Attached files
file | filename |
---|---|
EX-32.0 - EXHIBIT 32 - NAVISTAR FINANCIAL CORP | exhibit32.htm |
EX-10.0 - EXHIBIT 10 - NAVISTAR FINANCIAL CORP | exhibit10.htm |
EX-31.1 - EXHIBIT 31.1 - NAVISTAR FINANCIAL CORP | exhibit31_1.htm |
EX-31.2 - EXHIBIT 31.2 - NAVISTAR FINANCIAL CORP | exhibit31_2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C.
FORM
10-Q
[X]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the
quarterly period ended January 31, 2010
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
|
36-2472404
|
|||
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
425 N. Martingale Road,
Schaumburg, IL 60173
(Address
of principal executive offices, Zip Code)
Registrant’s
telephone number, including area code (630)
753-4000
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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” 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 Exchange Act).
Yes
[ ] No
[X]
APPLICABLE
ONLY TO CORPORATE ISSUERS:
As of
January 31, 2010, the number of shares outstanding of the registrant's common
stock was 1,600,000.
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 H (1) (a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
NAVISTAR
FINANCIAL CORPORATION
|
||||
AND
SUBSIDIARIES
|
||||
Page
Reference
|
||||
FINANCIAL INFORMATION
|
||||
Consolidated
Financial Statements:
|
||||
- Three
Months Ended January 31, 2010 and 2009
|
3
|
|||
– Three
Months Ended January 31, 2010 and 2009
|
4
|
|||
-
January 31, 2010 (Unaudited) and October 31, 2009
|
5
|
|||
- Three
Months Ended January 31, 2010 and 2009
|
6
|
|||
7
|
||||
Management's
Discussion and Analysis of Financial Condition and Results of
Operations
|
25
|
|||
Quantitative
and Qualitative Disclosures about Market Risk
|
33
|
|||
Controls
and
Procedures
|
33
|
|||
OTHER INFORMATION
|
||||
Exhibits
|
34
|
|||
35
|
||||
Item 1. Consolidated Financial
Statements
Navistar
Financial Corporation and Subsidiaries
Consolidated
Statements of Operations (Unaudited)
Millions
of dollars
|
For
the Three Months Ended
January
31,
|
|||||||
2010
|
2009
|
|||||||
Revenues
|
||||||||
Retail
notes and finance leases
revenue
|
$ | 40.7 | $ | 47.1 | ||||
Operating
leases
revenue
|
6.2 | 5.2 | ||||||
Wholesale
notes
interest
|
4.0 | 5.2 | ||||||
Retail
and wholesale accounts
interest
|
5.4 | 5.3 | ||||||
Securitization
income
|
4.1 | 10.1 | ||||||
Other
revenues
|
3.9 | 2.8 | ||||||
Total
revenues
|
64.3 | 75.7 | ||||||
Expenses
|
||||||||
Cost
of borrowing:
|
||||||||
Interest
expense
|
15.6 | 26.9 | ||||||
Other
|
6.1 | 3.3 | ||||||
Credit,
collections and
administrative
|
13.5 | 15.4 | ||||||
Provision
for credit
losses
|
8.0 | 4.0 | ||||||
Depreciation
on operating
leases
|
5.2 | 3.9 | ||||||
Derivative
expense
|
3.6 | 22.4 | ||||||
Other
(income)
expenses
|
(0.1 | ) | 2.3 | |||||
Total
expenses
|
51.9 | 78.2 | ||||||
Income
(loss) before
taxes
|
12.4 | (2.5 | ) | |||||
Income
tax expense
(benefit)
|
4.7 | (0.6 | ) | |||||
Net
income
(loss)
|
$ | 7.7 | $ | (1.9 | ) |
See Notes
to Consolidated Financial Statements
Navistar
Financial Corporation and Subsidiaries
(Loss)
(Unaudited)
Millions
of dollars
|
Capital
Stock
|
Paid-In
Capital
|
Retained
Earnings
|
Accumulated
Other
Comprehensive
Income (Loss)
|
Total
|
Comprehensive
Income
(Loss)
|
||||||||||||||||||
Balance
at October 31, 2008
|
$ | 1.6 | $ | 199.6 | $ | 79.1 | $ | (7.7 | ) | $ | 272.6 | |||||||||||||
2009
Activity:
|
||||||||||||||||||||||||
Net
loss
|
- | - | (1.9 | ) | - | (1.9 | ) | $ | (1.9 | ) | ||||||||||||||
Capital
contribution from parent company
|
- | 20.0 | - | - | 20.0 | - | ||||||||||||||||||
Pension
adjustment, (net of tax)
|
- | - | - | 0.2 | 0.2 | 0.2 | ||||||||||||||||||
Balance
at January 31, 2009
|
$ | 1.6 | $ | 219.6 | $ | 77.2 | $ | (7.5 | ) | $ | 290.9 | $ | (1.7 | ) | ||||||||||
Balance
at October 31, 2009
|
$ | 1.6 | $ | 219.6 | $ | 107.8 | $ | (16.8 | ) | $ | 312.2 | |||||||||||||
2010
Activity:
|
||||||||||||||||||||||||
Net
income
|
- | - | 7.7 | - | 7.7 | $ | 7.7 | |||||||||||||||||
Pension
adjustment, (net of tax)
|
- | - | - | 0.2 | 0.2 | 0.2 | ||||||||||||||||||
Balance
at January 31, 2010
|
$ | 1.6 | $ | 219.6 | $ | 115.5 | $ | (16.6 | ) | $ | 320.1 | $ | 7.9 |
See Notes
to Consolidated Financial Statements
Navistar
Financial Corporation and Subsidiaries
Millions
of dollars
|
As
of January 31,
2010
|
As
of October 31,
2009
|
||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Cash
and cash
equivalents
|
$ | 12.2 | $ | 16.1 | ||||
Finance
receivables, net of unearned income:
|
||||||||
Finance
receivables
|
2,272.1 | 2,538.6 | ||||||
Finance
receivables from
affiliates
|
119.0 | 154.3 | ||||||
Allowance
for
losses
|
(35.3 | ) | (32.6 | ) | ||||
Finance
receivables,
net
|
2,355.8 | 2,660.3 | ||||||
Amounts
due from sales of
receivables
|
315.4 | 291.5 | ||||||
Net
investment in operating
leases
|
92.0 | 79.5 | ||||||
Vehicle
inventory
|
22.5 | 26.5 | ||||||
Restricted
cash and cash
equivalents
|
364.5 | 421.8 | ||||||
Other
assets
|
113.4 | 107.7 | ||||||
Total
assets
|
$ | 3,275.8 | $ | 3,603.4 | ||||
LIABILITIES
AND SHAREOWNER’S EQUITY
|
||||||||
Net
accounts due to
affiliates
|
$ | 177.2 | $ | 31.2 | ||||
Senior
and secured
borrowings
|
2,631.0 | 3,093.6 | ||||||
Other
liabilities
|
147.5 | 166.4 | ||||||
Total
liabilities
|
2,955.7 | 3,291.2 | ||||||
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 | 219.6 | ||||||
Retained
earnings
|
115.5 | 107.8 | ||||||
Accumulated
other comprehensive
loss
|
(16.6 | ) | (16.8 | ) | ||||
Total
shareowner’s
equity
|
320.1 | 312.2 | ||||||
Total
liabilities and shareowner’s
equity
|
$ | 3,275.8 | $ | 3,603.4 | ||||
See Notes to
Consolidated Financial Statements
Navistar
Financial Corporation and Subsidiaries
Consolidated
Statements of Cash Flows
(Unaudited)
For
the Three Months Ended
January
31,
|
||||||||
Millions
of dollars
|
2010
|
2009
|
||||||
Cash
flow from operating activities:
|
||||||||
Net
income
(loss)
|
$ | 7.7 | $ | (1.9 | ) | |||
Adjustments
to reconcile net loss to cash flow from operations:
|
||||||||
Net
loss on sales of finance
receivables
|
15.5 | 14.8 | ||||||
Net
(gain) loss on sale and impairment of equipment under
|
||||||||
operating
leases and vehicle
inventory
|
(0.3 | ) | 2.1 | |||||
Depreciation
and
amortization
|
10.0 | 6.5 | ||||||
Provision
for credit
losses
|
8.0 | 4.0 | ||||||
Net
change in amounts due from sales of receivables
|
(23.9 | ) | 30.8 | |||||
Net
change in finance receivables - wholesale notes
|
12.0 | 6.6 | ||||||
Net
change in finance receivables from affiliates - wholesale
|
30.1 | 34.6 | ||||||
Net
change in net accounts due to
affiliates
|
146.0 | 45.4 | ||||||
Net
change in other assets and
liabilities
|
(8.9 | ) | (1.2 | ) | ||||
Net
cash provided by operating
activities
|
196.2 | 141.7 | ||||||
Cash
flow from investing activities:
|
||||||||
Net
originations of retail notes and finance leases, includes
affiliates
|
(185.8 | ) | (206.7 | ) | ||||
Net
change in restricted cash and cash
equivalents
|
57.3 | 150.1 | ||||||
Collections
on retail notes and finance lease receivables,
net
of change in unearned finance income, includes affiliates
|
245.8 | 282.1 | ||||||
Net
change in finance receivables from affiliates - accounts
|
1.4 | 3.7 | ||||||
Net
change in finance receivables -
accounts
|
166.8 | 85.7 | ||||||
Proceeds
from sale of vehicle
inventory
|
14.8 | 14.3 | ||||||
Purchase
of equipment leased to
others
|
(20.2 | ) | (5.3 | ) | ||||
Proceeds
from sale of equipment under operating leases
|
2.7 | 0.7 | ||||||
Net
cash provided by investing
activities
|
282.8 | 324.6 | ||||||
Cash
flow from financing activities:
|
||||||||
Net
change in bank revolver facilities, net of issuance costs
|
(290.7 | ) | (202.9 | ) | ||||
Proceeds
from issuance of senior bank term debt, net
of issuance
costs
|
435.3 | - | ||||||
Principal
payments on senior bank term
debt
|
(599.8 | ) | (1.6 | ) | ||||
Proceeds
from issuance of secured borrowings, net of issuance costs
|
239.0 | 11.5 | ||||||
Payments
on secured
borrowings
|
(266.7 | ) | (316.6 | ) | ||||
Capital
contribution from parent
company
|
- | 20.0 | ||||||
Net
cash used by financing
activities
|
(482.9 | ) | (489.6 | ) | ||||
Change
in cash and cash
equivalents
|
(3.9 | ) | (23.3 | ) | ||||
Cash
and cash equivalents, beginning of
year
|
16.1 | 34.4 | ||||||
Cash
and cash equivalents, end of
period
|
$ | 12.2 | $ | 11.1 | ||||
Supplemental
cash flow information:
|
||||||||
Interest
paid
|
$ | 15.3 | $ | 31.4 | ||||
Income
taxes paid, net of
refunds
|
0.5 | 0.1 | ||||||
Transfers
of loans and leases to vehicle
inventory
|
11.5 | 12.5 |
See Notes
to Consolidated Financial Statements
6
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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.
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.
We
prepared the accompanying unaudited consolidated financial statements in
accordance with accounting principles generally accepted in the United States of
America (“GAAP”) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X issued by the Securities and Exchange
Commission (“SEC”). Accordingly, they do not include all of the
information and notes required by accounting principles generally accepted in
the United States of America for complete financial statements. In our opinion
all normal recurring adjustments necessary for a fair presentation are reflected
in the consolidated financial statements. Operating results for the three month
period ended January 31, 2010 are not necessarily indicative of the results for
the full year. The accompanying unaudited financial statements have
been prepared in accordance with accounting policies described in our 2009
Annual Report on Form 10-K and should be read in conjunction with the
disclosures therein.
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 have any earning assets located in foreign countries, nor do we derive
revenues from any single customer that represents 10% or more of our total
revenues.
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.
7
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Recently
Adopted Accounting Standards
As of
January 31, 2010, we adopted new accounting guidance that expands disclosure
requirements for nonfinancial assets and nonfinancial liabilities that are
recognized or disclosed at fair value in the financial statements on a
nonrecurring basis. Our nonfinancial asset impacted by this disclosure was Vehicle inventory, which is
measured at the lower of cost or fair value and reviewed for impairment. The new
guidance relates to disclosure only and, therefore, did not have an impact on
our consolidated financial condition, results of operations or cash flows.
The disclosure requirements of this new accounting guidance are included in Note
13, Fair Value
Measurements.
Effective
November 1, 2009, we adopted new accounting guidance to establish accounting and
reporting standards for a noncontrolling interest in a subsidiary and for the
deconsolidation of a subsidiary. The guidance 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.
Adoption did not have an impact on our consolidated financial condition, results
of operations or cash flows.
Effective
November 1, 2009 we adopted new accounting guidance relating to business
combinations that 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. Additionally, the new
guidance addresses application issues on: initial recognition and measurement;
subsequent measurement and accounting; and disclosure of assets and liabilities
arising from contingencies in a business combination. Adoption did not have an
impact on our consolidated financial condition, results of operations or
cash flows.
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
January 2010, the Financial Accounting Standards Board (“FASB”) issued new
guidance regarding improving disclosures about fair value measurements. The
guidance requires new disclosures related to transfers in and out of Level 1 and
Level 2 as well as activity in Level 3 fair value measurements. The guidance
also provides clarification to existing disclosures. The new disclosures and
clarifications of existing disclosures are effective for interim and annual
reporting periods beginning after December 15, 2009, except for the disclosures
about purchases, sales, issuances, and settlements in the rollforward of
activity in Level 3 fair value measurements. Those disclosures are
effective for fiscal years beginning after December 15, 2010, and for interim
periods within those fiscal years. Our effective date for the new disclosures
and clarifications is the quarter ending April 30, 2010. Our
effective date for the disclosures about purchases, sales, issuances, and
settlements in the rollforward of activity in Level 3 fair value measurements is
November 1, 2011. The
new guidance relates to disclosure only and, therefore, will not have an impact
on our consolidated financial condition, results of operations or cash
flows. When effective, we will comply with the disclosure provisions
of this new guidance.
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.
8
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 October 31, 2010. The new guidance
relates to disclosure only and, therefore, will not have an impact on our
consolidated financial condition, results of operations or cash flows. When
effective, we will comply with the disclosure provisions of this new
guidance.
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 rates applied to the average
outstanding balances. These agreements are amended from time to time
to reflect prevailing market rates and fees. Effective December 16, 2009, NFC
began charging Navistar, Inc. a 3.0% per annum fee on the monthly outstanding
balance of the new bank credit facility to adjust for the incremental cost of
borrowing. This fee was $2.8 million during the three months ended January 31,
2010, and is included in Other
revenue. 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 three months ended January 31, 2010 and 2009, were
$1.0 billion each period. Aggregate interest and fee revenue from Navistar,
Inc., excluding Dealcor dealers (those majority owned by Navistar, Inc.), for
the three months ended January 31, 2010 and 2009, was $22.8 million and $17.9
million, respectively. The interest and fee revenues are reported as components
of Retail notes and finance leases revenue,
Securitization income, Wholesale notes interest, Retail and
wholesale accounts interest and Other revenue in the
consolidated statements of operations.
Finance
Receivable, Operating Leases and Vehicle Inventory
Under
certain circumstances Navistar, Inc. is contractually liable for 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 three months ended January 31
(in millions):
2010
|
2009
|
|||||||
Net
losses on finance
receivables
|
$ | 2.4 | $ | 0.8 | ||||
Impairment
losses on vehicle
inventory
|
0.8 | 4.8 | ||||||
Net
losses on sales of vehicle
inventory
|
0.2 | 3.2 |
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”), a
Mexican finance subsidiary of NIC. Fee amounts are based on outstanding
balances. These guarantee
fees for the three months ended January 31, 2010 and 2009, were $0.8 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 NFM's debt. Fees paid by NFC for this backstop guarantee were
less than $0.1 million and $0.1 million for the three months ended January 31,
2010 and 2009, respectively. No losses have been incurred relating to the
guarantees.
9
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Unsecured
Loans to Affiliates
On March
1, 2010, NFC entered into a one-year 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 the Eurodollar loan rate for each month as set
forth in the December 2009 bank credit facility). This agreement replaces the
one-year $100.0 million working capital loan agreement which expired December
10, 2009. As of January 31, 2010 and October 31, 2009, no amounts were
outstanding under the working capital loans and no interest income was
recognized during either of the three month periods ended January 31, 2010 or
2009.
Support
Agreements
As a
condition to the December 2009 bank credit facility, Navistar, Inc. will not
permit NFC’s ratio of the sum of consolidated pre-tax income, consolidated
interest expense and capital contributions from Navistar, Inc. 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. Navistar, Inc. made capital contributions of $20.0 million
to NFC during the three months ended January 31, 2009, to ensure compliance with
the 125% Fixed Charge Coverage Ratio. As of January 31, 2010, no
additional contributions have been required.
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. 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 $2.0 million
and $2.3 million for the three months ended January 31, 2010 and 2009,
respectively. Net accounts due
to affiliates represents the balance of other payables and receivables
related to operations, such as intercompany charges. Included in our
consolidated statements of financial condition are the following receivables
from affiliates (in millions):
January
31,
2010
|
October
31,
2009
|
|||||||
Finance
receivables from affiliates net of unearned income and dealer reserve
(Dealcor retail)
|
$ | 101.0 | $ | 104.8 | ||||
Finance
receivables from affiliates (Dealcor wholesale)
|
18.0 | 49.5 | ||||||
Net
accounts due to affiliates
(non-Dealcor)
|
177.2 | 31.2 |
3.
FINANCE RECEIVABLES
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
and we perform regular credit evaluations of our dealers and customers. 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. As of January 31, 2010 and
October 31, 2009, no single customer represented a significant concentration of
credit risk.
10
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Finance receivables balances
are summarized as follows (in millions):
January
31,
2010
|
October
31,
2009
|
|||||||
Retail
notes, net of unearned
income
|
$ | 1,864.8 | $ | 1,955.2 | ||||
Finance
leases, net of unearned
income
|
124.2 | 121.5 | ||||||
Wholesale
notes
held-for-sale
|
155.9 | 167.9 | ||||||
Accounts
(includes retail and
wholesale)
|
127.2 | 294.0 | ||||||
Finance
receivables from affiliates, net of unearned
income
|
119.0 | 154.3 | ||||||
Total
finance
receivables
|
2,391.1 | 2,692.9 | ||||||
Allowance
for
losses
|
(35.3 | ) | (32.6 | ) | ||||
Total
finance receivables,
net
|
$ | 2,355.8 | $ | 2,660.3 |
4.
ALLOWANCE FOR LOSSES
The
change in Allowance for
losses for finance receivables is summarized as follows (in
millions):
Three
Months Ended
January
31,
2010
|
Three
Months
Ended
January
31,
2009
|
Year
Ended
October
31,
2009
|
||||||||||
Allowance
for losses, beginning of
period
|
$ | 32.6 | $ | 28.4 | $ | 28.4 | ||||||
Provision
for credit
losses
|
8.0 | 4.0 | 29.7 | |||||||||
Net
charge-offs
|
(5.3 | ) | (2.8 | ) | (25.5 | ) | ||||||
Allowance
for losses, end of
period
|
$ | 35.3 | $ | 29.6 | $ | 32.6 |
Finance receivables include
the following amounts relating to impaired receivables (in
millions):
January
31,
2010
|
October
31,
2009
|
|||||||
Impaired
receivables with specific loss
reserves
|
$ | 55.3 | $ | 62.3 | ||||
Impaired
receivables without specific loss
reserves
|
2.8 | 2.5 | ||||||
Total
impaired
receivables
|
$ | 58.1 | $ | 64.8 |
Specific
loss reserves on impaired receivables recorded by NFC
|
$ | 12.5 | $ | 10.3 | ||||
Specific
loss reserves recorded by Navistar,
Inc.
|
13.4 | 14.2 | ||||||
Finance
receivables over 60 days
delinquent
|
21.6 | 15.7 |
The
average balances of impaired finance receivables for the three months ended
January 31, 2010 and 2009, were $59.4 million and $62.2 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 January 31, 2010,
three customers accounted for 43.0% of total impaired receivables with specific
loss reserves of $5.7 million recorded by NFC and $5.2 million recorded by
Navistar, Inc. 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. NFC would be solely
responsible for $10.1 million and $12.5 million of impaired receivables as of
January 31, 2010, and October 31, 2009, respectively. Navistar, Inc. would be
solely responsible for $2.6 million and $4.4 million of impaired receivables as
of January 31, 2010, and October 31, 2009, respectively. Losses on the remaining
impaired receivables are allocated between NFC and Navistar, Inc. based on
pre-established ratios under the loss sharing arrangements.
11
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 three months ended January 31 (in
millions):
2010
|
2009
|
|||||||
Impairment
losses on vehicle inventory
|
$ | 2.4 | $ | 5.5 | ||||
Net
(gains) losses on sale of vehicle inventory
|
(1.5 | ) | 4.5 |
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 (income) expenses in
the consolidated statements of operations.
The
change in NFC’s Vehicle
inventory is summarized as follows (in millions):
Three
Months Ended
January
31,
2010
|
Three
Months
Ended
January
31,
2009
|
Year
Ended
October
31,
2009
|
||||||||||
Vehicle
inventory, beginning of period
|
$ | 26.5 | $ | 42.0 | $ | 42.0 | ||||||
Net
additions
|
11.5 | 12.5 | 67.3 | |||||||||
Impairment
loss:
|
||||||||||||
Recorded
by
NFC
|
(1.6 | ) | (0.7 | ) | (3.9 | ) | ||||||
Recorded
by Navistar,
Inc.
|
(0.8 | ) | (4.8 | ) | (9.2 | ) | ||||||
Net
book value of repossessed assets sold
|
(13.1 | ) | (15.6 | ) | (69.7 | ) | ||||||
Vehicle
inventory, end of
period
|
$ | 22.5 | $ | 33.4 | $ | 26.5 |
6. NET
INVESTMENT IN OPERATING LEASES
Net investment in operating
leases is summarized as follows (in millions):
January
31,
2010
|
October
31,
2009
|
|||||||
Investment
in operating
leases
|
$ | 134.7 | $ | 119.8 | ||||
Less:
Accumulated
depreciation
|
(43.5 | ) | (41.0 | ) | ||||
Net
investment in equipment under operating
leases
|
91.2 | 78.8 | ||||||
Rent
receivable net of reserve for past due operating leases
|
0.8 | 0.7 | ||||||
Net
investment in operating
leases
|
$ | 92.0 | $ | 79.5 |
7. INCOME
TAXES
We
compute on a quarterly basis an estimated annual effective tax rate considering
ordinary income and related income tax expense. Ordinary income
refers to income (loss) from continuing operations before income tax expense
(benefit) excluding significant unusual or infrequently occurring
items. The tax effect of an unusual or infrequently occurring item is
recorded in the interim period in which it occurs. Items included in
income tax expense in the periods in which they occur include the cumulative
effect of changes in tax laws or rates and adjustments to our valuation
allowance following a change in judgment concerning the realizability of
deferred tax assets in future years.
12
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As of
January 31, 2010, the gross unrecognized tax benefits exclusive of accrued
interest and penalties were $8.0 million, ($5.0 million net of offsetting
indirect tax benefits). If these unrecognized tax benefits were
recognized, the entire amount would impact our effective tax rate.
NFC and
its 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 subsidiaries as if NFC filed its own consolidated return. Income tax expense (benefit)
includes federal, state and foreign income taxes.
We
recognize interest and penalties as part of Income tax expense (benefit).
Total gross interest and penalties included in Income tax expense (benefit)
were $0.2 million for each of the three months ended January 31, 2010 and
2009. Cumulative gross interest and penalties included in the
consolidated statements of financial condition as of January 31, 2010 and
October 31, 2009 were $3.6 million and $3.4 million ($2.4 million and $2.3
million, respectively, net of indirect benefits).
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 (in millions):
Weighted
Average
Interest
Rate
|
||||||||||||||||
January
31,
2010
|
October
31,
2009
|
January
31,
2010
|
October
31,
2009
|
|||||||||||||
Bank
credit facility at variable rates due December 2012
|
$ | 756.0 | $ | - | 4.6 | % | - | |||||||||
Bank
credit facility at variable rates refinanced in December
2009
|
- | 1,267.9 | - | 2.3 | % | |||||||||||
Revolving
retail warehouse facility at variable rates, due June 2010
|
500.0 | 500.0 | 0.5 | % | 0.5 | % | ||||||||||
Secured
fixed-rate term loan due March 2013
|
76.9 | - | 5.9 | % | - | |||||||||||
Borrowings
secured by asset-backed securities at various rates, currently between
0.6% and 5.9%, due serially through October 2016
|
1,160.2 | 1,191.5 | 2.2 | % | 1.6 | % | ||||||||||
Borrowings
secured by operating and finance leases due serially through October 2016
at rates currently between 2.6% and 6.6%
|
137.9 | 134.2 | 4.3 | % | 4.0 | % | ||||||||||
Total
senior and secured
borrowings
|
$ | 2,631.0 | $ | 3,093.6 | 2.8 | % | 1.8 | % |
On
December 16, 2009, the bank credit facility was refinanced for $815.0 million,
maturing in December 2012. The facility 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 facility, NFC
is subject to customary operational and financial covenants including an initial
minimum collateral coverage ratio of 120%. The term loan principal is to be paid
in quarterly installments of $0.9 million through October 31, 2012, with the
balance of $354.2 million due on December 16, 2012.
13
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Concurrent
with the bank credit facility refinancing, NFC issued borrowings secured by
asset-backed securities of $224.9 million and issued a term loan secured by
retail notes and leases of $79.3 million with monthly scheduled principal
payments through March 2013.
9.
POSTRETIREMENT BENEFITS
Defined
Benefit Plans
Generally,
the qualified and non-qualified pension plans are
non-contributory. Our policy is to fund the pension plans in
accordance with applicable United States government regulations. As
of January 31, 2010, all legal funding requirements have been met. We
were not required to make contributions to our pension plans for fiscal year
2009 and did not make contributions for the three months ended January 31, 2010
or 2009. We currently do not anticipate making any contributions
during the remainder of the fiscal year.
Components
of Net Postretirement Benefits Expense
Net
postretirement benefits expense included in Credit, collections and
administrative for the three months ended January 31, is comprised of the
following (in millions):
Pension Benefits
|
Other Benefits
|
|||||||||||||||
2010
|
2009
|
2010
|
2009
|
|||||||||||||
Service
cost for benefits earned during the period
|
$ | 0.1 | $ | 0.1 | $ | - | $ | - | ||||||||
Interest
on
obligation
|
0.9 | 1.0 | 0.2 | 0.3 | ||||||||||||
Amortization
of cumulative
losses
|
0.2 | 0.1 | - | - | ||||||||||||
Less
expected return on
assets
|
(0.9 | ) | (0.9 | ) | (0.1 | ) | (0.1 | ) | ||||||||
Net
postretirement benefits
expense
|
$ | 0.3 | $ | 0.3 | $ | 0.1 | $ | 0.2 |
Defined
Contribution Plans
Our
defined contribution plans cover a substantial portion of
employees. The defined contribution plans contain a 401(k) feature
and provide a company match. Many participants covered by the plans
receive annual company contributions to their retirement account based on an
age-weighted percentage of the participant’s eligible compensation for the
calendar year. Defined contribution expense pursuant to these plans
was $0.3 million for each of the three months ended January 31, 2010 and
2009.
14
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. CONTINGENCIES
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 January 31, 2010, NFC’s maximum guarantee exposure to this
outstanding debt was $207.3 million, the total amount outstanding at that
date. 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. See Note 2 for
fees recorded by NFC relating to these guarantees.
Guarantees
of Derivatives
As of
January 31, 2010 and October 31, 2009, NFC guaranteed derivative contracts for
interest rate swaps and interest rate caps of NFM. NFC’s exposure is
limited to the default risk of NFM. The unfavorable fair market value
of the guaranteed derivatives was immaterial as of January 31, 2010 and October
31, 2009.
11. 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.
Our
derivatives are 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 13, 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
|
|||||||||||||||
January
31, 2010
|
Notional
Amount
|
Fair
Value
|
Notional
Amount
|
Fair
Value
|
||||||||||||
Interest
rate
swaps
|
$ | 946.8 | $ | 25.2 | $ | 1,915.5 | $ | 46.8 | ||||||||
Interest
rate caps
purchased
|
500.0 | 3.5 | - | - | ||||||||||||
Interest
rate caps
sold
|
- | - | 500.0 | 3.2 | ||||||||||||
Total
derivatives
|
$ | 1,446.8 | $ | 28.7 | $ | 2,415.5 | $ | 50.0 |
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 |
15
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
losses (gains) from derivative instruments included in Derivative expense are as follows for the
three months ended January 31 (in millions):
2010
|
2009
|
|||||||
Interest
rate
swaps
|
$ | 3.2 | $ | 22.4 | ||||
Interest
rate caps purchased
|
1.3 | 2.0 | ||||||
Interest
rate caps
sold
|
(0.9 | ) | (2.0 | ) | ||||
Total
|
$ | 3.6 | $ | 22.4 |
12.
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 of the special purpose entity debt
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 $807.7 million of wholesale notes and $212.0
million in cash equivalents as of January 31, 2010, and $763.1 million of
wholesale notes and no cash equivalents as of October 31, 2009.
Components
of available wholesale note trust funding facilities were as follows (in
millions):
Maturity
|
January
31,
2010
|
October
31,
2009
|
|||||||
Investor
notes
|
February
2010
|
$ | 212.0 | $ | 212.0 | ||||
Variable
funding certificate (“VFC”)
|
August
2010
|
500.0 | 650.0 | ||||||
Investor
notes
|
October
2012
|
350.0 | - | ||||||
Total
|
$ | 1,062.0 | $ | 862.0 |
The
utilized portion of the VFC was $200.0 million and $350.0 million as of January
31, 2010 and October 31, 2009, respectively. Our retained interest was $249.3
million and $191.9 million as of January 31, 2010 and October 31, 2009,
respectively. On November 10, 2009, NFC completed the sale of $350.0 million of
three-year investor notes within the wholesale note trust funding facility. This
sale was eligible for funding under the U.S. Federal Reserve’s Term Asset-Backed
Securities Loan Facility (“TALF”) program. Concurrent with this sale, the VFC
facility commitment was reduced from $650.0 million to $500.0
million.
On
February 12, 2010, NFC completed the sale of $250.0 million of two-year investor
notes within the wholesale note trust funding facility. This sale was also
eligible for funding under TALF. In addition, on February 25, 2010, NFC paid off
investor notes of $212.0 million upon maturity.
The Truck
Retail Accounts Corporation (“TRAC’) facility owned $81.3 million of retail
accounts and $13.0 million of cash equivalents as of January 31, 2010, and $89.2
million of retail accounts and $19.6 million of cash equivalents as of October
31, 2009.
16
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Amount of
available retail accounts funding was as follows (in millions):
Maturity
|
January
31,
2010
|
October
31,
2009
|
|||||||
Conduit
funding
facility
|
October
2010
|
$ | 100.0 | $ | 100.0 | ||||
Funding
utilized
|
(27.1 | ) | (7.7 | ) | |||||
Total
availability
|
$ | 72.9 | $ | 92.3 |
Our
retained interest held in TRAC was $66.1 million and $99.6 million as of January
31, 2010 and October 31, 2009, respectively.
Amounts
due from sales of receivables
Amounts due from sales of
receivables represent NFC’s retained interest in those off-balance sheet
securitization transactions described above for wholesale notes and retail
accounts. 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 $315.4 million and $291.5 million as of January 31, 2010
and October 31, 2009, 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 13, Fair Value Measurements, 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 sales of
receivables are summarized as follows (in millions):
January
31,
2010
|
October
31,
2009
|
|||||||
Excess
seller’s
interest
|
$ | 291.0 | $ | 275.3 | ||||
Interest
only
strip
|
12.3 | 9.6 | ||||||
Restricted
cash
reserves
|
12.1 | 6.6 | ||||||
Total
amounts due from sales of
receivables
|
$ | 315.4 | $ | 291.5 |
17
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The key
economic assumptions as of January 31, 2010 and October 31, 2009, and the
sensitivity of the current fair values of residual cash flows as of January 31,
2010, to an immediate adverse change of 10 and 20 percent in that assumption are
as follows (in millions):
January
31,
|
October
31,
|
Adverse
Fair Value
Change
at
January
31, 2010
|
||||||||
2010
|
2009
|
10 | % | 20 | % | |||||
Discount
rate
(annual)
|
8.1 to
19.1 %
|
9.1 to
20.5 %
|
$ | 3.0 | $ | 6.5 | ||||
Estimated
credit
losses
|
0.0 to
0.24 %
|
0.0 to
0.24 %
|
0.1 | 0.2 | ||||||
Payment
speed (percent of portfolio per month)
|
6.0 to
86.7 %
|
4.9 to
70.8 %
|
0.8 | 1.7 |
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 (in millions):
January
31, 2010
|
Retail
Notes
|
Finance
Leases
|
Wholesale
Notes
|
Accounts
|
Affiliates
|
Total
|
||||||||||||||||||
Serviced
portfolio
|
$ | 1,864.8 | $ | 124.2 | $ | 886.8 | $ | 208.5 | $ | 195.8 | $ | 3,280.1 | ||||||||||||
Less
sold receivables – off-balance
sheet
|
- | - | (730.9 | ) | (81.3 | ) | (76.8 | ) | (889.0 | ) | ||||||||||||||
Total
on-balance sheet.
|
$ | 1,864.8 | $ | 124.2 | $ | 155.9 | $ | 127.2 | $ | 119.0 | $ | 2,391.1 |
October
31, 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 |
For sold
receivables, wholesale notes and affiliates balances past due over 60 days were
$0.6 million and $0.8 million as of January 31, 2010 and October 31, 2009,
respectively. Accounts balances in TRAC past due over 60 days were $0.1 million
and $1.6 million as of January 31, 2010 and October 31, 2009, respectively. No
credit losses on sold receivables were recorded for the three months ended
January 31, 2010 or 2009.
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 three months ended January 31 (in
millions):
2010
|
2009
|
|||||||
Fair
value
adjustments
|
$ | 6.8 | $ | 19.5 | ||||
Excess
spread
income
|
10.6 | 2.1 | ||||||
Servicing
fees
revenue
|
2.2 | 2.2 | ||||||
Losses
on sales of
receivables
|
(15.5 | ) | (14.8 | ) | ||||
Investment
income
|
- | 1.1 | ||||||
Securitization
income
|
$ | 4.1 | $ | 10.1 |
18
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Cash
flows from off-balance sheet securitization transactions for the three months
ended January 31 are as follows (in millions):
2010
|
2009
|
|||||||
Proceeds
from sales of finance
receivables
|
$ | 1,073.0 | $ | 1,042.5 | ||||
Servicing
fees
|
2.2 | 2.2 | ||||||
Cash
from net excess
spread
|
10.4 | 1.7 | ||||||
Investment
income
|
- | 0.7 | ||||||
Net
cash from securitization transactions
|
$ | 1,085.6 | $ | 1,047.1 |
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 generally no recourse
to NFC.
Variable
interest entities
We
consolidate the retail owner trusts as VIEs since we remain the primary
beneficiary of the trusts’ assets and liabilities.
As transferors of
wholesale notes 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 January 31, 2010 and October 31, 2009, our
retained interest in the QSPEs was $315.4
million and $291.5 million, respectively.
There was
no change in the determination to consolidate these entities during the three
months ended January 31, 2010, and we have not provided any financial or other
support that we were not contractually obligated to provide.
19
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
|
|||||||||||
January
31, 2010
|
VIEs
|
Securitizations
|
Total
|
|||||||||
Finance
receivables, net of allowance
|
$ | 1,074.9 | $ | 644.7 | $ | 1,719.6 | ||||||
Net
investment in operating leases
|
- | 92.0 | 92.0 | |||||||||
Restricted
cash and cash equivalents
|
112.1 | 249.3 | 361.4 | |||||||||
Vehicle
inventory
|
12.3 | 3.9 | 16.2 | |||||||||
Net
derivative fair value
|
(25.0 | ) | 3.5 | (21.5 | ) | |||||||
Secured
borrowings
|
(946.8 | ) | (851.3 | ) | (1,798.1 | ) |
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 | ) |
NFC
securitized finance receivables and investments in operating leases of $239.1
million and $11.8 million under secured borrowings for the three months ended
January 31, 2010 and 2009, respectively.
13.
FAIR VALUE MEASUREMENTS
In
accordance with FASB ASC 820, we use 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.
20
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 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), Restricted Cash and Cash Equivalents, and Net Accounts Due to
Affiliates. 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):
January
31, 2010
|
October
31, 2009
|
|||||||||||||||
Carrying
Value
|
Fair
Value
|
Carrying
Value
|
Fair
Value
|
|||||||||||||
Financial
assets:
|
||||||||||||||||
Cash
and cash
equivalents
|
$ | 12.2 | $ | 12.2 | $ | 16.1 | $ | 16.1 | ||||||||
Retail
notes
|
1,864.8 | 1,728.2 | 1,955.2 | 1,814.5 | ||||||||||||
Finance
receivables from
affiliates
|
119.0 | 111.7 | 154.3 | 144.1 | ||||||||||||
Accounts
(wholesale and
retail)
|
127.2 | 127.2 | 294.0 | 294.0 | ||||||||||||
Wholesale
notes
|
155.9 | 155.9 | 167.9 | 167.9 | ||||||||||||
Amounts
due from sales of receivables
|
315.4 | 315.4 | 291.5 | 291.5 | ||||||||||||
Restricted
cash and cash equivalents
|
364.5 | 364.5 | 421.8 | 421.8 | ||||||||||||
Derivative
financial
instruments
|
28.7 | 28.7 | 37.2 | 37.2 | ||||||||||||
Financial
liabilities:
|
||||||||||||||||
Net
accounts due to
affiliates
|
177.2 | 177.2 | 31.2 | 31.2 | ||||||||||||
Senior
and secured
borrowings
|
2,631.0 | 2,659.5 | 3,093.6 | 3,008.2 | ||||||||||||
Derivative
financial
instruments
|
50.0 | 50.0 | 65.2 | 65.2 |
21
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following tables present the fair values of financial instruments measured on a
recurring basis (in millions):
January
31, 2010
|
||||||||||||||||
Level
1
|
Level
2
|
Level
3
|
Total
|
|||||||||||||
Assets:
|
||||||||||||||||
Derivative
financial instruments
|
$ | - | $ | 3.5 | $ | 25.2 | $ | 28.7 | ||||||||
Amounts
due from sales of receivables
|
- | - | 315.4 | 315.4 | ||||||||||||
Assets
total
|
$ | - | $ | 3.5 | $ | 340.6 | $ | 344.1 | ||||||||
Liabilities:
|
||||||||||||||||
Derivative
financial
instruments
|
- | 25.0 | 25.0 | 50.0 | ||||||||||||
Liabilities
total
|
$ | - | $ | 25.0 | $ | 25.0 | $ | 50.0 |
October
31, 2009
|
||||||||||||||||
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 three months ended January 31 (in
millions):
2010
|
Net
Derivatives
|
Retained
Interests
|
Total
|
|||||||||
Beginning
balance
|
$ | 0.8 | $ | 291.5 | $ | 292.3 | ||||||
Realized
and unrealized losses included in earnings
|
(0.6 | ) | (5.1 | ) | (5.7 | ) | ||||||
Purchases,
issuances and settlements
|
- | 29.0 | 29.0 | |||||||||
Ending
balance
|
$ | 0.2 | $ | 315.4 | $ | 315.6 | ||||||
2009
|
Net
Derivatives
|
Retained
Interests
|
Total
|
|||||||||
Beginning
balance
|
$ | - | $ | 229.6 | $ | 229.6 | ||||||
Realized
and unrealized gains included in earnings
|
2.0 | 5.1 | 7.1 | |||||||||
Purchases,
issuances and settlements
|
- | (35.9 | ) | (35.9 | ) | |||||||
Ending
balance
|
$ | 2.0 | $ | 198.8 | $ | 200.8 | ||||||
Purchases,
issuances and settlements represent the net cash activity related to new
securitizations, liquidations and pay downs of retained interests.
22
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The
following table presents assets measured at fair value on a nonrecurring basis
(in millions):
January
31,
2010
|
October
31,
2009
|
|||||||
Impaired
finance receivables measured at fair
value
|
$ | 55.3 | $ | 62.3 | ||||
Specific
loss reserve recorded by
NFC
|
(12.5 | ) | (10.3 | ) | ||||
Specific
loss reserve recorded by Navistar,
Inc.
|
(13.4 | ) | (14.2 | ) | ||||
Fair
value of impaired finance
receivables
|
$ | 29.4 | $ | 37.8 | ||||
Vehicle
inventory
|
$ | 22.5 | $ | 26.5 |
An
impairment charge is recorded for the amount by which the carrying value of the
finance receivables exceeds the fair value of the underlying collateral, net of
remarketing costs. Fair values of the underlying collateral and Vehicle inventory are
determined by dealer vehicle value publications, adjusted for certain market
factors, which are Level 2 inputs. Combined impairment losses for NFC and
Navistar, Inc. on Vehicle
inventory were $2.4 million and $5.5 million for the three months ended
January 31, 2010 and 2009, respectively.
14.
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.
23
NAVISTAR
FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
15.
SUBSEQUENT EVENT
On March
5, 2010, NFC entered into a three-year Operating Agreement (with one
year automatic extensions and subject to early termination provisions) with GE
Capital Corporation and GE Capital Commercial, Inc. (collectively “GE”),
Navistar, Inc. and NIC. Under the terms of the agreement, GE becomes
Navistar, Inc.’s preferred source of retail customer financing for equipment
offered by Navistar, Inc. and its dealers in the U.S. GE will co-locate its
operations in NFC’s existing facility and will offer employment to NFC’s sales,
credit and marketing personnel. Navistar, Inc. will also provide GE a
loss sharing arrangement for credit losses similar to the loss sharing
arrangement currently in place with NFC. While under limited circumstances, NFC
retains the rights to originate retail customer financing, the Company expects
its retail finance receivables and retail finance revenues will decline over the
next five years as its retail portfolio pays down. For the three
months ended January 31, 2010 and 2009, retail note and lease originations were
$206.0 million and $212.0 million, respectively. Retail note and lease revenues
for the three months ended January 31, 2010 and 2009, were $46.9 million and
$52.3 million, respectively. We estimate that exit costs associated with this
transaction will not exceed $5.0 million.
Item 2. Management’s Discussion and
Analysis of Financial Condition and Results of Operations
Forward-Looking
Statements; Risk Factors
Information
provided and statements contained in this report that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended (“Securities Act”), Section 21E of the
Securities Exchange Act of 1934 (“Exchange Act”), and the Private Securities
Litigation Reform Act of 1995. Such forward–looking statements only
speak as of the date of this report and NFC assumes no obligation to update the
information included in this report. Such 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 not
guarantees of performance or results and they involve risks, uncertainties, and
assumptions. For a further description of these factors, see
Item 1A, Risk Factors
included within our Form 10-K for year ended October 31, 2009, which was filed
on December 21, 2009. Although we believe that these forward-looking
statements are based on reasonable assumptions, many factors could
affect our actual financial results or results of operations and could cause
actual results to differ materially from those in the forward-looking
statements.
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 Annual Report on Form 10-K for the year ended
October 31, 2009, including the consolidated financial statements and the
accompanying notes presented therein. 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 during the period reported, 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 have
any earning assets located in foreign countries, nor do we derive revenues from
any single customer that represents 10% or more of our total
revenues.
Overview
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.
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. 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, dealer financing has
increased slightly as credit markets have 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 our recent securitizations and the refinancing of our bank facility
have increased dramatically and a large portion of the increase has been passed
on to Navistar, Inc. in the form of higher finance rates and fees. We have also
increased dealer wholesale finance rates. If borrowing costs on future funding
facilities continue to increase, NFC will likely raise its finance rates to
Navistar, Inc. and other customers.
On March
5, 2010, NFC entered into a three-year Operating Agreement (with one
year automatic extensions and subject to early termination provisions) with GE
Capital Corporation and GE Capital Commercial, Inc. (collectively “GE”),
Navistar, Inc. and NIC. Under the terms of the agreement, GE becomes
Navistar, Inc.’s preferred source of retail customer financing for equipment
offered by Navistar, Inc. and its dealers in the U.S. GE will co-locate its
operations in NFC’s existing facility and will offer employment to NFC’s sales,
credit and marketing personnel. Navistar, Inc. will also provide GE a
loss sharing arrangement for credit losses similar to the loss sharing
arrangement currently in place with NFC. While under limited circumstances, NFC
retains the rights to originate retail customer financing, the Company expects
its retail finance receivables and retail finance revenues will decline over the
next five years as its retail portfolio pays down. For the three
months ended January 31, 2010 and 2009, retail note and lease originations were
$206.0 million and $212.0 million, respectively. Retail note and lease revenues
for the three months ended January 31, 2010 and 2009, were $46.9 million and
$52.3 million, respectively.
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. NFC uses interest rate swaps and
caps 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
decreased reflecting the impact of higher over-collateralization requirements of
our renewed VFC wholesale notes facility and funding under the TALF facility.
Additionally, our Provision
for credit losses has increased as a result the increase in our allowance
to finance receivables coverage ratio from 1.1% at January 31, 2009 to 1.7% at
January 31, 2010, attributable to an increase in specific loss reserves and the
impact of higher historical losses, partially offset by the decline in portfolio
balances.
Consolidated
Comparison of Business Results
The
following tables summarize our unaudited consolidated statements of operations
and illustrate the key financial indicators used to assess the consolidated
financial results. Financial information is presented for the three
months ended January 31, 2010 and 2009, as prepared in accordance
with U.S. GAAP for interim financial information (in millions).
Three
Months Ended
January
31
|
||||||||||||||||
2010
|
2009
|
Change
|
%
Change
|
|||||||||||||
Revenues
|
||||||||||||||||
Financing
revenue
|
$ | 50.1 | $ | 57.6 | $ | (7.5 | ) | (13.0 | ) | |||||||
Securitization
income
|
4.1 | 10.1 | (6.0 | ) | (59.4 | ) | ||||||||||
Operating
leases and other
revenue
|
10.1 | 8.0 | 2.1 | 26.3 | ||||||||||||
Total
revenues
|
64.3 | 75.7 | (11.4 | ) | (15.1 | ) | ||||||||||
Expenses
|
||||||||||||||||
Cost
of
borrowing
|
21.7 | 30.2 | (8.5 | ) | (28.1 | ) | ||||||||||
Credit,
collections and
administrative
|
13.5 | 15.4 | (1.9 | ) | (12.3 | ) | ||||||||||
Provision
for credit
losses
|
8.0 | 4.0 | 4.0 | 100.0 | ||||||||||||
Depreciation
on operating
leases
|
5.2 | 3.9 | 1.3 | 33.3 | ||||||||||||
Derivative
expense
|
3.6 | 22.4 | (18.8 | ) | (83.9 | ) | ||||||||||
Other
(income)
expenses
|
(0.1 | ) | 2.3 | (2.4 | ) |
N.M.
|
||||||||||
Total
expenses
|
51.9 | 78.2 | (26.3 | ) | (33.6 | ) | ||||||||||
Income
(loss) before
taxes
|
12.4 | (2.5 | ) | 14.9 |
N.M.
|
|||||||||||
Income
tax expense
(benefit)
|
4.7 | (0.6 | ) | 5.3 |
N.M
|
. | ||||||||||
Net
income
(loss)
|
$ | 7.7 | $ | (1.9 | ) | $ | 9.6 |
N.M.
|
Percentage
changes deemed to be not meaningful are designated N.M.
Financing
Revenue
Financing
revenues is comprised of interest revenue from the following interest earning
assets (in millions):
Three
Months Ended
January
31
|
||||||||||||||||
2010
|
2009
|
Change
|
%
Change
|
|||||||||||||
Retail
notes and finance
leases
|
$ | 40.7 | $ | 47.1 | $ | (6.4 | ) | (13.6 | ) | |||||||
Wholesale
notes
|
4.0 | 5.2 | (1.2 | ) | (23.1 | ) | ||||||||||
Retail
and wholesale
accounts
|
5.4 | 5.3 | 0.1 | 1.9 | ||||||||||||
Total
financing
revenue
|
$ | 50.1 | $ | 57.6 | $ | (7.5 | ) | (13.0 | ) |
Three
month period ended January 31, 2010 compared to the three month period ended
January 31, 2009
Financing revenue decreased
as a result of a decrease in the average finance receivable portfolio balance
from $3.0 billion to $2.5 billion, as originations decreased on declining
industry demand for vehicles. The average interest rates of the finance
receivable portfolio were 8.0% and 7.7% for 2010 and 2009,
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
$2.1 million to $10.6 million primarily resulting from the effect of new pricing
programs. Gains and losses on sales of receivables net of fair value adjustments
decreased from a gain of $4.7 million to a loss of $8.7 million as a result of
increased over-collateralization requirements effective with the recent renewal
of the VFC wholesale funding facility. This decrease was partially offset by a
reduction in discount rates. Servicing fees remained constant 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 increased from $8.0 million to $10.1 million primarily as a result of
an increase in rent from higher investment in equipment in operating leases, as
well as an additional fee charged to NIC for the incremental credit spread
effective with the bank refinancing in December 2009. These increases were
partially offset by lower investment interest rates and lower invested cash
balances.
Cost of borrowing primarily
includes interest expense on Senior and secured
borrowings. Cost of
borrowing decreased from $30.2 million to $21.7 million as a result of
lower average debt balances and lower borrowing rates. Our average interest
rates on Senior and secured
borrowings were 2.2% and 3.1% for the respective periods in 2010 and 2009
driven by lower LIBOR rates, partially offset by a higher credit spread on the
retail securitization completed in April 2009 and the bank refinancing completed
in December 2009. The average outstanding debt balance decreased from
$3.4 billion to $2.9 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 decrease of $1.9 million resulted from separation
costs in the 2009 period of $2.3 million that were not incurred in the 2010
period. The decrease was partially offset by $0.4 million relating to increases
in wages, benefits and other administrative costs.
Provision for credit losses
on receivables increased from $4.0 million to $8.0 million as we
increased our allowance to finance receivables coverage ratio from 1.1% at
January 31, 2009 to 1.7% at January 31, 2010, attributable to an increase in
specific loss reserves and the impact of higher historical losses.
Depreciation on operating leases
increased from $3.9 million to $5.2 million reflecting an increase in the
investment in equipment under operating leases. The average
investment in operating leases increased from $118.2 million to $127.3
million.
Derivative expense decreased
from $22.4 million to $3.6 million. An abrupt decrease in forward interest rate
curves during the three months ended January 31, 2009, caused net fair values to
decrease dramatically. Additionally, the notional amounts of amortizing swaps
were lower during the three months ended January 31, 2010.
Other (income) expenses moved
from an expense position of $2.3 million to an income position of $0.1 million
primarily as a result of a net gain on sales of vehicle inventory. This reflects
some improvement in used truck values which have declined throughout the recent
adverse economic environment.
Income tax expense (benefit)
includes federal, state and foreign taxes. Our income tax
expense changed from a benefit of $0.6 million to an expense of $4.7 million
primarily as a result of moving from a pre-tax loss position to a pre-tax profit
position.
Financial
Condition (in millions):
As
of
|
||||||||||||||||
January
31,
2010
|
October
31,
2009
|
Change
|
%
Change
|
|||||||||||||
Cash
and cash
equivalents
|
$ | 12.2 | $ | 16.1 | $ | (3.9 | ) | (24.2 | ) | |||||||
Finance
receivables,
net
|
2,355.8 | 2,660.3 | (304.5 | ) | (11.4 | ) | ||||||||||
Amounts
due from sales of
receivables
|
315.4 | 291.5 | 23.9 | 8.2 | ||||||||||||
Net
investment in operating
leases
|
92.0 | 79.5 | 12.5 | 15.7 | ||||||||||||
Vehicle
inventory
|
22.5 | 26.5 | (4.0 | ) | (15.1 | ) | ||||||||||
Restricted
cash and cash
equivalents
|
364.5 | 421.8 | (57.3 | ) | (13.6 | ) | ||||||||||
Other
assets
|
113.4 | 107.7 | 5.7 | 5.3 | ||||||||||||
Total
assets
|
$ | 3,275.8 | $ | 3,603.4 | $ | (327.6 | ) | (9.1 | ) | |||||||
Net
accounts due to
affiliates
|
$ | 177.2 | $ | 31.2 | $ | 146.0 | 467.9 | |||||||||
Senior
and secured
borrowings
|
2,631.0 | 3,093.6 | (462.6 | ) | (15.0 | ) | ||||||||||
Other
liabilities
|
147.5 | 166.4 | (18.9 | ) | (11.4 | ) | ||||||||||
Total
liabilities
|
2,955.7 | 3,291.2 | (335.5 | ) | (10.2 | ) | ||||||||||
Total shareowner’s equity
|
320.1 | 312.2 | 7.9 | 2.5 | ||||||||||||
Total
liabilities and shareowner’s equity
|
$ | 3,275.8 | $ | 3,603.4 | $ | (327.6 | ) | (9.1 | ) | |||||||
Balances
as of January 31, 2010 compared to balances as of October 31, 2009
Finance receivables, net
decreased $304.5 million to a balance of $2.4 billion. Of the $304.5
million decrease, retail notes and finance leases, net of unearned income
decreased $87.7 million which was the result of fewer acquisitions combined with
customer payments. Accounts decreased by $166.8 million primarily relating to
Ford business for which originations contractually ceased during the first
fiscal quarter of 2010. Wholesale notes decreased $12.0 million as dealer
concentration in the trust eased, allowing more notes to be sold into the
trust. Finance
receivables from
affiliates decreased $35.3 million as a result of Dealcor’s continuing
effort to reduce inventories. Allowance for losses
increased $2.7 million primarily as a result of an increase in specific loss
reserves and the impact of higher historical losses which was offset by the
impact of a decline in the finance receivable portfolio balance.
Amounts due from sales of
receivables increased from $291.5 million to $315.4 million primarily as
a result of a $57.4 million increase in retained interests in sold wholesale
notes caused by higher over-collateralization requirements in the amended VFC
facility, and the sale of $350.0 million of investor notes within the wholesale
note trust funding facility. The increase was partially offset by a decrease in
TRAC retained interest of $33.5 million as customer concentration in the
facility eased, allowing higher facility utilization.
Vehicle inventory decreased
from $26.5 million to $22.5 million as a result of impairment losses of $2.4
million of which Navistar, Inc. recognized $0.8 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 $421.8 million to $364.5 million as a result
of $22.8 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 $48.1 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. These
decreases were partially offset primarily by the addition of cash collateral
held in Navistar Financial Asset Sales Corp. (“NFASC”).
Other assets increased from
$107.7 million to $113.4 million as a result of new debt issuance costs relating
to the refinancing of the bank credit facility which are amortized over the
facility term. The new debt issuance costs were partially offset by the
amortization and acceleration of issuance costs relating to existing and
refinanced debt, 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 $3.1 billion to $2.6 billion primarily as a result of a
net reduction in borrowings under the refinanced bank credit facility of $511.9
million and normal payments on secured borrowings of $266.7 million. These
payments were partially offset by new borrowings which included the issuance of
$224.9 million of asset-backed notes and a $79.3 million loan secured by retail
notes and leases.
Other liabilities decreased
from $166.4 million to $147.5 million primarily as a result of the monthly
settlement payments and changes in fair value on derivative liabilities of $15.2
million, and a decrease in other accrued expenses of $3.7 million.
Shareholder’s equity
increased from $312.2 million to $320.1 million as a result of net income of
$7.7 million and pension adjustments of $0.2 million.
Asset
Quality
The
following table summarizes delinquencies and charge-offs:
|
January
31,
2010
|
October
31,
2009
|
Change
|
|||||||||
Delinquencies
|
||||||||||||
Retail
notes and finance leases greater than 60 days.
|
0.9 | % | 0.7 | % | 0.2 | % | ||||||
Wholesale
notes greater than 60 days
|
0.1 | % | 0.1 | % | - | |||||||
Wholesale
accounts greater than 60 days
|
0.9 | % | 0.9 | % | - | |||||||
Allowance
to finance receivables coverage ratio
|
1.7 | % | 1.4 | % | 0.3 | % |
Millions of dollars | Three Months Ended January 31, |
|
||||||||||
2010
|
2009
|
Change
|
|
|||||||||
Charge-offs
|
||||||||||||
Retail
notes and finance leases charge-offs
|
$ | 5.3 | $ | 2.8 | $ | 2.5 | ||||||
Retail
notes and finance leases charge-offs to liquidations
|
1.9 | % | 1.7 | % | 0.2 | % |
Retail
notes and finance leases delinquencies greater than 60 days have returned to
prior year levels after increased levels during most of the previous year
attributed to the general economic downturn. Repossessions increased from $9.5
million to $11.0 million for the three months ended January 31, 2009 and 2010,
respectively, reflecting a higher delinquency status than January 31, 2009,
partially offset by the impact of a lower receivable portfolio
level.
The
overall allowance to finance receivables coverage ratio increased as a result of
an increase in specific loss reserves of $2.2 million, the impact of higher
losses in the historical component of the loss allowance calculation and the
decline in the finance receivables portfolio balance. The average impaired
receivables as a percentage of finance receivables were 2.8% and 2.4% for the
three months ended January 31, 2010 and 2009, respectively.
The
allocation of the Allowance
for losses by receivable type is as follows (in
millions):
January
31,
2010
|
October
31,
2009
|
|||||||
Retail
Notes and Finance
Leases
|
$ | 34.5 | $ | 31.8 | ||||
Accounts
|
0.8 | 0.8 | ||||||
Total
|
$ | 35.3 | $ | 32.6 |
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 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 12 quarters, a qualitative component based upon current
economic and portfolio quality trends, and a specific reserve
component.
The
historical component based on 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 as a 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 notes and finance lease originations/purchases were $185.8 million and
$206.7 million during the three months ended January 31, 2010 and 2009,
respectively. NFC provided 12.7% and 12.6% of retail and lease
financing for the Navistar, Inc. new trucks sold in the U.S. during the three
months ended January 31, 2010 and 2009, respectively. NFC experienced
a slight increase in market share as a result of an increase in financing to
customers not normally requiring or seeking financing from NFC.
NFC
provided 96.4% and 97.5% of the wholesale financing of new trucks sold to
Navistar, Inc.’s dealers for the three months ended January 31, 2010 and 2009,
respectively. Wholesale note originations were $864.8 million and $777.6 million
for the three months ended January 31, 2010 and 2009, respectively.
Serviced
wholesale notes balances, including the portion from affiliates, were $967.1
million and $964.7 million as of January 31, 2010 and October 31, 2009,
respectively. The first quarter increase reflects higher dealer acquisition
activity.
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 January 31, 2010, were as follows:
Fitch
|
Standard
and
Poor’s
|
||
Senior
unsecured debt
|
BB-
|
BB-
|
|
Outlook
as of January 26, 2010
|
Negative
|
Stable
|
|
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. The asset-backed securitization market used by NFC and its lending
conduit banks continues to show signs of improvement. The launch of TALF has
added some stability to the securitization market. Pricing has improved,
although it remains higher than historical norms. 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 and credit spreads which reduce discounted future cash flows. Given
present market conditions, we expect a near-term decrease in our borrowing costs
relating to new funding facilities since market credit spreads are currently
lower than spreads of our more recently issued 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
investor notes 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. Concurrent with the
refinancing, NFC issued secured borrowings of $304.2 million secured by retail
notes and leases. As a result of the decrease in the size of the bank facility,
we have increased the balance of our trade payable with Navistar, Inc. which is
included in Net accounts due
to affiliates. As of January 31, 2010, the balance of the trade payable
was $167.0 million. There was no balance as of October 31, 2009.
On
February 12, 2010, we completed the sale of $250.0 million of two-year investor
notes within the wholesale note trust funding facility. This sale was eligible
for funding under the TALF program. In addition, on February 25, 2010, NFC paid
off investor notes of $212.0 million upon maturity.
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 TRIP to temporarily fund
retail notes and retail finance leases. Navistar Financial Asset Sales Corp.
(“NFASC”) finances certain retail notes.
We
securitized $246.8 million of retail notes through NFASC and issued secured
borrowings of $224.9 million during the three months ended January 31, 2010.
No retail
securitizations were completed through NFRRC or NFASC during the three months
ended January 31, 2009. 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 $807.7 million of wholesale notes and $212.0
in cash equivalents as of January 31, 2010, and $763.1 million of wholesale
notes and no cash equivalents as of October 31, 2009.
Components
of available wholesale note trust funding facilities were as follows (in
millions):
Maturity
|
January
31,
2010
|
October
31,
2009
|
|||||||
Investor
notes
|
February
2010
|
$ | 212.0 | $ | 212.0 | ||||
Variable
funding certificate (“VFC”)
|
August
2010
|
500.0 | 650.0 | ||||||
Investor
notes
(TALF)
|
October
2012
|
350.0 | - | ||||||
Total
|
$ | 1,062.0 | $ | 862.0 |
The
utilized portion of the VFC was $200.0 million and $350.0 million as of January
31, 2010 and October 31, 2009, respectively. The VFC facility
was reduced to $500.0 million in conjunction with the sale of the $350.0 million
of three-year investor notes under the TALF program on November 10, 2009. NFSC
held a retained interest in the facility of $249.3 million as of January 31,
2010 and $191.9 million as of October 31, 2009. On February 12, 2010, NFC
completed the sale of $250.0 million of two-year investor notes within the
wholesale note trust funding facility. This sale was also eligible for funding
under TALF. On February 25, 2010, NFC paid off investor notes of $212.0 million
upon maturity.
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. The
utilized portion of the TRAC funding facility was $27.1 million and $7.7 million
as of January 31, 2010 and October 31, 2009, respectively. TRAC held a
retained interest in the facility of $66.1 million as of January 31, 2010, and
$99.6 million as of October 31, 2009. The facility expires on October 29,
2010.
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 January 31, 2010 and October 31, 2009, NFC had $349.0 million
and $301.1 million, respectively, in retail notes and finance leases in
TRIP. In addition, the TRIP facility held $227.4 million and $275.5
million of cash equivalents as of January 31, 2010 and October 31, 2009,
respectively.
ITLC, our
wholly-owned subsidiary, was established to provide for the funding of certain
leases. ITLC received proceeds of $14.2 million and $11.8 million in
the form of on-balance sheet collateralized borrowings for the three months
ended January 31, 2010 and 2009, respectively. As of January 31, 2010
and October 31, 2009, respectively, the balance of ITLC’s collateralized
borrowings secured by operating and finance leases were $129.0 million and
$125.0 million.
On
December 16, 2009, we entered into a bank term loan for $79.3 million secured by
specific retail notes and leases with monthly scheduled principal payments
through March 2013.
On
December 16, 2009, our bank credit facility was refinanced for $815.0 million
due in 2012. The new facility 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 facility, NFC
is subject to customary operational and financial covenants including an initial
minimum collateral coverage ratio of 120%. The term loan principal is to be paid
in quarterly installments of $0.9 million through October 31, 2012, with the
balance of $354.2 million due on December 16, 2012.
The
availability under the revolver portion of the current and prior bank credit
facilities was as follows (in millions):
January
31,
2010
|
October
31,
2009
|
|||||||
Revolver
bank
loan
|
$ | 450.0 | $ | 800.0 | ||||
NFC
revolving loan
utilized
|
(391.0 | ) | (670.5 | ) | ||||
Mexican
sub-revolver loan
utilized
|
(20.0 | ) | (14.0 | ) | ||||
Total
availability
|
$ | 39.0 | $ | 115.5 |
New
Accounting Pronouncements
See Note
1 of Notes to Consolidated Financial Statements.
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
See Item
7A, Quantitative and
Qualitative Disclosures about Market Risk, of our Annual Report on Form
10-K for the year ended October 31, 2009. There have been no significant changes
in our exposure to market risk since October 31, 2009.
Item 4. Controls and Procedures
This
Report includes the certifications of our Chief Executive Officer and Chief
Financial Officer required by Rule 13a-14 of the Securities Exchange Act of
1934. This Item 4 includes information concerning the controls and control
evaluations referred to in those certifications.
Evaluation
of Disclosure Controls and Procedures
Disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the
Exchange Act) are designed to ensure that information required to be disclosed
in reports filed or submitted under the Exchange Act is
recorded, processed, summarized, and reported within the time periods
specified in the SEC rules and forms, and that such information is accumulated
and communicated to management, including our Chief Executive Officer and the
Chief Financial Officer, to allow timely decisions regarding required
disclosures.
In
connection with the preparation of this Report, our management, under the
supervision and with the participation of the Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of January 31, 2010.
Based on that evaluation, our Chief Executive Officer and Chief Financial
Officer have concluded that, as of the quarter ended January 31, 2010, our
disclosure controls and procedures were effective.
Changes
in Internal Control over Financial Reporting
There
were no material changes in our internal control over financial reporting
identified in connection with the evaluation required by Rules 13a-15 and 15d-15
that occurred during the quarter ended January 31, 2010 that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
Item
6. Exhibits
Number
|
Page
|
||
10
|
E-1
|
||
31.1
|
E-3
|
||
31.2
|
E-5
|
||
32
|
E-7
|
All
exhibits other than those indicated above are omitted because of the absence of
the conditions under which they are required or because the information called
for is shown in the consolidated financial statements and notes thereto in the
Quarterly Report on Form 10-Q for the period ended January 31,
2010.
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:
March 9, 2010
|
By: /s/
|
DAVID L. DERFELT
|
|
David
L. Derfelt
|
|||
V.P.,
and Controller
|
|||
(Principal
Accounting Officer)
|