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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, 1995
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 847-734-4275
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, 1995, 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, 1995
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 9
Independent Auditors' Report 39
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 40
PART III
Item 10. Directors and Executive Officers of the
Registrant (A) 40
Item 11. Executive Compensation (A) 40
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A) 40
Item 13. Certain Relationships and Related
Transactions (A) 40
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K 40
SIGNATURES - Principal Accounting Officer 41
- Directors 42
POWER OF ATTORNEY 42
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.
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 Transportation and Transportation's dealers.
The Corporation also finances wholesale accounts and selected
retail accounts receivable of Transportation. Sales of new
products (including trailers) of other manufacturers are also
financed regardless of whether designed or customarily sold for
use with Transportation's 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. ("Klein Truck") 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. Klein Truck appealed to the Oklahoma
Supreme Court where the case is now pending.
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 29
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
Customer demand for Class 5 through 8 trucks remained high
in 1995, as the strength in the U.S. economy experienced during
fiscal 1994 continued during fiscal 1995. As a result of the
strong truck industry and economy, the financial strength and
cash flows of many NFC customers continued to improve and NFC's
delinquencies and losses remained low. The strong economy also
contributed to high liquidity in the commercial financing markets
during 1995. As a result, many financial institutions have
increased their loan activity which gives NFC's customers more
financing alternatives than normal. This competition has caused
NFC to increase marketing efforts of its retail financing
products and services and to reduce finance rates during the
fiscal year.
Financing Volume
The Corporation's serviced receivables portfolio, which
includes sold receivables, totaled $3.2 billion at October 31,
1995, up from $2.5 billion and $2.2 billion at October 31, 1994
and 1993, respectively. The increases year over year reflect the
continued growth in the truck industry. During 1995, the
Corporation supplied 93% of the wholesale financing of new trucks
sold to Transportation's dealers, unchanged from 1994 and up from
90% in 1993. Acquisitions of wholesale notes increased $672
million, 29%, to $2,979 million in 1995 after a 17% increase to
$2,307 million in 1994 from 1993. Serviced wholesale note
balances were $854 million at October 31, 1995, up from $577
million and $559 million at October 31, 1994 and 1993,
respectively.
Acquisitions of retail notes and leases, net of unearned
finance income, increased 20% to $1.1 billion in 1995 after a 19%
increase to $.9 billion in 1994 from $.8 billion in 1993. The
higher level of financing activity reflects 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 14.4% in 1995
compared with 15.3% in 1994 and 1993. The Corporation's reduced
penetration level of retail financing of Transportation's sales
in 1995 was a result of competition and liquidity in the
commercial financing markets. Serviced retail notes and lease
financing balances were $1.9 billion at October 31, 1995,
compared with $1.6 billion and $1.4 billion at October 31, 1994
and 1993, respectively.
Owned net finance receivables balances, including
subordinated interests in retail and wholesale receivables,
increased to $1.5 billion at October 31, 1995, from $1.2 billion
at October 31, 1994, and $1.3 billion at October 31, 1993. The
increase in owned receivable balances resulted from higher
financing volumes, partially offset by increases in sold note
balances. Sold retail receivables balances increased to $1.2
billion at October 31, 1995, from $1.0 billion and $.5 billion at
October 31, 1994 and 1993, respectively. Sold wholesale note
balances were $500 million at October 31, 1995, a $200 million
increase over 1994 and 1993.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of Operations
The components of net income for the three years ended
October 31 are as follows:
($ Millions) 1995 1994 1993
Income before income taxes:
Finance operations $53.1 $49.9 $51.6
Insurance operations 5.6 5.3 1.1
Supplemental Trust contribution - - (3.7)
Income before taxes
and cumulative effect 58.7 55.2 49.0
Taxes on income 22.5 21.2 17.7
Cumulative effect of changes in
accounting policy - - 8.8
Net income $36.2 $34.0 $22.5
Income before taxes in 1995 was $58.7 million, a 6% increase
from $55.2 million in 1994. Finance operations' income in 1995
was $3.2 million higher than 1994 as a result of higher finance
receivables to support the demand for Transportation truck
products and improvement in the Corporation's borrowing spread
over market interest rates. This increase was partially offset
by lower gains on sales of retail notes. Gains on sales of
retail note receivables during 1995 were $5.2 million on sales of
$740 million compared with gains of $11.8 million on sales of
$1,033 million in 1994. Lower gains on sales resulted from
reduced sales volumes and lower margins on retail note
acquisitions from the second half of fiscal 1994 through the
first quarter of fiscal 1995, as rising interest costs to fund
retail note acquisitions could not be offset fully by increased
retail note pricing. In a rising interest rate environment, this
margin contraction is a typical occurrence for NFC as retail
truck customers generally require finance rate commitments on
purchases of trucks 30 to 90 days in advance of delivery. In
addition, the Corporation funds the majority of its retail notes
by selling the notes in the public market and the effective
interest rate for each sale is based on a market interest rate at
the time of sale which may be up to six months after the truck
delivery date. The gains on sales in fiscal 1994 were primarily
on sales in November and December, prior to the increase in
market interest rates. During the last half of fiscal 1995,
margins on retail note acquisitions have improved as market
interest rates have declined; however, margins remain below
historical levels due to increased competition in the commercial
financing markets.
Income before taxes of $55.2 million in 1994 increased 13%
from $49.0 million in 1993, which included a $3.7 million pretax
charge for the Corporation's portion of the Supplemental Trust
contribution. See note 10 to the Consolidated Financial
Statements. Finance operations' income in 1994 was $1.7 million
lower than 1993 as a result of lower margins on retail financing
and gains of $2.4 million less than those on 1993 sales of retail
receivables offset in part by the increased volume of wholesale
financing to support the increased demand for trucks. The
Corporation's insurance subsidiary's 1994 income increased $4.2
million over 1993 as a result of improved
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of Operations (Continued)
underwriting results on truck liability insurance. The more
significant elements of revenue and expense impacting net income
for these years are discussed in the following paragraphs.
Total revenue for 1995 was $228 million compared with $211
million and $232 million in 1994 and 1993, respectively. Retail
note and lease financing revenue was $73 million in 1995 compared
with $71 million and $102 million in 1994 and 1993, respectively.
The 1995 improvement over 1994 is due to higher financing volume
offset in part by lower gains on sold notes. Revenue in 1994 was
30% below 1993 as a higher proportion of retail notes was
financed through the sale of receivables as the Corporation
gained access to the asset-backed securitized market. 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.
Wholesale note revenue increased 38% in 1995 to $54 million
and increased 22% in 1994 from 1993 as a result of higher average
outstanding note balances in support of increased demand for
Transportation truck products. In addition, revenue in 1995
increased from higher average yields relating to a higher prime
interest rate.
Revenue from accounts increased in 1995 to $29 million from
$22 million and $18 million in 1994 and 1993, respectively. The
increase in 1995 and 1994 resulted from higher average
outstanding balances in support of increased demand for
Transportation truck products. In addition, revenue in 1995
increased from higher average yields relating to a higher prime
interest rate.
Servicing fee income increased to $18 million in 1995 from
$17 million in 1994 and $11 million in 1993 as a result of higher
levels of sold note receivable balances which the Corporation
continues to service.
Insurance premiums earned by Harco decreased 12% to $45
million in 1995 from $51 million in 1994 and 11% in 1994 from
1993. The decreases in 1995 and 1994 reflect reductions in
written premiums of truck liability lines in response to adverse
loss experience in those lines and to increased competition.
Borrowing costs increased 20% in 1995 to $84 million from
$70 million and $79 million in 1994 and 1993, respectively. The
increase in 1995 from 1994 is primarily the result of higher debt
balances to support increased wholesale note and account balances
and higher market interest rates. These increased borrowing
costs were offset by an improvement in the Corporation's
borrowing spread over market interest rates as a result of the
amended revolving debt agreement and the asset-backed commercial
paper ("ABCP") program. See note 9 to the Consolidated Financial
Statements. 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 ratio
of debt to equity was 5.2:1, 4.8:1 and 5.5:1 at October 31, 1995,
1994 and 1993, respectively.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of Operations (Continued)
On July 1, 1993, Navistar implemented a restructured retiree
health care and life insurance plan (the "Plan"), as discussed in
note 10 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.
Credit, collection and administrative expenses of $28
million were $2 million higher than 1994 primarily as a result of
the provision for payments to employees as provided by
Transportation's profit sharing agreement and the Corporation's
management incentive programs. In addition, costs were higher
due to increased retail note marketing efforts.
The provision for losses on receivables totaled $2.6 million
in 1995 compared with $2.3 million in 1994 and $1.5 million in
1993. Truck note and account write-offs (recoveries), including
those on sold notes, totaled $(.8) million in 1995, $.9 million
in 1994, and $.7 million in 1993. The provision amount exceeded
the write-offs (recoveries) due to growth of receivables
financed. At October 31, 1995, the Corporation's allowance for
losses equaled .62% of net financing receivables, including sold
receivables, compared with .65% and .69% as of October 31, 1994
and 1993, respectively.
Insurance claims and underwriting expenses decreased to $47
million in 1995 from $54 million and $65 million in 1994 and
1993, respectively. The decline resulted from decreases in
losses incurred in Harco's truck liability insurance lines.
Additionally, insurance operating expenses were lower as a result
of decreased commission costs associated with lower volumes of
premiums written through general agents.
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.
Receivable sales were a significant source of funding in
1995 and 1994. Through the asset-backed public market, the
Corporation has been able to fund fixed rate retail note
receivables at rates offered to companies with investment grade
ratings. During fiscal 1995, the Corporation sold $740 million
of retail notes, net of unearned finance income, through Navistar
Financial Retail Receivables Corporation ("NFRRC"), a wholly-
owned subsidiary,
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Liquidity and Funds Management (Continued)
to two owner trusts. The owner trusts, in turn, sold $714
million of notes and $26 million of certificates to investors.
Net proceeds from these sales were $693 million, after deducting
$2 million for underwriting fees and $45 million to establish
reserve accounts with the trusts as credit enhancement for the
public sales. During 1994, the Corporation sold $1,033 million
of retail notes receivable, $203 million through its bank
receivable purchase facility and $830 million through NFRRC and
owner trusts to public investors. Net proceeds from these sales
were $952 million after the reduction of holdback reserves and
credit enhancement. The net proceeds were used by the
Corporation for general working capital purposes. At October 31,
1995, the remaining shelf registration available to NFRRC for
issuance of asset-backed securities was $1,430 million. On
November 14, 1995, NFRRC filed an additional registration with
the Securities and Exchange Commission providing for the issuance
from time to time of an additional $2,000 million of asset-backed
securities.
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. On
June 8, 1995, a new Navistar Financial Dealer Note Master Trust
issued $200 million of 9.3 year asset-backed certificates to the
public. The proceeds of $195 million, net of $2 million of
expenses and underwriting fees and $3 million to fund a reserve
account, were used by the Corporation for general working capital
purposes. This issuance of $200 million of certificates during
fiscal 1995 increased NFSC's revolving wholesale note sales
trusts to $500 million. The sales trusts are comprised of three
$100 million pools of notes maturing serially from 1997 to 1999
and the $200 million pool maturing in 2004.
See note 9 to the Consolidated Financial Statements for a
discussion of the Corporation's revolving credit agreement and
asset-backed commercial paper program.
In March 1995, ratings on the Corporation's debt were
upgraded by Moody's Investors Service, Inc. ("Moody's").
Moody's raised its ratings for the Corporation's debt from Ba3 to
Ba2 for senior debt and from B2 to B1 for subordinated debt. In
March 1995, Duff & Phelps confirmed its debt ratings of BB+ for
senior debt and BB for subordinated debt. In October 1993,
ratings on the Corporation's debt were reviewed by Standard and
Poor's Corporation ("Standard and Poor'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. The
Corporation's commercial paper is rated "not prime" by Moody's.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Liquidity and Funds Management (Continued)
In November 1995, the Corporation sold $525 million of
retail notes, net of unearned finance income, through NFRRC to an
owner trust which, in turn, sold $507 million of notes and $18
million of certificates to investors. The proceeds of $499
million, after deducting $1 million for underwriting fees and $25
million to establish a reserve account with the trust as credit
enhancement, were used by the Corporation for general working
capital purposes.
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 and, to a lesser extent, by
utilizing derivative financial instruments. See notes 1 and 13
to the Consolidated Financial Statements. Corporate policy does
not allow the use of derivatives for speculative purposes.
Business Outlook
The demand for heavy trucks is forecast to soften during
fiscal 1996 and correspondingly NFC's wholesale and retail
financing activity is anticipated to be lower in 1996. The
decline in the heavy truck industry may impact the financial
strength of dealers and customers and NFC's ability to maintain
the current level of portfolio quality. Competition will
continue to put pressure on the Corporation's retail note
acquisition activity and retail note margins.
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 1996 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, 1995, 1994 and 1993 10
Statement of Consolidated Financial Condition as of
October 31, 1995 and 1994 11
Statement of Consolidated Cash Flow for the years ended
October 31, 1995, 1994 and 1993 12
Notes to Consolidated Financial Statements 13
Supplementary Financial Data 34
Independent Auditors' Report 39
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Income and Retained Earnings
Millions of dollars
Note
For the years ended October 31 1995 1994 1993 Reference
Revenues
Retail notes and lease financing $ 73.3 $ 71.4 $101.9
Wholesale notes 54.1 39.2 32.0
Accounts 29.2 22.2 17.5
Servicing fee income 18.3 17.3 10.6
Insurance premiums earned 44.6 51.1 57.4
Marketable securities 8.7 9.6 12.5
Total 228.2 210.8 231.9
Expenses
Cost of borrowing:
Interest expense 75.1 62.7 74.6 8, 9
Other 9.1 7.1 4.7
Total 84.2 69.8 79.3
Supplemental Trust expense - - 3.7 10
Credit, collection and administrative 27.9 25.9 26.1
Provision for losses on receivables 2.6 2.3 1.5 6
Insurance claims and underwriting 46.7 54.0 65.2
Other expense, net 8.1 3.6 7.1
Total 169.5 155.6 182.9
Income Before Taxes on Income and
Cumulative
Effect of Changes in Accounting Policy 58.7 55.2 49.0
Taxes on Income 22.5 21.2 17.7 7
Income Before Cumulative Effect of Changes
in Accounting Policy 36.2 34.0 31.3
Cumulative Effect of Changes in Accounting - - 8.8 10
Policy
Net Income 36.2 34.0 22.5
Retained Earnings
Beginning of year 56.8 48.4 48.5
Dividends paid (9.0) (25.6) (22.6)
End of year $ 84.0 $ 56.8 $ 48.4 12
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Financial Condition
Millions of dollars
Note
As of October 31 1995 1994 Reference
ASSETS
Cash and Cash Equivalents $ 2.9 $ 28.3
Marketable Securities 131.8 130.5 4
Receivables
Finance receivables 1,381.3 1,102.2 5
Allowance for losses (10.4) (8.2) 6
Receivables, net 1,370.9 1,094.0
Amounts Due from Sales of Receivables 247.8 193.0 5
Equipment on Operating Leases, Net 39.3 26.6
Repossessions 5.8 1.8
Reinsurance Receivables 24.8 33.7
Other Assets 51.4 26.9
Total Assets $1,874.7 $1,534.8
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt $ 50.5 $ 419.2 8
Accounts Payable 138.8 63.6
Accrued Income Taxes 12.0 2.3
Accrued Interest 12.1 11.3
Senior and Subordinated Debt 1,279.8 672.3 9
Dealers' Reserves 21.0 18.8
Unpaid Insurance Claims and Unearned Premiums 103.8 121.7
Shareowner's Equity 12
Capital stock (Par value $1.00, 1,600,000
shares issued and outstanding) and
paid-in capital 171.0 171.0
Retained Earnings 84.0 56.8
Unrealized gains (losses) on marketable
securities 1.7 (2.2) 4
Total 256.7 225.6
Total Liabilities and Shareowner's Equity $1,874.7 $1,534.8
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 1995 1994 1993 Reference
Cash Flow From Operations
Net income $ 36.2 $ 34.0 $ 22.5
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables (5.2) (11.8) (14.2) 5
Depreciation and amortization 11.1 8.7 9.7
Provision for losses on receivables 2.6 2.3 1.5 6
Cumulative effect of changes in
accounting policy - - 8.8
Supplemental Trust expense - - 3.7
Increase (decrease) in accounts payable
and accrued liabilities 5.3 (3.5) (1.8)
Increase in deferred income taxes .5 3.1 3.7
Increase (decrease) in accounts payable
to affiliated companies 73.2 (0.9) 14.3
Increase (decrease) in unpaid insurance
claims and unearned premiums, net of
reinsurance receivables (8.9) (6.5) 10.7
Other (3.6) (5.4) (3.6)
Total 111.2 20.0 55.3
Cash Flow From Investing Activities
Purchase of retail notes and lease
receivables (1,099.5) (915.9) (770.2)
Principal collections on retail notes
and lease receivables 123.4 180.9 337.4
Proceeds from sold retail notes 726.8 994.8 558.2
Acquisitions over cash collections of
wholesale notes and accounts
receivable (77.1) (140.0) (171.9)
Purchase of marketable securities (61.9) (51.8) (58.1)
Proceeds from sales of marketable
securities 67.3 45.1 64.8
Increase in property and equipment
leased to others (18.7) (5.3) (14.2)
Total (339.7) 107.8 (54.0)
Cash Flow From Financing Activities
Net increase in commercial paper 31.3 19.2 -
Net increase (decrease) in
short-term bank borrowings (400.0) 325.0 75.0
Net increase (decrease) in bank
revolving credit facility usage 405.0 (372.0) -
Net increase in asset-backed commercial
paper facility usage 275.8 - -
Principal payments on term debt (100.0) (80.0) (99.0)
Principal payments on subordinated debt - (100.0) -
Proceeds from issuance of subordinated
debt - 100.0 -
Dividends paid to Transportation (9.0) (25.6) (22.6)
Total 203.1 (133.4) (46.6)
Decrease in Cash and Cash Equivalents (25.4) (5.6) (45.3)
Cash and Cash Equivalents at Beginning of
Year 28.3 33.9 79.2
Cash and Cash Equivalents at End of Year $ 2.9 $ 28.3 $ 33.9
Supplementary disclosure of cash flow
information:
Interest paid $ 74.3 $ 64.8 $ 79.3
Income taxes paid $ 14.6 $ 22.1 $ 13.5
See Notes to Consolidated Financial Statements.
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1995
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 terms of the receivables using the
interest 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 securitizes and sells 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
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 liability for unpaid
insurance claims includes provisions for reported claims and an
estimate of unreported claims based on past experience. Such
provisions 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.
The Corporation's wholly-owned insurance subsidiary, Harco
National Insurance Company ("Harco"), limits its exposure on any
single loss occurrence by ceding reinsurance to other insurance
enterprises. Reinsurance receivables including amounts related
to unpaid insurance claims and prepaid reinsurance premiums are
reported as assets in the Statement of Consolidated Financial
Condition.
Income Taxes
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.
Marketable Securities
Marketable securities, which are classified as available-for-sale,
are reported at fair value. Unrealized gains or losses, net of deferred
income taxes, are included as a separate component of shareowner's
equity in the Statement of Consolidated Financial Condition.
Derivative Financial Instruments
The Corporation uses derivatives to reduce risks of interest rate
volatility. All derivative financial instruments are held for
purposes other than trading, and the Corporation's policy does not allow
the use of derivatives for speculative purposes. Gains or losses
related to hedges of anticipated sales of receivables are deferred and are
recognized in income when the receivables are sold.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
Reclassification
Certain amounts for prior years have been reclassified to conform
with the presentation used in the 1995 financial statements.
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 $55.7
in 1995, $50.7 in 1994 and $41.2 in 1993.
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 $2.4 in 1995, $2.5 in 1994 and $2.3
in 1993.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
2. TRANSACTIONS WITH AFFILIATED COMPANIES (Continued)
Short-Term Borrowings
The Corporation had daily average short-term borrowings from
Transportation of $93 in 1995 and $83 in 1994 on which interest
accrued at the Corporation's incremental short-term borrowing rate.
These borrowings, including $6 and $4 of interest expense in 1995 and 1994,
respectively, were repaid during each of the fiscal years.
Accounts Payable
Accounts payable include $89.5 and $16.3 payable to Transportation
at October 31, 1995 and 1994, respectively.
3. INDUSTRY SEGMENTS
Information by industry segment is summarized as follows:
1995 1994 1993
Revenues:
Finance operations $ 175.1 $ 150.6 $ 164.2
Insurance operations 53.1 60.2 67.7
Total revenue $ 228.2 $ 210.8 $ 231.9
Income before taxes on income and
cumulative effect of changes in
accounting policy:
Finance operations $ 53.1 $ 49.9 $ 47.9
Insurance operations 5.6 5.3 1.1
Total income before taxes on income
and cumulative effect of changes
in accounting policy $ 58.7 $ 55.2 $ 49.0
Assets at end of year:
Finance operations $1,701.9 $1,354.1 $1,473.5
Insurance operations 172.8 180.7 151.7
Total assets at end of year $1,874.7 $1,534.8 $1,625.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES
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 difference between
amortized cost and fair value, net of deferred income taxes, is
reflected as a separate component of shareowner's equity.
Shareowner's equity was increased by net unrealized holding gains
of $1.7 as of October 31, 1995, and decreased by net unrealized
holding losses of $2.2 at October 31, 1994. The following table
sets forth, by type of security issuer, the amortized cost and
estimated market values at October 31, 1995 and 1994:
Amortized Gross Unrealized Fair
Cost Gains Losses Value
October 31, 1995
U.S. government securities $ 52.8 $ 1.2 $ .1 $ 53.9
Corporate debt securities 32.0 .2 .2 32.0
Mortgage- and
asset-backed securities 32.7 .5 .1 33.1
Foreign governments 1.7 - - 1.7
Total debt securities $119.2 $ 1.9 $ .4 $120.7
Equity securities 10.0 1.7 .6 11.1
Total $129.2 $ 3.6 $ 1.0 $131.8
October 31, 1994
U.S. government 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES (Continued)
Contractual maturities of marketable debt securities at
October 31, 1995, are as follows:
Amortized Fair
Cost Value
Due in one year or less $ 21.9 $ 21.9
Due after one year through five years 32.1 32.8
Due after five years through ten years 21.2 21.5
Due after ten years 11.3 11.4
86.5 87.6
Mortgage- and asset-backed securities 32.7 33.1
Total $ 119.2 $ 120.7
Proceeds from sales or maturities of marketable securities
available for sale were $67.3 during 1995 and $45.1 during 1994.
Gross gains of $.8 and $.9 and gross losses of $.6 and $.2 were
realized on those sales in 1995 and 1994, respectively.
All marketable securities at October 31, 1995 and 1994, were
held by Harco, of which $23.2 and $29.5, 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:
1995 1994
Retail notes and lease financing $ 747.2 $ 513.9
Wholesale notes 268.2 230.6
Accounts:
Retail 316.7 308.2
Wholesale 49.2 49.5
Total 365.9 357.7
Total finance receivables $1,381.3 $1,102.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
Contractual maturities of finance receivables including
unearned finance income at October 31, 1995, are summarized as
follows:
Retail Wholesale Accounts
Due in:
1996 $238.6 $181.3 $365.9
1997 203.0 86.9 -
1998 184.5 - -
1999 139.8 - -
2000 92.5 - -
Due after 2000 7.7 - -
Gross finance receivables 866.1 268.2 365.9
Unearned finance income 118.9 - -
Total finance receivables $747.2 $268.2 $365.9
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. Outstanding
sold receivable net balances at October 31 are as follows:
1995 1994
Retail notes $1,173.2 $1,046.8
Wholesale notes 500.0 300.0
Total $1,673.2 $1,346.8
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 $5.2, $11.8 and $14.2 on retail note
receivable sales of $740, $1,033 and $576 for the fiscal years
ended October 31, 1995, 1994 and 1993, 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
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. During fiscal 1995, in two
separate sales, the Corporation sold a total of $740 of retail
notes, net of unearned finance income, through NFRRC to two
individual owner trusts. The owner trusts, in turn, sold $714 of
notes and $26 of certificates to investors. The proceeds of
$693, after deducting $2 for underwriting fees and $45 to
establish reserve accounts with the trusts as credit enhancement,
were used by the Corporation for general working capital
purposes. At October 31, 1995, the remaining shelf registration
available to NFRRC for issuance of asset-backed securities was
$1,430. On November 14, 1995, 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.
At October 31, 1994, NFSC had in place a $300 revolving
wholesale note sales trust providing for the continuous sale of
eligible wholesale notes on a daily basis. On June 8, 1995, a
new Navistar Financial Dealer Note Master Trust issued $200 of
9.3 year asset-backed certificates to the public. The proceeds
of $195, net of $2 of expenses and underwriting fees and $3 to
fund a reserve account, were used by the Corporation for general
working capital purposes. Under the terms of the sale, the
Corporation increased the amount subordinated to the investor's
interest from $46.5 to $86.5. This issuance of $200 of
certificates during fiscal 1995 increased NFSC's revolving
wholesale note sales trusts to $500. The sales trusts are
comprised of three $100 pools of notes maturing serially from
1997 to 1999 and the $200 pool maturing in 2004.
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 retail 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
The following is a summary of amounts included in "Amounts Due
from Sales of Receivables":
October 31
1995 1994
Cash held and invested by trusts $ 66.8 $ 51.5
Subordinated retained interests in wholesale
receivables 86.3 46.5
Subordinated retained interests in retail
receivables 12.2 14.1
Holdback reserves 43.7 64.4
Excess servicing fee and other 48.0 24.5
Allowance for credit losses (9.2) (8.0)
Total $247.8 $193.0
6. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as
follows:
1995 1994 1993
Total allowance for losses at beginning of
year $16.2 $14.8 $14.0
Provision for losses 2.6 2.3 1.5
Net (losses) recoveries (charged)
credited to allowance .8 (.9) (.7)
Total allowance for losses at end of
year $19.6 $16.2 $14.8
Allowance pertaining to:
Owned notes $10.4 $ 8.2 $10.9
Sold notes 9.2 8.0 3.9
Total $19.6 $16.2 $14.8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
7. TAXES ON INCOME
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.
Recognition of deferred tax assets is allowed if future
realization is more likely than not.
Taxes on income are summarized as follows:
1995 1994 1993
Current:
Federal $18.9 $15.1 $12.0
State and local 3.1 3.0 2.0
Total current 22.0 18.1 14.0
Deferred (primarily Federal) .5 3.1 3.7
Total $22.5 $21.2 $17.7
The effective tax rate of 38% in 1995 and 1994 and 36% in
1993 differs from the statutory United States Federal tax rate of
35% primarily because of state and local income taxes. Deferred
tax assets and liabilities at October 31, 1995 and 1994,
comprised the following:
1995 1994
Deferred tax assets:
Other postretirement benefits $2.8 $2.7
Unrealized losses on marketable securities - 1.2
Total deferred tax assets 2.8 3.9
Deferred tax liabilities:
Depreciation and other 6.4 5.9
Unrealized gains on marketable securities 1.0 -
Total deferred tax liabilities 7.4 5.9
Net deferred tax liabilities $4.6 $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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
8. 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.
Short-Term Debt at October 31 is summarized as follows:
1995 1994
Commercial paper $50.5 $ 19.2
Short-term bank borrowings - 400.0
Total $50.5 $419.2
Information regarding short-term borrowings is as follows:
1995 1994 1993
Aggregate obligations outstanding:
Daily average $ 37.8 $ 11.7 $ .6
Maximum month-end balance 81.1 419.2 75.0
Weighted average interest rate:
On average daily borrowing 6.4% 5.4% 6.5%
At October 31 6.3% 5.6% 6.5%
Unused commitments under the Corporation's bank revolving
credit facility and bank liquidity facility supporting the asset-
backed commercial paper program are used as backup for
outstanding short-term borrowings. See also note 9 to the
Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
9. SENIOR AND SUBORDINATED DEBT
Senior and Subordinated Debt outstanding at October 31 is
summarized as follows:
1995 1994
Bank revolving credit, at variable rates,
due October 1998 $ 760.0 $ 355.0
Funding under asset-backed commercial
paper program, at variable rates,
maturing October 1998 302.3 -
Senior term debt:
Notes, medium-term, 9.50%, due 1996 117.5 217.5
Unamortized discount - (.2)
Total senior term debt 117.5 217.3
Subordinated term debt:
Senior Notes, 8 7/8%, due November 1998 100.0 100.0
Total senior and subordinated debt $1,279.8 $ 672.3
The weighted average interest rate on total debt, including
short-term debt and the effect of discounts and related
amortization, was 7.4%, 7.1% and 6.6% in 1995, 1994 and 1993,
respectively. The aggregate annual maturities and required
payments of debt are as follows: 1996, $117.5; 1998, $1,062.3
and 1999, $100.0.
Effective November 9, 1994, the Corporation amended and
restated its $727 bank revolving credit agreement, extending the
maturity date to October 31, 1998 and expanding the commitment to
$900. In addition, the purchasers' commitments under the $600
retail notes purchase facility agreement were terminated and the
Corporation established a $300 asset-backed commercial paper
("ABCP") program supported by a bank liquidity facility with a
maturity date of October 31, 1998. Under the terms of the ABCP
program, a special purpose wholly-owned subsidiary of NFC
purchases eligible receivables from NFC. All assets of the
subsidiary are pledged to a Trust that funds the receivables with
A1/P1 rated commercial paper. In addition, the assets may be
sold to the Trust.
Available funding under the amended and restated credit
facility and the ABCP program was $148, of which $50 provided
funding backup for the outstanding short-term debt at October 31,
1995. The remaining $98 when combined with unrestricted cash and
cash equivalents made $101 available to fund the general business
purposes of the Corporation at October 31, 1995. While the
amended revolving credit facility removed certain dividend
restrictions, the Corporation is required to maintain tangible
net worth at a minimum of $175 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
9. SENIOR AND SUBORDINATED DEBT (Continued)
assets to the Corporation's debtholders. Compensating cash
balances are not required under the restated revolving credit
facility. Facility fees are paid quarterly regardless of usage.
As of October 31, 1995, approximately $208 of sold notes was
outstanding under the $600 retail notes purchase facility.
Participants of the facility will continue to own the receivables
during the run-off.
10. 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.
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 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. RETIREMENT BENEFITS (Continued)
Pension Expense
Net pension cost includes the following:
1995 1994 1993
Service cost-benefits earned during
the period $ .5 $ 1.0 $ .6
Interest cost on projected benefit
obligation 2.8 2.7 2.8
Return on assets - actual (gain) loss (9.1) 3.3 (8.4)
- deferred gain (loss) 5.8 (6.8) 5.2
Other costs (including amortization of
transition amount) - .1 .1
Net pension cost $ - $ .3 $ .3
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
1995 1994 1995 1994
Actuarial present value of:
Vested benefits $(31.8) $(25.8) $ (2.2) $ (1.8)
Non-vested benefits (4.0) (3.0) (.1) (.1)
Accumulated benefit
obligation (35.8) (28.8) (2.3) (1.9)
Effect of projected future
compensation levels (.9) (.6) - -
Total projected benefit
obligation (36.7) (29.4) (2.3) (1.9)
Plan assets at fair value 41.5 34.5 - -
Funded status at October 31 4.8 5.1 (2.3) (1.9)
Unrecognized net losses (gains) (4.2) (4.8) .6 .2
Unrecognized plan amendments .5 .5 - -
Unrecognized net obligation
as of transition date .1 .2 - -
Net asset (liability) $ 1.2 $ 1.0 $ (1.7) $ (1.7)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. RETIREMENT BENEFITS (Continued)
The weighted average rate assumptions used in determining
the projected benefit obligation and pension expense were:
1995 1994 1993
Discount rate used to determine the present
value of the projected benefit obligations 7.5% 9.2% 6.7%
Expected long-term rate of return on plan
assets 9.9% 9.0% 10.0%
Expected rate of increase in future
compensation levels 3.5% 3.5% 3.5%
Other Postretirement Benefits
During 1993, the Corporation adopted SFAS 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," and
recognized the 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 for other postretirement benefits
that are included in the Statement of Consolidated Income and
Retained Earnings include the following:
1995 1994 1993
Service cost - benefits earned during
the year $ .3 $ .2 $ .3
Interest cost on the accumulated benefit
obligation .8 .7 .6
Expected return on assets - actual (gain)/loss (1.5) (.2) -
- deferred gain/(loss) 1.2 - -
Total cost of postretirement benefits other
than pension $ .8 $ .7 $ .9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. RETIREMENT BENEFITS (Continued)
The components of the liability for other postretirement
benefits as of October 31, 1995 and 1994, were as follows:
1995 1994
Retirees and their dependents $(4.9) $(4.2)
Active employees eligible to retire (2.4) (2.2)
Other active participants (3.3) (2.6)
Accumulated postretirement benefit obligation (APBO) (10.6) (9.0)
Plan assets at fair value 4.5 2.8
APBO in excess of plan assets (6.1) (6.2)
Unrecognized net loss .4 .7
Net liability $(5.7) $(5.5)
The expected return on plan assets was 10% for 1995 and 9%
for 1994 and 1993. The weighted average of discount rates used
to determine the accumulated postretirement benefit obligation
was 7.7% and 8.9% at October 31, 1995 and 1994, respectively.
For 1996, 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% 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 $1.7 and the associated expense
recognized for the year ended October 31, 1995, would increase by
an estimated $.2.
11. 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, 1995, future minimum lease commitments under
noncancelable operating leases with remaining terms in excess of
one year are as follows:
Year Ended October 31,
1996 $1.7
1997 1.6
1998 1.6
1999 1.5
2000 1.2
Thereafter .2
Total $7.8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
12. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of
October 31, 1995 and 1994, 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 9,
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.
13. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the
Corporation's financial instruments were as follows:
1995 1994
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Finance receivables:
Retail notes $ 680.8 $ 707.2 $ 452.0 $ 458.1
Wholesale notes 268.2 268.2 230.6 230.6
Accounts 365.9 365.9 357.7 357.7
Amounts due from sales of
receivables 247.8 234.6 193.0 183.0
Financial liabilities:
Senior and subordinated debt $1,279.8 $1,282.9 $ 672.3 $ 673.9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
13. FINANCIAL INSTRUMENTS (Continued)
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 as a result of the
short maturity of these instruments.
Marketable Securities
Fair value is estimated based on quoted market price. The cost
and fair value of marketable securities is disclosed in note 4.
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 as a result of the short term nature of the
receivables.
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
13. FINANCIAL INSTRUMENTS (Continued)
Derivative Financial Instruments
The Corporation manages its exposure to fluctuations in
interest rate changes by limiting the amount of fixed rate assets
funded with variable rate debt by selling fixed rate retail
receivables on a fixed rate basis and, to a lesser extent, by
utilizing derivative financial instruments. These derivative
financial instruments may include interest rate swaps, interest
rate caps and forward interest rate contracts. 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. Notional amounts are used to measure
the volume of derivative financial instruments and do not
represent exposure to credit loss.
The Corporation enters into forward interest rate contracts
to manage its exposure to fluctuations in funding costs from the
anticipated securitization and sale of retail notes. The
Corporation locks into an interest rate by entering into a
forward contract on a U.S. Treasury security whose terms
approximate those used to determine the selling price of the
anticipated sale of receivables. Gains or losses incurred with
the closing of these agreements are included as a component of
the gain on sale of receivables.
During June through October 1995, the Corporation entered
into $325 of forward interest rate lock agreements on a Treasury
maturing in 1997 related to the anticipated November 1995 sale of
retail receivables. See also note 15. These hedge agreements,
which were closed on October 18, 1995, in conjunction with the
pricing of the sale, resulted in an immaterial loss which was
deferred at October 31, 1995, and included in the gain on the
sale of receivables recognized in November 1995.
During fiscal 1994 and 1995, there were no swap agreements
outstanding and only one interest rate cap purchased in 1985 for
a notional amount of $50 which serves to hedge the interest cost
of variable rate debt. The premium paid for this interest rate
cap agreement has been fully amortized to interest expense. The
effect of this cap on the Corporation's interest expense was not
material.
The Corporation's wholly-owned insurance subsidiary has
investments in Collateralized Mortgage Obligations ("CMO's") of
$33 which are included in the Corporation's marketable securities
at October 31, 1995.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. LEGAL PROCEEDINGS
In May 1993, a jury issued a verdict in favor of Vernon
Klein & Equipment, Inc. ("Klein Truck") 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 of Oklahoma reversed the verdict and entered
judgment in favor of Transportation on virtually all aspects of
the case. Klein Truck appealed to the Oklahoma Supreme Court
where the case is now pending.
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.
15. SUBSEQUENT EVENT
In November 1995, the Corporation sold $525 of retail notes,
net of unearned finance income, through NFRRC to an owner trust
which, in turn, sold $507 of notes and $18 of certificates to
investors. The Corporation initially sold $455 of retail notes
receivable on November 1, 1995, and via a pre-funding feature in
the agreement, subsequently sold an additional $70 of retail
receivables on November 10, 1995. The proceeds of $499, after
deducting $1 for underwriting fees and $25 to establish a reserve
account with the trust as credit enhancement for the public sale,
were used by the Corporation for general working capital
purposes.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
16. QUARTERLY FINANCIAL INFORMATION (unaudited)
1995
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
Revenues $50.9 $56.5 $64.1 $56.7 $228.2
Interest expense 17.1 20.4 19.1 18.5 75.1
Provision for losses
on receivables .1 .5 .4 1.6 2.6
Net income 6.3 7.5 13.3 9.1 36.2
1994
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
Revenues $58.8 $50.2 $50.6 $51.2 $210.8
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
SUPPLEMENTARY FINANCIAL DATA
Five Year Summary of Financial and Operating Data
Dollar amounts in millions
1995 1994 1993 1992 1991
Revenues and net income
retained
Revenues $ 228.2 $ 210.8 $ 231.9 $ 228.3 $ 235.9
Provision for losses on
receivables 2.6 2.3 1.5 3.6 5.8
Interest expense 75.1 62.7 74.6 82.2 90.3
Other charges, net 91.8 90.6 106.8 96.1 86.6
Taxes on income 22.5 21.2 17.7 16.9 20.2
Cumulative effect of changes
in accounting policy, net
of income taxes - - 8.8 - -
Net income 36.2 34.0 22.5 29.5 33.0
Dividends paid 9.0 25.6 22.6 16.0 74.0
Net income retained $ 27.2 $ 8.4 $ (.1) $ 13.5 $(41.0)
Percent of net income to
average shareowner's equity 15.0% 15.1% 10.3% 13.8% 15.0%
Assets at end of year
Cash and cash equivalents $ 2.9 $ 28.3 $ 33.9 $ 79.2 $ 16.0
Marketable securities 131.8 130.5 125.6 130.5 119.1
Finance receivables:
Truck retail notes and
lease financing 747.2 513.9 823.5 955.1 928.0
Wholesale notes 268.2 230.6 212.5 81.5 37.8
Accounts 365.9 357.7 245.1 204.3 162.9
Total 1,381.3 1,102.2 1,281.1 1,240.9 1,128.7
Allowance for losses (10.4) (8.2) (10.9) (12.4) (11.7)
Finance receivables,net 1,370.9 1,094.0 1,270.2 1,228.5 1,117.0
Other assets 369.1 282.0 195.5 170.5 196.0
Total assets $1,874.7 $1,534.8 $1,625.2 $1,608.7 $1,448.1
Liabilities and shareowner's
equity at end of year
Commercial paper $ 50.5 $ 19.2 $ - $ - $ 143.8
Short-term bank borrowings - 400.0 75.0 - 40.0
Bank revolving credit 760.0 355.0 727.0 727.0 220.0
Asset-backed commercial paper
facility 302.3 - - - -
Medium-term notes 117.5 217.3 222.2 261.1 419.4
Long-term notes and debentures - - 75.0 135.0 135.0
Subordinated debt 100.0 100.0 100.0 94.9 93.7
Total debt 1,330.3 1,091.5 1,199.2 1,218.0 1,051.9
Other liabilities 287.7 217.7 206.6 171.2 190.2
Shareowner's equity 256.7 225.6 219.4 219.5 206.0
Total liabilities and
shareowner's equity $1,874.7 $1,534.8 $1,625.2 $1,608.7 $1,448.1
Debt to equity ratio 5.2:1 4.8:1 5.5:1 5.5:1 5.1:1
Senior debt to capital funds
ratio 3.4:1 3.0:1 3.4:1 3.6:1 3.2:1
Gross insurance premiums
written $ 52.0 $ 59.0 $ 65.8 $ 69.2 $ 66.3
Number of employees at
October 31 360 353 339 364 353
SUPPLEMENTARY FINANCIAL DATA (Continued)
Gross Finance Receivables and Leases Acquired
Dollar amounts in millions 1995 1994 1993 1992 1991
Wholesale notes $2,979.4 $2,306.6 $1,977.6 $1,547.7 $1,461.0
Retail notes and leases:
New 1,075.0 861.9 730.0 591.8 554.4
Used 242.3 217.2 168.4 185.9 192.8
Total 1,317.3 1,079.1 898.4 777.7 747.2
Total $4,296.7 $3,385.7 $2,876.0 $2,325.4 $2,208.2
Analysis of Finance Retail Notes Acquired
Average Down Payment
Contractual as a Percent Average
Terms of Retail Monthy
in Months Sales Price Installment
Number of
Year Units New Used New Used New Used
1995 18,286 55 39 8.0% 16.7% $1,514 $1,003
1994 17,331 54 38 6.6 13.9 1,311 921
1993 15,879 53 34 6.2 17.0 1,248 786
1992 14,227 52 35 6.6 14.1 1,239 845
1991 13,768 52 37 7.2 13.5 1,286 875
SUPPLEMENTARY FINANCIAL DATA (Continued)
Analysis of Gross Retail Notes and Lease Financing
With Installments Past Due Over 60 Days
At October 31 ($ Millions) 1995 1994 1993 1992 1991
Original amount of notes
and leases $ 1.2 $ 1.3 $ 2.6 $ 4.3 $ 3.9
Balance of notes and leases .5 .5 .7 2.1 1.9
Balance as a percent of
total outstanding .06% .09% .08% .19% .18%
Analysis of Retail Note Repossessions
1995 1994 1993 1992 1991
Retail note repossessions
acquired as a perrcentage
of average retail note
gross balance .92% .97% 1.95% 3.70% 4.45%
SUPPLEMENTARY FINANCIAL DATA (Continued)
Analysis of Loss Experience
($ Millions) 1995 1994 1993 1992 1991
Net losses (recoveries):
Retail notes and leases $ .3 $ .6 $(.1) $2.4 $3.0
Wholesale notes (.9) .1 .8 .8 2.8
Accounts (.2) .2 - - -
Total $(.8) $ .9 $ .7 $3.2 $5.8
Percent net losses (recoveries)
to liquidations:
Retail notes and leases .03% .07% (.01)% .27% .41%
Wholesale notes (.03) .01 .04 .06 .19
Total (.02)% .03% .03% .13% .26%
Percent net losses (recoveries)
to related average gross
receivables outstanding:
Retail notes and leases .02% .04% - .17% .21%
Wholesale notes (.13) .03 .16 .20 .66
Accounts (.05) .08 - - -
Total (.03)% .04% .03% .16% .29%
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 protection of
assets from unauthorized use and the execution and recording of
transactions in accordance with management's authorization.
The system of internal controls which provides for appropriate
division of responsibility is supported by written policies and
procedures that are updated by management as necessary. The
system is tested and evaluated regularly by the parent
Company's internal auditors as well as by the independent
auditors in connection with their annual audit of the financial
statements. The independent auditors conduct their audit in
accordance with 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 circumstances
to respond appropriately to the recommendations presented.
Management believes that the Corporation's system of internal
controls accomplishes the objectives set forth in the first
sentence of this paragraph.
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, 1995 and 1994 and the results of their operations
and their cash flow for each of the three years in
the period ended October 31, 1995 in conformity with
generally accepted accounting principles.
As discussed in Note 10 to the consolidated
financial statements, effective November 1, 1992,
Navistar Financial Corporation changed its method of
accounting for postretirement benefits other than
pensions.
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
December 18, 1995
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 42
(27) Financial Data Schedule E-9
Reports on Form 8-K
No reports on Form 8-K were filed for the three months
ended October 31, 1995.
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 26, 1996
Phyllis E. Cochran
Vice President and Controller
(Principal Accounting Officer)