Back to GetFilings.com
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 (FEE REQUIRED)
For the fiscal year ended October 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-9618
N A V I S T A R I N T E R N A T I O N A L C O R P O R A T I O N
-------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3359573
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611
- -------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 836-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------------------------------- -----------------------
Common stock, par value $0.10 per share New York Stock Exchange
Chicago Stock Exchange
Pacific Exchange
Preferred stock purchase rights New York Stock Exchange
Chicago Stock Exchange
Pacific Exchange
Cumulative convertible junior preference stock,
Series D (with $1.00 par value per share) New York Stock Exchange
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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of December 18, 2000 the aggregate market value of common stock held by
non-affiliates of the registrant was $1,302,848,184.
As of December 18, 2000 the number of shares outstanding of the
registrant's common stock was 59,220,372.
Documents Incorporated by Reference
-----------------------------------
Proxy Statement for the 2001 Annual Meeting of Shareowners (Parts I and III)
Navistar Financial Corporation 2000 Annual Report on Form 10-K (Part IV)
NAVISTAR INTERNATIONAL CORPORATION
FORM 10-K
Year Ended October 31, 2000
INDEX
Page
PART I
Item 1. Business.............................................................................. 3
Item 2. Properties............................................................................ 9
Item 3. Legal Proceedings..................................................................... 10
Item 4. Submission of Matters to a Vote of Security Holders................................... 10
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 10
Item 6. Selected Financial Data............................................................... 10
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................. 11
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 22
Item 8. Financial Statements and Supplementary Data........................................... 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................... 63
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 63
Item 11. Executive Compensation................................................................ 63
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 63
Item 13. Certain Relationships and Related Transactions........................................ 63
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 64
SIGNATURES
Principal Accounting Officer..................................................................... 65
Directors ....................................................................................... 66
POWER OF ATTORNEY................................................................................... 66
INDEPENDENT AUDITORS' CONSENT....................................................................... 68
SCHEDULE ....................................................................................... F-1
EXHIBITS ....................................................................................... E-1
2
PART I
ITEM 1. BUSINESS
Navistar International Corporation is a holding company and its principal
operating subsidiary is International Truck and Engine Corporation,
(International), formerly Navistar International Transportation Corp. As used
hereafter, "Navistar" or "company" refers to Navistar International Corporation
and its consolidated subsidiaries.
Navistar operates in three principal industry segments: truck, engine
(collectively called "manufacturing operations") and financial services. The
company's truck segment is engaged in the manufacture and marketing of medium
and heavy trucks, including school buses. The company's engine segment is
engaged in the design and manufacture of mid-range diesel engines. The truck
segment operates primarily in the United States (U.S.) and Canada as well as in
Mexico, Brazil and other selected export markets while the engine segment
operates primarily in the U.S. and Brazil. Based on assets and revenues, the
truck and engine segments represent the majority of the company's business
activities. The financial services operations consist of Navistar Financial
Corporation (NFC), its domestic insurance subsidiary and the company's foreign
finance and insurance subsidiaries. Industry and geographic segment data for
2000, 1999 and 1998 is summarized in Note 14 to the Financial Statements, which
is included in Item 8.
PRODUCTS AND SERVICES
The following table illustrates the percentage of the company's sales of
products and services by product line based on dollar amount:
YEARS ENDED OCTOBER 31,
-----------------------
PRODUCT LINE 2000 1999 1998
- ------------ ---- ---- ----
Class 5, 6 and 7 medium trucks
and school buses ............................................................. 34% 32% 33%
Class 8 heavy trucks .............................................................. 32% 37% 38%
Truck service parts ............................................................... 9% 8% 9%
--- --- ---
Total truck .................................................................. 75% 77% 80%
Engine (including service parts) .................................................. 21% 19% 17%
Financial services ................................................................ 4% 4% 3%
--- --- ---
Total ........................................................................ 100% 100% 100%
=== === ===
The truck segment manufactures and distributes a full line of
diesel-powered trucks and school buses in the common carrier, private carrier,
government/service, leasing, construction, energy/petroleum and student
transportation markets. The truck segment also provides customers with
proprietary products needed to support the International(R) truck and bus lines,
together with a wide selection of other standard truck and trailer aftermarket
parts. The company offers diesel-powered trucks and school buses because of
their improved fuel economy, ease of serviceability and greater durability over
gasoline-powered vehicles.
3
PRODUCTS AND SERVICES (continued)
The truck and bus manufacturing operations in the U.S., Canada, Mexico and
Brazil consist principally of the assembly of components manufactured by its
suppliers, although the company produces its own mid-range diesel truck engines,
sheet metal components (including cabs) and miscellaneous other parts.
The engine segment designs and manufactures diesel engines for use in the
company's Class 5, 6 and 7 medium trucks and school buses and selected Class 8
heavy truck models, and for sale to original equipment manufacturers (OEMs) in
the U.S. and Mexico. This segment also sells engines for industrial,
agricultural and marine applications. In addition, the engine segment provides
customers with proprietary products needed to support the International(R)
engine lines, together with a wide selection of other standard engine and
aftermarket parts. In February 1999, Navistar acquired a 50% interest in Maxion
International Motores, S.A., the largest producer of diesel engines in South
America. The joint venture produces the current Maxion products in addition to
the Navistar 7.3 liter (7.3L) V-8 Turbo Diesel Engine. Based upon information
published by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck
and bus shipments represented 91.4% of all medium truck and bus shipments for
fiscal 2000 in the U.S. and Canada.
The financial services segment provides retail, wholesale and lease
financing of products sold by the truck segment and its dealers within the U.S.
as well as the company's wholesale accounts and selected retail accounts
receivable. NFC's insurance subsidiary provides commercial physical damage and
liability insurance to the truck segment's dealers and retail customers and to
the general public through an independent insurance agency system. The foreign
finance subsidiaries' primary business is to provide wholesale, retail and lease
financing to the Mexican operations' dealers and retail customers.
THE MEDIUM AND HEAVY TRUCK INDUSTRY
The markets in which Navistar competes are subject to considerable
volatility as they move in response to cycles in the overall business
environment and are particularly sensitive to the industrial sector, which
generates a significant portion of the freight tonnage hauled. Government
regulation has impacted and will continue to impact trucking operations and the
efficiency and specifications of equipment.
The following table shows industry retail deliveries in the combined U.S.
and Canadian markets for the five years ended October 31, in thousands of units:
YEARS ENDED OCTOBER 31
----------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Class 5, 6 and 7 medium trucks
and school buses................... 181.7 179.5 160.0 150.6 145.8
Class 8 heavy trucks.................... 258.3 286.0 232.0 196.8 195.4
----- ----- ----- ----- -----
Total.............................. 440.0 465.5 392.0 347.4 341.2
===== ===== ===== ===== =====
Source: Monthly data derived from materials produced by Ward's Communications in the U.S. and
the Canadian Vehicle Manufacturers Association.
Industry retail deliveries of Class 5 through 8 trucks and school buses in
the Mexican market were 32,900 units, 23,300 units and 21,800 units in 2000,
1999 and 1998, respectively, based on monthly data provided by the Associacion
Nacional de Productores de Autobuses, Camiones y Tractocamiones.
4
THE MEDIUM AND HEAVY TRUCK INDUSTRY (continued)
The company's first full year of operations in Brazil was 1999. Industry
retail deliveries of Class 5 through 8 trucks in the Brazilian market were
27,800 units in 2000 and 22,400 units in 1999 based on data provided by the
Associacao Nacional dos Fabricantes de Veiculos.
The Class 5 through 8 truck markets in the U.S., Canada, Mexico and Brazil
are highly competitive. Major U.S. domestic competitors include PACCAR, Ford and
General Motors, as well as foreign-controlled domestic manufacturers, such as
Freightliner and Sterling (DaimlerChrysler), Mack (Renault) and Volvo. In
addition, manufacturers from Japan such as Hino, Isuzu, Nissan and Mitsubishi
are competing in the U.S. and Canadian markets. In Mexico, the major domestic
competitors are Kenmex (PACCAR) and Mercedes (DaimlerChrysler). In Brazil, the
competition is with Mercedes (DaimlerChrysler), Volkswagen, Scania and Volvo.
The intensity of this competition results in price discounting and margin
pressures throughout the industry. In addition to the influence of price, market
position is driven by product quality, engineering, styling, utility and
distribution.
From October 31, 2000, the company's truck segment currently estimates $250
million in capital spending and $170 million in development expense through 2004
for development of its next generation vehicles.
TRUCK MARKET SHARE
The company delivered 118,200 Class 5 through 8 trucks, including school
buses, in the U.S. and Canada in fiscal 2000 which was comparable to the 119,300
units delivered in 1999. Navistar's market share in the combined U.S. and
Canadian Class 5 through 8 truck market increased to 26.9% from 25.6% in 1999.
The company delivered 7,700 Class 5 through 8 trucks, including school
buses, in Mexico in 2000, a 60% increase from the 4,800 units delivered in 1999.
Navistar's combined share of the Class 5 through 8 truck market in Mexico was
23.4% in 2000 and 20.7% in 1999.
The company delivered 600 trucks in Brazil in 2000, a 20% increase from the
500 units delivered in 1999. Navistar's share of the truck market in Brazil was
2.1% in both 2000 and 1999.
MARKETING AND DISTRIBUTION
Navistar's truck products are distributed in virtually all key markets in
the U.S. and Canada. The company's truck distribution and service network in
these countries was composed of 888, 927 and 945 dealers and retail outlets at
October 31, 2000, 1999 and 1998, respectively. Included in these totals were
494, 517 and 524 secondary and associate locations at October 31, 2000, 1999 and
1998, respectively. The company also has a dealer network in Mexico composed of
68, 60 and 44 dealer locations at October 31, 2000, 1999 and 1998, respectively,
and a dealer network in Brazil composed of 17, 14 and six dealer locations at
October 31, 2000, 1999, and 1998, respectively.
Retail dealer activity is supported by three regional operations in the
U.S. and general offices in Canada, Mexico and Brazil. The company has a
national account sales group, responsible for 94 major U.S. national account
customers. Navistar's network of 15 Used Truck Centers in the U.S. provides
trade-in support to the company's dealers and national accounts group, and
markets all makes and models of reconditioned used trucks to owner-operators and
fleet buyers.
5
MARKETING AND DISTRIBUTION (continued)
In the U.S. and Canada, the company operates seven regional parts
distribution centers, which allow it to offer 24 hour availability and same day
shipment of the parts most frequently requested by customers. The company also
operates parts distribution centers in Mexico and Brazil.
ENGINE AND FOUNDRY
Navistar is the leading supplier of mid-range diesel engines in the 160-300
horsepower range according to data supplied by Power Systems Research of
Minneapolis, Minnesota.
Navistar has an agreement to supply its 7.3L electronically controlled
diesel engine to Ford Motor Company (Ford) through the year 2002 for use in all
of Ford's diesel-powered light trucks and vans. Shipments to Ford account for
approximately 92% of the engine segment's 7.3L shipments. Total engine units
shipped reached 392,900 in 2000, a 5% increase over 1999. This excludes 54,100
units shipped by Maxion International Motores, S.A., the company's 50% owned
joint venture in Brazil, to its outside customers. The company's shipments of
engines to all OEMs totaled 304,400 units in 2000, an increase of 6% from the
286,500 units shipped in 1999. During 1997, Navistar entered into a 10-year
agreement, effective with model year 2003, to supply Ford with a successor
engine to the current 7.3L product for use in its diesel-powered super duty
trucks and vans (over 8,500 lbs. GVW). In fiscal 2000, the company finalized an
agreement with Ford to supply diesel engines for certain under 8,500 lbs. GVW
light duty trucks and sport utility vehicles. This contract extends through
2012. To support this program, the company is constructing an engine assembly
operation in Huntsville, Alabama, which will be fully operational by 2004.
From October 31, 2000, the company currently estimates $260 million in
capital spending and $115 million in development expense through 2003 for the
manufacture and development of its next generation version of diesel engines.
Included in these amounts is the company's investment in Huntsville, Alabama.
FINANCIAL SERVICES
NFC is a financial services organization that provides wholesale, retail
and lease financing of new and used trucks sold by the company and its dealers
in the U.S. NFC also finances the company's wholesale accounts and selected
retail accounts receivable. Sales of new products (including trailers) of other
manufacturers are also financed regardless of whether designed or customarily
sold for use with the company's truck products. In both 2000 and 1999, NFC
provided wholesale financing for 96% of the new truck units sold by the company
to its dealers and distributors in the U.S., and retail and lease financing for
16% of all new truck units sold or leased by the company to retail customers.
NFC's wholly owned domestic insurance subsidiary, Harco National Insurance
Company (Harco), provides commercial physical damage and liability insurance
coverage to the company's dealers and retail customers and to the general public
through an independent insurance agency system. On November 30, 2000, NFC's
board of directors approved a plan to sell Harco within the next fiscal year as
further described in Note 10 to the Financial Statements.
Navistar's wholly owned subsidiaries, Arrendadora Financiera Navistar,
Servicios Financieros Navistar and Navistar Comercial, provide wholesale, retail
and lease financing to the truck segment's dealers and customers in Mexico.
Harbour Assurance Company of Bermuda Limited, a wholly owned subsidiary of
the company, offers a variety of programs to the company, including general
liability insurance, ocean cargo coverage for shipments to and from foreign
distributors and reinsurance coverage for various company policies.
6
IMPORTANT SUPPORTING OPERATIONS
International Truck and Engine Corporation Canada has an agreement with a
subsidiary of General Electric Capital Canada, Inc. to provide financing for
Canadian dealers and customers.
RESEARCH AND DEVELOPMENT
Research and development activities, which are directed toward the
introduction of new products and improvements of existing products and processes
used in their manufacture, totaled $226 million, $207 million and $138 million
for 2000, 1999 and 1998, respectively.
BACKLOG
The backlog of unfilled truck orders (subject to cancellation or return in
certain events) at October 31, 2000, 1999 and 1998, was $1,258 million, $3,352
million and $4,505 million, respectively.
Although the backlog of unfilled orders is one of many indicators of market
demand, other factors such as changes in production rates, available capacity,
new product introductions and competitive pricing actions may affect
point-in-time comparisons.
EMPLOYEES
The company employed 17,000, 18,600 and 17,600 individuals at October 31,
2000, 1999 and 1998, respectively, worldwide. There is an employment reduction
anticipated in 2001 as discussed in Note 10 to the Financial Statements.
LABOR RELATIONS
At October 31, 2000, the United Automobile, Aerospace and Agricultural
Implement Workers of America (UAW) represented 7,700 of the company's active
employees in the U.S., and the National Automobile, Aerospace, and Agricultural
Implement Workers of Canada (CAW) represented 1,300 of the company's active
employees in Canada. Other unions represented 2,000 of the company's active
employees in the U.S. The company's master contract with the UAW expires on
October 1, 2002. The collective bargaining agreement with the CAW expires on
June 1, 2002. The current CAW contract allows the company to improve
productivity through better use of work assignments and manpower utilization.
PATENTS AND TRADEMARKS
Navistar continuously obtains patents on its inventions and owns a
significant patent portfolio. Additionally, many of the components, which
Navistar purchases for its products, are protected by patents that are owned or
controlled by the component manufacturer. Navistar has licenses under
third-party patents relating to its products and their manufacture and grants
licenses under its patents. The monetary royalties paid or received under these
licenses are not significant. No particular patent or group of patents is
considered by the company to be essential to its business as a whole.
Navistar's primary trademarks are an important part of its worldwide sales
and marketing efforts and provide instant identification of its products and
services in the marketplace. To support these efforts, Navistar maintains, or
has pending, registrations of its primary trademarks in those countries in which
it does business or expects to do business.
7
RAW MATERIALS AND ENERGY SUPPLIES
The company purchases raw materials, parts and components from numerous
outside suppliers, but relies upon some suppliers for a substantial number of
components for its truck and engine products. A majority of the company's
requirements for raw materials and supplies is filled by single-source
suppliers.
The impact of an interruption in supply will vary by commodity. Some parts
are generic to the industry while others are of a proprietary design requiring
unique tooling, which would require time to recreate. However, the company's
exposure to a disruption in production as a result of an interruption of raw
materials and supplies is no greater than the industry as a whole. In order to
remedy any losses resulting from an interruption in supply, the company
maintains contingent business interruption insurance for storms, fire and water
damage.
While the company believes that it has adequate assurances of continued
supply, the inability of a supplier to deliver could have an adverse effect on
production at certain of the company's manufacturing locations. The company's
exposure in Mexico and Brazil to an interruption in local supply could result in
an inability to meet local content requirements.
Navistar is currently meeting demand for International(R) engines, for both
International(R) truck and other OEMs. There are currently no engine component
supplier capacity issues. The expansion of engine capacity in Brazil and in
Huntsville, Alabama, should enable Navistar to meet any future external customer
needs in the light truck diesel market for the foreseeable future.
IMPACT OF GOVERNMENT REGULATION
Truck and engine manufacturers continue to face heavy governmental
regulation of their products, especially in the areas of environment and safety.
The company believes its products comply with all applicable environmental and
safety regulations.
As a diesel engine manufacturer, the company has incurred research,
development and tooling costs to design its engine product lines to meet United
States Environmental Protection Agency (U.S. EPA) and California Air Resources
Board (CARB) emission requirements that will come into effect after 2000. The
company intends to provide engines that satisfy CARB's emission standards in
2002 for engines used in vehicles from 8,501 to 14,000 lbs. GVW, as well as
heavy duty engines that comply with more stringent CARB and U.S. EPA emission
standards for 2004 and later model years. At the same time, Navistar expects to
be able to meet all of the obligations it agreed to in the Consent Decree signed
in October 1998 with the U.S. EPA and in a Settlement Agreement with CARB
concerning alleged excess emissions of nitrogen oxides.
U.S. EPA rulemaking is currently underway for emission standards for heavy
duty engines and low sulfur diesel requirements for 2007 and later model years.
Navistar is actively participating in this rulemaking to ensure that its
products can comply.
In 1999, U.S. EPA and CARB promulgated new emission standards for light
duty diesel engines, which cover Navistar's new V-6 diesel engines. On the basis
of available technology, compliance with the 2007 standards is dependent upon
the availability of low sulfur diesel fuel that is the subject of U.S. EPA's
2007 rulemaking. However, Navistar believes that CARB has exceeded its statutory
authority in promulgating these emission standards and in November 1999 filed
suit to overturn them. Even if the emission standards are not overturned,
Navistar does not believe they will have a material effect on the company's
financial condition or operating results.
8
IMPACT OF GOVERNMENT REGULATION (continued)
Canadian and Mexican heavy duty engine emission regulations essentially
mirror those of the U.S. EPA, except that compliance in Mexico is conditioned on
availability of low sulfur diesel fuel. The company's engines comply with
Canadian and Mexican emission regulations, as well as those of Brazil.
Truck manufacturers are also subject to various noise standards imposed by
federal, state and local regulations. The engine is one of a truck's primary
noise sources, and the company, therefore, works closely with OEMs to develop
strategies to reduce engine noise. The company is also subject to the National
Traffic and Motor Vehicle Safety Act (Safety Act) and Federal Motor Vehicle
Safety Standards (Safety Standards) promulgated by the National Highway Traffic
Safety Administration. The company believes it is in compliance with the Safety
Act and the Safety Standards.
Expenditures to comply with various environmental regulations relating to
the control of air, water and land pollution at production facilities and to
control noise levels and emissions from the company's products have not been
material except for two sites formerly owned by the company: Wisconsin Steel in
Chicago, Illinois, and Solar Turbine in San Diego, California. In 1994, the
company recorded a $20 million after-tax charge as a loss of discontinued
operations for environmental liabilities and cleanup cost at these two sites. It
is not expected that the costs of compliance with foreseeable environmental
requirements will have a material effect on the company's financial condition or
operating results.
ITEM 2. PROPERTIES
In North America, the company owns and operates 10 manufacturing and
assembly operations, which contain approximately 10 million square feet of floor
space. Of these 10 facilities, six plants manufacture and assemble trucks and
four plants are used by the company's engine segment. Of these four plants, two
manufacture diesel engines, one manufactures grey iron castings and one
manufactures ductile iron castings. In addition, the company owns or leases
other significant properties in the U.S. and Canada including vehicle and parts
distribution centers, sales offices and two engineering centers, which serve the
company's truck and engine segments, and its headquarters which is currently
located in Chicago, Illinois. In June 2001, the company's headquarters will be
moved to Warrenville, Illinois. The company's truck assembly facility located in
Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the
company as collateral for a $125 million revolving loan agreement.
The truck segment's principal research and engineering facility is located
in Fort Wayne, Indiana, and the engine segment's facility is located in Melrose
Park, Illinois. In addition, certain research is conducted at each of the
company's manufacturing plants.
All of the company's plants are being utilized and have been adequately
maintained, are in good operating condition and are suitable for its current
needs through productive utilization of the facilities. Navistar is currently
tooling a new plant in Huntsville, Alabama, to produce new high technology
diesel engines and a new plant in Tulsa, Oklahoma, to produce integrated
conventional school buses. These facilities, together with planned capital
expenditures, are expected to meet the company's manufacturing needs in the
foreseeable future.
A majority of the activity of the financial services operations is
conducted from its leased headquarters in Rolling Meadows, Illinois. The
financial services operations also lease two other office locations in the U.S.
and one in Mexico.
9
ITEM 3. LEGAL PROCEEDINGS
The company and its subsidiaries are subject to various claims arising in
the ordinary course of business, and are parties to various legal proceedings
that constitute ordinary routine litigation incidental to the business of the
company and its subsidiaries. In the opinion of the company's management, none
of these proceedings or claims are material to the business or the financial
condition of the company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
Navistar International Corporation common stock is listed on the New York
Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange under the
abbreviated stock symbol "NAV." Information regarding high and low market price
per share of common stock for each quarter of 2000 and 1999 is included in Note
19 to the Financial Statements on page 59. There were approximately 38,700
owners of common stock at October 31, 2000.
Holders of common stock are entitled to receive dividends when and as
declared by the board of directors out of funds legally available therefor,
provided that, so long as any shares of the company's preferred stock and
preference stock are outstanding, no dividends (other than dividends payable in
common stock) or other distributions (including purchases) may be made with
respect to the common stock unless full cumulative dividends, if any, on the
shares of preferred stock and preference stock have been paid. Under the General
Corporation Law of the State of Delaware, dividends may only be paid out of
surplus or out of net profits for the fiscal year in which the dividend is
declared or the preceding fiscal year, and no dividend may be paid on common
stock at any time during which the capital of outstanding preferred stock or
preference stock exceeds the net assets of the company.
The company has not paid dividends on the common stock since 1980. The
company does not expect to pay cash dividends on the common stock in the
foreseeable future, and is subject to restrictions under the indentures for the
$100 million 7% Senior Notes and the $250 million 8% Senior Subordinated Notes
on the amount of cash dividends the company may pay and is subject to certain
debt to equity ratios under the $125 million Mexican credit facility which may
indirectly limit its ability to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
This information is included in the table "Five-Year Summary of Selected
Financial and Statistical Data" on page 60 of this Form 10-K.
10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
Certain statements under this caption that are not purely historical
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995 and involve risks and uncertainties. These forward-looking
statements are based on current management expectations as of the date made. The
company assumes no obligation to update any forward-looking statements. Navistar
International 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
captions "Restructuring Charge" and "Business Environment."
Navistar International Corporation is a holding company and its principal
operating subsidiary is International Truck and Engine Corporation
(International), formerly known as Navistar International Transportation Corp.
In this discussion and analysis, "company" or "Navistar" refers to Navistar
International Corporation and its consolidated subsidiaries. Navistar operates
in three principal industry segments: truck, engine (collectively called
"manufacturing operations") and financial services. The company's truck segment
is engaged in the manufacture and marketing of Class 5 through 8 trucks,
including school buses. The truck segment also provides customers with
proprietary products needed to support the International(R) truck and bus lines,
together with a wide selection of other standard truck and trailer aftermarket
parts. The truck segment operates primarily in the United States (U.S.) and
Canada as well as in Mexico, Brazil and other selected export markets. The
company's engine segment is engaged in the design and manufacture of mid-range
diesel engines. The engine segment also provides customers with proprietary
products needed to support the International(R) engine line, together with a
wide selection of other standard engine and aftermarket parts. The engine
segment operates primarily in the U.S. and Brazil. The financial services
segment provides wholesale, retail and lease financing, and domestic commercial
physical damage and liability insurance coverage to the company's dealers and
retail customers and to the general public through an independent insurance
agency system. The financial services segment operates in the U.S., Mexico and
Bermuda.
The discussion and analysis reviews the operating and financial results,
and liquidity and capital resources of the manufacturing and financial services
operations. Manufacturing operations reflect the financial results of the
financial services operations included on a one-line basis under the equity
method of accounting. Financial services operations include Navistar Financial
Corporation (NFC), its domestic insurance subsidiary and the company's foreign
finance and insurance subsidiaries. See Note 1 to the Financial Statements.
RESULTS OF OPERATIONS
The company reported net income of $159 million for 2000, or $2.58 per
diluted common share, which includes an after-tax corporate restructuring charge
of $190 million that is further described under the caption "Restructuring
Charge". Net income was $544 million, or $8.20 per diluted common share in 1999,
and $299 million, or $4.11 per diluted common share in 1998. Net income in 1999
and 1998 included tax valuation allowance adjustments of $178 million and $45
million, respectively. Diluted earnings per share excluding the tax valuation
allowance adjustments and the restructuring charge were $5.67, $5.52, and $3.47
in 2000, 1999, and 1998, respectively.
The company's manufacturing operations reported income before income taxes
of $139 million in 2000 compared with $474 million in 1999 and $321 million in
1998. Pretax income for the manufacturing operations was reduced $287 million in
2000 by the effect of the corporate restructuring charge. The truck segment's
profit decreased by 39% in 2000 while revenues decreased by 4%, compared to
increases in profit and revenue of 20% and 6% in 1999, respectively. The engine
segment's profit increased by 13% in 2000 and 58% in 1999 compared to revenue
increases of 2% and 21%, respectively. During 2000 the company's truck segment
was adversely affected by decreased industry volume related to the declining
overall industry as well as reduced truck pricing and increases in material
costs. The engine segment's profit and revenue increases during 2000 were, in
part, due to record levels of engine shipments to other original equipment
manufacturers (OEMs). The truck and engine segments' profit increases in 1999
11
RESULTS OF OPERATIONS (continued)
were attributable to economies of scale in truck and engine production, improved
truck pricing and various other cost improvements.
The financial services segment's profit in 2000 decreased $4 million from
1999 primarily due to a decrease in NFC's pretax income from continuing
operations. NFC's pretax income from continuing operations in 2000 was $92
million compared to $96 million in 1999. The decrease was primarily due to lower
gains on the sale of retail notes and higher losses on retail receivables,
partially offset by higher average finance receivable balances. The financial
services segment's profit in 1999 was $28 million higher than in 1998, primarily
resulting from an increase in NFC's pretax income and a legal settlement in
favor of an insurance subsidiary of the company. The effect of the planned sale
of Harco National Insurance Company (Harco), a wholly owned subsidiary of NFC,
is reflected as a discontinued operation in NFC's financial statements, but the
expected loss on disposal is included as a component of the restructuring charge
in Navistar's consolidated financial statements, which is further described
under the caption "Restructuring Charge" and in Note 10 to the Financial
Statements.
Sales and Revenues
Sales and revenues of $8,451 million in 2000 were 2% lower than the $8,642
million reported in 1999, which was 10% higher than the $7,885 million reported
in 1998. Sales of manufactured products totaled $8,119 million in 2000, 2% lower
than the $8,326 million reported in 1999, which was 9% above the $7,629 reported
in 1998.
U.S. and Canadian industry sales of Class 5 through 8 trucks totaled
440,000 units in 2000, 5% lower than the 465,500 units in 1999, which was 19%
greater than the 392,000 units sold in 1998. Class 8 heavy truck sales totaled
258,300 units in 2000, a 10% decrease from the 286,000 units sold in 1999, which
was a 23% increase over the 232,000 units sold in 1998. Industry sales of Class
5, 6, and 7 medium trucks, including school buses, totaled 181,700 units in
2000, consistent with the 179,500 units sold in 1999, which was 12% above the
160,000 units sold in 1998. Industry sales of school buses, which accounted for
19% of the medium truck market, were 33,900 units in 2000, nearly unchanged from
1999, which experienced a 3% increase over 1998.
While the industry experienced a significant decline, the company's market
share in the combined U.S. and Canadian Class 5 through 8 truck market for 2000
increased to 26.9% from 25.6% in 1999. Market share was 29.1% in 1998.
Total engine shipments reached 392,900 units, a 5% increase over 1999. This
excludes the 54,100 units shipped by Maxion International Motores S.A., the
company's 50% owned joint venture in Brazil, to its outside customers. Shipments
of mid-range diesel engines by the company to other OEMs during 2000 were a
record 304,400 units, a 6% increase over the 286,500 units shipped in 1999,
which represented a 34% increase over 1998. Higher shipments to Ford Motor
Company (Ford) to meet consumer demand for light trucks and vans which use this
engine was the primary cause of the increases in both 2000 and 1999.
Finance and insurance revenue was $288 million for 2000, a $32 million
increase over 1999 revenue of $256 million, which was $55 million higher than
1998 revenue of $201 million. The increase in 2000 was primarily a result of an
increase in lease financing, while the increase in 1999 was impacted
significantly by greater wholesale and retail financing activity.
The company recorded other income of $44 million in 2000. This decreased
from the $60 million reported for 1999, which was an increase of $5 million from
1998. Lower cash balances, which reduced interest income, was a significant
factor in the decrease in 2000, while the increase in 1999 was primarily due to
a legal settlement in favor of an insurance subsidiary of the company.
12
RESULTS OF OPERATIONS (continued)
Costs and Expenses
Manufacturing gross margin was 16.8% in 2000, compared with 18.0% in 1999,
and 15.3% in 1998. Excluding the effect of the restructuring charge, the
company's manufacturing gross margin was 17.0% in 2000. The decrease in margin
primarily results from lower new truck pricing, declines in used truck values
and increases in material costs. The gross margin increase experienced in 1999
was primarily due to improved pricing and improved operating efficiencies.
Postretirement benefits expense of $146 million in 2000 decreased $70
million from $216 million in 1999, which increased $42 million from $174 million
reported in 1998. The 2000 decrease is primarily due to lower pension expense as
well as lower profit sharing provisions to the retiree trust, which was
partially offset by increased health and life insurance expense. The 1999
increase was mainly a result of higher retiree healthcare expense and higher
profit sharing provisions to the retiree trust. See Note 2 to the Financial
Statements.
Engineering and research expense in 2000 was $280 million, which was
consistent with the $281 million reported in 1999, but an increase from the $192
million in 1998. The increase in 1999 over 1998 reflected the company's
continuing investment in its next generation vehicle (NGV) and next generation
diesel (NGD) programs. NGV represented 50% of the increase while NGD accounted
for another 25%.
Sales, general and administrative expense of $488 million in 2000 was
comparable to the $486 million in 1999, which was higher than the $427 million
reported in 1998. The 1999 increase was primarily due to marketing programs and
the operational implementation of the company's integrated truck and engine
strategies.
Interest expense increased to $146 million in 2000 from $135 million in
1999 and $105 million in 1998. The rise in 2000 was partially attributable to
the financial services segment's increased borrowing costs related to higher
average receivable funding requirements and higher average interest rates. The
increase in 1999 was, in part, driven by higher average receivable funding
requirements due to higher sales.
Other expense totaled $87 million in 2000, compared with $71 million in
1999 and $79 million in 1998. The increase in 2000 is due to higher insurance
claims and underwriting fees.
RESTRUCTURING CHARGE
In October 2000, the company incurred charges for restructuring, asset
write-downs, loss on anticipated sale of business and other exit costs totaling
$306 million as part of an overall plan to restructure its manufacturing and
corporate operations ("Plan of Restructuring"). The following are the major
restructuring, integration and cost reduction initiatives included in the Plan
of Restructuring:
o Replacement of current steel cab trucks with a new line of high performance
next generation vehicles (NGV) and a concurrent realignment of the
company's truck manufacturing facilities
o Closure of certain operations and exit of certain activities
o Launch of the next generation technology diesel engines
o Consolidation of corporate operations
o Realignment of the bus and truck dealership network and termination of
various dealership contracts
13
RESTRUCTURING CHARGE (continued)
Of the pretax restructuring charge totaling $306 million, $124 million
represents non-cash charges. Approximately $8 million was spent in 2000 and the
remaining $174 million is expected to be spent as follows: 2001 - $66 million,
2002 - $42 million and 2003 and beyond - $66 million. The total cash outlay is
expected to be funded from existing cash balances and internally generated cash
flows from operations. The specific actions included in the Plan of
Restructuring are expected to be substantially complete by November 2001 and the
charge reflects costs and expenses that are incremental to the current period
and are directly related to the Plan of Restructuring.
The actions taken to implement the Plan of Restructuring are expected to
generate approximately $100 million in annualized savings for the company,
primarily from lower salaries and benefit costs, beginning in fiscal 2001. These
savings are expected to be more than offset by lower revenue from expected
industry driven reductions in annual truck and engine sales volumes.
Components of the restructuring charge are as follows:
Amount Balance
(Millions of dollars) Total Charges Incurred October 31, 2000
- --------------------------------------------- ---------------- --------------- ----------------------
Severance and other benefits $ 104 $ (7) $ 97
Inventory write-downs 20 (20) -
Other asset write-downs and losses 93 (93) -
Lease terminations 33 - 33
Loss on anticipated sale of business 17 - 17
Exit costs 39 (1) 38
----------- ---------- -------------
Total $ 306 $ (121) $ 185
=========== ========== =============
The severance and other benefit costs, asset write-downs and losses, lease
terminations, loss on anticipated sale of business, dealer termination and exit
costs, totaling $286 million, are presented as "Restructuring and loss on
anticipated sale of business" in the Statement of Income. Inventory write-down
costs of $20 million are included in "Cost of products sold related to
restructuring" in the Statement of Income.
A description of the significant components of the restructuring charge is
as follows:
Pursuant to the Plan of Restructuring, 3,100 positions will be eliminated
throughout the company. Severance and other benefit costs relate to the
reduction of approximately 2,100 employees from the workforce, primarily in
North America. Of the total workforce reductions, approximately 2,000 will
be in International's Truck Group, of which approximately 1,600 are
production-related employees, with the remainder impacting the Engine,
Corporate and Financial Services Groups. As of October 31, 2000,
approximately $7 million had been paid for severance and other benefits for
nearly 500 terminated employees. The remaining reduction of approximately
1,600 employees will be substantially complete by late 2001 when the
majority of the NGV products will be in production. The reduction is
primarily caused by a reduction in the required workforce to assemble the
new medium trucks, a lowering of anticipated industry demand for certain
products and the movement of products between manufacturing facilities.
Benefit costs will extend beyond the completion of the workforce reductions
due to the company's contractual severance obligations. Additionally, the
severance and other benefits component includes a $12 million non-cash
curtailment loss related to the company's postretirement benefit plans.
14
RESTRUCTURING CHARGE (continued)
In 1997, International announced the extension of its engine contract for
V-8 engines with Ford until 2012. This contract extension included the
development of new engines that provide better performance and meet
stricter emissions requirements. As part of the Plan of Restructuring, the
company finalized its plan for this new engine. The plan requires that
certain existing production assets be either replaced or disposed.
Accordingly, International entered into sale-leaseback transactions in
October 2000 for certain of these affected production assets, which
resulted in the recognition of a $55 million charge for the excess of the
carrying amount over the fair value of these assets. In addition, a charge
of $19 million was recorded for the impairment of other engine production
assets held for disposal and $9 million was recognized for the write-down
of engine and service inventory that will be replaced. International's
preparation for the launch of NGV, a new line of high performance steel cab
trucks, which begins in March 2001 resulted in the write-off of $11 million
of excess truck parts and service inventory related to prior vehicle
models. The remainder of the asset write-downs and losses primarily relate
to assets that will be disposed of or abandoned as a direct result of the
workforce reductions.
Lease termination costs include the future obligations under long-term
non-cancelable lease agreements at facilities being vacated following the
workforce reductions. This charge primarily consists of the estimated lease
costs, net of probable sublease income, associated with the cancelation of
the company's corporate office lease at NBC Tower in Chicago, Illinois,
which expires in 2010.
As part of the Plan of Restructuring, management evaluated the strategic
importance of certain of its operations. On November 30, 2000, NFC's board
of directors approved NFC management's plan to sell Harco within the next
fiscal year. The effect of the anticipated sale of Harco is reflected as a
discontinued operation in NFC's stand-alone financial statements because
Harco represents a major line of business and a reportable operating
segment of NFC. However, because Harco is not a major line of business nor
a separate operating segment of Navistar, the planned sale of Harco does
not qualify for discontinued operations presentation in accordance with
Accounting Principles Board Opinion No. 30 and accordingly, the anticipated
loss on disposal is included as a component of the restructuring charge.
Additionally, due to the anticipated sale of Harco within the next fiscal
year, all of Harco's assets and liabilities have been classified as current
within the Statement of Financial Position. Harco's revenues and pretax
income, respectively, were $56 million and $1 million in 2000, $44 million
and $5 million in 1999, and $42 million and $6 million in 1998. Total
assets, primarily marketable securities, and total liabilities, primarily
loss reserves, were $155 million and $94 million, respectively, as of
October 31, 2000 and $142 million and $81 million, respectively, as of
October 31, 1999.
Dealer termination and exit costs of $39 million principally include $17
million of settlement costs related to the termination of certain dealer
contracts in connection with the realignment of the company's bus
distribution network, and other litigation and exit costs to implement the
restructuring initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow is generated from the manufacture and sale of trucks and
mid-range diesel engines and their associated service parts as well as from
product financing and insurance coverage provided to the company's dealers and
retail customers by the financial services segment. The company's current debt
ratings have made sales of finance receivables the most economic sources of
funding for NFC. Insurance operations are self-funded.
15
LIQUIDITY AND CAPITAL RESOURCES (continued)
The company had working capital of $58 million at October 31, 2000,
compared to $340 million at October 31, 1999. The decrease from 1999 to 2000 is
primarily due to a net change in operating assets and liabilities of $181
million as described below, and an increase in notes payable and current
maturities of long-term debt of $290 million.
Consolidated cash, cash equivalents and marketable securities of the
company were $501 million at October 31, 2000, $576 million at October 31, 1999,
and $1,064 million at October 31, 1998. Cash, cash equivalents and marketable
securities available to manufacturing operations totaled $588 million, $1,045
million and $1,010 million at October 31, 2000, 1999 and 1998, respectively.
This included an intercompany receivable from NFC of $294 million, $659 million
and $106 million at October 31, 2000, 1999 and 1998, respectively, which NFC is
obligated to repay upon request.
Cash provided by operations during 2000 totaled $686 million, primarily
from net income of $159 million, $199 million of depreciation and amortization,
a $124 million non-cash restructuring charge and a net change in operating
assets and liabilities of $181 million. Income tax expense for 2000 was $65
million, composed of cash payments of $29 million to federal and certain state,
local and foreign governments and deferred expense of $56 million, offset by a
$20 million research and development tax credit.
The net source of cash resulting from the change in operating assets and
liabilities of $181 million includes a $591 million decrease in receivables
primarily due to a net decrease in wholesale note and account balances. The
change also includes a $288 million decrease in accounts payable primarily due
to a decrease in truck production levels and an $89 million decrease in other
liabilities primarily due to a reduction of the payments required by the
company's profit sharing and performance incentive programs.
During 2000, investment programs used $807 million in cash principally to
fund $553 million of capital expenditures. Capital expenditures were made
primarily for the NGV and NGD programs, for a school bus facility in Tulsa,
Oklahoma, and increased capacity, infrastructure and facility enhancements at
the Escobedo, Mexico plant. Investment programs also used cash for a $361
million net increase in retail notes and lease receivables and a $90 million net
increase in property and equipment leased to others. These were partially offset
by a net decrease in marketable securities of $136 million and proceeds from
sale-leasebacks of $90 million.
Financing activities provided a $175 million net increase in notes and debt
outstanding under the bank revolving credit facility and other commercial paper
programs, and a $151 million net increase in long-term debt. These were offset
by purchases of $151 million of common stock during 2000 in accordance with
board approved spending levels.
Cash flow from the company's manufacturing operations, financial services
operations and financing capacity is currently sufficient to cover planned
investment in the business. Capital investments for 2001 are expected to be $450
million including approximately $105 million for the NGV program and $145
million for the NGD program. In addition to the NGV and NGD programs, capital
expenditures are planned to purchase lease options on engine equipment, for a
school bus facility in Tulsa, Oklahoma, for leasehold improvements at the
company's new headquarters and for normal improvements to existing facilities
and products. The company had outstanding capital commitments of $268 million at
October 31, 2000, including $59 million for the NGV program and $172 million
through 2003 for the NGD program.
16
LIQUIDITY AND CAPITAL RESOURCES (continued)
The company currently estimates $250 million and $260 million in capital
spending and $170 million and $115 million in development expense through 2004
for the NGV and NGD programs, respectively. Approximately $120 million and $50
million of the development expenses are planned for 2001. Included in the NGD
amounts for capital spending and development expense are the company's
continuing investment to produce new high technology diesel engines in
Huntsville, Alabama.
The company's truck assembly facility in Escobedo, Mexico is encumbered by
a lien in favor of certain lenders of the company as collateral for a $125
million revolving Mexican credit facility. At October 31, 2000, $23 million of a
Mexican subsidiary's receivables were pledged as collateral for bank borrowings.
In addition, as of October 31, 2000, the company is contingently liable for
approximately $169 million for various purchasing commitments, credit guarantees
and buyback programs. Based on historical loss trends, the company's exposure is
not considered material. Additionally, restrictions under the terms of the
senior and senior subordinated notes and the Mexican credit facility include a
limitation on indebtedness and a limitation on certain restricted payments.
NFC has traditionally obtained funds to provide financing to the company's
dealers and retail customers from sales of finance receivables, commercial
paper, short and long-term bank borrowings, medium and long-term debt and equity
capital. At October 31, 2000, NFC's funding consisted of sold finance
receivables of $2,693 million, bank and other borrowings of $1,395 million,
subordinated debt of $100 million, capital lease obligations of $379 million and
equity of $304 million.
Through the asset-backed public market and private placement sales, NFC has
been able to fund fixed rate retail note receivables at rates offered to
companies with higher investment grade ratings. During 2000, NFC sold $1,008
million of retail notes through Navistar Financial Retail Receivables
Corporation (NFRRC), a wholly owned subsidiary of NFC. At October 31, 2000, the
aggregate shelf registration available to NFRRC for the issuance of asset-backed
securities was $1,783 million. Also, at October 31, 2000, Navistar Financial
Securities Corporation (NFSC), a wholly owned subsidiary of NFC, had in place a
revolving wholesale note trust that funded $883 million of wholesale notes.
In November 2000, NFC sold $765 million of retail notes, net of unearned
finance income, through NFRRC to an owner trust which, in turn, issued
securities which were sold to investors. A $5 million gain was recognized on
this sale.
During 2000, NFC sold $300 million of variable funding certificates,
through NFSC, to a conduit sponsored by a major financial institution and
reduced its maximum funding capacity from $300 million to $200 million. In July
2000, NFC issued a $212 million tranche of investor certificates. At October 31,
2000 the revolving wholesale note trust was comprised of three $200 million
tranches of investor certificates maturing in 2003, 2004 and 2008, the $212
million tranche of investor certificates maturing in 2005 and $125 million of
variable funding certificates maturing in 2001.
In October 2000, Truck Retail Instalment Paper Company (TRIP), a special
purpose wholly owned subsidiary of NFC, terminated the previously existing $400
million Asset-Backed Commercial Paper facility and issued $475 million of a
senior class AAA rated and $25 million of a subordinated class A rated floating
rate asset-backed notes. The proceeds were used to purchase eligible receivables
from NFC and to establish a revolving retail warehouse facility for NFC's retail
notes and retail leases, other than fair market value leases.
17
LIQUIDITY AND CAPITAL RESOURCES (continued)
In October 2000, NFC entered into a $500 million revolving retail facility
as a method to fund retail notes and finance leases prior to the sale of
receivables. Under the terms of this facility, NFC sells fixed rate retail notes
or finance leases to the conduit and pays investors a floating rate of interest.
As required by the rating agencies, NFC purchased an interest rate cap to
protect investors against rising interest rates. To offset the economic cost of
this cap, NFC sold an identical interest rate cap. As of October 31, 2000 the
interest rate caps each had a notional amount of $500 million and a net fair
value of zero.
During 2000, NFC established Truck Retail Accounts Corporation (TRAC), a
special purpose wholly owned subsidiary of NFC, for the purpose of securitizing
retail accounts receivable. At October 31, 2000 TRAC had in place a revolving
retail account conduit that provides for the funding of $100 million of eligible
retail accounts. As of October 31, 2000 NFC had utilized $80 million of this
facility. The facility expires in 2001.
During 2000, NFC established Truck Engine Receivables Finance Corporation,
a special purpose wholly owned subsidiary of NFC, for the purpose of
securitizing engine accounts receivable. In November 2000, NFC securitized all
of its unsecured trade receivables generated by the sale of diesel engines and
engine service parts from Navistar to Ford. The transaction provides for funding
of $100 million and expires in 2006.
NFC has a $925 million bank revolving credit facility and a $500 million
revolving retail warehouse facility program, which mature in March 2001 and
October 2005, respectively. As of October 31, 2000, available funding under the
bank revolving credit facility and the revolving retail warehouse facility
program was $30 million. When combined with unrestricted cash and cash
equivalents, $72 million remained available to fund the general business
purposes of NFC. Subsequent to October 31, 2000, NFC renegotiated its revolving
credit agreement. The new agreement provides for aggregate borrowings of $820
million and will mature in November 2005. Under the new revolving credit
agreement, Navistar's three Mexican finance subsidiaries will be permitted to
borrow up to $100 million in the aggregate, which will be guaranteed by NFC. The
Statement of Financial Position reflects $775 million of Navistar's bank
revolvers due March 2001 as long-term debt at October 31, 2000, since Navistar
has refinanced $775 million of the obligation on a long-term basis.
In conjunction with NFC's November 1998 sale of retail receivables, NFC
issued an interest rate cap for the protection of investors in NFC's debt
securities. The notional amount of the cap, $224 million, amortizes based on the
expected outstanding principal balance of the sold retail receivables. Under the
terms of the cap agreement, NFC will make payments if interest rates exceed
certain levels. The interest rate cap is recorded at fair value with changes in
fair value recognized in income. At October 31, 2000, the impact on income was
not material.
In November 1999, NFC sold $533 million of fixed rate retail receivables on
a variable rate basis and entered into an amortizing interest rate swap
agreement to fix the future cash flows of interest paid to lenders. In March
2000, NFC transferred all of the rights and obligations of the swap to the bank
conduit. The notional amount of the amortizing swap is based on the expected
outstanding principal balance of the sold retail receivables. Under the terms of
the agreement, NFC will make or receive payments based on the difference between
the transferred swap notional amount and the outstanding principal balance of
the sold retail receivables. As of October 31, 2000 the difference between the
amortizing swap notional amount and the net outstanding principal balance of the
sold retail receivables was $11 million.
At October 31, 2000, the company held German mark forward contracts with
notional amounts of $35 million and other derivative contracts with notional
amounts of $38 million. At October 31, 2000 the unrealized net loss on these
contracts was not material.
18
LIQUIDITY AND CAPITAL RESOURCES (continued)
At October 31, 2000, the Canadian operating subsidiary was contingently
liable for retail customers' contracts and leases financed by a third party. The
Canadian operating subsidiary is subject to maximum recourse of $312 million on
retail contracts and $33 million on retail leases. The Canadian operating
subsidiary, NFC and certain other subsidiaries included in the financial
services operations are parties to agreements that may result in the restriction
of amounts which can be distributed to International in the form of dividends or
loans and advances. At October 31, 2000, the maximum amount of dividends which
were available for distribution under the most restrictive covenants was $248
million.
NFC's maximum contractual exposure under all receivable sale recourse
provisions at October 31, 2000, was $330 million. However, management believes
the recorded reserves for losses on sold receivables are adequate. See Note 5 to
the Financial Statements.
The company and International are obligated under certain agreements with
public and private lenders of NFC to maintain the subsidiary's income before
interest expense and income taxes at not less than 125% of its total interest
expense. No income maintenance payments were required for the three years ended
October 31, 2000.
In February 2000, Standard and Poor's raised the company's and NFC's senior
debt ratings from BB+ to BBB-, and raised the company's and NFC's subordinated
debt ratings from BB- to BB+. In May 1999, Moody's and Duff and Phelps raised
the company's senior debt ratings from Ba1 and BB+ to Baa3 and BBB-,
respectively, and raised the company's subordinated debt ratings from Ba3 and
BB- to Ba2 and BB, respectively. NFC's senior debt ratings increased from Ba1
and BBB- to Baa3 and BBB, respectively. NFC's subordinated debt ratings were
also raised from Ba3 and BB+ to Ba2 and BBB-, respectively.
It is the opinion of management that, in the absence of significant
unanticipated cash demands, current and forecasted cash flow will provide a
basis for financing operating requirements and capital expenditures. Management
also believes that collections on the outstanding receivables portfolios as well
as funds available from various funding sources will permit the financial
services operations to meet the financing requirements of the company's dealers
and customers.
ENVIRONMENTAL MATTERS
The company has been named a potentially responsible party (PRP), in
conjunction with other parties, in a number of cases arising under an
environmental protection law, the Comprehensive Environmental Response,
Compensation and Liability Act, popularly known as the Superfund law. These
cases involve sites, which allegedly have received wastes from current or former
company locations. Based on information available to the company, which, in most
cases, consists of data related to quantities and characteristics of material
generated at, or shipped to, each site as well as cost estimates from PRPs
and/or federal or state regulatory agencies for the cleanup of these sites, a
reasonable estimate is calculated of the company's share, if any, of the
probable costs and is provided for in the financial statements. These
obligations are generally recognized no later than completion of the remedial
feasibility study and are not discounted to their present value. The company
reviews its accruals on a regular basis and believes that, based on these
calculations, its share of the potential additional costs for the cleanup of
each site will not have a material effect on the company's financial results.
DERIVATIVE FINANCIAL INSTRUMENTS
As disclosed in Notes 1 and 11 to the Financial Statements, the company
uses derivative financial instruments to transfer or reduce the risks of foreign
exchange and interest rate volatility, and potentially increase the return on
invested funds.
19
DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The company's manufacturing operations, as conditions warrant, hedge
foreign exchange exposure on the purchase of parts and materials from foreign
countries and its exposure from the sale of manufactured products in other
countries. Contracted purchases of commodities or manufacturing equipment may
also be hedged.
The financial services operations may use forward contracts to hedge
interest payments on the notes and certificates related to an expected sale of
receivables. The financial services operations also use interest rate swaps to
reduce exposure to interest rate changes when they sell fixed rate receivables
on a variable rate basis. For the protection of investors in NFC's securities,
NFC may enter into interest rate caps when fixed rate receivables are sold on a
variable rate basis.
YEAR 2000
The company had instituted a corporate-wide Year 2000 readiness project to
identify all systems, which required modification or replacement, and
established appropriate remediation and contingency plans to avoid an impact on
the company's ability to continue to provide its products and services. Through
the date of this report, the company has not experienced any significant Year
2000 problems.
The company's total cost of the Year 2000 project, which was funded through
operating cash flows, was $31 million including $25 million of expense and $6
million of capital expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
On November 1, 2000, the company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended. This statement standardizes the accounting for
derivative instruments by requiring that an entity recognize all derivatives as
assets or liabilities in the statement of financial position and measure them at
fair value. When certain criteria are met, it also provides for matching the
timing of gain or loss recognition on the derivative hedging instrument with the
recognition of (a) the changes in the fair value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction.
In November 2000, Navistar recorded an immaterial cumulative transition
adjustment to earnings primarily related to foreign currency derivatives.
Additionally, the company recorded an immaterial cumulative transition
adjustment in other comprehensive income for designated cash flow hedges.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" which the
company must adopt for all applicable transactions occurring after March 31,
2001. The company is currently assessing the impact of this standard on the
company's results of operations, financial condition and cash flows.
INCOME TAXES
The Statement of Financial Condition at October 31, 2000 and 1999 includes
a deferred tax asset of $862 million and $896 million, respectively, net of
valuation allowances of $86 million for both 2000 and 1999, related to future
tax benefits. The deferred tax asset has been reduced by the valuation allowance
as management believes it is more likely than not that some portion of the
deferred tax asset may not be realized in the future.
20
INCOME TAXES (continued)
The deferred tax asset includes the tax benefits associated with cumulative
tax losses of $950 million and temporary differences, which represent the
cumulative expense of $1,318 million recorded in the Statement of Income that
has not been deducted on the company's tax returns. The valuation allowance at
October 31, 2000, assumes that it is more likely than not that approximately
$226 million of cumulative tax losses will not be realized before their
expiration date. Realization of the net deferred tax asset is dependent on the
generation of approximately $2,300 million of future taxable income. Until the
company has utilized its significant net operating loss carryforwards, the cash
payment of U.S. federal income taxes will be minimal. See Note 3 to the
Financial Statements.
The company performs extensive analysis to determine the amount of the
deferred tax asset. Such analysis is based on the premise that the company is,
and will continue to be, a going concern and that it is more likely than not
that deferred tax benefits will be realized through the generation of future
taxable income. Management reviews all available evidence, both positive and
negative, to assess the long-term earnings potential of the company. The
financial results are evaluated using a number of alternatives in economic
cycles at various industry volume conditions. One significant factor considered
is the company's role as a leading producer of heavy and medium trucks and
school buses and mid-range diesel engines.
The 2000 income tax expense was reduced by $20 million for research and
development tax credits that will be taken against future income tax payments
related to research and development activities that occurred over the last
several years. In 1999, as a result of increased industry demand, the continued
successful implementation of the company's manufacturing strategies, changes in
the company's operating structure, and other positive operating indicators,
management reviewed its projected future taxable income and evaluated the impact
of these changes on its deferred tax asset valuation allowance. This review was
completed during the third quarter of 1999 and resulted in a reduction to the
deferred tax asset valuation allowance of $178 million, which was recorded as a
reduction of income tax expense resulting in an effective tax rate of 8%. In
addition, a $45 million reduction in the allowance was recorded during the
fourth quarter of 1998 based on a similar review. Management believes that, with
the combination of available tax planning strategies and the maintenance of
significant market share, earnings are achievable in order to realize the net
deferred tax asset of $862 million.
Reconciliation of the company's income before income taxes for financial
statement purposes to U.S. taxable income for the years ended October 31 is as
follows:
Millions of dollars 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Income before income taxes .................................. $ 224 $ 591 $ 410
Exclusion of income of foreign subsidiaries ................. (79) (102) (7)
State income taxes .......................................... (4) (4) (3)
Temporary differences........................................ 64 72 (175)
Other 2 (7) (26)
------- ------- -------
Taxable income......................................... $ 207 $ 550 $ 199
======= ======= =======
21
BUSINESS ENVIRONMENT
Sales of Class 5 through 8 trucks have historically been cyclical, with
demand affected by such economic factors as industrial production, construction,
demand for consumer durable goods, interest rates and the earnings and cash flow
of dealers and customers. Truck sales in 2000 have been hindered by a number of
factors including higher fuel prices, driver shortages, higher interest rates,
and increased new and used truck inventories. The demand for new trucks
reflected these adverse conditions as the number of new truck orders dropped
significantly throughout 2000, reducing the order backlog. The company's U.S.
and Canadian order backlog at October 31, 2000 was 24,000 units, compared with
57,300 units at October 31, 1999. Historically, retail deliveries have been
impacted by the rate at which new truck orders are received. Therefore, the
company continually evaluates order receipts and backlog throughout the year and
will balance production with demand as appropriate. To control costs and align
production schedules with demand, the company reduced its production schedules
during 2000 through shutdown weeks at the Chatham and Springfield Assembly
Plants.
The company currently projects 2001 U.S. and Canadian Class 8 heavy truck
demand to be 181,600 units, down 30% from 2000. Class 5, 6, and 7 medium truck
demand, excluding school buses is forecast at 108,000 units, 27% lower than in
2000. Demand for school buses is expected to decrease 6% in 2001 to 32,000
units. At these demand levels, the entire truck industry will be operating below
capacity. Mid-range diesel engine shipments by the company to OEMs in 2001 are
expected to be 295,700 units, 3% below 2000, reflecting an anticipated softening
in passenger car demand.
The company announced in May of 2000 that its Green Diesel Technology (tm)
will be available in the summer of 2001 on the International(R) rear engine
school bus with an International(R) 530E engine. The technology will surpass
emissions standards while maintaining an engine with diesel's power.
In fiscal 2000, the company finalized an agreement with Ford to supply
diesel engines for certain under 8,500 lbs. GVW light duty trucks and sport
utility vehicles. To support this program, the company is constructing an engine
assembly operation in Huntsville, Alabama.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company's primary market risks include fluctuations in interest rates
and currency exchange rates. The company is also exposed to changes in the
prices of commodities used in its manufacturing operations and to changes in the
prices of equity instruments owned by the company. Commodity price risk related
to the company's current commodity financial instruments and equity price risk
related to the company's current investments in equity instruments are not
material. The company does not hold any material market risk sensitive
instruments for trading purposes.
The company has established policies and procedures to manage sensitivity
to interest rate and foreign currency exchange rate market risk. These
procedures include the monitoring of the company's level of exposure to each
market risk, the funding of variable rate receivables with variable rate debt,
and limiting the amount of fixed rate receivables, which may be funded with
floating rate debt. These procedures also include the use of derivative
financial instruments to mitigate the effects of interest rate fluctuations and
to reduce the exposure to exchange rate risk.
22
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(continued)
Interest rate risk is the risk that the company will incur economic losses
due to adverse changes in interest rates. The company measures its interest rate
risk by estimating the net amount by which the fair value of all of its interest
rate sensitive assets and liabilities would be impacted by selected hypothetical
changes in market interest rates. Fair value is estimated using a discounted
cash flow analysis. Assuming a hypothetical instantaneous 10% adverse change in
interest rates as of October 31, 2000 and 1999, the net fair value of these
instruments would decrease by approximately $5 million in each year. The
company's interest rate sensitivity analysis assumes a parallel shift in
interest rate yield curves. The model, therefore, does not reflect the potential
impact of changes in the relationship between short-term and long-term interest
rates.
Foreign currency risk is the risk that the company will incur economic
losses due to adverse changes in foreign currency exchange rates. The company's
primary exposures to foreign currency exchange fluctuations are the Canadian
dollar/U.S. dollar, Mexican peso/U.S. dollar and Brazilian real/U.S. dollar. At
October 31, 2000 and 1999, the potential reduction in future earnings from a
hypothetical instantaneous 10% adverse change in quoted foreign currency spot
rates applied to foreign currency sensitive instruments would be approximately
$10 million in each year. The foreign currency sensitivity model is limited by
the assumption that all of the foreign currencies to which the company is
exposed would simultaneously decrease by 10%, because such synchronized changes
are unlikely to occur. The effects of foreign currency forward contracts have
been included in the above analysis; however, the sensitivity model does not
include the inherent risks associated with the anticipated future transactions
denominated in foreign currency for which these forward contracts have been
entered into for hedging purposes.
23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
- ------------------------------------------ ----
Statement of Financial Reporting Responsibility ............................................... 25
Independent Auditors' Report .................................................................. 26
Statement of Income for the years ended October 31, 2000, 1999 and 1998 ....................... 27
Statement of Comprehensive Income for the years ended October 31, 2000, 1999 and 1998.......... 27
Statement of Financial Condition as of October 31, 2000 and 1999 .............................. 28
Statement of Cash Flow for the years ended October 31, 2000, 1999 and 1998 .................... 29
Notes to Financial Statements
1 Summary of accounting policies ............................................................. 30
2 Postretirement benefits .................................................................... 33
3 Income taxes ............................................................................... 37
4 Marketable securities ...................................................................... 40
5 Receivables ................................................................................ 41
6 Inventories ................................................................................ 42
7 Property and equipment ..................................................................... 42
8 Debt ....................................................................................... 43
9 Other liabilities .......................................................................... 45
10 Restructuring charge ....................................................................... 46
11 Financial instruments ...................................................................... 48
12 Commitments, contingencies, restricted assets, concentrations and leases ................... 50
13 Legal proceedings and environmental matters ................................................ 51
14 Segment data ............................................................................... 52
15 Preferred and preference stocks ............................................................ 55
16 Common shareowners' equity ................................................................. 56
17 Earnings per share ......................................................................... 57
18 Stock compensation plans ................................................................... 58
19 Selected quarterly financial data (unaudited) .............................................. 59
Five-Year Summary of Selected Financial and Statistical Data .................................. 60
Additional Financial Information (unaudited) .................................................. 61
24
STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY
Management of Navistar International 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
accounting principles generally accepted in the United States of America 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 company's financial records and related data, as well as the
minutes of the board 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. Management believes that the
company's system of internal controls is adequate to accomplish these
objectives. 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 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 auditing standards
generally accepted in the United States of America 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
company's system of internal controls and takes the necessary actions that are
cost-effective in the circumstances to respond appropriately to the
recommendations presented.
The Audit Committee of the board of directors, composed of six non-employee
directors, meets periodically with the independent auditors, management, general
counsel and internal auditors to satisfy itself that such persons are properly
discharging their responsibilities regarding financial reporting and auditing.
In carrying out these responsibilities, the Committee has full access to the
independent auditors, internal auditors, general counsel and financial
management in scheduled joint sessions or private meetings as in the Committee's
judgment seems appropriate. Similarly, the company's independent auditors,
internal auditors, general counsel and financial management have full access to
the Committee and to the board of directors and each is responsible for bringing
before the Committee or its Chair, in a timely manner, any matter deemed
appropriate to the discharge of the Committee's responsibility.
John R. Horne
Chairman, President and
Chief Executive Officer
Robert C. Lannert
Executive Vice President
and Chief Financial Officer
25
INDEPENDENT AUDITORS' REPORT
Navistar International Corporation,
Its Directors and Shareowners:
We have audited the consolidated financial statements of Navistar
International Corporation and Consolidated Subsidiaries as of October 31, 2000
and 1999 and for each of the three years in the period ended October 31, 2000 as
listed in Item 8 and the financial statement schedule listed in Item 14. These
consolidated financial statements and financial statement schedule are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated 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
International Corporation and Consolidated Subsidiaries at October 31, 2000 and
1999, and the results of their operations and their cash flow for each of the
three years in the period ended October 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. Also, in our
opinion, the financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
December 11, 2000
Chicago, Illinois
26
STATEMENT OF INCOME
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------------------------
For the Years Ended October 31
Millions of dollars, except share data 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Sales and revenues
Sales of manufactured products................................. $ 8,119 $ 8,326 $ 7,629
Finance and insurance revenue.................................. 288 256 201
Other income................................................... 44 60 55
----- ----- -----
Total sales and revenues.................................. 8,451 8,642 7,885
----- ----- -----
Costs and expenses
Cost of products and services sold............................. 6,774 6,862 6,498
Cost of products sold related to restructuring................. 20 - -
----- ----- -----
Total cost of products and services sold.................. 6,794 6,862 6,498
Restructuring and loss on anticipated sale of business......... 286 - -
Postretirement benefits........................................ 146 216 174
Engineering and research expense............................... 280 281 192
Sales, general and administrative expense...................... 488 486 427
Interest expense............................................... 146 135 105
Other expense.................................................. 87 71 79
----- ----- -----
Total costs and expenses.................................. 8,227 8,051 7,475
----- ----- -----
Income before income taxes............................ 224 591 410
Income tax expense.................................... 65 47 111
----- ----- -----
Net income..................................................... 159 544 299
Less dividends on Series G preferred stock..................... - - 11
----- ----- -----
Net income applicable to common stock.......................... $ 159 $ 544 $ 288
===== ===== =====
- ----------------------------------------------------------------------------------------------------------------------
Earnings per share
Basic..................................................... $ 2.62 $ 8.34 $ 4.16
Diluted................................................... $ 2.58 $ 8.20 $ 4.11
Average shares outstanding (millions)
Basic..................................................... 60.7 65.2 69.1
Diluted................................................... 61.5 66.4 70.0
- ----------------------------------------------------------------------------------------------------------------------
STATEMENT OF COMPREHENSIVE INCOME
For the Years Ended October 31
Millions of dollars 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
Net income..................................................... $ 159 $ 544 $ 299
----- ----- -----
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment,
net of tax of $(1), $(81) and $76 million............. 34 152 (144)
Foreign currency translation adjustments and other........ (14) (18) 5
----- ----- -----
Other comprehensive income (loss), net of tax.................. 20 134 (139)
----- ----- -----
Comprehensive income........................................... $ 179 $ 678 $ 160
===== ===== =====
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
27
STATEMENT OF FINANCIAL CONDITION
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
As of October 31
Millions of dollars 2000 1999
- --------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents ............................ $ 297 $ 243
Marketable securities ................................ 167 138
Receivables, net ..................................... 1,075 1,550
Inventories .......................................... 648 625
Deferred tax asset, net .............................. 198 229
Other assets ......................................... 82 57
----- -----
Total current assets ...................................... 2,467 2,842
Marketable securities ..................................... 37 195
Finance and other receivables, net ........................ 1,467 1,268
Property and equipment, net ............................... 1,779 1,475
Investments and other assets .............................. 234 207
Prepaid and intangible pension assets ..................... 297 274
Deferred tax asset, net ................................... 664 667
----- -----
Total assets .............................................. $ 6,945 $ 6,928
===== =====
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt $ 482 $ 192
Accounts payable, principally trade .................. 1,096 1,399
Other liabilities .................................... 831 911
----- -----
Total current liabilities ................................. 2,409 2,502
Debt: Manufacturing operations ........................... 437 445
Financial services operations ...................... 1,711 1,630
Postretirement benefits liability ......................... 660 634
Other liabilities ......................................... 414 426
----- -----
Total liabilities ................................ 5,631 5,637
----- -----
Commitments and contingencies
Shareowners' equity
Series D convertible junior preference stock .............. 4 4
Common stock
(75.3 million shares issued) ......................... 2,139 2,139
Retained earnings (deficit) ............................... (143) (297)
Accumulated other comprehensive loss ...................... (177) (197)
Common stock held in treasury, at cost
(15.9 million and 12.1 million shares held) .......... (509) (358)
----- -----
Total shareowners' equity ........................ 1,314 1,291
----- -----
Total liabilities and shareowners' equity ................. $ 6,945 $ 6,928
===== =====
- --------------------------------------------------------------------------------
See Notes to Financial Statements.
28
STATEMENT OF CASH FLOW
Navistar International Corporation
and Consolidated Subsidiaries
----------------------------------
For the Years Ended October 31
Millions of dollars 2000 1999 1998
- ---------------------------------------------------------------------------------------
Cash flow from operations
Net income ............................................ $ 159 $ 544 $ 299
Adjustments to reconcile net income to cash
provided by operations:
Depreciation and amortization .................... 199 174 159
Deferred income taxes ............................ 56 185 149
Deferred tax asset valuation allowance
and other tax adjustments...................... (20) (178) (45)
Postretirement benefits funding (in excess of)
less than expense ............................. (3) 47 (373)
Non-cash restructuring charge .................... 124 -- --
Other, net ....................................... (10) (31) (16)
Change in operating assets and liabilities:
Receivables ...................................... 591 (445) (192)
Inventories ...................................... (34) (129) (13)
Prepaid and other current assets ................. 1 (24) (1)
Accounts payable ................................. (288) 139 192
Other liabilities ................................ (89) 20 202
----- ----- -----
Cash provided by operations ........................... 686 302 361
----- ----- -----
Cash flow from investment programs
Purchases of retail notes and lease receivables ....... (1,450) (1,442) (1,263)
Collections/sales of retail notes and lease receivables 1,089 1,282 1,071
Purchases of marketable securities .................... (192) (396) (837)
Sales or maturities of marketable securities .......... 328 726 521
Capital expenditures .................................. (553) (427) (302)
Proceeds from sale-leasebacks ......................... 90 -- --
Property and equipment leased to others ............... (90) (108) (125)
Investment in affiliates .............................. (1) (71) (7)
Capitalized interest and other ........................ (28) (15) (6)
----- ----- -----
Cash used in investment programs ................. (807) (451) (948)
----- ----- -----
Cash flow from financing activities
Issuance of debt ...................................... 241 196 577
Principal payments on debt ............................ (90) (135) (119)
Net increase in notes and debt outstanding
under bank revolving credit facility and
commercial paper programs ........................... 175 88 348
Purchases of common stock ............................. (151) (144) (189)
Redemption of Series G preferred stock ................ -- -- (240)
Dividends paid and other .............................. -- (3) (9)
----- ----- -----
Cash provided by financing activities ............ 175 2 368
----- ----- -----
Cash and cash equivalents
Increase (decrease) during the year .............. 54 (147) (219)
At beginning of the year ......................... 243 390 609
----- ----- -----
Cash and cash equivalents at end of the year .......... $ 297 $ 243 $ 390
===== ===== =====
- ---------------------------------------------------------------------------------------
See Notes to Financial Statements.
29
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
1. SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation
Navistar International Corporation is a holding company, whose principal
operating subsidiary is International Truck and Engine Corporation
(International), formerly Navistar International Transportation Corp. As used
hereafter, "company" or "Navistar" refers to Navistar International Corporation
and its consolidated subsidiaries. Navistar operates in three principal industry
segments: truck, engine (collectively called "manufacturing operations") and
financial services.
The company's truck segment is engaged in the manufacture and marketing of
Class 5 through 8 trucks, including school buses, and operates primarily in the
United States (U.S.) and Canada as well as in Mexico, Brazil and other selected
export markets. The company's engine segment is engaged in the design and
manufacture of mid-range diesel engines and operates primarily in the U.S. and
Brazil. The financial services operations of the company provide wholesale,
retail and lease financing, and domestic commercial physical damage and
liability insurance coverage to the company's dealers and retail customers and
to the general public through an independent insurance agency system.
The consolidated financial statements include the results of the company's
manufacturing operations and its wholly owned financial services subsidiaries.
The effects of transactions between the manufacturing and financial services
operations have been eliminated to arrive at the consolidated totals. Certain
1999 and 1998 amounts have been reclassified to conform with the presentation
used in the 2000 financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the U.S. 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 Recognition
Truck operations recognize shipments of new trucks and service parts to
dealers and retail customers as sales. Price allowances, expected in the normal
course of business, and the cost of special incentive programs are recorded at
the time of sale. Engine sales are recognized at the time of shipment to
original equipment manufacturers (OEMs). An allowance for losses on receivables
is maintained at an amount that management considers appropriate in relation to
the outstanding receivables portfolio, and it is charged when receivables are
determined to be uncollectible.
Financial services operations recognize finance charges on finance
receivables as income over the term of the receivables utilizing the interest
method. Operating lease revenues are recognized on a straight-line basis over
the life of the lease. Selected receivables are securitized and sold to public
and private investors with limited recourse. Gains or losses on sales of
receivables are credited or charged to revenue in the period in which the sale
occurs. Financial services operations continue to service the sold receivables
and receive a fee for such services. An allowance for losses is maintained at a
level deemed appropriate based on such factors as overall portfolio quality,
historical loss experience and current economic conditions.
30
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
Insurance premiums are earned on a prorata basis over the terms of the
policies. The liability for unpaid insurance claims includes provisions for
reported claims and an estimate of unreported claims based on past experience.
Cash and Cash Equivalents
All highly liquid financial instruments with maturities of three months or
less from date of purchase, consisting primarily of bankers' acceptances,
commercial paper, U.S. government securities and floating rate notes, are
classified as cash equivalents in the Statements of Financial Condition and Cash
Flow.
Marketable Securities
Marketable securities are classified as available-for-sale securities and
are reported at fair value. The difference between amortized cost and fair value
is recorded as a component of accumulated other comprehensive loss in
shareowners' equity, net of applicable deferred taxes. Securities with remaining
maturities of less than twelve months and other investments needed for current
cash requirements are classified as current within the Statement of Financial
Condition. All equity securities are classified as current because they are
highly liquid financial instruments, which can be readily converted to cash. All
other securities are classified as non-current. Due to the anticipated sale of
Harco National Insurance Company (Harco) within the next fiscal year, as further
described in Note 10, all of Harco's marketable securities as of October 31,
2000 have been classified as current within the Statement of Financial Position.
Inventories
Inventories are valued at the lower of average cost or market.
Property and Other Long-Lived Assets
Significant expenditures for replacement of equipment, tooling and pattern
equipment, and major rebuilding of machine tools are capitalized. Depreciation
and amortization are generally provided on the straight-line basis over the
estimated useful lives of the assets, which average 35 years for buildings and
improvements and 12 years for machinery and equipment. Gains and losses on
property disposals are included in other income and expense. The carrying amount
of all long-lived assets is evaluated periodically to determine if adjustment to
the depreciation and amortization period or to the unamortized balance is
warranted. Such evaluation is based principally on the expected utilization of
the long-lived assets and the projected, undiscounted cash flows of the
operations in which the long-lived assets are deployed.
Engineering and Research Expense
Engineering and research expense includes research and development expenses
and routine ongoing costs associated with improving existing products and
manufacturing processes. Research and development expenses, which include
activities for the introduction of new truck and engine products and major
improvements to existing products and processes, totaled $226 million, $207
million and $138 million in 2000, 1999 and 1998, respectively.
31
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Product Related Costs
The company accrues warranty expense at the time of end product sale.
Product liability expense is accrued based on the estimate of total future
payments to settle product liability claims.
Foreign Currency
The financial statements of foreign subsidiaries are translated to U.S.
dollars using the period-end exchange rate for assets and liabilities and a
weighted-average exchange rate for each period for revenues and expenses. The
local currency is the functional currency for the company's foreign subsidiaries
and translation adjustments for these subsidiaries are recorded as a component
of accumulated other comprehensive loss in shareowners' equity. Effective
February 1, 1999, the functional currency of the company's Mexican subsidiaries
changed from the U.S. dollar to the Mexican peso because Mexico's economy is no
longer considered highly inflationary. The effect of this change was not
material. Translation gains and losses arising from fluctuations in currency
exchange rates on transactions denominated in currencies other than the
functional currency are recognized in earnings as incurred, except for those
transactions which hedge purchase commitments and for those intercompany
balances which are designated as long-term investments. Net income included
foreign currency transaction losses of $4 million in 2000 and $10 million in
1999 and a foreign currency transaction gain of $4 million in 1998.
Derivative Financial Instruments
The company uses derivatives to transfer or reduce risks of foreign
exchange and interest rate volatility and to potentially increase the return on
invested funds. Financial services operations may use forward contracts to hedge
future interest payments on the notes and certificates related to an expected
sale of receivables. Financial services operations also use interest rate swaps
to reduce exposure to interest rate changes when they sell fixed rate
receivables on a variable rate basis. For the protection of investors in
Navistar Financial Corporation's (NFC) debt securities, NFC may enter into
interest rate caps when fixed rate receivables are sold on a variable rate
basis. The company also uses derivatives such as forward contracts to reduce its
exposure to foreign exchange volatility.
Derivative financial instruments are generally held for purposes other than
trading. Gains or losses related to hedges of anticipated transactions are
deferred until they are recognized in income when the effects of the anticipated
transactions are recognized in earnings. The principal balance of receivables
expected to be sold by NFC equals or exceeds the notional amount of open forward
contracts. Additionally, the value of committed purchases denominated in
currencies other than the functional currency generally exceeds the notional
amount of related open derivative contracts.
New Accounting Pronouncements
On November 1, 2000, the company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended (SFAS 133). This statement standardizes the accounting
for derivative instruments by requiring that an entity recognize all derivatives
as assets or liabilities in the statement of financial position and measure them
at fair value. When certain criteria are met, it also provides for matching the
timing of gain or loss recognition on the derivative hedging instrument with the
recognition of (a) the changes in the fair value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction.
32
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
1. SUMMARY OF ACCOUNTING POLICIES (continued)
New Accounting Pronouncements (continued)
In November 2000, Navistar recorded an immaterial cumulative transition
adjustment to earnings primarily related to foreign currency derivatives.
Additionally, the company recorded an immaterial cumulative transition
adjustment in other comprehensive income for designated cash flow hedges.
In September 2000, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 140, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities," which the
company must adopt for all applicable transactions occurring after March 31,
2001. The company is currently assessing the impact of this standard on the
company's results of operations, financial condition and cash flows.
2. POSTRETIREMENT BENEFITS
The company provides postretirement benefits to a substantial portion 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 (Trust) are required.
The cost of postretirement benefits is segregated as a separate component
in the Statement of Income and is as follows:
Millions of dollars 2000 1999 1998
- ----------------------------------------------------------
Pension expense ..................... $ 49 $ 77 $ 74
Health/life insurance ............... 73 65 42
Profit sharing provision to Trust ... 24 74 58
---- ---- ----
Total postretirement benefits expense $146 $216 $174
==== ==== ====
Generally, the pension plans are non-contributory. The company's policy is
to fund its pension plans in accordance with applicable U.S. and Canadian
government regulations and to make additional payments as funds are available to
achieve full funding of the accumulated benefit obligation. At October 31, 2000,
all legal funding requirements had been met. In 2001, the company expects to
contribute approximately $33 million to its pension plans to meet legal
requirements.
In 1993, the Retiree Health Benefit Trust was established to provide a
vehicle for funding the health care liability through company contributions and
retiree premiums. The company made a required prefunding contribution of $200
million to this trust during 1998.
33
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
2. POSTRETIREMENT BENEFITS (continued)
Postretirement Benefits Expense
Net periodic benefits expense included in the Statement of Income is
composed of the following:
Pension Benefits Other Benefits
---------------------- ---------------------
Millions of dollars 2000 1999 1998 2000 1999 1998
- ------------------------------------------------------------------------- ---------------------- ---------------------
Service cost for benefits
earned during the period ........................................... $ 29 $ 34 $ 37 $ 15 $ 16 $ 14
Interest on obligation .................................................. 245 229 231 126 107 98
Amortization costs and other ............................................ 76 99 88 13 15 2
Less expected return on assets .......................................... (301) (285) (282) (81) (73) (72)
----- ----- ----- ----- ----- ----
Net postretirement benefits expense ..................................... $ 49 $ 77 $ 74 $ 73 $ 65 $ 42
===== ===== ===== ===== ===== ====
"Amortization costs and other" 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. Also included is the expense
related to yearly lump-sum payments to retirees required by negotiated labor
contracts, expense related to defined contribution plans and amortization of
plan amendments. Plan amendments are recognized over the remaining service life
of employees, except for those plan amendments arising from negotiated labor
contracts, which are amortized over the length of the contract.
34
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
2. POSTRETIREMENT BENEFITS (continued)
Postretirement Benefits Expense (continued)
The funded status of the company's plans as of October 31, 2000 and 1999
and reconciliation with amounts recognized in the Statement of Financial
Condition are provided below.
Pension Benefits Other Benefits
---------------------- ---------------------
Millions of dollars 2000 1999 2000 1999
- --------------------------------------------------------------------------------------------------------------------
Change in benefit obligation
- ----------------------------
Benefit obligation at beginning of year.......... $ 3,245 $ 3,481 $ 1,636 $ 1,560
Service cost..................................... 29 34 15 16
Interest on obligation........................... 245 229 126 107
Amendments and other............................. - 8 - 4
Actuarial net (gain) loss........................ 47 (220) 358 52
Benefits paid.................................... (296) (287) (120) (103)
----- ----- ----- -----
Benefit obligation at end of year................ $ 3,270 $ 3,245 $ 2,015 $ 1,636
----- ----- ----- -----
Change in plan assets
- ---------------------
Fair value of plan assets at beginning of year... $ 3,113 $ 3,032 $ 764 $ 693
Actual return on plan assets..................... 299 348 63 118
Employer contributions........................... 39 12 9 10
Benefits paid.................................... (286) (279) (67) (57)
----- ----- ----- -----
Fair value of plan assets at end of year......... $ 3,165 $ 3,113 $ 769 $ 764
----- ----- ----- -----
Funded status.................................... $ (105) $ (132) $ (1,246) $ (872)
Unrecognized actuarial net loss.................. 316 279 695 331
Unrecognized transition amount................... 59 100 - -
Unrecognized prior service cost.................. 36 56 - -
----- ----- ----- -----
Net amount recognized............................ $ 306 $ 303 $ (551) $ (541)
===== ===== ===== =====
Amounts recognized in the Statement of Financial
Condition consist of:
- ---------------------
Prepaid benefit cost............................. $ 232 $ 148 $ - $ -
Accrued benefit liability - current............. (46) (95) (76) (58)
- noncurrent.......... (185) (151) (475) (483)
Intangible asset................................. 65 126 - -
Accumulated other comprehensive loss............. 240 275 - -
----- ----- ----- -----
Net amount recognized............................ $ 306 $ 303 $ (551) $ (541)
===== ===== ===== =====
35
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
2. POSTRETIREMENT BENEFITS (continued)
Postretirement Benefits Expense (continued)
The accumulated other comprehensive loss included in shareowner' equity is
recorded in the Statement of Financial Condition net of deferred income taxes of
$90 million and $91 million at October 31, 2000 and 1999, respectively.
The restructuring, as described in Note 10, will result in curtailment
losses of approximately $10 million related to the company's pension plans and
$2 million related to the company's postretirement health care plans. These
expenses are recorded as part of "Restructuring and loss on anticipated sale of
business" in the Statement of Income.
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 $1,901 million, $1,900 million and $1,673 million,
respectively, as of October 31, 2000, and $2,057 million, $2,056 million and
$1,814 million, respectively, as of October 31, 1999.
During 1998, the pension plans purchased 3 million shares of the company's
common stock. At October 31, 1998, these shares accounted for approximately 2%
of the plans' assets. During 1999, the pension plans sold all of their shares of
the company's common stock.
The weighted average rate assumptions used in determining expenses and
benefit obligations were:
Pension Benefits Other Benefits
------------------------------- ------------------------------
Millions of dollars 2000 1999 1998 2000 1999 1998
- ---------------------------------------- ---------- ----------- -------- ----------- ---------- -------
Discount rate used to determine
present value of benefit
obligation at end of year............ 8.0% 7.9% 6.8% 8.2% 8.0% 7.1%
Expected long-term rate of return
on plan assets for the year.......... 9.9% 9.7% 9.7% 11.0% 10.8% 10.8%
Expected rate of increase in future
compensation levels.................. 3.5% 3.5% 3.5% N/A N/A N/A
For 2001, the weighted average rate of increase in the per capita cost of
covered health care benefits is projected to be 10.3%. The rate is projected to
decrease to 5.0% by the year 2006 and remain at that level each year thereafter.
The effect of changing the health care cost trend rate by one-percentage point
for each future year is as follows:
One-Percentage One-Percentage
Point Increase Point Decrease
-------------- --------------
Effect on total of service
and interest cost components ............ $ 24 $ (21)
Effect on postretirement
benefit obligation ...................... 247 (211)
36
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
3. INCOME TAXES
The domestic and foreign components of income before income taxes consist
of the following:
Millions of dollars 2000 1999 1998
- --------------------------------------------------------------------------------
Domestic .......................... $ 145 $ 489 $ 403
Foreign ........................... 79 102 7
----- ----- -----
Total income before income taxes .. $ 224 $ 591 $ 410
===== ===== =====
The components of income tax expense consist of the following:
Millions of dollars 2000 1999 1998
- --------------------------------------------------------------------------------
Current:
Federal ....................... $ 4 $ 11 $ 4
State and local ............... 4 4 3
Foreign ....................... 21 25 --
----- ----- -----
Total current expense ................. 29 40 7
----- ----- -----
Deferred:
Federal ....................... 38 154 127
State and local ............... 7 23 19
Foreign ....................... 11 8 3
----- ----- -----
Total deferred expense ................ 56 185 149
----- ----- -----
Less research and development credit .. (20) -- --
Less valuation allowance adjustment .... -- (178) (45)
----- ----- -----
Total income tax expense .............. $ 65 $ 47 $ 111
===== ===== =====
37
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
3. INCOME TAXES (continued)
The deferred tax expense does not represent cash payment of income taxes
and was primarily generated by the utilization of net operating loss (NOL)
carryforwards and the increase of temporary differences, and will not require
future cash payments. Consolidated tax payments made during 2000, 1999 and 1998
were $29 million, $40 million and $7 million, respectively.
The relationship of the tax expense to income before taxes for 2000, 1999
and 1998 differs from the U.S. statutory rate (35%) because of state income
taxes and the benefit of NOL carryforwards in foreign countries. The 2000
effective tax rate reflects a $20 million research and development tax credit.
Also, the 1999 and 1998 effective tax rates reflect a $178 million and $45
million reduction in the deferred tax asset valuation allowance, respectively. A
valuation allowance has been provided for those NOL carryforwards and temporary
differences, which are estimated to expire before they are utilized. The
effective tax rates for 2000, 1999 and 1998 were 29.0%, 8.0% and 27.0%,
respectively.
In the third quarter of 2000, the company completed a study of research and
development activities that occurred over the last several years and recorded
$20 million of research and development tax credits. These credits will be taken
against future income tax payments. During 1999, as a result of continued strong
industry demand, the continued successful implementation of the company's
manufacturing strategies, changes in the company's operating structure, and
other positive operating indicators, management reviewed its projected future
taxable income and evaluated the impact of these changes on its deferred tax
asset valuation allowance. This review resulted in a reduction to the deferred
tax asset valuation allowance of $178 million, which reduced income tax expense
during the third quarter of 1999. In addition, a $45 million reduction in the
valuation allowance was recorded during the fourth quarter of 1998 based on a
similar review.
Undistributed earnings of foreign subsidiaries were $171 million and $126
million at October 31, 2000 and 1999, respectively. Taxes have not been provided
on these earnings because no withholding taxes are applicable upon repatriation
and any U.S. tax would be substantially offset by the utilization of NOL
carryforwards.
38
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
3. INCOME TAXES (continued)
Taxpaying entities of the company offset all deferred tax assets and
liabilities within each tax jurisdiction. The components of the deferred tax
asset (liability) at October 31 are as follows:
Millions of dollars 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
United States
Deferred tax assets:
Net operating loss carryforwards........................................... $ 308 $ 397
Alternative minimum tax and research and development credits............... 60 35
Postretirement benefits.................................................... 266 266
Product liability and warranty............................................. 104 116
Employee incentive programs................................................ 25 77
Restructuring costs........................................................ 81 -
Other liabilities.......................................................... 135 129
----- -----
Total deferred tax assets.................................................. 979 1,020
----- -----
Deferred tax liabilities:
Prepaid pension assets..................................................... (92) (102)
Depreciation............................................................... (16) (22)
----- -----
Total deferred tax liabilities............................................. (108) (124)
----- -----
Total deferred tax assets.................................................. 871 896
Less valuation allowance................................................... (65) (65)
----- -----
Net deferred U.S. tax assets............................................... $ 806 $ 831
----- -----
Foreign
Deferred tax assets:
Net operating loss carryforwards........................................... $ 33 $ 34
Other accrued liabilities.................................................. 44 52
----- -----
Total deferred tax assets.................................................. 77 86
Less valuation allowance................................................... (21) (21)
----- -----
Net deferred foreign tax assets............................................ $ 56 $ 65
----- -----
Total net deferred tax assets.............................................. $ 862 $ 896
----- -----
Deferred foreign tax liabilities:
Prepaid pension assets..................................................... $ (36) $ (45)
Depreciation............................................................... (26) (30)
Other .................................................................. (27) (12)
----- -----
Total deferred foreign tax liabilities..................................... $ (89) $ (87)
----- -----
Amounts recognized in the Statement of Financial Condition:
Deferred tax assets........................................................ $ 862 $ 896
Less current portion.................................................. (198) (229)
----- -----
Long-term deferred tax asset.......................................... $ 664 $ 667
===== =====
Other long-term liabilities................................................ $ (89) $ (87)
===== =====
39
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
3. INCOME TAXES (continued)
At October 31, 2000, the company had $863 million of domestic and $87
million of foreign NOL carryforwards available to offset future taxable income.
Such carryforwards reflect income tax losses incurred which will expire as
follows, in millions of dollars:
2008......................................... $ 710
2009......................................... 20
2011......................................... 179
Indefinite................................... 41
----
Total........................................ $ 950
====
Additionally, the reversal of net temporary differences of $1,318 million
as of October 31, 2000 will create net tax deductions, which, if not utilized
previously, will expire subsequent to 2011.
4. MARKETABLE SECURITIES
The fair value of marketable securities is estimated based on quoted market
prices, when available. If a quoted price is not available, fair value is
estimated using quoted market prices for similar financial instruments.
Information related to the company's marketable securities at October 31 is
as follows:
2000 1999
------------------------------------------------------
Amortized Fair Value Amortized Fair
Millions of dollars Cost Cost Value
- ----------------------------------------------------------------------------------------------------------------------
Corporate securities........................................... $ 101 $ 97 $ 172 $ 170
U.S. government securities..................................... 30 30 82 82
Mortgage and asset-backed securities........................... 46 46 55 54
Foreign government securities.................................. 6 6 5 5
----- ----- ----- -----
Total debt securities..................................... 183 179 314 311
----- ----- ----- -----
Equity securities.............................................. 24 25 22 22
----- ----- ----- -----
Total marketable securities.................................... $ 207 $ 204 $ 336 $ 333
===== ===== ===== =====
Contractual maturities of marketable debt securities at October 31 are as
follows:
2000 1999
------------------------------------------------------
Amortized Fair Value Amortized Fair Value
Millions of dollars Cost Cost
- ----------------------------------------------------------------------------------------------------------------------
Due in one year or less........................................ $ 72 $ 69 $ 116 $ 116
Due after one year through five years ......................... 45 44 126 124
Due after five years through 10 years ......................... 13 13 10 10
Due after 10 years ............................................ 7 7 7 7
----- ----- ----- -----
137 133 259 257
Mortgage and asset-backed securities........................... 46 46 55 54
----- ----- ----- -----
Total debt securities ......................................... $ 183 $ 179 $ 314 $ 311
===== ===== ===== =====
40
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
4. MARKETABLE SECURITIES (continued)
Gross gains and losses realized on sales or maturities of marketable
securities were not material for each of the two years. At October 31, 2000 and
1999, a domestic insurance subsidiary had $11 million of marketable securities,
which were on deposit with various state departments of insurance or otherwise
not available. These securities are included in total marketable securities
balances at October 31, 2000 and 1999.
The total marketable securities balance at October 31, 2000 and 1999
includes $110 million and $102 million of Harco's marketable securities. The
unrealized gain on these securities at October 31, 2000 was included in the net
estimated loss on the planned sale of Harco as further described in Note 10.
5. RECEIVABLES
Receivables at October 31 are summarized by major classification as
follows:
Millions of dollars 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Accounts receivable ......................................................... $ 691 $ 814
Retail notes ................................................................ 1,110 878
Lease financing.............................................................. 291 210
Wholesale notes.............................................................. 146 567
Amounts due from sales of receivables........................................ 317 244
Notes receivable............................................................. - 117
Other........................................................................ 26 24
Allowance for losses......................................................... (39) (36)
------- -------
Total receivables, net.................................................. 2,542 2,818
Less current portion.................................................... (1,075) (1,550)
------- -------
Finance and other receivables, net...................................... $ 1,467 $ 1,268
======= =======
The financial services segment purchases the majority of the wholesale
notes receivable and some retail notes and accounts receivable arising from the
company's operations.
The current portion of finance and other receivables is computed based on
contractual maturities. The actual cash collections may 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. Contractual maturities of accounts receivable, retail notes
and lease financing and wholesale notes, including unearned finance income, at
October 31, 2000 were: 2001 - $1,036 million, 2002 - $447 million, 2003 - $391
million, 2004 - $344 million, 2005 - $182 million and thereafter - $44 million.
Unearned finance income totaled $206 million at October 31, 2000.
A portion of NFC's funding for retail and wholesale notes comes from sales
of receivables by NFC to third parties with limited recourse. NFC's maximum
contractual exposure under all receivable sale recourse provisions at October
31, 2000 was $330 million; however, management believes that the allowance for
credit losses on sold receivables is adequate. Proceeds from sales of retail
notes receivable, net of underwriting costs, were $958 million in 2000, $1,192
million in 1999 and $953 million in 1998. Uncollected sold retail and wholesale
receivable balances totaled $2,693 million and $2,296 million as of October 31,
2000 and 1999, respectively.
41
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
5. RECEIVABLES (continued)
In November 2000, NFC sold $765 million of retail notes, net of unearned
finance income, through Navistar Financial Retail Receivables Corporation
(NFRRC) to an owner trust which, in turn, issued securities which were sold to
investors. A $5 million gain was recognized on this sale.
During 2000, NFC established Truck Engine Receivables Finance Corporation,
a special purpose wholly owned subsidiary of NFC, for the purpose of
securitizing engine accounts receivable. In November 2000, NFC securitized all
of its unsecured trade receivables generated by the sale of diesel engines and
engine service parts from Navistar to Ford Motor Company (Ford). The transaction
provides for funding of $100 million and expires in 2006.
6. INVENTORIES
Inventories at October 31 are as follows:
Millions of dollars 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Finished products............................................................ $ 394 $ 285
Work in process.............................................................. 42 95
Raw materials and supplies................................................... 212 245
------- -------
Total inventories............................................................ $ 648 $ 625
======= =======
7. PROPERTY AND EQUIPMENT
At October 31, property and equipment includes the following:
Millions of dollars 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Land ........................................................................ $ 17 $ 20
Buildings, machinery and equipment at cost:
Plants.................................................................. 1,559 1,627
Distribution............................................................ 101 102
Construction in progress................................................ 578 313
Net investment in operating leases...................................... 311 283
Other .................................................................. 186 253
------- -------
Total property.......................................................... 2,752 2,598
------- -------
Less accumulated depreciation and amortization.......................... (973) (1,123)
------- -------
Total property and equipment, net................................... $ 1,779 $ 1,475
======= =======
42
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
7. PROPERTY AND EQUIPMENT (continued)
Total property includes property under capitalized lease obligations of $21
million and $24 million at October 31, 2000 and 1999, respectively. Future
minimum rentals on net investments in operating leases are: 2001 - $85 million,
2002 - $72 million, 2003 - $58 million, 2004 - $40 million and thereafter - $24
million. 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. Capitalized interest for
2000, 1999 and 1998 was $32 million, $15 million and $12 million, respectively.
8. DEBT
Millions of dollars 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Manufacturing operations
Notes payable and current maturities of long-term debt..................... $ 135 $ 31
------- -------
8% Senior Subordinated Notes, due 2008..................................... 250 250
7% Senior Notes, due 2003.................................................. 100 100
Mexican credit facility.................................................... 75 83
Capitalized leases and other............................................... 12 12
------- -------
Total long-term debt................................................... 437 445
------- -------
Manufacturing operations debt................................................... 572 476
------- -------
Financial services operations
Commercial paper........................................................... 30 35
Current maturities of long-term debt....................................... 133 126
Bank revolvers, variable rates............................................. 184 -
------- -------
Total short-term debt.................................................. 347 161
------- -------
Bank revolvers, variable rates, due through 2005........................... 841 867
Asset-backed commercial paper program, variable rates,
terminated 2000........................................................ - 413
Revolving retail warehouse facility, variable rates, due October 2005...... 500 -
------- -------
Total long-term senior debt............................................ 1,341 1,280
9% Senior Subordinated Notes, due 2002..................................... 100 100
Capitalized leases, 4.1% to 6.7%, due serially through 2007................ 270 250
------- -------
Total long-term debt................................................... 1,711 1,630
------- -------
Financial services operations debt.............................................. 2,058 1,791
------- -------
Total debt...................................................................... $ 2,630 $ 2,267
======= =======
The effective annual interest rate on manufacturing notes payable was 7.8%
in 2000, 7.7% in 1999 and 6.8% in 1998. Consolidated interest payments were $184
million, $144 million and $124 million in 2000, 1999 and 1998, respectively.
43
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
8. DEBT (continued)
The company arranged financing for $125 million and $189 million of funds
denominated in U.S. dollars and Mexican pesos to be used for investment in the
company's Mexican manufacturing and financial services operations, respectively.
As of October 31, 2000, borrowings outstanding under these arrangements were
$282 million, of which 50% is denominated in dollars and 50% in pesos. The
interest rates on the dollar-denominated debt are at a negotiated fixed rate or
a variable rate based either on LIBOR or the Federal Funds Rate. On
peso-denominated debt, the interest rate is based on the Interbank Interest
Equilibrium Rate. The effective interest rate for the combined dollar and peso
denominated debt was 15.3% for 2000 and 18.1% for 1999.
NFC issues commercial paper with varying terms and has short-term
borrowings with various banks on a noncommitted basis. Compensating cash
balances and commitment fees are not required under these borrowings.
The aggregate contractual annual maturities for debt for the years ended
October 31 are as follows:
Financial
Manufacturing Services
Millions of dollars Operations Operations Total
- --------------------------------------------------------------------------------
2001....................... $ 135 $ 1,122 $ 1,257
2002....................... 31 241 272
2003....................... 143 119 262
2004....................... 24 52 76
2005 and thereafter........ 239 524 763
----- ----- -----
Total................. $ 572 $ 2,058 $ 2,630
===== ===== =====
Subsequent to October 31, 2000, NFC renegotiated its revolving credit
agreement. The new agreement provides for aggregate borrowings of $820 million
and will mature in November 2005. Under the new revolving credit agreement,
Navistar's three Mexican finance subsidiaries will be permitted to borrow up to
$100 million in the aggregate, which will be guaranteed by NFC. The Statement of
Financial Position reflects $775 million of Navistar's bank revolvers due March
2001 as long-term debt at October 31, 2000, since Navistar has refinanced $775
million of its revolving credit agreement on a long-term basis.
Weighted average interest rate on total debt, including short-term, and the
effect of discounts and related amortization for the years ended:
October 31, 2000............ 9.3% 6.4% 7.5%
October 31, 1999............ 10.1% 5.6% 6.6%
On October 16, 2000 Truck Retail Instalment Paper Company (TRIP), a special
purpose wholly owned subsidiary of NFC, terminated the previously existing $400
million Asset-Backed Commercial Paper facility and issued $475 million of a
senior class AAA rated and $25 million of a subordinated class A rated floating
rate asset-backed notes. The proceeds were used to purchase eligible receivables
from NFC and establish a revolving retail warehouse facility for NFC's retail
notes and retail leases, other than fair market value leases.
At October 31, 2000, NFC had a $925 million contractually committed bank
revolving credit facility and the $500 million revolving retail warehouse
facility program. Under the terms of the revolving retail warehouse facility
program TRIP purchases eligible receivables from NFC using funds it has received
from the sale of $475 million of AAA rated notes and $25 million of A rated
notes.
44
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
8. DEBT (continued)
Available funding under the bank revolving credit facility and the
revolving retail warehouse facility was $30 million. When combined with
unrestricted cash and cash equivalents, $72 million was available to fund the
general business purposes of NFC at October 31, 2000.
NFC's wholly owned subsidiaries, Navistar Financial Securities Corporation
(NFSC), NFRRC and Truck Retail Accounts Corporation (TRAC), have a limited
purpose of purchasing retail, wholesale and account receivables, respectively,
and transferring an undivided ownership interest in such receivables to
investors. The subsidiaries have limited recourse on the sold receivables and
their assets are available to satisfy the claims of their creditors prior to
such assets becoming available to NFC or affiliated companies.
NFSC has in place a revolving wholesale note trust that provides for the
funding of $883 million of eligible wholesale notes. At October 31, 2000 the
revolving wholesale note trust was comprised of three $200 million tranches of
investor certificates maturing in 2003, 2004 and 2008, a $212 million tranche of
investor certificates maturing in 2005 and $125 million of variable funding
certificates maturing in 2001.
During fiscal 2000, in two separate sales, NFC sold a total of $1,008
million of retail notes, net of unearned finance income, through NFRRC. The
aggregate net gain recognized on the sale of these notes was $3 million. The
aggregate shelf registration available to NFRRC for issuance of asset-backed
securities is $1,783 million.
NFC has entered into various sale-leaseback agreements involving vehicles
subject to retail finance and operating leases with end users. The outstanding
balances are classified under financial services operations as capital lease
obligations. These agreements grant the purchasers a security interest in the
underlying end user leases.
9. OTHER LIABILITIES
Major classifications of other liabilities at October 31 are as follows:
Millions of dollars 2000 1999
- ------------------------------------------------------------------------------------------------------------------
Product liability and warranty............................................. $ 321 $ 319
Employee incentive programs................................................ 69 212
Payroll, commissions and employee-related benefits......................... 93 103
Postretirement benefits liability.......................................... 122 153
Loss reserves and unearned premiums........................................ 125 102
Taxes...................................................................... 132 163
Sales and marketing........................................................ 53 56
Long-term disability and workers' compensation............................. 43 48
Environmental.............................................................. 14 22
Interest................................................................... 22 16
Restructuring reserve...................................................... 173 -
Other...................................................................... 78 143
------- -------
Total other liabilities............................................... 1,245 1,337
Less current portion.............................................. (831) (911)
------- -------
Other long-term liabilities....................................... $ 414 $ 426
======= =======
45
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
10. RESTRUCTURING CHARGE
In October 2000, the company incurred charges for restructuring, asset
write-downs, loss on anticipated sale of business, and other exit costs totaling
$306 million as part of an overall plan to restructure its manufacturing and
corporate operations ("Plan of Restructuring"). The following are the major
restructuring, integration and cost reduction initiatives included in the Plan
of Restructuring:
o Replacement of current steel cab trucks with a new line of high performance
next generation vehicles (NGV) and a concurrent realignment of the
company's truck manufacturing facilities
o Closure of certain operations and exit of certain activities
o Launch of the next generation technology diesel engines
o Consolidation of corporate operations
o Realignment of the bus and truck dealership network and termination of
various dealership contracts
Of the pretax restructuring charge totaling $306 million, $124 million
represents non-cash charges. Approximately $8 million was spent in 2000 and the
remaining $174 million is expected to be spent as follows: 2001 - $66 million,
2002 - $42 million and 2003 and beyond - $66 million. The total cash outlay is
expected to be funded from existing cash balances and internally generated cash
flows from operations. The specific actions included in the Plan of
Restructuring are expected to be substantially complete by November 2001.
Components of the restructuring charge are as follows:
Total Charges Amount Balance
(Millions of dollars) Incurred October 31, 2000
- --------------------------------------------- ---------------- --------------- ----------------------
Severance and other benefits $ 104 $ (7) $ 97
Inventory write-downs 20 (20) -
Other asset write-downs and losses 93 (93) -
Lease terminations 33 - 33
Loss on anticipated sale of business 17 - 17
Dealer termination and exit costs 39 (1) 38
------- ------- -------
Total $ 306 $ (121) $ 185
======= ======= =======
The severance and other benefits costs, asset write-downs and losses, lease
terminations, loss on anticipated sale of business, dealer termination and exit
costs, totaling $286 million, are presented as "Restructuring and loss on
anticipated sale of business" in the Statement of Income. Inventory write-down
costs of $20 million are included in "Cost of products sold related to
restructuring" in the Statement of Income.
46
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
10. RESTRUCTURING CHARGE (continued)
A description of the significant components of the restructuring charge is
as follows:
Pursuant to the Plan of Restructuring, 3,100 positions will be
eliminated throughout the company. Severance and other benefit costs
relate to the reduction of approximately 2,100 employees from the
workforce, primarily in North America. Of the total workforce
reductions, approximately 2,000 will be in International's Truck
Group, of which approximately 1,600 are production-related employees,
with the remainder impacting the Engine, Corporate and Financial
Services Groups. As of October 31, 2000, approximately $7 million had
been paid for a portion of the severance and other benefits for nearly
500 terminated employees. The remaining reduction of approximately
1,600 employees will be substantially completed by late 2001 when the
majority of the NGV products will be in production. The reduction is
primarily caused by a reduction in the required workforce to assemble
the new medium trucks, a lowering of anticipated industry demand for
certain products and the movement of products between manufacturing
facilities. Benefit costs will extend beyond the completion of the
workforce reductions due to the company's contractual severance
obligations. Additionally, the severance and other benefits component
includes a $12 million non-cash curtailment loss related to the
company's postretirement benefit plans.
In 1997, International announced the extension of its engine contract
for V-8 engines with Ford until 2012. This contract extension included
the development of new engines that provide better performance and
meet stricter emissions requirements. As part of the Plan of
Restructuring, the company finalized its plan for this new engine. The
plan requires that certain existing production assets be either
replaced or disposed. Accordingly, International entered into
sale-leaseback transactions in October 2000 for certain of these
affected production assets, which resulted in the recognition of a $55
million charge for the excess of the carrying amount over the fair
value of these assets. In addition, a charge of $19 million was
recorded for the impairment of other engine production assets held for
disposal and $9 million was recognized for the write-down of engine
service inventory that will be replaced. International's preparation
for the launch of NGV, a new line of high performance steel cab
trucks, which begins in March 2001 resulted in the write-off of $11
million of excess truck parts and service inventory related to prior
vehicle models. The remainder of the asset write-downs and losses
primarily relate to assets that were disposed of or abandoned as a
direct result of the workforce reductions.
Lease termination costs include the future obligations under long-term
non-cancelable lease agreements at facilities being vacated following
the workforce reductions. This charge primarily consists of the
estimated lease costs, net of probable sublease income, associated
with the cancelation of the company's corporate office lease at NBC
Tower in Chicago, Illinois, which expires in 2010.
As part of the Plan of Restructuring, management evaluated the
strategic importance of certain of its operations. On November 30,
2000, NFC's board of directors approved NFC management's plan to sell
Harco within the next fiscal year. The effect of the anticipated sale
of Harco is reflected as a discontinued operation in NFC's stand-alone
financial statements because Harco represents a major line of business
and a reportable operating segment of NFC. However, because Harco is
not a major line of business nor a separate operating segment of
Navistar, the planned sale of Harco does not qualify for discontinued
operations presentation in accordance with APB Opinion No. 30 and
accordingly, the anticipated loss on disposal is included as a
component of the restructuring charge. Additionally, due to the
anticipated sale of Harco within the next fiscal year, all of Harco's
assets and liabilities at October 31, 2000 have been classified as
current within the Statement of Financial Position. Harco's revenues
and pretax income, respectively, were $56 million and $1 million in
2000, $44 million and $5 million in 1999, and $42 million and $6
million in 1998. Total assets, primarily marketable securities, and
total liabilities, primarily loss reserves, were $155 million and $94
million, respectively, as of October 31, 2000 and $142 million and $81
million, respectively, as of October 31, 1999.
47
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
10. RESTRUCTURING CHARGE (continued)
Dealer termination and exit costs of $39 million principally include
$17 million of settlement costs related to the termination of certain
dealer contracts in connection with the realignment of the company's
bus distribution network, and other litigation and exit costs to
implement the restructuring initiatives.
11. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts of financial instruments, as reported in the Statement
of Financial Condition and described in various Notes to the Financial
Statements, and their fair values at October 31 are as follows:
2000 1999
------------------------------------------------------
Carrying Fair Value Carrying Fair Value
Millions of dollars Amount Amount
- ----------------------------------------------------------------------------------------------------------------------
Total receivables, net......................................... $ 2,542 $ 2,523 $ 2,818 $ 2,824
Long-term investments and other assets......................... 234 232 207 206
Total debt..................................................... 2,630 2,611 2,267 2,256
Cash and cash equivalents approximate fair value. The cost and fair value
of marketable securities are disclosed in Note 4.
The fair value of notes receivable and retail notes is estimated by
discounting expected cash flows at estimated current market rates. Customer
receivables, wholesale notes and retail and wholesale accounts approximate fair
value as a result of the short-term nature of the receivables.
The fair value of investments and other assets is estimated based on quoted
market prices or by discounting future cash flows.
The short-term debt and variable-rate borrowings under NFC's bank revolving
credit agreement, which are repriced frequently, approximate fair value. The
fair value of long-term debt is estimated based on quoted market prices, where
available. If a quoted market price is not available, fair value is estimated
using quoted market prices for similar financial instruments or discounting
future cash flows.
Derivatives Held or Issued for Purposes Other Than Trading
The company uses derivatives to transfer or reduce risks of foreign
exchange and interest rate volatility, and to potentially increase the return on
invested funds.
The company periodically enters into forward contracts in order to reduce
exposure to exchange rate risk related to purchases denominated in currencies
other than the functional currency.
48
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
11. FINANCIAL INSTRUMENTS (continued)
Derivatives Held or Issued for Purposes Other Than Trading (continued)
The financial services operations manage exposures 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 interest rate swaps, interest rate caps and forward
contracts. The fair value of these instruments is estimated based on quoted
market prices and is subject to market risk as the instruments may become less
valuable due to changes in market conditions or interest rates. NFC 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. NFC's credit exposure is limited to
the fair value of contracts with a positive fair value at the reporting date.
Notional amounts are used to measure the volume of derivative financial
instruments and do not represent exposure to credit loss.
The financial services operations enter into derivative financial
instruments to manage its exposure to fluctuations in the fair value of retail
notes expected to be sold. The financial services operations manage 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 its
receivables. Income recognition of changes in fair value of the derivatives is
deferred until the derivative instruments are closed. Gains or losses incurred
with the closing of these agreements are included as a component of the gain or
loss on sale of receivables.
In November 1998, NFC sold $545 million of fixed rate retail receivables to
a multi-seller asset-backed commercial paper conduit sponsored by a major
financial institution on a variable rate basis. For the protection of investors
in these securities, NFC issued an interest rate cap. The notional amount of the
cap amortizes based on the expected outstanding principal balance of the sold
retail receivables. Under the terms of the cap agreement, NFC will make payments
if interest rates exceed certain levels. As of October 31, 2000, the interest
rate cap had a notional amount of $224 million and is recorded at fair value
with changes in fair value recognized in income. For the year ended October 31,
2000, the impact on income was not material.
In November 1999, NFC sold $533 million of fixed rate retail receivables on
a variable rate basis and entered into an amortizing interest rate swap
agreement to fix the future cash flows of interest paid to lenders. In March
2000, NFC transferred all of the rights and obligations of the swap to the bank
conduit. The notional amount of the amortizing swap is based on the expected
outstanding principal balance of the sold retail receivables. Under the terms of
the agreement, NFC will make or receive payments based on the difference between
the transferred swap notional amount and the outstanding principal balance of
the sold retail receivables. As of October 31, 2000 the difference between the
amortizing swap notional amount and the net outstanding principal balance of the
sold retail receivables was $11 million.
In October 2000, NFC entered into a $500 million revolving retail facility
as a method to fund retail notes and finance leases prior to the sale of
receivables. Under the terms of this facility, NFC sells fixed rate retail notes
or finance leases to the conduit and pays investors a floating rate of interest.
As required by the rating agencies, NFC purchased an interest rate cap to
protect investors in these securities against rising interest rates. To offset
the economic cost of this cap, NFC sold an identical interest rate cap. As of
October 31, 2000 the interest rate caps each had a notional amount of $500
million and a net fair value of zero.
49
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
11. FINANCIAL INSTRUMENTS (continued)
Derivatives Held or Issued for Purposes Other Than Trading (continued)
At October 31, 2000, the company held German mark forward contracts with
notional amounts of $35 million and other derivative contracts with notional
amounts of $38 million. At October 31, 2000 the unrealized net loss on these
contracts was not material.
Discussion of Navistar's adoption of SFAS 133 is disclosed in Note 1.
12. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS
AND LEASES
Commitments, Contingencies and Restricted Assets
At October 31, 2000, commitments for capital expenditures in progress were
approximately $268 million. The company's truck assembly facility located in
Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the
company as collateral for the $125 million revolving Mexican credit facility. At
October 31, 2000, $23 million of a Mexican subsidiary's receivables were pledged
as collateral for bank borrowings. In addition, as of October 31, 2000, the
company is contingently liable for approximately $169 million for various
purchasing commitments, credit guarantees and buyback programs. Based on
historical loss trends, the company's exposure is not considered material.
Additionally, restrictions under the terms on the senior and senior subordinated
notes and Mexican credit facility include a limitation on indebtedness and a
limitation on certain restricted payments.
At October 31, 2000, the Canadian operating subsidiary was contingently
liable for retail customers' contracts and leases financed by a third party. The
Canadian operating subsidiary is subject to maximum recourse of $312 million on
retail contracts and $33 million on retail leases. The Canadian operating
subsidiary, NFC and certain other subsidiaries included in financial services
operations are parties to agreements that may result in the restriction of
amounts which can be distributed to International in the form of dividends or
loans and advances. At October 31, 2000, the maximum amount of dividends that
were available for distribution under the most restrictive covenants was $248
million.
The company and International are obligated under certain agreements with
public and private lenders of NFC to maintain the subsidiary's income before
interest expense and income taxes at not less than 125% of its total interest
expense. No income maintenance payments were required for any of the three years
ended October 31, 2000.
Concentrations
At October 31, 2000, the company employed 9,900 hourly workers and 6,300
salaried workers in the U.S. and Canada. Approximately 97% of the hourly
employees and 21% of the salaried employees are represented by unions. Of these
represented employees, 80% of the hourly workers and 95% of the salaried workers
are represented by the United Automobile, Aerospace, and Agricultural Implement
Workers of America (UAW) or the National Automobile, Aerospace, and Agricultural
Implement Workers of Canada (CAW). The company's current master contract with
the UAW expires on October 1, 2002. The collective bargaining agreement with the
CAW expires on June 1, 2002.
50
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
12. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS
AND LEASES (continued)
Concentrations (continued)
Reflecting higher consumer demand for light trucks and vans, sales of
mid-range diesel engines to Ford by the engine segment were 18% of consolidated
sales and revenues in 2000, 17% in 1999 and 14% in 1998. During 1997, Navistar
entered into a 10-year agreement, effective with model year 2003, to supply Ford
with a successor engine to the current 7.3 liter product for use in its
diesel-powered super duty trucks and vans (over 8,500 lbs. GVW). In fiscal 2000,
the company finalized an agreement with Ford to supply diesel engines for
certain under 8,500 lbs. GVW light duty trucks and sport utility vehicles. This
contract extends through 2012.
The company has long-term non-cancelable leases for use of various
equipment and facilities. Lease terms are generally for five to 25 years and, in
many cases, provide for renewal options. The company is generally obligated for
the cost of property taxes, insurance and maintenance. The company leases office
buildings, distribution centers, furniture and equipment, machinery and
equipment, and computer equipment.
The majority of the company's lease payments are for operating leases. At
October 31, 2000, future minimum lease payments under operating leases having
lease terms in excess of one year, including the net lease payments accrued for
in the restructuring reserve, are: 2001 - $53 million, 2002 - $40 million, 2003
- - $33 million, 2004 - $26 million, 2005 - $26 million and thereafter - $96
million. Total operating lease expense was $33 million in 2000, $30 million in
1999 and $36 million in 1998. Income received from sublease rentals was $6
million in 2000 and $7 million in 1999 and 1998.
13. LEGAL PROCEEDINGS AND ENVIRONMENTAL MATTERS
The company and its subsidiaries are subject to various claims arising in
the ordinary course of business, and are parties to various legal proceedings
that constitute ordinary routine litigation incidental to the business of the
company and its subsidiaries. In the opinion of the company's management, none
of these proceedings or claims is material to the business or the financial
condition of the company.
The company has been named a potentially responsible party (PRP), in
conjunction with other parties, in a number of cases arising under an
environmental protection law, the Comprehensive Environmental Response,
Compensation, and Liability Act, popularly known as the Superfund law. These
cases involve sites which allegedly have received wastes from current or former
company locations. Based on information available to the company, which, in most
cases, consists of data related to quantities and characteristics of material
generated at or shipped to each site as well as cost estimates from PRPs and/or
federal or state regulatory agencies for the cleanup of these sites, a
reasonable estimate is calculated of the company's share, if any, of the
probable costs and is provided for in the financial statements. These
obligations are generally recognized no later than completion of the remedial
feasibility study and are not discounted to their present value. The company
reviews its accruals on a regular basis and believes that, based on these
calculations, its share of the potential additional costs for the cleanup of
each site will not have a material effect on the company's financial results.
51
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
14. SEGMENT DATA
Navistar has three reportable segments: truck, engine and financial
services. The company's reportable segments are organized according to the
products and the markets they each serve.
The company's truck segment manufactures and distributes a full line of
diesel-powered trucks and school buses in the common carrier, private carrier,
government/service, leasing, construction, energy/petroleum and student
transportation markets. The truck segment also provides customers with
proprietary products needed to support the International(R) truck and bus lines,
together with a wide selection of standard truck and trailer aftermarket parts.
The company's engine segment designs and manufactures diesel engines for
use in the company's Class 5, 6 and 7 medium trucks and school buses and
selected Class 8 heavy truck models, and for sale to OEMs in the U.S. and
Mexico. This segment also sells engines for industrial, agricultural and marine
applications. In addition, the engine segment provides customers with
proprietary products needed to support the International(R) engine lines,
together with a wide selection of standard engine and aftermarket parts.
The company's financial services segment consists of NFC, its domestic
insurance subsidiary and the company's foreign finance and insurance
subsidiaries. NFC's primary business is the retail, wholesale and lease
financing of products sold by the truck segment and its dealers within the U.S.
as well as the company's wholesale accounts and selected retail accounts
receivable. NFC's insurance subsidiary provides commercial physical damage and
liability insurance to the truck segment's dealers and retail customers and to
the general public through an independent insurance agency system. The foreign
finance subsidiaries' primary business is to provide wholesale, retail and lease
financing to the Mexican operations' dealers and retail customers.
The company evaluates the performance of its operating segments based on
operating profits, which exclude certain corporate items, non-recurring charges,
including the restructuring charge, and retiree pension and medical expense.
Additionally, the operating profits of the company's truck and engine segments
exclude most interest revenue and expense items. Intersegment sales are
transferred at prices established by an agreement between the buying and selling
locations.
52
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
14. SEGMENT DATA (continued)
Reportable operating segment data follows:
Financial
Millions of dollars Truck Engine Services Total
- ----------------------------------------------- ---------------- ------------------ ---------------- -----------------
For the year ended October 31, 2000
----------------------------------------------------------------------
External revenues............................. $ 6,365 $ 1,754 $ 299 $ 8,418
Intersegment revenues......................... - 676 88 764
------- ------- ------- -------
Total revenues........................... $ 6,365 $ 2,430 $ 387 $ 9,182
======= ======= ======= =======
Interest expense.............................. $ - $ - $ 129 $ 129
Depreciation.................................. 74 53 59 186
Segment profit (a)............................ 179 331 98 608
As of October 31, 2000
----------------------------------------------------------------------
Segment assets................................ $ 1,939 $ 1,066 $ 2,900 $ 5,905
Capital expenditures (b)...................... 200 337 91 628
For the year ended October 31, 1999
----------------------------------------------------------------------
External revenues............................. $ 6,628 $ 1,698 $ 273 $ 8,599
Intersegment revenues......................... - 681 71 752
------- ------- ------- -------
Total revenues........................... $ 6,628 $ 2,379 $ 344 $ 9,351
======= ======= ======= =======
Interest expense.............................. $ - $ - $ 103 $ 103
Depreciation.................................. 62 59 48 169
Segment profit................................ 295 294 102 691
As of October 31, 1999
----------------------------------------------------------------------
Segment assets................................ $ 1,852 $ 814 $ 3,009 $ 5,675
Capital expenditures (b)...................... 199 213 110 522
For the year ended October 31, 1998
----------------------------------------------------------------------
External revenues............................. $ 6,276 $ 1,353 $ 219 $ 7,848
Intersegment revenues......................... - 606 67 673
------- ------- ------- -------
Total revenues........................... $ 6,276 $ 1,959 $ 286 $ 8,521
======= ======= ======= =======
Interest expense.............................. $ - $ - $ 82 $ 82
Depreciation.................................. 54 63 35 152
Segment profit................................ 246 186 74 506
As of October 31, 1998
----------------------------------------------------------------------
Segment assets................................ $ 1,379 $ 584 $ 2,310 $ 4,273
Capital expenditures (b)...................... 184 107 127 418
(a) Before the impact of the restructuring charge.
(b) Capital expenditures include the net increase in property and equipment
leased to others.
53
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
14. SEGMENT DATA (continued)
Reconciliation to the consolidated financial statements as of and for the
years ended October 31 was as follows:
Millions of dollars 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Segment sales and revenues...................... $ 9,182 $ 9,351 $ 8,521
Other income.................................... 33 43 37
Intercompany.................................... (764) (752) (673)
------- ------- -------
Consolidated sales and revenues................. $ 8,451 $ 8,642 $ 7,885
======= ======= =======
Segment profit.................................. $ 608 $ 691 $ 506
Restructuring charge............................ (306) - -
Corporate items................................. (89) (103) (118)
Manufacturing net interest income............... 11 3 22
------- ------- -------
Consolidated pretax income...................... $ 224 $ 591 $ 410
======= ======= =======
Segment interest expense........................ $ 129 $ 103 $ 82
Manufacturing expense and eliminations.......... 17 32 23
------- ------- -------
Consolidated interest expense................... $ 146 $ 135 $ 105
======= ======= =======
Segment depreciation
and amortization expense................... $ 186 $ 169 $ 152
Corporate expense............................... 13 5 7
------- ------- -------
Consolidated depreciation
and amortization expense................... $ 199 $ 174 $ 159
======= ======= =======
Segment assets.................................. $ 5,905 $ 5,675 $ 4,273
Cash and marketable securities.................. 167 327 869
Deferred taxes.................................. 862 896 912
Corporate intangible pension assets............. 50 92 124
Other corporate and eliminations................ (39) (62) 11
------- ------- -------
Consolidated assets............................. $ 6,945 $ 6,928 $ 6,189
======= ======= =======
Segment capital expenditures (a)................ $ 628 $ 522 $ 418
Corporate capital expenditures.................. 15 13 9
------- ------- -------
Consolidated capital expenditures............... $ 643 $ 535 $ 427
======= ======= =======
(a) Capital expenditures include the net increase in property and equipment
leased to others.
Information concerning principal geographic areas as of and for the years
ended October 31 was as follows:
Millions of dollars 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------
Revenues
United States...................... $ 7,482 $ 7,695 $ 7,065
Foreign countries.................. 969 947 820
Property and equipment
United States...................... $ 1,486 $ 1,188 $ 885
Foreign countries.................. 293 287 221
54
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
15. PREFERRED AND PREFERENCE STOCKS
The UAW holds the Nonconvertible Junior Preference Stock Series B and is
currently entitled to elect one member of the company's board of directors. At
October 31, 2000, there was one share of Series B Preference stock authorized
and outstanding. The value of the preference share is minimal.
On April 20, 1999, the company's board of directors adopted a shareholder
rights plan (Rights Plan) and declared a rights dividend of one preferred share
purchase right (Right) for each outstanding share of common stock (Common
Shares) of the company to shareowners of record as of the close of business on
May 3, 1999. Subject to the terms of the Rights Plan, each Right entitles the
registered holder to purchase from the company one one-thousandth of a share of
Series A Junior Participating Preferred Stock of the company (Preferred Shares)
at a price of $175 per one one-thousandth of a Preferred Share, subject to
adjustment. The Rights are exercisable only if a person or group (Acquiring
Person) acquires 15% or more of the outstanding Common Shares and commences a
tender offer for 15% or more of the outstanding Common Shares. Upon any such
occurrence, each Right will entitle its holder (other than the Acquiring Person
and certain related parties) to purchase, at the Right's then current exercise
price, a number of Common Shares having a market value of two times such price.
Similarly, in the event the company is acquired in a merger or other business
combination and is not the surviving corporation, each Right (other than Rights
owned by the Acquiring Person and certain related parties) shall thereafter be
exercisable for a number of shares of common stock of the acquiring company
having a market value of two times the exercise price of the Right. Subject to
certain conditions, the Rights are redeemable by the company's board of
directors for $0.01 per Right and are exchangeable for Common Shares. The Rights
have no voting power and initially expire on May 3, 2009.
During 1998, the company redeemed all 4.8 million shares of its $6.00
Series G Convertible Cumulative Preferred Stock at a redemption price of $50 per
share plus accrued dividends. At October 31, 2000, there were 162,000 shares of
Series D Convertible Junior Preference Stock (Series D) outstanding and 3
million authorized and issued with an optional redemption price and liquidation
preference of $25 per share plus accrued dividends. The Series D converts into
common stock (subject to adjustment in certain circumstances) at .3125 per
share. The Series D ranks senior to common stock as to dividends and liquidation
and receives dividends at a rate of 120% of the cash dividends on common stock
as declared on an as-converted basis.
Under the General Corporation Law of the State of Delaware (DGCL),
dividends may only be paid out of surplus or out of net profits for the fiscal
year in which the dividend is declared or the preceding fiscal year, and no
dividend may be paid on common stock at any time during which the capital of
outstanding preferred stock or preference stock exceeds the net assets of the
company. At October 31, 2000, the company had a surplus of $1,306 million as
defined under DGCL.
55
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
16. COMMON SHAREOWNERS' EQUITY
Changes in certain shareowners' equity accounts are as follows:
Millions of dollars 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Common Stock
Beginning of year.............................................. $ 2,139 $ 2,139 $ 1,659
Conversion of Class B common stock and other................... - - 480
------- ------- -------
End of year ................................................. $ 2,139 $ 2,139 $ 2,139
======= ======= =======
Class B Common Stock
Beginning of year.............................................. $ - $ - $ 471
Conversion/repurchase of stock................................. - - (471)
------- ------- -------
End of year ................................................. $ - $ - $ -
======= ======= =======
Retained Earnings (Deficit)
Beginning of year.............................................. $ (297) $ (829) $ (1,109)
Net income ................................................. 159 544 299
Preferred dividends............................................ - - (11)
Other ........................................................ (5) (12) (8)
------- ------- -------
End of year ................................................. $ (143) $ (297) $ (829)
======= ======= =======
Common Stock Held in Treasury
Beginning of year.............................................. $ (358) $ (214) $ (53)
Repurchase of common stock and other........................... (151) (144) (189)
Reissuance of treasury shares.................................. - - 28
------- ------- -------
End of year ................................................. $ (509) $ (358) $ (214)
======= ======= =======
Common Stock
The company has authorized 110 million shares of common stock with a par
value of $0.10 per share. At October 31, 2000 and 1999, there were 59.4 million
and 63.2 million shares of common stock outstanding, net of common stock held in
treasury, respectively.
In January 1998, the company repurchased 3.2 million shares of the Class B
common stock that was outstanding. During June 1998, a secondary public offering
of the common stock of the company was completed, in which the Navistar
International Transportation Corp. Retiree Supplemental Benefit Trust (Trust)
sold approximately 19.9 million shares of common stock at an offering price of
$26.50 per share. These shares represented the Class B common stock held by the
Trust which automatically converted into common stock upon the sale. In
conjunction with this offering, the company purchased 2 million of the shares
being offered. The company did not receive any proceeds from the sale of the
shares in the offering. In addition, the underwriters exercised their
over-allotment option and elected to purchase 1.1 million shares from the
company at $26.50 per share. The company offset the dilution through open market
purchases.
56
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
16. COMMON SHAREOWNERS' EQUITY (continued)
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss as of October 31 are
as follows (in millions of dollars):
Foreign
Minimum Currency Accumulated
Pension Translation Other
Liability Adjustments Comprehensive
Adjustments and Other Loss
----------------------------------------------------------------------------
2000 .............................. $ (150) $ (27) $ (177)
1999 .............................. (184) (13) (197)
1998 .............................. (336) 5 (331)
In the Statement of Comprehensive Income, the tax effects of foreign
currency translation adjustments and other were not material for each of the
years in the three year period ended October 31, 2000.
17. EARNINGS PER SHARE
Earnings per share was computed as follows:
Millions of dollars, except share and per share data 2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
Net income...................................................... $ 159 $ 544 $ 299
Less dividends on Series G preferred stock...................... - - 11
----- ----- -----
Net income applicable to common stock (Basic and Diluted) $ 159 $ 544 $ 288
===== ===== =====
Average shares outstanding (millions)
Basic...................................................... 60.7 65.2 69.1
Dilutive effect of options outstanding
and other dilutive securities.......................... 0.8 1.2 0.9
----- ----- -----
Diluted.................................................... 61.5 66.4 70.0
===== ===== =====
Earnings per share
Basic...................................................... $ 2.62 $ 8.34 $ 4.16
Diluted.................................................... 2.58 8.20 4.11
Unexercised employee stock options to purchase 1.1 million, .2 million and
.5 million shares of Navistar common stock during the years ended October 31,
2000, 1999 and 1998, respectively, were not included in the computation of
diluted shares outstanding because the exercise prices were greater than the
average market prices of Navistar common stock. Additionally, the diluted
calculation for 1998 excludes the effects of the conversion of the Series G
preferred stock as such conversion would have been anti-dilutive.
57
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
18. STOCK COMPENSATION PLANS
The company has stock-based compensation plans, approved by the Committee
on Compensation and Governance of the board of directors, which provide for
granting of stock options to employees for purchase of common stock at the fair
market value of the stock on the date of grant. The grants generally have a
10-year contractual life.
The company has elected to continue to account for stock option grants to
employees and directors in accordance with Accounting Principles Board Opinion
No. 25 and related interpretations. Accordingly, no compensation cost has been
recognized for fixed stock options because the exercise prices of the stock
options equal the market value of the company's common stock at the date of
grant. Had compensation cost for the plans been determined based upon the fair
value at the grant date consistent with Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation," pro forma net
income would have been $152 million in 2000, $542 million in 1999 and $297
million in 1998; pro forma diluted earnings per share would have been $2.47 in
2000, $8.16 in 1999 and $4.09 in 1998; and pro forma basic earnings per share
would have been $2.51 in 2000, $8.30 in 1999 and $4.14 in 1998.
The weighted-average fair values at date of grant for options granted
during 2000, 1999 and 1998 were $14.50, $8.15 and $7.53, respectively, and were
estimated using the Black-Scholes option-pricing model with the following
assumptions: 2000 1999 1998
Risk-free interest rate ........................ 6.1% 4.5% 5.7%
Dividend yield ................................. 0.0% 0.0% 0.0%
Expected volatility ............................ 36.9% 35.1% 31.9%
Expected life in years.......................... 4.0 4.0 3.5
The following summarizes stock option activity for the years ended October
31:
2000 1999 1998
---------------------------- ----------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares in thousands Shares Price Shares Price Shares Price
------------ -------------- ------------ --------------- ------------- -------------
Options outstanding
at beginning of year..... 3,102 $ 23.30 2,538 $ 20.29 2,430 $ 18.73
Granted...................... 1,470 39.67 1,271 27.16 809 23.93
Exercised.................... (624) 16.72 (563) 17.78 (592) 14.23
Canceled..................... (134) 37.25 (144) 25.82 (109) 45.45
----- ----- ----- ----- ----- -----
Options outstanding
at year-end.............. 3,814 $ 30.20 3,102 $ 23.30 2,538 $ 20.29
===== ===== ===== ===== ===== =====
Options exercisable
at year-end............... 1,445 $ 23.36 1,468 $ 19.94 1,765 $ 18.73
===== ===== ===== ===== ===== =====
Options available for
grant at year-end......... 856 1,564 443
===== ===== =====
58
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2000
18. STOCK COMPENSATION PLANS (continued)
The following table summarizes information about stock options outstanding
and exercisable at October 31, 2000.
Outstanding Options Options Exercisable
- ------------------------------------------------------------------------------------ -----------------------------------------
Weighted
Number Average Weighted Number Weighted
Range of Outstanding Remaining Average Exercisable Average
Exercise Prices (in thousands) Contractual Life Exercise Price (in thousands) Exercise Price
--------------- -------------- ---------------- -------------- -------------- --------------
$ 9.56 - $ 13.75 384 6.1 $ 11.30 384 $ 11.30
17.41 - 26.66 1,740 8.2 24.86 858 24.41
27.97 - 37.72 359 9.1 34.65 98 34.53
38.19 - 53.69 1,331 9.6 41.44 105 48.70
19. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
--------------------- -------------------- ------------------ -------------------
Millions of dollars,
except per share data 2000 1999 2000 1999 2000 1999 2000 1999
- ------------------------------------------------------------ -------------------- ------------------ --------------------
Sales and revenues................. $ 2,166 $1,924 $ 2,388 $ 2,287 $ 1,924 $ 1,874 $ 1,973 $ 2,557
Manufacturing gross margin......... 16.6% 16.5% 18.0% 17.9% 17.5% 18.3% 14.8% 19.1%
Manufacturing gross margin
excluding restructuring charge 16.6% 16.5% 18.0% 17.9% 17.5% 18.3% 15.8% 19.1%
Net income/(loss).................. $ 70 $ 61 $ 98 $ 96 $ 96 $ 255 $ (105) $ 132
Earnings/(loss) per share (a)
Basic......................... $ 1.12 $ 0.92 $ 1.61 $ 1.44 $ 1.62 $ 3.94 $ (1.77) $ 2.08
Diluted....................... $ 1.10 $ 0.91 $ 1.58 $ 1.42 $ 1.60 $ 3.86 $ (1.77) $ 2.04
Net income excluding restructuring
charge and tax valuation
allowance adjustment.......... $ 70 $ 61 $ 98 $ 96 $ 96 $ 77 $ 85 $ 132
Market price range-common stock
High $48 $34 3/8 $41 3/16 $53 1/2 $37 $56 1/4 $40 3/8 $51 11/16
Low. $35 1/2 $21 1/8 $31 5/8 $32 1/8 $29 5/8 $41 $29 13/16 $36 1/4
(a) Diluted earnings per share excluding restructuring charge and tax valuation
allowance adjustment for the quarters ended October 31, 2000 and July 31,
1999 was $1.41 and $1.17, respectively.
(b) In the fourth quarter of 2000, the company recorded an after-tax
restructuring charge of $190 million, and additionally benefited from the
reversal of $54 million of profit sharing and incentive compensation. In
the third quarter of 1999, the company benefited from a reduction to the
deferred tax asset valuation allowance of $178 million.
59
FIVE-YEAR SUMMARY OF SELECTED FINANCIAL AND STATISTICAL DATA
As of and for the Years Ended October 31
(Millions of dollars, except share data,
units shipped and percentages) 2000 1999 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Sales and revenues..................................... $ 8,451 $ 8,642 $ 7,885 $ 6,371 $ 5,754
Net income............................................. 159 544 299 150 65
Earnings per share
Basic......................................... 2.62 8.34 4.16 1.66 0.49
Diluted (a)................................... 2.58 8.20 4.11 1.65 0.49
Net income excluding the restructuring charge
and tax valuation allowance adjustments (b)... 349 366 254 150 65
Average number of shares outstanding (millions)
Basic......................................... 60.7 65.2 69.1 73.1 73.7
Diluted....................................... 61.5 66.4 70.0 73.6 73.8
- ----------------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA
Total assets........................................... $ 6,945 $ 6,928 $ 6,189 $ 5,516 $ 5,326
Long-term debt
Manufacturing operations.......................... $ 437 $ 445 $ 446 $ 80 $ 99
Financial services operations..................... 1,711 1,630 1,490 1,070 1,206
----- ----- ----- ----- -----
Total long-term debt................................... $ 2,148 $ 2,075 $ 1,936 $ 1,150 $ 1,305
===== ===== ===== ===== =====
Shareowners' equity.................................... 1,314 1,291 769 1,020 916
Total manufacturing operations'
long-term debt as a percent
of total manufacturing capitalization............. 23.2% 25.2% 36.6% 7.2% 9.6%
Return on equity....................................... 12.1% 42.2% 38.9% 14.7% 7.1%
- ----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Capital expenditures................................... $ 553 $ 427 $ 302 $ 169 $ 111
Engineering and research expense....................... 280 281 192 124 129
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
Manufacturing gross margin............................. 16.8% 18.0% 15.3% 14.2% 12.5%
Manufacturing gross margin excluding
restructuring charge.............................. 17.0% 18.0% 15.3% 14.2% 12.5%
U.S. and Canadian market share (c)..................... 26.9% 25.6% 29.1% 28.3% 27.5%
Unit shipments worldwide
Trucks............................................ 124,900 129,000 127,500 104,400 95,200
OEM engines....................................... 304,400 286,500 213,700 184,000 163,200
(a) Diluted earnings per share excluding the restructuring charge and tax
valuation allowance adjustments for the years 2000 to 1996 were $5.67,
$5.52, $3.47, $1.65 and $0.49, respectively.
(b) In fiscal year 2000, the company recorded an after-tax restructuring charge
of $190 million. In fiscal years 1999 and 1998, the company benefited from
reductions to the company's deferred tax asset valuation allowance of $178
million and $45 million, respectively.
(c) Based on retail deliveries of medium trucks (Classes 5, 6 and 7), including
school buses, and heavy trucks (Class 8).
60
ADDITIONAL FINANCIAL INFORMATION (Unaudited)
The following additional financial information is provided based upon the
continuing interest of certain shareholders and creditors.
Navistar International Corporation (with financial services operations on
an equity basis) in millions of dollars
As of October 31 and for the Years Then Ended
Condensed Statement of Income 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Sales of manufactured products................................. $ 8,119 $ 8,326 $ 7,629
Other income................................................... 33 44 49
----- ----- -----
Total sales and revenues.................................. 8,152 8,370 7,678
----- ----- -----
Cost of products sold.......................................... 6,737 6,826 6,464
Cost of products sold related to restructuring................. 20 - -
----- ----- -----
Total cost of products and services sold.................. 6,757 6,826 6,464
Restructuring costs............................................ 267 - -
Postretirement benefits........................................ 146 216 174
Engineering and research expense............................... 280 281 192
Sales, general and administrative expense...................... 428 433 390
Other expense.................................................. 135 140 137
----- ----- -----
Total costs and expenses.................................. 8,013 7,896 7,357
----- ----- -----
Income before income taxes
Manufacturing operations.................................. 139 474 321
Financial services operations............................. 85 117 89
----- ----- -----
Income before income taxes............................ 224 591 410
Income tax expense.................................... 65 47 111
----- ----- -----
Net income $ 159 $ 544 $ 299
===== ===== =====
Condensed Statement of Financial Condition 2000 1999
- --------------------------------------------------------------------------------------------------------
Cash, cash equivalents and marketable securities............... $ 294 $ 386
Inventories.................................................... 597 604
Property and equipment, net.................................... 1,464 1,188
Equity in non-consolidated subsidiaries........................ 386 377
Other assets 1,095 1,527
Deferred tax asset, net........................................ 862 896
----- -----
Total assets.............................................. $ 4,698 $ 4,978
===== =====
Accounts payable, principally trade............................ $ 1,087 $ 1,386
Postretirement benefits liability.............................. 773 776
Other liabilities.............................................. 1,524 1,525
Shareowners' equity............................................ 1,314 1,291
----- -----
Total liabilities and shareowners' equity................. $ 4,698 $ 4,978
===== =====
61
ADDITIONAL FINANCIAL INFORMATION (Unaudited)
Navistar International Corporation (with financial services operations on
an equity basis) in millions of dollars
For the years ended October 31
Condensed Statement of Cash Flow 2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------------
Cash flow from operations
Net income..................................................... $ 159 $ 544 $ 299
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization......................... 140 126 123
Deferred income taxes................................. 56 185 149
Deferred tax asset valuation allowance and other
tax adjustments.................................. (20) (178) (45)
Postretirement benefits funding
(in excess of) less than expense................ (3) 47 (373)
Equity in earnings of investees, net of
dividends received............................... (31) (18) (1)
Non-cash restructuring charge......................... 113 - -
Other, net............................................ (42) (18) 9
Change in operating assets and liabilities..................... (280) (25) 331
----- ----- -----
Cash provided by operations.................................... 92 663 492
----- ----- -----
Cash flow from investment programs
Purchases of marketable securities............................. (135) (323) (772)
Sales or maturities of marketable securities................... 277 651 449
Capital expenditures........................................... (552) (425) (300)
Proceeds from sale-leasebacks.................................. 90 - -
Receivable from financial services operations.................. 365 (553) (7)
Investment in affiliates....................................... (6) (71) (7)
Capitalized interest and other................................. (30) (17) (1)
----- ----- -----
Cash provided by (used in) investment programs................. 9 (738) (638)
----- ----- -----
Cash used in financing activities.............................. (55) (109) (76)
----- ----- -----
Cash and cash equivalents
Increase (decrease) during the period.......................... 46 (184) (222)
At beginning of year........................................... 167 351 573
----- ----- -----
Cash and cash equivalents at end of the period................. $ 213 $ 167 $ 351
===== ===== =====
62
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Executive Officers of the Registrant
- ------------------------------------
The following selected information for each of the company's current
executive officers was prepared as of December 15, 2000.
OFFICERS AND POSITIONS WITH
NAME AGE NAVISTAR AND OTHER INFORMATION
- ---- --- ------------------------------
John R. Horne................. 62 Chairman, President and Chief Executive Officer since 1996 and
a Director since 1990. Mr. Horne also is Chairman, President and
Chief Executive Officer of International since 1995 and a Director
since 1987. Prior to this, Mr. Horne served as President and Chief
Executive Officer, 1995-1996, President and Chief Operating
Officer, 1990-1995.
Robert C. Lannert............. 60 Executive Vice President and Chief Financial Officer and a
Director since 1990. Mr. Lannert also is Executive Vice President
and Chief Financial Officer of International since 1990 and a
Director since 1987.
Robert A. Boardman............ 53 Senior Vice President and General Counsel since 1990. Mr.
Boardman also is Senior Vice President and General Counsel of
International since 1990.
Thomas M. Hough............... 55 Vice President and Treasurer since 1992. Mr. Hough also is Vice
President and Treasurer of International since 1992.
Mark T. Schwetschenau......... 44 Vice President and Controller since 1998. Mr. Schwetschenau
also is Vice President and Controller of International since 1998.
Prior to this, Mr. Schwetschenau served as Vice President, Finance,
Quaker Foods Division, the Quaker Oats Company, 1995-1997, and
Director, Finance, Convenience Foods Division, the Quaker Oats
Company, 1993-1995.
Mary P. Cahill................ 46 Corporate Secretary since 2000. Ms. Cahill also is Associate
General Counsel of International since 1996.
Other information required by Item 10 of this Form is incorporated herein
by reference from Navistar's definitive Proxy Statement for the February 20,
2001 Annual Meeting of Shareowners.
ITEMS 11, 12 AND 13
Information required by Items 11, 12 and 13 of this Form is incorporated
herein by reference from Navistar's definitive Proxy Statement for the February
20, 2001 Annual Meeting of Shareowners.
63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
- --------------------
See Item 8 - Financial Statements and Supplementary Data
Schedule Page
- -------- ----
II Valuation and Qualifying Accounts and Reserves ..................... F-1
This financial statement schedule of the company is filed as part of this
Form 10-K and should be read in conjunction with the Consolidated Financial
Statements, and related notes thereto, of the company. All other schedules are
omitted because of the absence of the conditions under which they are required
or because information called for is shown in the consolidated financial
statements and notes thereto.
Finance and Insurance Subsidiaries:
The consolidated financial statements of Navistar Financial Corporation for
the years ended October 31, 2000, 1999 and 1998 appearing on pages 11 through 39
in the Annual Report on Form 10-K for Navistar Financial Corporation for the
fiscal year ended October 31, 2000, Commission File No. 1-4146-1, are
incorporated herein by reference and filed as Exhibit 28 to this Form 10-K.
Exhibits Page
- -------- ----
(3) Articles of Incorporation and By-Laws ............................. E-1
(4) Instruments Defining the Rights of Security Holders,
Including Indentures ......................................... E-2
(10) Material Contracts ................................................ E-4
(21) Subsidiaries of the Registrant .................................... E-7
(23) Independent Auditors' Consent ..................................... 68
(24) Power of Attorney ................................................. 66
(27) Financial Data Schedule ........................................... *
(28) Navistar Financial Corporation Annual Report
on Form 10-K for the fiscal year ended October 31, 2000....... *
*Filed only electronically with the Securities and Exchange Commission.
All exhibits other than those indicated above are omitted because of the
absence of the conditions under which they are required or because the
information called for is shown in the financial statements and notes thereto in
the 2000 Annual Report on Form 10-K.
Exhibits, other than those incorporated by reference, have been included in
copies of this report filed with the Securities and Exchange Commission.
Shareowners of the company will be provided with copies of these exhibits upon
written request to the Corporate Secretary at the address given on the cover
page of this Form 10-K.
Reports on Form 8-K
- -------------------
The company filed a current report on Form 8-K with the Commission on
October 31, 2000 in which the company announced a fourth quarter charge against
earnings related to restructuring operations and launching a series of new
products.
64
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
SIGNATURE
Pursuant to the requirements of Section 13 and 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 INTERNATIONAL CORPORATION
- ----------------------------------
(Registrant)
/s/ Mark T. Schwetschenau
- ----------------------------------
Mark T. Schwetschenau December 20, 2000
Vice President and Controller
(Principal Accounting Officer)
65
EXHIBIT 24
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
POWER OF ATTORNEY
Each person whose signature appears below does hereby make, constitute and
appoint John R. Horne, Robert C. Lannert and Mark T. Schwetschenau and each of
them acting individually, true and lawful attorneys-in-fact and agents with
power to act without the other and with full power of substitution, to execute,
deliver and file, for and on such person's behalf, and in such person's name and
capacity or capacities as stated below, any amendment, exhibit or supplement to
the Form 10-K Report making such changes in the report as such attorney-in-fact
deems appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
Signature Title Date
--------- ----- ----
/s/ John R. Horne
- ---------------------------------
John R. Horne Chairman of the Board, December 20, 2000
President and
Chief Executive Officer,
and Director
(Principal Executive Officer)
/s/ Robert C. Lannert
- ---------------------------------
Robert C. Lannert Executive Vice President December 20, 2000
and Chief Financial Officer
and Director
(Principal Financial Officer)
/s/ Mark T. Schwetschenau
- ---------------------------------
Mark T. Schwetschenau Vice President and Controller December 20, 2000
(Principal Accounting Officer)
/s/ William F. Andrews
- ---------------------------------
William F. Andrews Director December 20, 2000
66
EXHIBIT 24 (CONTINUED)
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
-----------------------------
SIGNATURES (Continued)
Signature Title Date
--------- ----- ----
/s/ Y. Marc Belton
- ---------------------------------
Y. Marc Belton Director December 20, 2000
/s/ John D. Correnti
- ---------------------------------
John D. Correnti Director December 20, 2000
/s/ Jerry E. Dempsey
- ---------------------------------
Jerry E. Dempsey Director December 20, 2000
/s/ Dr. Abbie J. Griffin
- ---------------------------------
Dr. Abbie J. Griffin Director December 20, 2000
/s/ Michael N. Hammes
- ---------------------------------
Michael N. Hammes Director December 20, 2000
/s/ Paul C. Korman
- ---------------------------------
Paul C. Korman Director December 20, 2000
/s/ Allen J. Krowe
- ---------------------------------
Allen J. Krowe Director December 20, 2000
/s/ Southwood J. (Woody) Morcott
- ---------------------------------
Southwood J. (Woody) Morcott Director December 20, 2000
/s/ William F. Patient
- ---------------------------------
William F. Patient Director December 20, 2000
67
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Navistar International Corporation:
We consent to the incorporation by reference in the Registration
Statements, including post-effective amendments, No. 2-70979, No. 33-26847, No.
333-25783, No. 333-29735, No. 333-29739, No. 333-29301 and No. 333-77781 of
Navistar International Corporation, all on Form S-8, of our report dated
December 11, 2000, relating to the financial statements and financial statement
schedule of Navistar International Corporation and of the financial statements
of Navistar Financial Corporation, appearing and incorporated by reference in
this Annual Report on Form 10-K of Navistar International Corporation for the
year ended October 31, 2000.
Deloitte & Touche LLP
December 20, 2000
Chicago, Illinois
68
SCHEDULE II
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
==========
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998
(MILLIONS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
DESCRIPTION DEDUCTIONS FROM
RESERVES
BALANCE AT ADDITIONS BALANCE
DESCRIPTION DEDUCTED BEGINNING CHARGED TO AT END
OF RESERVES FROM OF YEAR TO INCOME DESCRIPTION AMOUNT OF YEAR
- ----------- -------- ---------- ---------- ----------- -------- -------
Reserves deducted
from assets to
which they
apply:
2000
----
Uncollectible notes
and accounts
Allowance for Notes and written off and
losses on accounts reserve adjustment,
receivables..... receivable..... $ 36 $ 35 less recoveries.... $ 32 $ 39
1999
----
Uncollectible notes
and accounts
Allowance for Notes and written off and
losses on accounts reserve adjustment,
receivables..... receivable..... $ 33 $ 14 less recoveries.... $ 11 $ 36
1998
----
Uncollectible notes
and accounts
Allowance for Notes and written off and
losses on accounts reserve adjustment,
receivables..... receivable..... $ 31 $ 14 less recoveries.... $ 12 $ 33
F-1