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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, 1998
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, 1998, 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, 1998
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 7A. Quantitative and Qualitative Disclosures About Market Risk.. 9
Item 8. Financial Statements........................................ 10
Statement of Financial Reporting Responsibility.......... 33
Independent Auditors' Report............................. 34
Supplementary Financial Data............................. 35
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure...................... 38
PART III
Item 10. Directors and Executive Officers of the
Registrant (A)........................................... 38
Item 11. Executive Compensation (A).................................. 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A)....................................... 38
Item 13. Certain Relationships and Related
Transactions (A)......................................... 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K...................................... 38
SIGNATURES- Principal Accounting Officer ............................. 39
- Directors................................................. 40
POWER OF ATTORNEY..................................................... 40
INDEX TO 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 commercial financing 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; Duluth,
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 of this Report for explanation.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements under this caption, which involve risks and
uncertainties, constitute "forward-looking statements" under the Securities
Reform Act. 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 headings "Year 2000", "Business Outlook" and
"Quantitative and Qualitative Disclosures About Market Risk."
Financing Volume
In response to the continued strong U.S. economy, customer demand for Class
5 through 8 trucks in fiscal 1998 was 13% and 15% higher than 1997 and 1996,
respectively. The strong economy continued to contribute to high liquidity in
the commercial financing markets, which gives the Corporation's customers more
financing alternatives. This continuing, highly competitive financing market has
caused the Corporation to increase marketing efforts for its retail and
wholesale financing products and services and to reduce finance rates offered
during the fiscal year.
Financing support provided to retail customers over the last three years
was as follows:
1998 1997 1996
Retail and Lease Financing: ($ millions)
Finance market share of new International
trucks sold in the U.S. 16.0% 13.2% 16.3%
Purchases of receivables and
equipment leased to others $1,397 $1,036 $1,135
Serviced retail notes and lease
financing balances (including
sold notes) at October 31 $2,579 $2,253 $2,200
As a result of the Corporation's higher finance market share and the higher
truck industry demand in 1998, purchases of receivables and equipment leased to
others were 35% above 1997. During fiscal 1998 the serviced portfolio grew 14%
to $2.6 billion. Purchases of receivables and equipment leased to others in 1997
were below those of 1996 as a result of the lower finance market share.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Financing Volume (continued)
Financing support provided to Transportation's dealers over the last three
years was as follows:
1998 1997 1996
Wholesale Financing: ($ millions)
Percent of wholesale financing of
new International trucks sold to
Transportation's dealers in the U.S. 95% 94% 94%
Purchases of receivables $3,813 $2,773 $2,706
Serviced wholesale note balances
(including sold notes) at
October 31 $1,039 $ 691 $ 685
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 increased slightly to 95% from 94% in 1997 and 1996. In
1998 the volume of receivables purchased was 38% higher than 1997 and 41% higher
than 1996 in response to the strong industry demand.
Results of Operations
The components of net income over the last three years were as follows:
1998 1997 1996
Income before income taxes: ($ millions)
Finance operations $79.2 $68.6 $74.2
Insurance operations 6.0 6.0 6.3
Income before income taxes 85.2 74.6 80.5
Taxes on income 32.3 28.9 31.1
Net income $52.9 $45.7 $49.4
Return on average equity 18.5% 16.1% 18.1%
The Corporation's 1998 return on average equity was a record 18.5% in 1998,
compared with 16.1% and 18.1% in 1997 and 1996, respectively. The increase over
1997 is primarily due to the higher level of wholesale and retail financing,
partially offset by lower financing margins and higher costs to service the
larger portfolio. Net income in 1997 was 7.5% lower than 1996, reflecting lower
average dealer inventory levels and gains on sales of retail notes, partially
offset by a lower provision for losses during 1997.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations:
Retail note and lease financing revenue for 1998 was $136 million compared
with $106 million and $98 million in 1997 and 1996, respectively. The 28% growth
in fiscal 1998 is due to higher retail financing activities and the shift of the
portfolio to operating leases, offset in part by lower yields. Included in
retail note and lease financing revenue is operating lease revenue of $46
million, $29 million and $14 million in 1998, 1997 and 1996, respectively. The
higher operating lease revenue is the result of an increase in vehicles under
operating leases 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.
Also included in retail note and lease finance revenue are gains on sales
of retail note receivables of $15 million, $13 million and $20 million in 1998,
1997 and 1996, 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, the
Corporation'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 1998 wholesale note revenue increased 20% to $43 million versus
1997, primarily as a result of the higher level of wholesale financing activity,
offset in part by lower yields in response to the competitive commercial
financing market. Wholesale note revenue decreased 36% in 1997 to $36 million as
a result of lower average outstanding note balances and lower yields in response
to the competitive commercial financing market.
Borrowing costs increased 21% in 1998 to $88 million from $73 million in
1997 primarily due to higher average receivable funding requirements. The
Corporation's weighted average interest rate on all debt was 6.4% in 1998 and
1997 and 6.5% in 1996. Borrowing costs decreased 11% in 1997 to $73 million from
$82 million in 1996 primarily due to lower wholesale funding requirements. The
ratio of debt to equity was 5.8:1, 4.3:1 and 4.7:1 at October 31, 1998, 1997,
and 1996, respectively.
Credit, collection and administrative expenses increased to $36 million in
1998 from $31 million and $28 million in 1997 and 1996, respectively. The
increase in 1998 compared with 1997 and 1996 was primarily due to employee
related costs to support the increase in financing activity, costs associated
with year 2000 initiatives and marketing programs.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations (continued)
The provision for losses on receivables totaled $1 million in 1998 compared
with $3 million in 1997 and $9 million in 1996. The improvement in 1998 compared
to 1997 is primarily due to recovery of losses on one large account. Notes and
account write-offs, net of recoveries, including sold notes, were less than one
million in 1998, $2 million in 1997 and $5 million in 1996. The Corporation's
allowance for losses as a percentage of serviced finance receivables was .64%,
.72% and .74% at October 31, 1998, 1997 and 1996, respectively.
Depreciation and other expenses in 1998 increased to $30 million from $19
million in 1997 and $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, 1998. Harco's gross premiums
written in 1998 were $47 million, 2% and 12% below 1997 and 1996, 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 was 70% during 1998 and 1997, compared to 73%
in 1996.
Liquidity and Funds Management
The Corporation 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
and equity capital. The Corporation's current debt ratings have made sales of
finance receivables the most economical source of funding. The Corporation's
insurance operation generates its funds through internal operations and has no
external borrowings.
In January 1998, Moody's, Standard and Poors, and Duff and Phelps raised
the Corporation's senior debt ratings from Ba2, BB and BB+ to Ba1, BB+ and BBB-,
respectively, while the subordinated debt ratings were also raised from B1, B+
and BB to Ba3, BB- and BB+, respectively.
Operations provided $69 million in cash in 1998 primarily due to net
income. The cash provided by operations was used to pay dividends of $57
million. Investing activities used $418 million in cash, while financing
activities, excluding dividends, provided $410 million. During 1998, the
purchase of $1,397 million of retail receivables and equipment leased to others
was funded primarily with $953 million of proceeds from the sale of receivables,
principal collections on retail notes and lease receivables of $116 million, and
$410 million net increase in total debt. See also the "Statements of
Consolidated Cash Flow" on page 13.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Funds Management (continued)
Over the last three years, operations provided $182 million in cash and
proceeds from the sale of retail receivables totaled $2,893 million. These
amounts were used principally to fund the purchase of receivables and equipment
leased to others of $3,288, net of principal collections on the receivables, and
to pay dividends of $123 million.
Receivable sales were a significant source of funding in 1998, 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 1998, 1997 and 1996, the Corporation
sold $1,001, $987 and $985 million, respectively, of retail notes, through
Navistar Financial Retail Receivables Corporation ("NFRRC"), a wholly-owned
subsidiary of the Corporation, to owner trusts, which in turn, issued securities
which were sold to investors. On August 28, 1998, NFRRC filed a shelf
registration with the Securities and Exchange Commission which provides for the
issuance of an additional $2,500 million of asset-backed securities. The
aggregate shelf registration available to NFRRC for issuance of asset-backed
securities is $2,972 million.
At October 31, 1998, Navistar Financial Securities Corporation ("NFSC"), a
wholly-owned subsidiary of the Corporation, had a revolving wholesale note trust
that provides for the funding of $700 million of wholesale notes. All eligible
wholesale notes are sold to the trust through NFSC. During 1998, a $100 million
tranche of investor certificates matured and NFSC issued a $200 million tranche
of investor certificates. As of October 31, 1998, the trust is comprised of one
$100 million tranche of investor certificates maturing in 1999 and three $200
million tranches of investor certificates maturing in 2003, 2004 and 2008.
During fiscal 1998 and 1997, the Corporation entered into sale/leaseback
agreements involving vehicles subject to retail finance leases and operating
leases with end users. Total proceeds were $144 million and $111 million in 1998
and 1997, respectively. The outstanding capital lease obligations at October 31,
1998 were $213 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.
As of October 31, 1998, available funding under the bank revolving credit
facility and the ABCP program was $124 million, of which $22 million provided
funding backup for the outstanding short-term debt. The remaining $102 million,
when combined with unrestricted cash and cash equivalents, made $116 million
available to fund the general business purposes of the Corporation.
In November 1998, the Corporation sold $545 million of retail notes, net of
unearned finance income, through NFRRC to a multi-seller asset-backed commercial
paper conduit sponsored by a major financial institution.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Year 2000
The Corporation has identified all significant information technology
("IT") applications that will require remediation, which in some cases will
involve the replacement of systems, to ensure Year 2000 compliance. Internal and
external resources are being used to make the required modifications and to test
for Year 2000 compliance. The Corporation plans to complete the modifications
and testing process of all significant IT systems by August 1999, which is prior
to any anticipated impact on its operating systems.
As of October 31, 1998 the Corporation believes it has remediated
approximately 55% of its non-compliant IT systems. Total costs connected with
the remediation of the Corporation's significant IT systems during 1998 and 1997
totaled $3.7 million and $1.1 million, respectively. Estimated future costs
total $2.5 million. Approximately 25% of the total costs, representing
investment in new IT systems, will be capitalized and depreciated over three to
five years. The total cost of the Year 2000 project has not had nor is it
anticipated to have a material impact on the Corporation's financial position or
results of operations and will be funded through operating cash flows.
While certain aspects of the Corporation's businesses could operate on a
manual basis for a period of time, in the event Year 2000 compliance for its
significant IT systems is not reached, the Corporation currently believes that
the most reasonably likely worst case scenario would be the inability to sustain
its current level of performance and customer service. Additionally, a
significant failure of the banking systems or key entities in the financial
markets could adversely affect the Corporation's ability to access various
credit and money markets. The Corporation is therefore committed to taking all
appropriate actions to achieve Year 2000 compliance for its significant IT
systems before the millennium change date. The Corporation has developed a
detailed plan, which includes an anticipated remediation completion date for
each significant IT system and a scheduled overall completion date of August
1999. Management reviews the progress under the action plan on a weekly basis.
Whenever management concludes a material risk exists that a significant IT
system will not be remediated by the scheduled overall completion date, a
contingency plan is developed.
The Corporation has initiated formal communications with all significant
third party suppliers which provide operational support and non-IT systems to
determine the extent to which the Corporation would be vulnerable in the event
that one or more of those third parties fail to remediate their own Year 2000
issues. The Corporation has received assurances from its significant suppliers
of cash management services that they will be able to operate in the Year 2000
and beyond, without interruption in service. While the Corporation believes that
it does not have significant exposure to other significant suppliers' Year 2000
problems, it is seeking compliance assurances from such other significant
suppliers.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Year 2000 (continued)
The costs of the project and the date on which the Corporation believes it
will complete the Year 2000 remediation are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of qualified
personnel, the ability to locate and correct all relevant computer codes and
similar uncertainties.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." 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.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to establish accounting and reporting
standards for derivative instruments. This statement requires recognition of all
derivative instruments in the statement of financial position as either assets
or liabilities, measured at fair value, and is effective for fiscal years
beginning after June 15, 1999. This statement additionally requires changes in
the fair value of derivatives to be recorded each period in current earnings or
comprehensive income, depending on the intended use of the derivatives. The
Corporation is currently assessing the impact of this statement on its results
of operations, financial condition and cash flows.
Business Outlook
The truck industry in 1999 is forecasted to decrease approximately 3% from
1998. The competitive commercial financing market will continue to put pressure
on the Corporation's retail and wholesale financing activity and margins.
Increased volatility in the capital markets is likely to put additional pressure
on the funding rates offered to the Corporation in the asset-backed public
market, commercial paper markets and other debt financing markets.
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Business Outlook (continued)
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 1999 and beyond.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Corporation is exposed to market risk primarily due to fluctuations in
interest rates. Interest rate risk arises from the funding of a portion of the
Corporation's fixed rate receivables with floating rate debt and from the
Corporation's investment in fixed income securities. The Corporation has managed
exposure to interest rate changes by funding floating rate receivables with
floating rate debt and fixed rate receivables with fixed rate debt, floating
rate debt and equity capital. Management has reduced the net exposure which
results from the funding of fixed rate receivables with floating rate debt by
generally selling fixed rate receivables on a fixed rate basis and by utilizing
derivative financial instruments. The Corporation does not use financial
instruments for trading purposes.
The Corporation maintains investments in marketable securities. The
securities are classified as available for sale and are recorded on the
Statements of Consolidated Financial Condition at fair value with unrealized
gains or losses reported as a separate component of shareowner's equity, net of
applicable deferred taxes. As of October 31, 1998, the fair value of the
Corporation's marketable securities portfolio was $108 million, consisting of
$91 million invested in debt securities and $17 million invested in equity
securities.
The Corporation measures its interest rate risk by estimating the net
amount by which the fair value of all interest rate sensitive assets and
liabilities, including derivative financial instruments, would be impacted by
selected hypothetical changes in market interest rates. Assuming a hypothetical
10% increase in interest rates as of October 31, 1998, the estimated net fair
asset value would decrease by approximately $5 million.
Equity price risk arises when the Corporation could incur economic losses
due to adverse changes in a particular stock index or price. The Corporation's
investments in equity securities are exposed to equity price risk and the fair
value of the portfolio is correlated to the S&P 500. Management estimates that
an immediate 10% change in the S&P 500 would affect the fair value of its equity
securities by approximately $1.7 million.
Item 8. Financial Statements and Supplementary Data Page
Navistar Financial Corporation and Subsidiaries:
Statements of Consolidated Income and Retained Earnings
for the years ended October 31, 1998, 1997 and 1996................ 11
Statements of Consolidated Financial Condition as of
October 31, 1998 and 1997 ......................................... 12
Statements of Consolidated Cash Flow for the years ended
October 31, 1998, 1997 and 1996.................................... 13
Notes to Consolidated Financial Statements........................... 14
Statement of Financial Reporting Responsibility...................... 33
Independent Auditors' Report......................................... 34
Supplementary Financial Data......................................... 35
Navistar Financial Corporation and Subsidiaries
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Statements of Consolidated Income and Retained Earnings
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Millions of Dollars
For the years ended October 31 1998 1997 1996
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Revenues
Retail notes and lease financing.......... $135.8 $105.8 $ 97.7
Wholesale notes........................... 43.3 36.1 56.6
Accounts.................................. 33.3 31.2 26.6
Servicing fee income...................... 21.6 20.0 20.5
Insurance premiums earned................. 32.3 33.3 42.0
Marketable securities..................... 9.6 8.5 9.4
Total................................. 275.9 234.9 252.8
Expenses
Cost of borrowing:
Interest expense...................... 81.0 65.9 73.2
Other................................. 7.1 7.0 8.4
Total................................. 88.1 72.9 81.6
Credit, collection and administrative..... 36.1 31.0 28.2
Provision for losses on receivables....... 0.8 2.5 9.3
Insurance claims and underwriting......... 35.6 35.1 44.4
Depreciation expense and other............ 30.1 18.8 8.8
Total................................. 190.7 160.3 172.3
Income Before Taxes............................ 85.2 74.6 80.5
Taxes on Income................................ 32.3 28.9 31.1
Net Income..................................... 52.9 45.7 49.4
Retained Earnings
Beginning of year......................... 113.1 107.4 84.0
Dividends paid............................ (57.0) (40.0) (26.0)
End of year............................... $109.0 $113.1 $107.4
See Notes to Consolidated Financial Statements.
Navistar Financial Corporation and Subsidiaries
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Statements of Consolidated Financial Condition
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Millions of Dollars
As of October 31 1998 1997
- ------------------------------------------------------------------------------
ASSETS
Cash and Cash Equivalents.............................. $ 14.1 $ 10.7
Marketable Securities.................................. 108.0 114.2
Receivables
Finance receivables................................. 1,523.7 1,223.2
Allowance for losses................................ (12.8) (12.0)
Receivables, net................................ 1,510.9 1,211.2
Amounts Due from Sales of Receivables.................. 245.9 233.3
Equipment on Operating Leases, Net..................... 217.7 124.1
Repossessions.......................................... 14.4 13.0
Other Assets........................................... 101.9 104.1
Total Assets........................................... $2,212.9 $1,810.6
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt........................................ $ 21.8 $ 141.0
Accounts Payable and Other Liabilities................. 193.9 191.3
Senior and Subordinated Debt........................... 1,611.2 1,082.7
Dealers' Reserves...................................... 24.0 22.2
Unpaid Insurance Claims and Unearned Premiums.......... 80.5 85.6
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................................... 109.0 113.1
Minimum pension liability adjustment................ (1.0) -
Unrealized gains on marketable securities........... 2.5 3.7
Total........................................... 281.5 287.8
Total Liabilities and Shareowner's Equity.............. $2,212.9 $1,810.6
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 1998 1997 1996
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Cash Flow From Operations
Net income................................... $ 52.9 $ 45.7 $ 49.4
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables.............. (15.3) (13.4) (20.2)
Depreciation and amortization.............. 35.4 22.5 15.3
Provision for losses on receivables........ 0.8 2.5 9.3
Increase (decrease) in accounts payable
to affiliated companies.................. 5.3 107.0 (65.0)
Other...................................... (10.5) (22.3) (17.3)
Total.................................. 68.6 142.0 (28.5)
Cash Flow From Investing Activities
Proceeds from sold retail notes.............. 952.6 958.2 982.1
Purchase of retail notes and
lease receivables........................ (1,262.8) (969.7) (1,069.0)
Principal collections on retail notes and
lease receivables........................ 116.4 93.8 70.2
Acquisitions (over)under cash collections of
wholesale notes and accounts receivable.. (105.8) (59.9) 163.0
Purchase of marketable securities............ (43.1) (65.3) (63.0)
Proceeds from sales and maturities of
marketable securities.................... 50.3 84.8 67.7
Purchase of equipment leased to others....... (134.2) (66.3) (65.9)
Sale of equipment leased to others........... 8.9 23.8 9.7
Total.................................. (417.7) (0.6) 94.8
Cash Flow From Financing Activities
Net (decrease) increase in short-term debt... (119.2) 41.6 48.9
Net increase (decrease) in bank
revolving credit facility usage.......... 422.0 (311.0) (56.0)
Net increase (decrease) in asset-backed
commercial paper facility usage.......... 6.0 (15.3) 88.1
Principal payments on long-term debt......... (43.6) (21.6) (117.5)
Proceeds from long-term debt................. 144.3 208.9 -
Dividends paid to Transportation............. (57.0) (40.0) (26.0)
Total.................................. 352.5 (137.4) (62.5)
Increase in Cash and Cash Equivalents.......... 3.4 4.0 3.8
Cash and Cash Equivalents at Beginning of Year. 10.7 6.7 2.9
Cash and Cash Equivalents at End of Year....... $ 14.1 $ 10.7 $ 6.7
Supplementary disclosure of cash flow
information:
Interest paid................................ $ 80.4 $ 59.7 $ 76.3
Income taxes paid............................ $ 36.4 $ 23.8 $ 32.2
See Notes to Consolidated Financial Statements.
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1998
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 commercial financing 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 when
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 written by the Corporation's wholly-owned insurance
subsidiary, Harco National Insurance Company ("Harco"), 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.
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.
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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (continued)
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
All derivative financial instruments, such as forward contracts, interest
rate swaps and interest rate caps, are held for purposes other than trading. The
Corporation's policy prohibits the use of derivative financial instruments for
speculative purposes. The Corporation generally uses derivative financial
instruments to reduce its exposure to interest rate volatility.
The Corporation may use forward contracts to hedge the fair value of its
fixed rate receivables against changes in market interest rates in anticipation
of the sale of such receivables. The principal balance of receivables expected
to be sold by the Corporation equals or exceeds the notional amount of open
forward contracts. The Corporation may use interest rate swaps to reduce
exposure to interest rate changes when it sells fixed rate receivables on a
variable rate basis. Gains or losses incurred with the closing of forward
contracts and interest rate swaps are included in the net gain or loss on sale
of receivables.
For the protection of investors, the Corporation may write interest rate
caps when fixed rate receivables are sold on a variable rate basis. The
Corporation will make payments under the terms of the written caps if interest
rates exceed certain levels. The written caps are recorded at fair value with
subsequent changes in fair value recognized in income.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." 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)
New Accounting Standards (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," to establish accounting and reporting
standards for derivative instruments. This statement requires recognition of all
derivative instruments in the statement of financial position as either assets
or liabilities, measured at fair value, and is effective for fiscal years
beginning after June 15, 1999. This statement additionally requires changes in
the fair value of derivatives to be recorded each period in current earnings or
comprehensive income, depending on the intended use of the derivatives. The
Corporation is currently assessing the impact of this statement on its results
of operations, financial condition and cash flow.
Reclassification
Certain prior year amounts have been reclassified to conform with the
presentation used in the 1998 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
$67.2 in 1998, $54.7 in 1997 and $49.8 in 1996.
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 $10.7 in 1998, $10.1 in
1997 and $9.5 in 1996.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
2. TRANSACTIONS WITH AFFILIATED COMPANIES (continued)
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, 1998.
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 $2.6 in 1998, $2.1 in 1997 and $2.4 in 1996.
Accounts Payable
Accounts payable and other liabilities include $136.8 and $131.5 payable to
Transportation at October 31, 1998 and 1997, respectively.
3. INDUSTRY SEGMENTS
Information by industry segment is summarized as follows:
1998 1997 1996
- -------------------------------------------------------------------------------
Revenues:
Finance operations...................... $ 234.3 $ 193.5 $ 201.6
Insurance operations.................... 41.6 41.4 51.2
Total revenues........................ $ 275.9 $ 234.9 $ 252.8
Income before taxes:
Finance operations...................... $ 79.2 $ 68.6 $ 74.2
Insurance operations.................... 6.0 6.0 6.3
Total income before taxes............. $ 85.2 $ 74.6 $ 80.5
Assets at end of year:
Finance operations...................... $2,067.0 $1,659.3 $1,626.9
Insurance operations.................... 145.9 151.3 166.9
Total assets at end of year........... $2,212.9 $1,810.6 $1,793.8
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
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, the amortized cost and estimated fair
values at October 31:
1998 1997
------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- ------------------------------------------------------------------------------
U.S. government and
agency securities.................. $ 21.7 $ 23.2 $ 26.6 $ 27.1
Mortgage and
asset-backed securities............ 38.2 38.7 37.8 38.2
Corporate debt and other securities.. 28.4 28.6 30.3 30.1
Total debt securities.............. 88.3 90.5 94.7 95.4
Equity securities.................... 15.6 17.5 13.5 18.8
Total.............................. $ 103.9 $ 108.0 $ 108.2 $ 114.2
Net unrealized gains and losses on marketable securities were $4.1 and $6.0
at October 31, 1998 and 1997, respectively. Gross unrealized losses were not
material.
Contractual maturities of marketable debt securities at October 31, 1998
are as follows:
Amortized Fair
Cost Value
- ------------------------------------------------------------------------------
Due in one year or less............................... $ 12.9 $ 12.9
Due after one year through five years................. 13.6 14.2
Due after five years through ten years................ 14.1 14.8
Due after ten years................................... 9.5 9.9
50.1 51.8
Mortgage- and asset-backed securities................. 38.2 38.7
Total debt securities............................. $ 88.3 $ 90.5
Actual maturities may differ from the contractual maturities because of
prepayments.
Proceeds from sales or maturities of marketable securities available for
sale were $50.3 during 1998 and $84.8 during 1997. The related net realized
gains were $3.3 and $1.8 in 1998 and 1997, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES (continued)
All marketable securities at October 31, 1998 and 1997 were held by Harco,
of which $12.6 and $14.5, respectively, were on deposit with various state
departments of insurance or otherwise restricted as to use.
5. FINANCE RECEIVABLES
Finance receivable balances, net of unearned finance income, at October 31
are summarized as follows:
1998 1997
- ------------------------------------------------------------------------------
Retail notes and lease financing...................... $ 915.9 $ 706.5
Wholesale notes....................................... 224.9 45.7
Accounts:
Retail.............................................. 312.9 396.6
Wholesale........................................... 70.0 74.4
Total............................................ 382.9 471.0
Total finance receivables..................... $1,523.7 $1,223.2
Contractual maturities of finance receivables including unearned finance
income at October 31, 1998, are summarized as follows:
Retail Wholesale Accounts
- ------------------------------------------------------------------------------
Due in fiscal year:
1999 ............................... $ 281.6 $ 141.7 $ 382.9
2000 ............................... 242.1 83.2 -
2001 ............................... 218.7 - -
2002 ............................... 174.5 - -
2003 ............................... 118.9 - -
Due after 2003............................ 27.9 - -
Gross finance receivables.......... 1,063.7 224.9 382.9
Unearned finance income................... 147.8 - -
Total finance receivables.......... $ 915.9 $ 224.9 $ 382.9
The actual cash collections from finance receivables will vary from the
contractual cash flows because of sales, prepayments, extensions and renewals.
The contractual maturities, therefore, should not be regarded as a forecast of
future collections.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (continued)
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.
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:
1998 1997
- ------------------------------------------------------------------------------
Retail notes..................................... $1,445.4 $1,422.2
Wholesale notes.................................. 700.0 545.5
Total....................................... $2,145.4 $1,967.7
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.
During fiscal 1998, in two separate sales, the Corporation sold a total of
$1,001 of retail notes, net of unearned finance income, through NFRRC to two
individual owner trusts. The owner trusts, in turn, issued securities which were
sold to investors. On August 28, 1998, NFRRC filed a shelf registration with the
Securities and Exchange Commission which provides for the issuance of an
additional $2,500 of asset-backed securities. The aggregate shelf registration
available to NFRRC for issuance of asset-backed securities is $2,972.
NFSC has in place a revolving wholesale note trust that provides for the
continuous sale of eligible wholesale notes up to $700. During 1998, a $100
tranche of investor certificates matured and NFSC issued a $200 tranche of
investor certificates. As of October 31, 1998 the trust is comprised of one $100
tranche of investor certificates maturing in 1999 and three $200 tranches of
investor certificates maturing in 2003, 2004 and 2008.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (continued)
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 receivable sales require the Corporation to maintain cash reserves with the
trusts as credit enhancement. The use of cash reserves held by the trusts is
restricted under the terms of the securitized sales agreements. The maximum
exposure under all receivable sale recourse provisions at October 31, 1998 was
$259; however, management believes the recorded reserves for losses are
adequate.
The following is a summary of amounts included in Amounts Due from Sales of
Receivables as of October 31:
1998 1997
- ------------------------------------------------------------------------------
Cash held and invested by trusts.......................... $100.4 $ 90.8
Subordinated retained interests in wholesale receivables.. 114.5 99.9
Subordinated retained interests in retail receivables..... 34.9 47.4
Interest only receivables................................. 8.7 7.7
Allowance for credit losses............................... (12.6) (12.5)
Total................................................ $245.9 $233.3
6. INVESTMENT IN OPERATING LEASES
Operating leases at year-end were as follows:
1998 1997
- ------------------------------------------------------------------------------
Investment in operating leases:
Vehicles and other equipment, at cost.................. $271.1 $150.0
Less: Accumulated depreciation........................ (53.4) (25.9)
Net investment in operating leases.................. $217.7 $124.1
Future minimum rentals on operating leases are as follows: 1999, $62.8;
2000, $53.7; 2001, $34.7; 2002, $17.7 and $5.4 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:
1998 1997 1996
- ------------------------------------------------------------------------------
Total allowance for losses at beginning of year..... $24.5 $24.0 $19.6
Provision for losses................................ 0.8 2.5 9.3
Net (losses) recoveries (charged)
credited to allowance............................ 0.1 (2.0) (4.9)
Total allowance for losses at end of year.... $25.4 $24.5 $24.0
Allowance pertaining to:
Owned notes...................................... $12.8 $12.0 $11.6
Sold notes....................................... 12.6 12.5 12.4
Total........................................ $25.4 $24.5 $24.0
8. TAXES ON INCOME
Taxes on income are summarized as follows:
1998 1997 1996
- ------------------------------------------------------------------------------
Current:
Federal.......................................... $24.7 $29.6 $26.4
State and local.................................. 3.3 4.1 4.4
Total current................................ 28.0 33.7 30.8
Deferred (primarily Federal)........................ 4.3 (4.8) 0.3
Total........................................ $32.3 $28.9 $31.1
The effective tax rate of approximately 38% in each of the three years
ended October 31, 1998 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:
1998 1997
- ------------------------------------------------------------------------------
Deferred tax assets:
Other postretirement benefits........................... $2.3 $3.0
Deferred tax liabilities:
Depreciation and other.................................. 5.8 2.2
Unrealized gains on marketable securities............... 1.5 2.3
Total deferred tax liabilities...................... 7.3 4.5
Net deferred tax liabilities........................ $5.0 $1.5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
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:
1998 1997 1996
- ------------------------------------------------------------------------------
Aggregate obligations outstanding:
Daily average................................. $106.1 $109.7 $ 68.2
Maximum month-end balance..................... 148.8 145.0 117.8
Weighted average interest rate:
On average daily borrowing.................... 6.1% 6.1% 6.0%
At October 31................................. 6.1% 6.1% 5.9%
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.
10. SENIOR AND SUBORDINATED DEBT
Senior and subordinated debt outstanding at October 31 is summarized as
follows:
1998 1997
- ------------------------------------------------------------------------------
Bank revolving credit facility, at variable
rates, due March 2001............................... $ 815.0 $ 393.0
Funding under asset-backed commercial
paper program ("ABCP"), at variable
rates, due March 2001............................... 400.7 399.9
Capital lease obligations, 4.75% to 5.62%,
due serially through 2004........................... 213.3 95.8
Subordinated term debt:
Senior Notes, 8 7/8%, due November 1998............. 82.2 94.0
Senior Notes, 9%, due June 2002..................... 100.0 100.0
Total senior and subordinated debt............. $1,611.2 $1,082.7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT (continued)
The weighted average interest rate on total debt, including short-term debt
and the effect of discounts and related amortization, was 6.4% in 1998 and 1997,
and 6.5% in 1996. The aggregate annual maturities and required payments of
senior and subordinated debt are as follows:
Fiscal year ended October 31
1999 $ 121.3
2000 47.7
2001 1,269.0
2002 141.8
2003 and thereafter 31.4
Total $1,611.2
At October 31, 1998, the Corporation had 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 the Corporation, purchases eligible receivables from the
Corporation. All assets of TRIP are pledged to a Trust that funds the
receivables with A1/P1 rated commercial paper.
Available funding under the bank revolving credit facility and the ABCP
program was $124, of which $22 provided funding backup for the outstanding
short-term debt at October 31, 1998. The remaining $102 when combined with
unrestricted cash and cash equivalents made $116 available to fund the general
business purposes of the Corporation at October 31, 1998. Under the terms of the
bank 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. The bank revolving credit 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 bank
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 balance of subordinated debt may not exceed 75% of consolidated
tangible net worth.
During fiscal 1998 and 1997, the Corporation entered into sale/leaseback
agreements involving vehicles subject to retail finance and operating leases
with end users. The balances are 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. POSTRETIREMENT BENEFITS
Effective October 31, 1998 the Corporation adopted SFAS No. 132,
"Employers' Disclosures About Pensions and Other Postretirement Benefits." The
information for 1998, 1997 and 1996 has been presented in conformity with the
requirements of SFAS No. 132.
The Corporation provides postretirement benefits to a majority of its
employees. Costs associated with postretirement benefits include pension and
postretirement health care expenses for employees, retirees and surviving
spouses and dependents. In addition, as part of the 1993 restructured health
care and life insurance plans, profit sharing payments to the Retiree
Supplemental Benefit Trust are required.
Generally, the pension plans are non-contributory. The Corporation's policy
is to fund its pension plans in accordance with applicable United States
government regulations. At October 31, 1998, all legal funding requirements had
been met.
Postretirement Expense
Net periodic benefit cost included in the Statements of Consolidated Income
is composed of the following:
Pension Other Benefits
---------------------- ----------------------
1998 1997 1996 1998 1997 1996
- -------------------------------------------------------- ----------------------
Service cost for benefits
earned during the period.......$ 1.0 $ 0.8 $ 0.7 $ 0.4 $ 0.4 $ 0.4
Interest cost on obligation...... 3.1 3.0 2.9 0.8 0.9 0.8
Net amortization costs and other. 0.1 - 0.1 - - -
Less expected return on assets... (4.7) (4.0) (3.6) (0.7) (0.5) (0.5)
Net postretirement
(income) expense...............$(0.5) $(0.2) $ 0.1 $ 0.5 $ 0.8 $ 0.7
"Amortization costs" include amortization of cumulative gains and losses
over the expected remaining service life of employees and amortization of the
initial transition liability over 15 years and amortization of plan amendments.
Plan amendments are recognized over the remaining service life of employees.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. POSTRETIREMENT BENEFITS (continued)
Postretirement Expense (continued)
The funded status of the Corporation's plans as of October 31, 1998 and
1997 and a reconciliation with amounts recognized in the Statements of
Consolidated Financial Condition are as follows:
Pension Benefits Other Benefits
-------------------- -------------------
1998 1997 1998 1997
- ------------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning
of year.......................... $44.0 $38.7 $11.6 $11.2
Service cost........................ 1.0 0.8 0.4 0.4
Interest on obligation.............. 3.1 3.0 0.8 0.9
Actuarial net loss (gain)........... 6.1 4.0 1.5 (0.7)
Benefits paid....................... (2.7) (2.5) (0.3) (0.2)
Benefit obligation at end
of year.......................... $51.5 $44.0 $14.0 $11.6
Change in plan asset
Fair value of plan assets at
beginning of year................ $50.1 $42.7 $ 4.4 $ 3.9
Actual return on plan assets........ 5.3 9.7 0.4 0.2
Employer contribution............... - - 2.1 0.4
Benefits paid....................... (2.4) (2.3) (0.2) (0.1)
Fair value of plan assets at
year-end......................... $53.0 $50.1 $ 6.7 $ 4.4
Funded status....................... $ 1.5 $ 6.1 $(7.3) $(7.2)
Unrecognized actuarial net
(gain) loss...................... (1.1) (6.5) 2.8 1.0
Unrecognized transition amount...... 0.1 0.1 - -
Unrecognized prior service cost..... 0.4 0.4 - -
Net amount recognized............... $ 0.9 $ 0.1 $(4.5) $(6.2)
Amounts recognized in the
Statements of Consolidated
Financial Condition
consists of:
Prepaid benefit cost.......... $ 2.4 $ 1.7 $ - $ -
Accrued benefit liability..... (3.1) (1.6) (4.5) (6.2)
Intangible asset.............. - - - -
Accumulated reduction in
shareowner's equity........ 1.6 - - -
Net amount recognized... $ 0.9 $ 0.1 $(4.5) $(6.2)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. POSTRETIREMENT BENEFITS (continued)
Postretirement Expense (continued)
The accumulated reduction in shareowner's equity is recorded in the
Statement of Financial Condition net of deferred income taxes of $0.6 at October
31, 1998.
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $3.3, $3.1, and $0.0, respectively, as of October
31, 1998, and $2.4, $2.3 and $0.0, respectively, as of October 31, 1997.
The weighted average rate assumptions used in determining expenses and
benefit obligations were:
Pension Other Benefits
-------------------- -------------------
1998 1997 1996 1998 1997 1996
------------------------------------------------------------------------------
Discount rate used to determine
present value of benefit
obligation at year-end....... 6.7% 7.2% 7.9% 7.1% 7.4% 8.1%
Expected long-term rate of
return on plan asset for
the year..................... 9.6% 9.6% 8.9% 10.8% 11.1% 10.5%
Expected rate of increase in
future compensation levels... 3.5% 3.5% 3.5% N/A N/A N/A
For 1999, the weighted average rate of increase in the per capita cost of
covered health care benefits is projected to be 9.7%. The rate is projected to
decrease to 5.0% by the year 2005 and remain at that level each year thereafter.
The effect of changing the health care cost trend rate is as follows:
1-Percentage- 1-Percentage-
Point Increase Point Decrease
- -------------------------------------------------------------------------------
Effect on total of service and interest cost
components................................... $0.2 $(0.2)
Effect on postretirement benefit obligation..... 2.0 (1.7)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
12. LEASES
The Corporation is obligated under non-cancelable 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, 1998, future minimum lease commitments under
non-cancelable operating leases with remaining terms in excess of one year are
as follows:
Year Ended October 31,
1999........................................ $ 1.8
2000........................................ 1.4
2001........................................ 0.3
2002........................................ 0.1
2003........................................ 0.1
Thereafter.................................. 0.1
Total....................................... $ 3.8
13. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 1998 and
1997, 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:
1998 1997
------------------------------------------
Carrying Fair Carrying Fair
Value Value Amount Value
- -------------------------------------------------------------------------------
Financial assets:
Finance receivables:
Retail notes.................. $ 775.3 $ 797.6 $ 607.0 $ 619.0
Wholesale notes and accounts.. 607.8 607.8 516.7 516.7
Amounts due from sales of
receivables................... 245.9 243.8 233.3 230.3
Financial liabilities:
Senior and subordinated debt..... 1,397.9 1,401.4 986.9 990.2
The carrying amount of cash and cash equivalents approximates fair value.
The cost and fair value of marketable securities are disclosed in Note 4.
The fair value of retail notes is estimated by discounting the future
contractual 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 wholesale notes and retail and wholesale
accounts, all of which reprice monthly, 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 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.
The estimated fair values for all other financial instruments approximate
carrying values due to the short-term nature or variable interest terms inherent
in the financial instruments.
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
generally by selling fixed rate receivables on a fixed rate basis and by
utilizing derivative financial instruments. These derivative financial
instruments may include forward contracts, interest rate swaps and interest rate
caps. The fair value of these instruments is subject to market risk as the
instruments may become less valuable due to changes in market conditions or
interest rates. The Corporation manages exposure to 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. The
Corporation does not require collateral or other security to support derivative
financial instruments with credit risk. The Corporation's counter-party credit
exposure is limited to the fair value of contracts with a positive fair value at
the reporting date. At October 31, 1998, none of the Corporation's derivative
financial instruments had positive fair values. 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 retail notes anticipated to be
sold. The Corporation manages such 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.
As of October 31, 1998, outstanding derivative financial instruments
consisted of the following:
Notional
Amount Fair Value
- ------------------------------------------------------------------------------
Forward interest rate contracts in anticipation of:
November 1998 sale of retail receivables...... $450 $(5.2)
May 1999 sale of retail receivables........... $ 50 $(0.1)
Fair values of forward interest rate contracts are based on quoted market
prices. There were no derivative financial instruments outstanding at October
31, 1997.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
15. LEGAL PROCEEDINGS
The Corporation is subject to various claims arising in the ordinary course
of business, and is party to various legal proceedings which constitute ordinary
routine litigation incidental to the business of the Corporation. In the opinion
of the Corporation's management, none of these proceedings or claims are
material to the business or the financial condition of the Corporation.
16. SUBSEQUENT EVENT
In November 1998, the Corporation sold $545 of retail notes, net of
unearned finance income, through NFRRC to a multi-seller asset-backed commercial
paper conduit sponsored by a major financial institution.
17. QUARTERLY FINANCIAL INFORMATION (unaudited)
1998
--------------------------------------------------
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------
Revenues..................... $62.6 $64.1 $79.3 $69.9 $275.9
Interest expense............. 15.7 20.3 23.2 21.8 81.0
Provision for (recovery of)
losses on receivables...... 0.4 0.8 (2.6) 2.2 0.8
Net income................... 13.4 10.7 17.7 11.1 52.9
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 5.7
- ------------------------------------------------------------------------------
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 accompanying consolidated financial statements of Navistar
Financial Corporation and its subsidiaries as of October 31, 1998 and 1997 and
for each of the three years in the period ended October 31, 1998, 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 as of October 31, 1998 and 1997 and the results
of their operations and their cash flow for each of the three years in the
period ended October 31, 1998 in conformity with generally accepted accounting
principles.
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
December 14, 1998
Chicago, Illinois
SUPPLEMENTARY FINANCIAL DATA
Five Year Summary of Financial and Operating Data
Dollar amounts in millions
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Results of Operations:
Revenues...................$ 275.9 $ 234.9 $ 252.8 $ 228.2 $ 210.8
Net income ................ 52.9 45.7 49.4 36.2 34.0
Dividends paid ............ 57.0 40.0 26.0 9.0 25.6
Percent of net income to
average shareowner's
equity.................. 18.5% 16.1% 18.1% 15.0% 15.1%
Financial Data:
Finance receivables, net ..$1,510.9 $1,211.2 $1,193.6 $1,370.9 $1,094.0
Total assets .............. 2,212.9 1,810.6 1,793.8 1,874.7 1,534.8
Total debt ................ 1,633.0 1,223.7 1,305.8 1,330.3 1,091.5
Shareowner's equity ....... 281.5 287.8 279.7 256.7 225.6
Debt to equity ratio ...... 5.8:1 4.3:1 4.7:1 5.2:1 4.8:1
Senior debt to capital
funds ratio............. 3.1:1 2.1:1 3.2:1 3.4:1 3.0:1
Number of employees at
October 31.............. 394 358 352 360 353
SUPPLEMENTARY FINANCIAL DATA (Continued)
Gross Finance Receivables and Leases Acquired
- -------------------------------------------------------------------------------
($ Millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Wholesale notes.............. $3,812.8 $2,772.8 $2,705.8 $2,979.4 $2,306.6
Retail notes and leases:
New....................... 1,358.0 976.2 1,064.1 1,075.0 861.9
Used ..................... 309.2 270.3 281.7 242.3 217.2
Total................... 1,667.2 1,246.5 1,345.8 1,317.3 1,079.1
Total .................... $5,480.0 $4,019.3 $4,051.6 $4,296.7 $3,385.7
Serviced (including sold notes) Retail Notes and
Leases With Installments Past Due Over 60 Days
- -------------------------------------------------------------------------------
At October 31 ($ Millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Original amount of notes
and leases................. $ 33.6 $ 31.8 $ 14.0 $ 4.2 $ 3.1
Balance of notes and leases.. 16.5 16.2 8.0 2.2 1.3
Balance as a percent of
total outstanding.......... 0.57% 0.64% 0.32% 0.10% 0.07%
Retail Note and Lease Repossessions (including sold notes)
- -------------------------------------------------------------------------------
1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Retail note and lease repossessions
acquired as a percentage
of average serviced retail
note and lease balances.... 2.26% 2.69% 3.08% 0.92% 0.93%
SUPPLEMENTARY FINANCIAL DATA (Continued)
Credit Loss Experience on Serviced (including sold notes) Receivables
- -------------------------------------------------------------------------------
($ Millions) 1998 1997 1996 1995 1994
- -------------------------------------------------------------------------------
Net losses (recoveries):
Retail notes and leases ..... $ .2 $2.2 $5.1 $ .3 $ .6
Wholesale notes ............. (.3) (.2) (.2) (.9) .1
Accounts..................... - - - (.2) .2
Total ................... $(.1) $2.0 $4.9 $(.8) $ .9
Percent net losses (recoveries) to liquidations:
Retail notes and leases ..... .02% .18% .48% .03% .07%
Wholesale notes ............. (.01) (.01) (.01) (.03) .01
Total ................... - .05% .13% (.02)% .03%
Percent net losses (recoveries) to related average gross receivables
outstanding:
Retail notes and leases ..... .01% .09% .22% .02% .04%
Wholesale notes ............. (.04) (.02) (.02) (.13) .03
Accounts..................... - - - (.05) .08
Total ................... - .06% .14% (.03)% .04%
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,
1998.
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 21, 1998
Phyllis E. Cochran
Vice President and Controller
(Principal Accounting Officer)