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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, 1996
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, 1996, 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, 1996
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) 2
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 2
Item 6. Selected Financial Data (A) 2
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (A) 3
Item 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's properties principally consist of office
equipment and leased office space in Rolling Meadows, Illinois;
Columbus, Ohio; Atlanta, Georgia; Plano, Texas; Mt. Laurel, New
Jersey; and San Ramon, California. The office equipment owned
and in use by the Corporation is not significant in relation to
the total assets of the Corporation.
Item 3. Legal Proceedings
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. Based on discussions with
outside counsel, NFC's management 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.
PART I (Continued)
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
Financing Volume
The Corporation's serviced receivables portfolio, which
includes sold receivables, totaled $3.3 billion at October 31,
1996, up from $3.2 billion and $2.5 billion at October 31, 1995
and 1994, respectively.
In fiscal 1996 customer demand for Class 5 through 8 trucks
declined approximately 9% compared with 1995 and was slightly
higher than 1994 demand. In spite of lower customer demand and
the continued highly competitive commercial financing market,
fiscal 1996 acquisitions of retail notes and leases of $1.1
billion, net of unearned finance income, were equal to 1995. The
Corporation's finance market share of new trucks manufactured by
Transportation and sold in the United States increased to 16.3%
in 1996 from 14.4% in 1995. Acquisitions in 1995 were $.2
billion higher than 1994 due to increased demand offset in part
by lower finance market share of 14.4% in 1995 compared with
15.3% in 1994. Serviced retail notes and lease financing
balances were $2.2 billion at October 31, 1996, compared with
$1.9 billion and $1.6 billion at October 31, 1995 and 1994,
respectively.
During fiscal 1996, the Corporation supplied 94% of the
wholesale financing of new trucks sold to Transportation's
dealers, slightly higher than the 93% in 1995 and 1994. During
1996, Transportation dealers generally reduced inventory levels
in response to lower customer demand. As a result, acquisitions
of wholesale notes decreased $.3 billion, 9%, to $2.7 billion in
1996 after a 29% increase to $3.0 billion in 1995 from 1994.
Serviced wholesale note balances were $685 million at October 31,
1996, compared to $854 million and $577 million at October 31,
1995 and 1994, respectively.
Owned finance receivables balances, including subordinated
interests in retail and wholesale receivables, decreased to $1.4
billion at October 31, 1996, from $1.5 billion at October 31,
1995 due primarily to lower wholesale financing. Balances in 1995
were $.2 billion higher than 1994 as a result of the higher level
of wholesale and retail financing. Receivable sales were a
significant source of funding during fiscal 1996 and 1995 and, as
a result, sold retail receivable balances increased to $1.4
billion at October 31, 1996 from $1.2 billion and $1.0 billion at
October 31, 1995 and 1994, respectively. Sold wholesale note
balances were $500 million at October 31, 1996 and 1995 and $300
million at October 31, 1994.
Results of Operations
The Corporation's after tax return on equity was a record
18.1% in 1996 compared with 15.0% and 15.1% in 1995 and 1994,
respectively. Income before taxes in 1996 was $81 million, a 37%
increase from $59 million in 1995, primarily as a result of
higher gains on sales of retail notes, higher levels
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of Operations (Continued)
of wholesale note balances during the first nine months of 1996
and higher retail and lease balances offset in part by a higher
loss provision. Gains on sales of retail note receivables during
1996 were $20 million on sales of $985 million compared with
gains of $5 million on sales of $740 million in 1995. The higher
gains on sales resulted from higher margins on retail notes due
to declining market interest rates prior to the sale in November
1995. During a declining interest rate environment, the
Corporation's acquisition spreads improve as NFC's cost of
borrowing differs from the time when interest rates are quoted to
borrowers and the time when notes are acquired. In addition, the
effective interest rate for each sale is based on a market
interest rate at the time of the sale, which may be up to six
months after the Corporation acquired the retail note. During
fiscal 1995, the opposite impact was experienced by NFC on a sale
in November 1994 as market interest rates were rising and a loss
was recorded on that sale.
Income before taxes of $59 million in 1995 increased 6% from
$55 million in 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 the $740 million retail
notes sold in 1995 were $5 million compared with $12 million on
sales of $1,033 million in 1994.
The more significant elements of revenue and expense
impacting net income for these years are discussed in the
following paragraphs:
Retail note and lease financing revenue for 1996 was $98
million compared with $73 million and $71 million in 1995 and
1994, respectively. The 1996 improvement over 1995 is primarily
due to higher gains on sold notes and higher average balances.
The increase in 1995 revenues compared with 1994 is due to higher
financing volume offset in part by lower gains on sold notes.
Wholesale note revenue increased 5% in 1996 to $57 million
as a result of higher average outstanding note balances in the
first nine months of the fiscal year offset in part by lower
average yields relating to a lower prime interest rate. In 1995
revenue increased 38% compared with 1994 as the level of
wholesale financing was higher to support increased demand for
Transportation truck products and higher average yields due to
higher prime interest rates.
Revenue from accounts decreased in 1996 to $27 million from
$29 million in 1995 as the decline in customer demand caused a
lower level of financing activity. Revenue in 1995 was 32%
higher than 1994 due to higher outstanding balances in support of
the increased demand for Transportation truck products and higher
average yields due to higher prime interest rates.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Results of Operations (Continued)
Servicing fee income increased to $20 million in 1996 from
$18 million in 1995 and $17 million in 1994 as a result of higher
levels of sold note receivable balances which the Corporation
continues to service.
Insurance premiums earned by Harco decreased 6% to $42
million in 1996 from $45 million in 1995 and 12% in 1995 from
1994. The decreases in 1996 and 1995 reflect reductions in
written premiums of truck liability lines in response to adverse
loss experience in those lines and to increased competition.
Borrowing costs decreased slightly in 1996 to $82 million
from $84 million in 1995 after a significant increase in 1995
compared with $70 million in 1994. During 1996 the Corporation's
weighted average interest rate on all debt declined to 6.5% from
7.4% in 1995 primarily due to the maturity of high fixed rate
public debt during 1995 and 1996 and also due to lower market
interest rates. The favorable rate impact was offset in part by
higher debt balances to support receivable balances. The
increase in 1995 from 1994 was primarily the result of higher
debt balances to support increased wholesale note and account
balances and higher market interest rates, offset in part by an
improvement in the Corporation's borrowing spread over market
interest rates as a result of the 1995 amendment to the revolving
debt agreement and the asset-backed commercial paper ("ABCP")
program. The ratio of debt to equity was 4.7:1, 5.2:1 and 4.8:1
at October 31, 1996, 1995, and 1994, respectively.
Credit collection and administrative expenses were $28
million in 1996 and 1995 compared with $26 million in 1994. The
$2 million increase in 1995 compared with 1994 was due to retail
marketing efforts and incentive programs.
The provision for losses on receivables totaled $9 million
in 1996 compared with $3 million in 1995 and $2 million in 1994.
As the trucking industry softened during 1996, the high level of
new truck purchases in 1995 caused an over capacity in the
trucking sector. This over capacity coupled with competitive
freight rates and higher fuel costs impacted NFC's customers'
abilities to meet obligations and has resulted in higher
delinquencies, repossessions and credit losses. Notes and
account write-offs (recoveries), including sold notes totaled $5
million in 1996, $(1) million in 1995 and $1 million in 1994.
The Corporation's allowance for losses as a percentage of
serviced finance receivables was .74%, .62% and .65% at October
31, 1996, 1995 and 1994, respectively.
Insurance claims and underwriting expenses decreased to $44
million in 1996 from $47 million and $54 million in 1995 and
1994, respectively. The decline resulted from decreases in
losses incurred in Harco's truck liability insurance lines and
lower commission costs associated with lower volumes of premiums
written through general agents.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
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 sales of receivables, commercial paper, short- and
long-term bank borrowings, medium- and long-term debt issues 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 operation generates its funds through
internal operations and has no external borrowings.
Operations used $29 million in cash in 1996 as the cash
provided from net income of $49 million was offset by a decrease
in accounts payable reflecting the timing of payments to
Transportation. Investment activities provided $95 million in
cash primarily due to a $163 million decline in wholesale note
and account balances, offset in part by higher retail and
equipment leasing activity. During 1996, the purchase of $1,108
million retail notes and lease receivables was funded with $982
million proceeds from the sale of the receivables and principal
collections of $125 million. The cash provided from investing
activities was used to lower debt funding and to pay dividends of
$26 million. See also the "Statement of Consolidated Cash Flow"
on page 12.
Over the last three years, operations provided $103 million
in cash and proceeds from the sale of retail receivables totaled
$2,704 million. These amounts were used mainly to fund
receivable acquisitions of $2,747, net of principal collections
on the receivables, and dividend payments of $61 million.
Receivable sales were a significant source of funding in
1996 and 1995. 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 1996 and 1995, the Corporation sold $985
and $740 million, respectively, of retail notes, through Navistar
Financial Retail Receivables Corporation ("NFRRC"), a wholly-
owned subsidiary, to owner trusts which in turn sold notes and
certificates to investors. At October 31, 1996, the remaining
shelf registration available to NFRRC for issuance of asset-
backed securities was $2.4 billion. The Corporation has a $500
million revolving wholesale note trust that provides for the
continuous sale of eligible wholesale notes on a daily basis.
The trust is funded by securities sold to the public comprised of
three $100 million tranches of investor certificates maturing
serially from 1997 to 1999 and a $200 million tranche of investor
certificates maturing in 2004. See Note 5 to the Consolidated
Financial Statements for further discussion.
The Corporation has a $925 million bank revolving credit
facility and a $400 million asset-backed commercial paper
("ABCP") program supported by a bank liquidity facility, which
mature in March 2001. See Note 10 to the Consolidated Financial
Statements for further discussion.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Liquidity and Funds Management (Continued)
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.
In November 1996, the Corporation sold $487 million of
retail notes, net of unearned finance income, through NFRRC to an
owner trust which in turn sold notes and certificates to
investors. A gain of $6.9 million was recognized on the 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 and, to a lesser extent, by
utilizing derivative financial instruments. See notes 1 and 14
to the Consolidated Financial Statements. Corporate policy
prohibits the use of derivatives for speculative purposes.
On February 1, 1994, the Illinois Department of Revenue
("Department") issued a Notice of Deficiency to the Corporation
for approximately $12 million for the fiscal years 1989 throuth
1991. The Corporation maintains that the Department's
interpretation and application of the law is incorrect and
improper. Based on discussions with outside counsel, NFC's
management is of the opinion that NFC's position will prevail and
the Department's action will not have a material impact on NFC's
financial condition. See Note 8 to the Consolidated Financial
Statements for further discussion.
Pending Accounting Standards
In June 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 125 ("SFAS
No. 125"), "Accounting for Transfers and Servicing of Financial
Assets and Extinguishments of Liabilities" which the Corporation
must adopt for all applicable transactions occurring after
December 31, 1996. The Corporation will apply SFAS No. 125 to
securitization transactions occurring on or after January 1,
1997. The new standard is not expected to have a material effect
on the Corporation's net income or financial condition.
Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
Business Outlook
The demand for heavy trucks is forecast to continue to
soften during fiscal 1997 and correspondingly NFC's profitability
and wholesale and retail financing activity are anticipated to be
lower. 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 1997 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, 1996, 1995 and 1994 10
Statement of Consolidated Financial Condition as of
October 31, 1996 and 1995 11
Statement of Consolidated Cash Flow for the years ended
October 31, 1996, 1995 and 1994 12
Notes to Consolidated Financial Statements 13
Supplementary Financial Data 34
Independent Auditors' Report 39
Navistar Financial Corporoation and Subsidiaries
Statement of Consolidated Income and Retained Earnings
Millions of Dollars
For the years ended October 31 1996 1995 1994
Revenues
Retail notes and lease financing $ 97.7 $ 73.3 $ 71.4
Wholesale notes 56.6 54.1 39.2
Accounts 26.6 29.2 22.2
Servicing fee income 20.5 18.3 17.3
Insurance premiums earned 42.0 44.6 51.1
Marketable securities 9.4 8.7 9.6
Total 252.8 228.2 210.8
Expenses
Cost of borrowing:
Interest expense (Notes 9 and 10) 73.2 75.1 62.7
Other 8.4 9.1 7.1
Total 81.6 84.2 69.8
Credit, collection and administrative 28.2 27.9 25.9
Provision for losses on receivables (Note 7) 9.3 2.6 2.3
Insurance claims and underwriting 44.4 46.7 54.0
Other expense, net 8.8 8.1 3.6
Total 172.3 169.5 155.6
Income Before Taxes 80.5 58.7 55.2
Taxes on Income (Note 8) 31.1 22.5 21.2
Net Income 49.4 36.2 34.0
Retained Earnings
Beginning of year 84.0 56.8 48.4
Dividends paid
(26.0) (9.0) (25.6)
End of year (Note 13) $107.4 $ 84.0 $ 56.8
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Financial Condition
Millions of Dollars
As of October 31 1996 1995
ASSETS
Cash and Cash Equivalents $ 6.7 $ 2.9
Marketable Securities (Note 4) 128.1 131.8
Receivables
Finance receivables (Note 5) 1,205.2 1,381.3
Allowance for losses (Note 7) (11.6) (10.4)
Receivables, net 1,193.6 1,370.9
Amounts Due from Sales of Receivables (Note 5) 264.3 247.8
Equipment on Operating Leases, Net (Note 6) 101.1 39.3
Repossessions 13.2 5.8
Reinsurance Receivables 21.2 24.8
Other Assets 65.6 51.4
Total Assets $1,793.8 $1,874.7
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt (Note 9) $ 99.4 $ 50.5
Accounts Payable 66.7 138.8
Other Liabilities 19.7 24.1
Senior and Subordinated Debt (Note 10) 1,206.4 1,279.8
Dealers' Reserves 22.3 21.0
Unpaid Insurance Claims and Unearned Premiums 99.6 103.8
Commitments and Contingent Liabilities (Notes 8, 12 & 15) - -
Shareowner's Equity (Note 13)
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital 171.0 171.0
Retained earnings 107.4 84.0
Unrealized gains on marketable
securities (Note 4) 1.3 1.7
Total 279.7 256.7
Total Liabilities and Shareowner's Equity $1,793.8 $1,874.7
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Cash Flow
Millions of Dollars
For the years ended October 31 1996 1995 1994
Cash Flow From Operations
Net income $ 49.4 $ 36.2 $ 34.0
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables (Note 5) (20.2) (5.2) (11.8)
Depreciation and amortization 15.3 11.1 8.7
Provision for losses on receivables (Note 7) 9.3 2.6 2.3
Increase (decrease) in accounts payable
to affiliated companies (65.0) 73.2 (0.9)
Other (17.3) (6.7) (12.3)
Total (28.5) 111.2 20.0
Cash Flow From Investing Activities
Proceeds from sold retail notes 982.1 726.8 994.8
Purchase of retail notes and lease receivables (1,107.6) (1,099.5) (915.9)
Principal collections on retail notes and
lease receivables 125.4 123.4 180.9
Acquisitions (over)/under cash collections of
wholesale notes and accounts receivable 163.0 (77.1) (140.0)
Purchase of marketable securities (63.0) (61.9) (51.8)
Proceeds from sales and maturities of
marketable securities 67.7 67.3 45.1
Increase in property and equipment
leased to others (72.8) (18.7) (5.3)
Total 94.8 (339.7) 107.8
Cash Flow From Financing Activities
Net increase (decrease) in short-term debt 48.9 (368.7) 344.2
Net increase (decrease) in bank
revolving credit facility usage (56.0) 405.0 (372.0)
Net increase in asset-backed commercial paper
facility usage 88.1 275.8 -
Principal payments on long-term debt (117.5) (100.0) (180.0)
Proceeds from issuance of long-term debt - - 100.0
Dividends paid to Transportation (26.0) (9.0) (25.6)
Total (62.5) 203.1 (133.4)
Increase/(Decrease) in Cash and Cash Equivalents 3.8 (25.4) (5.6)
Cash and Cash Equivalents at Beginning of Year 2.9 28.3 33.9
Cash and Cash Equivalents at End of Year $ 6.7 $ 2.9 $ 28.3
Supplementary disclosure of cash flow information:
Interest paid $ 76.3 $ 74.3 $ 64.8
Income taxes paid $ 32.2 $ 14.6 $ 22.1
See Notes to Consolidated Financial Statements.
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1996
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").
Nature of Operations
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. The
Corporation also 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.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue on Receivables
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. Revenue on
operating leases is recognized on a straight-line basis over the
life of the lease. Recognition of revenue on receivables and
leases is suspended when management determines the collection of
future income is not probable. Income recognition is resumed if
collection doubts are removed.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
Allowance for Losses on Receivables
The allowance for losses on receivables is established
through a charge to the provision for losses. The allowance is
an estimate of the amount adequate to absorb losses on existing
receivables that may become uncollectible. The allowance is
maintained at an amount management considers appropriate in
relation to the outstanding receivables portfolio based on such
factors as overall portfolio quality, historical loss experience
and current economic conditions.
Under various agreements, Transportation and its dealers may
be liable for a portion of customer losses or may be required to
repurchase the repossessed collateral at the receivable principal
value. The Corporation's losses are net of these benefits.
Receivables are charged off to the allowance for losses as soon
as the receivable is determined to be uncollectible.
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
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 are classified as available-for-sale
and are reported at fair value.
Derivative Financial Instruments
The Corporation uses derivatives to reduce its exposure to
interest rate volatility. All derivative financial instruments
are held for purposes other than trading, and the Corporation's
policy prohibits 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.
Pending Accounting Standards
In June 1996, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 125,
("SFAS No. 125") "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" which the
Corporation must adopt for all applicable transactions occurring
after December 31, 1996. The Corporation will apply SFAS No. 125
to securitization transactions occurring on or after January 1,
1997. The new standard is not expected to have a material effect
on the Corporation's net income or financial condition.
Reclassification
Certain amounts for prior years have been reclassified to conform
with the presentation used in the 1996 financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
2. TRANSACTIONS WITH AFFILIATED COMPANIES
Wholesale Notes, Wholesale Accounts and Retail Accounts
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
was $49.8 in 1996, $55.7 in 1995 and $50.7 in 1994.
Retail Notes and Lease Financing
In accordance with agreements between the Corporation and
Transportation, Transportation may be liable for certain losses
on the finance receivables and may be required to repurchase the
repossessed collateral at the receivable principal value. Losses
recorded by Transportation were $9.5 in 1996 and $.6 in 1995 and
1994.
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
1996, $2.4 in 1995 and $2.5 in 1994.
Short-Term Debt
The Corporation had daily average short-term borrowings from
Transportation of $85 in 1996 and $93 in 1995 on which interest
accrued at the Corporation's incremental short-term borrowing
rate. These borrowings, including $5 and $6 of interest expense
in 1996 and 1995, respectively, were repaid during each of the
fiscal years.
Accounts Payable
Accounts payable include $24.5 and $89.5 payable to
Transportation at October 31, 1996 and 1995, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
3. INDUSTRY SEGMENTS
Information by industry segment is summarized as follows:
1996 1995 1994
Revenues:
Finance operations $ 201.6 $ 175.1 $ 150.6
Insurance operations 51.2 53.1 60.2
Total revenue $ 252.8 $ 228.2 $ 210.8
Income before taxes:
Finance operations $ 74.2 $ 53.1 $ 49.9
Insurance operations 6.3 5.6 5.3
Total income before taxes $ 80.5 $ 58.7 $ 55.2
Assets at end of year:
Finance operations $1,626.9 $1,701.9 $1,354.1
Insurance operations 166.9 172.8 180.7
Total assets at end of year $1,793.8 $1,874.7 $1,534.8
4. MARKETABLE SECURITIES
The fair value of marketable securities is 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 $1.3 and
$1.7 as of October 31, 1996 and 1995, respectively. The
following table sets forth, by type of security issuer, the
amortized cost and estimated market values at October 31, 1996
and 1995:
Amortized Gross Realized Fair
Cost Gains Losses Value
U.S. government and
agency securities $ 41.7 $ .3 $ .5 $ 41.5
Corporate debt securities 29.1 .1 .4 28.8
Mortgage- and
asset-backed securities 42.4 .2 .4 42.2
Foreign governments 1.5 - - 1.5
Total debt securities $ 114.7 $ .6 $ 1.3 $ 114.0
Equity securities 11.3 3.5 .7 14.1
Total $ 126.0 $ 4.1 $ 2.0 $ 128.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES (Continued)
Amortized Gross Unrealized Fair
October 31, 1995 Cost Gains Losses Value
U.S. government and
agency 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 - - .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
Contractual maturities of marketable debt securities at
October 31, 1996, are as follows:
Amortized Fair
Cost Value
Due in one year or less $ 16.1 $ 16.0
Due after one year through five years 31.2 31.5
Due after five years through ten years 18.9 18.5
Due after ten years 6.1 5.8
72.3 71.8
Mortgage- and asset-backed securities 42.4 42.2
Total (Excludes Stocks) $ 114.7 $ 114.0
Actual maturities may differ from the contractual maturities
because of prepayments by the issuers.
Proceeds from sales or maturities of marketable securities
available for sale were $67.7 during 1996 and $67.3 during 1995.
Gross gains of $1.8 and $.8 and gross losses of $.5 and $.6 were
realized on those sales in 1996 and 1995, respectively.
All marketable securities at October 31, 1996 and 1995, were
held by Harco, of which $16.7 and $23.2, respectively, were on
deposit with various state departments of insurance or otherwise
restricted as to use.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES
Finance receivable balances, net of unearned finance income,
at October 31 are summarized as follows:
1996 1995
Retail notes and lease financing $ 733.3 $ 747.2
Wholesale notes 100.5 268.2
Accounts:
Retail 314.7 316.7
Wholesale 56.7 49.2
Total 371.4 365.9
Total finance receivables $1,205.2 $1,381.3
Contractual maturities of finance receivables including
unearned finance income at October 31, 1996, are summarized as
follows:
Retail Wholesale Accounts
Due in:
1997 $230.7 $ 69.5 $371.4
1998 211.6 31.0 -
1999 186.4 - -
2000 142.3 - -
2001 75.5 - -
Due after 2001 13.8 - -
Gross finance receivables 860.3 100.5 371.4
Unearned finance income 127.0 - -
Total finance receivables $733.3 $100.5 $371.4
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's primary business is to provide wholesale,
retail and lease financing for new and used trucks sold by
Transportation and Transportation's dealers, and as a result the
Corporation's receivables and leases have significant
concentration in the trucking industry. On a geographic basis,
there is not a disproportionate concentration of credit risk in
any area of the United States. The Corporation retains as
collateral a security interest in the equipment associated with
wholesale notes, retail notes and leases other than accounts.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
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:
1996 1995
Retail notes $1,366.4 $1,173.2
Wholesale notes 500.0 500.0
Total $1,866.4 $1,673.2
Gains or losses from the sales of receivables are recognized
in the period in which such sales occur. The allowance for
credit losses is adequately provided prior to the receivable
sales; therefore, gains from receivable sales are not reduced for
expected credit losses. Included in "Retail notes and lease
financing" revenue are gains totaling $20.2, $5.2 and $11.8 on
retail note receivable sales of $985, $740 and $1,033 for the
fiscal years ended October 31, 1996, 1995 and 1994, 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. During fiscal 1996,
in two separate sales, the Corporation sold a total of $985 of
retail notes, net of unearned finance income, through NFRRC to
two individual owner trusts. The owner trusts, in turn, sold
$946 of notes and $39 of certificates to investors. The proceeds
of $934, net of underwriting fees and credit enhancements, were
used by the Corporation for general working capital purposes. At
October 31, 1996, the remaining shelf registration available to
NFRRC for issuance of asset-backed securities was $2.4 billion.
NFSC has in place a $500 revolving wholesale note trust that
provides for the continuous sale of eligible wholesale notes on a
daily basis. The issuance of a $200 tranche of investor
certificates during fiscal 1995 increased NFSC's revolving
wholesale note trust to $500. The trust is comprised of three
$100 tranches of investor certificates maturing serially from
1997 to 1999 and a $200 tranche of investor certificates maturing
in 2004.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
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.
The following is a summary of amounts included in "Amounts
Due from Sales of Receivables" as of October 31:
1996 1995
Cash held and invested by trusts $ 85.2 $ 66.8
Subordinated retained interests in wholesale 85.4 86.3
receivables
Subordinated retained interests in retail 12.5 12.2
receivables
Holdback reserves 31.7 43.7
Excess servicing fee and other 61.9 48.0
Allowance for credit losses
(12.4) (9.2)
Total $264.3 $247.8
6. INVESTMENT IN OPERATING LEASES
Operating leases at year-end were as follows:
1996 1995
Investment in operating leases
Vehicles and other equipment, at cost $116.4 $ 49.0
Less: Accumulated depreciation
(15.3) (9.7)
Net investment in operating leases $101.1 $ 39.3
Future minimum rentals on operating leases are as follows:
1997, $24.7; 1998, $22.2; 1999, $16.9; 2000, $11.1 and $5.3
thereafter. Each of these assets is depreciated on a straight-
line basis over the term of the lease in an amount necessary to
reduce the leased vehicle to its estimated residual value at the
end of the lease term.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
7. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as
follows:
1996 1995 1994
Total allowance for losses at beginning of year $19.6 $16.2 $14.8
Provision for losses 9.3 2.6 2.3
Net (losses) recoveries (charged)
credited to allowance (4.9) .8 (.9)
Total allowance for losses at end of year $24.0 $19.6 $16.2
Allowance pertaining to:
Owned notes $11.6 $10.4 $ 8.2
Sold notes 12.4 9.2 8.0
Total $24.0 $19.6 $16.2
8. TAXES ON INCOME
Taxes on income are summarized as follows:
1996 1995 1994
Current:
Federal $26.4 $18.9 $15.1
State and local 4.4 3.1 3.0
Total current 30.8 22.0 18.1
Deferred (primarily Federal) .3 .5 3.1
Total $31.1 $22.5 $21.2
The effective tax rate of 38% 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, comprised the following:
1996 1995
Deferred tax assets:
Other postretirement benefits $2.9 $2.8
Deferred tax liabilities:
Depreciation and other 6.9 6.4
Unrealized gains on marketable securities .8 1.0
Total deferred tax liabilities 7.7 7.4
Net deferred tax liabilities $4.8 $4.6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
8.TAXES ON INCOME (Continued)
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. Based on discussions with
outside counsel, NFC's management 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. Short-Term Debt outstanding at October 31 was
comprised only of commercial paper. There were no short-term
borrowings outstanding.
Information regarding short-term debt is as follows:
1996 1995 1994
Aggregate obligations outstanding:
Daily average $ 68.2 $ 37.8 $ 11.7
Maximum month-end balance 117.8 81.1 419.2
Weighted average interest rate:
On average daily borrowing 6.0% 6.4% 5.4%
At October 31 5.9% 6.3% 5.6%
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 10 to the
Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT
Senior and Subordinated Debt outstanding at October 31 is
summarized as follows:
1996 1995
Bank revolving credit, at variable rates,
due March 2001 $ 704.0 $ 760.0
Funding under asset-backed commercial
paper program, at variable rates,
due March 2001 402.4 302.3
Senior term debt:
Notes, medium-term, 9.50%, due 1996 - 117.5
Subordinated term debt:
Senior Notes, 8 7/8%, due November 1998 100.0 100.0
Total senior and subordinated debt $1,206.4 $1,279.8
The weighted average interest rate on total debt, including
short-term debt and the effect of discounts and related
amortization, was 6.5%, 7.4% and 7.1% in 1996, 1995 and 1994,
respectively. The aggregate annual maturities and required
payments of debt are as follows: 1999, $100.0; and 2001,
$1,106.4.
Effective March 29, 1996, the Corporation amended and
restated its $900 million bank revolving credit facility and its
$300 million asset-backed commercial paper ("ABCP") program
supported by a bank liquidity facility, extending the maturity
date of each facility to March 2001. In addition, the commitment
of the bank revolving credit facility was expanded to $925
million, the ABCP facility was increased to $400 million and a
new pricing and fee structure was established. The available
funding under the ABCP program is $414 million which is comprised
of the $400 million liquidity facility plus $14 million of trust
certificates issued in connection with the formation of the ABCP
Trust.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT (Continued)
Available funding under the amended and restated credit
facility and the ABCP program was $233, of which $99 provided
funding backup for the outstanding short-term debt at October 31,
1996. The remaining $134 when combined with unrestricted cash
and cash equivalents made $141 available to fund the general
business purposes of the Corporation at October 31, 1996. Under
the terms of the revolving credit facility, 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
amended agreement grants security interests in substantially all
of the Corporation's 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.
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.
Pension Benefits
Generally pension benefits are non-contributory with
benefits related to an employee's length of service and
compensation rate. Plan assets are primarily invested in a
dedicated portfolio of long-term fixed income securities with the
remainder invested in high quality equity securities.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
Pension Expense
Net pension cost includes the following:
1996 1995 1994
Service cost for benefits earned during
the period $ .7 $ .5 $ 1.0
Interest cost on projected benefit
obligation 2.9 2.8 2.7
Return on assets - actual (gain) loss (3.2) (9.1) 3.3
- deferred gain (loss) (.4) 5.8 (6.8)
Net amortization costs and other costs. .1 - .1
Net pension cost $ .1 $ - $ .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
1996 1995 1996 1995
Actuarial present value of:
Vested benefits $(31.5) $ (31.8) $ (2.0) $ (2.2)
Non-vested benefits (4.0) (4.0) (.1) (.1)
Accumulated benefit
obligation (35.5) (35.8) (2.1) (2.3)
Effect of projected future
compensation levels (.9) - - (1.0)
Total projected benefit
obligation (36.5) (36.7) (2.1) (2.3)
Plan assets at fair value 42.7 41.5 - -
Funded status at October 31 6.2 4.8 (2.1) (2.3)
Unrecognized net losses (gains) (5.5) (4.2) .4 .6
Unrecognized plan amendments .5 .5 - -
Unrecognized net obligation
as of transition date .1 .1 - -
Net asset (liability) $ 1.3 $ 1.2 $ (1.7) $ (1.7)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
The weighted average rate assumptions used in determining the
projected benefit obligation and pension expense were:
1996 1995 1994
Discount rate used to determine the present value 7.9% 7.5% 9.2%
of the projected benefit obligations
Expected long-term rate of return on plan assets 8.9% 9.9% 9.0%
Expected rate of increase in future
compensation levels 3.5% 3.5% 3.5%
Other Postretirement Benefits
The components of expense for other postretirement benefits that
are included in the Statement of Consolidated Income and Retained
Earnings include the following:
1996 1995 1994
Service cost for benefits earned during the year $ .4 $ .3 $ .2
Interest cost on the accumulated benefit
obligation .8 .8 .7
Expected return on assets - actual (gain) loss .8 (1.5) (.2)
- deferred gain (loss) (1.3) 1.2 -
Total cost of other postretirement benefits $ .7 $ .8 $ .7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
The funded status of other postretirement benefits as of October 31,
1996 and 1995, were as follows:
1996 1995
Accumulated other postretirement benefit
obligation (APBO):
Retirees and their dependents $(4.9) $(4.9)
Active employees eligible to retire (2.9) (2.4)
Other active participants (3.4) (3.3)
Total APBO (11.2) (10.6)
Plan assets at fair value 3.9 4.5
APBO in excess of plan assets (7.3) (6.1)
Unrecognized net loss 1.5 .4
Net liability $(5.8) $(5.7)
The expected return on plan assets was 10.5% for 1996, 10%
for 1995 and 9% for 1994. The weighted average of discount rates
used to determine the accumulated postretirement benefit
obligation was 8.1% and 7.7% at October 31, 1996 and 1995,
respectively. For 1997, the weighted average rate of increase in
the per capita cost of covered health care benefits is projected
to be 8.1%. The rate is projected to decrease to 5.0% in the
year 2004 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 $1.2 and the
associated expense recognized for the year ended October 31,
1996, would increase by an estimated $.1.
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, 1996, future minimum lease commitments under
noncancelable operating leases with remaining terms in excess of
one year are as follows:
Year Ended October 31,
1997 $1.7
1998 1.7
1999 1.6
2000 1.3
2001 .3
Thereafter -
Total $6.6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
13. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of
October 31, 1996 and 1995, 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.
14. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the
Corporation's financial instruments were as follows:
1996 1995
Carrying Fair Carrying Fair
Amount Value Amount Value
Financial assets:
Finance receivables:
Retail notes $ 662.5 $ 672.1 $ 680.8 $ 707.2
Wholesale notes 100.5 100.5 268.2 268.2
Accounts 371.4 371.4 365.9 365.9
Amounts due from sales of
receivables 264.3 258.1 247.8 234.6
Financial liabilities:
Senior and subordinated debt $1,206.4 $1,207.4 $1,279.8 $1,282.9
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. 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
14. 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 or loss on sale of receivables.
During August through October 1996, the Corporation entered
into $400 of forward interest rate lock agreements on a Treasury
maturing in 1998 related to the anticipated November 1996 sale of
retail receivables. See also Note 16. These hedge agreements,
which were closed in conjunction with the pricing of the sale,
resulted in a $1.9 loss which was deferred at October 31, 1996,
and included in the gain on the sale of receivables recognized in
November 1996.
The Corporation's wholly-owned insurance subsidiary has
investments in Collateralized Mortgage Obligations ("CMO's") of
$42 which are included in the Corporation's marketable securities
at October 31, 1996. These securities have characteristics which
reduce the Corporation's exposure to prepayment risk.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
15. LEGAL PROCEEDINGS
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 EVENT
In November 1996, the Corporation sold $487 of retail notes,
net of unearned finance income, through NFRRC to an owner trust
which, in turn, sold notes and certificates to investors. A gain
of $6.9 was recognized on the sale.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
17. QUARTERLY FINANCIAL INFORMATION (unaudited)
1996
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
Revenues $68.7 $60.7 $67.0 $56.4 $252.8
Interest expense 17.1 19.7 18.8 17.6 73.2
Provision for losses
on receivables 1.1 1.6 1.7 4.9 9.3
Net income 16.6 8.7 15.6 8.5 49.4
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
SUPPLEMENTARY FINANCIAL DATA
Five Year Summary of Financial and Operating Data
Dollar amounts in millions
1996 1995 1994 1993 1992
Revenues and net income retained
Revenues $ 252.8 $ 228.2 $ 210.8 $ 231.9 $ 228.3
Provision for losses on
receivables 9.3 2.6 2.3 1.5 3.6
Interest expense 73.2 75.1 62.7 74.6 82.2
Other charges, net 89.8 91.8 90.6 106.8 96.1
Taxes on income 31.1 22.5 21.2 17.7 16.9
Cumulative effect of changes in
accounting policy, net of
income taxes - - - 8.8 -
Net income 49.4 36.2 34.0 22.5 29.5
Dividends paid 26.0 9.0 25.6 22.6 16.0
Net income retained $ 23.4 $27.2 $ 8.4 $ (.1) $ 13.5
Percent of net income to
average shareowner's equity 18.1% 15.0% 15.1% 10.3% 13.8%
Assets at end of year
Cash and cash equivalents $ 6.7 $ 2.9 $ 28.3 $ 33.9 $ 79.2
Marketable securities 128.1 131.8 130.5 125.6 130.5
Finance receivables:
Truck retail notes and
lease financing 733.3 747.2 513.9 823.5 955.1
Wholesale notes 100.5 268.2 230.6 212.5 81.5
Accounts 371.4 365.9 357.7 245.1 204.3
Total 1,205.2 1,381.3 1,102.2 1,281.1 1,240.9
Allowance for losses (11.6) (10.4) (8.2) (10.9) (12.4)
Finance receivables, net 1,193.6 1,370.9 1,094.0 1,270.2 1,228.5
Other assets 465.4 369.1 282.0 195.5 170.5
Total assets $1,793.8 $1,874.7 $1,534.8 $1,625.2 $1,608.7
Liabilities and shareowner's
equity at end of year
Short-term borrowings $ 99.4 $ 50.5 $ 419.2 $ 75.0 $ -
Bank revolving credit 704.0 760.0 355.0 727.0 727.0
Asset-backed commercial paper
facility 402.4 302.3 - - -
Medium-term notes - 117.5 217.3 222.2 261.1
Long-term notes and debentures - - - 75.0 135.0
Subordinated debt 100.0 100.0 100.0 100.0 94.9
Total debt 1,305.8 1,330.3 1,091.5 1,199.2 1,218.0
Other liabilities 208.3 287.7 217.7 206.6 171.2
Shareowner's equity 279.7 256.7 225.6 219.4 219.5
Total liabilities and
shareowner's equity $1,793.8 $1,874.7 $1,534.8 $1,625.2 $1,608.7
Debt to equity ratio 4.7:1 5.2:1 4.8:1 5.5:1 5.5:1
Senior debt to capital funds ratio 3.2:1 3.4:1 3.0:1 3.4:1 3.6:1
Gross insurance premiums written $ 53.3 $ 52.0 $ 59.0 $ 65.8 $ 69.2
Number of employees at Oct. 31 352 360 353 339 364
SUPPLEMENTARY FINANCIAL DATA (Continued)
Gross Finance Receivables and Leases Acquired
Dollar amounts in millions
1996 1995 1994 1993 1992
Wholesale notes $2,705.8 $2,979.4 $2,306.6 $1,977.6 $1,547.7
Retail notes and leases:
New 1,064.1 1,075.0 861.9 730.0 591.8
Used 281.7 242.3 217.2 168.4 185.9
Total 1,345.8 1,317.3 1,079.1 898.4 777.7
Total $4,051.6 $4,296.7 $3,385.7 $2,876.0 $2,325.4
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
1996 19,521 55 42 8.0% 15.6% $1,394 $ 918
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
SUPPLEMENTARY FINANCIAL DATA (Continued)
Analysis of Gross Retail Notes and Lease Financing
With Installments Past Due Over 60 Days
At October 31 ($ Millions) 1996 1995 1994 1993 1992
Original amount of notes
and leases $ 3.2 $ 1.2 $ 1.3 $ 2.6 $ 4.3
Balance of notes and leases 2.1 .5 .5 .7 2.1
Balance as a percent of
total outstanting .25% .06% .09% .08% .19%
Analysis of Retail Note Repossessions
1996 1995 1994 1993 1992
Retail note repossessions
acquired as a percentage
of average retail note
gross balance 3.15% .92% .97% 1.95% 3.70%
SUPPLEMENTARY FINANCIAL DATA (Continued)
Analysis of Loss Experience
($ Millions) 1996 1995 1994 1993 1992
Net losses (recoveries):
Retail notes and leases $5.1 $ .3 $ .6 $(.1) $2.4
Wholesale notes (.2) (.9) .1 .8 .8
Accounts - (.2) .2 - -
Total $4.9 $(.8) $ .9 $ .7 $3.2
Percent net losses (recoveries)
to liquidations:
Retail notes and leases .48% .03% .07% (.01)% .27%
Wholesale notes (.01) (.03) .01 .04 .06
Total .13% (.02)% .03% .03% .13%
Percent net losses (recoveries)
to related average gross
receivables outstanding:
Retail notes and leases .22% .02% .04% - .17%
Wholesale notes (.02) (.13) .03 .16 .20
Accounts - (.05) .08 - -
Total .14% (.03)% .04% .03% .16%
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, 1996 and 1995 and the results of
their operations and their cash flow for each of the three
years in the period ended October 31, 1996 in conformity with
generally accepted accounting principles.
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
December 16, 1996
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
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended
October 31, 1996.
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 22, 1997
Phyllis E. Cochran
Vice President and Controller
(Principal Accounting Officer)