Attached files
| file | filename |
|---|---|
| EX-4.0 - EXHIBIT 4 INSTRUMENTS - NAVISTAR FINANCIAL CORP | exhibit_4.htm |
| EX-10.0 - EXHIBIT 10 CONTRACTS - NAVISTAR FINANCIAL CORP | exhibit_10.htm |
| EX-12.0 - EXHIBIT 12 CALCULATION - NAVISTAR FINANCIAL CORP | exhibit_12.htm |
| EX-32.0 - EXHIBIT 32 CERTIFICATION - NAVISTAR FINANCIAL CORP | exhibit_32.htm |
| EX-31.2 - EXHIBIT 31.2 CFO - NAVISTAR FINANCIAL CORP | exhibit31_2.htm |
| EX-31.1 - EXHIBIT 31.1 CEO - NAVISTAR FINANCIAL CORP | exhibit31_1.htm |
| EX-3.0 - EXHIBIT 3 ARTICLES - NAVISTAR FINANCIAL CORP | exhibit_3.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
fiscal year ended October 31,
2009
OR
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the
transition period from ___ to ___
Commission
file number 001-04146
NAVISTAR
FINANCIAL CORPORATION
(Exact
name of registrant as specified in its charter)
|
Delaware
(State
or other jurisdiction of incorporation or organization)
|
36-2472404
(I.R.S.
Employer Identification No.)
|
425 N. Martingale Road,
Schaumburg, IL 60173
(Address
of principal executive offices, Zip Code)
(630)
753-4000
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes [ ] No [X]
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes [ ] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes
[ ]No [ ]
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. [X]
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer or smaller reporting
company. See definition of “large accelerated filer,” “accelerated
filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act (Check
one):
Large accelerated filer
[ ] Accelerated
filer
[ ] Non-accelerated
filer [X]Smaller reporting
company [ ]
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes [_]No
[X]
As of
November 30, 2009, the number of shares outstanding of the registrant's common
stock was 1,600,000.
Documents
Incorporated by Reference: None
THE
REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR, INC., WHICH IS A
WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL CORPORATION, AND MEETS THE
CONDITIONS SET FORTH IN GENERAL INSTRUCTION I (1) (a) AND (b) OF FORM 10-K AND
IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
NAVISTAR
FINANCIAL CORPORATION
AND
SUBSIDIARIES
|
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(A)
-Omitted or amended or reduced as the registrant is a wholly-owned
subsidiary of Navistar, Inc., which is a wholly-owned subsidiary of
Navistar International Corporation, and meets the conditions set forth in
General Instructions I (1) (a) and (b) of Annual Report on Form 10-K and
is, therefore, filing this report with the reduced disclosure
format.
|
EXPLANATORY
NOTE
The
registrant, Navistar Financial Corporation, was incorporated in Delaware in 1949
and is a wholly-owned subsidiary of Navistar, Inc., which is a wholly-owned
subsidiary of Navistar International Corporation (“NIC”). As used
herein, “us,” “we,” “our” or “NFC” refers to Navistar Financial Corporation and
its wholly-owned subsidiaries, unless the context otherwise
requires.
We are a
commercial financing organization that provides wholesale, retail and lease
financing in the United States for sales of new and used trucks sold by
Navistar, Inc. and Navistar, Inc.’s dealers. We also finance
wholesale accounts and selected retail accounts receivable of Navistar, Inc.
(“accounts”). Sales of new products (including trailers) of other
manufacturers are also financed by NFC regardless of whether they are designed
or customarily sold for use with Navistar, Inc.’s truck products.
We
typically sell our finance receivables to various special purpose entities while
continuing to service the receivables thereafter. Some of these
transactions qualify for off-balance sheet accounting whereby an initial gain or
loss is recorded and revenues are recorded primarily for servicing fees and
excess spread income over the remaining life of the finance
receivables. For transactions receiving on-balance sheet treatment,
we record the interest revenue earned on the finance receivables, and the
interest expense paid on secured borrowings issued in connection with the
finance receivables sold. (See Item 7, Management’s Discussion and
Analysis of Financial
Condition and Results of Operations, for an explanation of securitized
receivables).
Periodic
Reports Access
NIC maintains a website with the
address www.navistar.com. NFC is not including the information
contained on NIC’s website as a part of, or incorporating it by reference into,
this Annual Report on Form 10-K. We make available, free of charge,
through NIC’s website our Annual Report on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, and amendments to these reports, if any,
as soon as reasonably practicable after we electronically file such material
with, or furnish such material to, the Securities and Exchange Commission
(“SEC”).
NFC has
adopted the Code of Ethics posted on NIC’s website. This Code of
Ethics applies to all employees, directors and officers, including the chief
executive officer and principal financial officer. NFC intends to
disclose any amendments to, or waivers from, the Code of Ethics that are
required to be publicly disclosed pursuant to the rules of the SEC.
Forward-Looking
Statements
This
document contains forward-looking statements within the meaning of Section 27A
of the Securities Act, Section 21E of the Exchange Act of 1934 (“Exchange Act”),
and the Private Securities Litigation Reform Act of 1995 that are subject to
risks and uncertainties. You should not place undue reliance on those statements
because they are subject to numerous uncertainties and factors relating to our
operations and business environment, all of which are difficult to predict and
many of which are beyond our control, and such forward-looking statements only
speak as of the date hereof. Forward-looking statements include information
concerning our possible or assumed future results of operations, including
descriptions of our business strategy. These statements often include
words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,”
or similar expressions. These statements are based on assumptions
that we have made in light of our experience in the industry as well as our
perceptions of historical trends, current conditions, expected future
developments, and other factors we believe are appropriate under the
circumstances. As you read and consider the information contained
herein, you should understand that these statements are not guarantees of
performance or results. They involve risks, uncertainties, and
assumptions. Although we believe that these forward-looking
statements are based on reasonable assumptions, you should be aware that many
factors could affect our actual financial results and could cause these actual
results to differ materially from those in the forward-looking
statements.
This
section identifies specific risks that could adversely affect our business,
results of operations or financial condition. The following information should
be read in conjunction with Item 7, Management’s Discussion and
Analysis of Financial
Condition and Results of Operations, and the accompanying consolidated
financial statements and related notes included in this report.
All
future written and oral forward-looking statements by us or persons acting on
our behalf are expressly qualified in their entirety by the cautionary
statements contained or referred to above. Except for our ongoing
obligations to disclose material information as required by the federal
securities laws, we do not have any obligations or intention to release publicly
any revisions to any forward-looking statements to reflect events or
circumstances in the future or to reflect the occurrence of unanticipated
events.
Strategic
Decisions of NIC
As an
indirect wholly-owned subsidiary of NIC, we are subject to the effects of
strategic decisions made from time to time by NIC. The major share of our
business consists of financing Navistar, Inc. vehicles and supporting their
dealers. Any extended reduction or suspension of Navistar, Inc.’s
production or sale of vehicles for reasons discussed below would have an adverse
effect on our business. An absence or reduction in special-rate financing
programs supported by Navistar, Inc. may reduce our financing volume or market
share of financing sales relating to Navistar, Inc. vehicles. In addition, we
are dependent on NIC for certain administrative support services as well as
capital contributions needed from time to time in order for NFC to maintain
compliance with performance related debt covenants. Significant changes in NIC’s
overall business strategy, sales volume, work stoppages, ability to provide
administrative support services or ability to contribute capital as needed,
could have a material adverse effect on our results of operations, financial
condition and liquidity.
Economic
Condition of the Trucking Industry
The
markets in which NIC competes are subject to considerable
cyclicality. NIC’s ability to generate business for us depends in
part on the varying conditions in the truck, school bus, mid-range diesel
engine, and service parts markets which are subject 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. Truck and engine demand is also dependent on general economic
conditions, credit availability, interest rate levels and fuel costs, among
other factors.
The North
American truck market in which NIC operates is highly
competitive. This competition results in price discounting and margin
pressures throughout the industry and could adversely affect our
business.
The value
of our lease and loan portfolio and the underlying collateral and our ability to
generate new business at competitive rates depend substantially on the economic
condition of the trucking industry. To the extent events such as high fuel
prices, fuel shortages or general economic downturn adversely affect the
trucking industry, there could be decreased demand for vehicles, an increase in
customer defaults, impaired asset values and less competitive interest and lease
rates. These events could have a material adverse impact on our results of
operations, financial condition and liquidity.
Access
to Capital
We
traditionally obtain the funds to provide financing from sales of receivables,
medium and senior debt, equity capital and from short and long-term bank
borrowings. Our ability to sell our receivables may be dependent on
the following factors: the volume and credit quality of receivables, the
performance of previously securitized receivables, general demand for the type
of receivables we offer, market capacity for our sponsored investments,
accounting and tax changes, our debt ratings and our ability to maintain back-up
liquidity facilities for certain securitization programs. NFC’s
inability to access capital could adversely affect our ability to finance our
parent company’s products. If as a result of any of these or other
factors, the cost of securitized funding significantly increased or securitized
funding was no longer available, there could be a material adverse effect on our
results of operations, financial condition and liquidity.
Market
Conditions
The U.S.
and global economies have recently undergone a period of economic uncertainty,
and the related financial markets experienced unprecedented volatility. This
market volatility produced downward pressure on credit availability for certain
issuers without regard to those issuers’ underlying financial strength and
resulted in increased borrowings costs. The funding strategy and
liquidity position of NFC has been adversely affected by the stress in the
credit markets that began in mid-2007 and reached unprecedented levels during
the first half of fiscal 2009.
The asset
backed securitization market used by NFC and its lending conduit banks was
adversely affected by substantial credit tightening: access to capital,
securitization markets and other forms of financing were constricted. Even
though the volatility has stabilized in the second half of fiscal 2009, due in
part to the launch of the U.S. Federal Reserve’s Term Asset-Backed Securities
Loan Facility (“TALF”), increases in credit spreads and borrowing rates are seen
at all credit rating levels. As a result, our future borrowings will
be more costly than in the past. Our recent securitizations are priced higher
than in the past but consistent with market pricing for similar rated
securitizations. The market for wholesale floorplan securitizations has
experienced similar increases in pricing. There can be no assurance that the
recent stabilization seen in our credit markets will continue. If market
volatility and disruption reoccur, these conditions could adversely affect our
results of operations, financial condition and liquidity.
In
addition, volatility in market interest rates may cause material fluctuations in
the fair value of our derivatives associated with secured borrowings and our
retained interest in off-balance sheet securitizations. These fair value
fluctuations could have an adverse impact on NFC’s results of operations,
financial condition and liquidity.
Credit
Risk
We
actively manage the credit risk of our receivables to balance our level of risk
and return. The allowance for credit losses reflected on our consolidated
statements of financial condition is our estimate of the probable credit losses
inherent in the receivables at the date of our consolidated statements of
financial condition. Increases in our delinquencies and vehicle repossessions
typically result in higher charge-offs and increases in the Provision for credit losses.
If delinquencies and vehicle repossessions continue to increase it could have a
material adverse impact on the results of operations, financial condition and
liquidity of NFC.
Collection
and Servicing Problems
Disruption
of our billing and collection processes, such as failure to maintain accurate
account records or to maintain access to such records could have a significant
negative impact on our ability to collect on our receivables and satisfy our
customers. This could have a material adverse impact on our results of
operations, financial condition and liquidity.
Pending
litigation and an adverse resolution of such litigation may adversely affect our
business, financial condition, results of operations, and cash
flows
Litigation
can be expensive, lengthy, and disruptive to normal business operations. The
results of complex legal proceedings are often uncertain and difficult to
predict. An unfavorable outcome of a particular matter or any future legal
proceedings could have a material adverse effect on our business, financial
condition, results of operations, and cash flows. For additional information
regarding certain lawsuits in which we are involved, see Item 3, Legal Proceedings, and Note
15, Legal Proceedings,
to the accompanying consolidated financial statements.
Changes
in Laws or Regulations
Aspects
of our business as a lender and lessor are subject to state and federal laws and
regulations including, but not limited to, (a) establishment of maximum interest
rates, (b) collection, foreclosure and repossession procedures, (c) financial
transaction structures and (d) the use and reporting of information relating to
a borrower’s or lessee’s credit experience. Changes to such laws or regulations
could have a material adverse effect on our results of operations, financial
condition and liquidity because such changes may impair our ability to originate
or securitize receivables or maximize the value of a receivable upon foreclosure
or repossession.
Reduction
in our Credit Rating
If we
experience a reduction in our credit rating, it could have a material adverse
effect on us by reducing our revenues if existing or potential customers decide
not to retain us, and by increasing our borrowing costs or limiting our ability
to obtain new financings on acceptable terms.
None
NFC’s
properties principally consist of office equipment and leased office space in
Schaumburg, Illinois. The office equipment owned and in use by us is not
significant in relation to the total assets of NFC.
Item
3.
Legal Proceedings
We are
subject to various claims arising in the ordinary course of business, and are
parties to various legal proceedings, which constitute ordinary, routine
litigation incidental to our business. In our opinion, the disposition of
these proceedings and claims will not have a material adverse effect on the
business or our results of operations, cash flows or financial
condition.
In
December 2004, we announced that we would restate our financial results for the
fiscal years 2002 and 2003 and the first three quarters of fiscal 2004.
Our restated Annual Report on Form 10-K was filed in February 2005. The
SEC notified us on February 9, 2005, that it was conducting an informal inquiry
into our 2004 restatement. On March 17, 2005, we were advised by the SEC
that the status of the inquiry had been changed to a formal investigation.
On November 8, 2006, we announced that we would restate our financial results
for fiscal years 2002 through 2004 and for the first three quarters of fiscal
2005. We were subsequently informed by the SEC that it was expanding the
2004 investigation to include the 2005 restatement. Our 2005 Annual Report
on Form 10-K, which included the restated financial statements, was filed in
December 2007. We have been providing information to and are fully cooperating
with the SEC in its investigation.
NIC is
party to an offer of settlement made to the investigative staff of the SEC. The
investigative staff has decided to recommend this offer of settlement to the
SEC. As a result of the proposed settlement, without admitting or denying
wrongdoing, NIC would consent to the entry of an administrative settlement and
would not pay a civil penalty. This proposed settlement is subject to mutual
agreement on the specific language of the orders and to final approval by the
SEC. Our understanding is that the proposed settlement would conclude the SEC’s
investigation of NIC and NFC with respect to the 2004 and 2005 restatements. We
cannot provide assurance that the proposed settlement will be approved by the
SEC and, in the event the proposed settlement is not approved, what the ultimate
resolution of this investigation will be.
Intentionally
omitted. See the index page of this report for an
explanation.
As of
October 31, 2009, Navistar, Inc. owned all shares of our issued and outstanding
capital stock. No shares are reserved for officers and employees, or
for options, warrants, conversions and other rights. We did not pay dividends to
Navistar, Inc. in fiscal 2009, however, we paid dividends of $14.8 million and
$400.0 million in fiscal 2008 and 2007, respectively. Navistar, Inc. made
capital contributions of $20.0 million and $60.0 million to NFC in fiscal 2009
and 2008, respectively, and none in fiscal 2007.
Intentionally
omitted. See the index page of this report for
explanation.
Management’s
Discussion and Analysis of Financial Condition and Results of Operations
(“MD&A”) is designed to provide information that is supplemental to, and
should be read together with, our consolidated financial statements and the
accompanying notes presented in Item 8 of this Annual Report on Form
10-K. The information contained herein is intended to assist the
reader in obtaining an understanding of our consolidated financial statements,
the changes in certain key items in those financial statements from year to
year, the primary factors that accounted for those changes, any known trends or
uncertainties that we are aware of that may have a material impact on our future
performance, as well as how certain accounting principles affect our
consolidated financial statements.
We
evaluate our performance and allocate resources based on a single segment
concept. Accordingly, there are no separately identified material operating
segments for which discrete financial information is available. We do not derive
revenues from any single customer that represents 10% or more of our total
revenues.
Overview
NFC is a
commercial financing organization that provides retail, wholesale and lease
financing of products sold by Navistar, Inc. and its dealers within the United
States. NFC also finances wholesale accounts and selected retail
accounts receivable of Navistar, Inc. Sales of new products
(including trailers) of other manufacturers are also financed regardless of
whether they are designed or customarily sold for use with Navistar, Inc.’s
truck products.
During
fiscal year 2009, the traditional truck industry continued to be under pressure
from credit tightening and the general economic downturn. Credit spreads, which
generally represent the default risk component above the base interest rate that
a lender charges its customer, remain at historically high levels but are
currently lower than the unprecedented levels seen at the end of 2008 and
beginning of 2009. The increase in credit spreads has been partially offset by
lower base interest rates. The value of our lease and loan portfolio, the
underlying collateral and our ability to generate new business at competitive
rates depend substantially on the economic condition of the trucking industry.
There was decreased demand for vehicles, impaired asset values and less
competitive interest and lease rates. These conditions have negatively impacted
unit sales volumes for Navistar, Inc. Both retail and wholesale portfolio
balances reflect the decline in the traditional truck industry volume.
With the decline in the truck market, the retail portfolio is liquidating faster
than new acquisitions are being financed. Navistar, Inc. expects a slight
recovery in traditional truck industry retail deliveries in 2010. On the
wholesale side, dealers delayed the purchase of new trucks, particularly in the
first half of fiscal 2009, until the credit markets stabilized. NFC’s ability to
raise rates has not been enough to counterbalance the entire impact of the lower
financing volume. In 2010, credit spreads are expected to decrease slightly from
year end 2009 levels but remain higher than historical norms. NFC’s borrowing
costs on recent securitizations have increased dramatically and a large portion
of the increase has been passed on to Navistar, Inc. in the form of higher
finance rates. Dealer wholesale finance rates have also been increased. If
borrowing costs on future funding facilities continue to increase, NFC will
likely raise its finance rates to Navistar, Inc. and other
customers.
Revenues
have been declining reflecting lower financing volume as a direct result of
lower Navistar, Inc. vehicle sales. Our Cost of borrowing declined
substantially reflecting the impact of a lower base interest rate environment
and lower average outstanding debt balances during 2009. However, since lower
interest rates reduce the net fair value of our interest rate swaps, we continue
to recognize expense relating to these derivatives. NFC uses interest rate swaps
as economic hedges on the future cash flows of our secured borrowings. These
swaps do not qualify for hedge accounting under Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 815, Derivatives and Hedging,
thus the fair value adjustment is a period cost which can swing dramatically
when fluctuations in forward interest rates occur. Securitization income has
increased as a result of the market stabilization which has reduced credit
spreads from peak levels seen at the beginning of 2009, allowing us to reduce
the discount rates used to value our retained interests, and the increase in
margin which increases the cash flows used to compute the fair value of our
retained interests in sold receivables. Additionally, our Provision for credit losses
has decreased as a result of reduced credit losses driven primarily by the
decline in portfolio balances. This was partially offset by an increase in
specific reserves. We expect credit loss rates to continue to decline into
fiscal 2010.
Consolidated
Comparison of Business Results
The
following table summarizes our consolidated statements of operations and
illustrates the key financial indicators used to assess the consolidated
financial results. Financial information is presented for the
comparative fiscal years ended October 31, 2009 and 2008 (dollars in
millions):
|
2009
|
2008
|
Change
|
%
Change
|
|||||||||||||
|
Revenues
|
||||||||||||||||
|
Financing
revenue
|
$ | 209.8 | $ | 263.3 | $ | (53.5 | ) | (20.3 | ) | |||||||
|
Securitization
income
|
40.5 | 12.2 | 28.3 | 232.0 | ||||||||||||
|
Operating
leases and other
revenue
|
28.8 | 49.1 | (20.3 | ) | (41.3 | ) | ||||||||||
|
Total
revenues
|
279.1 | 324.6 | (45.5 | ) | (14.0 | ) | ||||||||||
|
Expenses
|
||||||||||||||||
|
Cost
of
borrowing
|
83.0 | 199.1 | (116.1 | ) | (58.3 | ) | ||||||||||
|
Credit,
collections and
administrative
|
57.4 | 56.9 | 0.5 | 0.9 | ||||||||||||
|
Provision
for credit
losses
|
29.7 | 32.2 | (2.5 | ) | (7.8 | ) | ||||||||||
|
Depreciation
on operating
leases
|
16.3 | 17.0 | (0.7 | ) | (4.1 | ) | ||||||||||
|
Derivative
expense
|
40.6 | 55.0 | (14.4 | ) | (26.2 | ) | ||||||||||
|
Other
expenses
|
5.5 | 9.2 | (3.7 | ) | (40.2 | ) | ||||||||||
|
Total
expenses
|
232.5 | 369.4 | (136.9 | ) | (37.1 | ) | ||||||||||
|
Income
(loss) before
taxes
|
46.6 | (44.8 | ) | 91.4 |
N.M.
|
|||||||||||
|
Income
tax expense
(benefit)
|
17.9 | (14.1 | ) | 32.0 |
N.M.
|
|||||||||||
|
Net
income
|
$ | 28.7 | $ | (30.7 | ) | $ | 59.4 |
N.M.
|
||||||||
Percentage
changes deemed to be not meaningful are designated N.M.
Financing
revenue is comprised of interest revenue from the following interest earning
assets (dollars in millions):
|
|
||||||||||||||||
|
2009
|
2008
|
Change
|
%
Change
|
|||||||||||||
|
Retail
notes and finance
leases
|
$ | 174.8 | $ | 221.4 | $ | (46.6 | ) | (21.0 | ) | |||||||
|
Wholesale
notes
|
13.7 | 15.9 | (2.2 | ) | (13.8 | ) | ||||||||||
|
Retail
and wholesale
accounts
|
21.3 | 26.0 | (4.7 | ) | (18.1 | ) | ||||||||||
|
Total
financing
revenue
|
$ | 209.8 | $ | 263.3 | $ | (53.5 | ) | (20.3 | ) | |||||||
The
year ended October 31, 2009 compared to the year ended October 31,
2008
Financing revenue decreased
as a result of a decrease in the average finance receivable portfolio balance
from $3.4 billion to $2.9 billion, as originations decreased on declining
industry demand for vehicles. The average interest rates of the finance
receivable portfolio were 7.3% and 7.7% for 2009 and 2008,
respectively.
Securitization income
represents all revenue and expense components resulting from off-balance
sheet sales of receivables including: excess spread income, servicing fees,
initial gain or loss at time of sale, investment income and fair value
adjustments related to retained interests. Excess spread income increased from
$19.6 million to $28.8 million primarily resulting from the effect of new
pricing programs and lower lender interest rates. The increase in excess spread
was partially offset by the effects of a lower sold portfolio level. Income on
sales of receivables net of fair value adjustments improved from a loss of $22.5
million to a gain of $2.1 million as a result of increased pricing to dealers, a
reduction in discount rates used to value retained interests and decreased
borrowing costs which increased the fair value of the interest only strip, as
well as pay downs on the debt in the wholesale trust which reduces the amount of
required seller’s interest. Servicing fees declined primarily as a result of the
decrease in the average balances of sold facilities and investment income
decreased as a result of lower interest rates on restricted cash accounts
established as additional collateral for our sold facilities.
Operating leases and other revenue
primarily includes rental income
on operating leases, interest earned on cash accounts and guarantee fees. These
revenues decreased from $49.1 million to $28.8 million primarily as a result of
lower interest rates on restricted cash accounts established as additional
collateral for our secured borrowings.
Cost of borrowing primarily
includes interest expense on Senior and secured
borrowings. Cost of
borrowing decreased from $199.1 million to $83.0 million as a result of
lower average debt balances and lower borrowing rates. Our average interest
rates on Senior and secured
borrowings were 2.1% and 4.7% for the respective periods in 2009 and 2008
driven by lower LIBOR rates, partially offset by a higher credit spread on the
retail securitization completed in 2009. The average outstanding debt
balance decreased from $4.0 billion to $3.4 billion, reflecting lower funding
needs resulting from lower origination volume.
Credit, collections and
administrative expenses include costs relating to the management and
servicing of receivables as well as general business expenses and
wages. The net increase of $0.5 million resulted from an increase of
$2.3 million relating to separation costs, $1.7 million relating to depreciation
expense on capitalized costs of the recently implemented enhancements to our
information systems, and $0.4 million relating to increases in wages, benefits
and other administrative costs. The 2008 period included $3.9 million of costs
related to the relocation of NFC’s regional offices to Schaumburg.
Provision for credit losses
on receivables decreased from $32.2 million to $29.7 million as a result
of the slight decrease in charge-offs driven primarily by the decrease in the
average finance receivable portfolio balance. The decrease was partially offset
by the effect of an increase in our allowance to finance receivables coverage
ratio during the year from 1.0% to 1.4%, attributable to an increase in specific
loss reserves and the impact of higher losses in the historical component of the
loss allowance calculation.
Depreciation on operating leases
decreased from $17.0 million to $16.3 million reflecting a slightly lower
investment in equipment under operating leases. The average
investment in operating leases decreased from $121.8 million to $119.6
million.
Derivative expense decreased
from $55.0 million to $40.6 million as a result of fluctuations in forward
interest rate curves and the regular amortization of notional
amounts. In addition, the expense decreased by $2.2 million as a
result of including non-performance risk in the fair value calculation of our
derivatives pursuant to the adoption of new accounting guidance.
Other expenses decreased from
$9.2 million to $5.5 million primarily as a result of a decrease in impairment
losses and losses on the sale of vehicle inventory of $3.3
million. These losses reflect lower values of certain used truck
models which are sensitive to the adverse economic
environment.
Income tax expense (benefit)
includes federal, state and foreign taxes. Our income tax
expense changed from a benefit of $14.1 million to an expense of $17.9 million
primarily as a result of moving from a pre-tax loss position to a pre-tax profit
position.
The
following table summarizes our consolidated statements of operations and
illustrates the key financial indicators used to assess the consolidated
financial results. Financial information is presented for the
comparative fiscal years ended October 31, 2008 and 2007 (dollars in
millions):
|
2008
|
2007
|
Change
|
%
Change
|
|||||||||||||
|
Revenues
|
||||||||||||||||
|
Financing
revenue
|
$ | 263.3 | $ | 325.2 | $ | (61.9 | ) | (19.0 | ) | |||||||
|
Securitization
income
|
12.2 | 73.2 | (61.0 | ) | (83.3 | ) | ||||||||||
|
Operating
leases and other
revenue
|
49.1 | 55.0 | (5.9 | ) | (10.7 | ) | ||||||||||
|
Total
revenues
|
324.6 | 453.4 | (128.8 | ) | (28.4 | ) | ||||||||||
|
Expenses
|
||||||||||||||||
|
Cost
of
borrowing
|
199.1 | 248.2 | (49.1 | ) | (19.8 | ) | ||||||||||
|
Credit,
collections and
administrative
|
56.9 | 50.6 | 6.3 | 12.5 | ||||||||||||
|
Provision
for credit
losses
|
32.2 | 19.6 | 12.6 | 64.3 | ||||||||||||
|
Depreciation
on operating
leases
|
17.0 | 18.5 | (1.5 | ) | (8.1 | ) | ||||||||||
|
Derivative
expense
|
55.0 | 8.9 | 46.1 | 518.0 | ||||||||||||
|
Other
expenses
|
9.2 | 2.2 | 7.0 | 318.2 | ||||||||||||
|
Total
expenses
|
369.4 | 348.0 | 21.4 | 6.1 | ||||||||||||
|
Income
(loss) before
taxes
|
(44.8 | ) | 105.4 | (150.2 | ) |
N.M.
|
||||||||||
|
Income
tax (benefit)
expense
|
(14.1 | ) | 38.1 | (52.2 | ) |
N.M.
|
||||||||||
|
Net
income(loss)
|
$ | (30.7 | ) | $ | 67.3 | $ | (98.0 | ) |
N.M.
|
|||||||
Percentage
changes deemed to be not meaningful are designated N.M.
Financing
revenue is comprised of interest revenue from the following interest earning
assets (dollars in millions):
|
|
||||||||||||||||
|
2008
|
2007
|
Change
|
%
Change
|
|||||||||||||
|
Retail
notes and finance
leases
|
$ | 221.4 | $ | 262.4 | $ | (41.0 | ) | (15.6 | ) | |||||||
|
Wholesale
notes
|
15.9 | 28.1 | (12.2 | ) | (43.4 | ) | ||||||||||
|
Retail
and wholesale
accounts
|
26.0 | 34.7 | (8.7 | ) | (25.1 | ) | ||||||||||
|
Total
financing
revenue
|
$ | 263.3 | $ | 325.2 | $ | (61.9 | ) | (19.0 | ) | |||||||
The
year ended October 31, 2008 compared to the year ended October 31,
2007
Financing
revenue was lower as a result of the decrease in the average finance receivable
portfolio balance from $3.9 billion to $3.4 billion, as originations decreased
resulting from declines in industry demand from both the wholesale and retail
sides of the business. The average interest rates of the finance receivable
portfolio were 7.7% and 8.3% for 2008 and 2007, respectively.
Securitization income
represents all revenue and expense components resulting from off-balance
sheet sales of receivables including: excess spread income, servicing fees,
initial gain or loss at time of sale, investment income and fair value
adjustments related to retained interests. Excess spread income decreased by
$33.9 million, as a result of a decrease in the average sold portfolio as well
as margin compression relating to interest rate changes and the continued
challenging credit markets. Losses on sales of receivables net of fair value
adjustments increased from $4.7 million to $22.5 million as the discount rates
used to value those retained interests increased as a result of disruption in
the credit markets. Servicing fees and investment income also declined as a
result of the decrease in the average sold facilities.
Operating leases and other revenue
primarily includes rental income
on operating leases and interest earned on cash accounts. Operating leases
revenue decreased from $55.0 million to $49.1 million reflecting the decline in
originations of operating leases and a lower investment in equipment under
operating leases. Additionally, interest earned on restricted cash accounts
established as additional collateral for our secured borrowings decreased as
rates declined, even though average invested cash levels increased.
Cost of borrowing primarily
includes interest expense on Senior and secured
borrowings. Cost of
borrowing decreased from $248.2 million to $199.1 million as a result of
lower average debt balances and lower borrowing rates. Our
average interest rates on Senior and secured borrowings
were 4.7% and 5.3% for the respective periods in 2008 and 2007 driven by
lower LIBOR rates. The average outstanding debt balance decreased
from $4.5 billion to $4.0 billion, reflecting lower funding needs resulting from
lower origination volume.
Credit, collections and
administrative expenses include costs relating to the management and
servicing of receivables as well as general business expenses and
wages. Such costs increased $3.9 million as a result of the
relocation of the regional offices to Schaumburg. Additionally, consultant fees
relating to accounting and information systems support increased $2.7
million.
Provision for credit losses
on receivables increased from $19.6 million to $32.2 million reflecting
economic deterioration in the marketplace as delinquencies, impaired
receivables, specific reserves for high-risk accounts and charge-offs increased.
This was partially offset by the impact of a lower total balance of retail notes
and finance leases. As a result of these factors, our allowance to finance
receivables coverage ratio increased from 0.7% to 1.0%.
Depreciation on operating leases
decreased from $18.5 million to $17.0 million reflecting the continued
decline in originations of operating leases and lower investment in equipment
under operating leases. The investment in operating leases decreased
from $124.2 million in 2007 to $119.5 million in 2008.
Derivative expense increased
from $8.9 million to $55.0 million as a result of the decline in fair value of
our interest rate swaps as forward interest rate curves decreased, periodic
settlement payments increased, and additional swaps related to new
securitizations were entered into. The swaps are used as an economic hedge on
the future cash flows of our secured borrowings. The decrease in the forward
interest rates curves created an increase in both the current and future monthly
swap settlements resulting in the increase in derivative expense. Additionally,
within the current credit market environment, new retail secured borrowings were
closed at higher spreads. These higher spreads coupled with declining interest
rates also contributed to the increase. These swaps do not qualify for hedge
accounting under ASC Topic 815, thus the fair value
adjustment is a period cost.
Other expenses increased from
$2.2 million to $9.2 million primarily as a result of repossessed and residual
inventory write-downs and losses. The write-downs reflect lower
values of certain used truck models which are sensitive to the deteriorating
economic environment.
Income tax (benefit) expense
includes federal, state and foreign taxes. Our income tax
decreased from an expense of $38.1 million to a benefit of $14.1 million
primarily as a result of moving from a profitable pre-tax position to a pre-tax
loss position.
Financial
Condition (in millions):
|
As
of
|
||||||||||||||||
|
October
31,
2009
|
October
31,
2008
|
Change
|
%
Change
|
|||||||||||||
|
Cash
and cash
equivalents
|
$ | 16.1 | $ | 34.4 | $ | (18.3 | ) | (53.2 | ) | |||||||
|
Finance
receivables,
net
|
2,660.3 | 3,090.2 | (429.9 | ) | (13.9 | ) | ||||||||||
|
Amounts
due from sales of
receivables
|
291.5 | 229.6 | 61.9 | 27.0 | ||||||||||||
|
Net
accounts due from
affiliates
|
- | 17.5 | (17.5 | ) | N.M | |||||||||||
|
Net
investment in operating
leases
|
79.5 | 72.9 | 6.6 | 9.1 | ||||||||||||
|
Vehicle
inventory
|
26.5 | 42.0 | (15.5 | ) | (36.9 | ) | ||||||||||
|
Restricted
cash and cash
equivalents
|
421.8 | 515.4 | (93.6 | ) | (18.2 | ) | ||||||||||
|
Other
assets
|
107.7 | 123.0 | (15.3 | ) | (12.4 | ) | ||||||||||
|
Total
assets
|
$ | 3,603.4 | $ | 4,125.0 | $ | (521.6 | ) | (12.6 | ) | |||||||
|
Senior
and secured
borrowings
|
$ | 3,093.6 | $ | 3,679.1 | (585.5 | ) | (15.9 | ) | ||||||||
|
Net
accounts due to
affiliates
|
31.2 | - | 31.2 | N.M | ||||||||||||
|
Other
liabilities
|
166.4 | 173.3 | $ | (6.9 | ) | (4.0 | ) | |||||||||
|
Total
liabilities
|
3,291.2 | 3,852.4 | (561.2 | ) | (14.6 | ) | ||||||||||
|
Total shareowner’s equity
|
312.2 | 272.6 | 39.6 | 14.5 | ||||||||||||
|
Total
liabilities and shareowner’s equity
|
$ | 3,603.4 | $ | 4,125.0 | $ | (521.6 | ) | (12.6 | ) | |||||||
Balances
as of October 31, 2009 compared to balances as of October 31, 2008
Finance receivables, net
decreased $429.9 million to a balance of $2.7 billion as of October 31, 2009.
Of the $429.9 million decrease, retail notes and finance leases, net of
unearned income decreased $514.0 million which was the result of fewer
acquisitions combined with customer payments. Accounts increased by $96.4
million primarily relating to Ford business which is expected to terminate
during the first fiscal quarter of 2010. Wholesale notes increased $49.9 million
as a result of relatively high acquisitions during October
2009. Finance
receivables from
affiliates decreased $58.0 million as a result of Dealcor’s effort to
reduce inventories. Allowance for losses
increased $4.2 million primarily as a result of an increase in specific loss
reserves and the impact of higher losses in the historical component of the loss
allowance calculation which was offset by the decline in the finance receivable
portfolio balance.
Amounts due from the sale of
receivables increased from $229.6 million to $291.5 million primarily as
a result of a $52.3 million increase in retained interests in sold wholesale
notes caused by higher over-collateralization requirements in the amended VFC
facility. In addition, TRAC retained interest increased by $9.6 million as
concentration limits reduced the facility utilization level.
Vehicle inventory decreased
from $42.0 million to $26.5 million as a result of impairment losses of $13.1
million of which Navistar Inc. recognized $9.2 million under the loss sharing
arrangements with NFC. Additionally, sales of used trucks exceeded repossessions
and lease terminations for the period.
Restricted cash and cash
equivalents decreased from $515.4 million to $421.8 million as a result
of $70.7 million in lower collateral account balances in Navistar Financial
Retail Receivables Corporation (“NFRRC”) attributable to the lower outstanding
portfolio level. In addition, cash collateral in Truck Retail Instalment Paper
Corporation (“TRIP”) was lower by $23.2 million as finance receivable levels
increased. The TRIP facility is required to maintain a combined balance of
$500.0 million of finance receivables and cash equivalents as
collateral.
Other assets decreased from
$123.0 million to $107.7 million as a result of the amortization of debt
issuance costs, prepaid expenses and other capitalized assets, as well as the
effect of monthly settlement payments and changes in fair value on derivative
assets.
Senior and secured borrowings
decreased from $3.7 billion to $3.1 billion primarily as a result of $1.1
billion of payments on secured borrowings. The payments were
partially offset by $348.1 million in new secured borrowings which included the
issuance of $298.6 million of asset-backed notes in April 2009.
Other liabilities decreased
from $173.3 million to $166.4 million primarily as a result of the monthly
settlement payments and changes in fair value on derivative liabilities of $17.7
million, and a decrease in accrued interest of $5.9 million. These decreases
were partially offset by increases in postretirement benefit liabilities of
$14.7 million and other accrued expenses of $2.0 million.
Shareholder’s equity
increased from $272.6 million to $312.2 million as a result of net income of
$28.7 million and a capital contribution of $20.0 million from Navistar, Inc.
The capital contribution was a direct result of the commitment by Navistar, Inc.
to ensure our Fixed Charge Coverage Ratio is at least 125% on a rolling four
quarter basis.
Asset
Quality
The
following table summarizes delinquencies and charge-offs:
|
As
of October 31,
|
||||||||||||
|
|
2009
|
2008
|
Change
|
|||||||||
|
Delinquencies
|
||||||||||||
|
Retail
notes & finance leases greater than 60 days.
|
0.7 | % | 0.7 | % | 0.0 | % | ||||||
|
Wholesale
notes greater than 60 days
|
0.1 | % | 0.4 | % | (0.3 | %) | ||||||
|
Wholesale
accounts greater than 60 days
|
0.9 | % | 2.0 | % | (1.1 | %) | ||||||
|
Allowance
to finance receivable coverage ratio
|
1.4 | % | 1.0 | % | 0.4 | % | ||||||
|
Millions
of dollars
|
Years
Ended October 31,
|
|||||||||||
|
2009
|
2008
|
2007
|
||||||||||
|
Charge-offs
|
||||||||||||
|
Retail
notes & finance leases charge-offs
|
$ | 25.5 | $ | 25.4 | $ | 9.9 | ||||||
|
Wholesale notes
charge-offs
|
1.1 | 1.8 | 1.0 | |||||||||
|
Wholesale accounts
charge-offs
|
- | 0.5 | - | |||||||||
|
Retail
notes & finance leases charge-offs to liquidations
|
2.3 | % | 1.9 | % | 1.0 | % | ||||||
| Wholesale notes charge-offs to liquidations | - | 0.1 | % | - | ||||||||
Retail
notes and finance leases delinquencies greater than 60 days have returned to
prior year levels after increased levels during most of the year attributed to
the general economic downturn. Repossessions decreased from $121.3 million in
2008 to $59.7 million in 2009 reflecting the lower receivable portfolio level
and recent improvement in delinquencies.
The
overall allowance to finance receivable coverage ratio increased as a result of
an increase in specific loss reserves of $5.7 million, the impact of higher
losses in the historical component of the loss allowance calculation and the
decline in the finance receivable portfolio balance. Impaired receivables
increased by $5.2 million during the year to $64.8 million.
The
allocation of the Allowance
for losses by receivable type is as follows at October 31 (in
millions):
|
2009
|
2008
|
|||||||
|
Retail
Notes and Finance
Leases
|
$ | 31.8 | $ | 27.5 | ||||
|
Accounts
|
0.8 | 0.9 | ||||||
|
Total
|
$ | 32.6 | $ | 28.4 | ||||
NFC
evaluates its Allowance for
losses based on a pool method by asset type: retail notes and finance
leases broken out by customer type, and wholesale accounts. The
finance receivables in these pools are considered to be relatively
homogenous.
NFC’s
estimate of the required allowance is based upon three factors: a
historical component based upon a weighted average of actual loss experience
from the most recent three years, a qualitative component based upon current
economic and portfolio quality trends, and a specific reserve
component.
The
actual losses related to the retail notes and finance leases portfolio are also
stratified by customer types to reflect the differing loss statistics for
each.
The
qualitative component is the result of analysis of asset quality trend
statistics from the most recent four quarters. In addition, we analyze
specific economic indicators such as tonnage, fuel prices, and gross domestic
product for additional insight into the overall state of the economy and its
potential impact on our portfolio.
In
addition, when we identify significant customers at probable risk of default, we
segregate those customers’ receivables from the pools and separately evaluate
the estimated losses based on the market value of the collateral and specific
terms of the receivable contracts. We use the same process in estimating
the collateral values as we do in estimating the values of our Vehicle
inventory.
Financing
Environment
Financing
Volume and Finance Market Share
NFC’s net
retail note and finance lease originations/purchases were $585.6 million and
$868.7 million for the years ended October 31, 2009 and October 31, 2008,
respectively. NFC provided 8.6% and 11.0% of retail and lease
financing for the Navistar, Inc. new trucks sold in the U.S. during the fiscal
years ended October 31, 2009, and 2008, respectively. NFC experienced
a decrease in market share as a result of additional sales from Navistar, Inc.
to customers that NFC does not traditionally finance, such as large rental
companies.
NFC
provided 95.8% of the wholesale financing of new trucks sold to Navistar, Inc.’s
dealers in fiscal 2009, 96.2% in 2008, and 93.5% in 2007. Wholesale note
originations were $3.2 billion in fiscal 2009, $3.5 billion in fiscal 2008 and
$4.0 billion in fiscal 2007.
Serviced
wholesale notes balances, including the portion from affiliates, were $964.7
million and $990.8 million as of October 31, 2009 and 2008, respectively. The
2009 decrease reflects Navistar, Inc.’s lower sales to its dealers in the United
States.
Funds
Management
We have
traditionally obtained the funds to provide financing to Navistar, Inc.'s
dealers and retail customers from the financing of receivables in securitization
transactions, short and long-term bank borrowings, and medium and senior
debt. Given our debt ratings and the overall quality of our
receivables, the financing of receivables in securitizations has been the most
economical source of funding.
Credit
Ratings
NFC’s
credit ratings as of October 31, 2009, were as follows:
|
Fitch
|
Standard
and
Poor’s
|
|
|
Senior
unsecured debt
|
BB-
|
BB-
|
|
Outlook
as of October 20, 2009
|
Negative
|
Negative
|
|
During
August 2009 and May 2008, Standard and Poor’s and Fitch, respectively,
removed both NIC and NFC from the credit watch with negative implications
while outlook remains Negative.
|
||
Funding
Trends
The
uncertainty and market volatility in capital and credit markets has stabilized
recently. During the first half of our fiscal year market volatility
produced downward pressure on credit availability for most issuers without
regard to those issuers’ underlying financial strength and resulted in increased
borrowings costs. The funding strategy of NFC has been adversely
affected by stress in the credit markets caused by a lack of liquidity and
increased capital reserve requirements.
The asset
backed securitization market used by NFC and its lending conduit banks continues
to be adversely affected by a relatively tight credit environment, however,
improvement has been seen in recent months. Substantial increases in credit
spreads were seen at all credit rating levels. Even high quality and highly
rated issuers saw their previous rates increase significantly. The recent launch
of TALF has however added some stability to the securitization market. Pricing
has improved, although it remains higher than historical norms. On April 30,
2009, NFC issued $298.6 million of asset-backed notes into a
bank-sponsored, multi-seller conduit facility. This was our only retail
securitization transaction completed in fiscal 2009. This issuance of
asset-backed notes and credit rating thereon, demonstrates our ability to access
credit markets in the current environment. The market for wholesale floorplan
securitizations has been more volatile than for retail loans. The renewal of the
VFC in August 2009 contains increased over-collateralization requirements which
reduce total expected future cash flows. Given present market conditions, we
expect a near-term increase in our borrowing costs relating to new funding
facilities since market credit spreads are higher than those of our existing
debt. Our ability to obtain financing at competitive rates depends substantially
on the funding opportunities available.
On
November 10, 2009, NFC completed the sale of $350.0 million of three-year
asset-backed securities within the wholesale note trust funding facility. This
sale was eligible for funding under the TALF program.
On
December 16, 2009, our bank credit facility was refinanced for $815.0 million
due in 2012. The refinancing contains a term loan of $365.0 million and a
revolving loan of $450.0 million with a sub-revolver of $100.0 million
designated for NIC’s Mexican finance subsidiaries. Under the new agreement, NFC
is subject to customary operational and financial covenants including an initial
minimum collateral coverage ratio of 120%. Concurrent with the refinancing, NFC
issued secured borrowings of $304.2 million secured by retail notes and
leases.
In
addition, we have engaged in discussions with multiple parties regarding a
strategic alliance that would ensure funding and liquidity, reduce the need for
capital, lower our funding costs, expand financing options available to
Navistar, Inc. customers and reduce overall leverage. If completed, we believe
it may not be necessary to refinance our TRIP revolving retail warehouse
facility that is currently scheduled to mature in June 2010.
Guarantees
NFC
periodically guarantees the outstanding debt of NIC's Mexican finance
subsidiary, Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto
Multiple, Entidad No Regulada (“NFM”). The guarantees allow for
diversification of funding sources for the affiliate. As of October 31,
2009, we had numerous guarantees related to NFM and our maximum exposure under
these guarantees is the total amount of debt outstanding of $199.5 million. We
have not recorded any liability related to these guarantees.
Contractual
Obligations
The
following table provides aggregate information about outstanding contractual
obligations and other long-term liabilities as of October 31, 2009, presented
reflecting the impact of the subsequent refinancing of our bank facility in
December 2009. Secured borrowings are payable solely out of collections on the
securitized receivables transferred to those entities. The asset
backed debt is the legal obligation of the consolidated subsidiary whereby there
is no recourse to NFC (in millions):
|
Due
in Fiscal
|
2010
|
2011-2012 | 2013-2014 |
After
2014
|
Total
|
|||||||||||||||
|
Senior
borrowings (1)
|
$ | 651.4 | $ | 7.3 | $ | 884.3 | $ | 224.9 | $ | 1,767.9 | ||||||||||
|
Secured
borrowings(1)
|
40.8 | 228.2 | 503.2 | 553.5 | 1,325.7 | |||||||||||||||
|
Operating
leases
|
1.7 | 2.8 | 2.5 | 1.5 | 8.5 | |||||||||||||||
|
Interest
(2)
|
78.8 | 154.7 | 61.0 | 38.9 | 333.4 | |||||||||||||||
|
Total
|
$ | 772.7 | $ | 393.0 | $ | 1,451.0 | $ | 818.8 | $ | 3,435.5 | ||||||||||
(1) Principal
only
(2) Amounts represent estimated contractual
interest payments on outstanding debt. Rates in effect as of October
31, 2009, are used for variable rate debt.
Funding
Facilities
We
finance receivables through securitizations utilizing the asset-backed public
market and private placement sales. NFC, through these securitizations, despite
a rising rate market, has been able to fund its operating needs at rates which
are more economical than those available to NFC in the public unsecured bond
market. We finance receivables using a process commonly known as securitization,
whereby asset-backed securities are sold via public offering or private
placement. In a typical securitization transaction, NFC
transfers a pool of finance receivables to a bankruptcy remote, special purpose
entity (“SPE”). The SPE then transfers the receivables to a special
purpose entity, generally a trust, in exchange for securities of the trust which
are then retained or sold into the public market or privately placed. The
securities issued by the trust are secured by future collections on the
receivables transferred to the trust. These transactions are structured as sales
from a legal standpoint but are subject to the provisions of ASC Topic 860,
Transfers and
Servicing, as to accounting treatment. When we finance
receivables we use various wholly-owned special purpose subsidiaries depending
on the assets being financed. Navistar Financial Securities
Corporation (“NFSC”) finances wholesale notes, NFRRC finances retail notes and
finance leases, International Truck Leasing Corporation (“ITLC”) finances
operating leases and some finance leases, and Truck Retail Accounts Corporation
(“TRAC”) finances retail accounts. NFC uses Truck Retail Instalment
Paper Corporation (“TRIP”) to temporarily fund retail notes and retail finance
leases.
We
securitized $343.3 million of retail notes through NFRRC and issued secured
borrowings of $298.6 million during the year ended October 31, 2009. We securitized $1.2
billion of retail notes through NFRRC and issued secured borrowings of $1.0
billion during the year ended October 31, 2008. On November 16, 2009, NFC
exercised its right to pay off retail securitization debt of $66.9 million in
advance of final maturity. Generally, NFC enters into interest rate swap
agreements in connection with a securitization of retail note
receivables. On a consolidated basis, NFC effectively fixes the rate
on a portion of its variable rate debt by entering into interest rate swap
agreements with contractual amortization schedules.
NFC
securitizes wholesale notes through NFSC, which has in place a revolving
wholesale note trust that provides for the funding of eligible wholesale
notes. The trust owned $763.1 million of wholesale notes and no cash
equivalents as of October 31, 2009, and $818.6 million of wholesale notes and
$95.3 million of cash equivalents as of October 31, 2008. As
discussed in Note 13, Securitization Transactions,
a portion of the wholesale trust is funded by a $650.0 million bank conduit
facility which was renewed on August 25, 2009. The renewal contains higher
over-collateralization requirements which have had an adverse impact on Securitization
income.
Components
of available wholesale note trust funding certificates as of October 31 were as
follows (in millions):
|
Maturity
|
2009
|
2008
|
|||||||
|
Investor
certificate
|
February
2010
|
$ | 212.0 | $ | 212.0 | ||||
|
Variable
funding certificate
|
August
2010
|
650.0 | 800.0 | ||||||
|
Total
|
$ | 862.0 | $ | 1,012.0 | |||||
The
utilized portion of the variable funding certificate (“VFC”) was $350.0 million
and $550.0 million as of October 31, 2009 and 2008,
respectively. The VFC facility was reduced to $500.0 million
subsequent to October 31, 2009 in conjunction with the sale of the $350.0
million of three-year asset-backed securities under the TALF program. NFSC held
a retained interest in the facility of $191.9 million as of October 31, 2009 and
$139.6 million as of October 31, 2008.
TRAC
obtains financing for its retail accounts through a bank conduit that provides
for the funding of up to $100.0 million of eligible retail accounts. In July
2009, the facility was amended to allow NFC more flexibility with regard to
pricing on certain retail accounts and has been extended to October 29, 2010. As
a result of the amendment, the spread over lenders’ cost of funds was increased
from 200 basis points to 300 basis points. The utilized portion of
the TRAC funding facility was $7.7 million and $47.5 million as of October 31,
2009, and 2008, respectively. TRAC held a retained interest in the facility
of $99.6 million as of October 31, 2009, and $90.0 million as of October 31,
2008.
TRIP, a
special purpose, wholly-owned subsidiary of NFC, has a $500.0 million revolving
facility which matures in June 2010 and is subject to optional early redemption
in full without penalty or premium upon satisfaction of certain terms and
conditions on any date on or after April 15, 2010. NFC uses TRIP to
temporarily fund retail notes and retail leases, other than operating
leases. This facility is used primarily during the periods prior to a
securitization of retail notes and finance leases. NFC retains a repurchase
option against the retail notes and leases sold into TRIP; therefore, TRIP’s
assets and liabilities are included in our consolidated statements of financial
condition. As of October 31, 2009 and 2008, respectively NFC had $301.1 million
and $242.5 million, respectively, in retail notes and finance leases in
TRIP. In addition, the TRIP facility held $275.5 million and $298.8
million of cash equivalents as of October 31, 2009 and 2008,
respectively.
ITLC, our
wholly-owned subsidiary, was established to provide for the funding of certain
leases. During fiscal 2009, ITLC received proceeds of $40.2 million
in the form of on-balance sheet collateralized borrowings. During
fiscal 2008, ITLC received proceeds of $54.0 million in the form of on-balance
sheet collateralized borrowings. As of October 31, 2009, the balance of ITLC’s
collateralized borrowings secured by operating and finance leases was $125.0
million as compared to $130.4 million on October 31, 2008.
Our
ability to finance our receivables may be dependent on the following factors:
receivable eligibility, the volume and credit quality of receivables, the
performance of previously securitized receivables, general demand for the type
of receivables we offer, market capacity for our sponsored investments,
accounting and tax changes, our debt ratings and our ability to maintain back-up
liquidity facilities for certain securitization programs. If as a
result of any of these or other factors, the cost of securitized funding
significantly increased or securitized funding was no longer available, there
could be a material adverse effect on our results of operations, financial
condition and liquidity.
The bank
credit agreement (“Agreement”), as amended in March 2007, has two primary
components, a term loan of $620.0 million and a revolving bank loan of $800.0
million. The latter has a Mexican sub-revolver up to $100.0 million
which may be used by NIC’s Mexican finance subsidiaries.
As of
October 31, the availability under the revolver portion of the Agreement was as
follows (in millions):
|
2009
|
2008
|
|||||||
|
Revolver
bank
loan
|
$ | 800.0 | $ | 800.0 | ||||
|
NFC
revolving loan
utilized
|
(670.5 | ) | (454.0 | ) | ||||
|
Mexican
sub-revolver loan
utilized
|
(14.0 | ) | (100.0 | ) | ||||
|
Total
availability
|
$ | 115.5 | $ | 246.0 | ||||
Navistar,
Inc. made capital contributions of $20.0 million and $60.0 million to NFC during
fiscal 2009 and 2008, respectively, to ensure compliance with the 125% Fixed
Charge Coverage Ratio requirement under the Agreement. We expect that
Navistar, Inc. will be able to make any capital contributions that may be
necessary in fiscal 2010.
On March
28, 2007, NFC entered into a First Amendment to the Agreement increasing the
term loan component from $400.0 million to $620.0 million. In
December 2009, NFC refinanced the remaining term loan principal outstanding
balance of $597.4 million as of October 31, 2009, originally scheduled to be
paid in July 2010.
Critical
Accounting Estimates
Our
consolidated financial statements are prepared in accordance with generally
accepted accounting principles (“GAAP”) in the United States. In connection with
the preparation of our consolidated financial statements, we use estimates and
make judgments and assumptions about future events that affect the reported
amounts of assets, liabilities, revenue, expenses and the related disclosures.
Our assumptions, estimates and judgments are based on historical experience,
current trends and other factors we believe are relevant at the time we prepared
our consolidated financial statements. Our significant accounting
policies are discussed in Note 1, Summary of Accounting
Policies, to our accompanying consolidated financial statements. We
believe that the following policies are the most critical in fully understanding
and evaluating our reported results as they require us to make difficult,
subjective and complex judgments. In determining whether an estimate
is critical we consider if:
|
·
|
the
nature of the estimates or assumptions contains levels of subjectivity and
judgment necessary to account for highly
uncertain matters or the susceptibility of such matters to change;
and
|
· the
impact of the estimates and assumptions on financial condition or operating
performance is material.
We have
reviewed these critical accounting policies and related disclosures with the
Audit Committee of our Board of Directors.
Allowance
for losses
The Allowance for losses for
finance receivables is established through a charge to the Provision for credit
losses. The allowance is an estimate of the amount required to
absorb probable losses on the existing portfolio of finance receivables that may
become uncollectible. Finance receivables are charged off to the
Allowance for losses
when amounts due from the customers are determined to be uncollectible. NFC’s
estimate of the required allowance is based upon three factors: a
historical component based upon a weighted average of actual loss experience
from the most recent three years, a qualitative component based upon current
economic and portfolio quality trends, and a specific reserve component. The
qualitative component is the result of analysis of asset quality trend
statistics from the most recent four quarters. In addition, we also
analyze specific economic indicators such as tonnage, fuel prices, and gross
domestic product for additional insight into the overall state of the economy
and its potential impact on our portfolio. The actual losses related to the
retail notes and finance leases portfolio are also stratified by customer types
to reflect the differing loss statistics for each. To the extent that our
judgments about these risk factors and conditions are not accurate, an
adjustment to our allowance for losses may materially impact our results of
operations or financial condition. If we were to apply a hypothetical increase
and decrease of 10 basis points to the historical loss rate component used in
calculating the allowance for losses, the required allowance, as of October 31,
2009, would increase from $32.6 million to $34.7 million and decrease to $30.5
million, respectively.
Amounts
due from sales of receivables (including fair value calculation)
Some of
our securitization transactions qualify as sales under ASC Topic 860. Gains or
losses on sales of receivables are credited or charged to securitization income
in the periods in which the sales occur. Amounts due from sales of receivables,
also known as retained interests, which include interest-only receivables, cash
reserve accounts and subordinated certificates, are recorded at fair value. The
accretion of the discount related to the retained interests is recognized on an
effective yield basis. We estimate i) the payment speed for the receivables
sold, ii) the discount rate used to determine the present value of future cash
flows, and iii) the anticipated net losses on the receivables to calculate the
gain or loss. The method for calculating the gain or loss aggregates the
receivables into a homogeneous pool. Cash flow estimates are made for each
securitization transaction which are based upon historical and current
experience, anticipated future portfolio performance, market-based discount
rates and other factors. These assumptions also impact the estimate of the
fair value of the retained interests which is calculated monthly with changes in
fair value included in the consolidated statements of operations. The primary
assumption used to estimate retained interests in sold receivables is the
discount rate. An immediate adverse change in the discount rate used to estimate
retained interests of 10.0% as of October 31, 2009, would result in a decrease
in pre-tax income of $2.4 million for the year ended October 31, 2009. See Note
14, Fair Value
Measurements, under Notes to Consolidated Financial Statements for
information on unobservable inputs used to determine fair value.
Derivative
financial instruments
NFC
manages its exposure to fluctuating interest rates on retail securitizations by
limiting the amount of fixed rate assets funded with variable rate
debt. This is accomplished by funding fixed rate receivables
utilizing a combination of fixed rate debt and variable rate debt and derivative
financial instruments to convert the variable rate debt to
fixed. These derivative financial instruments may include forward
contracts, interest rate swaps, and interest rate caps. Our fair value
calculations require us to apply judgments using expected future settlements
together with forward interest rate curves, then recording assets and
liabilities using a mark to market fair value approach where unrealized gains
and losses are recorded as a period cost. Our estimated fair values impact the
timing and amount of Derivative expense. An
adverse parallel shift of 25 and 50 basis points in the forward interest rate
curve as of October 31, 2009 would result in a cumulative decrease in pre-tax
income of $2.5 million and $5.0 million, respectively. See Note 14, Fair Value Measurements,
under Notes to Consolidated Financial Statements for information on unobservable
inputs used to determine fair value.
Vehicle
inventory
We review
the carrying value of our vehicles periodically to determine that recorded
amounts are appropriate and the vehicles have not been impaired. If the carrying
value of the vehicles is considered impaired, an impairment charge is recorded
for the amount by which the carrying value of the vehicles exceeds its fair
value, net of remarketing costs. Our impairment loss calculations require us to
apply judgments in estimating future cash flows and asset fair
values. Vehicles could become impaired in the future or require
additional charges as a result of cost and availability of financing, new
vehicle pricing, physical condition of an asset, laws and regulations, or
changes in the business environment. Our estimated fair values impact the timing
and amount of impairment expense. An adverse change in the aggregate estimated
fair value of vehicles of 5.0% as of October 31, 2009 would result in a
cumulative decrease in pre-tax income of $1.3 million for the year ended October
31, 2009.
Pension
and other postretirement benefits
We
provide pension and postretirement benefits to a portion of our employees,
former employees, and their beneficiaries. Accounting for these benefits
requires the use of our estimates and assumptions as well as third party
actuarial data. The primary assumptions include factors such as discount rates,
healthcare cost trend rate, inflation, expected return on plan assets,
retirement rates, mortality rates and other factors. As of October 31, 2009, an
increase in the discount rate of 1.0%, assuming inflation remains unchanged,
would result in a decrease of $5.9 million in the pension obligations and would
result in a decrease of less than $0.1 million in the net periodic benefit cost.
A decrease of 1.0% in the discount rate of the other postretirement benefit
plans would result in an increase in other postretirement obligations of $6.5
million and a decrease of less than $0.1 million in the net periodic benefit
cost. The calculation of the expected return on plan assets is
described in Note 9, Postretirement Benefits, to
the accompanying consolidated financial statements. The expected return on
assets was 9.0% for 2009, 2008 and 2007. The expected return
on assets is a long-term assumption whose
accuracy can only be measured over a long time
period based upon past experience. We modified our investment policies during
the year and have reallocated the related plan assets for the pension plan asset
trust. As a result, we have lowered our expectations for future
returns on plans assets from 9.0% to 8.5% as of October 31, 2009.
Income
taxes
We
account for income taxes using the asset and liability method. Tax laws require
certain items to be reported in tax filings at different times than the items
are recognized in the consolidated financial statements. A current liability is
recognized for the estimated taxes payable for the current year. Deferred income
taxes represent the future consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. Deferred income taxes
are adjusted for enacted changes in tax laws in the period such changes are
enacted. Valuation allowances are recorded to reduce deferred tax assets when it
is more likely than not that a tax benefit will not be realized. Realization is
dependent on generating sufficient future taxable income. Changes in estimates
of future taxable income could affect future evaluations. Income tax (benefit) expense
is computed under a tax sharing agreement between us and our parent as if we
were a separate taxpayer, as are tax payments and realization of deferred tax
assets. The ultimate recovery of certain of our deferred tax assets is dependent
upon the amount and timing of future taxable income and other factors such as
the taxing jurisdiction in which the asset is to be recovered. A high
degree of judgment is required to determine if and the extent that valuation
allowances should be recorded against deferred tax assets. We have provided
valuation allowances at October 31, 2009, and October 31, 2008 aggregating $0.9
million and $1.5 million, respectively, for state deferred tax assets based upon
our current assessment of factors described above.
On
November 1, 2007 we adopted new accounting guidance which addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under the new accounting
guidance, we may recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained on
examination by taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
settlement. Guidance is provided on de-recognition, classification, interest and
penalties on income taxes, and accounting in interim periods. Upon adoption, we
increased our liability for uncertain tax positions by $3.9 million, resulting
in a decrease to retained earnings of $2.5 million. After adoption,
the amount of liability for uncertain tax positions was $7.9 million and $10.3
million at October 31, 2009, and October 31, 2008, respectively. If these
unrecognized tax benefits are recognized, the entire amount would impact our
effective tax rate. We recognize interest and penalties related to
uncertain tax positions as part of Income tax (benefit) expense.
While it is probable that the liability for uncertain tax positions may change
during the next 12 months, we do not believe that such change would have a
material impact on our financial condition, results of operations, or cash
flows.
New
Accounting Standards
See Note
1 of Notes to Consolidated Financial Statements
Fluctuating
interest rates are our primary market risk. Interest rate risk arises
when we fund a portion of the fixed rate receivables with floating rate
debt. NFC has managed this exposure to interest rate changes by
funding floating rate receivables with floating rate debt and fixed rate
receivables with fixed rate debt, floating rate debt and equity
capital. We have reduced the net exposure, which results from the
funding of fixed rate receivables with floating rate debt by generally
securitizing fixed rate receivables and by utilizing derivative financial
instruments, primarily swaps, when appropriate. Since we do not use
hedge accounting for our derivatives, the adjustments to the derivative fair
values are recorded in the consolidated statements of operations which can cause
volatility in our earnings. The derivatives do however provide NFC with an
economic hedge of the expected future interest cash flows associated with the
variable rate debt. NFC does not use derivative financial instruments
for trading purposes.
NFC
measures its interest rate risk by estimating the net amount by which the fair
value of all interest rate sensitive assets and liabilities, including
derivative financial instruments, would be impacted by selected hypothetical
changes in market interest rates. Fair value is estimated using a
discounted cash flow analysis. Assuming a hypothetical instantaneous
10% adverse change in interest rates as of October 31, 2009 and 2008, the
estimated fair value of the net assets would decrease by approximately $20.3
million and $29.9 million, respectively. NFC’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. The estimated fair value
decrease is not reflective of the impact on our pre-tax earnings, since not all
interest rate sensitive assets and liabilities are recorded at fair
value.
Index
|
Consolidated Financial
Statements:
|
Page
|
|||
|
Report
of Independent Registered Public Accounting
Firm
|
22 | |||
|
Consolidated
Statements of Operations
Years
ended October 31, 2009, 2008 and
2007
|
23 | |||
|
Consolidated
Statements of Shareowner’s Equity and Comprehensive Income
(Loss)
Years
ended October 31, 2009, 2008 and
2007
|
24 | |||
|
Consolidated
Statements of Financial Condition
As
of October 31, 2009 and
2008
|
25 | |||
|
Consolidated
Statements of Cash Flows
Years
ended October 31, 2009, 2008 and
2007
|
26 | |||
|
Notes
to Consolidated Financial
Statements
|
27 | |||
Report
of Independent Registered Public Accounting Firm
The Board
of Directors and Shareowner
Navistar
Financial Corporation:
We have
audited the accompanying consolidated statements of financial condition of
Navistar Financial Corporation and subsidiaries (the Company) as of October 31,
2009 and 2008, and the related consolidated statements of operations,
shareowner’s equity and comprehensive income (loss) and cash flows for each of
the years in the three-year period ended October 31, 2009. 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 the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Navistar Financial
Corporation and subsidiaries as of October 31, 2009 and 2008, and the results of
their operations and their cash flows for each of the years in the three-year
period ended October 31, 2009, in conformity with U.S. generally accepted
accounting principles.
|
/s/ KPMG
LLP
|
Chicago,
Illinois
December
21, 2009
Navistar
Financial Corporation and Subsidiaries
Consolidated
Statements of Operations
|
For
the years ended
October
31,
|
||||||||||||
|
Millions
of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Revenues
|
||||||||||||
|
Retail
notes and finance leases
revenue
|
$ | 174.8 | $ | 221.4 | $ | 262.4 | ||||||
|
Operating
leases
revenue
|
21.7 | 22.3 | 23.9 | |||||||||
|
Wholesale
notes
interest
|
13.7 | 15.9 | 28.1 | |||||||||
|
Retail
and wholesale accounts
interest
|
21.3 | 26.0 | 34.7 | |||||||||
|
Securitization
income
|
40.5 | 12.2 | 73.2 | |||||||||
|
Other
revenues
|
7.1 | 26.8 | 31.1 | |||||||||
|
Total
revenues
|
279.1 | 324.6 | 453.4 | |||||||||
|
Expenses
|
||||||||||||
|
Cost
of borrowing:
|
||||||||||||
|
Interest
expense
|
69.6 | 186.8 | 238.0 | |||||||||
|
Other
|
13.4 | 12.3 | 10.2 | |||||||||
|
Credit,
collections and
administrative
|
57.4 | 56.9 | 50.6 | |||||||||
|
Provision
for credit
losses
|
29.7 | 32.2 | 19.6 | |||||||||
|
Depreciation
on operating
leases
|
16.3 | 17.0 | 18.5 | |||||||||
|
Derivative
expense
|
40.6 | 55.0 | 8.9 | |||||||||
|
Other
expenses
|
5.5 | 9.2 | 2.2 | |||||||||
|
Total
expenses
|
232.5 | 369.4 | 348.0 | |||||||||
|
Income
(loss) before
taxes
|
46.6 | (44.8 | ) | 105.4 | ||||||||
|
Income
tax expense
(benefit)
|
17.9 | (14.1 | ) | 38.1 | ||||||||
|
Net
income
(loss)
|
$ | 28.7 | $ | (30.7 | ) | $ | 67.3 | |||||
See Notes
to Consolidated Financial Statements
Navistar
Financial Corporation and Subsidiaries
Consolidated
Statements of Shareowner’s Equity and Comprehensive Income (Loss)
|
Millions
of dollars
|
Capital
Stock
|
Paid-In
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Loss
|
Total
|
Comprehensive
Income
(Loss)
|
||||||||||||||||||
|
Balance
at October 31, 2006
|
$ | 1.6 | $ | 139.6 | $ | 459.8 | $ | (1.7 | ) | $ | 599.3 | $ | 86.4 | |||||||||||
|
2007
Activity:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | 67.3 | - | 67.3 | 67.3 | ||||||||||||||||||
|
Pension
adjustment, (net of tax $0.2)
|
- | - | - | 0.3 | 0.3 | 0.3 | ||||||||||||||||||
|
Impact
of accounting for postretirement benefit plans (net of tax
$0.6)
|
- | - | - | 1.2 | 1.2 | - | ||||||||||||||||||
|
Cash
dividend paid to parent company
|
- | - | (400.0 | ) | - | (400.0 | ) | - | ||||||||||||||||
|
Balance
at October 31, 2007
|
$ | 1.6 | $ | 139.6 | $ | 127.1 | $ | (0.2 | ) | $ | 268.1 | $ | 67.6 | |||||||||||
|
2008
Activity:
|
||||||||||||||||||||||||
|
Net
loss
|
- | - | (30.7 | ) | - | (30.7 | ) | (30.7 | ) | |||||||||||||||
|
Pension
adjustment, (net of tax $4.5)
|
- | - | - | (7.5 | ) | (7.5 | ) | (7.5 | ) | |||||||||||||||
|
Impact
of accounting for uncertainties for income tax
|
- | - | (2.5 | ) | - | (2.5 | ) | - | ||||||||||||||||
|
Capital
contribution from parent company
|
- | 60.0 | - | - | 60.0 | - | ||||||||||||||||||
|
Cash
dividend paid to parent company
|
- | - | (14.8 | ) | - | (14.8 | ) | - | ||||||||||||||||
|
Balance
at October 31, 2008
|
$ | 1.6 | $ | 199.6 | $ | 79.1 | $ | (7.7 | ) | $ | 272.6 | $ | (38.2 | ) | ||||||||||
|
2009
Activity:
|
||||||||||||||||||||||||
|
Net
income
|
- | - | 28.7 | - | 28.7 | 28.7 | ||||||||||||||||||
|
Pension
adjustment, (net of tax $5.0)
|
- | - | - | (9.1 | ) | (9.1 | ) | (9.1 | ) | |||||||||||||||
|
Capital
contribution from parent
company
|
- | 20.0 | - | - | 20.0 | - | ||||||||||||||||||
|
Balance
at October 31, 2009
|
$ | 1.6 | $ | 219.6 | $ | 107.8 | $ | (16.8 | ) | $ | 312.2 | $ | 19.6 | |||||||||||
See Notes
to Consolidated Financial Statements
Navistar
Financial Corporation and Subsidiaries
Consolidated
Statements of Financial Condition
|
As
of
October
31,
|
||||||||
|
Millions
of dollars
|
2009
|
2008
|
||||||
|
ASSETS
|
||||||||
|
Cash
and cash
equivalents
|
$ | 16.1 | $ | 34.4 | ||||
|
Finance
receivables, net of unearned income:
|
||||||||
|
Finance
receivables
|
2,538.6 | 2,906.3 | ||||||
|
Finance
receivables from
affiliates
|
154.3 | 212.3 | ||||||
|
Allowance
for
losses
|
(32.6 | ) | (28.4 | ) | ||||
|
Finance
receivables,
net
|
2,660.3 | 3,090.2 | ||||||
|
Amounts
due from sales of
receivables
|
291.5 | 229.6 | ||||||
|
Net
accounts due from
affiliates
|
- | 17.5 | ||||||
|
Net
investment in operating
leases
|
79.5 | 72.9 | ||||||
|
Vehicle
inventory
|
26.5 | 42.0 | ||||||
|
Restricted
cash and cash
equivalents
|
421.8 | 515.4 | ||||||
|
Other
assets
|
107.7 | 123.0 | ||||||
|
Total
assets
|
$ | 3,603.4 | $ | 4,125.0 | ||||
|
LIABILITIES
AND SHAREOWNER’S EQUITY
|
||||||||
|
Net
accounts due to
affiliates
|
$ | 31.2 | $ | - | ||||
|
Senior
and secured
borrowings
|
3,093.6 | 3,679.1 | ||||||
|
Other
liabilities
|
166.4 | 173.3 | ||||||
|
Total
liabilities
|
3,291.2 | 3,852.4 | ||||||
|
Shareowner’s
equity
|
||||||||
|
Capital
stock ($1 par value, 2,000,000 shares authorized, 1,600,000
shares
issued
and outstanding)
|
1.6 | 1.6 | ||||||
|
Paid-in
capital
|
219.6 | 199.6 | ||||||
|
Retained
earnings
|
107.8 | 79.1 | ||||||
|
Accumulated
other comprehensive
loss
|
(16.8 | ) | (7.7 | ) | ||||
|
Total
shareowner’s
equity
|
312.2 | 272.6 | ||||||
|
Total
liabilities and shareowner’s
equity
|
$ | 3,603.4 | $ | 4,125.0 | ||||
See Notes
to Consolidated Financial Statements
|
Navistar
Financial Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
|
||||||||||||
|
For
the years ended
October
31
|
||||||||||||
|
Millions
of dollars
|
2009
|
2008
|
2007
|
|||||||||
|
Cash
flow from operating activities:
|
||||||||||||
|
Net
income
(loss)
|
$ | 28.7 | $ | (30.7 | ) | $ | 67.3 | |||||
|
Adjustments
to reconcile net income to cash flow from operations:
|
||||||||||||
|
Net
loss on sales of finance
receivables
|
48.1 | 23.8 | 9.3 | |||||||||
|
Net
loss on sale and impairment of equipment under operating leases and
vehicle inventory
|
7.5 | 9.7 | 1.5 | |||||||||
|
Depreciation
and
amortization
|
27.7 | 24.8 | 25.2 | |||||||||
|
Provision
for credit
losses
|
29.7 | 32.2 | 19.6 | |||||||||
|
Net
change in amounts due from sales of receivables
|
(61.9 | ) | 89.5 | 387.7 | ||||||||
|
Net
change in finance receivables - wholesale notes
|
(49.9 | ) | (12.4 | ) | 140.4 | |||||||
|
Net
change in finance receivables from affiliates - wholesale
|
20.6 | (44.8 | ) | 37.7 | ||||||||
|
Net
change in net accounts due to/from
affiliates
|
48.7 | 42.6 | (41.4 | ) | ||||||||
|
Net
change in other assets and
liabilities
|
(10.3 | ) | (78.6 | ) | 7.8 | |||||||
|
Net
cash provided by operating
activities
|
88.9 | 56.1 | 655.1 | |||||||||
|
Cash
flow from investing activities:
|
||||||||||||
|
Originations
of retail notes and finance leases, includes affiliates
|
(585.6 | ) | (868.7 | ) | (1,185.6 | ) | ||||||
|
Net
change in restricted cash and cash
equivalents
|
93.6 | (144.9 | ) | 280.5 | ||||||||
|
Collections
on retail notes and finance lease receivables,
net
of change in unearned finance income, includes affiliates
|
1,011.1 | 1,312.0 | 1,305.7 | |||||||||
|
Net
change in finance receivables from affiliates - accounts
|
1.8 | 7.3 | (10.4 | ) | ||||||||
|
Net
change in finance receivables -
accounts
|
(96.4 | ) | 71.8 | (105.6 | ) | |||||||
|
Proceeds
from sale of vehicle
inventory
|
67.2 | 92.8 | 30.1 | |||||||||
|
Purchase
of equipment leased to
others
|
(35.0 | ) | (29.3 | ) | (24.3 | ) | ||||||
|
Proceeds
from sale of equipment under operating leases
|
3.4 | 17.7 | 15.5 | |||||||||
|
Loans
to
affiliates
|
- | (20.0 | ) | (110.0 | ) | |||||||
|
Loan
repayment from
affiliates
|
- | 80.0 | 50.0 | |||||||||
|
Net
cash provided by investing
activities
|
460.1 | 518.7 | 245.9 | |||||||||
|
Cash
flow from financing activities:
|
||||||||||||
|
Net
change in senior bank revolver, net of issuance costs
|
216.5 | 35.0 | (253.7 | ) | ||||||||
|
Proceeds
from issuance of senior bank term debt, net of issuance
costs
|
- | - | 217.2 | |||||||||
|
Principal
payments on senior bank term
debt
|
(6.2 | ) | (6.2 | ) | (5.1 | ) | ||||||
|
Proceeds
from issuance of secured borrowings, net of issuance costs
|
346.3 | 1,069.9 | 887.0 | |||||||||
|
Payments
on secured
borrowings
|
(1,143.9 | ) | (1,694.9 | ) | (1,361.4 | ) | ||||||
|
Dividends
paid to parent
company
|
- | (14.8 | ) | (400.0 | ) | |||||||
|
Capital
contribution from parent
company
|
20.0 | 60.0 | - | |||||||||
|
Net
cash used in financing
activities
|
(567.3 | ) | (551.0 | ) | (916.0 | ) | ||||||
|
Change
in cash and cash
equivalents
|
(18.3 | ) | 23.8 | (15.0 | ) | |||||||
|
Cash
and cash equivalents, beginning of
year
|
34.4 | 10.6 | 25.6 | |||||||||
|
Cash
and cash equivalents, end of
year
|
$ | 16.1 | $ | 34.4 | $ | 10.6 | ||||||
|
Supplemental
cash flow information:
|
||||||||||||
|
Interest
paid
|
$ | 75.6 | $ | 191.6 | $ | 237.5 | ||||||
|
Income
taxes paid, net of
refunds
|
0.6 | 73.0 | 32.4 | |||||||||
|
Transfers
of loans and leases to vehicle
inventory
|
67.3 | 129.0 | 49.6 | |||||||||
See Notes
to Consolidated Financial Statements
1.
SUMMARY OF ACCOUNTING POLICIES
Nature
of Operations
Navistar
Financial Corporation was incorporated in Delaware in 1949 and is a wholly-owned
subsidiary of Navistar, Inc. which is a wholly-owned subsidiary of Navistar
International Corporation (“NIC”). As used herein, “us,” “we,” “our”
or “NFC” refers to Navistar Financial Corporation and its wholly-owned
subsidiaries unless the context otherwise requires. NFC is a
commercial financing organization that provides retail, wholesale and lease
financing of products sold by Navistar, Inc. and its dealers within the United
States. NFC also finances wholesale accounts and selected retail
accounts receivable of Navistar, Inc. Sales of new products
(including trailers) of other manufacturers are also financed regardless of
whether they are designed or customarily sold for use with Navistar, Inc.’s
truck products.
Revenue
includes interest revenue from retail notes, finance leases, wholesale notes,
retail accounts, wholesale accounts, securitization income and rental income
from operating leases. Cost of borrowing includes interest expense on debt
financing and amortization of debt issuance costs.
We have
traditionally obtained the funds to provide financing to Navistar, Inc.'s
dealers and retail customers from the securitization of finance receivables,
short and long-term bank borrowings, and medium and senior debt. We
securitize wholesale notes through our wholly-owned subsidiary Navistar
Financial Securities Corporation (“NFSC”), which has in place a revolving
wholesale note trust that provides for the funding of eligible wholesale
notes. We finance non-fleet retail notes and finance leases through
Navistar Financial Retail Receivables Corporation (“NFRRC”) and Truck Retail
Instalment Paper Corporation (“TRIP”), our wholly-owned
subsidiaries. Fleet accounts receivables are financed via Truck
Retail Accounts Corporation (“TRAC”), our wholly-owned subsidiary.
International Truck Leasing Corporation, (“ITLC”), our wholly-owned subsidiary,
was established to provide for the funding of certain leases. See
Securitization Transactions below.
Basis
of Presentation and Consolidation
The
accompanying consolidated financial statements include the assets, liabilities,
revenues, and expenses of Navistar Financial Corporation, its wholly-owned
subsidiaries and variable interest entities (“VIEs”), if any, of which we are
the primary beneficiary. The effects of transactions among consolidated entities
have been eliminated to arrive at the consolidated amounts.
To date,
the only potential VIEs identified are the retail owner trusts which are
consolidated and the bank conduits used in various financing
transactions. We determined we are not the primary beneficiary of any
conduit VIEs since our variable interest in the assets in each conduit VIE is
significantly less than 50% of the fair value of the conduit VIE’s total assets
and therefore is not deemed to be a variable interest in the conduit VIE
itself. The maximum loss exposure relating to these non-consolidated
conduit VIEs is limited to our subordinated interests in various securitization
transactions and relates to credit risk only. If, at any time, our
interest in the specific assets of a conduit VIE (including any derivative or
other indemnification agreement) exceeds 50% of the fair value of the conduit
VIE’s total assets, we would perform the required analysis to determine whether
we were the primary beneficiary of that conduit VIE and, if so, would include
the assets and liabilities of the conduit VIE in our consolidated financial
statements. We make a similar evaluation at the end of each reporting
period.
We
evaluate our performance and allocate resources based on a single segment
concept. Accordingly, there are no separately identified material operating
segments for which discrete financial information is available. We do not derive
revenues from any single customer that represents 10% or more of our total
revenues. We have evaluated subsequent events and transactions for potential
recognition or disclosure in the consolidated financial statements through
December 21, 2009, the day the consolidated financial statements were filed with
the SEC.
Estimates
The
preparation of financial statements in conformity with GAAP requires us 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. Significant estimates and assumptions
are used for, but are not limited to: (1) allowance for losses;
(2) amounts due from sales of receivables (including fair value
calculations); (3) derivative financial instruments; (4) vehicle inventory;
(5) income taxes; and (6) pension and other postretirement benefits.
Future events and their effects cannot be predicted with certainty, and
accordingly, our accounting estimates require the exercise of judgment. The
accounting estimates used in the preparation of our consolidated financial
statements will change as new events occur, as more experience is acquired, as
additional information is obtained and as our operating environment changes. We
evaluate and update our assumptions and estimates on an ongoing basis and may
employ outside experts to assist in our evaluations for statistical models and
pension and benefits. Actual results could differ from the estimates we have
used.
Revenue
Recognition
Finance
Receivables
We
recognize revenue from retail notes, finance leases, wholesale notes, retail
accounts and wholesale accounts, including amounts received from Navistar, Inc.
for reimbursement of interest income for various dealer and buyer incentives, as
interest income using the effective interest method. Certain direct origination
costs and fees are deferred and recognized as an adjustment to yield and are
reported as part of interest income over the life of the receivables as
specified by Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 315, Receivables. Loans are
considered to be impaired when we conclude it is probable the customer will not
be able to make full payment after reviewing the customer’s financial
performance, payment ability, capital raising potential, management style,
economic situation, etc. The accrual of interest is discontinued on all impaired
receivables. When interest accrual is discontinued, all unpaid
accrued interest is reversed against interest revenue. We resume
accruing interest on these accounts when payments are current according to the
terms of the loans and future payments are reasonably assured.
Operating
Leases
We
recognize revenue on operating leases as rental income on a straight-line basis
over the life of the lease. Recognition of revenue is suspended when
we determine the collection of future rental revenue is not
probable. Income recognition is resumed if collection doubts are
removed.
Securitization
Transactions
We
finance receivables using a process commonly known as securitization, whereby
asset-backed securities are sold via public offering or private
placement. In a typical securitization transaction, NFC sells a
pool of finance receivables to a bankruptcy remote, special purpose entity
(“SPE”). The SPE then transfers the receivables to a special purpose
entity, generally a trust, in exchange for securities of the trust which are
then retained or sold into the public market or privately
placed. These securities are issued by the trust and are secured by
future collections on the receivables transferred to the trust. These
transactions are subject to the provisions of ASC Topic 860, Transfers and Servicing, as
to accounting treatment. When we finance receivables we use various
wholly-owned special purpose subsidiaries depending on the type of assets being
financed. TRIP finances retail notes and finance leases on a short
term basis. NFRRC finances retail notes and finance leases on a long
term basis; ITLC finances operating leases and certain finance
leases. NFRRC, TRIP and ITLC securitizations are accounted for
as secured borrowings. Wholesale notes are financed through NFSC and
retail accounts for parts, special items or large fleet customers of Navistar,
Inc. are financed through TRAC. Financings of receivables by NFSC and
TRAC comply with the requirements of ASC Topic 860 and are accounted for as
sales. When we account for securitizations as sales, we have
retained interests in the receivables sold (transferred). The retained interests
may include subordinated securities, undivided interests in receivables used as
over-collateralization, restricted cash held for the benefit of the trust and
interest-only strips. Our retained interests are the first to absorb any credit
losses on the transferred receivables because we have the most subordinated
interests in the trust. Our exposure to credit losses on the
transferred receivables is limited to our retained interests.
The SPEs’
assets are available to satisfy the creditors’ claims against the assets prior
to such assets becoming available for the SPEs’ own uses or to NFC or affiliated
companies. The transfer is structured as a legal sale, and we are
under no obligation to repurchase any transferred receivable that becomes
delinquent in payment or otherwise is in default. We are not
responsible for credit losses on transferred receivables other than through our
ownership of the lowest tranches in the securitization structures. We do not
guarantee any securities issued by trusts. We, as seller and the servicer of the
finance receivables are obligated to provide certain representations and
warranties regarding the receivables. Should any receivables fail to
meet these representations and warranties, we, as seller of the receivables, are
required to repurchase the affected receivables.
Off-balance
sheet securitizations:
For
transactions that qualify as sales under ASC Topic 860, receivables and
associated liabilities are removed from the consolidated statements of financial
condition. Gains or losses from these sales are recognized at the time of sale
based on the relative carrying value of the portion sold and the portions
allocated to the retained interests and are included in Securitization income. The
gain or loss is determined by the difference between the proceeds received and
the allocated carrying value of the sold receivables. We estimate the payment
speeds for the receivables sold, the discount rate used to determine the present
value of the retained interests and the anticipated net losses on the
receivables in order to calculate the gain or loss. Estimates are
based on historical experience, anticipated future portfolio performance,
market-based discount rates and other factors and are made separately for each
securitization transaction. The fair value of retained
interests is based on these assumptions. We re-evaluate the fair
value of the retained interests on a monthly basis and recognize in current
income changes as required. The retained interests are classified as
trading securities and are recorded as Amounts due from sales of
receivables in our consolidated statements of financial
condition.
The
trusts used for off-balance sheet sales engage us as servicer for a servicing
fee. The servicing duties include collecting payments on receivables and
preparing monthly investor reports on the performance of the receivables that
are used by the trustee to distribute monthly interest and principal payments to
investors. We apply the same servicing policies and procedures that
are applied to our owned receivables. The servicing income received
by us is just adequate to compensate us for our servicing responsibilities.
Therefore, no servicing asset or liability is recorded.
The
following elements of income related to the off-balance sheet securitizations
are included in Securitization
income in the consolidated statements of operations and in operating
activities in the consolidated statements of cash flows.
Fair
value adjustments –
Gains or losses on changes in the
estimated fair value of the retained interests.
Excess
spread income –
Income
generated by the receivables in off-balance sheet securitization trusts, net of
interest expense, credit losses and administrative expenses.
Servicing fee revenue –
Fees charged for collection and
reporting on behalf of the investors.
Gains
and losses on sale of receivables –
Proceeds less initial relative carrying
value calculated in the period of sale.
Investment income –
Interest income on cash reserve
accounts.
On-balance
sheet securitizations:
For
transactions that do not qualify as sales under ASC Topic 860, the financed
receivables remain on our balance sheet net of allowance for losses and the
associated debt issued is recorded as secured borrowings in the consolidated
statements of financial condition under Finance receivables and Senior and secured borrowings,
respectively. Interest revenue and expense are recorded as earned or
incurred in the consolidated statements of operations and debt issuance costs
are capitalized
and included in Other
assets and amortized on a level yield basis over the term of the debt.
For these on-balance sheet receivables, a Provision for credit losses
is recognized for probable losses. There are no gains or losses
recorded upon transfer and income is earned over the life of the assets
transferred.
Income
Taxes
NIC and
its domestic subsidiaries file a consolidated federal income tax return and both
combined and separate state income tax returns. We determine our
provision for income taxes using the asset and liability approach for accounting
for income taxes. Tax laws require certain items to be reported in tax filings
at different times than the items are recognized in the consolidated financial
statements. A current liability or receivable is recognized for the estimated
taxes payable or receivable for the current year. Deferred income taxes
represent the future consequences expected to occur when the reported amounts of
assets and liabilities are recovered or paid. Deferred income taxes are adjusted
for enacted changes in tax laws in the period such changes are enacted.
Valuation allowances are recorded to reduce deferred tax assets when it is more
likely than not that a tax benefit will not be realized. Realization is
dependent on generating sufficient future taxable income; changes in estimates
of future taxable income could affect future valuations. We recognize an accrual
for tax exposures for uncertain tax positions. Income taxes are computed under a
tax sharing agreement between us and our parent as if we were a separate
taxpayer, as are tax payments and realization of tax assets.
On
November 1, 2007 we adopted new accounting guidance, which addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under the new accounting
guidance, we may recognize the tax benefit from an uncertain tax position only
if it is more likely than not that the tax position will be sustained on
examination by taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
settlement. Guidance is provided on de-recognition, classification, interest and
penalties on income taxes, and accounting in interim periods. We recognize
interest and penalties related to uncertain tax positions as part of Income tax (benefit)
expense.
Cash
and Cash Equivalents
Cash and
cash equivalents are defined as short-term, highly liquid investments with
original maturities of 90 days or less.
Finance
Receivables
ASC Topic
942, Financial Services –
Depository and Lending, requires companies to report loans and trade
receivables not held for sale on the balance sheet at outstanding principal
adjusted for any charge offs, the allowance for losses, fees or costs deferred
on origination and any unamortized premiums or discounts on purchased loans.
Loans held for sale are reported at the lower of cost or fair value. NFC’s
retail notes, finance leases, retail accounts and wholesale accounts are
classified as held for investment. Upon origination, wholesale notes are
classified as held-for-sale and are valued at the lower of amortized cost or
fair value on an aggregate basis. Finance receivables from
affiliates include retail and wholesale notes and wholesale accounts.
Our finance receivables consist of the following:
Retail
Notes--
Retail
notes primarily consist of fixed rate loans to commercial customers to
facilitate their purchase of new and used trucks, trailers and related
equipment. At acquisition, we record the retail notes at their gross
value (principal and interest) and record, as a reduction to the gross value,
the amount of unearned interest. Revenue is recorded over the
term of the note using the effective interest method.
Finance
Leases --
Finance
leases consist of direct financing leases to commercial customers to facilitate
their acquisition of new and used trucks, trailers and related
equipment. Finance leases are recorded at origination as gross
finance receivable, unearned income and the guaranteed residual value of the
leased equipment. Unearned income represents the excess of the gross
receivable, plus the guaranteed residual value over the cost of the equipment.
Revenue is recorded over the term of the lease using the effective interest
method.
Wholesale
Notes --
Wholesale
notes purchased primarily from Navistar, Inc. consist of variable rate loans to
dealers for the purchase of new and used trucks, trailers and related
equipment.
Retail
Accounts --
Retail
accounts purchased from Navistar, Inc. consist of short-term accounts
receivables related to the sale of products to commercial
customers.
Wholesale
Accounts --
Wholesale
accounts purchased from Navistar, Inc. consist of short-term accounts
receivables primarily related to the sales of items other than trucks, trailers
and related equipment (e.g. service parts) to Navistar, Inc.’s
dealers.
Allowance
for Losses
The Allowance for losses for
finance receivables is established through a charge to the Provision for credit
losses. The allowance is an estimate of the amount required to
absorb probable losses on the existing portfolio of finance receivables that may
become uncollectible. Finance receivables are charged off to the
Allowance for losses
when amounts due from the customers are determined to be
uncollectible.
Troubled
loan accounts are specifically identified and segregated from the remaining
owned loan portfolio. The expected loss on troubled accounts is fully reserved
in a separate calculation as a specific reserve. A specific reserve is recorded
if it is believed that there is a greater than 50% likelihood that the account
could be impaired, and if the value of the underlying collateral is less than
the principal balance of the loan. We calculate a general reserve on the
remaining loan portfolio using loss ratios based on a pool method by asset
type: retail notes, finance leases and accounts. NFC’s estimate of
the required allowance is based upon three factors: a historical component
based upon a weighted average of actual loss experience from the most recent
three years, a qualitative component based upon current economic and portfolio
quality trends, and a specific reserve component. The qualitative component is
the result of analysis of asset quality trend statistics from the most recent
four quarters. In addition, we analyze specific economic indicators such
as tonnage, fuel prices, and gross domestic product for additional insight into
the overall state of the economy and its potential impact on our portfolio. The
actual losses related to the retail notes and finance leases portfolio are also
stratified by customer types to reflect the differing loss statistics for
each.
Under
various agreements, Navistar, Inc. and its dealers may be liable for a portion
of customer losses or may be required to repurchase the repossessed collateral
at the receivable principal value. The amount of losses we record in
our Provision for credit
losses does not include any amount for receivables covered under these
agreements. Allocation of the losses on the portfolio between us, Navistar, Inc.
and dealers is generally dependent on the type of collateral being financed and
loss sharing percentages established at the date of financing. Navistar, Inc.’s
proportion of total losses depends on a number of factors including the type of
collateral financed, the size of the customer exposure and the loss sharing
arrangement previously established.
In order
to establish a specific reserve in the loss allowance for finance receivables,
we look at many of the same factors listed above but also consider the financial
strength of the customer or dealer and key management, the timeliness of
payments, the number and location of satellite locations especially for the
dealer, the number of dealers of competitor manufacturers in the market area,
type of equipment normally financed (over the road or local use/delivery
vehicles) and the seasonality of the business (e.g., primarily a bus dealer). We
may continue to collect payments on accounts with specific reserves as the
amount of the reserve is reviewed at least quarterly. In addition, when we
identify significant customers at probable risk of default, we segregate those
customers’ receivables from the pools and separately evaluate the estimated
losses based on the market value of the collateral and specific terms of the
receivable contracts. We use the same process in estimating the collateral
values as we do in estimating the values of our Vehicle
Inventory.
Net
Investment in Operating Leases
We have
investments in trucks, tractors and trailers that are leased to customers under
operating lease agreements. These vehicles are depreciated on a
straight-line basis over the term of the lease in an amount necessary to reduce
the leased asset to the residual value guaranteed by the secured lender,
normally a bank, at the end of the lease. The residual values of the
equipment represent estimates of the values of the assets at the end of the
lease contracts, at which time, the net investment in the equipment is
transferred to Vehicle
inventory.
Vehicle
Inventory
We
recognize repossessed assets and the return of equipment under operating leases
at the lower of cost or fair value, less estimated remarketing costs and
reclassify the net investment from Finance receivables or Net investment in operating
leases to Vehicle
inventory. Losses arising from the repossession of collateral supporting
finance receivables are recognized upon repossession and charged to the Allowance for losses account.
Operating lease returns are adjusted to fair market value when a decrease in
value is determined to have occurred, and any loss is charged to Other expense. The value of
the asset is recorded as Vehicle
inventory. Once the repossessed or returned assets are sold,
the additional losses or gains, if any, are charged to Other expenses. Realization
of the carrying values is dependent on our future ability to market the vehicles
under then prevailing conditions. We review inventory values periodically to
determine if recorded amounts are appropriate and have not been
impaired. If the value of the equipment has been impaired, the
carrying value is reduced and charged to Other expenses.
Restricted
Cash and Cash Equivalents
Restricted cash and cash
equivalents are primarily those held in designated bank accounts for our
securitization facilities which are accounted for as secured borrowings. These
amounts are used to pay interest expense, principal, or other amounts in
accordance with the related securitization agreements. Interest
income on short-term cash equivalents which are restricted for on-balance sheet
securitizations is included in Other revenues.
Pension
and Postretirement Benefits
We use
actuarial methods and assumptions to account for our defined benefit pension
plans and our postretirement benefit plans. Pension and
postretirement benefit expense includes the actuarially computed cost of
benefits earned during the current service period, the interest cost on accrued
obligations, the expected return on plan assets based on fair market values, the
straight-line amortization of net actuarial gains and losses, and adjustments
due to plan amendments. Net actuarial gains and losses are generally
amortized over the expected average remaining service period of the
employees.
Derivative
Financial Instruments
We
recognize all derivatives as assets or liabilities in the consolidated
statements of financial condition and measure them at fair value in accordance
with ASC Topic 815, Derivatives and
Hedging. When certain criteria are met, the timing of gain or
loss recognition on the derivative instrument is matched with the recognition of
(a) the changes in the fair value or cash flows of the hedged asset or liability
attributable to the hedged risk or (b) the earnings effect of the hedged
forecasted transaction. Our policy prohibits the use of derivative
financial instruments for speculative purposes. We use derivative
financial instruments to reduce our exposure to interest rate volatility. We may
use forward starting swap or cap contracts to limit interest rate risk exposure
on the notes and certificates related to an expected sale of
receivables. We may use interest rate swaps or caps to reduce
exposure to interest rate changes when we sell fixed rate receivables on a
variable rate basis. The fair value of these instruments is estimated by
discounting expected future monthly settlements and is subject to market risk as
the instruments may become less valuable if market conditions, interest rates or
credit spreads of the counterparties change. We do not use hedge accounting for
any swaps or caps under ASC Topic 815, thus changes in fair value of these
instruments are recognized in
Derivative expense.
Recently
Adopted Accounting Standards
In April
2009, the FASB issued new accounting guidance for estimating fair value when the
volume and level of activity for the asset or liability have significantly
decreased. This includes identifying circumstances that indicate a transaction
is not orderly. This guidance was effective for interim periods ending after
June 15, 2009. Adoption of this guidance did not have any impact on our
consolidated financial condition, results of operations or cash
flows.
In
December 2008, the FASB issued new accounting guidance to require public
entities to provide additional disclosures about transfers of financial assets.
It also requires public enterprises to provide additional disclosures about
their involvement with variable interest entities (“VIEs”). The disclosure
requirements of this new accounting guidance are included in Note 13, Securitization
Transactions.
In
September 2008, the FASB issued new accounting guidance which clarifies and
illustrates how an entity would determine fair value when the market for a
financial asset in not active. The adoption of this new accounting guidance did
not have any impact on our consolidated financial condition, results of
operations or cash flows.
In March
2008, the FASB issued new accounting guidance to require enhanced disclosures
relating to derivative assets and liabilities. This guidance was effective for
financial statements issued for fiscal years and interim periods beginning after
November 15, 2008. The disclosure requirements of this new accounting guidance
are included in Note 12, Derivative Financial
Instruments.
In
February 2007, the FASB issued new accounting guidance permitting entities to
choose to measure many financial instruments and certain other items at fair
value. This guidance was effective as of the beginning of the first fiscal year
beginning after November 15, 2007. We adopted this guidance on
November 1, 2008. We have not elected to measure any of our financial
assets or financial liabilities at fair value which were not previously required
to be measured at fair value; therefore, the adoption of this new accounting
guidance did not impact our consolidated financial statements.
In
September 2006, the FASB issued new accounting guidance defining fair value,
establishing a framework for measuring fair value and expanding disclosures
about fair value measurements. In February 2008, the FASB amended this new
accounting guidance to (1) defer the effective date one year for certain
nonfinancial assets and nonfinancial liabilities and (2) remove certain leasing
transactions from the scope of the new guidance. We applied this new
accounting guidance to all other fair value measurements effective November 1,
2008. This new accounting guidance was effective for financial statements issued
for fiscal years beginning after November 15, 2007, and for interim periods
within those fiscal years. The application of this guidance resulted in an
increase of $2.2 million to the net fair value of our derivative assets and
derivative liabilities for non-performance risk and a corresponding reduction to
Derivative expense in
fiscal 2009.
Recently
Issued Accounting Standards
New
accounting guidance issued by various standard setting and governmental
authorities that has not yet become effective with respect to our consolidated
financial statements is described below, together with our assessment of the
potential impact it may have on our financial position, results of operations
and cash flows:
In June
2009, the FASB issued new accounting guidance governing the determination of
whether an enterprise is the primary beneficiary of a VIE, and is, therefore,
required to consolidate an entity, by requiring a qualitative analysis rather
than a quantitative analysis. The qualitative analysis will include, among other
things, consideration of who has the power to direct the activities of the
entity that most significantly impact the entity’s economic performance and who
has the obligation to absorb losses or the right to receive benefits of the VIE
that could potentially be significant to the VIE. This standard also requires
continuous reassessments of whether an enterprise is the primary beneficiary of
a VIE. Previous guidance required reconsideration of whether an enterprise was
the primary beneficiary of a VIE only when specific events had occurred.
Qualifying special purpose entities (“QSPEs”), which were previously exempt from
the application of this guidance, will be subject to the provisions of this new
accounting guidance when it becomes effective. This new guidance also requires
enhanced disclosures about an enterprise’s involvement with a VIE. The new
guidance is effective for
fiscal years beginning on or after November 15, 2009. Earlier adoption is
prohibited. Our effective date is November 1,
2010. Currently, we are evaluating the impact of adoption on our
consolidated financial condition, results of operations and cash
flows.
In June 2009, the FASB issued new accounting guidance that eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. This guidance is effective for fiscal years beginning after November 15, 2009. Our effective date is November 1, 2010. Currently, we are evaluating the impact of adoption on our consolidated financial condition, results of operations and cash flows.
In
December 2008, the FASB issued new accounting guidance on an employer’s
disclosures about plan assets of a defined benefit pension or other post
retirement plan. This guidance is effective for fiscal years ending after
December 15, 2009. Our effective date is November 1, 2009. When
effective, we will comply with the disclosure provisions of this new
guidance.
In
February 2008, the FASB issued new accounting guidance that permits companies to
defer the effective date of new disclosure requirements for one year for
nonfinancial assets and nonfinancial liabilities that are recognized or
disclosed at fair value in the financial statements on a nonrecurring basis. We
have decided to defer adoption of the new disclosure requirements until November
1, 2009 for nonfinancial assets and nonfinancial liabilities that are recognized
or disclosed at fair value in our consolidated financial statements on a
nonrecurring basis. Our primary nonfinancial assets that could be impacted by
this deferral include Vehicle
inventory, which is measured at the lower of cost or fair value and
tested for impairment. Adoption is not expected to have an impact on our
consolidated financial condition, results of operations or cash
flows.
In
December 2007, the FASB issued new accounting guidance to establish accounting
and reporting standards for the noncontrolling interest in a subsidiary and for
the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest
in a subsidiary is an ownership interest in the consolidated entity that should
be reported as equity in the consolidated financial statements. The new guidance
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Earlier adoption is
prohibited. Our effective date is November 1,
2009. Adoption is not expected to have an impact on our consolidated
financial condition, results of operations or cash flows.
In
December 2007, the FASB issued new accounting guidance relating to business
combinations and defines the acquirer as the entity that obtains control of one
or more businesses in the business combination and establishes the acquisition
date as the date that the acquirer achieves control. Subsequently, in April 2009
the FASB issued new accounting guidance clarifying the December 2007 guidance to
address application issues on: initial recognition and measurement; subsequent
measurement and accounting; and disclosure of assets and liabilities arising
from contingencies in a business combination. This new guidance applies
prospectively to business combinations for which the acquisition date is on or
after the beginning of the first annual reporting period beginning on or after
December 15, 2008. Early adoption is prohibited. Our effective
date is November 1, 2009. Adoption is not expected to have an impact on our
consolidated financial condition, results of operations or cash
flows.
We have
determined that all other recently issued accounting pronouncements are not
expected to have a material impact on our consolidated financial condition,
results of operations or cash flows.
2.
TRANSACTIONS WITH AFFILIATED COMPANIES
Wholesale
Notes, Wholesale Accounts and Retail Accounts
In
accordance with the agreements between NFC and Navistar, Inc. relating to
financing of wholesale notes, wholesale accounts and retail accounts, NFC
receives interest income from Navistar, Inc. at prevailing market rates applied
to the average outstanding balances. Interest paid by dealers on
wholesale notes, if any, plus the payments made by Navistar, Inc. for the
typical “interest free” period offered to the dealers equals the total revenues
received on wholesale notes. Substantially all revenues earned on
wholesale accounts and retail accounts are received from Navistar, Inc.
Receivables purchased by NFC from Navistar, Inc. for the years ended October 31,
2009, 2008 and 2007, were $3.6 billion, $4.2 billion and $4.9 billion,
respectively. Aggregate interest revenue from Navistar, Inc., excluding Dealcor
dealers (those majority owned by Navistar, Inc.), for the years ended October
31, 2009, 2008 and 2007, was $66.0 million, $66.6 million and $118.5 million,
respectively. The interest revenues are reported as components of Retail notes and finance leases revenue,
Securitization income, Wholesale notes interest
and Retail and
wholesale accounts interest in the consolidated statements of operations.
Effective November 1, 2008, NFC and Navistar, Inc. amended the April 1, 2007
Amended and Restated Master Intercompany Agreement, whereby NFC began charging
Navistar, Inc. for: 1) non-use fees assessed by certain providers of NFC’s
funding facilities, and 2) surcharges on balances relating to retail and
wholesale accounts, and wholesale notes, and 3) surcharges on retail notes and
wholesale notes balances for Dealcor dealers. Effective July 31, 2009, NFC and
Navistar, Inc. entered into an additional amendment allowing NFC to charge
Navistar, Inc. premium finance rates on certain retail accounts that are
ineligible under the TRAC funding facility. These intercompany fees are included
in Retail notes and finance leases revenue,
Wholesale notes
interest, Retail and
wholesale accounts interest and Securitization income. These
two amendments resulted in additional revenue of $19.7 million from Navistar
Inc., for the year ended October 31, 2009, of which $4.3 million pertained to
Dealcor dealers.
Finance
Receivable, Operating Leases and Vehicle Inventory
Navistar,
Inc. may be contractually liable for certain losses on NFC’s finance receivables
and investments in equipment on operating leases and may be required to
repurchase the repossessed collateral at the receivable principal unpaid balance
or share in the impairment losses or losses on sale of vehicle inventory with
NFC. Losses recorded by Navistar, Inc. on vehicles financed by NFC
were as follows for the years ended October 31 (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Net
losses on finance
receivables
|
$ | 18.4 | $ | 9.0 | $ | 6.8 | ||||||
|
Impairment
losses on vehicle
inventory
|
9.2 | 7.7 | - | |||||||||
|
Net
losses on sales of vehicle
inventory
|
4.2 | 10.9 | 1.6 | |||||||||
Guarantee
Fee Revenue
NFC
receives fees for its guarantee of revolving debt owed by Navistar Financial,
S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad No Regulada
(“NFM”). Fee amounts are based on outstanding balances. Effective January 1,
2008, the fees on outstanding balances were raised from 25 basis points to 100
basis points. These guarantee fees for the years ended October 31, 2009, 2008
and 2007 were $2.7 million, $2.5 million and $0.6 million,
respectively. Concurrently, NFC pays fees to NIC to provide a full
backstop guarantee on all losses incurred as a result of NFC’s guarantee of
NIC’s Mexican finance subsidiaries. Fees paid by NFC for this
backstop guarantee were $0.4 million each for the years ended October 31, 2009,
2008 and 2007. No losses have been incurred relating to the
guarantees.
Unsecured
Loans to Affiliates
On
December 10, 2008, NFC entered into a working capital loan agreement with NFM
whereas NFC has agreed to lend an aggregate amount not to exceed $100.0 million
(at a floating rate equal to a predetermined credit spread over the one month
LIBOR rate for each month as set forth in the Amended and Restated Credit
Agreement) until December 10, 2009, at which time the working capital loan
agreement will expire. As of October 31, 2009 no amounts were outstanding on the
working capital loan and there was no interest income recognized for the year
ended October 31, 2009.
On
October 19, 2007, NFC entered into a working capital loan agreement with NFM
whereas NFC agreed to lend an aggregate amount not to exceed $80.0 million at a
floating rate equal to one percent over the prime rate for each month until
October 19, 2008, at which time the agreement expired. The loan was repaid in
2008. Interest revenue recognized on this loan included in Other revenues was $1.6
million and $0.1 million for the years ended October 31, 2008 and 2007,
respectively.
Support
Agreements
Under
provisions of the bank credit agreement (“Agreement”), Navistar, Inc. will not
permit NFC’s ratio of the sum of consolidated pretax income plus consolidated
interest expense to consolidated interest expense (“Fixed Charge Coverage
Ratio”) to be less than 125% on the last day of any fiscal quarter for the
period of four consecutive fiscal quarters then ended. In May 2008 we
received an Acknowledgement and Consent from the lenders that confirmed that
capital contributions from Navistar, Inc., if any, would be part of consolidated
income for purposes of the Fixed Charge Coverage Ratio
calculation. Navistar, Inc. made capital contributions of $20.0
million and $60.0 million to NFC during fiscal 2009 and 2008, respectively, to
ensure compliance with the 125% Fixed Charge Coverage Ratio. No such
contributions were required during the fiscal year 2007.
Administrative
Expenses
NFC pays
a fee to Navistar, Inc. for data processing and other administrative services
based on the cost of actual services performed. The amount of the fee
was $5.0 million, $4.2 million, and $2.9 million for the years ended October 31,
2009, 2008 and 2007, respectively. The fee is reported in Credit, collections and
administrative expenses in the consolidated statements of
operations.
Net
accounts due and finance receivables from affiliates
NIC has
significant ownership interest in, or is primary beneficiary of VIEs related to,
certain Dealcor dealers at October 31, 2009 and 2008. These dealers’ operations
are consolidated with NIC. Other than being owned by NIC, Dealcor
dealers are treated on par with non-owned independent dealers. Total revenue in
our consolidated statements of operations includes revenue from Dealcor dealers
of $8.3 million, $13.8 million and $13.9 million for the years ended October 31,
2009, 2008 and 2007, respectively. Net accounts due from
affiliates represents the balance of other miscellaneous receivables
related to operations, such as intercompany charges. Included in our
consolidated statements of financial condition are the following finance
receivables from affiliates as of October 31 (in millions):
|
2009
|
2008
|
|||||||
|
Finance
receivables from affiliates net of unearned income and dealer reserve
(Dealcor retail)
|
$ | 104.8 | $ | 140.4 | ||||
|
Finance
receivables from affiliates (Dealcor wholesale)
|
49.5 | 71.9 | ||||||
|
Net
accounts due (to) from affiliates (non-Dealcor)
|
(31.2 | ) | 17.5 | |||||
3.
FINANCE RECEIVABLES
Concentration
of credit risk
Our
primary business is to provide wholesale, retail and lease financing for new and
used trucks sold by Navistar, Inc. and Navistar, Inc.’s dealers, and as a
result, our receivables and leases have significant concentration in the
trucking industry. On a geographic basis, there is not a
disproportionate concentration of credit risk in any region of the United
States. We retain as collateral an ownership interest in the equipment
associated with leases and, on behalf of the various trusts we maintain, a
security interest in the equipment associated with wholesale notes and retail
notes.
Financial
instruments with potential credit risk consist primarily of Finance receivables. Finance receivables primarily
represent receivables under retail finance contracts, receivables arising from
leasing transactions and notes receivables. We generally maintain a
secured interest in the equipment financed and perform regular credit
evaluations of our dealers and customers. At October 31, 2009 and
2008, respectively, no single customer represented a significant concentration
of credit risk.
Finance receivables balances,
as of October 31, are summarized as follows (in millions):
|
2009
|
2008
|
|||||||
|
Retail
notes, net of unearned
income
|
$ | 1,955.2 | $ | 2,468.0 | ||||
|
Finance
leases, net of unearned
income
|
121.5 | 122.7 | ||||||
|
Wholesale
notes held for
sale
|
167.9 | 118.0 | ||||||
|
Accounts
(includes retail and
wholesale)
|
294.0 | 197.6 | ||||||
|
Finance
receivables from affiliates, net of unearned
income
|
154.3 | 212.3 | ||||||
|
Total
finance
receivables
|
2,692.9 | 3,118.6 | ||||||
|
Allowance
for
losses
|
(32.6 | ) | (28.4 | ) | ||||
|
Total
finance receivables,
net
|
$ | 2,660.3 | $ | 3,090.2 | ||||
Accounts
include $175.3 million and $41.6 million as of October 31, 2009 and 2008,
respectively, from Ford relating to an engine supply contract with Navistar,
Inc. which expires in December 2009. NFC recorded financing revenue
relating to the Ford accounts of $10.1 million, $13.0 million and $22.1 million
for the years ended October 31, 2009, 2008 and 2007, respectively.
Contractual
maturities of finance receivables as of October 31, 2009, are summarized as
follows (in millions):
|
Retail
notes
|
Finance
leases
|
Wholesale
notes
|
Accounts
|
Affiliates
|
||||||||||||||||
|
Due
in fiscal year:
|
||||||||||||||||||||
|
2010
|
$ | 794.2 | $ | 47.4 | $ | 167.9 | $ | 294.0 | $ | 81.4 | ||||||||||
|
2011
|
582.8 | 31.9 | - | - | 31.4 | |||||||||||||||
|
2012
|
391.8 | 21.2 | - | - | 20.7 | |||||||||||||||
|
2013
|
225.4 | 31.5 | - | - | 11.6 | |||||||||||||||
|
2014
|
100.8 | 5.2 | - | - | 6.2 | |||||||||||||||
|
Thereafter
|
40.2 | 2.3 | - | - | 3.5 | |||||||||||||||
|
Gross
finance
receivables
|
2,135.2 | 139.5 | 167.9 | 294.0 | 154.8 | |||||||||||||||
|
Unearned
finance
income
|
(180.0 | ) | (18.0 | ) | - | - | (0.5 | ) | ||||||||||||
|
Finance
receivables, net of unearned income
|
$ | 1,955.2 | $ | 121.5 | $ | 167.9 | $ | 294.0 | $ | 154.3 | ||||||||||
The
actual cash collections from finance receivables may vary from the contractual
cash flows because of sales, prepayments, extensions, delinquencies, credit
losses, and renewals. The contractual maturities, therefore, should
not be regarded as a forecast of future collections.
4.
ALLOWANCE FOR LOSSES
The Allowance for losses for
finance receivables is summarized as follows for the fiscal years ended October
31 (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Allowance
for losses, beginning of
year
|
$ | 28.4 | $ | 23.9 | $ | 15.3 | ||||||
|
Provision
for credit
losses
|
29.7 | 32.2 | 19.6 | |||||||||
|
Net
charge-offs
|
(25.5 | ) | (27.7 | ) | (11.0 | ) | ||||||
|
Allowance
for losses, end of
year
|
$ | 32.6 | $ | 28.4 | $ | 23.9 | ||||||
Finance receivables include
the following amounts relating to impaired receivables as of October 31 (in
millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Impaired
receivables with specific loss reserves.
|
$ | 62.3 | $ | 55.8 | $ | 37.2 | ||||||
|
Impaired
receivables without specific loss reserves.
|
2.5 | 3.8 | 0.9 | |||||||||
|
Total
impaired
receivables
|
$ | 64.8 | $ | 59.6 | $ | 38.1 | ||||||
|
Specific
loss reserves on impaired receivables recorded by NFC
|
$ | 10.3 | $ | 4.6 | $ | 3.1 | ||||||
|
Specific
loss reserves on impaired receivables recorded by Navistar,
Inc.
|
14.2 | 16.1 | 6.8 | |||||||||
|
Finance
receivables over 60 days
delinquent
|
15.7 | 18.6 | 23.0 | |||||||||
The
average balances of impaired finance receivables for the years ended October 31,
2009, 2008 and 2007 were $64.2 million, $46.8 million and $27.5 million,
respectively.
Impaired
receivables include customer balances identified as troubled loans as a result
of financial difficulties, and other receivables on which earnings were
suspended. NFC continued to collect payments on certain impaired receivable
balances on which earnings were suspended. As of October 31, 2009,
three customers accounted for 42.5% of total impaired receivables with specific
loss reserves of $5.6 million recorded by NFC and $2.0 million recorded by
Navistar, Inc. As of October 31, 2008, two customers accounted for
36.5% of total impaired receivables with specific loss reserves of $0.2 million
recorded by NFC and $9.2 million recorded by Navistar, Inc. NFC would be solely
responsible for $12.5 million and $17.8 million of impaired receivables as of
October 31, 2009, and October 31, 2008, respectively. Navistar, Inc. would be
solely responsible for $4.4 million and $8.7 million of impaired receivables as
of October 31, 2009, and October 31, 2008, respectively. Losses on the remaining
impaired receivables are allocated between NFC and Navistar, Inc. based on
pre-established ratios under the loss sharing arrangements.
5.
VEHICLE INVENTORY
NFC has
inventory relating to asset repossessions of defaulted receivables and leased
equipment returned at the end of the lease term that it reports separately in
the consolidated statements of financial condition. Certain impairment losses
and losses on the sale of vehicle inventory are allocated between NFC and
Navistar, Inc. based on pre-established ratios under the loss sharing
arrangements. Combined net losses recorded by NFC and Navistar, Inc. are
summarized as follows for the years ended October 31 (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Impairment
losses on vehicle inventory
|
$ | 13.1 | $ | 12.6 | $ | - | ||||||
|
Net
losses on sale of vehicle inventory
|
6.7 | 15.7 | 3.1 | |||||||||
See Note
2, Transactions with
Affiliated Companies, for the portion of the above losses recorded by
Navistar, Inc. The remaining impairment losses and losses on the sale of
vehicles recorded by NFC are included in Other expenses in the
consolidated statements of operations.
The
change in NFC’s Vehicle
inventory is summarized as follows for the years ended October 31 (in
millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Vehicle
inventory, beginning of period
|
$ | 42.0 | $ | 23.2 | $ | 5.2 | ||||||
|
Net
additions
|
67.3 | 129.0 | 49.6 | |||||||||
|
Impairment
loss:
|
||||||||||||
|
Recorded
by
NFC
|
(3.9 | ) | (4.9 | ) | - | |||||||
|
Recorded
by Navistar,
Inc.
|
(9.2 | ) | (7.7 | ) | - | |||||||
|
Net
book value of inventory sold
|
(69.7 | ) | (97.6 | ) | (31.6 | ) | ||||||
|
Vehicle
inventory, end of
period
|
$ | 26.5 | $ | 42.0 | $ | 23.2 | ||||||
6.
NET INVESTMENT IN OPERATING LEASES
Net investment in operating
leases is summarized as follows as of October 31 (in millions):
|
2009
|
2008
|
|||||||
|
Investment
in equipment under operating leases
|
$ | 119.8 | $ | 119.5 | ||||
|
Less:
Accumulated
depreciation
|
(41.0 | ) | (47.5 | ) | ||||
|
Net
investment in equipment under operating leases
|
78.8 | 72.0 | ||||||
|
Rent
receivable net of reserve for past due operating leases
|
0.7 | 0.9 | ||||||
|
Net
investment in operating
leases
|
$ | 79.5 | $ | 72.9 | ||||
Future
minimum rentals on operating leases are as follows: 2010, $20.4 million; 2011,
$13.3 million; 2012, $9.9 million; 2013, $7.3 million; 2014, $3.1 million, and
$2.2 million thereafter.
7.
INCOME TAXES
Taxes on
income for the years ended October 31 are summarized as follows (in
millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Federal
and
foreign
|
$ | 14.8 | $ | 0.6 | $ | 43.2 | ||||||
|
State
and
local
|
(0.4 | ) | 1.7 | 3.0 | ||||||||
|
Total
current
|
14.4 | 2.3 | 46.2 | |||||||||
|
Deferred
(primarily
federal)
|
3.5 | (16.4 | ) | (8.1 | ) | |||||||
|
Total
income tax (benefit)
expense
|
$ | 17.9 | $ | (14.1 | ) | $ | 38.1 | |||||
A
reconciliation of the statutory federal income tax expense (benefit) to recorded
income tax expense (benefit) for the years ended October 31 is as
follows:
|
2009
|
2008
|
2007
|
||||||||||
|
Statutory
federal income tax expense (benefit)
|
$ | 16.3 | $ | (15.7 | ) | $ | 36.9 | |||||
|
State
income taxes net of federal income taxes
|
0.6 | 0.5 | 1.4 | |||||||||
|
Other
|
1.0 | 1.1 | (0.2 | ) | ||||||||
|
Income
tax expense
(benefit)
|
$ | 17.9 | $ | (14.1 | ) | $ | 38.1 | |||||
NFC and
its domestic subsidiaries are included in NIC’s consolidated federal income tax
returns. Certain state income tax returns are required to be filed on
a separate basis and others are included in various combined
reports. In accordance with its intercompany tax sharing agreement
with NIC, all federal income tax liabilities or credits are determined by NFC
and its domestic subsidiaries as if NFC filed its own consolidated
return. No income tax payments were made to NIC during fiscal 2009.
Total income tax payments made to NIC during fiscal 2008 and 2007 were $71.0
million and $30.8 million, respectively. The amount of federal and
state income taxes payable to (due from) NIC as of October 31, 2009 and 2008
were $5.9 million and ($0.9) million, respectively. Accrued income
tax is included in Other
liabilities on the consolidated statements of financial
condition.
The net
deferred tax asset is included in Other assets on the
consolidated statements of financial condition. The components of
deferred tax assets and liabilities from operations as of October 31 are as
follows (in millions):
|
2009
|
2008
|
|||||||
|
Deferred
tax assets:
|
||||||||
|
Pension
and other postretirement
benefits
|
$ | 13.8 | $ | 8.6 | ||||
|
Allowance
for
losses
|
11.9 | 10.4 | ||||||
|
Secured
borrowings
|
48.0 | 47.8 | ||||||
|
Market
value adjustments on derivatives and retained interest
|
16.3 | 23.1 | ||||||
|
Other
|
6.2 | 8.6 | ||||||
|
Less
valuation
allowance
|
(0.9 | ) | (1.5 | ) | ||||
|
Total
deferred tax
assets
|
95.3 | 97.0 | ||||||
|
Deferred
tax liabilities:
|
||||||||
|
Lease
transactions
|
(24.1 | ) | (27.0 | ) | ||||
|
Equipment
under operating
lease
|
(24.7 | ) | (23.6 | ) | ||||
|
Total
deferred tax
liabilities
|
(48.8 | ) | (50.6 | ) | ||||
|
Net
deferred tax
assets
|
$ | 46.5 | $ | 46.4 | ||||
We have
incurred net operating losses in certain states where we file separately from
NIC. As a result of those losses and our net deferred tax asset
position, we assessed the need for a valuation allowance based on a
determination of whether it is more likely than not that deferred tax benefits
will be realized through the generation of future taxable
income. Appropriate consideration was given to all available
evidence, both positive and negative, in assessing the need for a valuation
allowance. As a result of that assessment, a valuation allowance was
established in the amount of $0.9 million and $1.5 million as of October 31,
2009 and 2008, respectively. We believe that the remaining deferred
tax assets will more likely than not be realized.
On
November 1, 2007, we adopted new accounting guidance which addresses the
determination of whether tax benefits claimed or expected to be claimed on a tax
return should be recorded in the financial statements. Under the new guidance,
we may recognize the tax benefit from an uncertain tax position only if it is
more likely than not that the tax position will be sustained on examination by
taxing authorities, based on the technical merits of the
position. The tax benefits recognized in the financial statements
from such a position should be measured based on the largest benefit that has a
greater than fifty percent likelihood of being realized upon ultimate
settlement. New guidance is provided on de-recognition,
classification, interest and penalties on income taxes, and accounting in
interim periods. Upon adoption, we increased our liability for uncertain tax
positions by $3.9 million, resulting in a decrease to retained earnings of $2.5
million. As of October 31, 2009 and 2008, the amount of liability for
uncertain tax positions exclusive of accrued interest and penalties was $7.9
million and $10.3 million, respectively. If these unrecognized tax
benefits are recognized, the entire amount would impact our effective tax
rate.
The
recognition of the beginning and ending gross unrecognized tax benefits is as
follows (in millions):
|
Balance
at November 1,
2008
|
$ | 10.3 | ||
|
Increase
related to prior year tax
positions
|
- | |||
|
Decrease
related to prior year tax
positions
|
(0.5 | ) | ||
|
Decrease
related to current year tax
positions
|
(0.8 | ) | ||
|
Reductions
related to lapse in applicable statute of limitations
|
(1.1 | ) | ||
|
Balance
at October 31,
2009
|
$ | 7.9 |
We
recognize interest and penalties as part of Income tax (benefit) expense.
Total interest and penalties included in income tax expense for the year ended
October 31, 2009 were less than $0.1 million and for the year ended October 31,
2008 were $0.7 million. Cumulative interest and penalties included in the
consolidated balance sheets as of October 31, 2009, were $3.4
million.
We, as a
subsidiary of NIC, are subject to examination in the United States federal tax
jurisdiction for the years 2002 to 2008. Also, as a subsidiary of NIC or as a
separate filing entity, we are subject to examination in various state and
foreign jurisdictions over various periods. In connection with
examinations of tax returns, contingencies may arise that generally result from
differing interpretations of applicable tax laws and regulations as they relate
to the amount, timing, or inclusion of revenues or expenses in taxable income.
We believe we have sufficient accruals for our contingent
liabilities. While it is probable that the liability for
uncertain tax positions may change during the next twelve months, we do not
believe that such change would have a material impact on our financial
condition, results of operations, or cash flows.
8.
SENIOR AND SECURED BORROWINGS
Senior and secured borrowings
are summarized as follows for the fiscal years ended October 31 (in
millions):
|
Weighted
Average Interest Rate
|
||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Senior
bank credit facility at variable rates due July 2010, refinanced
subsequent to year end
|
$ | 1,267.9 | $ | 1,057.6 | 2.3 | % | 5.7 | % | ||||||||
|
Revolving
retail warehouse facility at variable rates due June 2010
|
500.0 | 500.0 | 0.5 | % | 4.6 | % | ||||||||||
|
Borrowings
secured by asset-backed securities at various
rates, currently between 0.5% and 4.4% due serially
through 2016
|
1,191.5 | 1,989.6 | 1.6 | % | 3.8 | % | ||||||||||
|
Borrowings
secured by operating and finance leases at rates currently between 2.6%
and 6.6% due serially through July 2016
|
134.2 | 131.9 | 4.0 | % | 4.5 | % | ||||||||||
|
Total
senior and secured
borrowings
|
$ | 3,093.6 | $ | 3,679.1 | 1.8 | % | 4.5 | % | ||||||||
The
senior bank credit agreement (“Agreement”), as amended in March 2007, has two
primary components, a term loan of $620.0 million and a revolving bank loan of
$800.0 million. The latter has a Mexican sub-revolver up to $100.0
million which may be used by NIC’s Mexican finance subsidiaries. The term loan
principal balance as of October 31, 2009 and 2008 was $597.4 million and $603.6
million, respectively.
Availability
under the revolver portion of the Agreement as of October 31 was as follows (in
millions):
|
2009
|
2008
|
|||||||
|
Revolver
bank
loan
|
$ | 800.0 | $ | 800.0 | ||||
|
NFC
revolving loan
utilized
|
(670.5 | ) | (454.0 | ) | ||||
|
Mexican
sub-revolver loan utilized
|
(14.0 | ) | (100.0 | ) | ||||
|
Total
availability
|
$ | 115.5 | $ | 246.0 | ||||
Under the
terms of the Agreement, as amended, NFC is required to maintain a debt to
tangible net worth ratio of no greater than 6:1, a twelve-month rolling fixed
charge coverage ratio of no less than 125%, and a twelve-month rolling combined
retail/lease losses to liquidations ratio of no greater than 6%. The Agreement
grants security interests in substantially all of NFC’s unsecured assets to the
participants in the Agreement. Compensating cash balances are not
required. Annual facility fees of 0.375% are paid in quarterly installments on
the revolving loan portion only, regardless of usage.
The
amount of dividends permitted by the Agreement to be paid to our parent company
is $400.0 million plus net income and any non-core asset sale proceeds from May
1, 2007, through the date of such payment. As of October 31, 2009, no dividends
were available for distribution to our parent company.
On
December 16, 2009, the Agreement was refinanced for $815.0 million due in 2012.
The refinancing contains a term loan of $365.0 million and a revolving loan of
$450.0 million with a sub-revolver of $100.0 million designated for NIC’s
Mexican finance subsidiaries. Under the new agreement, NFC is subject to
customary operational and financial covenants including an initial minimum
collateral coverage ratio of 120%. Concurrent with the refinancing, NFC issued
secured borrowings of $304.2 million secured by retail notes and
leases.
TRIP, a
special purpose, wholly-owned subsidiary of NFC, has a $500 million revolving
retail warehouse facility which matures in June 2010 and is subject to optional
early redemption in full without penalty or premium upon satisfaction of certain
terms and conditions on any date on or after April 15, 2010. NFC uses
TRIP to temporarily fund retail notes and retail leases, other than operating
leases. This facility is used primarily during the periods prior to a
securitization of retail notes and finance leases. NFC retains a repurchase
option against the retail notes and leases sold into TRIP, therefore TRIP’s
assets and liabilities are included in our consolidated statements of financial
condition. The balance of receivables in TRIP fluctuates based on the demand for
retail truck financing and the timing of our retail securitizations. As of
October 31, 2009 and 2008 NFC had $301.1 million and $242.5 million,
respectively, in retail notes and finance leases in TRIP.
The
asset-backed debt is issued by consolidated SPEs and is payable out of
collections on the finance receivables sold to the SPEs. This debt is
the legal obligation of the SPEs and not NFC. The balance outstanding was $1.2
billion and $2.0 billion as of October 31, 2009 and 2008,
respectively. The carrying amount of the retail notes and finance
leases used as collateral was $1.3 billion and $2.0 billion as of October 31,
2009 and 2008, respectively. On November 16, 2009, NFC exercised its right
to pay off retail securitization debt of $66.9 million in advance of final
maturity.
NFC
enters into secured borrowing agreements involving vehicles subject to operating
and finance leases with retail customers. The balances are classified
under Senior and secured
borrowings as borrowings secured by leases. In connection with the
securitizations and secured borrowing agreements of certain of its leasing
portfolio assets, NFC and its wholly-owned subsidiary, Navistar Leasing Services
Corporation (“NLSC”) have established Navistar Leasing Company (“NLC”), a
Delaware business trust. NLSC was formerly known as Harco Leasing
Company, Inc. prior to its name change effective September 21, 2006. NLC holds
legal title to leased vehicles and is the lessor on substantially all leases
originated by NFC. NLSC owns beneficial interests in the titles held by NLC and
has transferred other beneficial interests issued by NLC to purchasers under
secured borrowing agreements and securitizations. Neither the
beneficial interests held by purchasers under secured borrowing agreements or
the assets represented thereby, nor legal interest in any assets of NLC, are
available to NLSC, NFC or its creditors. The balance of the secured
borrowings of NLC totaled $9.2 million and $1.5 million as of October 31, 2009
and 2008, respectively.
ITLC, a
special purpose, wholly-owned subsidiary of NFC, was established in June 2004 to
provide NFC with another vehicle to obtain borrowings secured by
leases. The balances are classified under Senior and secured borrowings
as borrowings secured by leases. ITLC’s assets are available to
satisfy its creditors’ claims prior to such assets becoming available for ITLC’s
use or to NFC or affiliated companies. The balance of these secured
borrowings issued by ITLC totaled $125.0 million and $130.4 million as of
October 31, 2009 and 2008, respectively. The carrying amount of the
finance and operating leases used as collateral was $105.4 million and $121.2
million as of October 31, 2009 and 2008, respectively. Restricted cash and cash
equivalents used as collateral was $11.2 million as of October 31, 2009
and $10.9 million as of October 31, 2008. In addition, these secured borrowings
are secured by the monthly rental payments on operating leases.
The
future aggregate annual contractual maturities and required payments of Senior and secured borrowings
as of October 31, 2009, presented reflecting the impact of the subsequent
refinancing of our bank facility in December 2009, are as follows (in
millions):
|
Year
ended October 31
|
||||
|
2010
|
$ | 692.2 | ||
|
2011
|
210.4 | |||
|
2012
|
25.1 | |||
|
2013
|
1,042.8 | |||
|
2014
|
344.7 | |||
|
Thereafter
|
778.4 | |||
|
Total
|
$ | 3,093.6 | ||
9. POSTRETIREMENT
BENEFITS
Defined
Benefits Plans
We
provide postretirement benefits to some employees. Costs associated with
postretirement benefits include pension and postretirement healthcare expenses
for employees, retirees, and surviving spouses and dependents. We use an October
31 measurement date for all of our defined benefit plans.
Effective
October 31, 2007, we adopted new accounting guidance requiring that the funded
status of our pension plans and the benefit obligations of our post-retirement
benefit plans be recognized in our consolidated statements of financial
condition. The new guidance also requires the measurement date for
plan assets and liabilities to coincide with the sponsor’s year
end. We have historically measured the plan assets and benefit
obligations as of our balance sheet date.
Generally,
the plans are non-contributory. Our policy is to fund pension plans in
accordance with applicable United States government regulations. As of October
31, 2009, all legal funding requirements had been met. We were not required to
make contributions to our pension plans for fiscal years 2008 or
2009.
Obligations
and Funded Status
A summary
of the changes in benefit obligations and plan assets is as follows (in
millions):
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Change in benefit
obligation
|
||||||||||||||||
|
Benefit
obligation at beginning of year
|
$ | 51.9 | $ | 65.5 | $ | 15.2 | $ | 20.4 | ||||||||
|
Amendments
|
0.5 | - | - | - | ||||||||||||
|
Service
cost
|
0.3 | 0.3 | 0.1 | 0.1 | ||||||||||||
|
Interest
on
obligation
|
4.2 | 3.9 | 1.2 | 1.2 | ||||||||||||
|
Actuarial
net loss
(gain)
|
13.0 | (13.1 | ) | 3.0 | (5.4 | ) | ||||||||||
|
Plan
participants’
contributions
|
- | - | 0.3 | 0.2 | ||||||||||||
|
Benefits
paid
|
(4.3 | ) | (4.7 | ) | (1.6 | ) | (1.5 | ) | ||||||||
|
Subsidy
receipts
|
- | - | 0.2 | 0.2 | ||||||||||||
|
Benefit
obligation at end of
year
|
$ | 65.6 | $ | 51.9 | $ | 18.4 | $ | 15.2 | ||||||||
|
Change in plan assets
|
||||||||||||||||
|
Fair
value of plan assets at beginning of year
|
$ | 42.4 | $ | 68.1 | $ | 6.0 | $ | 9.5 | ||||||||
|
Actual
return on plan
assets
|
5.5 | (21.5 | ) | 0.9 | (3.1 | ) | ||||||||||
|
Employer
contributions
|
0.5 | 0.5 | - | 0.1 | ||||||||||||
|
Benefits
paid
|
(4.3 | ) | (4.7 | ) | (0.4 | ) | (0.5 | ) | ||||||||
|
Fair
value of plan assets at end of year
|
$ | 44.1 | $ | 42.4 | $ | 6.5 | $ | 6.0 | ||||||||
|
Unfunded
status
|
$ | (21.5 | ) | $ | (9.5 | ) | $ | (11.9 | ) | $ | (9.2 | ) | ||||
|
Amounts
recognized in the consolidated statements of
financial condition consist of:
|
||||||||||||||||
|
Other
assets
|
$ | - | $ | - | $ | - | $ | - | ||||||||
|
Other
liabilities
|
(21.5 | ) | (9.5 | ) | (11.9 | ) | (9.2 | ) | ||||||||
|
Net
amount
recognized
|
$ | (21.5 | ) | $ | (9.5 | ) | $ | (11.9 | ) | $ | (9.2 | ) | ||||
|
Amounts
recognized in our accumulated other comprehensive loss (pretax) consist
of:
|
||||||||||||||||
|
Net
actuarial loss
(gain)
|
$ | 25.8 | $ | 15.0 | $ | 0.2 | $ | (2.7 | ) | |||||||
|
Prior
service
cost
|
0.5 | 0.1 | - | - | ||||||||||||
|
Net
amount
recognized
|
$ | 26.3 | $ | 15.1 | $ | 0.2 | $ | (2.7 | ) | |||||||
The
accumulated benefit obligation for pension benefits, a measure which excludes
the effect of salary and wage increases, was $63.9 million and $50.7 million as
of October 31, 2009 and 2008, respectively.
The
amounts included in Accumulated other comprehensive
loss are net of deferred income taxes of $9.7 million and $4.7 million at
October 31, 2009 and 2008, respectively.
Net
periodic postretirement benefits expense (income) included in the consolidated
statements of operations for the years ended October 31, is comprised of the
following (in millions):
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||
|
Service
cost for benefits earned during the
period
|
$ | 0.3 | $ | 0.3 | $ | 0.3 | $ | 0.1 | $ | 0.1 | $ | 0.1 | ||||||||||||
|
Interest
on
obligation
|
4.2 | 3.9 | 3.9 | 1.2 | 1.2 | 1.2 | ||||||||||||||||||
|
Amortization
of cumulative losses (gains)
|
0.5 | 0.2 | 0.5 | (0.2 | ) | - | - | |||||||||||||||||
|
Less
expected return on assets
|
(3.6 | ) | (5.9 | ) | (5.3 | ) | (0.5 | ) | (0.8 | ) | (0.7 | ) | ||||||||||||
|
Net
postretirement benefits expense (income):
|
$ | 1.4 | $ | (1.5 | ) | $ | (0.6 | ) | $ | 0.6 | $ | 0.5 | $ | 0.6 | ||||||||||
Other
amounts recognized in other comprehensive income (loss) and net periodic benefit
(income) cost before tax for our pension and other post-retirement plans
consisted of the following (in millions):
|
Actuarial
net loss
(gain)
|
$ | 11.2 | $ | 13.6 | $ | - | $ | 2.7 | $ | (1.5 | ) | $ | - | |||||||||||
|
Prior
service cost
(credit)
|
0.5 | 0.1 | - | - | - | - | ||||||||||||||||||
|
Amortization
of cumulative losses
|
(0.5 | ) | (0.2 | ) | - | .2 | - | - | ||||||||||||||||
|
Minimum
pension liability adjustment
|
- | - | (0.5 | ) | - | - | - | |||||||||||||||||
|
Total
recognized in other comprehensive loss
|
11.2 | 13.5 | (0.5 | ) | 2.9 | (1.5 | ) | - | ||||||||||||||||
|
Total
recognized in net periodic benefit cost (income) and other comprehensive
loss
|
$ | 12.6 | $ | 12.0 | $ | (1.1 | ) | $ | 3.5 | $ | (1.0 | ) | $ | 0.6 |
The
estimated amount of actuarial loss that will be amortized from Accumulated other comprehensive
loss into net periodic expense during the next fiscal year is $0.9
million.
Cumulative
unrecognized gains and losses where substantially all of the plan participants
are inactive are amortized over the average remaining life expectancy of the
inactive plan participants. For all other plans, cumulative gains and
losses are amortized over the average remaining service life of active
employees. Plan amendments are amortized over the average remaining
service lives of active employees.
Assumptions
The
weighted average rate assumptions used in determining benefit obligations for
the years ended October 31 were:
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Discount
rate used to determine present value of benefit obligation at end of
year
|
5.4 | % | 8.4 | % | 5.4 | % | 8.4 | % | ||||||||
|
Expected
rate of increase in future compensation levels
|
3.5 | % | 3.5 | % | N/A | N/A | ||||||||||
The
weighted average rate assumptions used in determining net postretirement benefit
expense for the years ended October 31 were:
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||||||||||
|
2009
|
2008
|
2007
|
2009
|
2008
|
2007
|
|||||||||||||||||||
|
Discount
rate
|
8.4 | % | 6.1 | % | 5.7 | % | 8.4 | % | 6.1 | % | 5.7 | % | ||||||||||||
|
Expected
long-term rate of return on plan
assets
|
9.0 | % | 9.0 | % | 9.0 | % | 9.0 | % | 9.0 | % | 9.0 | % | ||||||||||||
|
Expected
rate of increase in future compensation
levels
|
3.5 | % | 3.5 | % | 3.5 | % | N/A | N/A | N/A | |||||||||||||||
The
actuarial assumptions used to compute the net periodic pension cost and
postretirement benefit cost are based upon information available as of beginning
of the year, specifically, market interest rates, past experience and our best
estimate of future economic conditions. Changes in these assumptions may impact
future benefit costs and obligations. In computing future costs and obligations,
we must make assumptions about such things as employee mortality and turnover,
expected salary and wage increases, discount rates, expected returns on plan
assets, and expected future cost increases. Three of these items have a
significant impact on the level of cost: (1) discount rates; (2) expected rates
of returns on plan assets; and (3) healthcare cost trend rates.
We
estimate the discount rate for our pension and OPEB obligations by matching
anticipated future benefit payments for the plans to the Citibank yield curve to
establish a weighted average discount rate for each plan. Healthcare cost trend
rates are established through a review of actual recent cost trends and
projected future trends. Our retiree medical trend assumptions are the best
estimate of expected inflationary increases to healthcare costs. The assumptions
used are based upon both our specific trends and nationally expected trends.
Recently, our average increases have been lower than the nationally expected
trends. This methodology is utilized because it provides for a matching of
expected investment yields available considering the timing of future cash
outflows.
We
determine our expected return on plan assets assumption by evaluating both
historical returns as well as estimates of future
returns. Specifically, we analyzed the average historical broad
market returns for various periods of time over the past 100 years for equities
and over a 30 year period for fixed income securities, and adjusted the computed
amount for any expected changes in the long-term outlook for both the equity and
fixed income markets. We consider the current asset mix as well as
our targeted asset mix when establishing the expected return on plan
assets.
The
weighted average rate of increase in the per capita cost of post retirement
healthcare benefits was 7.9% in 2009 and is projected to be 8.0% in
2010. The rate is projected to decrease to 5.0% by the year 2015 and
remain at that level each year thereafter. The effect of changing the
healthcare cost trend rate by one-percentage point for each future year is as
follows (in millions):
|
One-Percentage
Point
Increase
|
One-Percentage
Point
Decrease
|
|||||||
|
Effect
on total of service and interest cost components
|
$ | 0.1 | $ | (0.1 | ) | |||
|
Effect
on postretirement benefit
obligation
|
1.8 | (1.6 | ) | |||||
Plan
Assets
As of
October 31, 2009 and 2008, the weighted average percentage of plan assets by
category is as follows:
|
Pension
Benefits
|
Other
Benefits
|
|||||||||||||||||||||||
|
Asset
Category
|
Target
Range
|
2009
|
2008
|
Target
Range
|
2009
|
2008
|
||||||||||||||||||
|
Equity
securities
|
||||||||||||||||||||||||
|
NIC common
stock
|
- | - | 8 | % | 10 | % | ||||||||||||||||||
|
Other equity securities
|
65 | % | 73 | % | 46 | % | 50 | % | ||||||||||||||||
|
Hedge
funds
|
- | - | 7 | % | 15 | % | ||||||||||||||||||
|
Private
equity
|
- | - | 2 | % | - | |||||||||||||||||||
|
Total
equity securities
|
60-80 | % | 65 | % | 73 | % | 50-85 | % | 63 | % | 75 | % | ||||||||||||
|
Debt
securities
|
30 | % | 27 | % | 32 | % | 20 | % | ||||||||||||||||
|
Other, including
cash
|
5 | % | - | 5 | % | 5 | % | |||||||||||||||||
|
Total
debt securities and other
|
20-40 | % | 35 | % | 27 | % | 15-50 | % | 37 | % | 25 | % | ||||||||||||
Our
investment strategy is consistent with our policy to maximize returns while
considering overall investment risk and the funded status of the plans relative
to their benefit obligations. Our investment strategy takes into account the
long-term nature of the benefit obligations, the liquidity needs of the plans
and the expected risk/return tradeoffs of the asset classes in which the plans
may choose to invest. Asset allocations are established through an
investment policy, which is updated periodically and reviewed by a fiduciary
committee and the Board of Directors. We believe that returns on
common stock over the long term will be higher than returns from fixed-income
securities as the historical broad market indices have shown. Equity and
fixed-income investments are made across a broad range of industries and
companies to provide protection against the impact of volatility in any single
industry or company. Under our strategy, hedge fund investments are
targeted to be no more than 15% of pension assets.
Expected
Future Benefit Payments
Our
expected future benefit payments and federal subsidy receipts for the years
ending October 31, 2010 through 2014 and the five years ending October 31, 2019,
are estimated as follows (in millions):
|
Pension
Benefit
Payments
|
Other
Postretirement
Benefit
Payments
|
Postretirement
Benefit
Subsidy Receipts
|
||||||||||
|
2010
|
$ | 4.8 | $ | 1.5 | $ | 0.2 | ||||||
|
2011
|
4.9 | 1.6 | 0.3 | |||||||||
|
2012
|
4.9 | 1.6 | 0.3 | |||||||||
|
2013
|
4.9 | 1.7 | 0.3 | |||||||||
|
2014
|
5.0 | 1.7 | 0.3 | |||||||||
|
2015
through
2019
|
24.5 | 8.6 | 1.8 | |||||||||
Defined
Contribution Plans
Our
defined contribution plans cover a substantial portion of our employees. The
defined contribution plans contain a 401(k) feature and provide a company
match. Many participants covered by the plan receive annual company
contributions to their retirement accounts based on an age-weighted percentage
of the participant’s eligible compensation for the calendar
year. Defined contribution expense pursuant to these plans was $1.0
million each in 2009, 2008 and 2007, which approximates the amount we
fund.
10.
COMMITMENTS AND CONTINGENCIES
Leases
NFC is
obligated under non-cancelable operating leases for the majority of its office
facilities. These leases are generally renewable and provide that
property taxes and maintenance costs are to be paid by the lessee. As
of October 31, 2009, future minimum lease commitments under non-cancelable
operating leases are as follows (in millions):
|
Year
Ended October 31
|
||||
|
2010
|
$ | 1.7 | ||
|
2011
|
1.4 | |||
|
2012
|
1.4 | |||
|
2013
|
1.2 | |||
|
2014
|
1.3 | |||
|
2015
and
beyond
|
1.5 | |||
|
Total
|
$ | 8.5 | ||
The total
operating lease expense was $2.9 million, $3.1 million and $1.6 million for the
years ended October 31, 2009, 2008 and 2007, respectively.
Guarantees
of Debt
NFC
periodically guarantees the outstanding debt of affiliates. The
guarantees allow for diversification of funding sources for NFM and Navistar
Comercial S. A. de C.V. As of October 31, 2009, NFC’s maximum
guarantee exposure to this outstanding debt was $199.5 million, the total amount
outstanding at that date.
As of October 31, 2008, NFC’s maximum guarantee exposure to this
outstanding debt was $218.6 million, the total amount outstanding at that date.
No payments were made to third parties as a result of the guarantees of debt
during the three years ended October 31, 2009. See Note 2 for fees recorded by
NFC relating to these guarantees.
The
following table summarizes the borrowings as of October 31, 2009, (in
millions):
|
Type
of Funding
|
Maturity
|
Maximum
Amount
of
Guaranty
|
Outstanding
Balance
|
||||||||||
|
Revolving
credit facility
|
(1 | ) |
August
2013
|
$ | 13.3 | $ | 8.0 | ||||||
|
Revolving
credit facility
|
(1 | ) |
May
2011
|
15.2 | 5.6 | ||||||||
|
Revolving
credit facility
|
(1 | ) |
June
2010
|
25.0 | 23.8 | ||||||||
|
Revolving
credit facility
|
(1 | ) |
October
2011
|
20.9 | 19.6 | ||||||||
|
Revolving
credit facility
|
(1 | ) |
September
2015
|
136.9 | 128.5 | ||||||||
|
Revolving
credit facility
|
(2 | ) |
July
2010
|
100.0 | 14.0 | ||||||||
|
Total
|
$ | 311.3 | $ | 199.5 | |||||||||
(1) Peso-denominated.
(2) Revolving
credit facility guaranteed jointly with NIC.
Guarantees
of Derivatives
As of
October 31, 2009, NFC guaranteed derivative contracts for interest rate swaps of
NFM. NFC’s exposure is limited to any unfavorable fair market value
of these derivative contracts only in cases of default by NFM. The notional
amount of guaranteed derivatives as of October 31, 2009 was $0.3 million and the
unfavorable fair value was immaterial. The notional amount of guaranteed
derivatives as of October 31, 2008 was $32.4 million and there was no
unfavorable fair value.
The
foreign currency conversion rate at October 31, 2009, of 13.1 to 1 was used by
NFC to convert the peso-denominated guarantees to United States
dollars.
NFC has
not recognized a liability related to any of these guarantees since the debt is
owed to a third party by a subsidiary of our parent company.
11.
SHAREOWNER’S EQUITY
The
number of authorized shares of capital stock as of October 31, 2009 and 2008 was
2,000,000, of which 1,600,000 shares were issued and
outstanding. Navistar, Inc. owns all issued and outstanding capital
stock. No shares are reserved for officers and employees, or for
options, warrants, conversions and other rights.
We paid
no dividends to Navistar, Inc. in fiscal 2009. Dividends of $14.8 million and
$400.0 million were paid in fiscal 2008 and 2007, respectively. Navistar, Inc.
made capital contributions of $20.0 million and $60.0 million to NFC in fiscal
2009 and 2008, respectively. No contributions were made by Navistar, Inc. in
fiscal 2007.
12.
DERIVATIVE FINANCIAL INSTRUMENTS
NFC
manages its exposure to fluctuations in interest rates by limiting the amount of
fixed rate assets funded with variable rate debt. This is
accomplished by funding fixed rate receivables utilizing a combination of fixed
rate debt and variable rate debt and derivative financial instruments to convert
the variable rate debt to fixed. These derivative financial
instruments may include forward contracts, interest rate swaps, and interest
rate caps. The fair value of these instruments is estimated by
discounting expected future monthly settlements and is subject to market risk as
the instruments may become less valuable with changes in market conditions,
interest rates or the credit spreads of the counterparties. NFC
manages exposure to counterparty credit risk by entering into derivative
financial instruments with major financial institutions that can be expected to
fully perform under the terms of such agreements. NFC does not
require collateral or other security to support derivative financial
instruments, if any, with credit risk. NFC’s counterparty credit
exposure is limited to the positive fair value of contracts at the reporting
date. Notional amounts of derivative financial instruments do not represent
exposure to credit loss.
NFC has
entered into various interest rate swaps agreements in connection with the sale
of retail note and lease receivables. The purpose and structure
of these swaps is to convert the floating rate portion of the asset backed
securities into fixed rate swap interest to match the interest basis of the
receivables pool sold to the owner trust in those periods, and to protect NFC
from interest rate volatility. Since the timing of actual liquidations and the
repayment of the securitized debt will vary from original scheduled cash flows,
the notional amounts of the interest rate swaps are amortized on a monthly basis
to correspond with the future expected cash flows of the instruments being
hedged; normally variable rate debt. Since we do not use hedge accounting
for our derivatives, the adjustments to the derivative fair values are recorded
in the consolidated statements of operations which can cause volatility in our
earnings. Our policy prohibits the use of derivative financial instruments for
speculative purposes.
In June
2005, TRIP issued Series 2005-1 floating rate, asset backed Notes in the amount
of $500.0 million to replace the Series 2000-1 Notes that matured in October
2005. Under the terms of the related agreements, TRIP uses the
proceeds from the Notes to finance retail note and lease
receivables. TRIP purchased an interest rate cap to protect it
against the potential of rising interest rates. To offset future
volatility in income as a result of this cap, NFC entered into another interest
rate cap which offset that which was purchased by TRIP. The interest rate caps
have a maturity date of June 15, 2016.
Our
derivatives are all accounted for as free standing derivatives with no hedge
designation, with any change in fair values recorded to earnings each period.
The fair values of asset and liability derivative financial instruments are
recorded on a gross basis in the consolidated statements of financial condition
in Other assets and
Other liabilities,
respectively. See Note 14, Fair Value Measurements, for
information on the fair value measurement of our derivative financial
instruments. The interest rate swap agreements have contractual maturity dates
ranging from May 18, 2010 to April 18, 2016. The fair values of our derivative
instruments are as follows (in millions):
|
Other
Assets
|
Other
Liabilities
|
|||||||||||||||
|
October
31, 2009
|
Notional
Amount
|
Fair
Value
|
Notional
Amount
|
Fair
Value
|
||||||||||||
|
Interest
rate
swaps
|
$ | 1,124.7 | $ | 32.4 | $ | 2,314.1 | $ | 61.1 | ||||||||
|
Interest
rate caps
purchased
|
500.0 | 4.8 | - | - | ||||||||||||
|
Interest
rate caps
sold
|
- | - | 500.0 | 4.1 | ||||||||||||
|
Total
derivatives
|
$ | 1,624.7 | $ | 37.2 | $ | 2,814.1 | $ | 65.2 | ||||||||
|
Other
Assets
|
Other
Liabilities
|
|||||||||||||||
|
October
31, 2008
|
Notional
Amount
|
Fair
Value
|
Notional
Amount
|
Fair
Value
|
||||||||||||
|
Interest
rate
swaps
|
$ | 1,636.4 | $ | 38.7 | $ | 3,469.0 | $ | 79.6 | ||||||||
|
Interest
rate caps
purchased
|
500.0 | 3.3 | - | - | ||||||||||||
|
Interest
rate caps
sold
|
- | - | 500.0 | 3.3 | ||||||||||||
|
Total
derivatives
|
$ | 2,136.4 | $ | 42.0 | $ | 3,969.0 | $ | 82.9 | ||||||||
The
losses (gains) from derivative instruments included in Derivative expense are as follows for the
years ended October 31 (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Interest rate
swaps
|
$ | 41.3 | $ | 55.0 | $ | 8.9 | ||||||
|
Interest rate caps purchased
|
(1.5 | ) | (1.2 | ) | 1.0 | |||||||
|
Interest rate caps
sold
|
0.8 | 1.2 | (1.0 | ) | ||||||||
|
Total
|
$ | 40.6 | $ | 55.0 | $ | 8.9 | ||||||
13.
SECURITIZATION TRANSACTIONS
We
typically sell our finance receivables to our various special purpose entities,
while continuing to service the receivables thereafter. In addition
to servicing, NFC’s continued involvement includes retained interests in the
sold receivables and hedging interest rates using interest rate swaps and caps.
We maintain an ownership interest in a subordinated tranche that is in a first
loss position. In accordance with ASC Topic 860, some of these transactions
qualify as sales of financial assets (off-balance sheet) whereby an initial gain
or loss is recorded and servicing fee revenue; excess spread income and
associated collection and servicing costs are recorded over the remaining life
of the finance receivables. For transactions that are accounted for as secured
borrowings, we record the interest revenue earned on the finance receivables,
and the interest expense paid on secured borrowings issued in connection with
the finance receivables sold.
Securitizations
accounted for as sales of financial assets
NFC
securitizes wholesale notes receivables and retail accounts receivables through
off-balance sheet funding facilities.
The
wholesale notes owner trust owned $763.1 million of wholesale notes and no cash
equivalents as of October 31, 2009, and $818.6 million of wholesale notes and
$95.3 million of cash equivalents as of October 31, 2008.
Components
of available wholesale note trust funding certificates were as follows (in
millions):
|
Maturity
|
October
31,
2009
|
October
31,
2008
|
|||||||
|
Investor
certificate
|
February
2010
|
$ | 212.0 | $ | 212.0 | ||||
|
Variable
funding certificate (“VFC”)
|
August
2010
|
650.0 | 800.0 | ||||||
|
Total
|
$ | 862.0 | $ | 1,012.0 | |||||
The VFC
commitment decreased from $800.0 million to $750.0 million in December 2008,
then to $650.0 million in June 2009. The utilized portion of the VFC was $350.0
million and $550.0 million as of October 31, 2009 and 2008, respectively. Our
retained interest was $191.9 million and $139.6 million as of October 31, 2009
and 2008, respectively. On August 25, 2009, NFC entered into a renewal and
extension of the VFC for $650.0 million, maturing on August 24, 2010. On
November 10, 2009, NFC completed the sale of $350.0 million of three-year
asset-backed securities within the wholesale note trust funding facility. This
sale was eligible for funding under the U.S. Federal Reserve’s TALF (Term
Asset-Backed Securities Loan Facility) program. Concurrent with this sale, the
VFC facility commitment was reduced to $500.0 million.
The TRAC
facility owned $89.2 million of retail accounts and $19.6 million of cash
equivalents as of October 31, 2009, and $123.1 million of retail accounts and
$22.8 million of cash equivalents as of October 31, 2008. On October 30, 2009,
the maturity of the facility was extended to October 29, 2010.
Amount of
available retail accounts funding was as follows (in millions):
|
Maturity
|
October
31,
2009
|
October
31,
2008
|
|||||||
|
Conduit
funding
facility
|
October
2010
|
$ | 100.0 | $ | 100.0 | ||||
|
Funding
utilized
|
(7.7 | ) | (47.5 | ) | |||||
|
Total
availability
|
$ | 92.3 | $ | 52.5 | |||||
Our
retained interest held in TRAC was $99.6 million and $90.0 million as of October
31, 2009 and 2008, respectively.
Amounts
due from sales of receivables
Amounts due from sales of
receivables represent NFC’s retained interest in its off-balance sheet
securitization transactions. NFC transfers pools of finance
receivables to various subsidiaries. The subsidiaries’ assets are
available to satisfy their creditors’ claims prior to such assets becoming
available for the subsidiaries’ own uses or to NFC or affiliated companies. NFC
is under no obligation to repurchase any sold receivable that becomes delinquent
in payment or otherwise is in default. The terms of receivable sales
generally require NFC to provide credit enhancements in the form of receivables
over-collateralization and/or cash reserves with the trusts and
conduits. The use of such cash reserves by NFC is restricted under the
terms of the securitized sales agreements. The maximum exposure under
all securitizations accounted for as sales is the fair value of the Amounts due from sales of
receivables of $291.5 million and $229.6 million as of October 31, 2009
and 2008, respectively.
We
estimate the payment speeds for the receivables sold, the discount rate used to
determine the fair value of our retained interests and the anticipated net
losses on the receivables in order to calculate the gain or loss on the sale of
the receivables. Estimates are based on historical experience,
anticipated future portfolio performance, market-based discount rates and other
factors and are made separately for each securitization
transaction. The fair value of our retained interests is based
on these assumptions. See Note 14 for more information on the fair value
measurement of our retained interests. We re-evaluate the fair value
of our retained interests on a monthly basis and recognize in current income
changes as required. Our retained interests are classified as trading
securities and are recorded as Amounts due from sales of
receivables in our consolidated statements of financial
condition.
Amounts due from the sales of
receivables are summarized as follows (in millions):
|
October
31,
2009
|
October
31,
2008
|
|||||||
|
Excess
seller’s
interest
|
$ | 275.3 | $ | 218.7 | ||||
|
Interest
only
strip
|
9.6 | 2.1 | ||||||
|
Restricted
cash
reserves
|
6.6 | 8.8 | ||||||
|
Total
amounts due from sales of
receivables
|
$ | 291.5 | $ | 229.6 | ||||
The key
economic assumptions as of October 31, 2009 and 2008, and the sensitivity of the
current fair values of residual cash flows as of October 31, 2009, to an
immediate adverse change of 10 and 20 percent in that assumption are as follows
(in millions):
|
October
31,
|
October
31,
|
Adverse
Fair Value
Change
at
October
31, 2009
|
||||||||
|
2009
|
2008
|
10 | % | 20 | % | |||||
|
Discount
rate
(annual)
|
9.1 to
20.5 %
|
14.6 to
23.0 %
|
$ | 2.4 | $ | 5.5 | ||||
|
Estimated
credit
losses
|
0.0 to
0.24 %
|
0.0 to
0.24 %
|
0.1 | 0.2 | ||||||
|
Payment
speed (percent of portfolio per month)
|
4.9 to
70.8 %
|
8.8 to
75.7 %
|
0.4 | 0.9 | ||||||
The lower
end of the discount rate assumption range and the upper end of the payment speed
assumption range were used to value our retained interests in TRAC. No
percentage for estimated credit losses were assumed for TRAC as no losses have
been incurred to date and none are expected. The upper end of the discount rate
assumption range and the lower end of the payment speed assumption range were
used to value our retained interests in the wholesale note securitization
facility.
The
following tables reconcile the total serviced portfolio to the on-balance sheet
portfolio, net of unearned income, as of October 31 (in millions):
|
2009
|
Retail
Notes
|
Finance
Leases
|
Wholesale
Notes
|
Accounts
|
Affiliates
|
Total
|
||||||||||||||||||
|
Serviced
portfolio
|
$ | 1,955.2 | $ | 121.5 | $ | 835.3 | $ | 383.2 | $ | 250.0 | $ | 3,545.2 | ||||||||||||
|
Less
sold receivables – off-balance
sheet
|
- | - | (667.4 | ) | (89.2 | ) | (95.7 | ) | (852.3 | ) | ||||||||||||||
|
Total
on-balance sheet.
|
$ | 1,955.2 | $ | 121.5 | $ | 167.9 | $ | 294.0 | $ | 154.3 | $ | 2,692.9 | ||||||||||||
|
2008
|
Retail
Notes
|
Finance
Leases
|
Wholesale
Notes
|
Accounts
|
Affiliates
|
Total
|
||||||||||||||||||
|
Serviced
portfolio
|
$ | 2,468.0 | $ | 122.7 | $ | 839.4 | $ | 320.7 | $ | 309.5 | $ | 4,060.3 | ||||||||||||
|
Less
sold receivables –off-balance
sheet
|
- | - | (721.4 | ) | (123.1 | ) | (97.2 | ) | (941.7 | ) | ||||||||||||||
|
Total
on-balance sheet
|
$ | 2,468.0 | $ | 122.7 | $ | 118.0 | $ | 197.6 | $ | 212.3 | $ | 3,118.6 | ||||||||||||
For sold
receivables, wholesale notes and affiliates balances past due over 60 days were
$0.8 million and $3.2 million, respectively, as of October 31, 2009 and 2008,
respectively. Accounts balances in TRAC past due over 60 days were $1.6 million
as of October 31, 2009. There were no past due balances in TRAC as of October
31, 2008. No credit losses on sold receivables were recorded for the years ended
October 31, 2009 or 2008.
Securitization
income
The
following table sets forth the activity related to off-balance sheet
securitizations reported in Securitization income on the
consolidated statements of operations for the years ended October 31 (in
millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Fair
value
adjustments
|
$ | 50.2 | $ | 1.3 | $ | 4.6 | ||||||
|
Excess
spread
income
|
28.8 | 19.6 | 53.5 | |||||||||
|
Servicing
fees
revenue
|
8.1 | 10.0 | 15.3 | |||||||||
|
Losses
on sales of
receivables
|
(48.1 | ) | (23.8 | ) | (9.3 | ) | ||||||
|
Investment
income
|
1.5 | 5.1 | 9.1 | |||||||||
|
Securitization
income
|
$ | 40.5 | $ | 12.2 | $ | 73.2 | ||||||
Cash
flows from off-balance sheet securitization transactions for the years ended
October 31are as follows (in millions):
|
2009
|
2008
|
2007
|
||||||||||
|
Proceeds
from sales of finance
receivables
|
$ | 4,125.0 | $ | 4,455.8 | $ | 5,056.1 | ||||||
|
Servicing
fees
|
8.1 | 9.2 | 15.9 | |||||||||
|
Cash
from net excess
spread
|
30.4 | 16.9 | 49.7 | |||||||||
|
Investment
income
|
1.2 | 3.7 | 7.1 | |||||||||
|
Net
cash from securitization transactions
|
$ | 4,164.7 | $ | 4,485.6 | $ | 5,128.8 | ||||||
We have
not provided any financial or other support that we were not contractually
obligated to provide to any special purpose entity or related beneficial
interest holders, and there are no third party liquidity arrangements,
guarantees or other commitments that may affect the fair value of our retained
interests in our securitizations.
Securitizations
accounted for as secured borrowings
Securitizations
accounted for as secured borrowings include retail owner trust VIEs for which we
are the primary beneficiary and other securitizations that do not qualify for
sale accounting treatment. These secured borrowings are payable solely out of
collections on the finance receivables, operating leases and other assets
transferred to those subsidiaries. The asset backed debt is the legal
obligation of the consolidated subsidiary whereby there is no recourse to
NFC.
Variable
interest entities
We
consolidate the retail owner trusts as VIEs since we remain the primary
beneficiary of the trust’s assets and liabilities.
As transferors of
financial assets to QSPEs, such transfers are not
subject to the accounting standard on consolidation of VIEs, therefore, we
do not
consolidate any QSPEs to which those financial assets are
transferred. The
maximum loss exposure relating to these QSPEs is limited to
our retained interests in the related securitization transactions and relates to
credit risk only. As of October 31, 2009 and 2008, our retained
interest in the QSPEs was $291.5
million and $229.6 million, respectively.
There was
no change in the determination to consolidate these entities during the year
ended October 31, 2009, and we have not provided any financial or other support
that we were not contractually obligated to provide.
The
following table sets forth the carrying amount of transferred financial assets
and (liabilities) of the consolidated VIEs and other securitizations that do not
qualify for sale accounting treatment (in millions):
|
Consolidated
|
Other
|
|||||||||||
|
October
31, 2009
|
VIEs
|
Securitizations
|
Total
|
|||||||||
|
Finance
receivables, net of allowance
|
$ | 1,310.8 | $ | 404.9 | $ | 1,715.7 | ||||||
|
Net
investment in operating leases
|
- | 79.5 | 79.5 | |||||||||
|
Restricted
cash and cash equivalents
|
134.9 | 286.7 | 421.6 | |||||||||
|
Vehicle
inventory
|
13.9 | 5.6 | 19.5 | |||||||||
|
Net
derivative fair value
|
(31.6 | ) | 4.8 | (26.8 | ) | |||||||
|
Secured
borrowings
|
(1,191.5 | ) | (634.2 | ) | (1,825.7 | ) | ||||||
|
Consolidated
|
Other
|
|||||||||||
|
October
31, 2008
|
VIEs
|
Securitizations
|
Total
|
|||||||||
|
Finance
receivables, net of allowance
|
$ | 1,983.1 | $ | 333.6 | $ | 2,316.7 | ||||||
|
Net
investment in operating leases
|
- | 72.9 | 72.9 | |||||||||
|
Restricted
cash and cash equivalents
|
205.5 | 309.7 | 515.2 | |||||||||
|
Vehicle
inventory
|
22.8 | 7.9 | 30.7 | |||||||||
|
Net
derivative fair value
|
(38.7 | ) | 3.3 | (35.4 | ) | |||||||
|
Secured
borrowings
|
(1,989.6 | ) | (631.9 | ) | (2,621.5 | ) | ||||||
NFC
securitized finance receivables and investments in operating leases of $348.1
million, $1.1 billion and $888.5 million under secured borrowings for the years
ended October 31, 2009, 2008 and 2007, respectively.
14.
FAIR VALUE MEASUREMENTS
In
September 2006, the FASB issued new accounting guidance addressing aspects of
the expanding application of fair value accounting. Effective November 1, 2008,
we adopted this new guidance for financial assets and liabilities and have opted
to defer adoption for one year for nonfinancial assets and nonfinancial
liabilities that are recognized or disclosed at fair value in the financial
statements on a nonrecurring basis. We consider Vehicle inventory a
nonfinancial asset recognized at the lower of cost or fair value on a
nonrecurring basis.
The new
accounting guidance provides for the following:
|
•
|
Defines
fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants
at the measurement date, and establishes a framework for measuring fair
value;
|
|
|
•
|
Establishes
a three-level hierarchy of fair value measurements based upon the
observability of inputs used to value assets and liabilities as of the
measurement date;
|
|
|
•
|
Requires
consideration of non-performance risk ; and
|
|
|
•
|
Expands
disclosures about instruments measured at fair value.
|
The new
accounting guidance establishes a three-level valuation hierarchy of fair value
measurements based upon the reliability of observable and unobservable inputs
used in valuations of fair value. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect our market
assumptions. The use of observable and unobservable inputs result in the
following fair value hierarchy of fair value measurements:
|
•
|
Level 1 —
based upon quoted prices for identical instruments
in active markets;
|
|
|
•
|
Level 2 —
based upon quoted prices for similar instruments in
active markets; quoted prices for identical or similar instruments in
markets that are not active; or model-derived valuations whose significant
inputs are observable: and
|
|
|
•
|
Level 3 —
based upon one or more significant unobservable
input
|
The
following section describes the valuation methodologies used to measure fair
value, key inputs and significant assumptions:
Retail Notes. The fair values
of retail notes are estimated by discounting the future contractual cash flows
using the interest rates and credit spreads currently being offered for notes
with similar terms.
Finance Receivables from
Affiliates. Finance Receivables from Affiliates are comprised of retail
notes, wholesale notes and wholesale accounts for which fair values are
estimated separately as described in the respective category.
Wholesale Notes. Wholesale notes are
classified as held-for-sale and are valued at the lower of amortized cost or
fair value on an aggregate basis. Fair values approximate amortized cost as a
result of the short-term nature and variable interest rate terms charged on
wholesale notes.
Derivative Assets and Liabilities.
We measure derivative fair values assuming that the unit of account is an
individual derivative transaction and that derivative could be sold or
transferred on a stand-alone basis. Certain interest rate swaps are amortized
based on actual loan liquidations which can fluctuate from month to
month. In these cases, market data is not available and we estimate
the amortization of the notional amount which is used to determine fair value.
Measurements based upon these assumptions are Level 3. Changes in fair value are
recognized in Derivative
expense. We consider counterparty non-performance risk under the new
accounting guidance in the recognized measure of fair value of derivative
financial instruments. We use our counterparty’s non-performance spread for
derivative assets and our non-performance spread for derivative
liabilities.
Amounts Due from Sales of
Receivables (Retained Interests). We retain
certain interests in receivables sold in off-balance sheet securitization
transactions. We estimate the fair value of retained interests using
internal valuation models that incorporate market inputs and our own assumptions
about future cash flows. The fair value of retained interests is
estimated based on the present value of monthly collections on the sold finance
receivables in excess of amounts needed for payment of the debt and other
obligations issued or arising in the securitization transactions. In
addition to the amount of debt and collateral held by the securitization
vehicle, the three key inputs that affect the valuation of our retained
interests include credit losses, prepayment speed, and the discount
rate. Changes in fair value are recognized in Securitization
income.
Senior and Secured
Borrowings. The fair values of Senior and secured borrowings
are estimated by discounting the future contractual cash flows using an
estimated discount rate reflecting interest rates and credit spreads currently
being offered for debt with similar terms since there is no public market for
this debt.
Cash and Cash Equivalents, Accounts
(Wholesale and Retail), and Restricted Cash and Cash
Equivalents. The estimated fair values of these financial instruments
approximate the respective carrying values as a result of their short-term
maturity or highly liquid nature.
The
following table presents the carrying amounts and estimated fair values of our
financial instruments (in millions):
|
2009
|
2008
|
|||||||||||||||
|
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|||||||||||||
|
Financial
assets:
|
||||||||||||||||
|
Cash
and cash
equivalents
|
$ | 16.1 | $ | 16.1 | $ | 34.4 | $ | 34.4 | ||||||||
|
Retail
notes
|
1,955.2 | 1,814.5 | 2,468.0 | 2,220.5 | ||||||||||||
|
Finance
receivables from
affiliates
|
154.3 | 144.1 | 212.3 | 198.6 | ||||||||||||
|
Accounts
(wholesale and
retail)
|
294.0 | 294.0 | 197.6 | 197.6 | ||||||||||||
|
Wholesale
notes
|
167.9 | 167.9 | 118.0 | 118.0 | ||||||||||||
|
Amounts
due from sales of receivables
|
291.5 | 291.5 | 229.6 | 229.6 | ||||||||||||
|
Restricted
cash and cash equivalents
|
421.8 | 421.8 | 515.4 | 515.4 | ||||||||||||
|
Derivative
financial
instruments
|
37.2 | 37.2 | 42.0 | 42.0 | ||||||||||||
|
Financial
liabilities:
|
||||||||||||||||
|
Senior
and secured
borrowings
|
3,093.6 | 3,008.2 | 3,679.1 | 3,662.5 | ||||||||||||
|
Derivative
financial
instruments
|
65.2 | 65.2 | 82.9 | 82.9 | ||||||||||||
The
following table presents the fair values of financial instruments measured on a
recurring basis as of October 31, 2009 (in millions):
|
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
|
Assets:
|
||||||||||||||||
|
Derivative
financial instruments
|
$ | - | $ | 4.8 | $ | 32.4 | $ | 37.2 | ||||||||
|
Amounts
due from sales of receivables
|
- | - | 291.5 | 291.5 | ||||||||||||
|
Assets
total
|
$ | - | $ | 4.8 | $ | 323.9 | $ | 328.7 | ||||||||
|
Liabilities:
|
||||||||||||||||
|
Derivative
financial
instruments
|
- | 33.6 | 31.6 | 65.2 | ||||||||||||
|
Liabilities
total
|
$ | - | $ | 33.6 | $ | 31.6 | $ | 65.2 | ||||||||
The
following tables present the changes in Level 3 financial instruments measured
at fair value on a recurring basis for the year ended October 31, 2009 (in
millions):
|
Net
Derivatives
|
Retained
Interests
|
Total
|
||||||||||
|
Beginning
balance
|
$ | - | $ | 229.6 | $ | 229.6 | ||||||
|
Realized
gains included in earnings
|
0.8 | 5.0 | 5.8 | |||||||||
|
Purchases,
issuances and settlements
|
- | 56.9 | 56.9 | |||||||||
|
Ending
balance
|
$ | 0.8 | $ | 291.5 | $ | 292.3 | ||||||
Purchases,
issuances and settlements represent the net cash activity related to new
securitizations, liquidations and pay downs of retained interests.
Certain
impaired finance receivables are measured at fair value on a nonrecurring basis.
An impairment charge is recorded for the amount by which the carrying value of
the receivables exceeds the fair value of the underlying collateral, net of
remarketing costs. As of October 31, 2009, impaired receivables measured at fair
value with a carrying amount of $62.3 million have specific loss reserves of
$24.5 million and a fair value of $37.8 million. Of the specific loss reserves
of $24.5 million, $10.3 million was recorded by NFC and $14.2 million was
recorded by Navistar, Inc. based on pre-established ratios under the loss
sharing arrangements. Fair values of the underlying collateral are
determined by dealer vehicle value publications, adjusted for certain market
factors, which are Level 2 inputs.
15.
LEGAL PROCEEDINGS
We are
subject to various claims arising in the ordinary course of business, and are
parties to various legal proceedings, which constitute ordinary, routine
litigation incidental to our business. In our opinion, the disposition of
these proceedings and claims will not have a material adverse effect on the
business or our results of operations, cash flows or financial
condition.
In
December 2004, we announced that we would restate our financial results for the
fiscal years 2002 and 2003 and the first three quarters of fiscal 2004.
Our restated Annual Report on Form 10-K was filed in February 2005. The
SEC notified us on February 9, 2005, that it was conducting an informal inquiry
into our 2004 restatement. On March 17, 2005, we were advised by the SEC
that the status of the inquiry had been changed to a formal investigation.
On November 8, 2006, we announced that we would restate our financial results
for fiscal years 2002 through 2004 and for the first three quarters of fiscal
2005. We were subsequently informed by the SEC that it was expanding the
2004 investigation to include the 2005 restatement. Our 2005 Annual Report
on Form 10-K, which included the restated financial statements, was filed in
December 2007. We have been providing information to the SEC and are fully
cooperating with their investigation.
NIC is
party to an offer of settlement made to the investigative staff of the SEC. The
investigative staff has decided to recommend this offer of settlement to the
SEC. As a result of the proposed settlement, without admitting or denying
wrongdoing, NIC would consent to the entry of an administrative settlement and
would not pay a civil penalty. This proposed settlement is subject to mutual
agreement on the specific language of the orders and to final approval by the
SEC. Our understanding is that the proposed settlement would conclude the SEC’s
investigation of NIC and NFC with respect to the 2004 and 2005 restatements. We
cannot provide assurance that the proposed settlement will be approved by the
SEC and, in the event the proposed settlement is not approved, what the ultimate
resolution of this investigation will be.
16.
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly
condensed consolidated statements of operations data (in millions):
|
1st
Quarter Ended
January
31,
|
2nd Quarter
Ended
April
30,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Financing
revenue
|
$ | 57.6 | $ | 73.2 | $ | 53.5 | $ | 69.8 | ||||||||
|
Securitization
income
|
10.1 | 9.9 | 11.4 | 8.1 | ||||||||||||
|
Operating
leases and other revenue
|
8.0 | 13.9 | 6.8 | 12.7 | ||||||||||||
|
Interest
expense
|
26.9 | 62.3 | 15.1 | 46.8 | ||||||||||||
|
Credit,
collection and administrative
|
15.4 | 12.2 | 15.0 | 18.0 | ||||||||||||
|
Provision
for credit
losses
|
4.0 | 4.6 | 8.4 | 6.0 | ||||||||||||
|
Depreciation
on operating
leases
|
3.9 | 4.5 | 4.1 | 4.0 | ||||||||||||
|
Derivative
expense
(income)
|
22.4 | 40.2 | 9.2 | (1.7 | ) | |||||||||||
|
Net
income
(loss)
|
(1.9 | ) | (19.2 | ) | 9.8 | 7.3 | ||||||||||
|
3rd
Quarter Ended
July
31,
|
4th Quarter
Ended
October
31,
|
|||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||
|
Financing
revenue
|
$ | 50.3 | $ | 61.8 | $ | 48.4 | $ | 58.5 | ||||||||
|
Securitization
income
|
16.2 | 2.7 | 2.8 | (8.5 | ) | |||||||||||
|
Operating
leases and other revenue
|
7.1 | 9.6 | 6.9 | 12.9 | ||||||||||||
|
Interest
expense
|
15.7 | 38.3 | 11.9 | 39.4 | ||||||||||||
|
Credit,
collection and administrative
|
13.0 | 13.4 | 14.0 | 13.3 | ||||||||||||
|
Provision
for credit
losses
|
9.1 | 13.3 | 8.2 | 8.3 | ||||||||||||
|
Depreciation
on operating
leases
|
4.1 | 4.3 | 4.2 | 4.2 | ||||||||||||
|
Derivative
expense
(income)
|
4.5 | 1.1 | 4.5 | 15.4 | ||||||||||||
|
Net
income
(loss)
|
13.9 | (1.4 | ) | 6.9 | (17.4 | ) | ||||||||||
Quarterly
condensed consolidated statements of financial condition data (in
millions):
|
As
of
January
31,
|
As
of
April
30,
|
As
of
July
31,
|
||||||||||||||||||||||
|
2009
|
2008
|
2009
|
2008
|
2009
|
2008
|
|||||||||||||||||||
|
Finance
receivables,
net
|
$ | 2,860.7 | $ | 3,710.9 | $ | 2,823.3 | $ | 3,556.1 | $ | 2,582.8 | $ | 3,136.2 | ||||||||||||
|
Amounts
due from sales of receivables
|
198.8 | 205.8 | 239.2 | 240.1 | 220.3 | 263.4 | ||||||||||||||||||
|
Restricted
cash and cash equivalents
|
365.3 | 817.7 | 619.5 | 691.2 | 475.5 | 636.7 | ||||||||||||||||||
|
Total
assets
|
3,672.5 | 5,105.4 | 3,922.5 | 4,792.1 | 3,513.9 | 4,359.3 | ||||||||||||||||||
|
Senior
and secured borrowings
|
3,169.8 | 4,653.5 | 3,431.4 | 4,352.7 | 3,031.3 | 3,926.2 | ||||||||||||||||||
|
Total
liabilities and shareowner’s equity
|
3,672.5 | 5,105.4 | 3,922.5 | 4,792.1 | 3,513.9 | 4,359.3 | ||||||||||||||||||
None
Introduction
Management
engaged in substantial effort during Fiscal Year 2009 to remediate the material
weakness in internal control over financial reporting disclosed in the Annual
Report on Form 10-K for the fiscal year ended October 31,
2008. Management believes that the culmination of the actions taken
at NFC has strengthened the control environment and internal controls over
financial reporting.
(a)
Evaluation of Disclosure Controls and Procedures
Management’s
evaluation of the effectiveness of the Company’s disclosure controls and
procedures as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act was
performed under the supervision and with the participation of senior management,
including the Chief Executive Officer and the Chief Financial
Officer. The purpose of disclosure controls and procedures is to
ensure that information required to be disclosed in the reports filed or
submitted under the Exchange Act are recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to management, including
the Chief Executive Officer and the Chief Financial Officer, to allow timely
decisions regarding required disclosures.
Based
upon this evaluation, the Company’s Chief Executive Officer and Chief Financial
Officer concluded that the Company’s disclosure controls and procedures were
effective as of October 31, 2009.
(b)
Changes in Internal Control over Financial Reporting
As
previously disclosed under “Item 9A – Controls and Procedures” in the Annual
Report on Form 10-K for the fiscal year ended October 31, 2008, Management had
concluded that the internal control over financial reporting was not effective
based on a material weakness identified. Management worked throughout the year
to remediate the material weakness and in the fourth quarter ended October 31,
2009 had sufficient evidence to conclude that the remediation of the previously
reported material weakness was complete.
To
remediate the previously reported material weakness, management hired a new
Accounting Manager to work with Operations Management to monitor the recording
of repossessed vehicle inventory. In order to ensure an accurate and properly
valued vehicle inventory balance, the Accounting Manager regularly reviews
various aspects of the repossession process, including 1) compliance with
repossessed vehicle inventory accounting policies and procedures, 2) the
repossessed vehicle valuation analysis to confirm the valuation reflects lower
of cost or market, 3) the loss allocation between NFC and our parent, and 4) the
comparison of the current month actual repossessed vehicle sales to repossessed
vehicle inventory book values to test for reasonableness. The above actions
taken by management have resulted in the vehicle inventory balance being
completely and accurately recorded in the general ledger.
Other
than those changes discussed above, there were no other material changes in the
internal control over financial reporting identified in connection with the
evaluation required by Rules 13a-15(f) and 15d-15(f) that occurred during the
quarter ended October 31, 2009 that have materially affected, or are reasonably
likely to materially affect, internal control over financial
reporting.
(c)
Management’s Report on Internal Control over Financial Reporting
Management
is responsible for establishing and maintaining adequate internal control over
financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. Internal control over financial reporting is a process
designed by, and under the supervision of, the Chief Executive Officer and the
Chief Financial Officer and effected by Management and the Board of Directors,
to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with GAAP. Internal control over financial reporting includes those
policies and procedures that:
|
·
|
Pertain
to the maintenance of records that, in reasonable detail, accurately and
fairly reflect the transactions and dispositions of assets of the
company.
|
|
·
|
Provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP and that
receipts and expenditures of the company are being made in accordance with
authorization of Management and the Board of
Directors.
|
|
·
|
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of assets that could have a
material effect on the consolidated financial
statements.
|
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect all misstatements. Also, projections of any
evaluation of the effectiveness of internal control over financial reporting to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
Management
assessed the effectiveness of internal control over financial reporting as of
October 31, 2009 using the criteria set forth by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”) in Internal Control -
Integrated Framework. Based on this assessment, Management concluded that
internal control over financial reporting was effective as of October 31,
2009.
NFC’s
independent registered public accounting firm, KPMG LLP, has not audited the
effectiveness of the company’s internal controls over financial reporting as of
October 31, 2009 as Management’s report is not subject to attestation pursuant
to temporary rules (229.308T) of the Securities and Exchange Commission that
permit us to provide only Management’s report in this Annual Report on Form
10-K.
None
Intentionally
omitted. See the index page of this Report for
explanation.
All audit
fees payable to KPMG related to NFC’s consolidated financial statements for the
year ended October 31, 2008 were paid by Navistar, Inc. whereby NFC was charged
a fee by Navistar, Inc. for administrative services. Audit fees billed or
expected to be billed by KPMG for the year ended October 31, 2009, were $3.0
million and payable by NFC. Fees paid to KPMG for audit related
services rendered to us were $220.0 thousand each for the years ended October
31, 2009 and 2008.
Audit
Committee pre-approval policy
Information
required by Item 14 of this Form and the audit committee’s pre-approval policies
and procedures regarding the engagement of the principal accountant related to
our various receivable sales are incorporated herein by reference from NIC’s
definitive Proxy Statement for the February 16, 2010, Annual Meeting of
Shareowners under the caption “Audit Committee Report – Independent Auditor
Fees”.
As part
of this pre-approval process, our audit committee reviews the type of and fees
for agreed upon procedures to be performed by our principal accountants and
makes recommendations to NIC’s audit committee.
Exhibits,
Including Those Incorporated By Reference and Financial Statement
Schedules
Exhibits
Index:
|
3
|
E-1
|
||
|
4
|
|
E-2
|
|
|
10
|
E-3
|
||
|
12
|
Calculation of Ratio of Earnings to Fixed Charges | E-24 | |
|
31.1
|
|
E-25
|
|
|
31.2
|
|
E-27
|
|
|
32
|
|
E-29
|
Financial
Statements
See Index
to Financial Statements in Item 8.
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
|
Navistar Financial
Corporation
|
|||
|
(Registrant)
|
|||
|
Date:
December 21, 2009
|
By: /s/
|
DAVID L. DERFELT
|
|
|
David
L. Derfelt
|
|||
|
V.P.,
and Controller
|
|||
|
(Principal
Accounting Officer)
|
|||
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
POWER
OF ATTORNEY
Each
person whose signature appears below does hereby make, constitute and appoint
David Johanneson, William McMenamin and David Derfelt 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/
|
WILLIAM V. MCMENAMIN
William
V. McMenamin
|
Vice
President, Chief Financial Officer and Treasurer; Director
(Principal
Financial Officer)
|
December 21, 2009
|
||
|
/s/
|
DAVID L. DERFELT
David
L. Derfelt
|
Vice
President and Controller
(Principal
Accounting Officer)
|
December 21, 2009
|
||
|
/s/
|
DAVID J.
JOHANNESON
David
J. Johanneson
|
President
and Chief Executive Officer; Director
(Principal
Executive Officer)
|
December 21, 2009
|
||
|
/s/
|
JOHN V. MULVANEY,
SR.
John
V. Mulvaney, Sr.
|
Director
|
December 21, 2009
|
||
|
/s/
|
RICHARD C.
TARAPCHAK
Richard
C. Tarapchak
|
Director
|
December 21, 2009
|
||
|
/s/
|
ANDREW J. CEDEROTH
Andrew
J. Cederoth
|
Director
|
December 21, 2009
|
||
|
/s/
|
JACK J. ALLEN
Jack
J. Allen
|
Director
|
December 21, 2009
|
||
|
/s/
|
ALICE M. PETERSON
Alice
M. Peterson
|
Director
|
December 21,
2009
|