NAVISTAR INTERNATIONAL CORPORATION
FORM 10-K
Year Ended October 31, 2001
INDEX
Page
----
PART I
Item 1. Business.............................................................................. 3
Executive Officers of the Registrant.................................................. 10
Item 2. Properties............................................................................ 11
Item 3. Legal Proceedings..................................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders................................... 11
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters............. 12
Item 6. Selected Financial Data............................................................... 12
Item 7. Management's Discussion and Analysis of Results of Operations
and Financial Condition............................................................ 13
Item 7A. Quantitative and Qualitative Disclosures about Market Risk............................ 25
Item 8. Financial Statements and Supplementary Data........................................... 26
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure........................................................... 71
PART III
Item 10. Directors and Executive Officers of the Registrant.................................... 71
Item 11. Executive Compensation................................................................ 71
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 71
Item 13. Certain Relationships and Related Transactions........................................ 71
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 72
SIGNATURES
Principal Accounting Officer..................................................................... 73
Directors ....................................................................................... 74
POWER OF ATTORNEY................................................................................... 74
INDEPENDENT AUDITORS' REPORT........................................................................ 76
INDEPENDENT AUDITORS' CONSENT....................................................................... 76
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). 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 in the U.S., Brazil and Argentina. 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. NFC's domestic insurance subsidiary,
Harco National Insurance Company (Harco), was sold on November 30, 2001. See Note 11 to the Financial Statements, which is included
in Item 8. Industry and geographic segment data for 2001, 2000 and 1999 is summarized in Note 15 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 2001 2000 1999
- ------------ ---- ---- ----
Class 5, 6 and 7 medium trucks
and school buses.......................... 37% 34% 32%
Class 8 heavy trucks........................... 21% 32% 37%
Truck service parts............................ 12% 9% 8%
-------- -------- -------
Total truck............................. 70% 75% 77%
Engine (including service parts) .............. 26% 21% 19%
Financial services............................. 4% 4% 4%
-------- -------- -------
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.
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.
3
PRODUCTS AND SERVICES (continued)
The engine segment designs and manufactures diesel engines for use in the company's Class 5, 6 and 7 medium trucks, school buses
and selected Class 8 heavy truck models, and for sale to original equipment manufacturers (OEMs) in the U.S., Mexico and Brazil.
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 January 2001, Navistar acquired the remaining 50% interest of Maxion International Motores,
S.A. (Maxion), the largest producer of diesel engines in South America. The company changed the name of the new wholly owned
subsidiary to International Engines South America (IESA) and it will produce 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 93% of all medium truck and bus shipments for fiscal 2001 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. and Mexico as well as the company's wholesale accounts and selected retail accounts receivable. NFC's
insurance subsidiary, which was sold on November 30, 2001, provided 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.
In September 2001, the company formed a joint venture with Ford Motor Company (Ford). The joint venture will conduct business
through two operating companies named Blue Diamond Truck, S. de R.L. de C.V., and Blue Diamond Parts, LLC. Initially, the joint
venture will produce Class 6 and 7 medium commercial trucks that will be marketed independently under the Ford brand and Navistar's
International(R)brand. The trucks will be produced at Navistar's plant in Escobedo, Mexico. In subsequent years, Blue Diamond plans to
expand the range of commercial trucks for both companies. Another element of the joint venture is service parts support, in which
significant opportunities exist to provide high quality product support to customers of the new vehicles.
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:
2001 2000 1999 1998 1997
---- ---- ---- ---- ----
Class 5, 6 and 7 medium trucks
and school buses................... 149.0 181.7 179.5 160.0 150.6
Class 8 heavy trucks.................... 163.7 258.3 286.0 232.0 196.8
----- ----- ----- ----- -----
Total.............................. 312.7 440.0 465.5 392.0 347.4
===== ===== ===== ===== =====
Source: Monthly data derived from materials produced by Ward's Communications in the U.S. and the Canadian Vehicle Manufacturers
Association.
4
THE MEDIUM AND HEAVY TRUCK INDUSTRY (continued)
Industry retail deliveries of Class 5 through 8 trucks and school buses in the Mexican market were 28,600 units, 32,900 units and
23,300 units in 2001, 2000 and 1999, respectively, based on monthly data provided by the Associacion Nacional de Productores de
Autobuses, Camiones y Tractocamiones.
Industry retail deliveries of Class 5 through 8 trucks in the Brazilian market were 33,800 units, 27,800 units and 22,400 units
in 2001, 2000 and 1999, respectively, 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) and Volvo and Mack (Volvo Global Trucks). 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, 2001, the company's truck segment currently estimates $130 million in capital spending and $100 million in
development expense through 2004 for development of its next generation vehicles.
TRUCK MARKET SHARE
The company delivered 82,400 Class 5 through 8 trucks, including school buses, in the U.S. and Canada in fiscal 2001, a decrease
of 30% from the 118,200 units delivered in 2000. This decline closely parallels the overall industry drop of 29% during this
period. Navistar's market share in the combined U.S. and Canadian Class 5 through 8 truck market in 2001 decreased slightly to 26.3%
from 26.9% in 2000.
The company delivered 8,900 Class 5 through 8 trucks, including school buses, in Mexico in 2001, a 16% increase from the 7,700
units delivered in 2000. Navistar's combined share of the Class 5 through 8 truck market in Mexico was 31.2% in 2001 and 23.4% in
2000.
The company delivered 700 trucks in Brazil in 2001, a 13% increase from the 600 units delivered in 2000. Navistar's share of the
truck market in Brazil was 1.9% in 2001 and 2.1% in 2000.
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 882, 888 and 927 dealers and retail outlets at October 31, 2001, 2000 and
1999, respectively. Included in these totals were 505, 494 and 517 secondary and associate locations at October 31, 2001, 2000 and
1999, respectively. The company also has a dealer network in Mexico composed of 70, 68 and 60 dealer locations at October 31, 2001,
2000 and 1999, respectively, and a dealer network in Brazil composed of 17 dealer locations at October 31, 2001 and 2000, and 14
dealer locations at October 31, 1999.
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 80 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. The company's diesel engines are sold under the International(R) brand as well as
produced for other OEMs, principally Ford.
Navistar has an agreement to supply its 7.3L electronically controlled diesel engine to Ford through the year 2002 for use in all
of Ford's diesel-powered light trucks and vans. Shipments to Ford account for approximately 94% of the engine segment's 7.3L
shipments. Total engine units shipped reached 394,300 in 2001, comparable to 2000. The company's shipments of engines to OEMs
totaled 324,900 units in 2001, an increase of 7% from the 304,400 units shipped in 2000. The 2001 shipments include additional units
shipped by the company's wholly owned engine subsidiary in Brazil, IESA, which was fully acquired in January 2001. 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. To
support this program, the company has constructed an engine assembly operation in Huntsville, Alabama.
From October 31, 2001, the company currently estimates $140 million in capital spending and $120 million in development expense
through 2004 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. During 2001 and 2000, 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 15% and 16%, respectively,
of all new truck units sold or leased by the company to retail customers.
NFC's wholly owned domestic insurance subsidiary, Harco, provided 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, as further described in Note 11 to the Financial Statements. On
November 30, 2001, NFC completed the sale of all of the stock of Harco to IAT Reinsurance Syndicate Ltd., a Bermuda reinsurance
company for approximately $62 million in cash.
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 retail 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 major improvements of
existing products and processes used in their manufacture, totaled $213 million, $226 million and $207 million for 2001, 2000 and
1999, respectively.
BACKLOG
The backlog of unfilled truck orders (subject to cancellation or return in certain events) at October 31, 2001, 2000 and 1999,
was $1,107 million, $1,258 million and $3,352 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 16,500, 17,000 and 18,600 individuals at October 31, 2001, 2000 and 1999, respectively, worldwide.
LABOR RELATIONS
At October 31, 2001, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represented 7,600 of
the company's active employees in the U.S., and the National Automobile, Aerospace, and Agricultural Implement Workers of Canada
(CAW) represented 1,000 of the company's active employees in Canada. Other unions represented 1,200 of the company's active
employees in the U.S. and Mexico. 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.
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.
See Item 3, Legal Proceedings, for discussion regarding various claims and controversies between the company and Caterpillar, Inc.
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 parts and components
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 2001. 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 entered into July 1999 with the U.S. EPA and in a Settlement Agreement with CARB
concerning alleged excess emissions of nitrogen oxides.
U.S. EPA recently enacted new emission standards for heavy duty engines and low sulfur diesel fuel requirements for 2007 and
later model years. The company actively participated in this rulemaking to ensure that the rules are technologically feasible.
Other companies and parties, including International, have filed suit in Federal Court both contesting and supporting these rules.
The company is participating in these lawsuits to ensure that issues and concerns that may affect its products and development are
addressed.
In 1999, U.S. EPA and CARB promulgated new emission standards for light duty diesel engines which cover the company's new light
duty V-6 diesel engines. On the basis of available technology, compliance with these standards in 2007 is dependent upon the
availability of low sulfur diesel fuel which is the subject of U.S. EPA's 2007 rulemaking. However, the company 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, the company does not believe they will have a material effect on its 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 emission regulations of
Argentina, Brazil, Canada and Mexico.
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,
Navistar 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.
9
EXECUTIVE OFFICERS OF THE REGISTRANT
The following selected information for each of the company's current executive officers (as defined by regulations of the
Securities and Exchange Commission) was prepared as of December 15, 2001.
OFFICERS AND POSITIONS WITH
NAME AGE NAVISTAR AND OTHER INFORMATION
---- --- ------------------------------
John R. Horne................. 63 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............. 61 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.
John J. Bongiorno............. 63 President of the Financial Services Group of International since 1999;
President and Chief Executive Officer of Navistar Financial
Corporation since 1984. Prior to this, Mr. Bongiorno served as
Vice President, Operations for Navistar Financial Corporation,
1981-1984.
J. Steven Keate............... 45 President of the Truck Group of International since 1999. Prior to
this, Mr. Keate served as Group Vice President and General
Manager of International's heavy vehicle center, 1997-1999; and,
Vice President and Controller of International, 1995-1997. Prior
to International, Mr. Keate served as Vice President and
Controller of General Dynamics.
Daniel C. Ustian.............. 51 President of the Engine Group of International since 1999. Prior to
this, Mr. Ustian served as Group Vice President and General
Manager of Engine and Foundry, 1993-1999; and Vice President of
Manufacturing and Director of Finance in the Engine and Foundry
Division.
Robert A. Boardman............ 54 Senior Vice President and General Counsel since 1990. Mr. Boardman
also is Senior Vice President and General Counsel of
International since 1990.
Pamela J. Hamilton............ 51 Senior Vice President, Human Resources and Administration since 1998.
Prior to this, Ms. Hamilton served as Senior Vice President,
Human Resources, Environment Health and Safety and Government
Relations of W.R. Grace and Company, 1993-1998.
Thomas M. Hough............... 56 Vice President and Treasurer since 1992. Mr. Hough also is Vice
President and Treasurer of International since 1992.
Mark T. Schwetschenau......... 45 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, Quaker Oats Company, 1995-1997.
Robert J. Perna............... 37 Corporate Secretary since June 2001. Mr. Perna also is General
Attorney, Finance and Securities, of International since April
2001. Prior to this Mr. Perna served as Associate General
Counsel, General Electric Railcar Services Corporation, a
subsidiary of GE Capital Corp., 2000-2001; Senior Counsel,
Finance and Securities, of International, 1997-2000; and Senior
Attorney, Finance and Securities, 1996-1997.
10
ITEM 2. PROPERTIES
In North America, the company owns and operates 11 manufacturing and assembly operations, which contain approximately 12 million
square feet of floor space. Of these 11 facilities, seven 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 located in Warrenville, Illinois. In addition, the company owns and operates a
manufacturing plant in both Brazil and Argentina, which contain a total of 500,000 square feet of floor space for use by the
company's South American engine subsidiary.
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. In 2001, Navistar completed the tooling for a new
plant in Huntsville, Alabama, to produce new high-technology diesel engines. 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.
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.
Various claims and controversies have arisen between the company and its current fuel system supplier, Caterpillar Inc.,
regarding the ownership and validity of certain patents covering fuel system technology to be used in the company's next generation
version of diesel engines. In June 1999, in Federal Court in Peoria, IL, Caterpillar sued Sturman Industries, Inc., the company's
joint venture partner in developing fuel system technology, alleging that technology invented and patented by Sturman and licensed to
the company, belongs to Caterpillar. The company believes that Caterpillar may assert claims against the company regarding other
aspects of fuel system technology to be used in the company's new engines. The company believes that Sturman has meritorious defenses
to such claims and intends to continue to cooperate with Sturman to defend this action vigorously. The company also believes that it
has meritorious defenses to any such claims Caterpillar may assert against the company and will defend vigorously any such action.
Based upon the information developed to date, the company believes that the risk of a material adverse judgment against the company
in any such matter is remote.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
11
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 2001 and 2000 is included in Note 21 to the Financial Statements on page 67. There were approximately 37,000
holders of record of common stock at October 31, 2001.
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 cash 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 $250 million 8% Senior
Subordinated Notes, the $400 million 9 3/8% Senior Notes and the $19 million 9.95% Senior Notes on the amount of cash dividends the
company may pay. Navistar Financial Corporation is subject to certain restrictions under its revolving credit facility which may
limit its ability to pay dividends to International.
ITEM 6. SELECTED FINANCIAL DATA
This information is included in the table "Five-Year Summary of Selected Financial and Statistical Data" on page 68 of this Form
10-K.
12
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). 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 lines, together with a wide selection of
other standard engine and aftermarket parts. The engine segment operates in the U.S., Brazil and Argentina. The financial services
segment provides wholesale, retail and lease financing. 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) and the company's foreign finance and insurance subsidiaries. See Note 1 to the Financial Statements.
RESULTS OF OPERATIONS
The company reported a net loss of $23 million for 2001, or a loss of $0.39 per diluted common share. Net income was $159
million, or $2.58 per diluted common share in 2000, and $544 million, or $8.20 per diluted common share in 1999. Net income in 2001
and 2000 included an after-tax corporate restructuring charge of $1 million and $190 million, respectively. Net income in 1999
included a tax valuation allowance adjustment of $178 million. The diluted loss per share excluding the restructuring charge was
$0.38 in 2001. Diluted earnings per share excluding the restructuring charge and the tax valuation allowance adjustment were $5.67
and $5.52 in 2000 and 1999, respectively.
The company's manufacturing operations reported a loss before income taxes of $147 million in 2001 compared with pretax income of
$139 million in 2000 and $474 million in 1999. Pretax income for the manufacturing operations was reduced $15 million and $287
million in 2001 and 2000, respectively, by the effects of the corporate restructuring charge. The truck segment's profit decreased
by $415 million in 2001 from the $179 million in 2000, which decreased from the $295 million in 1999. The truck segment's revenues
in 2001 were $4,651 million, 27% lower than the $6,365 million reported in 2000, which was 4% lower than the $6,628 million reported
in 1999. The engine segment's profit in 2001 was $257 million, 22% lower than the $331 million reported in 2000, which was 13%
higher than 1999. The engine segment's revenues were $2,301 million in 2001, a 5% decrease from the $2,430 million reported in 2000,
which was comparable to the revenues reported in 1999. During 2001, the company's truck segment was adversely affected by declining
overall industry volume as well as reduced truck pricing. The engine segment's profit decrease during 2001 was primarily the result
of unfavorable sales mix. The engine segment's profit and revenue increases in 2000 were partially attributable to record levels of
engine shipments to other original equipment manufacturers (OEMs).
13
RESULTS OF OPERATIONS (continued)
The financial services segment's profit in 2001 decreased $10 million from 2000 primarily due to lower gains on the sale of
wholesale notes and lower average finance receivable balances, partially offset by higher gains from marketable securities and higher
average operating lease balances. The financial services segment's profit in 2000 was consistent with that of 1999. The sale of
Harco National Insurance Company (Harco), a wholly owned subsidiary of NFC, 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 11 to
the Financial Statements. The changes in the financial services segment's revenues are primarily due to changes in finance and
insurance revenue discussed below.
Sales and Revenues
Sales and revenues of $6,722 million in 2001 were 20% lower than the $8,451 million reported in 2000, which were 2% lower than the
$8,642 million reported in 1999. Sales of manufactured products totaled $6,423 million in 2001, 21% lower than the $8,119 million
reported in 2000, which were 2% below the $8,326 million reported in 1999.
U.S. and Canadian industry sales of Class 5 through 8 trucks totaled 312,700 units in 2001, 29% lower than the 440,000 units in
2000, which were 5% lower than the 465,500 units sold in 1999. Class 8 heavy truck sales totaled 163,700 units in 2001, a 37% decrease
from the 258,300 units sold in 2000, which was a 10% decrease from the 286,000 units sold in 1999. Industry sales of Class 5, 6, and 7
medium trucks, including school buses, totaled 149,000 units in 2001, an 18% decrease from the 181,700 units sold in 2000, which was
consistent with the 179,500 units sold in 1999. Industry sales of school buses, which accounted for 19% of the medium truck market in
2001, were 27,900 units in 2001, which was 18% lower than the 33,900 units in 2000, which was nearly unchanged from 1999.
The company's market share in the combined U.S. and Canadian Class 5 through 8 truck market for 2001 was 26.3%, a slight decrease
from 26.9% in 2000. Market share was 25.6% in 1999.
Total engine shipments reached 394,300 units, which is slightly higher than the 392,900 units reported in 2000, resulting
primarily from the inclusion of shipments by International Engines South America (IESA) in the consolidated financial results for
2001, partially offset by lower shipments within the company. In the first quarter of 2001, IESA became a wholly owned subsidiary of
the company. Shipments of mid-range diesel engines by the company to other OEMs during 2001 were 324,900 units, a 7% increase over
the 304,400 units shipped in 2000, which represented a 6% increase over 1999. Inclusion of shipments of IESA was the primary cause
for the higher shipments in 2001. 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 increase in 2000.
Finance and insurance revenue was $256 million for 2001, a $32 million decrease from 2000 revenue of $288 million, which was $32
million higher than 1999 revenue of $256 million. The decrease in 2001 was primarily due to lower average wholesale note and
receivable balances, while the increase in 2000 was primarily a result of an increase in lease financing.
The company recorded other income of $43 million in 2001, consistent with the $44 million reported for 2000, which was a decrease
of $16 million from 1999. Lower cash balances, which reduced interest income, was a significant factor for the decrease in 2000.
14
RESULTS OF OPERATIONS (continued)
Costs and Expenses
Manufacturing gross margin was 13.0% in 2001, a decrease from the 16.8% in 2000, and 18.0% in 1999. Excluding the effects of the
restructuring charge, the company's manufacturing gross margin was 13.3% in 2001 and 17.0% in 2000. The decrease from the 2000
margin is primarily due to the impact of lower volumes and pressure on pricing. The gross margin decrease in 2000 primarily resulted
from lower new truck pricing, declines in used truck values and increases in material costs.
Postretirement benefits expense of $171 million in 2001 increased $25 million from the $146 million in 2000, which decreased $70
million from the $216 million reported in 1999. The 2001 increase is primarily due to higher health and welfare expense, which was
partially offset by lower profit sharing provisions to the retiree trust related to lower profit. 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 welfare expense. See Note 2 to the Financial Statements.
Engineering and research expense in 2001 was $253 million, which decreased from the $280 million reported in 2000, which was
consistent with the $281 million reported in 1999. The decrease in 2001 over 2000 reflected a reduction in the amount of spending
required by the company's Next Generation Vehicle (NGV) program, which decreased 44% from 2000.
Sales, general and administrative expense of $547 million in 2001 was higher than the $488 million reported in 2000, which was
comparable to the $486 million reported in 1999. The increase in 2001 is primarily due to an increase in the provision for losses on
receivables driven by an increase in repossession frequency and pricing pressure in the used truck market.
Interest expense increased to $161 million in 2001 from $146 million in 2000 and $135 million in 1999. The 2001 increase is
primarily due to the increase in the outstanding balance of the company's debt as a result of the debt issuance that occurred in May
2001. 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.
Other expense totaled $36 million in 2001, compared with $87 million in 2000 and $71 million in 1999. The decrease in 2001 is
due to lower 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"). In the fourth quarter of 2001, the company recorded a $1 million net adjustment to the various initiatives, which
brought the total charge to $307 million. 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 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
15
RESTRUCTURING CHARGE (continued)
Of the pretax restructuring charge totaling $307 million, $150 million represents non-cash charges. Approximately $8 million and
$59 million was spent in 2000 and 2001, respectively. The remaining $90 million is expected to be spent as follows: 2002 - $32
million, 2003 - $20 million, 2004 - $11 million and beyond - $27 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 were substantially complete by November 2001.
The actions taken to implement the Plan of Restructuring generated approximately $100 million in annualized savings for the
company, primarily from lower salaries and benefit costs, in fiscal 2001. These savings were more than offset by lower revenue from
industry driven reductions in annual truck and engine sales volumes.
Components of the restructuring charge are as follows:
2001 Balance
Total Incurred ---------------------------- Oct. 31,
Millions of dollars Charges 2000 Incurred Adjustments 2001
----------------------------------- ------------- ------------- ------------- ------------ ----------
Severance and other benefits $ 104 $ (7) $ (36) $ (29) $ 32
Inventory write-downs 20 (20) (11) 11 -
Other asset write-downs and losses 93 (93) (28) 28 -
Lease terminations 33 - (3) 5 35
Loss on sale of business 17 - (2) (13) 2
Dealer termination and exit costs 39 (1) (16) (1) 21
--------- -------- --------- -------- ---------
Total $ 306 $ (121) $ (96) $ 1 $ 90
========= ======== ========= ======== =========
The severance and other benefits costs, asset write-downs and losses, lease terminations, loss on sale of business, dealer
termination and exit costs, totaling $286 million in 2000 and $(10) million in 2001, are presented as "Restructuring and loss on
anticipated sale of business" in the Statement of Income. Inventory write-down costs of $20 million in 2000 and $11 million in 2001
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:
At October 31, 2000, pursuant to the Plan of Restructuring, it was anticipated that 3,100 positions would be eliminated
throughout the company. Severance and other benefit costs included costs related to the reduction of approximately 2,100
employees from the workforce, primarily in North America. At October 31, 2001, the company revised its total number of severance
related workforce reduction to 1,900, which resulted in a reduction to the severance accrual of $29 million. As of October 31,
2001, approximately $31 million had been paid for a portion of the severance and other benefits for 1,500 terminated employees,
and $12 million of curtailment losses have been reclassified as a noncurrent postretirement liability. Of the $31 million of
total severance and benefit costs paid, $24 million was paid during 2001. The remaining reduction of approximately 400 employees
will be substantially completed by December 2001 when the majority of the NGV products will be in production. The workforce
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.
16
RESTRUCTURING CHARGE (continued)
As part of the Plan of Restructuring, the company finalized its manufacturing plan for its new Ford diesel engines and next
generation vehicles. 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 $20
million was recognized for the write-down of service inventory that will be replaced. The remainder of the asset write-downs and
losses primarily relates to assets that were disposed of or abandoned as a direct result of the workforce reductions. During
2001, additional asset and inventory write-downs related to the original initiatives were identified, which resulted in an
additional charge of $39 million.
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. At October 31, 2001, the accrual for lease termination was increased by $5 million primarily due to lower
estimated sublease income. Payments incurred to date for lease termination costs were $3 million, all of which were incurred in
2001.
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. On November 30, 2001, NFC finalized the sale of
all of the stock of Harco to IAT Reinsurance Syndicate Ltd., a Bermuda reinsurance company for approximately $62 million in
cash. Based upon the sales price to IAT, the company reduced its loss estimate by $13 million. Additionally, a $1 million
curtailment loss has been reclassified as a noncurrent postretirement liability. Payments incurred related to exit costs of
approximately $1 million were incurred in 2001. Due to the sale of Harco, the net investment in Harco at October 31, 2001 and
2000, has been classified as other current assets within the Statement of Financial Condition and its revenues and expenses have
been excluded from the Statement of Income for 2001. Harco's revenues and pretax income, respectively, were $62 million and $10
million in 2001, $56 million and $1 million in 2000, and $44 million and $5 million in 1999. Total assets, primarily marketable
securities, and total liabilities, primarily loss reserves, were $165 million and $96 million, respectively, as of October 31,
2001, and $155 million and $94 million, respectively, as of October 31, 2000.
Dealer termination and exit costs of $39 million principally include $14 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. During 2001, the accrual for this initiative was reduced by
approximately $1 million mainly due to lower estimated dealer termination costs. As of October 31, 2001, approximately $17
million has been paid for dealer termination and exit costs, of which $16 million was paid during 2001.
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 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.
17
LIQUIDITY AND CAPITAL RESOURCES (continued)
The company had working capital of $463 million at October 31, 2001, compared to $59 million at October 31, 2000. The increase
from 2000 to 2001 is primarily due to the completion of $325 million of sale leaseback financing transactions in September 2001.
Consolidated cash, cash equivalents and marketable securities of the company were $1,085 million at October 31, 2001, $476
million at October 31, 2000, and $475 million at October 31, 1999. Cash, cash equivalents and marketable securities available to
manufacturing operations totaled $809 million, $588 million and $1,045 million at October 31, 2001, 2000 and 1999, respectively.
This included an intercompany receivable from NFC of $3 million, $294 million and $659 million at October 31, 2001, 2000 and 1999,
respectively, which NFC is obligated to repay upon request.
Cash provided by operations during 2001 totaled $220 million. The company had a net loss of $23 million, which was more than
offset by $217 million of non-cash items, principally depreciation and amortization. Also included was a net change in operating
assets and liabilities of $26 million.
The net source of cash resulting from the change in operating assets and liabilities included a $133 million decrease in
receivables primarily due to a net decrease in wholesale note and account balances and a $40 million decrease in inventories which
resulted primarily from lower new truck shipments and higher levels of repossessions. These were partially offset by a $123 million
decrease in other liabilities primarily due to a decrease in accrued employee compensation, a reduction in the restructuring
liability as a result of cash payments during the year and a decrease in the warranty liability.
During 2001, investment programs provided $92 million in cash which includes $385 million of proceeds from sale-leasebacks and a
$277 million net decrease in retail notes and lease receivables. These were partially offset by a net increase in marketable
securities of $83 million, a net increase in property and equipment leased to others of $52 million and $326 million of capital
expenditures. Capital expenditures were made primarily for the NGV and Next Generation Diesel (NGD) programs, for a school bus
facility in Tulsa, Oklahoma, and for a new engine facility in Huntsville, Alabama. Investment programs also used $60 million of cash
to purchase the remaining 50% interest in Maxion International Motores, S.A. (Maxion), now known as IESA.
In 2001, the company entered into three sale leaseback arrangements with various financial institutions. Under the first
arrangement, truck cab assembly machinery with a net book value of $58 million, was sold for $60 million and leased back under an
8-year operating lease agreement. Under the second arrangement, tooling and related engine manufacturing equipment with a net book
value of $261 million, was sold for $260 million and leased back under an 11.5-year operating lease agreement. The third arrangement
consisted of additional engine manufacturing equipment with a net book value of $62 million that was sold for $65 million and leased
back under a 10-year operating lease agreement. The gain on these transactions was deferred and is being amortized over the terms of
the lease agreements.
Financing activities provided a $333 million net increase in long-term debt primarily related to the private placement of $400
million 9 3/8% Senior Notes in May 2001. These were partially offset by a $122 million net decrease in notes and debt outstanding
under the bank revolving credit facility and commercial paper programs.
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 2002 are expected to be $250 million including
approximately $45 million for the NGV program and $120 million for the NGD program. The company had outstanding capital commitments
of $187 million at October 31, 2001, including $46 million for the NGV program and $98 million for the NGD program.
18
LIQUIDITY AND CAPITAL RESOURCES (continued)
The company currently estimates $130 million in capital spending and $100 million in development expense through 2004 for the NGV
program, and $140 million in capital spending and $120 million in development expense through 2004 for the NGD program.
Approximately $35 million and $50 million of the development expenses for the NGV and NGD programs, respectively, are planned for
2002. 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.
At October 31, 2001, $32 million of a Mexican subsidiary's receivables were pledged as collateral for bank borrowings. In
addition, as of October 31, 2001, the company is contingently liable for approximately $163 million for various purchasing
commitments, credit guarantees and buyback programs. Based on historical loss trends, the company's exposure is not considered
material.
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,
2001, NFC's funding consisted of sold finance receivables of $2,711 million, bank and other borrowings of $1,192 million,
subordinated debt of $100 million, capital lease obligations of $361 million and equity of $331 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 2001, NFC sold $1,365 million of retail notes, net of
unearned finance income, through Navistar Financial Retail Receivables Corporation (NFRRC), a special purpose wholly owned subsidiary
of NFC. Aggregate gains of $21 million were recognized on these sales.
Over the period November 1, through December 10, 2001, NFC sold $470 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 $16 million gain was recognized on
this sale.
At October 31, 2001, Navistar Financial Securities Corporation (NFSC), a wholly owned subsidiary of NFC, had in place a revolving
wholesale note trust that funded $797 million of eligible wholesale notes. As of October 31, 2001, the 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 a variable funding certificate with a maximum capacity of $200 million. This facility expires in January 2002
with an option for renewal.
In October 2000, NFC entered into a $500 million retail revolving 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, 2001, the interest rate caps each had a notional amount of $500 million and a net fair value of zero.
At October 31, 2001, Truck Retail Accounts Corporation (TRAC), a special purpose, wholly owned subsidiary of NFC, had in place a
revolving retail account conduit that provides for the funding of $100 million of eligible retail accounts. As of October 31, 2001,
NFC had utilized $91 million of this facility. The facility expires in August 2002 with an option for renewal.
At October 31, 2001, Truck Engine Receivables Financing Corporation (TERFCO), a special purpose, wholly owned subsidiary of NFC,
provided for funding of $100 million of eligible Ford accounts receivable. The funding facility is due in 2005. As of October 31,
2001, NFC had utilized $100 million of this facility.
19
LIQUIDITY AND CAPITAL RESOURCES (continued)
At October 31, 2001, NFC had an $820 million contractually committed bank revolving credit facility that will mature in November
2005. Under the revolving credit agreement, Navistar's three Mexican finance subsidiaries are permitted to borrow up to $100 million
in the aggregate, which is guaranteed by the company and NFC.
At October 31, 2001, NFC had a $500 million revolving retail warehouse facility due in October 2005. In October 2000, Truck
Retail Instalment Paper Corporation, a special purpose, wholly owned subsidiary of NFC, issued $475 million of senior class AAA rated
and $25 million of 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.
In December 2000, NFC sold fixed rate retail receivables on a variable rate basis and entered into an interest rate swap
agreement. 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 and on changes in the interest rates. As of
October 31, 2001, the difference between the amortizing swap notional amount and the net outstanding principal balance of the sold
retail receivables was $3 million and had an immaterial fair value.
In July 2001, NFC entered into an interest rate swap agreement to fix a portion of its floating rate revolving debt. This
transaction is accounted for as a cash flow hedge, and consequently, gains and losses on the derivative are recorded in other
comprehensive income. Derivative gains and losses are reclassified from other comprehensive income as the hedged item affects
earnings. There was no ineffectiveness related to this derivative during 2001. As of October 31, 2001, the interest rate swap had a
notional amount of $35 million and a fair value of $2 million.
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, $138 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, 2001, 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, 2001, the difference between the amortizing swap notional amount and the net outstanding principal
balance of the sold retail receivables was $32 million and had a fair value of $1 million.
At October 31, 2001, available funding under the bank revolving credit facility, the revolving retail warehouse facility, the
retail account facilities and the revolving wholesale note trust was $539 million. When combined with unrestricted cash and cash
equivalents, $561 million remained available to fund the general business purposes of NFC.
At October 31, 2001, 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 $288 million on retail contracts and
$37 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, 2001, the maximum amount of dividends which were available for
distribution under the most restrictive covenants was $187 million.
20
LIQUIDITY AND CAPITAL RESOURCES (continued)
NFC's maximum contractual exposure under all receivable sale recourse provisions at October 31, 2001, was $340 million. However,
management believes that the allowance for credit losses on sold receivables is adequate. See Notes 5 and 6 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, 2001.
There have been no material changes in the company's hedging strategies or derivative positions since October 31, 2000. Further
disclosure may be found in Note 12 to the Financial Statements.
In May 2001, the company completed the private placement of $400 million 9 3/8% Senior Notes due 2006. The proceeds of the
Senior Notes are to be used for debt repayment, to fund ongoing capital development programs and for general capital purposes.
International, exclusive of its subsidiaries, will initially guarantee the payment of the principal, premium and interest on these
notes, as well as the existing $100 million 7% senior notes due 2003 and the $250 million 8% senior subordinated notes due 2008.
In May 2001, Standard and Poor's affirmed the company's and NFC's senior debt ratings of BBB- as well as the company's and NFC's
subordinated debt ratings of BB+. They also assigned a BBB- rating to the senior unsecured notes that the company issued in May
2001. Moody's confirmed the company's and NFC's subordinated debt ratings of Ba2, but lowered the company's and NFC's senior debt
ratings from Baa3 to Ba1. Fitch IBCA affirmed the company's senior debt rating at BBB- and the subordinated debt rating at BB.
Additionally, Fitch IBCA downgraded the senior debt rating for NFC from BBB to BBB- and its subordinated debt rating from BBB- to BB.
It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow
as well as anticipated financing actions will provide sufficient funds to meet 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 retail
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.
21
DERIVATIVE FINANCIAL INSTRUMENTS
As disclosed in Notes 1 and 12 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.
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.
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, and 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.
On April 1, 2001, the company adopted Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The adoption of this statement has not had and is not expected to
have a material effect on the company's results of operations, financial condition or cash flows. Further disclosure may be found in
Note 6 to the Financial Statements.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS
141), "Business Combinations," Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible
Assets," and Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 141
applies to all business combinations initiated after June 30, 2001. SFAS 142 will be adopted by the company on November 1, 2001, and
will not have a material impact on the company's financial position, results of operations or cash flows. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The company is evaluating the impact of SFAS 143 on its
financial position, results of operations and cash flows.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal
years. The company is evaluating the impact on the company's financial position, results of operations and cash flows.
INCOME TAXES
The Statement of Financial Condition at October 31, 2001 and 2000, includes a deferred tax asset of $980 million and $862
million, respectively, net of valuation allowances of $86 million for both 2001 and 2000, 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.
22
INCOME TAXES (continued)
The deferred tax asset includes the tax benefits associated with cumulative tax losses of $1,092 million and temporary
differences, which represent the cumulative expense of $1,487 million recorded in the Statement of Income that has not been deducted
on the company's tax returns. The valuation allowance at October 31, 2001, 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 $2,600 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 income tax benefit in 2001 was increased by $6 million for research and development tax credits. Income tax expense in 2000
was reduced by $20 million for research and development tax credits. These 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. 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 $980 million.
Reconciliation of the company's income (loss) before income taxes for financial statement purposes to U.S. taxable income (loss)
for the years ended October 31 is as follows:
Millions of dollars 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Income (loss) before income taxes ........................... $ (47) $ 224 $ 591
Exclusion of loss (income) of foreign subsidiaries .......... 11 (79) (102)
State income taxes .......................................... (2) (4) (4)
Temporary differences........................................ (144) 74 72
Permanent differences........................................ 19 2 (7)
------- ------- -------
Taxable income (loss).................................. $ (163) $ 217 $ 550
======= ======= =======
23
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 2001 have been hindered by a number of factors including the general economic slow down, higher fuel prices, driver
shortages, increased new and used truck inventories and higher insurance costs. The demand for new trucks reflected these adverse
conditions as the number of new truck orders dropped significantly throughout 2001, reducing the order backlog. The company's U.S.
and Canadian order backlog at October 31, 2001, was 16,600 units, compared with 24,000 units at October 31, 2000. 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 2001 through shutdown weeks at its
Chatham, Garland, Escobedo and Springfield Assembly Plants as well as at its Engine and Foundry Plants in Melrose Park, Waukesha and
Indianapolis.
The market environment in 2002 is anticipated to be similar to 2001, though with greater economic uncertainty as a result of the
terrorist attacks on September 11, 2001. Reflecting the continued industry-wide decline in new truck orders, the company lowered its
industry projections for 2002. The company currently projects 2002 U.S. and Canadian Class 8 heavy truck demand to be 154,000 units,
down 6% from 2001. Class 5, 6, and 7 medium truck demand, excluding school buses, is forecast at 112,500 units, 7% lower than in
2001. Demand for school buses is expected to remain consistent with 2001 at 28,000 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 2002 are expected to be
326,400 units, slightly higher than 2001.
The company launched the industry's first High Performance TrucksTM in February 2001. The launch of the new International(R)4000,
7000 and 8000 Series trucks, which are built for specific applications to improve customer profitability, represents the most
comprehensive product launch in the history of International.
In March 2001, Green Diesel Technology(TM), available in an International(R)530E engine, was certified for use in school buses by the
U.S. Environmental Protection Agency and the California Air Resources Board. The technology, which surpasses emissions standards
while maintaining an engine with diesel power, provides a cost-effective, clean-air solution for school districts.
In June 2001, the company, through its wholly owned subsidiary, American Transportation Corporation, opened a new school bus
manufacturing facility in Tulsa, Oklahoma. The nearly 1-million-square-foot plant currently employs more than 400 workers to
assemble the International integrated conventional school bus. An integrated chassis design combines the chassis, bus body and school
bus part components to deliver customer value in the areas of improved visibility, ergonomics and operating economy.
In September 2001, the company formed a joint venture with Ford. The joint venture will conduct business through two operating
companies named Blue Diamond Truck, S. de R.L. de C.V., and Blue Diamond Parts, LLC. Initially, the joint venture will produce Class
6 and 7 medium commercial trucks that will be marketed independently under the Ford brand and Navistar's International(R)brand. The
trucks will be produced at Navistar's plant in Escobedo, Mexico. In subsequent years, Blue Diamond plans to expand the range of
commercial trucks for both companies. Another element of the joint venture is service parts support, in which significant
opportunities exist to provide high quality product support to customers of the new vehicles.
24
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.
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, 2001 and 2000, the
net fair value of these instruments would decrease by approximately $20 million and $5 million, respectively. 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, 2001 and 2000, 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 $2 million and $10 million, respectively. 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.
25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements Page
- ------------------------------------------ ----
Statement of Financial Reporting Responsibility...................................................... 27
Independent Auditors' Report......................................................................... 28
Statement of Income for the years ended October 31, 2001, 2000 and 1999.............................. 29
Statement of Comprehensive Income for the years ended October 31, 2001, 2000 and 1999................ 29
Statement of Financial Condition as of October 31, 2001 and 2000..................................... 30
Statement of Cash Flow for the years ended October 31, 2001, 2000 and 1999........................... 31
Notes to Financial Statements
1 Summary of accounting policies.............................................................. 32
2 Postretirement benefits..................................................................... 36
3 Income taxes................................................................................ 39
4 Marketable securities....................................................................... 42
5 Receivables................................................................................. 43
6 Sale of receivables......................................................................... 43
7 Inventories................................................................................. 45
8 Property and equipment...................................................................... 46
9 Debt........................................................................................ 47
10 Other liabilities........................................................................... 49
11 Restructuring charge........................................................................ 50
12 Financial instruments....................................................................... 52
13 Commitments, contingencies, restricted assets, concentrations and leases.................... 54
14 Legal proceedings and environmental matters................................................. 56
15 Segment data................................................................................ 56
16 Preferred and preference stocks............................................................. 59
17 Common shareowners' equity.................................................................. 60
18 Earnings per share.......................................................................... 61
19 Stock compensation plans.................................................................... 62
20 Condensed consolidating guarantor and non-guarantor financial information................... 63
21 Selected quarterly financial data (unaudited)............................................... 67
Five -Year Summary of Selected Financial and Statistical Data........................................ 68
Additional Financial Information (unaudited)......................................................... 69
26
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
27
INDEPENDENT AUDITORS' REPORT
Navistar International Corporation,
Its Directors and Shareowners:
We have audited the Statement of Financial Condition of Navistar International Corporation and Consolidated Subsidiaries as of
October 31, 2001 and 2000, and the related Statements of Income, Comprehensive Income and of Cash Flow for each of the three years in
the period ended October 31, 2001. These consolidated financial statements are the responsibility of the company's management. Our
responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 2001 and 2000, and the results of their
operations and their cash flow for each of the three years in the period ended October 31, 2001, in conformity with accounting
principles generally accepted in the United States of America.
Deloitte & Touche LLP
December 10, 2001
Chicago, Illinois
28
STATEMENT OF INCOME
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------------------------
For the Years Ended October 31
Millions of dollars, except share data 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Sales and revenues
Sales of manufactured products................................. $ 6,423 $ 8,119 $ 8,326
Finance and insurance revenue.................................. 256 288 256
Other income................................................... 43 44 60
--------- --------- ---------
Total sales and revenues.................................. 6,722 8,451 8,642
--------- --------- ---------
Costs and expenses
Cost of products and services sold............................. 5,600 6,774 6,862
Cost of products sold related to restructuring................. 11 20 -
--------- --------- ---------
Total cost of products and services sold.................. 5,611 6,794 6,862
Restructuring and loss on anticipated sale of business......... (10) 286 -
Postretirement benefits........................................ 171 146 216
Engineering and research expense............................... 253 280 281
Sales, general and administrative expense...................... 547 488 486
Interest expense............................................... 161 146 135
Other expense.................................................. 36 87 71
--------- --------- ---------
Total costs and expenses.................................. 6,769 8,227 8,051
--------- --------- ---------
Income (loss) before income taxes..................... (47) 224 591
Income tax expense (benefit).......................... (24) 65 47
--------- --------- ---------
Net income (loss).............................................. $ (23) $ 159 $ 544
========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share
Basic..................................................... $ (0.39) $ 2.62 $ 8.34
Diluted................................................... $ (0.39) $ 2.58 $ 8.20
Average shares outstanding (millions)
Basic..................................................... 59.5 60.7 65.2
Diluted................................................... 59.5 61.5 66.4
- ----------------------------------------------------------------------------------------------------------------------
STATEMENT OF COMPREHENSIVE INCOME
For the Years Ended October 31
Millions of dollars 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss).............................................. $ (23) $ 159 $ 544
--------- --------- ---------
Other comprehensive income (loss), net of tax:
Minimum pension liability adjustment,
net of tax of $100, $(1) and $(81) million............ (164) 34 152
Foreign currency translation adjustments and other........ 2 (14) (18)
--------- --------- ---------
Other comprehensive income (loss), net of tax.................. (162) 20 134
--------- --------- ---------
Comprehensive income (loss).................................... $ (185) $ 179 $ 678
========= ========= =========
- ---------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
29
STATEMENT OF FINANCIAL CONDITION
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------
As of October 31
Millions of dollars 2001 2000
- -----------------------------------------------------------------------------------------------------------------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 822 $ 297
Marketable securities..................................... 41 57
Receivables, net.......................................... 917 1,035
Inventories............................................... 644 648
Deferred tax asset, net................................... 145 198
Other assets.............................................. 167 139
-------- --------
Total current assets........................................... 2,736 2,374
Marketable securities.......................................... 222 122
Finance and other receivables, net............................. 1,164 1,467
Property and equipment, net.................................... 1,669 1,778
Investments and other assets................................... 169 149
Prepaid and intangible pension assets.......................... 272 297
Deferred tax asset, net........................................ 835 664
-------- --------
Total assets................................................... $ 7,067 $ 6,851
======== ========
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt.... $ 412 $ 482
Accounts payable, principally trade....................... 1,103 1,091
Other liabilities......................................... 758 742
-------- --------
Total current liabilities...................................... 2,273 2,315
Debt: Manufacturing operations................................ 908 437
Financial services operations........................... 1,560 1,711
Postretirement benefits liability.............................. 824 660
Other liabilities.............................................. 375 414
-------- --------
Total liabilities..................................... 5,940 5,537
-------- --------
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).................................... (170) (143)
Accumulated other comprehensive loss........................... (339) (177)
Common stock held in treasury, at cost
(15.9 million shares held)................................ (507) (509)
-------- --------
Total shareowners' equity............................. 1,127 1,314
-------- --------
Total liabilities and shareowners' equity...................... $ 7,067 $ 6,851
======== ========
- -----------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
30
STATEMENT OF CASH FLOW
Navistar International Corporation
and Consolidated Subsidiaries
------------------------------------------------------
For the Years Ended October 31
Millions of dollars 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Cash flow from operations
Net income (loss).............................................. $ (23) $ 159 $ 544
Adjustments to reconcile net income (loss) to cash
provided by operations:
Depreciation and amortization......................... 217 199 174
Deferred income taxes................................. (11) 56 185
Deferred tax asset valuation allowance
and other tax adjustments........................ (6) (20) (178)
Postretirement benefits funding less than
(in excess of) expense........................... 58 (3) 47
Non-cash restructuring charge......................... 26 124 -
Other, net............................................ (67) (10) (31)
Change in operating assets and liabilities, net of
effects of acquisition:
Receivables........................................... 133 591 (445)
Inventories........................................... 40 (34) (129)
Prepaid and other current assets...................... (5) 1 (24)
Accounts payable...................................... (19) (288) 139
Other liabilities..................................... (123) (89) 20
--------- --------- ---------
Cash provided by operations............................... 220 686 302
--------- --------- ---------
Cash flow from investment programs
Purchases of retail notes and lease receivables................ (967) (1,450) (1,442)
Collections/sales of retail notes and lease receivables........ 1,244 1,089 1,282
Purchases of marketable securities............................. (268) (277) (396)
Sales or maturities of marketable securities................... 185 328 726
Capital expenditures........................................... (326) (553) (427)
Payments for acquisition, net of cash acquired................. (60) - -
Proceeds from sale-leasebacks.................................. 385 90 -
Property and equipment leased to others........................ (52) (90) (108)
Investment in affiliates....................................... 30 (1) (71)
Capitalized interest and other................................. (79) (28) (15)
--------- --------- ---------
Cash provided by (used in) investment programs............ 92 (892) (451)
--------- --------- ---------
Cash flow from financing activities
Issuance of debt............................................... 601 241 196
Principal payments on debt..................................... (268) (90) (135)
Net increase (decrease) in notes and debt outstanding
under bank revolving credit facility and
commercial paper programs................................. (122) 260 88
Purchases of common stock...................................... - (151) (144)
Other financing activities..................................... 2 - (3)
--------- --------- ---------
Cash provided by financing activities..................... 213 260 2
--------- --------- ---------
Cash and cash equivalents
Increase (decrease) during the year....................... 525 54 (147)
At beginning of the year.................................. 297 243 390
--------- --------- ---------
Cash and cash equivalents at end of the year................... $ 822 $ 297 $ 243
========= ========= =========
- ----------------------------------------------------------------------------------------------------------------------
See Notes to Financial Statements.
31
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
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). 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 in the U.S., Brazil and
Argentina. 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 company's domestic insurance subsidiary, Harco National Insurance Company (Harco), was sold
on November 30, 2001, as further described in Note 11.
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 2000 and 1999 amounts have been reclassified to conform with the
presentation used in the 2001 financial statements. Due to the sale of Harco, the net investment in Harco has been classified as
other current assets for all periods presented in the Statement of Financial Condition.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of
America 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 other business
conditions, and it is charged to sales, general and administrative expense when receivables are determined to be uncollectible.
32
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
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.
Receivables are charged off to the allowance for losses when the receivable is determined to be uncollectible.
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.
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.
33
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
1. SUMMARY OF ACCOUNTING POLICIES (continued)
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 $213 million, $226 million and $207
million in 2001, 2000 and 1999, respectively.
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 majority of the company's foreign subsidiaries, with the major exception being the company's engine subsidiary in
Brazil, International Engines South America (IESA), which uses the U.S. dollar as its functional currency. Translation adjustments
for these subsidiaries whose local currency is their functional currency are recorded as a component of accumulated other
comprehensive loss in shareowners' equity. 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 (loss) included foreign currency transaction losses of $6 million in 2001 and $4 million in 2000 and a $10 million gain in
1999.
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. NFC will make payments under the terms of the written caps if interest rates exceed
certain levels. All derivative instruments are recorded at fair value. For those instruments that do not qualify for hedge
accounting, changes in fair value are recognized in income. 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.
34
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
1. SUMMARY OF ACCOUNTING POLICIES (continued)
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, and 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.
On April 1, 2001, the company adopted Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The adoption of this statement has not had and is not expected to
have a material effect on the company's results of operations, financial condition or cash flows. Further disclosure may be found in
Note 6.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 141 (SFAS
141), "Business Combinations," Statement of Financial Accounting Standards No. 142 (SFAS 142), "Goodwill and Other Intangible
Assets," and Statement of Financial Accounting Standards No. 143 (SFAS 143), "Accounting for Asset Retirement Obligations." SFAS 141
applies to all business combinations initiated after June 30, 2001. SFAS 142 will be adopted by the company on November 1, 2001, and
will not have a material impact on the company's financial position, results of operations or cash flows. SFAS 143 is effective for
financial statements issued for fiscal years beginning after June 15, 2002. The company is evaluating the impact of SFAS 143 on its
financial position, results of operations and cash flows.
In August 2001, the FASB issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," which is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal
years. The company is evaluating the impact on the company's financial position, results of operations and cash flows.
35
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
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 2001 2000 1999
- ----------------------------------------------------------------------------------------------------------------------
Pension expense................................................ $ 46 $ 49 $ 77
Health/life insurance.......................................... 125 73 65
Profit sharing provision to Trust.............................. - 24 74
--------- --------- ---------
Total postretirement benefits expense.......................... $ 171 $ 146 $ 216
========= ========= =========
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, 2001, all legal funding requirements had been met. In 2002, the company expects
to contribute approximately $171 million to its pension plans to meet legal requirements.
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 2001 2000 1999 2001 2000 1999
- ------------------------------------------------ ---------- ----------- ---------- ---------- ----------- ----------
Service cost for benefits
earned during the period............. $ 28 $ 29 $ 34 $ 18 $ 15 $ 16
Interest on obligation.................... 250 245 229 159 126 107
Amortization costs and other.............. 71 76 99 28 13 15
Less expected return on assets............ (303) (301) (285) (80) (81) (73)
------ ------ ------ ------ ------ ------
Net postretirement benefits expense....... $ 46 $ 49 $ 77 $ 125 $ 73 $ 65
====== ====== ====== ====== ====== ======
"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.
36
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
2. POSTRETIREMENT BENEFITS (continued)
Postretirement Benefits Expense (continued)
The funded status of the company's plans as of October 31, 2001 and 2000, and reconciliation with amounts recognized in the
Statement of Financial Condition are provided below.
Pension Benefits Other Benefits
---------------- --------------
Millions of dollars 2001 2000 2001 2000
- ----------------------------------------------------------------- ------------ ------------- ------------ ------------
Change in benefit obligation
- ----------------------------
Benefit obligation at beginning of year...................... $ 3,255 $ 3,245 $ 2,015 $ 1,636
Service cost................................................. 28 29 18 15
Interest on obligation....................................... 250 245 159 126
Actuarial net loss........................................... 151 32 53 358
Benefits paid................................................ (300) (296) (127) (120)
--------- --------- --------- ----------
Benefit obligation at end of year............................ $ 3,384 $ 3,255 $ 2,118 $ 2,015
--------- --------- --------- ----------
Change in plan assets
- ---------------------
Fair value of plan assets at beginning of year............... $ 3,165 $ 3,113 $ 769 $ 764
Actual return on plan assets................................. (10) 299 (77) 63
Employer contributions....................................... 6 39 10 9
Benefits paid................................................ (289) (286) (57) (67)
--------- --------- --------- ----------
Fair value of plan assets at end of year..................... $ 2,872 $ 3,165 $ 645 $ 769
--------- --------- --------- ----------
Funded status................................................ $ (512) $ (90) $ (1,473) $ (1,246)
Unrecognized actuarial net loss.............................. 752 301 879 695
Unrecognized transition amount............................... 30 59 - -
Unrecognized prior service cost.............................. 19 36 - -
--------- --------- --------- ----------
Net amount recognized........................................ $ 289 $ 306 $ (594) $ (551)
========= ========= ========= ==========
Amounts recognized in the Statement of
Financial Condition consist of:
- ------------------------------
Prepaid benefit cost......................................... $ 241 $ 232 $ - $ -
Accrued benefit liability - current......................... (175) (46) (82) (76)
- noncurrent...................... (312) (185) (512) (475)
Intangible asset............................................. 31 65 - -
Accumulated other comprehensive loss......................... 504 240 - -
--------- --------- --------- ----------
Net amount recognized........................................ $ 289 $ 306 $ (594) $ (551)
========= ========= ========= ==========
37
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
2. POSTRETIREMENT BENEFITS (continued)
Postretirement Benefits Expense (continued)
The minimum pension liability adjustment included in accumulated other comprehensive loss is recorded in the Statement of
Financial Condition net of deferred income taxes of $190 million and $90 million at October 31, 2001 and 2000, respectively.
The Plan of Restructuring, as described in Note 11, resulted in curtailment losses of approximately $13 million related to the
company's postretirement obligations. These expenses are recorded as part of "Restructuring and loss on anticipated sale of
business" in the 2000 Statement of Income, and were classified in the Statement of Financial Condition as postretirement benefit
liabilities.
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 $1,968 million, $1,967 million and $1,481 million, respectively, as of
October 31, 2001, and $1,901 million, $1,900 million and $1,673 million, respectively, as of October 31, 2000.
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 2001 2000 1999 2001 2000 1999
- ------------------------------------------------ ---------- ----------- ---------- ----------- ---------- -----------
Discount rate used to determine
present value of benefit
obligation at end of year............ 7.4% 8.0% 7.9% 7.4% 8.2% 8.0%
Expected long-term rate of return
on plan assets for the year.......... 9.9% 9.9% 9.7% 10.8% 11.0% 10.8%
Expected rate of increase in future
compensation levels.................. 3.5% 3.5% 3.5% N/A N/A N/A
For 2002, the weighted average rate of increase in the per capita cost of covered health care benefits is projected to be 11.0%.
The rate is projected to decrease to 5.0% by the year 2007 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......... $ 28 $ (23)
Effect on postretirement
benefit obligation................... 293 (249)
38
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
3. INCOME TAXES
The domestic and foreign components of income (loss) before income taxes consist of the following:
Millions of dollars 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Domestic....................................................... $ (36) $ 145 $ 489
Foreign........................................................ (11) 79 102
--------- --------- ---------
Total income (loss) before income taxes........................ $ (47) $ 224 $ 591
========= ========= =========
The components of income tax expense (benefit) consist of the following:
Millions of dollars 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Current:
Federal................................................ $ - $ 4 $ 11
State and local........................................ 2 4 4
Foreign................................................ (9) 21 25
--------- --------- ---------
Total current expense (benefit)................................ (7) 29 40
--------- --------- ---------
Deferred:
Federal................................................ (5) 38 154
State and local........................................ - 7 23
Foreign................................................ (6) 11 8
--------- --------- ---------
Total deferred expense (benefit)............................... (11) 56 185
--------- --------- ---------
Less research and development credits.......................... (6) (20) -
Less valuation allowance adjustment............................ - - (178)
--------- --------- ---------
Total income tax expense (benefit)............................. $ (24) $ 65 $ 47
========= ========= =========
39
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
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 2001, 2000 and 1999 were $2 million, $29 million and $40 million, respectively.
The relationship of the tax expense (benefit) to income (loss) before taxes for 2001, 2000 and 1999 differs from the U.S.
statutory rate (35%) because of state income taxes and the benefit of NOL carryforwards in foreign countries. The 2001 and 2000
effective tax rates reflect a $6 million and $20 million research and development tax credit, respectively. Also, the 1999 effective
tax rate reflects a $178 million reduction in the deferred tax asset valuation allowance. 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 2001, 2000 and 1999 were 51.1%, 29.0% and 8.0%, 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. In the third quarter of 2001, the company recorded
an additional $6 million of research and development tax credits for 2001 research and development activities. 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.
Undistributed earnings of foreign subsidiaries were $115 million and $171 million at October 31, 2001 and 2000, 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.
40
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
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 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
United States
- -------------
Deferred tax assets:
Net operating loss carryforwards........................................... $ 359 $ 308
Alternative minimum tax and research and development credits............... 68 60
Postretirement benefits.................................................... 383 266
Product liability and warranty............................................. 79 104
Employee incentive programs................................................ 10 25
Restructuring costs........................................................ 38 81
Other liabilities.......................................................... 128 135
-------- --------
Total deferred tax assets.................................................. 1,065 979
-------- --------
Deferred tax liabilities:
Prepaid pension assets..................................................... (89) (92)
Depreciation............................................................... (8) (16)
-------- --------
Total deferred tax liabilities............................................. (97) (108)
-------- --------
Net deferred tax assets.................................................... 968 871
Less valuation allowance................................................... (65) (65)
-------- --------
Net deferred U.S. tax assets............................................... 903 806
-------- --------
Foreign
- -------
Deferred tax assets:
Net operating loss carryforwards........................................... 26 33
Postretirement benefits.................................................... 30 32
Other accrued liabilities.................................................. 42 12
-------- --------
Total deferred tax assets.................................................. 98 77
Less valuation allowance................................................... (21) (21)
-------- --------
Net deferred foreign tax assets............................................ 77 56
-------- --------
Total net deferred tax assets.............................................. $ 980 $ 862
======== ========
Deferred foreign tax liabilities:
Prepaid pension assets..................................................... $ (32) $ (36)
Depreciation............................................................... (30) (26)
Other...................................................................... (13) (27)
-------- --------
Total deferred foreign tax liabilities..................................... $ (75) $ (89)
======== ========
Amounts recognized in the Statement of Financial Condition:
Deferred tax assets........................................................ $ 980 $ 862
Less current portion.................................................. (145) (198)
-------- --------
Long-term deferred tax asset.......................................... $ 835 $ 664
======== ========
Other long-term liabilities................................................ $ (75) $ (89)
======== ========
41
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
3. INCOME TAXES (continued)
At October 31, 2001, the company had $1,016 million of domestic and $76 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......................................... $ 678
2009......................................... 35
2011......................................... 179
2021......................................... 163
Indefinite................................... 37
-------
Total........................................ $ 1,092
=======
Additionally, the reversal of net temporary differences of $1,487 million as of October 31, 2001, will create net tax deductions,
which, if not utilized previously, will expire subsequent to 2021.
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:
2001 2000
------------------------------------------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------
Corporate securities........................................... $ 216 $ 216 $ 154 $ 150
U.S. government securities..................................... 41 41 2 2
Mortgage and asset-backed securities........................... - - 18 18
Foreign government securities.................................. 6 6 6 6
------- ------- ------- -------
Total debt securities..................................... 263 263 180 176
------- ------- ------- -------
Equity securities.............................................. - - 2 3
------- ------- ------- -------
Total marketable securities.................................... $ 263 $ 263 $ 182 $ 179
======= ======= ======= =======
Contractual maturities of marketable debt securities at October 31 are as follows:
2001 2000
------------------------------------------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- ----------------------------------------------------------------------------------------------------------------------
Due in one year or less........................................ $ 255 $ 255 $ 142 $ 139
Due after one year through five years ......................... 3 3 19 18
Due after five years through 10 years ......................... 5 5 1 1
Due after 10 years ............................................ - - - -
------- ------- ------- -------
263 263 162 158
Mortgage and asset-backed securities........................... - - 18 18
------- ------- ------- -------
Total debt securities ......................................... $ 263 $ 263 $ 180 $ 176
======= ======= ======= =======
42
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
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 ended
October 31, 2001. The marketable securities balance at October 31, 2001 and 2000, includes $214 million and $85 million,
respectively, of marketable securities used as collateral in NFC's revolving retail warehouse facility. The entire portfolios are
invested in short-term instruments, but due to the liquidity restrictions, these short-term marketable securities are classified as
long-term.
5. RECEIVABLES
Receivables at October 31 are summarized by major classification as follows:
Millions of dollars 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Accounts receivable ......................................................... $ 634 $ 677
Retail notes ................................................................ 738 1,110
Lease financing.............................................................. 309 291
Wholesale notes.............................................................. 116 146
Amounts due from sales of receivables........................................ 324 317
Allowance for losses......................................................... (40) (39)
--------- ---------
Total receivables, net.............................................. 2,081 2,502
Less current portion................................................ (917) (1,035)
--------- ---------
Finance and other receivables, net...................................... $ 1,164 $ 1,467
========= =========
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, 2001 were: 2002 - $986 million, 2003 -
$344 million, 2004 - $245 million, 2005 - $190 million, 2006 - $123 million and thereafter - $32 million. Unearned finance income
totaled $123 million at October 31, 2001.
Proceeds from sales of retail notes receivable, net of underwriting costs, were $1,239 million in 2001, $958 million in 2000 and
$1,192 million in 1999.
During the period November 1, through December 10, 2001, NFC sold $470 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 $16 million gain was recognized on this sale.
6. SALE OF RECEIVABLES
On April 1, 2001, the company adopted Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities". The adoption of this statement has not had and is not expected to
have a material effect on the company's results of operations, financial condition or cash flows.
43
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
6. SALE OF RECEIVABLES (continued)
NFC securitizes and sells certain retail and wholesale receivables through NFRRC, Navistar Financial Securities Corporation
(NFSC), Truck Retail Accounts Corporation (TRAC) and Truck Engine Receivables Financing Corporation (TERFCO), all special purpose,
wholly owned subsidiaries of NFC. NFRRC, NFSC, TRAC and TERFCO have limited recourse on the sold receivables. The terms of
receivable sales generally require NFC to maintain cash reserves with the trusts and conduits as credit enhancement. These cash
reserves are restricted under the terms of the securitized sales agreements. The maximum exposure under all receivable sale recourse
provisions at October 31, 2001, was $340 million; however, management believes the recorded reserves for losses are adequate.
NFC continues to service the receivables, for which a servicing fee is received. Servicing fees are earned on a level yield
basis over the terms of the related sold receivables. Servicing fees are typically set at 1.0% of average outstanding net receivable
balances, representing NFC's estimated costs to service the receivables.
Gains or losses on sales of receivables are estimated based upon the present value of future expected cash flows using
assumptions for prepayment speeds and current market interest rates. These assumptions use management's best estimates commensurate
with the risks involved. An allowance for credit losses is provided prior to the receivable sale and is reclassified as part of
retained interest upon sale.
Finance receivable balances do not include receivables sold by NFC to public and private investors with limited recourse
provisions. Outstanding sold receivable balances at October 31 are as follows, in millions:
2001 2000
----------------- ---------------
Retail notes.............................. $ 1,863 $ 1,730
Wholesale notes........................... 797 883
Retail accounts........................... 191 80
------- ------
Total................................ $ 2,851 $ 2,693
======= =====
Additional financial data for gross serviced finance receivables as of October 31, 2001, is as follows, in millions:
Retail Wholesale
Notes Leases Notes Accounts
------------ ------------ -------------- --------------
Gross serviced finance receivables.......... $ 2,720 $ 531 $ 817 $ 416
Gross serviced finance receivables with
installments past due................... 25 13 7 18
Credit losses net of recoveries............. 22 2 1 -
During 2001, NFC sold $1,365 million of retail notes, net of unearned finance income, through NFRRC. Aggregate gains of $21
million were recognized on these sales. Key economic assumptions used in measuring these gains and the related retained interest at
October 31, 2001, were a prepayment speed of 1.1 to 1.3, a weighted average remaining life of 25 months and a residual cash flows
discount rate of 6.41% to 9.61%.
44
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
6. SALE OF RECEIVABLES (continued)
At October 31, 2001, NFSC had in place a revolving wholesale note trust that provides for the funding of $1,012 million of
eligible wholesale notes. TERFCO had in place a revolving trust that provides for the funding of $100 million of eligible Ford
accounts receivable. TRAC had in place a revolving retail account conduit that provides for the funding of $100 million of eligible
retail accounts.
When receivables are sold, NFC retains interest in the securitized receivables in the form of interest-only strips, servicing
rights, cash reserve accounts and subordinated certificates. The carrying amount of these retained interests approximate fair value
and were $324 million and $317 million at October 31, 2001 and 2000, respectively. These amounts are included in finance and other
receivables in the Statement of Financial Condition.
The following table summarizes certain cash flows received from (paid to) securitization trusts/conduits during the year ended
October 31, 2001, in millions:
Proceeds from initial sales of retail receivables.................................................. $ 1,390
Proceeds from subsequent sales of receivables into revolving facilities............................ 5,064
Servicing fees received............................................................................ 27
All other cash received from trusts................................................................ 193
Purchase of delinquent or foreclosed receivables................................................... (96)
Cash used for pool buybacks........................................................................ (221)
7. INVENTORIES
Inventories at October 31 are as follows:
Millions of dollars 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Finished products............................................................ $ 405 $ 394
Work in process.............................................................. 33 42
Raw materials and supplies................................................... 206 212
-------- --------
Total inventories............................................................ $ 644 $ 648
======== ========
45
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
8. PROPERTY AND EQUIPMENT
At October 31, property and equipment includes the following:
Millions of dollars 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Land ........................................................................ $ 19 $ 17
Buildings, machinery and equipment at cost:
Plants.................................................................. 1,819 1,559
Distribution............................................................ 132 101
Construction in progress................................................ 281 578
Net investment in operating leases...................................... 311 311
Other .................................................................. 236 185
-------- --------
Total property.......................................................... 2,798 2,751
-------- --------
Less accumulated depreciation and amortization.......................... (1,129) (973)
-------- --------
Total property and equipment, net................................... $ 1,669 $ 1,778
======== ========
Total property includes property under capitalized lease obligations of $21 million at October 31, 2001 and 2000. Future minimum
rentals on net investments in operating leases are: 2002 - $92 million, 2003 - $79 million, 2004 - $61 million, $2005 - $35 million
and thereafter - $26 million. Capitalized interest for 2001, 2000 and 1999 was $41 million, $32 million and $15 million,
respectively.
In 2001, the company entered into three sale leaseback arrangements with various financial institutions. Under the first
arrangement, truck cab assembly machinery with a net book value of $58 million, was sold for $60 million and leased back under an
8-year operating lease agreement. Under the second arrangement, tooling and related engine manufacturing equipment with a net book
value of $261 million, was sold for $260 million and leased back under an 11.5-year operating lease agreement. The third arrangement
consisted of additional engine manufacturing equipment with a net book value of $62 million that was sold for $65 million and leased
back under a 10-year operating lease agreement. The gain on these transactions was deferred and is being amortized over the terms of
the lease agreements.
46
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
9. DEBT
Millions of dollars 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Manufacturing operations
Notes payable and current maturities of long-term debt..................... $ 58 $ 135
---------- ----------
8% Senior Subordinated Notes, due 2008..................................... 250 250
7% Senior Notes, due 2003.................................................. 100 100
9 3/8% Senior Notes, due 2006.............................................. 400 -
Mexican credit facility.................................................... - 75
Bank term loans............................................................ 131 -
9.95% Senior Notes, due 2011............................................... 19 -
Capitalized leases and other............................................... 8 12
---------- ----------
Total long-term debt................................................... 908 437
---------- ----------
Manufacturing operations debt................................................... 966 572
---------- ----------
Financial services operations
Commercial paper........................................................... - 30
Current maturities of long-term debt....................................... 100 133
Bank revolvers, variable rates............................................. 154 184
9% Senior Subordinated Notes, due 2002..................................... 100 -
---------- ----------
Total short-term debt.................................................. 354 347
---------- ----------
Bank revolvers, variable rates, due through 2005........................... 800 841
Revolving retail warehouse facility, variable rates, due October 2005...... 500 500
---------- ----------
Total long-term senior debt............................................ 1,300 1,341
9% Senior Subordinated Notes, due 2002..................................... - 100
Capitalized leases, 4.1% to 6.7%, due serially through 2007................ 260 270
---------- ----------
Total long-term debt................................................... 1,560 1,711
---------- ----------
Financial services operations debt.............................................. 1,914 2,058
---------- ----------
Total debt...................................................................... $ 2,880 $ 2,630
========== ==========
The effective annual interest rate on manufacturing notes payable was 7.8% in 2001, 7.8% in 2000 and 7.7% in 1999. Consolidated
interest payments were $179 million, $166 million and $149 million in 2001, 2000 and 1999, respectively.
In May 2001, the company completed the private placement of $400 million 9 3/8% Senior Notes due 2006. The proceeds of the Senior
Notes were used to enable the company's Mexican subsidiary to repay all of its borrowings under its loan agreement. The remainder of
the net proceeds is to be used for general corporate purposes, including working capital and capital expenditures.
47
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
9. DEBT (continued)
The company arranged financing for $296 million of funds denominated in U.S. dollars and Mexican pesos to be used for investment
in the company's Mexican financial services operations. As of October 31, 2001, borrowings outstanding under these arrangements were
$265 million, of which 36% is denominated in dollars and 64% in pesos. The interest rates on the dollar-denominated debt are at a
negotiated fixed rate or at a variable rate based on LIBOR. 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 14.9% for 2001 and
15.3% for 2000.
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
- ---------------------------------------------------------------------------------------------------------------------
2002........................................................... $ 58 $ 354 $ 412
2003........................................................... 195 165 360
2004........................................................... 32 98 130
2005........................................................... 9 556 565
2006 and thereafter............................................ 672 741 1,413
--------- --------- ---------
Total..................................................... $ 966 $ 1,914 $ 2,880
========= ========= =========
Weighted average interest rate on total debt, including short-term, and the effect of discounts and related
amortization for the years ended:
October 31, 2001............................................... 8.5% 5.7% 6.6%
October 31, 2000............................................... 9.3% 6.4% 7.5%
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.
At October 31, 2001, NFC had an $820 million contractually committed bank revolving credit facility that will mature in November
2005. Under the 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 the company and NFC.
At October 31, 2001, NFC had a $500 million revolving retail warehouse facility due in October 2005. Truck Retail Instalment
Paper Corporation, a special purpose wholly owned subsidiary of NFC, issued $475 million of senior class AAA rated and $25 million of
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.
Available funding under the bank revolving credit facility, the revolving retail warehouse facility and the revolving wholesale
note trust was $539 million. When combined with unrestricted cash and cash equivalents, $561 million was available to fund the
general business purposes of NFC at October 31, 2001.
48
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
9. DEBT (continued)
NFC's wholly owned subsidiaries, NFSC, NFRRC and 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 $1,012 million of eligible wholesale notes.
At October 31, 2001, 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 a variable funding certificate
with a maximum capacity of $200 million. This facility expires in January 2002 with an option for renewal.
TERFCO has in place a revolving trust that provides for the funding of $100 million of eligible Ford accounts receivable. TRAC
has in place a revolving retail account conduit that provides for the funding of $100 million of eligible retail accounts.
NFC enters 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 debt as capital lease obligations.
10. OTHER LIABILITIES
Major classifications of other liabilities at October 31 are as follows:
Millions of dollars 2001 2000
- ----------------------------------------------------------------------------------------------------------------------
Product liability and warranty............................................. $ 241 $ 321
Employee incentive programs................................................ 34 69
Payroll, commissions and employee-related benefits......................... 88 93
Postretirement benefits liability.......................................... 257 122
Loss reserves and unearned premiums........................................ 22 35
Taxes...................................................................... 114 133
Sales and marketing........................................................ 37 53
Long-term disability and workers' compensation............................. 48 43
Environmental.............................................................. 11 14
Interest................................................................... 36 22
Restructuring reserve...................................................... 90 173
Other...................................................................... 155 78
-------- --------
Total other liabilities........................................... 1,133 1,156
Less current portion.............................................. (758) (742)
-------- --------
Other long-term liabilities....................................... $ 375 $ 414
======== ========
49
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
11. 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"). In the fourth quarter of 2001, the company recorded a $1 million net adjustment to the various initiatives, which
brought the total charge to $307 million. 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 $307 million, $150 million represents non-cash charges. Approximately $8 million and
$59 million was spent in 2000 and 2001, respectively. The remaining $90 million is expected to be spent as follows: 2002 - $32
million, 2003 - $20 million, 2004 - $11 million and beyond - $27 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 were substantially complete by November 2001.
Components of the restructuring charge are as follows:
2001 Balance
Total Incurred ---------------------------- Oct. 31,
Millions of dollars Charges 2000 Incurred Adjustments 2001
----------------------------------- ------------- ------------- ------------- ------------ -------------
Severance and other benefits $ 104 $ (7) $ (36) $ (29) $ 32
Inventory write-downs 20 (20) (11) 11 -
Other asset write-downs and losses 93 (93) (28) 28 -
Lease terminations 33 - (3) 5 35
Loss on sale of business 17 - (2) (13) 2
Dealer termination and exit costs 39 (1) (16) (1) 21
--------- -------- --------- -------- ---------
Total $ 306 $ (121) $ (96) $ 1 $ 90
========= ======== ========= ======== =========
The severance and other benefits costs, asset write-downs and losses, lease terminations, loss on sale of business, dealer
termination and exit costs, totaling $286 million in 2000 and $(10) million in 2001, are presented as "Restructuring and loss on
anticipated sale of business" in the Statement of Income. Inventory write-down costs of $20 million in 2000 and $11 million in 2001
are included in "Cost of products sold related to restructuring" in the Statement of Income.
50
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
11. RESTRUCTURING CHARGE (continued)
A description of the significant components of the restructuring charge is as follows:
At October 31, 2000, pursuant to the Plan of Restructuring, it was anticipated that 3,100 positions would be eliminated
throughout the company. Severance and other benefit costs include costs related to the reduction of approximately 2,100
employees from the workforce, primarily in North America. At October 31, 2001, the company revised its total number of severance
related workforce reduction to 1,900, which resulted in a reduction to the severance accrual of $29 million. As of October 31,
2001, approximately $31 million had been paid for a portion of the severance and other benefits for 1,500 terminated employees,
and $12 million of curtailment losses have been reclassified as a noncurrent postretirement liability. Of the $31 million of
total severance and benefits costs paid, $24 million was paid during 2001. The remaining reduction of approximately 400
employees will be substantially completed by December 2001 when the majority of the NGV products will be in production. The
workforce 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.
As part of the Plan of Restructuring, the company finalized its manufacturing plan for its new Ford Motor Company (Ford) diesel
engines and next generation vehicles. 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 $20 million was recognized for the write-down of service inventory that will be replaced. The remainder of the
asset write-downs and losses primarily relates to assets that were disposed of or abandoned as a direct result of the workforce
reductions. During 2001, additional asset and inventory write-downs related to the original initiatives were identified, which
resulted in an additional charge of $39 million.
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. At October 31, 2001, the accrual for lease termination was increased by $5 million primarily due to lower
estimated sublease income. Payments incurred to date for lease termination costs were $3 million, all of which were incurred in
2001.
51
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
11. RESTRUCTURING CHARGE (continued)
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. On November 30, 2001, NFC finalized the sale of
all of the stock of Harco to IAT Reinsurance Syndicate Ltd., a Bermuda reinsurance company for approximately $62 million in
cash. Based upon the sales price to IAT, the company reduced its loss estimate by $13 million. Additionally, a $1 million
curtailment loss has been reclassified as a noncurrent postretirement liability. Payments incurred related to exit costs of
approximately $1 million were incurred in 2001. Due to the sale of Harco, the net investment in Harco at October 31, 2001 and
2000, has been classified as other current assets within the Statement of Financial Condition and its revenues and expenses have
been excluded from the Statement of Income for 2001. Harco's revenues and pretax income, respectively, were $62 million and $10
million in 2001, $56 million and $1 million in 2000, and $44 million and $5 million in 1999. Total assets, primarily marketable
securities, and total liabilities, primarily loss reserves, were $165 million and $96 million, respectively, as of October 31,
2001, and $155 million and $94 million, respectively, as of October 31, 2000.
Dealer termination and exit costs of $39 million principally include $14 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. During 2001, the accrual for this initiative was reduced by
approximately $1 million mainly due to lower estimated dealer termination costs. As of October 31, 2001, approximately $17
million has been paid for dealer termination and exit costs, of which $16 million was paid during 2001.
12. 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:
2001 2000
------------------------------------------------------
Carrying Fair Carrying Fair
Millions of dollars Amount Value Amount Value
- ----------------------------------------------------------------------------------------------------------------------
Total receivables, net......................................... $ 2,081 $ 2,112 $ 2,502 $ 2,488
Long-term investments and other assets........................ 336 337 288 286
Total debt..................................................... 2,880 2,854 2,630 2,611
Cash and cash equivalents approximate fair value. The cost and fair value of marketable securities are disclosed in Note 4.
52
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
12. FINANCIAL INSTRUMENTS (continued)
Fair Value of Financial Instruments (continued)
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 long-term 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.
The financial services operations manage exposure to fluctuations in interest rates by limiting the amount of fixed rate assets
funded with variable rate debt generally by selling fixed rate receivables on a fixed rate basis and by utilizing derivative
financial instruments. These derivative financial instruments may include 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 the 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. For
transactions which qualify for hedge accounting, the fair value of the derivatives is deferred until the designated loans are sold.
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, 2001, the interest rate cap had a notional amount of $138 million and is recorded at fair value with changes in fair
value recognized in income. For the year ended October 31, 2001, the impact on income was not material.
53
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
12. FINANCIAL INSTRUMENTS (continued)
Derivatives Held or Issued for Purposes Other Than Trading (continued)
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, 2001, the difference between the amortizing swap notional amount and the net outstanding principal
balance of the sold retail receivables was $32 million and had a net fair value of $1 million.
In October 2000, NFC entered into a $500 million retail revolving 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, 2001, the interest rate caps each had a notional amount of $500 million and a net fair value of
zero.
In December 2000, NFC sold fixed rate retail receivables on a variable rate basis and entered into an interest rate swap
agreement. 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 and on changes in the interest rates. As of
October 31, 2001, the difference between the amortizing swap notional amount and the net outstanding principal balance of the sold
retail receivables was $3 million and had an immaterial fair value.
In July 2001, NFC entered into an interest rate swap agreement to fix a portion of its floating rate revolving debt. This
transaction is accounted for as a cash flow hedge, and consequently, gains and losses on this derivative are recorded in other
comprehensive income. Derivative gains and losses are reclassified from other comprehensive income as the hedged item affects
earnings. There was no ineffectiveness related to this derivative during 2001. As of October 31, 2001, the interest rate swap had a
notional amount of $35 million and a net fair value of $2 million.
At October 31, 2001, the company held derivative contracts with notional amounts of $68 million. At October 31, 2001, the
unrealized net loss on these contracts was not material.
13. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS
AND LEASES
Commitments, Contingencies and Restricted Assets
At October 31, 2001, commitments for capital expenditures in progress were approximately $187 million. At October 31, 2001, $32
million of a Mexican subsidiary's receivables were pledged as collateral for bank borrowings. In addition, as of October 31, 2001,
the company is contingently liable for approximately $163 million for various purchasing commitments, credit guarantees and buyback
programs. Based on historical loss trends, the company's exposure is not considered material.
54
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
13. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS
AND LEASES (continued)
Commitments, Contingencies and Restricted Assets (continued)
At October 31, 2001, 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 $288 million on retail contracts and
$37 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, 2001, the maximum amount of dividends that were available for distribution
under the most restrictive covenants was $187 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, 2001.
Concentrations
At October 31, 2001, the company employed 8,600 hourly workers and 6,200 salaried workers in the U.S. and Canada. Approximately
92% of the hourly employees and 20% of the salaried employees are represented by unions. Of these represented employees, 93% 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.
Sales of mid-range diesel engines to Ford by the engine segment were 21% of consolidated sales and revenues in 2001, 18% in 2000
and 17% 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 7.3 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.
Leases
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, 2001, 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: 2002 - $80 million, 2003 - $72 million, 2004 - $64 million, 2005 - $64 million and thereafter - $201 million. Total operating
lease expense was $44 million in 2001, $33 million in 2000 and $30 million in 1999. Income received from sublease rentals was $5
million in 2001, $6 million in 2000 and $7 million in 1999.
55
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
14. 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.
15. 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., Mexico and Brazil. 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, which was sold on November 30, 2001, provided 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.
56
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
15. SEGMENT DATA (continued)
Reportable operating segment data follows:
Financial
Millions of dollars Truck Engine Services Total
- ----------------------------------------------- ---------------- ------------------ ---------------- -----------------
For the year ended October 31, 2001
----------------------------------------------------------------------
External revenues............................. $ 4,651 $ 1,772 $ 280 $ 6,703
Intersegment revenues......................... - 529 57 586
--------- --------- --------- ---------
Total revenues........................... $ 4,651 $ 2,301 $ 337 $ 7,289
========= ========= ========= =========
Interest expense.............................. $ - $ - $ 134 $ 134
Depreciation and amortization expense......... 82 53 67 202
Segment profit (loss) (a)..................... (236) 257 88 109
As of October 31, 2001
----------------------------------------------------------------------
Segment assets................................ $ 1,919 $ 1,053 $ 2,474 $ 5,446
Capital expenditures (b)...................... 124 180 54 358
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 and amortization expense......... 74 53 59 186
Segment profit (a)............................ 179 331 98 608
As of October 31, 2000
----------------------------------------------------------------------
Segment assets................................ $ 1,939 $ 1,066 $ 2,806 $ 5,811
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 and amortization expense......... 62 59 48 169
Segment profit................................ 295 294 102 691
As of October 31, 1999
----------------------------------------------------------------------
Segment assets................................ $ 1,852 $ 814 $ 2,928 $ 5,594
Capital expenditures (b)...................... 199 213 110 522
(a) Before the impact of the restructuring charge.
(b) Capital expenditures include the net increase in property and equipment leased to others.
57
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
15. SEGMENT DATA (continued)
Reconciliation to the consolidated financial statements as of and for the years ended October 31 was as follows:
Millions of dollars 2001 2000 1999
- ------------------------------------------------- ---------------------- ----------------------- ----------------------
Segment sales and revenues...................... $ 7,289 $ 9,182 $ 9,351
Other income.................................... 19 33 43
Intercompany.................................... (586) (764) (752)
--------- --------- ---------
Consolidated sales and revenues................. $ 6,722 $ 8,451 $ 8,642
========= ========= =========
Segment profit.................................. $ 109 $ 608 $ 691
Restructuring charge............................ (1) (306) -
Corporate items................................. (145) (89) (103)
Manufacturing net interest income (expense)..... (10) 11 3
--------- --------- ---------
Consolidated pretax income (loss)............... $ (47) $ 224 $ 591
========= ========= =========
Segment interest expense........................ $ 134 $ 129 $ 103
Manufacturing expense and eliminations.......... 27 17 32
--------- --------- ---------
Consolidated interest expense................... $ 161 $ 146 $ 135
========= ========= =========
Segment depreciation
and amortization expense................... $ 202 $ 186 $ 169
Corporate expense............................... 15 13 5
--------- --------- ---------
Consolidated depreciation
and amortization expense................... $ 217 $ 199 $ 174
========= ========= =========
Segment assets.................................. $ 5,446 $ 5,811 $ 5,594
Cash and marketable securities.................. 718 167 327
Deferred taxes.................................. 980 862 896
Corporate intangible pension assets............. 4 50 92
Other corporate and eliminations................ (81) (39) (62)
--------- --------- ---------
Consolidated assets............................. $ 7,067 $ 6,851 $ 6,847
========= ========= =========
Segment capital expenditures (a)................ $ 358 $ 628 $ 522
Corporate capital expenditures.................. 20 15 13
--------- --------- ---------
Consolidated capital expenditures............... $ 378 $ 643 $ 535
========= ========= =========
(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 2001 2000 1999
- ------------------------------------------------- ---------------------- ----------------------- ----------------------
Revenues
United States...................... $ 5,575 $ 7,481 $ 7,695
Foreign countries.................. 1,147 970 947
Property and equipment
United States...................... $ 1,354 $ 1,485 $ 1,188
Foreign countries.................. 315 293 287
58
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
16. 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, 2001, 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 of the company to shareowners of
record as of the close of business on May 3, 1999. On October 16, 2001, the company's board of directors authorized the redemption
of these rights. The rights were redeemed at a price of $0.01 per right, payable in cash. The redemption payment was mailed on
November 15, 2001, to shareowners of record on October 26, 2001. As a result of the redemption, the rights plan has been terminated.
At October 31, 2001, there were 161,000 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, 2001, the company had a surplus of $1,119 million as defined under DGCL.
59
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
17. COMMON SHAREOWNERS' EQUITY
Changes in certain shareowners' equity accounts are as follows:
Millions of dollars 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------
Common Stock .................................................. $ 2,139 $ 2,139 $ 2,139
=========== =========== ===========
Retained Earnings (Deficit)
Beginning of year.............................................. $ (143) $ (297) $ (829)
Net income (loss)........................................... (23) 159 544
Other ......................................................... (4) (5) (12)
----------- ----------- -----------
End of year ................................................... $ (170) $ (143) $ (297)
=========== =========== ===========
Common Stock Held in Treasury
Beginning of year.............................................. $ (509) $ (358) $ (214)
Repurchase of common stock and other........................... 2 (151) (144)
----------- ------------ ------------
End of year ................................................. $ (507) $ (509) $ (358)
=========== =========== ===========
Common Stock
The company has authorized 110 million shares of common stock with a par value of $0.10 per share. At October 31, 2001 and 2000,
there were 59.4 million shares of common stock outstanding, net of common stock held in treasury.
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
----------------------------------------------------------------------------
2001 .............................. $ (314) $ (25) $ (339)
2000 .............................. (150) (27) (177)
1999 .............................. (184) (13) (197)
The minimum pension liability adjustment is recorded in the Statement of Financial Condition net of deferred income taxes of
$190 million and $90 million at October 31, 2001 and 2000, respectively.
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, 2001.
60
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
18. EARNINGS PER SHARE
Earnings (loss) per share was computed as follows:
Millions of dollars, except share and per share data 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Net income (loss)............................................... $ (23) $ 159 $ 544
======== ======== ========
Average shares outstanding (millions)
Basic...................................................... 59.5 60.7 65.2
Dilutive effect of options outstanding
and other dilutive securities.......................... - 0.8 1.2
-------- -------- --------
Diluted.................................................... 59.5 61.5 66.4
======== ======== ========
Earnings (loss) per share
Basic...................................................... $ (0.39) $ 2.62 $ 8.34
Diluted.................................................... (0.39) 2.58 8.20
The computation of diluted shares outstanding for the year ended October 31, 2001, excludes incremental shares of 0.6 million
related to employee stock options and other dilutive securities. These shares are excluded due to their anti-dilutive effect as a
result of the company's loss for the year ended October 31, 2001.
61
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
19. 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," the pro forma net loss would have been $32 million
in 2001, and pro forma net income would have been $152 million in 2000 and $542 million in 1999; the pro forma diluted loss per share
would have been $0.53 in 2001, and pro forma earnings per share would have been $2.47 in 2000 and $8.16 in 1999; and the pro forma
basic loss per share would have been $0.53 in 2001, and pro forma earnings per share would have been $2.51 in 2000 and $8.30 in 1999.
The weighted-average fair values at date of grant for options granted during 2001, 2000 and 1999 were $7.78, $14.50 and $8.15,
respectively, and were estimated using the Black-Scholes option-pricing model with the following assumptions:
2001 2000 1999
---- ---- ----
Risk-free interest rate......................................... 5.4% 6.1% 4.5%
Dividend yield.................................................. 0% 0% 0%
Expected volatility............................................. 39.1% 36.9% 35.1%
Expected life in years.......................................... 4.0 4.0 4.0
The following summarizes stock option activity for the years ended October 31:
2001 2000 1999
---------------------------- ----------------------------- ---------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares in thousands Shares Price Shares Price Shares Price
- ------------------- ------------ -------------- ------------ --------------- ------------- -------------
Options outstanding
at beginning of year...... 3,814 $ 30.20 3,102 $ 23.30 2,538 $ 20.29
Granted...................... 1,289 21.40 1,470 39.67 1,271 27.16
Exercised.................... (142) 21.57 (624) 16.72 (563) 17.78
Canceled..................... (131) 34.52 (134) 37.25 (144) 25.82
------- -------- ------- -------- ------- --------
Options outstanding
at end of year........... 4,830 $ 27.98 3,814 $ 30.20 3,102 $ 23.30
======= ======== ======= ======== ======= ========
Options exercisable
at end of year............ 2,832 $ 29.33 1,445 $ 23.36 1,468 $ 19.94
======= ======== ======= ======== ======= ========
Options available for
grant at end of year...... 140 856 1,564
======= ======= =======
62
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
19. STOCK COMPENSATION PLANS (continued)
The following table summarizes information about stock options outstanding and exercisable at October 31, 2001.
Options Outstanding 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 - $ 13.75 354 4.1 $ 11.33 354 $ 11.33
17.41 - 26.66 2,854 7.5 23.32 1,282 24.63
27.95 - 37.72 362 7.2 34.50 331 34.82
38.19 - 53.69 1,260 7.7 41.36 865 41.56
20. CONDENSED CONSOLIDATING GUARANTOR AND NON-GUARANTOR FINANCIAL INFORMATION
The following tables set forth the condensed consolidating Statements of Financial Condition as of October 31, 2001 and
2000, and the Statements of Income and Cash Flow for each of the three years in the period ended October 31, 2001. The following
information is included as a result of the guarantee of the $400 million Senior Notes by International, exclusive of its
subsidiaries. International is a direct wholly owned subsidiary of NIC. International, exclusive of its subsidiaries, also
guarantees NIC's obligations under its 7% senior notes due 2003 and 8% senior subordinated notes due 2008. None of NIC's other
subsidiaries guarantee any of these notes. Each of the guarantees is full and unconditional. Separate financial statements and
other disclosures concerning International have not been presented because management believes that such information is not material
to investors. NIC includes the consolidated financial results of the parent company only, with all of its wholly owned subsidiaries
accounted for under the equity method. International, for purposes of this disclosure only, includes the consolidated financial
results of its wholly owned subsidiaries accounted for under the equity method. "Non-Guarantor Companies and Eliminations" includes
the consolidated financial results of all other non-guarantor subsidiaries including the elimination entries for all intercompany
transactions. All applicable corporate expenses have been allocated appropriately among the guarantor and non-guarantor subsidiaries.
The parent company files a consolidated U.S. federal income tax return which includes International and its U.S.
subsidiaries. International has a tax allocation agreement (Tax Agreement) with the parent company which requires International to
compute its separate federal income tax expense based on its adjusted book income. Any resulting tax liability is paid to the parent
company. In addition, under the Tax Agreement, International is required to pay to the parent company any tax payments received from
its subsidiaries. The effect of the Tax Agreement is to allow the parent company, rather than International, to utilize U.S.
operating income/losses and NIC operating loss carryforwards.
63
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements
20. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
Non-Guarantor
Companies and
NIC International Eliminations Consolidated
-------------- ---------------- ------------------ ---------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED OCTOBER 31, 2001
Sales and revenues....................................... $ 11 $ 5,362 $ 1,349 $ 6,722
----------- ------------ ----------- ------------
Cost of products and services sold....................... - 4,755 845 5,600
Restructuring and loss on anticipated sale of business... - 13 (12) 1
All other operating expenses............................. (68) 955 284 1,171
------------ ------------ ------------ ------------
Total costs and expenses............................. (68) 5,723 1,117 6,772
------------ ------------ ------------ ------------
Equity in income (loss) of nonconsolidated subsidiaries.. (126) 180 (51) 3
------------ ------------ ------------ ------------
Income (loss) before income taxes........................ (47) (181) 181 (47)
Income tax expense (benefit)............................. (24) 77 (77) (24)
------------- ------------ ------------- ------------
Net income (loss)........................................ $ (23) $ (258) $ 258 $ (23)
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF OCTOBER 31, 2001
ASSETS
Cash and marketable securities........................... $ 698 $ 6 $ 381 $ 1,085
Receivables, net......................................... 7 181 1,893 2,081
Inventories.............................................. - 336 308 644
Property and equipment, net.............................. - 873 796 1,669
Investment in affiliates................................. (1,215) 885 330 -
Deferred tax asset and other assets...................... 968 230 390 1,588
------------ ------------ ------------ ------------
Total assets......................................... $ 458 $ 2,511 $ 4,098 $ 7,067
============ ============ ============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Debt..................................................... $ 821 $ 21 $ 2,038 $ 2,880
Postretirement benefits liability........................ - 986 95 1,081
Amounts due (from) to affiliates......................... (1,566) 1,374 192 -
Other liabilities........................................ 76 1,397 506 1,979
------------ ------------ ------------ ------------
Total liabilities.................................... (669) 3,778 2,831 5,940
------------ ------------ ------------ ------------
Shareowners' equity (deficit)............................ 1,127 (1,267) 1,267 1,127
------------ ------------ ------------ ------------
Total liabilities and shareowners' equity................ $ 458 $ 2,511 $ 4,098 $ 7,067
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE YEAR ENDED OCTOBER 31, 2001
Cash provided by (used in) operations.................... $ 211 $ (141) $ 150 $ 220
------------ ------------ ------------ ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables.... - - 277 277
Net (increase) decrease in marketable securities......... 44 - (127) (83)
Capital expenditures..................................... - (265) (61) (326)
Other investing activities............................... (38) 374 (112) 224
------------ ------------ ------------ ------------
Cash provided by (used in) investment programs........... 6 109 (23) 92
------------ ------------ ------------ ------------
Cash flow from financing activities
Net borrowings (repayments) of debt...................... 377 15 (181) 211
Other financing activities............................... - - 2 2
------------ ------------ ------------ ------------
Cash provided by (used in) financing activities.......... 377 15 (179) 213
------------ ------------ ------------ ------------
Cash and cash equivalents
Increase (decrease) during the year...................... 594 (17) (52) 525
At beginning of the year................................. 64 23 210 297
------------ ------------ ------------ ------------
Cash and cash equivalents at end of the year............... $ 658 $ 6 $ 158 $ 822
============ ============ ============ ============
64
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements
20. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
Non-Guarantor
Companies and
NIC International Eliminations Consolidated
-------------- ---------------- ------------------ ---------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR YEAR ENDED OCTOBER 31, 2000
Sales and revenues....................................... $ 20 $ 7,312 $ 1,119 $ 8,451
----------- ------------ ----------- ------------
Cost of products and services sold....................... - 6,120 654 6,774
Restructuring and loss on anticipated sale of business... - 260 46 306
All other operating expenses............................. (67) 922 297 1,152
------------ ------------ ------------ ------------
Total costs and expenses............................. (67) 7,302 997 8,232
------------ ------------ ------------ ------------
Equity in income (loss) of nonconsolidated subsidiaries.. 137 118 (250) 5
------------ ------------ ------------ ------------
Income before income taxes............................... 224 128 (128) 224
Income tax expense....................................... 65 51 (51) 65
------------ ------------ ------------ ------------
Net income............................................... $ 159 $ 77 $ (77) $ 159
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF OCTOBER 31, 2000
ASSETS
Cash and marketable securities........................... $ 117 $ 23 $ 336 $ 476
Receivables, net......................................... - 199 2,303 2,502
Inventories.............................................. - 401 247 648
Property and equipment, net.............................. - 1,071 707 1,778
Investment in affiliates................................. (746) 777 (31) -
Deferred tax asset and other assets...................... 888 252 307 1,447
------------ ------------ ------------ ------------
Total assets......................................... $ 259 $ 2,723 $ 3,869 $ 6,851
============ ============ ============ ============
LIABILITIES AND SHAREOWNERS' EQUITY
Debt..................................................... $ 444 $ 6 $ 2,180 $ 2,630
Postretirement benefits liability........................ - 814 (32) 782
Amounts due (from) to affiliates......................... (1,581) 1,169 412 -
Other liabilities........................................ 82 1,489 554 2,125
------------ ------------ ------------ ------------
Total liabilities.................................... (1,055) 3,478 3,114 5,537
------------ ------------ ------------ ------------
Shareowners' equity (deficit)............................ 1,314 (755) 755 1,314
------------ ------------ ------------ ------------
Total liabilities and shareowners' equity................ $ 259 $ 2,723 $ 3,869 $ 6,851
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE YEAR ENDED OCTOBER 31, 2000
Cash provided by (used in) operations.................... $ (118) $ 418 $ 386 $ 686
------------ ------------ ------------ ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables.... - - (361) (361)
Net (increase) decrease in marketable securities......... 142 - (91) 51
Capital expenditures..................................... - (471) (82) (553)
Other investing activities............................... (5) 70 (94) (29)
------------ ------------ ------------ ------------
Cash provided by (used in) investment programs........... 137 (401) (628) (892)
------------ ------------ ------------ ------------
Cash flow from financing activities
Net borrowings (repayments) of debt...................... 95 (1) 317 411
Purchase of common stock and other....................... (151) - - (151)
------------ ------------ ------------ ------------
Cash provided by (used in) financing activities.......... (56) (1) 317 260
------------ ------------ ------------ ------------
Cash and cash equivalents
Increase (decrease) during the year...................... (37) 16 75 54
At beginning of the year................................. 101 7 135 243
------------ ------------ ------------ ------------
Cash and cash equivalents at end of the year............... $ 64 $ 23 $ 210 $ 297
============ ============ ============ ============
65
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements
20. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)
Non-Guarantor
Companies and
NIC International Eliminations Consolidated
-------------- ---------------- ------------------ ---------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR YEAR ENDED OCTOBER 31, 1999
Sales and revenues....................................... $ 27 $ 7,634 $ 981 $ 8,642
----------- ------------ ----------- ------------
Cost of products and services sold....................... - 6,329 533 6,862
All other operating expenses............................. (62) 965 291 1,194
------------ ------------ ------------ ------------
Total costs and expenses............................. (62) 7,294 824 8,056
------------ ------------ ------------ ------------
Equity in income (loss) of nonconsolidated subsidiaries.. 502 177 (674) 5
------------ ------------ ------------ ------------
Income before income taxes............................... 591 517 (517) 591
Income tax expense....................................... 47 198 (198) 47
------------ ------------ ------------ ------------
Net income............................................... $ 544 $ 319 $ (319) $ 544
============ ============ ============ ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE YEAR ENDED OCTOBER 31, 1999
Cash provided by (used in) operations.................... $ (342) $ 369 $ 275 $ 302
------------ ------------ ------------ ------------
Cash flow from investment programs
Purchases, net of collections, of finance receivables.... - - (160) (160)
Net (increase) decrease in marketable securities......... 328 - 2 330
Capital expenditures..................................... - (326) (101) (427)
Other investing activities............................... (54) (36) (104) (194)
------------ ------------ ------------ ------------
Cash provided by (used in) investment programs........... 274 (362) (363) (451)
------------ ------------ ------------ ------------
Cash flow from financing activities
Net borrowings (repayments) of debt...................... - (4) 153 149
Purchase of common stock and other....................... (144) - (3) (147)
------------ ------------ ------------ ------------
Cash provided by (used in) financing activities.......... (144) (4) 150 2
------------ ------------ ------------ ------------
Cash and cash equivalents
Increase (decrease) during the year...................... (212) 3 62 (147)
At beginning of the year................................. 313 4 73 390
------------ ------------ ------------ ------------
Cash and cash equivalents at end of the year............... $ 101 $ 7 $ 135 $ 243
============ ============ ============ ============
66
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 2001
21. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
Millions of dollars,
except per share data 2001 2000 2001 2000 2001 2000 2001 2000
---- ---- ---- ---- ---- ---- ---- ----
Sales and revenues................. $ 1,507 $ 2,166 $ 1,794 $ 2,388 $ 1,586 $ 1,924 $ 1,835 $ 1,973
Manufacturing gross margin......... 11.0% 16.6% 13.9% 18.0% 14.2% 17.5% 12.8% 14.8%
Manufacturing gross margin
excluding restructuring charge.. 11.0% 16.6% 13.9% 18.0% 14.2% 17.5% 13.6% 15.8%
Net income (loss).................. $ (35) $ 70 $ 3 $ 98 $ 2 $ 96 $ 7 $ (105)
Earnings (loss) per share (a)
Basic........................... $ (0.58) $ 1.12 $ 0.05 $ 1.61 $ 0.03 $ 1.62 $ 0.12 $(1.77)
Diluted......................... $ (0.58) $ 1.10 $ 0.05 $ 1.58 $ 0.03 $ 1.60 $ 0.11 $(1.77)
Net income (loss) excluding
restructuring (b)............... $ (35) $ 70 $ 3 $ 98 $ 2 $ 96 $ 8 $ 85
Market price range-common stock
High............................ $ 35.50 $ 48.00 $ 30.69 $ 41.19 $ 34.00 $ 37.00 $ 37.05 $40.38
Low............................. $ 18.25 $ 35.50 $ 21.78 $ 31.63 $ 25.81 $ 29.63 $ 24.40 $29.81
(a) Diluted earnings per share excluding the restructuring charge for the quarters ended October 31, 2001 and 2000, were $0.13 and
$1.41, respectively.
(b) In the fourth quarter of 2001, the company recorded an after-tax restructuring expense adjustment of $1 million. 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.
67
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) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Sales and revenues.............................. $ 6,722 $ 8,451 $ 8,642 $ 7,885 $ 6,371
Net income (loss) .............................. (23) 159 544 299 150
Earnings (loss) per share
Basic.................................. (0.39) 2.62 8.34 4.16 1.66
Diluted (a)............................ (0.39) 2.58 8.20 4.11 1.65
Net income (loss) excluding restructuring charge
and tax valuation allowance adjustments (b).... (22) 349 366 254 150
Average number of shares outstanding (millions)
Basic.................................. 59.5 60.7 65.2 69.1 73.1
Diluted................................ 59.5 61.5 66.4 70.0 73.6
- --------------------------------------------------------------------------------------------------------------------
FINANCIAL DATA
Total assets.................................... $ 7,067 $ 6,851 $ 6,847 $ 6,104 $ 5,425
Long-term debt
Manufacturing operations................... $ 908 $ 437 $ 445 $ 446 $ 80
Financial services operations.............. 1,560 1,711 1,630 1,490 1,070
--------- --------- --------- --------- --------
Total long-term debt............................ $ 2,468 $ 2,148 $ 2,075 $ 1,936 $ 1,150
========= ========= ========= ========= ========
Shareowners' equity............................. 1,127 1,314 1,291 769 1,020
Total manufacturing operations'
long-term debt as a percent
of total manufacturing capitalization...... 43.4% 23.2% 25.2% 36.6% 7.2%
Return on equity................................ (2.0)% 12.1% 42.2% 38.9% 14.7%
- --------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DATA
Capital expenditures............................ $ 326 $ 553 $ 427 $ 302 $ 169
Engineering and research expense................ 253 280 281 192 124
- --------------------------------------------------------------------------------------------------------------------
OPERATING DATA
Manufacturing gross margin...................... 13.0% 16.8% 18.0% 15.3% 14.2%
Manufacturing gross margin excluding
restructuring charge....................... 13.3% 17.0% 18.0% 15.3% 14.2%
U.S. and Canadian market share (c).............. 26.3% 26.9% 25.6% 29.1% 28.3%
Unit shipments worldwide
Trucks..................................... 89,600 124,900 129,000 127,500 104,400
OEM engines (d)............................ 324,900 304,400 286,500 213,700 184,000
(a) Diluted earnings (loss) per share excluding the restructuring charge and tax valuation allowance adjustments for the years 2001
to 1997 were $(0.38), $5.67, $5.52, $3.47 and $1.65, respectively.
(b) In 2001, the company recorded an after-tax restructuring expense adjustment of $1 million. In 2000, the company recorded an
after-tax restructuring charge of $190 million. In 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).
(d) Includes OEM engine shipments from International Engines South America.
68
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 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Sales of manufactured products................................. $ 6,423 $ 8,119 $ 8,326
Other income................................................... 19 33 44
----------- ----------- -----------
Total sales and revenues.................................. 6,442 8,152 8,370
----------- ----------- -----------
Cost of products sold.......................................... 5,569 6,737 6,826
Cost of products sold related to restructuring................. 11 20 -
----------- ----------- -----------
Total cost of products and services sold.................. 5,580 6,757 6,826
Restructuring costs............................................ 4 267 -
Postretirement benefits........................................ 170 146 216
Engineering and research expense............................... 253 280 281
Sales, general and administrative expense...................... 466 428 433
Other expense.................................................. 116 135 140
----------- ----------- -----------
Total costs and expenses.................................. 6,589 8,013 7,896
----------- ----------- -----------
Income (loss) before income taxes
Manufacturing operations.................................. (147) 139 474
Financial services operations............................. 100 85 117
----------- ----------- -----------
Income (loss) before income taxes..................... (47) 224 591
Income tax expense (benefit).......................... (24) 65 47
----------- ----------- -----------
Net income (loss).............................................. $ (23) $ 159 $ 544
=========== =========== ===========
Condensed Statement of Financial Condition 2001 2000
- --------------------------------------------------------------------------------------------------------
Cash, cash equivalents and marketable securities............... $ 806 $ 294
Inventories.................................................... 569 597
Property and equipment, net.................................... 1,359 1,464
Equity in non-consolidated subsidiaries........................ 398 386
Other assets 895 1,095
Deferred tax asset, net........................................ 979 862
----------- -----------
Total assets.............................................. $ 5,006 $ 4,698
=========== ===========
Accounts payable, principally trade............................ $ 1,051 $ 1,087
Postretirement benefits liability.............................. 1,069 773
Other liabilities.............................................. 1,759 1,524
Shareowners' equity............................................ 1,127 1,314
----------- -----------
Total liabilities and shareowners' equity................. $ 5,006 $ 4,698
=========== ===========
69
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 2001 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Cash flow from operations
Net income (loss).............................................. $ (23) $ 159 $ 544
Adjustments to reconcile net income (loss)
to cash provided by (used in) operations:
Depreciation and amortization......................... 150 140 126
Deferred income taxes................................. (9) 56 185
Deferred tax asset valuation allowance and other
tax adjustments.................................. (6) (20) (178)
Postretirement benefits funding
less than (in excess of) expense................ 58 (3) 47
Equity in earnings of investees, net of
dividends received............................... (27) (31) (18)
Non-cash restructuring charge......................... 39 113 -
Other, net............................................ (63) (42) (18)
Change in operating assets and liabilities, net of
effects of acquisition.................................... (196) (280) (25)
-------- -------- --------
Cash provided by (used in) operations.......................... (77) 92 663
-------- -------- --------
Cash flow from investment programs
Purchases of marketable securities............................. (130) (135) (323)
Sales or maturities of marketable securities................... 174 277 651
Capital expenditures........................................... (325) (552) (425)
Payments for acquisition, net of cash acquired................. (60) - -
Proceeds from sale-leasebacks.................................. 385 90 -
Receivable from financial services operations.................. 291 365 (553)
Investment in affiliates....................................... 26 (6) (71)
Capitalized interest and other................................. (81) (30) (17)
-------- -------- --------
Cash provided by (used in) investment programs................. 280 9 (738)
-------- -------- --------
Cash provided by (used in) financing activities................ 350 (55) (109)
-------- -------- --------
Cash and cash equivalents
Increase (decrease) during the year............................ 553 46 (184)
At beginning of year........................................... 213 167 351
-------- -------- --------
Cash and cash equivalents at end of the year................... $ 766 $ 213 $ 167
======== ======== ========
70
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information required by Item 10 of this Form is incorporated herein by reference from Navistar's definitive Proxy Statement for
the February 19, 2002 Annual Meeting of Shareowners and in Part I, Item 1, of this Form 10-K.
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 19, 2002 Annual Meeting of Shareowners.
71
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, 2001, 2000 and 1999
appearing on pages 11 through 42 in the Annual Report on Form 10-K for Navistar Financial Corporation for the fiscal year ended
October 31, 2001, Commission File No. 1-4146-1, are incorporated herein by reference and filed as Exhibit 99 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-6
(21) Subsidiaries of the Registrant.......................................................... E-10
(23) Independent Auditors' Consent........................................................... 76
(24) Power of Attorney....................................................................... 74
(99) Navistar Financial Corporation Annual Report
on Form 10-K for the fiscal year ended October 31, 2001............................... *
*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 2001 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 16, 2001, in which the company announced that its
board of directors has authorized the redemption of the rights issued pursuant to the rights plan adopted on April 20,1999.
72
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 18, 2001
Vice President and Controller
(Principal Accounting Officer)
73
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 18, 2001
President and
Chief Executive Officer,
and Director
(Principal Executive Officer)
/s/ Robert C. Lannert
- -------------------------------
Robert C. Lannert Executive Vice President December 18, 2001
and Chief Financial Officer
and Director
(Principal Financial Officer)
/s/ Mark T. Schwetschenau
- -------------------------------
Mark T. Schwetschenau Vice President and Controller December 18, 2001
(Principal Accounting Officer)
/s/ William F. Andrews
- -------------------------------
William F. Andrews Director December 18, 2001
74
EXHIBIT 24 (CONTINUED)
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
---------------
SIGNATURES (Continued)
Signature Title Date
- ------------------------------- ------------------------------ --------------------------
/s/ Y. Marc Belton
- -------------------------------
Y. Marc Belton Director December 18, 2001
/s/ John D. Correnti
- -------------------------------
John D. Correnti Director December 18, 2001
/s/ Jerry E. Dempsey
- -------------------------------
Jerry E. Dempsey Director December 18, 2001
/s/ Dr. Abbie J. Griffin
- -------------------------------
Dr. Abbie J. Griffin Director December 18, 2001
/s/ Michael N. Hammes
- -------------------------------
Michael N. Hammes Director December 18, 2001
/s/ Allen J. Krowe
- -------------------------------
Allen J. Krowe Director December 18, 2001
/s/ David McAllister
- -------------------------------
David McAllister Director December 18, 2001
/s/ Southwood J. Morcott
- -------------------------------
Southwood J. Morcott Director December 18, 2001
/s/ William F. Patient
- -------------------------------
William F. Patient Director December 18, 2001
75
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
---------------
INDEPENDENT AUDITORS' REPORT
Navistar International Corporation,
Its Directors and Shareowners:
We have audited the consolidated financial statements of Navistar International Corporation and Consolidated Subsidiaries (the
company) as of October 31, 2001 and 2000, and for each of the three years in the period ended October 31, 2001, and have issued our
report thereon dated December 10, 2001; such consolidated financial statements and report are included in this Annual Report on Form
10-K of Navistar International Corporation and Consolidated Subsidiaries for the year ended October 31, 2001. Our audits also
included the consolidated financial statement schedule for the company, listed in Item 14. The financial statement schedule is the
responsibility of the company's management. Our responsibility is to express an opinion based on our audits. 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 10, 2001
Chicago, Illinois
---------------
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, No. 333-77781 and No. 333-73392 of Navistar International
Corporation and Consolidated Subsidiaries, all on Form S-8, of our reports dated December 10, 2001, relating to the consolidated
financial statements and financial statement schedule of Navistar International Corporation and of the consolidated financial
statements of Navistar Financial Corporation, appearing and incorporated by reference in this Annual Report on Form 10-K of Navistar
International Corporation and Consolidated Subsidiaries for the year ended October 31, 2001.
Deloitte & Touche LLP
December 18, 2001
Chicago, Illinois
76
SCHEDULE II
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
==========
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 2001, 2000 AND 1999
(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 AT END
OF RESERVES FROM OF YEAR TO INCOME DESCRIPTION AMOUNT OF YEAR
----------- -------- --------- --------- ----------- ------ -------
Reserves deducted
from assets to
which they
apply:
2001
----
Uncollectible notes
and accounts
Allowance for Notes and written off and
losses on accounts reserve adjustment,
receivables..... receivable..... $ 39 $ 71 less recoveries.... $ 70 $ 40
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
F-1