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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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________
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Commission File Number 1-4146-1
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NAVISTAR FINANCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
Delaware 36-2472404
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2850 West Golf Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 847-734-4000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No__
As of November 30, 1997, 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
I(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, 1997
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................................. 1
Item 6. Selected Financial Data (A)................................. 1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (A)..................... 2
Item 8. Financial Statements........................................ 8
Independent Auditors' Report................................ 31
Supplementary Financial Data................................ 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 35
PART III
Item 10. Directors and Executive Officers of the
Registrant (A).............................................. 35
Item 11. Executive Compensation (A).................................. 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A).......................................... 35
Item 13. Certain Relationships and Related
Transactions (A)............................................ 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 35
SIGNATURES- Principal Accounting Officer ............................... 36
- Directors.............................................. 37
POWER OF ATTORNEY....................................................... 37
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 I(1) (a) and (b) of Form 10-K and is,
therefore, filing this Form with the 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 is a financial services organization that provides
wholesale, retail and 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 an 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
There were no material pending legal proceedings other than ordinary,
routine litigation incidental to the business of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See the index page of this Report for explanation.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
See Note 13 to Consolidated Financial Statements.
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
Certain statements under this caption constitute "forward-looking
statements" under the Securities Reform Act, which involve risks and
uncertainties. Navistar Financial Corporation's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under the heading "Business Outlook".
Financing Volume
In fiscal 1997 industry demand for Class 5 through 8 trucks was slightly
higher than 1996 and 9% lower than 1995. Financing support provided to retail
customers over the last three years was as follows:
1997 1996 1995
Retail and Lease Financing: ($ millions)
Finance market share of new International
trucks sold in the U.S. 13.2% 16.3% 14.4%
Purchases of receivables and
equipment leased to others $1,036 $1,135 $1,113
Serviced retail notes and lease
financing balances (including
sold notes) at October 31 $2,253 $2,200 $1,960
During 1997, the Corporation's finance market share fell below 1996
performance due to the highly competitive commercial financing market. As a
result of the lower finance market share, purchases of receivables and equipment
leased to others in 1997 were below 1996. Purchases of receivables and equipment
leased to others in 1996 were consistent with those of 1995 as the increase in
finance market share was offset by the lower industry demand for Class 5 through
8 trucks.
Financing support provided to Transportation's dealers over the last three
years was as follows:
1997 1996 1995
Wholesale Financing: ($ millions)
Percent of wholesale financing of
new International trucks sold to
Transportation's dealers in the U.S. 94% 94% 93%
Purchases of receivables $2,773 $2,706 $2,979
Serviced wholesale note balances
(including sold notes) at
October 31 $ 691 $ 685 $ 854
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Financing Volume (continued)
In spite of the strong liquidity in the commercial financing market, the
Corporation's finance percentage of new International trucks sold to
Transportation's dealers remained at 94%. In 1997 the volume of receivables
purchased was slightly higher than 1996 and 7% below 1995 in response to the
truck industry demand. Although dealer inventory levels at October 31, 1997 were
comparable to the 1996 year end levels, fiscal 1997 average dealer inventory
levels were approximately 22% below 1996. In response to the continued strong
customer demand, Transportation's dealers significantly increased the level of
truck inventory during the fourth quarter of fiscal 1997. Wholesale note
balances at October 31, 1996 were 25% below 1995 year end balances. This
significant decline occurred primarily in the fourth quarter of fiscal 1996 as
average dealer inventory levels during fiscal 1996 were approximately 22% higher
than fiscal 1995.
Results of Operations
The components of net income over the last three years were as follows:
1997 1996 1995
Income before income taxes: ($ millions)
Finance operations $68.6 $74.2 $53.1
Insurance operations 6.0 6.3 5.6
Income before taxes 74.6 80.5 58.7
Taxes on income 28.9 31.1 22.5
Net income $45.7 $49.4 $36.2
Return on average equity 16.1% 18.1% 15.0%
The Corporation's 1997 return on average equity of 16.1% was below its
record 18.1% in 1996 primarily due to lower average dealer inventory levels and
gains on sales of retail notes, partially offset by lower borrowing costs and
provision for losses. Income in 1996 was 37% higher than 1995 primarily as a
result of higher gains on sales of retail notes and higher average wholesale
note balances.
Finance Operations:
Retail note and lease financing revenue for 1997 was $106 million compared
with $98 million and $73 million in 1996 and 1995, respectively. Included in
these amounts is operating lease revenue of $29 million, $14 million and $9
million in 1997, 1996 and 1995, respectively. The higher operating lease revenue
is the result of an increase in operating lease balances due to a market shift
toward lease financing. For operating leases, the Corporation recognizes the
entire lease payment as revenue and records depreciation expense on the assets
under lease.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations (Continued)
Also included in retail note and lease finance revenue are gains on sales
of retail note receivables of $13 million, $20 million and $5 million in 1997,
1996 and 1995, respectively, on sales of $987 million, $985 million and $740
million, respectively. The higher gains on sales in fiscal 1996 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, NFC's
acquisition spreads may improve as the Corporation's cost of borrowing differs
from the time when interest rates are quoted to borrowers and the time when such
notes are acquired. In addition, unless hedged, 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 notes.
In fiscal 1997 wholesale note revenue decreased 36.2% from 1996 primarily
as a result of lower average outstanding note balances and lower yields in
response to the competitive commercial financing market. Wholesale note revenue
increased 5% in 1996 to $57 million as a result of higher average outstanding
note balances offset in part by lower average yields relating to a lower prime
interest rate.
Borrowing costs decreased 10.6% in 1997 to $73 million from $82 million in
1996 primarily due to lower wholesale funding requirements and lower borrowing
rates. During 1997 the Corporation's weighted average interest rate on all debt
declined to 6.4% from 6.5% in 1996. The Corporation's 1996 borrowing costs of
$82 million were slightly less than the $84 million in 1995 due to a decline in
the Corporation's weighted average interest rate offset in part by higher debt
balances to support receivable balances. During 1996, the Corporation's weighted
average interest rate on all debt declined to 6.5% from 7.4% in 1995 primarily
due to lower market interest rates and the maturity of high fixed rate public
debt during 1995 and 1996. The ratio of debt to equity was 4.3:1, 4.7:1 and
5.2:1 at October 31, 1997, 1996, and 1995, respectively.
Credit, collection and administrative expenses increased to $31 million in
1997 from $28 million in 1996 and 1995. The increase in 1997 compared with 1996
and 1995 was primarily due to employee related costs, retail marketing efforts
and training and development programs.
The provision for losses on receivables totaled $3 million in 1997 compared
with $9 million in 1996 and $3 million in 1995. During 1997 and 1996 competitive
freight rates and higher fuel costs have impacted NFC's customers' abilities to
meet obligations and have resulted in higher delinquencies, repossessions and
credit losses as compared to 1995. Notes and account write-offs (recoveries),
including sold notes totaled $2 million in 1997, $5 million in 1996 and $(1)
million in 1995. The Corporation's allowance for losses as a percentage of
serviced finance receivables was .72%, .74% and .62% at October 31, 1997, 1996
and 1995, respectively.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations (Continued)
Depreciation and other expenses in 1997 increased to $19 million from $9
million in 1996. The increase is primarily the result of a larger investment in
equipment under operating leases.
Insurance Operations:
Harco National Insurance Company's ("Harco") pretax income was $6 million
in each of the three years ended October 31, 1997. Harco's gross premiums
written in 1997 were $49 million, 10% and 8% below 1996 and 1995, respectively.
The insurance industry continues to be over capitalized which results in a
highly competitive market and places pressure on Harco's volume and margins. The
ratio of losses to earned premiums during 1997 was 70% compared to 73% and 71%
in 1996 and 1995, respectively. The loss ratio improvement is primarily due to
favorable experience in the liability lines.
Liquidity and Funds Management
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 Corporation's current debt ratings
have made sales of finance receivables the most economical source of cash. The
Corporation's insurance operation generates its funds through internal
operations and has no external borrowings.
Operations provided $142 million in cash in 1997 primarily due to the cash
provided from net income of $46 million and an increase in accounts payable to
affiliated companies of $107 million. Investing activities used $1 million in
cash. During 1997, the purchase of $1,036 million of receivables and equipment
leased to others was funded primarily with $958 million of proceeds from the
sale of receivables and principal collections of $94 million. The cash provided
by operations and the $209 million of proceeds from the issuance of long term
debt were used principally to lower bank borrowings by $311 million and to pay
dividends of $40 million. See also the "Statements of Consolidated Cash Flow" on
page 11.
Over the last three years, operations provided $225 million in cash and
proceeds from the sale of retail receivables totaled $2,667 million. These
amounts were used principally to fund the purchase of receivables and equipment
leased to others of $3,007, net of principal collections on the receivables, and
to pay dividends of $75 million.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Funds Management (Continued)
Receivable sales were a significant source of funding in 1997 and 1996.
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 1997 and 1996, the Corporation sold $987 and $985
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, 1997,
the remaining shelf registration available to NFRRC for issuance of asset-backed
securities was $1,473 million.
At October 31, 1997, Navistar Financial Securities Corporation ("NFSC"), a
wholly-owned subsidiary of the Corporation, had in place a $600 million
revolving wholesale note trust that provides for the continuous sale of eligible
wholesale notes on a daily basis. During 1997, a $100 million tranche matured
and the trust issued a $200 million tranche of investor certificates which
matures in 2003. The trust is funded by securities sold to the public comprised
of two $100 million tranches of investor certificates maturing in 1998 and 1999
and two $200 million tranches of investor certificates maturing in 2003 and
2004. At October 31, 1997, the remaining shelf registration available to NFSC
for issuance of investor certificates was $200 million.
On May 30, 1997, the Corporation sold $100 million of Senior Subordinated
Notes due June 2002. The net proceeds from the sale of the Notes offered were
approximately $98 million after the deduction of underwriting fees and certain
other expenses.
During fiscal 1997, the Corporation entered into sale/leaseback agreements
involving vehicles subject to retail finance leases and operating leases with
end users. Total proceeds were $111 million and the outstanding capital lease
obligations at October 31, 1997 were $96 million.
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.
In November 1997, the Corporation sold $500 million of retail notes through
NFRRC to an owner trust, which in turn, sold notes to investors. A gain of $7
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.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Funds Management (Continued)
Under a state law enacted February 14, 1997, the Corporation was relieved
of any liability under the Notice of Deficiency issued on February 1, 1994 by
the Illinois Department of Revenue to the Corporation for the fiscal years 1989
through 1991. See Note 8 to the Consolidated Financial Statements for further
discussion.
Year 2000
The Corporation has and will continue to make certain investments in its
information systems and applications to ensure they are year 2000 compliant.
Spending for these modifications has not had and is not expected to have a
material impact on the Corporation's financial condition or results of
operations in any given year.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS No. 131 establishes standards for reporting information
about operating segments, and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
disclosures and, accordingly, will have no impact on the Corporation's reported
financial condition, results of operations or cash flows.
Business Outlook
The truck industry in 1998 is forecasted to be consistent with 1997. The
competitive commercial financing market will continue to put pressure on the
Corporation's retail and wholesale financing activity and 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 1998 and beyond.
Page
Item 8. Financial Statements and Supplementary Data
Navistar Financial Corporation and Subsidiaries:
Statements of Consolidated Income and Retained Earnings
for the years ended October 31, 1997, 1996 and 1995.............. 9
Statements of Consolidated Financial Condition as of
October 31, 1997 and 1996 ....................................... 10
Statements of Consolidated Cash Flow for the years ended
October 31, 1997, 1996 and 1995.................................. 11
Notes to Consolidated Financial Statements......................... 12
Independent Auditors' Report....................................... 31
Supplementary Financial Data....................................... 32
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Statements of Consolidated Income and Retained Earnings
- -------------------------------------------------------------------------------
Millions of Dollars
For the years ended October 31 1997 1996 1995
- -------------------------------------------------------------------------------
Revenues
Retail notes and lease financing.............. $105.8 $ 97.7 $ 73.3
Wholesale notes............................... 36.1 56.6 54.1
Accounts...................................... 31.2 26.6 29.2
Servicing fee income.......................... 20.0 20.5 18.3
Insurance premiums earned..................... 33.3 42.0 44.6
Marketable securities......................... 8.5 9.4 8.7
Total..................................... 234.9 252.8 228.2
Expenses
Cost of borrowing:
Interest expense.......................... 65.9 73.2 75.1
Other..................................... 7.0 8.4 9.1
Total..................................... 72.9 81.6 84.2
Credit, collection and administrative......... 31.0 28.2 27.9
Provision for losses on receivables........... 2.5 9.3 2.6
Insurance claims and underwriting............. 35.1 44.4 46.7
Depreciation expense and other................ 18.8 8.8 8.1
Total..................................... 160.3 172.3 169.5
Income Before Taxes................................ 74.6 80.5 58.7
Taxes on Income.................................... 28.9 31.1 22.5
Net Income......................................... 45.7 49.4 36.2
Retained Earnings
Beginning of year............................. 107.4 84.0 56.8
Dividends paid................................ (40.0) (26.0) (9.0)
End of year................................... $113.1 $107.4 $ 84.0
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Statements of Consolidated Financial Condition
- -------------------------------------------------------------------------------
Millions of Dollars
As of October 31 1997 1996
- -------------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents.............................. $ 10.7 $ 6.7
Marketable Securities.................................. 114.2 128.1
Receivables
Finance receivables............................... 1,223.2 1,205.2
Allowance for losses.............................. (12.0) (11.6)
Receivables, net.............................. 1,211.2 1,193.6
Amounts Due from Sales of Receivables.................. 233.3 264.3
Equipment on Operating Leases, Net..................... 124.1 101.1
Repossessions.......................................... 13.0 13.2
Other Assets........................................... 104.1 86.8
Total Assets........................................... $1,810.6 $1,793.8
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt........................................ $ 141.0 $ 99.4
Accounts Payable and Other Liabilities................. 191.3 86.4
Senior and Subordinated Debt........................... 1,082.7 1,206.4
Dealers' Reserves...................................... 22.2 22.3
Unpaid Insurance Claims and Unearned Premiums.......... 85.6 99.6
Commitments and Contingencies
Shareowner's Equity
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital..... 171.0 171.0
Retained earnings................................. 113.1 107.4
Unrealized gains on marketable securities......... 3.7 1.3
Total......................................... 287.8 279.7
Total Liabilities and Shareowner's Equity.............. $1,810.6 $1,793.8
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
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Statements of Consolidated Cash Flow
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Millions of Dollars
For the years ended October 31 1997 1996 1995
- -------------------------------------------------------------------------------
Cash Flow From Operations
Net income.................................... $ 45.7 $ 49.4 $ 36.2
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables................. (13.4) (20.2) (5.2)
Depreciation and amortization................. 22.5 15.3 11.1
Provision for losses on receivables........... 2.5 9.3 2.6
Increase (decrease) in accounts payable
to affiliated companies..................... 107.0 (65.0) 73.2
Other......................................... (22.3) (17.3) (6.7)
Total................................... 142.0 (28.5) 111.2
Cash Flow From Investing Activities
Proceeds from sold retail notes............... 958.2 982.1 726.8
Purchase of retail notes and
lease receivables........................... (969.7) (1,069.0) (1,089.3)
Principal collections on retail notes and
lease receivables........................... 93.8 70.2 113.2
Acquisitions (over)/under cash collections of
wholesale notes and accounts receivable..... (59.9) 163.0 (77.1)
Purchase of marketable securities............. (65.3) (63.0) (61.9)
Proceeds from sales and maturities of
marketable securities....................... 84.8 67.7 67.3
Purchase of equipment leased to others........ (66.3) (65.9) (23.9)
Sale of equipment leased to others............ 23.8 9.7 5.2
Total................................... (0.6) 94.8 (339.7)
Cash Flow From Financing Activities
Net increase (decrease) in short-term debt.... 41.6 48.9 (368.7)
Net (decrease) increase in bank
revolving credit facility usage............. (311.0) (56.0) 405.0
Net (decrease) increase in asset-backed
commercial paper facility usage............. (15.3) 88.1 275.8
Principal payments on long-term debt.......... (21.6) (117.5) (100.0)
Proceeds from long-term debt.................. 208.9 - -
Dividends paid to Transportation.............. (40.0) (26.0) (9.0)
Total................................... (137.4) (62.5) 203.1
Increase/(Decrease) in Cash and
Cash Equivalents.............................. 4.0 3.8 (25.4)
Cash and Cash Equivalents at Beginning of Year.. 6.7 2.9 28.3
Cash and Cash Equivalents at End of Year........ $ 10.7 $ 6.7 $ 2.9
Supplementary disclosure of cash
flow information:
Interest paid................................. $ 59.7 $ 76.3 $ 74.3
Income taxes paid............................. $ 23.8 $ 32.2 $ 14.6
See Notes to Consolidated Financial Statements.
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1997
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 is a financial services organization that provides retail,
wholesale and 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 an 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
Revenue from finance receivables is recognized using the interest method.
Revenue on operating leases is recognized on a straight-line basis over the life
of the lease. Recognition of revenue is suspended when management determines the
collection of future income is not probable. Income recognition is resumed if
collection doubts are removed.
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. Gains or losses on sales of receivables are
credited or charged to financing revenue in the period in which the sales occur.
An adequate allowance for credit losses is provided prior to the receivable
sales.
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 related 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 other assets in the Statements 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. The difference between amortized cost and fair value is recorded
as an adjustment to shareowner's equity, net of applicable deferred taxes.
Derivative Financial Instruments
The Corporation uses derivatives such as forward contracts and interest
rate swaps to reduce its exposure to interest rate volatility. The Corporation's
primary use of such financial instruments is to hedge the fair value of its
fixed rate receivables against changes in market interest rates in anticipation
of the sale of such receivables.
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 as income when the receivables are
sold. The principal balance of receivables expected to be sold by the
Corporation equals or exceeds the notional amount of open derivative contracts.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS No. 131 establishes standards for reporting information
about operating segments, and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
disclosures and, accordingly, will have no impact on the Corporation's reported
financial condition, results of operations or cash flows.
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 1997 financial statements.
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 from Transportation at the
principal amount of the receivables. Revenue collected from Transportation was
$54.7 in 1997, $49.8 in 1996 and $55.7 in 1995
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 $10.1 in 1997, $9.5 in
1996 and $0.6 in 1995.
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. No income
maintenance payments were required during the three-year period ended October
31, 1997.
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 $2.1 in 1997 and $2.4 in 1996 and 1995.
Accounts Payable
Accounts payable and other liabilities include $131.5 and $24.5 payable to
Transportation at October 31, 1997 and 1996, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
3. INDUSTRY SEGMENTS
Information by industry segment is summarized as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Revenues:
Finance operations....................... $ 193.5 $ 201.6 $ 175.1
Insurance operations..................... 41.4 51.2 53.1
Total revenues......................... $ 234.9 $ 252.8 $ 228.2
Income before taxes:
Finance operations....................... $ 68.6 $ 74.2 $ 53.1
Insurance operations..................... 6.0 6.3 5.6
Total income before taxes.............. $ 74.6 $ 80.5 $ 58.7
Assets at end of year:
Finance operations....................... $1,659.3 $1,626.9 $1,701.9
Insurance operations..................... 151.3 166.9 172.8
Total assets at end of year............ $1,810.6 $1,793.8 $1,874.7
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 following
table sets forth, by type of security issuer, the amortized cost and estimated
fair values at October 31:
1997 1996
----------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------
U.S. government and
agency securities................. $ 26.6 $ 27.1 $ 41.7 $ 41.5
Mortgage and
asset-backed secuurities.......... 37.8 38.2 42.4 42.2
Corporate debt and other securities... 30.3 30.1 30.6 30.3
Total debt securities............. 94.7 95.4 114.7 114.0
Equity securities..................... 13.5 18.8 11.3 14.1
Total............................. $ 108.2 $ 114.2 $ 126.0 $ 128.1
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES (Continued)
Net unrealized gains and losses on marketable securities were $6.0 and $2.1
at October 31, 1997 and 1996, respectively. Unrealized losses were not material.
Contractual maturities of marketable debt securities at October 31, 1997,
are as follows:
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------
Due in one year or less.................................. $ 17.4 $ 17.4
Due after one year through five years.................... 11.8 11.8
Due after five years through ten years................... 18.1 18.5
Due after ten years...................................... 9.6 9.5
56.9 57.2
Mortgage- and asset-backed securities.................... 37.8 38.2
Total (Excludes equity securities)................... $ 94.7 $ 95.4
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 $84.8 during 1997 and $67.7 during 1996. The related realized gains
and losses were not material.
All marketable securities at October 31, 1997 and 1996 were held by Harco,
of which $14.5 and $16.7, 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:
1997 1996
- -------------------------------------------------------------------------------
Retail notes and lease financing....................... $ 706.5 $ 733.3
Wholesale notes........................................ 45.7 100.5
Accounts:
Retail 396.6 314.7
Wholesale......................................... 74.4 56.7
Total......................................... 471.0 371.4
Total finance receivables................ $1,223.2 $1,205.2
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (continued)
Contractual maturities of finance receivables including unearned finance
income at October 31, 1997, are summarized as follows:
Retail Wholesale Accounts
- -------------------------------------------------------------------------------
Due in fiscal year:
1998 .................................... $239.4 $ 40.7 $471.0
1999 .................................... 190.1 5.0 -
2000 .................................... 160.9 - -
2001 .................................... 130.5 - -
2002 .................................... 90.6 - -
Due after 2002................................. 17.8 - -
Gross finance receivables............... 829.3 45.7 471.0
Unearned finance income........................ 122.8 - -
Total finance receivables............... $706.5 $ 45.7 $471.0
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.
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:
1997 1996
- -------------------------------------------------------------------------------
Retail notes............................................ $1,422.2 $1,366.4
Wholesale notes......................................... 545.5 500.0
Total.............................................. $1,967.7 $1,866.4
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
During fiscal 1997, in two separate sales, the Corporation sold a total of
$987 of retail notes, net of unearned finance income, through NFRRC to two
individual owner trusts. The owner trusts, in turn, sold notes and certificates
to investors. At October 31, 1997, the remaining shelf registration available to
NFRRC for issuance of asset-backed securities was $1,473.
NFSC has in place a revolving wholesale note trust that provides for the
continuous sale of eligible wholesale notes up to $600. During 1997, a $100
tranche of investor certificates matured and NFSC issued a $200 tranche of
investor certificates. The trust is comprised of two $100 tranches of investor
certificates maturing in 1998 and 1999 and two $200 tranches of investor
certificates maturing in 2003 and 2004. At October 31, 1997, the remaining shelf
registration available to NFSC for issuance of investor certificates was $200.
NFRRC and NFSC 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. The terms
of retail receivable sales require the Corporation to maintain cash reserves
with the trusts as credit enhancement for public sales. The cash reserves held
by the trusts are restricted for use by the securitized sales agreements. The
maximum exposure under all receivable sale recourse provisions at October 31,
1997 was $245.8; however, management believes the reserves to be adequate.
On January 1, 1997, the Corporation adopted Statement of Financial
Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", for all
applicable transactions. SFAS No. 125 requires that amounts previously
classified as excess servicing be reclassified as interest only receivables and
that such amounts be recorded at estimated fair value. Restatement of the
financial statements of prior periods is not permitted. The new standard did not
have a material effect on the Corporation's net income or financial condition.
The following is a summary of amounts included in "Amounts Due from Sales
of Receivables" as of October 31:
1997 1996
- -------------------------------------------------------------------------------
Cash held and invested by trusts............................ $ 90.8 $ 85.2
Subordinated retained interests in wholesale receivables.... 99.9 85.4
Subordinated retained interests in retail receivables....... 47.4 96.0
Interest only receivables................................... 7.7 -
Excess servicing............................................ - 10.1
Allowance for credit losses................................. (12.5) (12.4)
Total.................................................. $233.3 $264.3
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
6. INVESTMENT IN OPERATING LEASES
Operating leases at year-end were as follows:
1997 1996
- -------------------------------------------------------------------------------
Investment in operating leases
Vehicles and other equipment, at cost........................ $150.0 $116.4
Less: Accumulated depreciation.............................. (25.9) (15.3)
Net investment in operating leases........................... $124.1 $101.1
Future minimum rentals on operating leases are as follows: 1998, $30.1;
1999, $26.8; 2000, $20.4; 2001, $12.6 and $3.6 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.
7. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Total allowance for losses at beginning of year....... $24.0 $19.6 $16.2
Provision for losses.................................. 2.5 9.3 2.6
Net (losses) recoveries (charged)
credited to allowance............................ (2.0) (4.9) 0.8
Total allowance for losses at end of year.... $24.5 $24.0 $19.6
Allowance pertaining to:
Owned notes...................................... $12.0 $11.6 $10.4
Sold notes....................................... 12.5 12.4 9.2
Total..........................................$24.5 $24.0 $19.6
8. TAXES ON INCOME
Taxes on income are summarized as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Current:
Federal.......................................... $29.6 $26.4 $18.9
State and local.................................. 4.1 4.4 3.1
Total current................................ 33.7 30.8 22.0
Deferred (primarily Federal).......................... (4.8) 0.3 0.5
Total........................................ $28.9 $31.1 $22.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
8. TAXES ON INCOME (continued)
The effective tax rate of approximately 38% in each of the three years
ended October 31, 1997 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:
1997 1996
- -------------------------------------------------------------------------------
Deferred tax assets:
Other postretirement benefits............................... $3.0 $2.9
Deferred tax liabilities:
Depreciation and other...................................... 2.2 6.9
Unrealized gains on marketable securities................... 2.3 0.8
Total deferred tax liabilities.......................... 4.5 7.7
Net deferred tax liabilities............................ $1.5 $4.8
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 $12 million. The Department had taken the position that
nearly 100% of NFC's income during these years should be attributed to and taxed
by Illinois. On February 14, 1997, a state law was enacted which negated the
Department's position and relieved NFC of the aforementioned Notice of
Deficiency.
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.
Information regarding short-term debt is as follows:
1997 1996 1995
- -------------------------------------------------------------------------------
Aggregate obligations outstanding:
Daily average.................................. $109.7 $ 68.2 $ 37.8
Maximum month-end balance...................... 145.0 117.8 81.1
Weighted average interest rate:
On average daily borrowing..................... 6.1% 6.0% 6.4%
At October 31.................................. 6.1% 5.9% 6.3%
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:
1997 1996
- -------------------------------------------------------------------------------
Bank revolving credit, at variable rates,
due March 2001........................................$ 393.0 $ 704.0
Funding under asset-backed commercial
paper program ("ABCP"), at variable
rates, due March 2001................................. 399.9 402.4
Capital lease obligations, 5.19% to 5.62%,
due serially through 2003............................. 95.8 -
Subordinated term debt:
Senior Notes, 8 7/8%, due November 1998............... 94.0 100.0
Senior Notes, 9%, due June 2002....................... 100.0 -
Total senior and subordinated debt...........$1,082.7 $1,206.4
The weighted average interest rate on total debt, including short-term debt
and the effect of discounts and related amortization, was 6.4%, 6.5% and 7.4% in
1997, 1996 and 1995, respectively. The aggregate annual maturities and required
payments of debt are as follows:
Fiscal year ended October 31,
1998 $ 12.6
1999 111.0
2000 25.4
2001 819.6
2002 and thereafter 114.1
Total $1,082.7
At October 31, 1997, the Corporation has a $925 contractually committed
bank revolving credit facility and a $400 ABCP program supported by a bank
liquidity facility. Available funding under the ABCP program is comprised of the
$400 liquidity facility plus $14 of trust certificates issued in connection with
the formation of the ABCP trust. Under the terms of the ABCP program, Truck
Retail Instalment Paper Company ("TRIP"), a special purpose wholly-owned
subsidiary of NFC, purchases eligible receivables from NFC. All assets of TRIP
are pledged to a Trust that funds the receivables with A1/P1 rated commercial
paper.
Available funding under the amended and restated credit facility and the
ABCP program was $546, of which $141 provided funding backup for the outstanding
short-term debt at October 31, 1997. The remaining $405 when combined with
unrestricted cash and cash equivalents made $416 available to fund the general
business purposes of the Corporation at October 31, 1997. Under the terms of the
revolving credit facility, the Corporation is required to maintain tangible net
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT (Continued)
worth at a minimum of $175 and a debt to tangible net worth ratio of no greater
than 7 to 1. Consistent with the previous revolving credit agreement, the
amended agreement grants security interests in substantially all of the
Corporation's assets to the Corporation's debtholders. Compensating cash
balances are not required under the restated revolving credit facility. Facility
fees are paid quarterly regardless of usage.
Under the terms of the 8 7/8% Subordinated debt agreement, the aggregate
principal balances of subordinated debt may not exceed 75% of consolidated
tangible net worth.
During fiscal 1997, the Corporation entered into sale/leaseback agreements
involving vehicles subject to retail finance and operating leases with end
users. The balance, as of October 31, 1997, is classified under senior and
subordinated debt as capital lease obligations. These agreements grant to the
purchasers a security interest in the underlying end user leases.
11. RETIREMENT BENEFITS
The Corporation provides postretirement benefits to substantially all of
its employees. Expenses associated with postretirement benefits include pension
expense for employees, retirees and surviving spouses, and postretirement health
care and life insurance expense for employees, retirees, surviving spouses and
dependents.
Pension Benefits
Generally pension benefits are non-contributory with benefits related to an
employee's length of service and compensation rate. Plan assets are primarily
invested in a dedicated portfolio of long-term fixed income securities with the
remainder invested in high quality equity securities.
Pension Expense
Net pension (income) expense includes the following:
1997 1996 1995
-------------------------------------------------------------------------
Service cost for benefits earned during
the period....................................$ 0.8 $ 0.7 $ 0.5
Interest cost on projected benefit
obligation.................................... 3.0 2.9 2.8
Return on assets - actual (gain) loss........... (9.7) (3.2) (9.1)
- deferred gain (loss)......... 5.7 (0.4) 5.8
Net amortization costs and other costs.......... - 0.1 -
Net pension (income) expense..............$(0.2) $ 0.1 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
Pension Assets and Liabilities
The plans' funded status and reconciliation to the Statements 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
--------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------
Actuarial present value of:
Vested benefits................. $ (35.8) $ (31.5) $ (2.2) $ (2.0)
Non-vested benefits............. (4.4) (4.0) (0.1) (0.1)
Accumulated benefit
obligation.................. (40.2) (35.5) (2.3) (2.1)
Effect of projected future
compensation levels......... (1.4) (1.0) (0.1) -
Total projected benefit
obligation.................. (41.6) (36.5) (2.4) (2.1)
Plan assets at fair value.......... 50.1 42.7 - -
Funded status at October 31..... 8.5 6.2 (2.4) (2.1)
Unrecognized net losses (gains).... (7.3) (5.5) 0.8 0.4
Unrecognized plan amendments....... 0.4 0.5 - -
Unrecognized net obligation
as of transition date....... 0.1 0.1 - -
Net asset (liability)......... $ 1.7 $ 1.3 $ (1.6) $ (1.7)
The weighted average rate assumptions used in determining the projected
benefit obligation and pension expense were:
1997 1996 1995
- -------------------------------------------------------------------------------
Discount rate used to determine the present value
of the projected benefit obligations................. 7.2% 7.9% 7.5%
Expected long-term rate of return on plan assets.......... 9.6% 8.9% 9.9%
Expected rate of increase in future
compensation levels.................................. 3.5% 3.5% 3.5%
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
Other Postretirement Benefits
The components of expense for other postretirement benefits that are
included in the Statements of Consolidated Income and Retained Earnings include
the following:
1997 1996 1995
- -------------------------------------------------------------------------------
Service cost for benefits earned during the year....... $ 0.4 $ 0.4 $ 0.3
Interest cost on the accumulated benefit
obligation........................................ 0.9 0.8 0.8
Expected return on assets - actual (gain) loss......... (0.2) 0.8 (1.5)
- deferred gain (loss)....... (0.3) (1.3) 1.2
Total cost of other postretirement benefits............ $ 0.8 $ 0.7 $ 0.8
The funded status of other postretirement benefits as of October 31 were as
follows:
1997 1996
- -------------------------------------------------------------------------------
Accumulated other postretirement benefit obligation (APBO):
Retirees and their dependents............................... $(6.2) $(4.9)
Active employees eligible to retire......................... (2.0) (2.9)
Other active participants................................... (3.4) (3.4)
Total APBO ................................................. (11.6) (11.2)
Plan assets at fair value................................... 4.4 3.9
APBO in excess of plan assets............................... (7.2) (7.3)
Unrecognized net loss....................................... 1.0 1.5
Net liability............................................... $(6.2) $(5.8)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
The expected return on plan assets was 11.1% for 1997, 10.5% for 1996 and
10.0% for 1995. The weighted average of discount rates used to determine the
accumulated postretirement benefit obligation was 7.4% and 8.1% at October 31,
1997 and 1996, respectively. For 1998, 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 $1.7 and the associated expense
recognized for the year ended October 31, 1997, would increase by an estimated
$0.2.
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, 1997, future minimum lease commitments under
noncancelable operating leases with remaining terms in excess of one year are as
follows:
Year Ended October 31,
1998............................................. $ 1.7
1999............................................. 1.7
2000............................................. 1.4
2001............................................. 0.2
2002............................................. -
Thereafter....................................... -
Total........................................ $ 5.0
13. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 1997 and
1996, 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Corporation's
financial instruments were as follows:
1997 1996
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------
Financial assets:
Finance receivables:
Retail notes.................... $ 607.0 $ 619.0 $ 662.5 $ 672.1
Wholesale notes and accounts.... 516.7 516.7 471.9 471.9
Amounts due from sales of
receivables..................... 233.3 230.3 264.3 258.1
Financial liabilities:
Senior and subordinated debt...... $1,082.7 $1,086.0 $1,206.4 $1,207.4
Cash and cash equivalents approximate fair value. The cost and fair value
of marketable securities are disclosed in Note 4.
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
re-price frequently, the carrying amount approximates fair value. For wholesale
notes and retail and wholesale accounts, which also reprice frequently, the
carrying amounts approximate fair value as a result of the short term nature of
the receivables.
The fair value of cash deposits included above in amounts due from sales of
receivables approximates their carrying value. The fair values of other amounts
due from sales of receivables were derived by discounting expected cash flows at
estimated current market rates.
For variable-rate debt that reprices frequently, the carrying amount
approximates fair value. For fixed rate debt, the fair value is estimated based
on quoted market prices where available and, where not available, on quoted
market prices of debt with similar characteristics.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS (Continued)
Derivatives Held or Issued for Purposes Other Than Trading
The Corporation manages its exposure to fluctuations in interest rates 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
counter-party 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 the fair value of the retail notes anticipated to be
sold. The Corporation manages interest rate risk by entering into forward
contracts to sell fixed debt securities or forward interest rate swaps whose
fair value is highly correlated with that of the Corporation's 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 the second half of fiscal 1997 the Corporation entered into $500 of
interest rate hedge agreements in anticipation of the November 1997 sale of
retail receivables. These hedge agreements, which were closed in conjunction
with the pricing of the sale, resulted in an immaterial loss which was deferred
and included in the gain on the sale of retail receivables recognized in
November 1997.
15. LEGAL PROCEEDINGS
The Corporation is subject to various 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. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
16. SUBSEQUENT EVENT
In November 1997, the Corporation sold $500 of retail notes, net of
unearned finance income, through NFRRC to an owner trust which, in turn, sold
notes to investors. A gain of $7.2 was recognized on the sale.
17. QUARTERLY FINANCIAL INFORMATION (unaudited)
1997
----------------------------------------------
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------
Revenues........................ $58.1 $57.3 $62.5 $57.0 $234.9
Interest expense................ 14.3 17.2 16.7 17.7 65.9
Provision for loss
on receivables.............. 0.7 0.5 0.3 1.0 2.5
Net income...................... 13.4 9.3 13.4 9.6 45.7
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 loss
on receivables............... 1.1 1.6 1.7 4.9 9.3
Net income....................... 16.6 8.7 15.6 8.5 49.4
- -------------------------------------------------------------------------------
Navistar Financial Corporation and Subsidiaries
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Statement of Financial Reporting Responsibility
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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
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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, 1997 and 1996 and the results of
their operations and their cash flow for each of the three years in the period
ended October 31, 1997 in conformity with generally accepted accounting
principles.
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
December 15, 1997
Chicago, Illinois
SUPPLEMENTARY FINANCIAL DATA
Five Year Summary of Financial and Operating Data
Dollar amounts in millions
1997 1996 1995 1994 1993
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Results of Operations:
Revenues.................$ 234.9 $ 252.8 $ 228.2 $ 210.8 $ 231.9
Net income ............... 45.7 49.4 36.2 34.0 22.5
Dividends paid ........... 40.0 26.0 9.0 25.6 22.6
Percent of net income to
average shareowner's
equity................. 16.1% 18.1% 15.0% 15.1% 10.3%
Financial Data:
Finance receivables, net.$1,211.2 $1,193.6 $1,370.9 $1,094.0 $1,270.2
Total assets ............ 1,810.6 1,793.8 1,874.7 1,534.8 1,625.2
Total debt .............. 1,223.7 1,305.8 1,330.3 1,091.5 1,199.2
Shareowner's equity ..... 287.8 279.7 256.7 225.6 219.4
Debt to equity ratio ..... 4.3:1 4.7:1 5.2:1 4.8:1 5.5:1
Senior debt to capital
funds ratio........... 2.1:1 3.2:1 3.4:1 3.0:1 3.4:1
Number of employees at
October 31............... 358 352 360 353 339
SUPPLEMENTARY FINANCIAL DATA (Continued)
Gross Finance Receivables and Leases Acquired
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($ Millions) 1997 1996 1995 1994 1993
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Wholesale notes............$2,772.8 $2,705.8 $2,979.4 $2,306.6 $1,977.6
Retail notes and leases:
New...................... 976.2 1,064.1 1,075.0 861.9 730.0
Used .................... 270.3 281.7 242.3 217.2 168.4
Total................. 1,246.5 1,345.8 1,317.3 1,079.1 898.4
Total ................$4,019.3 $4,051.6 $4,296.7 $3,385.7 $2,876.0
Serviced (including sold notes) Retail Notes and
Leases With Installments Past Due Over 60 Days
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At October 31 ($ Millions) 1997 1996 1995 1994 1993
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Original amount of notes
and leases...................... $ 31.8 $ 14.0 $ 4.2 $ 3.1 $ 3.6
Balance of notes and leases......... 16.2 8.0 2.2 1.3 1.3
Balance as a percent of
total outstanding............... 0.64% 0.32% 0.10% 0.07% 0.09%
Retail Note and Lease Repossessions (including sold notes)
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1997 1996 1995 1994 1993
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Retail note and lease repossessions
acquired as a percentage
of average serviced retail
note and lease balances.............. 2.69% 3.08% 0.92% 0.93% 1.94%
SUPPLEMENTARY FINANCIAL DATA (Continued)
Credit Loss Experience on Serviced (including sold notes) Receivables
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($ Millions) 1997 1996 1995 1994 1993
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Net losses (recoveries):
Retail notes and leases ............ $2.2 $5.1 $ .3 $ .6 $(.1)
Wholesale notes .................... (.2) (.2) (.9) .1 .8
Accounts - - (.2) .2 -
Total .......................... $2.0 $4.9 $(.8) $ .9 $ .7
Percent net losses (recoveries) to liquidations:
Retail notes and leases ............ .18% .48% .03% .07% (.01)%
Wholesale notes .................... (.01) (.01) (.03) .01 .04
Total .......................... .05% .13% (.02)% .03% .03%
Percent net losses (recoveries) to related average gross receivables
outstanding:
Retail notes and leases ............ .09% .22% .02% .04% -
Wholesale notes .................... (.02) (.02) (.13) .03 .16
Accounts - - (.05) .08 -
Total .......................... .06% .14% (.03)% .04% .03%
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
See Index to Exhibits.
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended October
31, 1997.
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 December 22, 1997
Phyllis E. Cochran
Vice President and Controller
(Principal Accounting Officer)