 up from 13.7% in 1992.
Receivable sales were a significant source of funding during 1994 as
proceeds from sold retail notes were $995 million, an increase of $437 million
over 1993. Outstanding sold receivable balances totaled $1,334 million at
October 31, 1994 up from $839 million and $533 million at October 31, 1993 and
1992, respectively.
As a result of gaining access to the asset-backed public market in 1994,
the Corporation was able to fund fixed rate retail note receivables at rates
offered to companies with investment grade. In three separate receivable
sales during fiscal 1994, the Corporation sold $830 million retail notes
receivable, net of unearned finance, through its special purpose subsidiary,
Navistar Financial Retail Receivables Corporation ("NFRRC"). NFRRC
subsequently sold these notes to three individual owner trusts which, in turn,
sold interests in the notes to investors in exchange for fixed rate notes and
certificates. These three sales of retail notes, pursuant to a $1 billion
registration filed with the Securities and Exchange Commission in September
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
1993, resulted in proceeds of $771 million, net of $57 million in cash
reserves with the trusts as credit enhancements, which reduced the
Corporation's short-term debt and borrowings under the revolving bank credit
facility. On October 7, 1994, NFRRC filed an additional registration with the
Securities and Exchange Commission providing for the issuance from time to
time of an additional $2 billion of asset-backed securities, bringing the
total amount available for issuance by NFRRC to $2.17 billion at fiscal year-
end.
Since December 1990, the Corporation has utilized a $300 million
revolving wholesale note sales trust providing for the continuous sale of
eligible wholesale notes on a daily basis. The sales trust sold three $100
million tranches of floating rate pass-through certificates, maturing serially
from 1997 to 1999, to the public.
At October 31, 1994, the Corporation had a contractually committed bank
revolving credit facility of $727 million and a contractually committed retail
notes receivable purchase facility of $600 million. Unused commitments under
the credit and purchase facilities were $595 million, of which $419 million
provided funding backup for the outstanding short-term debt at October 31,
1994. The remaining $176 million when combined with unrestricted cash and
cash equivalents made $204 million available to fund the general business
purposes of the Corporation.
In November 1994, as discussed in note 16 to the Consolidated Financial
Statements, the Corporation amended and restated its credit and purchase
facility agreements. The revolving credit agreement commitment was expanded
from $727 million to $900 million and the maturity date was extended to
October 31, 1998. In addition, the purchasers' commitments under the $600
million retail notes purchase facility agreement were terminated and the
Corporation established a $300 million asset-backed commercial paper program
supported by a bank liquidity facility with a maturity date of October 31,
1998. As of October 31, 1994, $377 million of sold notes were outstanding
under the retail notes purchase facility. Participants of the facility will
continue to own the receivables during the normal run-off. While the amended
revolving credit facility removes certain dividend restrictions, the
Corporation is required to maintain tangible net worth at a minimum of $175
million and a debt to tangible net worth ratio of no greater than 7 to 1.
In October 1993, ratings on the Corporation's debt were reviewed by
Standard and Poor's Corporation ("Standard and Poor's") and Moody's Investors
Service, Inc. ("Moody's"). Standard and Poor's raised its ratings for the
Corporation's debt from B- to BB for senior debt and from CCC to B+ for
subordinated debt. Moody's confirmed their previous ratings of Ba3 for senior
debt and B2 for subordinated debt. In November 1993, Duff & Phelps confirmed
their debt ratings of BB+ for senior debt and BB for subordinated debt. The
Corporation's commercial paper is rated "not prime" by Moody's.
On November 16, 1993, the Corporation sold $100 million of 8 7/8% Senior
Subordinated Notes due 1998 to the public. On December 16, 1993, the net
proceeds from the 8 7/8% subordinated issue were used to redeem the
Corporation's 11.95% Subordinated Debentures due December 1995. The
Corporation also redeemed its 7 1/2% Senior Debentures due January 1994 on
December 15, 1993.
On December 15, 1994, the Corporation sold $315 of retail notes, net of
unearned finance income, through NFRRC to an owner trust which, in turn, sold
$304 of notes and $11 of certificates to investors. The proceeds of $314, net
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
of $1 of underwriting fees, were used by the Corporation for general working
capital purposes and to establish a $19 reserve account with the trust as
credit enhancement for the public sale.
The Corporation manages sensitivity to interest rate changes by funding
floating rate assets with floating rate debt, primarily borrowings under the
bank revolving credit agreement, and fixed rate assets with fixed rate debt,
equity and floating rate debt. Management has limited the amount of fixed
rate assets funded with floating rate debt by selling retail receivables on
a fixed rate basis. The Corporation will occasionally enter into a forward
interest rate lock agreement prior to a retail note receivables sale to
protect against rising interest rates.
Business Outlook
The truck industry is forecasted to continue to be strong in 1995. No
significant change from the current level of financing support for
Transportation truck product sales is anticipated by the Corporation.
Competition coupled with potentially higher interest rates will put pressure
on the Corporation's performance in 1995. Several financing institutions have
entered the truck retail financing market, and this will put pressure on the
Corporation's retail note acquisition activity. Higher funding costs will
impact retail note margins and gains on sales of retail notes compared to
1994.
Management believes that collections on the outstanding receivables
portfolio plus cash available from the Corporation's various funding sources
will permit Navistar Financial to meet the financing requirements of
Transportation's dealers and retail customers through 1995 and beyond.
Page
Item 8. Financial Statements and Supplementary Data
Navistar Financial Corporation and Subsidiaries:
Statement of Consolidated Income and Retained Earnings
for the years ended October 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . 9
Statement of Consolidated Financial Condition as of
October 31, 1994 and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Statement of Consolidated Cash Flow for the years ended
October 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . 12
Supplementary Financial Data. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Independent Auditors' Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Income and Retained Earnings
Millions of dollars
Note
For the years ended October 31 1994 1993 1992 Reference
Revenues
Retail notes and lease financing . . . . . . . . . . . . . . . . . $ 69.3 $101.9 $100.7
Wholesale notes . . . . . . . . . . . . . . . . . . . . . . . . . . 39.0 32.0 28.3
Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.2 17.5 14.8
Servicing fee income. . . . . . . . . . . . . . . . . . . . . . . . 17.3 10.6 8.6
Insurance premiums earned . . . . . . . . . . . . . . . . . . . . . 51.1 57.4 59.9
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . 11.2 12.5 16.0
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210.1 231.9 228.3
Expenses
Cost of borrowing:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 62.7 74.6 82.2 9, 10
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 4.7 4.5
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69.8 79.3 86.7
Supplemental Trust expense. . . . . . . . . . . . . . . . . . . . . - 3.7 - 11
Credit, collection and administrative . . . . . . . . . . . . . . . 25.9 26.1 26.8
Provision for losses on receivables . . . . . . . . . . . . . . . . 2.3 1.5 3.6 6
Insurance claims and underwriting . . . . . . . . . . . . . . . . . 54.0 65.2 61.7
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . 2.9 7.1 3.1
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154.9 182.9 181.9
Income Before Taxes on Income and Cumulative
Effect of Changes in Accounting Policy. . . . . . . . . . . . . . . 55.2 49.0 46.4
Taxes on Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 17.7 16.9 8
Income Before Cumulative Effect of Changes
in Accounting Policy . . . . . . . . . . . . . . . . . . . . . . . 34.0 31.3 29.5
Cumulative Effect of Changes in Accounting Policy . . . . . . . . . . - 8.8 - 11
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.0 22.5 29.5
Retained Earnings
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 48.4 48.5 35.0
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (25.6) (22.6) (16.0)
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56.8 $ 48.4 $ 48.5 13
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Financial Condition
Millions of dollars
Note
As of October 31 1994 1993 Reference
ASSETS
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.3 $ 33.9
Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 130.5 125.6 4
Receivables
Finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,124.0 1,281.1 5
Allowance for losses . . . . . . . . . . . . . . . . . . . . . . . . . . (8.2) (10.9) 6
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,115.8 1,270.2
Amounts Due from Sales of Receivables . . . . . . . . . . . . . . . . . . . 180.6 138.4 5
Equipment on Operating Leases, Net. . . . . . . . . . . . . . . . . . . . . 26.6 25.1
Repossessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 1.8
Reinsurance Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 33.7 - 7
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.9 30.2
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,544.2 $1,625.2
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 419.2 $ 75.0 9
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.0 77.3
Accrued Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 3.1
Accrued Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 14.4
Senior and Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . 672.3 1,124.2 10
Dealers' Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.8 17.3
Unpaid Insurance Claims and Unearned Premiums . . . . . . . . . . . . . . . 121.7 94.5 7
Shareowner's Equity 13
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital . . . . . . . . . . . . . . 171.0 171.0
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56.8 48.4
Unrealized losses on marketable securities. . . . . . . . . . . . . . . . (2.2) - 4
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225.6 219.4
Total Liabilities and Shareowner's Equity . . . . . . . . . . . . . . . . . $1,544.2 $1,625.2
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Cash Flow
Millions of dollars
Note
For the years ended October 31 1994 1993 1992 Reference
Cash Flow From Operations
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34.0 $ 22.5 $ 29.5
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables . . . . . . . . . . . . . . . . . . (11.8) (14.2) (5.5) 5
Depreciation and amortization . . . . . . . . . . . . . . . . . . 8.7 9.7 8.1
Provision for losses on receivables . . . . . . . . . . . . . . . 2.3 1.5 3.6 6
Cumulative effect of changes in
accounting policy . . . . . . . . . . . . . . . . . . . . . . . - 8.8 -
Supplemental Trust expense. . . . . . . . . . . . . . . . . . . . - 3.7 -
Decrease in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . . . . . . . . (3.5) (1.8) (22.6)
Increase in deferred income taxes . . . . . . . . . . . . . . . . 3.1 3.7 2.8
Increase (decrease) in accounts payable
to affiliated companies . . . . . . . . . . . . . . . . . . . . (0.9) 14.3 5.9
Increase (decrease) in unpaid insurance
claims and unearned premiums, net of
reinsurance receivables . . . . . . . . . . . . . . . . . . . . (6.5) 10.7 3.6
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.4) (3.6) (12.9)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.0 55.3 12.5
Cash Flow From Investing Activities
Purchase of retail notes and lease receivables. . . . . . . . . . . . (915.9) (770.2) (658.6)
Principal collections on retail notes and
lease receivables . . . . . . . . . . . . . . . . . . . . . . . . . 180.9 337.4 409.3
Proceeds from sold retail notes . . . . . . . . . . . . . . . . . . . 994.8 558.2 249.2
Acquisitions over cash collections of
wholesale notes and accounts receivable . . . . . . . . . . . . . . (140.0) (171.9) (85.2)
Purchase of marketable securities . . . . . . . . . . . . . . . . . . (51.8) (58.1) (85.7)
Proceeds from sales of marketable securities . . . . . . . . . . . . 45.1 64.8 76.9
Increase in property and equipment
leased to others. . . . . . . . . . . . . . . . . . . . . . . . . . (5.3) (14.2) (3.9)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.8 (54.0) (98.0)
Cash Flow From Financing Activities
Net increase (decrease) in bank
revolving credit facility usage . . . . . . . . . . . . . . . . . . (372.0) - 507.0
Principal payments on term debt . . . . . . . . . . . . . . . . . . . (80.0) (99.0) (158.5)
Principal payments on subordinated debt . . . . . . . . . . . . . . . (100.0) - -
Proceeds from issuance of subordinated debt . . . . . . . . . . . . . 100.0 - -
Net increase (decrease) in commercial paper . . . . . . . . . . . . . 19.2 - (143.8)
Net increase (decrease) in
short-term bank borrowings . . . . . . . . . . . . . . . . . . . . 325.0 75.0 (40.0)
Dividends paid to Transportation . . . . . . . . . . . . . . . . . . (25.6) (22.6) (16.0)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (133.4) (46.6) 148.7
Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . (5.6) (45.3) 63.2
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . 33.9 79.2 16.0
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . $ 28.3 $ 33.9 $ 79.2
Supplementary disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64.8 $ 79.3 $ 79.9
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . 22.1 13.5 18.9
See Notes to Consolidated Financial Statements.
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1994
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Navistar
Financial Corporation ("NFC") and its wholly-owned subsidiaries
("Corporation"). All significant intercompany accounts and transactions have
been eliminated. All of the Corporation's capital stock is owned by Navistar
International Transportation Corp. ("Transportation"), which is wholly-owned
by Navistar International Corporation ("Navistar").
Revenue on Receivables
Finance charges on retail notes and finance leases are recognized as
income over the term of the receivables on the accrual basis utilizing the
actuarial method. Interest from interest-bearing notes and accounts is taken
into income on the accrual basis.
Allowance for Losses on Receivables
The Corporation's allowance for losses on receivables is maintained at
an amount management considers appropriate in relation to the outstanding
receivables portfolio. Receivables are charged off to the allowance for
losses as soon as they are determined to be uncollectible based on a note-by-
note review, after all prelitigation collection efforts have been exhausted.
Repossessions are carried at the lower of the unpaid net receivable
balance or estimated realizable value of the equipment.
Receivable Sales
The Corporation sells and securitizes receivables to public and private
investors with limited recourse. The Corporation continues to service the
receivables, for which a servicing fee is received. Servicing fees are earned
on a level yield basis over the terms of the related sold receivables and are
included in servicing fee income. In a subordinated capacity, the Corporation
retains excess servicing cash flows, a limited interest in the principal
balances of the sold receivables and certain cash deposits provided as credit
enhancements for investors. Gains or losses on sales of receivables are
credited or charged to financing revenue in the period in which the sales
occur.
Insurance Operations
Insurance premiums are earned on a pro rata basis over the terms of the
policies. Commission costs and premium taxes incurred in acquiring business
are deferred and amortized on the same basis as such premiums are earned. The
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
liability for unpaid insurance claims includes provisions for reported claims
and an estimate of unreported claims based on past experience. Such provi-
sions include an estimate of loss adjustment expense. The estimated liability
for unpaid insurance claims is regularly reviewed and updated. Any change in
such estimate is reflected in current operations.
Income Taxes
The tax effect of each item of revenue or expense reported in the
Statement of Consolidated Income and Retained Earnings is recognized in the
current period regardless of when the related tax is paid. Navistar and its
subsidiaries file a consolidated Federal income tax return which includes
Transportation and the Corporation. Federal income taxes for the Corporation
are computed on a separate consolidated return basis and are payable to
Transportation.
Cash and Cash Equivalents
Cash and cash equivalents include money market funds and marketable
securities with original maturities of three months or less, except for such
securities held by the insurance operations which are included in marketable
securities.
Reclassification
Certain 1993 and 1992 amounts have been reclassified to conform with the
presentation used in the 1994 financial statements.
Changes in Accounting Policy
In the first quarter of fiscal 1994, the Corporation adopted Statement
of Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"), which
is applicable to the Corporation's wholly-owned insurance subsidiary, Harco
National Insurance Company ("Harco"). This statement eliminates the practice
of reporting liabilities relating to reinsured contracts net of the effects
of ceded reinsurance. Disclosures relating to SFAS 113 are provided in note
7. Effective October 31, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") and Statement of Financial Accounting
Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" ("SFAS 119"). SFAS 115 establishes financial
accounting and reporting standards for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. SFAS 119 requires disclosures about the amounts, nature, and
terms of derivative financial instruments. Disclosures relating to SFAS 115
and SFAS 119 are provided in notes 4 and 14, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
In the third quarter of fiscal 1993, the Corporation adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes"
("SFAS 109") and Statement of Financial Accounting Standards No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
106") retroactive to November 1, 1992. The cumulative effect of adopting
these changes in accounting policy resulted in an after tax charge to income
of $8.8. Periods prior to November 1, 1992 were not required to be restated
for the changes in accounting policy.
2. TRANSACTIONS WITH AFFILIATED COMPANIES
The Corporation's primary business is the retail, wholesale, and to a
lesser extent, lease financing of products sold by Transportation and its
dealers within the United States.
Wholesale Notes, Wholesale Accounts and Retail Accounts Revenue
In accordance with the agreements between the Corporation and
Transportation relating to financing of wholesale notes, wholesale accounts
and retail accounts, the Corporation receives interest income from
Transportation at agreed upon interest rates applied to the average
outstanding balances less interest amounts paid by dealers on wholesale notes
and wholesale accounts.
The Corporation purchases wholesale notes and accounts of dealers from
Transportation at the principal amount of the receivables. An acquisition fee
applicable to purchases of wholesale notes secured by new equipment is charged
to Transportation. The retail accounts are accounts of Transportation
customers. Revenue collected from Transportation for wholesale notes,
wholesale and retail accounts and leases was $50.7 in 1994, $41.2 in 1993 and
$38.6 in 1992.
Support Agreements
Under provisions of certain public and private financing arrangements,
agreements with Transportation 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. Since
1984, no maintenance payments have been required under these agreements.
Administrative Expenses
The Corporation pays a fee to Transportation for data processing and
other administrative services based on the actual cost of services performed.
The amount of the fee was $2.5 in 1994, $2.3 in 1993 and $2.6 in 1992.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
2. TRANSACTIONS WITH AFFILIATED COMPANIES (Continued)
Short-Term Borrowings
During fiscal 1994, the Corporation had daily average short-term
borrowings from Transportation of $83 on which interest accrued at the
Corporation's incremental short-term borrowing rate. These borrowings,
including $4 of interest expense, were repaid during the year.
Accounts Payable
Accounts payable include $16.3 and $19.5 payable to Transportation at
October 31, 1994 and 1993, respectively.
3. INDUSTRY SEGMENTS
The Corporation is engaged in two industry segments in the United States:
finance and insurance. The Corporation provides wholesale, retail and lease
financing for the sales of new and used trucks and related equipment by
Transportation and its dealers. To a lesser extent, the Corporation also
finances other commercial vehicles, primarily trailers, sold by independent
dealers. Harco National Insurance Company, NFC's wholly-owned insurance
subsidiary, provides commercial physical damage and liability insurance
coverage to Transportation's dealers and retail customers, and to the general
public through the independent insurance agency system.
Information by industry segment is summarized as follows:
1994 1993 1992
Revenues:
Finance operations . . . . . . . . . . . . . . . . . . . . . . $ 149.9 $ 164.2 $ 155.5
Insurance operations . . . . . . . . . . . . . . . . . . . . . 60.2 67.7 72.8
Total revenue . . . . . . . . . . . . . . . . . . . . . . . $ 210.1 $ 231.9 $ 228.3
Income before taxes on income and cumulative
effect of changes in accounting policy:
Finance operations . . . . . . . . . . . . . . . . . . . . . . $ 49.9 $ 47.9 $ 36.6
Insurance operations . . . . . . . . . . . . . . . . . . . . . 5.3 1.1 9.8
Total income before taxes on income and
cumulative effect of changes in
accounting policy. . . . . . . . . . . . . . . . . . . . . $ 55.2 $ 49.0 $ 46.4
Assets at end of year:
Finance operations . . . . . . . . . . . . . . . . . . . . . . $1,363.5 $1,473.5 $1,459.2
Insurance operations . . . . . . . . . . . . . . . . . . . . . 180.7 151.7 149.5
Total assets at end of year . . . . . . . . . . . . . . . . $1,544.2 $1,625.2 $1,608.7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES
Effective October 31, 1994, the Corporation applied SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities." Marketable securities
at October 31, 1994 are classified as securities available-for-sale and are
stated at fair value. The fair value of marketable securities is estimated
based on quoted market prices, when available. If a quoted price is not
available, fair value is estimated using quoted market prices for similar
financial instruments. The Corporation's retained earnings as of October 31,
1994 were decreased by $2.2 for unrealized holding losses, net of income
taxes, and are included as a separate component of shareowner's equity in the
Statement of Consolidated Financial Condition. As the restatement of prior
years' financial statements is not permitted, marketable securities at October
31, 1993, consisting of investments in debt securities, were carried at
amortized cost. The following table sets forth, by type of security issuer,
the amortized cost and estimated market values at October 31, 1994 and 1993:
Gross Gross Estimated
Amortized Unrealized Unrealized Market
October 31, 1994 Cost Gains Losses Value
U.S. government and federal
agency securities . . . . . . . . . . . $ 67.4 $ .4 $ 2.4 $ 65.4
Corporate debt securities. . . . . . . . . 27.7 - .4 27.3
Mortgage- and
asset-backed securities . . . . . . . . 28.3 .1 .7 27.7
Foreign governments. . . . . . . . . . . . 1.6 - - 1.6
Total debt securities. . . . . . . . $125.0 $ .5 $ 3.5 $122.0
Equity securities. . . . . . . . . . . . . 8.8 .4 .7 8.5
Total. . . . . . . . . . . . . . . . $133.8 $ .9 $ 4.2 $130.5
October 31, 1993
U.S. government and federal
agency securities . . . . . . . . . . . $ 70.1 $ 4.4 $ - $ 74.5
Corporate debt securities. . . . . . . . . 17.8 .6 - 18.4
Mortgage- and
asset-backed securities . . . . . . . . 36.1 1.3 - 37.4
Foreign governments. . . . . . . . . . . . 1.6 .1 - 1.7
Total debt securities. . . . . . . . $125.6 $ 6.4 $ - $132.0
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES (Continued)
The amortized cost and estimated market values for investments in debt
securities at October 31, 1994 by contractual maturity, are shown below:
Estimated
Amortized Market
Cost Value
Due in one year or less. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16.9 $ 16.9
Due after one year through five years. . . . . . . . . . . . . . . . . . . . 61.1 60.3
Due after five years through ten years . . . . . . . . . . . . . . . . . . . 12.7 11.5
Due after ten years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6.0 5.6
96.7 94.3
Mortgage- and asset-backed securities. . . . . . . . . . . . . . . . . . . . 28.3 27.7
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $125.0 $122.0
Proceeds from sales or maturities of marketable securities available-for-
sale were $45.1 during 1994 and $64.8 during 1993. Gross gains of $.9 and
$1.3 were realized on those sales or maturities in 1994 and 1993,
respectively. There were gross losses of $.2 in 1994 and 1993.
All marketable securities at October 31, 1994 and 1993 were held by Harco
National Insurance Company, of which $29.5 and $26.5, respectively, were on
deposit with various state departments of insurance or otherwise restricted
as to use.
5. FINANCE RECEIVABLES
Finance receivable balances, net of unearned finance income, at October
31 are summarized as follows:
1994 1993
Retail notes and lease financing:
Truck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 508.2 $ 802.9
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 20.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526.3 823.5
Wholesale notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240.0 212.5
Accounts:
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308.2 200.9
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.5 44.2
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357.7 245.1
Total finance receivables . . . . . . . . . . . . . . . . . . . . . . $1,124.0 $1,281.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
Contractual maturities of finance receivables including unearned finance
income at October 31, 1994 are summarized as follows:
Retail Wholesale Accounts
Due in:
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 165.3 $ 134.7 $ 357.7
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 144.9 105.0 -
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 116.2 .3 -
Due after 1997 . . . . . . . . . . . . . . . . . . . . . . 161.1 - -
Gross finance receivables . . . . . . . . . . . . . . 587.5 240.0 357.7
Unearned finance income . . . . . . . . . . . . . . . . . 61.2 - -
Total finance receivables . . . . . . . . . . . . . . $ 526.3 $ 240.0 $ 357.7
The actual cash collections from finance receivables will vary from the
contractual cash flows because of sales, prepayments, extensions and renewals.
The contractual maturities, therefore, should not be regarded as a forecast
of future collections.
The Corporation sells finance receivables to public and private investors
with limited recourse provisions. Uncollected sold receivable net balances
at October 31 are as follows:
1994 1993
Retail notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,034.4 $539.4
Wholesale notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300.0 300.0
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,334.4 $839.4
Gains or losses from the sales of receivables are recognized in the
period in which such sales occur. As the allowance for credit losses is
adequately provided prior to the receivable sales, gains from receivable sales
are not reduced for expected credit losses. Included in "Retail notes and
lease financing" revenue are gains totaling $11.8, $14.2 and $5.5 for the
fiscal years ended October 31, 1994, 1993 and 1992, respectively. Gains on
sales of wholesale receivables are not material as a result of their short
maturities.
The Corporation has two wholly-owned subsidiaries, Navistar Financial
Retail Receivables Corporation ("NFRRC") and Navistar Financial Securities
Corporation ("NFSC"), which have a limited purpose of purchasing retail and
wholesale receivables, respectively, and transferring an undivided ownership
interest in such notes to investors in exchange for pass-through notes and
certificates. These subsidiaries have limited recourse on the sold
receivables and their assets are available to satisfy the claims of their
creditors prior to such assets becoming available to the Corporation or
affiliated companies. At October 31, 1994, NFSC had in place a $300 revolving
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
wholesale note sales trust providing for the continuous sale of eligible
wholesale notes on a daily basis. The sales trust is comprised of three $100
pools of notes maturing serially from 1997 to 1999. On September 16, 1993,
NFRRC filed a registration with the Securities and Exchange Commission
providing for the issuance from time to time of $1,000 of asset-backed
securities. During fiscal 1994, in three separate sales, the Corporation sold
$830 of retail notes, net of unearned finance income, through NFRRC to three
individual owner trusts. The owner trusts, in turn, sold $801 of notes and
$29 of certificates to investors. The proceeds of $828, net of $2 of
underwriting fees, were used by the Corporation for general working capital
purposes and to establish $57 in cash reserves with the trusts as credit
enhancement for the public sales. On October 7, 1994, NFRRC filed an
additional registration with the Securities and Exchange Commission providing
for the issuance from time to time of an additional $2,000 of asset-backed
securities, bringing the total amount available for issuance by NFRRC to
$2,170 at fiscal year-end.
The Corporation's retained interest in sold receivables and other related
amounts are generally restricted and subject to limited recourse provisions.
Holdback reserves were established pursuant to the limited recourse provisions
of the retail note sales to private investors. The securitized sales
structure requires the Corporation to maintain cash reserves with the trusts
as credit enhancement for public sales. The cash reserves are held by the
trusts and restricted for use by the securitized sales agreements. The
following is a summary of amounts included in "Amounts Due from Sales of
Receivables":
October 31
1994 1993
Cash held by trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51.5 $ 9.6
Subordinated retained interests in receivables . . . . . . . . . . . . . . . 60.6 54.4
Holdback reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.4 69.4
Excess servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 8.9
Less allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . (8.0) (3.9)
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180.6 $138.4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
6. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as follows:
1994 1993 1992
Total allowance for losses at beginning of year . . . . . . . . . . . . $14.8 $14.0 $13.6
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 1.5 3.6
Net losses charged to allowance . . . . . . . . . . . . . . . . . . . . (.9) (.7) (3.2)
Total allowance for losses at end of year . . . . . . . . . . . . . . $16.2 $14.8 $14.0
Allowance pertaining to:
Owned notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.2 $10.9 $12.4
Sold notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 3.9 1.6
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16.2 $14.8 $14.0
7. REINSURANCE RECEIVABLES
In the normal course of business, the Corporation's wholly-owned
insurance subsidiary, Harco National Insurance Company, limits its exposure
on any single loss occurrence by ceding reinsurance to other insurance
enterprises. SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts", prescribes the accounting
standards for such reinsurance arrangements and was adopted by the Corporation
in the first quarter of fiscal 1994. This statement eliminates the practice
of reporting liabilities relating to reinsured contracts net of the effects
of reinsurance. It requires reinsurance receivables including amounts related
to unpaid insurance claims and prepaid reinsurance premiums to be reported as
assets. In accordance with SFAS 113, the Corporation's assets include $33.7
of reinsurance receivables at October 31, 1994. The adoption of SFAS 113 did
not have a material effect on the Corporation's financial results.
Restatement of prior years' financial statements is not required.
8. TAXES ON INCOME
During fiscal 1993, the Corporation adopted SFAS 109 "Accounting for
Income Taxes." Under SFAS 109, deferred tax assets and liabilities are
generally determined based on the difference between the financial statement
and tax bases of assets and liabilities using enacted tax rates in effect for
the year in which the differences are expected to reverse. SFAS 109 generally
allows recognition of deferred tax assets if future realization is more likely
than not.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
8. TAXES ON INCOME (Continued)
Taxes on income are summarized as follows:
1994 1993 1992
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.1 $12.0 $12.7
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 2.0 1.4
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 14.0 14.1
Deferred (primarily Federal) . . . . . . . . . . . . . . . . . . . . . . 3.1 3.7 2.8
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21.2 $17.7 $16.9
The effective tax rate of 38% in 1994 and 36% in 1993 and 1992 differs
from the statutory United States Federal tax rate of 35% in 1994 and 1993 and
34% in 1992 primarily because of state and local income taxes. Deferred tax
assets and liabilities at October 31, 1994 and 1993 are comprised of the
following:
1994 1993
Deferred tax assets:
Other postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . $2.7 $2.7
Unrealized losses on marketable securities. . . . . . . . . . . . . . . . . . . . 1.2 -
Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 2.7
Deferred tax liabilities:
Depreciation and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 2.7
Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . $2.0 $ -
During 1992, auditors of the Illinois Department of Revenue
("Department") began an income tax audit of NFC for the fiscal years ended
October 31, 1989, 1990 and 1991. On February 1, 1994 the Department issued
a Notice of Deficiency to NFC for approximately $11.9 million. The Department
has taken the position that nearly 100% of NFC's income during these years
should be attributed to and taxed by Illinois. NFC maintains that the
Department's interpretation and application of the law is incorrect and
improper, and that the Department's intended result is constitutionally
prohibited. NFC's outside counsel is of the opinion that it is more likely
than not that NFC's position will prevail such that the Department's action
will not have a material impact on NFC's earnings and financial position.
9. SHORT-TERM DEBT
Commercial paper is issued by the Corporation with varying terms. The
Corporation also has short-term borrowings with various banks on a non-
committed basis. Compensating cash balances and commitment fees are not
required under these agreements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
9. SHORT-TERM DEBT (Continued)
Short-Term Debt at October 31 is summarized as follows:
1994 1993
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19.2 $ -
Short-term bank borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400.0 75.0
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $419.2 $ 75.0
Information regarding short-term borrowings is as follows:
1994 1993 1992
Aggregate obligations outstanding:
Daily average. . . . . . . . . . . . . . . . . . . . . . . . . . $ 11.7 $ .6 $ 56.2
Maximum month-end balance. . . . . . . . . . . . . . . . . . . . 419.2 75.0 203.3
Weighted average interest rate:
On average daily borrowing . . . . . . . . . . . . . . . . . . . 5.4% 6.5% 5.5%
At October 31. . . . . . . . . . . . . . . . . . . . . . . . . . 5.6% 6.5% -
Unused commitments under the Corporation's bank revolving credit facility
and retail notes receivable purchase facility are used as backup for
outstanding short-term borrowings.
10. SENIOR AND SUBORDINATED DEBT
Senior and Subordinated Debt outstanding at October 31 is summarized as
follows:
1994 1993
Bank revolving credit, at variable rates,
due November 1995. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 355.0 $ 727.0
Senior term debt:
7 1/2% Debentures, due January 1994 . . . . . . . . . . . . . . . . . . - 75.0
Notes, medium-term, 9.50% to 9.75%,
due 1995 to 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . 217.5 222.5
Unamortized discount . . . . . . . . . . . . . . . . . . . . . . . . . . (.2) (.3)
Total senior term debt . . . . . . . . . . . . . . . . . . . . . . . 217.3 297.2
Subordinated term debt:
Debentures, 11.95%, due December 1995 . . . . . . . . . . . . . . . . . - 100.0
Senior Notes, 8 7/8%, due November 1998. . . . . . . . . . . . . . . . . 100.0 -
Total subordinated term debt . . . . . . . . . . . . . . . . . . . . . 100.0 100.0
Total senior and subordinated debt . . . . . . . . . . . . . . . . . $ 672.3 $1,124.2
/TABLE
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT (Continued)
The weighted average interest rate on total debt, including short-term
debt and the effect of discounts and related amortization, was 7.1%, 6.6% and
7.6% in 1994, 1993 and 1992, respectively. At October 31, 1994, all of the
Corporation's term debt was at a fixed rate of interest. The aggregate annual
maturities and required payments of debt are as follows: 1995, $100; 1996,
$472; and 1999, $100.
At October 31, 1994, the Corporation had $1,327 of committed credit
facilities. These facilities consisted of a contractually committed bank
revolving credit facility of $727 and a contractually committed retail notes
receivable purchase facility of $600. Unused commitments under the credit and
purchase facilities were $595, of which $419 provided funding backup for the
outstanding short-term debt at October 31, 1994. The remaining $176 when
combined with unrestricted cash and cash equivalents made $204 available to
fund the general business purposes of the Corporation at October 31, 1994.
Compensating cash balances are not required under the revolving credit
facility, but commitment fees are paid on the unused portions of the bank
revolving credit and retail notes receivable purchase facilities. The
Corporation also pays a facility fee on the $600 retail notes receivable
purchase facility. The bank revolving credit facility grants security
interests in substantially all of the Corporation's assets to the
Corporation's debtholders. In November 1994, the Corporation amended its
committed credit facilities. See note 16 for discussion of the subsequent
event.
On November 16, 1993, the Corporation sold $100 of 8 7/8% Senior
Subordinated Notes due 1998 and used the proceeds to redeem its 11.95%
Subordinated Debentures due December 1995 on December 16, 1993. The
Corporation also redeemed its 7 1/2% Senior Debentures due January 1994 on
December 15, 1993.
11. RETIREMENT BENEFITS
The Corporation provides postretirement benefits to substantially all of
its employees. Expenses associated with postretirement benefits include
pension expense for employees, retirees and surviving spouses, and
postretirement health care and life insurance expense for employees, retirees,
surviving spouses and dependents.
The pension plans are non-contributory with benefits related to an
employee's length of service and compensation rate. The Corporation's policy
is to fund its qualified pension plan in accordance with applicable government
regulations and to make additional payments as necessary to maintain full
funding of the vested accumulated benefit obligation. For plan years which
ended during the current fiscal year, all legal funding requirements have been
met. Plan assets are primarily invested in a dedicated portfolio of long-term
fixed income securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
In addition to providing pension benefits, the Corporation provides
health care and life insurance for a majority of its retired employees. For
most retirees, these benefits are defined by the terms of an agreement between
Navistar and its employees, retirees and collective bargaining organizations
which provides for postretirement health care and life insurance benefits
("the Plan"). The Plan, which was implemented on July 1, 1993, provided for
cost sharing between Navistar and retirees in the form of premiums, co-
payments and deductibles. A Base Program Trust was established to provide a
vehicle for funding of the health care liability through Navistar
contributions and retiree premiums. A separate independent Retiree
Supplemental Benefit Trust was also established to potentially reduce retiree
premiums, co-payments and deductibles and provide additional benefits in the
future. During 1993, the Corporation agreed to contribute $3.7 to the
Supplemental Benefit Trust.
Pension Expense
Net pension cost includes the following:
1994 1993 1992
Service cost-benefits earned during the period . . . . . . . . . . . . . $ 1.0 $ .6 $ .6
Interest cost on projected benefit obligation. . . . . . . . . . . . . . 2.7 2.8 2.7
Return on assets - actual gain (loss) . . . . . . . . . . . . . . 3.3 (8.4) (2.8)
- deferred gain (loss) . . . . . . . . . . . . . (6.8) 5.2 (.3)
Other costs (including amortization of
transition amount) . . . . . . . . . . . . . . . . . . . . . . . . . . .1 .1 .3
Net pension cost . . . . . . . . . . . . . . . . . . . . . . . . . . $ .3 $ .3 $ .5
The unrecognized net obligation as of the transition date is being
amortized on a straight-line basis over 15 years. The effect of plan
amendments is amortized over the remaining average service life of active
employees.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
Pension Assets and Liabilities
The plans' funded status and reconciliation to the Statement of
Consolidated Financial Condition as of October 31 were as follows:
Plan in Which Plan in Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
1994 1993 1994 1993
Actuarial present value of:
Vested benefits . . . . . . . . . . . . . $(25.8) $(32.8) $(1.8) $(1.9)
Non-vested benefits . . . . . . . . . . . (3.0) (2.4) (.1) (.1)
Accumulated benefit
obligation . . . . . . . . . . . . . . (28.8) (35.2) (1.9) (2.0)
Effect of projected future
compensation levels . . . . . . . . . (.6) (3.5) - -
Total projected benefit
obligation . . . . . . . . . . . . . . (29.4) (38.7) (1.9) (2.0)
Plan assets at fair value . . . . . . . . . 34.5 39.8 - -
Funded status at October 31. . . . . . . . 5.1 1.1 (1.9) (2.0)
Unrecognized net losses (gains). . . . . . . (4.8) (.8) .2 .2
Unrecognized plan amendments . . . . . . . . .5 .6 - -
Unrecognized net obligation
as of transition date . . . . . . . . .2 .2 - -
Net asset (liability) . . . . . . . . . $ 1.0 $ 1.1 $(1.7) $(1.8)
The weighted average rate assumptions used in determining the projected
benefit obligation and pension expense were:
1994 1993 1992
Discount rate used to determine the present value
of the projected benefit obligations . . . . . . . . . . . . . . . . 9.2% 6.7% 8.1%
Expected long-term rate of return on plan assets . . . . . . . . . . . 9.0% 10.0% 10.0%
Expected rate of increase in future
compensation levels. . . . . . . . . . . . . . . . . . . . . . . . . 3.5% 3.5% 5.5%
Postretirement Benefits Other Than Pensions
During 1993, the Corporation adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" retroactive to November 1, 1992.
SFAS 106 requires the accrual of the expected cost of providing postretirement
benefits during employees' active service periods. The Corporation's previous
practice was to charge the cost of these benefits against operations on a pay-
as-you-go basis. The adoption of SFAS 106 did not affect cash flow, but it
did change the timing of the recognition of costs.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
The Corporation elected to recognize the SFAS 106 transition obligation
as a one-time non-cash charge to earnings. The cumulative effect of this
change in accounting policy, as of November 1, 1992, was $8.8, net of income
taxes of $5.4.
The components of expense under SFAS 106 for postretirement benefits
other than pensions that are included in the Statement of Consolidated Income
and Retained Earnings for 1994 and 1993 include the following:
1994 1993
Service cost - benefits earned during the year . . . . . . . . . . . . . . . . . . . $ .2 $ .3
Interest cost on the accumulated benefit obligation. . . . . . . . . . . . . . . . . .7 .6
Expected return on assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (.2) -
Total cost of postretirement benefits other than pensions. . . . . . . . . . . . . . $ .7 $ .9
The components of the liability for postretirement benefits other than
pensions as of October 31, 1994 were as follows:
1994 1993
Retirees and their dependents. . . . . . . . . . . . . . . . . . . . . . . . . . . . $(4.2) $(4.6)
Active employees eligible to retire. . . . . . . . . . . . . . . . . . . . . . . . . (2.2) (1.3)
Other active participants. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.6) (2.7)
Accumulated postretirement benefit obligation (APBO) . . . . . . . . . . . . . . . . (9.0) (8.6)
Plan assets at fair value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.8 2.4
APBO in excess of plan assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . (6.2) (6.2)
Unrecognized net loss. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7 .8
Net liability recognized on the
Statement of Consolidated Financial Condition . . . . . . . . . . . . . . . . . . $(5.5) $(5.4)
The discount rate used to determine the accumulated postretirement
benefit obligation at October 31, 1994, was 8.9%, based on the estimated
income of high-quality fixed income securities which could be purchased to
effectively settle the obligation. For 1995, the weighted average rate of
increase in the per capita cost of covered health care benefits is projected
to be 10.0%. The rate is projected to decrease to 5.0% in the year 2003 and
remain at that level each year thereafter. If the cost trend rate assumptions
were increased by one percentage point for each year, the accumulated
postretirement benefit obligation would increase by approximately $1.0 and the
associated expense recognized for the year ended October 31, 1994 would
increase by an estimated $.2. Conversely, a decrease in the cost trend rate
would lower the accumulated postretirement benefit obligation and the
associated expense.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
12. LEASES
The Corporation is obligated under noncancelable operating leases for the
majority of its office facilities and equipment. These leases are generally
renewable and provide that property taxes and maintenance costs are to be paid
by the lessee. At October 31, 1994, future minimum lease commitments under
noncancelable operating leases with remaining terms in excess of one year are
as follows:
Year Ended October 31,
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1.5
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.5
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
1998 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.4
1999 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3
Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.3
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8.4
13. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 1994
and 1993 was 2,000,000 of which 1,600,000 shares were issued and outstanding.
All of the issued and outstanding capital stock is owned by Transportation and
no shares are reserved for officers and employees, or for options, warrants,
conversions and other rights. As discussed in note 16, the Corporation
amended and restated its bank credit facility in November 1994 which among
other things changed previous limitations on the Corporation's authority to
pay dividends to Transportation.
14. FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Corporation,
using available market information and valuation methodologies as described
below. However, considerable judgment is required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Corporation
could realize in a current market exchange. The use of different market
assumptions or valuation methodologies may have a material effect on the
estimated fair value amounts.
The methods and assumptions used to estimate the fair value of each class
of financial instruments are summarized as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS (Continued)
Marketable Securities
Fair value is estimated based on quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar financial instruments. The fair value of
marketable securities held by insurance affiliates at October 31, 1994 is
disclosed, as required, in note 4 and included below.
Finance Receivables
The fair value of truck retail notes is estimated by discounting the future
cash flows using an estimated discount rate reflecting current rates paid
to purchasers of similar types of receivables with similar credit, interest
rate and prepayment risks. For other retail notes, primarily variable-rate
notes that reprice frequently, and for wholesale notes and retail and
wholesale accounts, the carrying amounts approximate fair value.
Amounts Due from Sales of Receivables
The fair values of excess servicing cash flows and other subordinated
amounts due the Corporation arising from receivable sale transactions were
derived by discounting expected cash flows at estimated current market
rates. The fair value of cash deposits approximates their carrying value.
Senior and Subordinated Debt
For variable-rate borrowings under the bank revolving credit agreement that
reprice frequently, the carrying amount approximates fair value. The fair
values of notes and debentures are estimated based on quoted market prices
where available and, where not available, on quoted market prices of debt
with similar characteristics.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS (Continued)
The carrying amounts of financial instruments as reported in the
Statement of Financial Condition and described in the various notes to the
financial statements and their fair values at October 31 are as follows:
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Cash and cash equivalents. . . . . . . . . . . $ 28.3 $ 28.3 $ 33.9 $ 33.9
Marketable securities. . . . . . . . . . . . . 130.5 130.5 125.6 132.0
Finance receivables:
Retail notes . . . . . . . . . . . . . . . . 464.4 470.5 765.6 776.7
Wholesale notes. . . . . . . . . . . . . . . 240.0 240.0 212.5 212.5
Accounts . . . . . . . . . . . . . . . . . . 357.7 357.7 245.1 245.1
Amounts due from sales of
receivables. . . . . . . . . . . . . . . . . 180.6 170.6 138.4 134.9
Financing liabilities:
Senior and subordinated debt . . . . . . . . . $672.3 $673.9 $1,124.2 $1,138.0
Derivative Financial Instruments
The Corporation acquires floating rate wholesale receivables and fixed
rate retail receivables and generally funds floating rate receivables with
floating rate funding and fixed rate receivables with fixed rate funding and
equity. Interest rate caps and swaps are used when needed to convert floating
rate funds to fixed and vice versa to match the asset portfolio. In addition,
the Corporation will use a variety of contracts to lock in interest rates
during the period in which retail receivables are being sold. During fiscal
1994, the Corporation entered into two short-term forward interest rate lock
agreements related to two sales of receivables. At October 31, 1994, there
were no swap agreements outstanding and only one interest rate cap purchased
in 1985 for a notional amount of $50 million which serves to partially hedge
the interest cost of variable rate debt. The Corporation's wholly-owned
insurance subsidiary has investments in Collateralized Mortgage Obligations
of $18.2 and are included in the Corporation's marketable securities at
October 31, 1994.
15. LEGAL PROCEEDINGS
In May 1993, a jury issued a verdict in favor of Vernon Klein &
Equipment, Inc. and against Transportation and the Corporation in the amount
of $10.8 in compensatory damages and $15 in punitive damages. Transportation
appealed the verdict and, in November 1994, the Court of Appeals of the State
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
15. LEGAL PROCEEDINGS (Continued)
of Oklahoma reversed the verdict and entered judgment in favor of
Transportation on virtually all aspects of the case.
The Corporation and its subsidiaries are subject to various other claims
arising in the ordinary course of business, and are parties to various legal
proceedings which constitute ordinary routine litigation incidental to the
business of the Corporation and its subsidiaries. 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.
16. SUBSEQUENT EVENTS
In November 1994, the Corporation amended and restated its $727 million
bank revolving credit agreement, extending the maturity date to October 31,
1998 and expanding the commitment to $900 million. In addition, the
purchasers' commitments under the $600 million retail notes purchase facility
agreement were terminated and the Corporation established a $300 million asset
backed commercial paper ("ABCP") program supported by a bank liquidity
facility with a maturity date of October 31, 1998. While the amended
revolving credit facility removes certain dividend restrictions, the
Corporation is required to maintain tangible net worth at a minimum of $175
million and a debt to tangible net worth ratio of no greater than 7 to 1.
Consistent with the previous revolving credit agreement, the restated
agreement grants security interests in substantially all of the Corporation's
assets to the Corporation's debtholders.
As of October 31, 1994, approximately $377 million of sold notes were
outstanding under the $600 million retail notes purchase facility.
Participants of the facility will continue to own the receivables during the
run off.
Under the terms of the ABCP program, a special purpose wholly-owned
subsidiary of NFC will purchase retail and lease receivables. All assets of
the subsidiary will be pledged to a Trust that will fund the receivables with
A1/P1 rated commercial paper. In addition, the assets may be sold to the
Trust.
Compensating cash balances are not required under the restated revolving
credit facility. Facility fees are paid quarterly regardless of usage. The
Corporation also pays a commitment fee on the unused portion of the $300
million ABCP liquidity facility.
On December 15, 1994, the Corporation sold $315 of retail notes, net of
unearned finance income, through NFRRC to an owner trust which, in turn, sold
$304 of notes and $11 of certificates to investors. The proceeds of $314, net
of $1 of underwriting fees, were used by the Corporation for general working
capital purposes and to establish a $19 reserve account with the trust as
credit enhancement for the public sale.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
17. QUARTERLY FINANCIAL INFORMATION (unaudited)
1994
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
Revenues . . . . . . . . . . . . . $58.0 $48.3 $50.6 $53.2 $210.1
Interest expense . . . . . . . . . 15.7 15.7 16.7 14.6 62.7
Provision for losses
on receivables . . . . . . . . . .8 .2 .1 1.2 2.3
Net income . . . . . . . . . . . . 10.9 8.0 8.6 6.5 34.0
1993
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
Revenues . . . . . . . . . . . . . $60.9 $59.1 $56.4 $55.5 $231.9
Interest expense . . . . . . . . . 20.8 18.8 17.6 17.4 74.6
Provision for losses
on receivables . . . . . . . . . .9 1.1 .3 (.8) 1.5
Net income . . . . . . . . . . . . .9 8.8 5.2 7.6 22.5
SUPPLEMENTARY FINANCIAL DATA
Five Year Summary of Financial and Operating Data
Dollar amounts in millions
1994 1993 1992 1991 1990
Revenues and net income retained
Revenues . . . . . . . . . . . . . . . . . . $ 210.1 $ 231.9 $ 228.3 $ 235.9 $ 247.6
Provision for losses on
receivables . . . . . . . . . . . . . . . . 2.3 1.5 3.6 5.8 3.5
Interest expense . . . . . . . . . . . . . . 62.7 74.6 82.2 90.3 110.1
Other charges, net . . . . . . . . . . . . . 89.9 106.8 96.1 86.6 78.6
Taxes on income . . . . . . . . . . . . . . . 21.2 17.7 16.9 20.2 20.4
Cumulative effect of changes in
accounting policy, net of
income taxes. . . . . . . . . . . . . . . . - 8.8 - - -
Net income . . . . . . . . . . . . . . . . . 34.0 22.5 29.5 33.0 35.0
Dividends paid . . . . . . . . . . . . . . . 25.6 22.6 16.0 74.0 33.0
Net income retained . . . . . . . . . . . . . $ 8.4 $ (.1) $ 13.5 $ (41.0) $ 2.0
Percent of net income to average
shareowner's equity . . . . . . . . . . . . 15.1% 10.3% 13.8% 15.0% 13.6%
Assets at end of year
Cash and cash equivalents . . . . . . . . . . $ 28.3 $ 33.9 $ 79.2 $ 16.0 $ 11.1
Marketable securities . . . . . . . . . . . . 130.5 125.6 130.5 119.1 103.3
Finance receivables:
Truck retail notes and lease financing. . . 508.2 802.9 935.9 902.8 817.5
Wholesale notes . . . . . . . . . . . . . . 240.0 212.5 81.5 37.8 401.4
Accounts . . . . . . . . . . . . . . . . . 357.7 245.1 204.3 162.9 202.7
Other retail notes . . . . . . . . . . . . 18.1 20.6 19.2 25.2 24.5
Total . . . . . . . . . . . . . . . . . . 1,124.0 1,281.1 1,240.9 1,128.7 1,446.1
Allowance for losses . . . . . . . . . . . (8.2) (10.9) (12.4) (11.7) (11.7)
Finance receivables, net . . . . . . . . 1,115.8 1,270.2 1,228.5 1,117.0 1,434.4
Other assets . . . . . . . . . . . . . . . . 269.6 195.5 170.5 196.0 131.6
Total assets . . . . . . . . . . . . . . $1,544.2 $1,625.2 $1,608.7 $1,448.1 $1,680.4
Liabilities and shareowner's equity at end of year
Commercial paper. . . . . . . . . . . . . . . $ 19.2 $ - $ - $ 143.8 $ 558.1
Short-term bank borrowings . . . . . . . . . 400.0 75.0 - 40.0 70.0
Bank revolving credit . . . . . . . . . . . . 355.0 727.0 727.0 220.0 -
Medium-term notes . . . . . . . . . . . . . . 217.3 222.2 261.1 419.4 342.3
Long-term notes and debentures . . . . . . . - 75.0 135.0 135.0 184.9
Subordinated debt . . . . . . . . . . . . . . 100.0 100.0 94.9 93.7 92.6
Total debt . . . . . . . . . . . . . . . 1,091.5 1,199.2 1,218.0 1,051.9 1,247.9
Other liabilities . . . . . . . . . . . . . . 227.1 206.6 171.2 190.2 185.5
Shareowner's equity . . . . . . . . . . . . . 225.6 219.4 219.5 206.0 247.0
Total liabilities and
shareowner's equity . . . . . . . . . . $1,544.2 $1,625.2 $1,608.7 $1,448.1 $1,680.4
Debt to equity ratio . . . . . . . . . . . . 4.8:1 5.5:1 5.5:1 5.1:1 5.1:1
Senior debt to capital funds ratio. . . . . . 3.0:1 3.4:1 3.6:1 3.2:1 3.4:1
Gross insurance premiums written. . . . . . . $ 59.0 $ 65.8 $ 69.2 $ 66.3 $ 55.8
Number of employees . . . . . . . . . . . . . 353 339 364 353 368
SUPPLEMENTARY FINANCIAL DATA (Continued)
Gross Finance Receivables and Leases Acquired
Dollar amounts in millions 1994 1993 1992 1991 1990
Wholesale notes . . . . . . . . . . . $2,306.6 $1,977.6 $1,547.7 $1,461.0 $1,601.4
Retail notes and leases:
New . . . . . . . . . . . . . . . 861.9 730.0 591.8 554.4 512.6
Used . . . . . . . . . . . . . . 217.2 168.4 185.9 192.8 189.7
Total . . . . . . . . . . . . . 1,079.1 898.4 777.7 747.2 702.3
Total . . . . . . . . . . . . . . . $3,385.7 $2,876.0 $2,325.4 $2,208.2 $2,303.7
Analysis of Finance Retail Notes Acquired
Average Down Payment
Contractual as a Percent Average
Term of Retail Monthly
in Months Sales Price Installment
Number of
Year Units New Used New Used New Used
1994. . . . . . . . . . 17,331 54 38 6.6% 13.9% $1,311 $921
1993. . . . . . . . . . 15,879 53 34 6.2 17.0 1,248 786
1992. . . . . . . . . . 14,227 52 35 6.6 14.1 1,239 845
1991 . . . . . . . . . 13,768 52 37 7.2 13.5 1,286 875
1990 . . . . . . . . . 13,950 53 37 8.8 16.5 1,327 766
SUPPLEMENTARY FINANCIAL DATA (Continued)
Analysis of Gross Retail Notes and Lease Financing
With Installments Past Due Over 60 Days
At October 31 ($ Millions) 1994 1993 1992 1991 1990
Original amount of notes
and leases . . . . . . . . . . . . . . . . . . $ 1.3 $ 2.6 $ 4.3 $ 3.9 $ 6.1
Balance of notes and leases . . . . . . . . . . . .5 .7 2.1 1.9 3.9
Balance as a percent of
total outstanding . . . . . . . . . . . . . . . .09% .08% .19% .18% .40%
Analysis of Repossessions
1994 1993 1992 1991 1990
Repossessions acquired as a
percentage of average retail
note gross balance. . . . . . . . . . . . . . . . .97% 1.95% 3.70% 4.54% 5.61%
SUPPLEMENTARY FINANCIAL DATA (Continued)
Analysis of Loss Experience
($ Millions) 1994 1993 1992 1991 1990
Net losses:
Retail notes and leases . . . . . . . . . . . . . . $ .6 $(.1) $2.4 $3.0 $2.0
Wholesale notes . . . . . . . . . . . . . . . . . . .1 .8 .8 2.8 .4
Accounts. . . . . . . . . . . . . . . . . . . . . . .2 - - - -
Total . . . . . . . . . . . . . . . . . . . . $ .9 $ .7 $3.2 $5.8 $2.4
Percent net losses (recoveries) to liquidations:
Retail notes and leases . . . . . . . . . . . . . . .07% (.01)% .27% .41% .26%
Wholesale notes . . . . . . . . . . . . . . . . . . .01 .04 .06 .19 .03
Total . . . . . . . . . . . . . . . . . . . . .03% .03% .13% .26% .10%
Percent net losses to related
average gross receivables outstanding:
Retail notes and leases . . . . . . . . . . . . . . .04% -% .17% .21% .13%
Wholesale notes . . . . . . . . . . . . . . . . . . .03 .16 .20 .66 .10
Accounts. . . . . . . . . . . . . . . . . . . . . . .08 - - - -
Total . . . . . . . . . . . . . . . . . . . . .04% .03% .16% .29% .11%
Includes loss experience on sold notes.
Navistar Financial Corporation and Subsidiaries
Statement of Financial Reporting Responsibility
Management of Navistar Financial Corporation and its subsidiaries is
responsible for the preparation and for the integrity and objectivity of the
accompanying financial statements and other financial information in this
report. The financial statements have been prepared in accordance with
generally accepted accounting principles and include amounts that are based
on management's estimates and judgments.
The accompanying financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Management has made available to Deloitte
& Touche LLP all the Corporation's financial records and related data, as well
as the minutes of Directors' meetings. Management believes that all
representations made to Deloitte & Touche LLP during its audit were valid and
appropriate.
Management is responsible for establishing and maintaining a system of
internal controls throughout its operations that provides reasonable assurance
as to the integrity and reliability of the financial statements, the protec-
tion of assets from unauthorized use and the execution and recording of
transactions in accordance with management's authorization. The system of
internal controls which provides for appropriate division of responsibility
is supported by written policies and procedures that are updated by management
as necessary. The system is tested and evaluated regularly by the parent
Company's internal auditors as well as by the independent auditors in connec-
tion with their annual audit of the financial statements. The independent
auditors conduct their audit in accordance with generally accepted auditing
standards and perform such tests of transactions and balances as they deem
necessary. Management considers the recommendations of its internal auditors
and independent auditors concerning the Corporation's system of internal
controls and takes the necessary actions that are cost-effective in the cir-
cumstances to respond appropriately to the recommendations presented. Manage-
ment believes that the Corporation's system of internal controls accomplishes
the objectives set forth in the first sentence of this paragraph.
John J. Bongiorno
President and Chief Executive Officer
Phyllis E. Cochran
Vice President and Controller
Navistar Financial Corporation and Subsidiaries
Independent Auditors' Report
Navistar Financial Corporation:
We have audited the financial statements of Navistar Financial Corporation
and its subsidiaries listed in Item 8. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Navistar Financial
Corporation and its subsidiaries at October 31, 1994 and 1993, and the results
of their operations and their cash flow for each of the three years in the
period ended October 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, effective
November 1, 1992, Navistar Financial Corporation changed its method of
accounting for postretirement benefits other than pensions and for income
taxes.
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
December 12, 1994
Chicago, Illinois
Item 9. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure
None
PART III
Items 10, 11, 12 and 13
Intentionally omitted. See the index page of this Report
for explanation.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
Financial Statements
See Index to Financial Statements in Item 8.
Financial Statement Schedules
All schedules are omitted because of the absence of the conditions under
which they are required or because information called for is shown in the
financial statements and notes thereto.
Exhibits, Including Those Incorporated By Reference
Exhibit Form 10-K
Number Description Page
(3) Articles of Incorporation and By-Laws
of the Registrant. . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-1
(4) Instruments Defining the Rights of Security
Holders, including Indentures. . . . . . . . . . . . . . . . . . . . . . . . E-2
(10) Material Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . E-3
(24) Power of Attorney. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
(27) Financial Data Schedule
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended October 31,
1994.
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/PHYLLIS E. COCHRAN January 27,1995
Phyllis E. Cochran
Vice President and Controller
(Principal Accounting Officer)