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EX-99.1 - EXHIBIT 99.1 - NAVISTAR INTERNATIONAL CORPnavex9917312017.htm
EX-32.2 - EXHIBIT 32.2 - NAVISTAR INTERNATIONAL CORPnavex3227312017.htm
EX-32.1 - EXHIBIT 32.1 - NAVISTAR INTERNATIONAL CORPnavex3217312017.htm
EX-31.2 - EXHIBIT 31.2 - NAVISTAR INTERNATIONAL CORPnavex3127312017.htm
EX-31.1 - EXHIBIT 31.1 - NAVISTAR INTERNATIONAL CORPnavex3117312017.htm
EX-10.90 - EXHIBIT 10.90 - NAVISTAR INTERNATIONAL CORPnavex10907312017.htm
EX-10.89 - EXHIBIT 10.89 - NAVISTAR INTERNATIONAL CORPnavex10897312017.htm
EX-10 - EXHIBIT 10 - NAVISTAR INTERNATIONAL CORPnavex107312017.htm
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
___________________________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2017

OR
o
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 1-9618
___________________________________________________

  navistarlogo2015a12.jpg
NAVISTAR INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
_______________________________________________
Delaware
36-3359573
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
 
 
2701 Navistar Drive, Lisle, Illinois
60532
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code (331) 332-5000
______________________________________________________
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  þ    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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  þ    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)
Large accelerated filer
 
o
  
Accelerated filer
 
þ
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
(Do not check if a smaller reporting company)
 
Emerging growth company
 
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  o    No  þ
As of August 31, 2017, the number of shares outstanding of the registrant’s common stock was 98,183,165, net of treasury shares.
 
 
 
 
 



NAVISTAR INTERNATIONAL CORPORATION FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I—Financial Information
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 


2






Disclosure Regarding Forward-Looking Statements
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements only speak as of the date of this report and Navistar International Corporation assumes no obligation to update the information included in this report.
Such forward-looking statements include, but are not limited to, statements concerning:
estimates we have made in preparing our financial statements;
the implementation of our strategic alliance with Volkswagen Truck & Bus GmbH ("VW T&B");
our development of new products and technologies;
anticipated sales, volume, demand, markets for our products, and financial performance;
anticipated performance and benefits of our products and technologies;
our business strategies relating to, and our ability to meet, federal and state regulatory heavy-duty diesel emissions standards applicable to certain of our engines, including the timing and costs of compliance and consequences of noncompliance with such standards, as well as our ability to meet other federal, state and foreign regulatory requirements;
our business strategies and long-term goals, and activities to accomplish such strategies and goals;
our ability to implement our strategy focused on growing the core business, seeking new sources of revenue, driving operational excellence, leveraging the VW T&B alliance, investing in our people, and improving our financial performance, as well as the results we expect to achieve from the implementation of our strategy;
our expectations related to new product launches;
anticipated results from the realignment of our leadership and management structure;
anticipated benefits from acquisitions, strategic alliances, and joint ventures we complete;
our expectations and estimates relating to restructuring activities, including restructuring charges and timing of cash payments related thereto, and operational flexibility, savings, and efficiencies from such restructurings;
our expectations relating to debt refinancing activities;
our expectations relating to the potential effects of anticipated divestitures and closures of businesses;
our expectations relating to our cost-reduction actions and actions to reduce discretionary spending;
our expectations relating to our ability to service our long-term debt;
our expectations relating to our wholesale and retail finance receivables and revenues;
our expectations and estimates relating to our used truck inventory;
liabilities resulting from environmental, health and safety laws and regulations;
our anticipated capital expenditures;
our expectations relating to payments of taxes;
our expectations relating to warranty costs;
our expectations relating to interest expense;
our expectations relating to impairment of goodwill and other assets;
costs relating to litigation and similar matters;
estimates relating to pension plan contributions and unfunded pension and postretirement benefits;
trends relating to commodity prices; and
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.


3





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. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our results of operations and could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to differences in our future financial results include those discussed in Item 1A, Risk Factors, included within our Annual Report on Form 10-K for the fiscal year ended October 31, 2016 which was filed on December 20, 2016, as well as those factors discussed elsewhere in this report. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the United States ("U.S.") Securities and Exchange Commission ("SEC"). We make these filings available free of charge on our website (http://www.navistar.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Quarterly Report on Form 10-Q. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

4





PART I—Financial Information
Item 1.
Financial Statements
Navistar International Corporation and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions, except per share data)
2017
 
2016
 
2017

2016
Sales and revenues
 
 
 
 
 
 
 
Sales of manufactured products, net
$
2,178

 
$
2,052

 
$
5,870

 
$
5,946

Finance revenues
35

 
34

 
102

 
102

Sales and revenues, net
2,213

 
2,086

 
5,972

 
6,048

Costs and expenses
 
 
 
 
 
 
 
Costs of products sold
1,803

 
1,757

 
4,949

 
5,068

Restructuring charges
(13
)
 
5

 
(4
)
 
11

Asset impairment charges
6

 
12

 
13

 
17

Selling, general and administrative expenses
233

 
197

 
654

 
604

Engineering and product development costs
61

 
62

 
189

 
181

Interest expense
91

 
84

 
262

 
246

Other income, net
(8
)
 
(15
)
 
(7
)
 
(62
)
Total costs and expenses
2,173

 
2,102

 
6,056

 
6,065

Equity in income of non-consolidated affiliates
1

 
2

 
6

 
3

Income (loss) from continuing operations before income taxes
41

 
(14
)
 
(78
)
 
(14
)
Income tax expense

 
(14
)
 
(10
)
 
(25
)
Income (loss) from continuing operations
41

 
(28
)
 
(88
)
 
(39
)
Income from discontinued operations, net of tax
1

 

 
1

 

Net income (loss)
42

 
(28
)
 
(87
)

(39
)
Less: Net income attributable to non-controlling interests
5

 
6

 
18

 
24

Net income (loss) attributable to Navistar International Corporation
$
37

 
$
(34
)
 
$
(105
)
 
$
(63
)
 
 
 
 
 
 
 

Amounts attributable to Navistar International Corporation common shareholders:
 
 
 
 
 
 


Income (loss) from continuing operations, net of tax
$
36

 
$
(34
)
 
$
(106
)
 
$
(63
)
Income from discontinued operations, net of tax
1

 

 
1

 

Net income (loss)
$
37

 
$
(34
)
 
$
(105
)
 
$
(63
)
 
 
 
 
 
 
 
 
Income (loss) per share:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
0.37

 
$
(0.42
)
 
$
(1.16
)
 
$
(0.77
)
Discontinued operations
0.01

 

 
0.01

 

 
0.38

 
(0.42
)
 
(1.15
)
 
(0.77
)
 
 
 
 
 
 
 
 
Diluted:
 
 
 
 
 
 
 
Continuing operations
0.37

 
(0.42
)
 
(1.16
)
 
(0.77
)
Discontinued operations
0.01

 

 
0.01

 

 
0.38

 
(0.42
)
 
(1.15
)
 
(0.77
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
98.3

 
81.7

 
91.1

 
81.7

Diluted
98.6

 
81.7

 
91.1

 
81.7


See Notes to Consolidated Financial Statements
5



Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) 
(in millions)
Three Months Ended July 31,
 
Nine Months Ended July 31,
2017

2016
 
2017
 
2016
Net income (loss)
$
42

 
$
(28
)
 
$
(87
)
 
$
(39
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
42

 
(10
)
 
34

 
7

Defined benefit plans, net of tax
125

 
34

 
194

 
82

Total other comprehensive income
167

 
24

 
228

 
89

Comprehensive income (loss)
209

 
(4
)
 
141

 
50

Less: Net income attributable to non-controlling interests
5

 
6

 
18

 
24

Total comprehensive income (loss) attributable to Navistar International Corporation
$
204

 
$
(10
)
 
$
123

 
$
26


See Notes to Consolidated Financial Statements
6



Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
 
July 31,
2017
 
October 31,
2016
(in millions, except per share data)
 
 
 
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
911

 
$
804

Restricted cash and cash equivalents
81

 
64

Marketable securities
62

 
46

Trade and other receivables, net
311

 
276

Finance receivables, net
1,557

 
1,457

Inventories, net
979

 
944

Other current assets
181

 
168

Total current assets
4,082

 
3,759

Restricted cash
56

 
48

Trade and other receivables, net
18

 
16

Finance receivables, net
231

 
220

Investments in non-consolidated affiliates
55

 
53

Property and equipment (net of accumulated depreciation and amortization of $2,500 and $2,553, respectively)
1,333

 
1,241

Goodwill
38

 
38

Intangible assets (net of accumulated amortization of $133 and $124, respectively)
44

 
53

Deferred taxes, net
141

 
161

Other noncurrent assets
82

 
64

Total assets
$
6,080

 
$
5,653

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
965

 
$
907

Accounts payable
1,213

 
1,113

Other current liabilities
1,137

 
1,183

Total current liabilities
3,315

 
3,203

Long-term debt
4,255

 
3,997

Postretirement benefits liabilities
2,747

 
3,023

Other noncurrent liabilities
686

 
723

Total liabilities
11,003

 
10,946

Stockholders’ deficit
 
 
 
Series D convertible junior preference stock
2

 
2

Common stock (103.1 and 86.8 shares issued, respectively, and $0.10 par value per share and 220 shares authorized at both dates)
10

 
9

Additional paid-in capital
2,733

 
2,499

Accumulated deficit
(5,068
)
 
(4,963
)
Accumulated other comprehensive loss
(2,412
)
 
(2,640
)
Common stock held in treasury, at cost (4.9 and 5.2 shares, respectively)
(190
)
 
(205
)
Total stockholders’ deficit attributable to Navistar International Corporation
(4,925
)
 
(5,298
)
Stockholders’ equity attributable to non-controlling interests
2

 
5

Total stockholders’ deficit
(4,923
)
 
(5,293
)
Total liabilities and stockholders’ deficit
$
6,080

 
$
5,653


See Notes to Consolidated Financial Statements
7



Navistar International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended July 31,
(in millions)
2017
 
2016
Cash flows from operating activities
 
 
 
Net loss
$
(87
)
 
$
(39
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
113

 
111

Depreciation of equipment leased to others
56

 
53

Deferred taxes, including change in valuation allowance
(16
)
 

Asset impairment charges
13

 
17

Loss (gain) on sales of investments and businesses, net
(5
)
 
2

Amortization of debt issuance costs and discount
36

 
27

Stock-based compensation
19

 
9

Provision for doubtful accounts, net of recoveries
9

 
9

Equity in income of non-consolidated affiliates, net of dividends
1

 
5

Write-off of debt issuance cost and discount
4

 

Other non-cash operating activities
(21
)
 
(12
)
Changes in other assets and liabilities, exclusive of the effects of businesses disposed
(290
)
 
(196
)
Net cash used in operating activities
(168
)
 
(14
)
Cash flows from investing activities
 
 
 
Purchases of marketable securities
(619
)
 
(378
)
Sales of marketable securities
586

 
358

Maturities of marketable securities
17

 
39

Net change in restricted cash and cash equivalents
(25
)
 
(64
)
Capital expenditures
(93
)
 
(83
)
Purchases of equipment leased to others
(96
)
 
(94
)
Proceeds from sales of property and equipment
32

 
20

Investments in non-consolidated affiliates
(2
)
 
(1
)
Proceeds from sales of affiliates
6

 
36

Net cash used in investing activities
(194
)
 
(167
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
278

 
72

Principal payments on securitized debt
(326
)
 
(69
)
Net change in secured revolving credit facilities
119

 
26

Proceeds from issuance of non-securitized debt
491

 
163

Principal payments on non-securitized debt
(368
)
 
(235
)
Net change in notes and debt outstanding under revolving credit facilities
23

 
(151
)
Principal payments under financing arrangements and capital lease obligations
(1
)
 
(1
)
Debt issuance costs
(22
)
 
(12
)
Proceeds from financed lease obligations
49

 
17

Issuance of common stock
256

 

Stock issuance costs
(11
)
 

Proceeds from exercise of stock options
4

 

Dividends paid by subsidiaries to non-controlling interest
(21
)
 
(28
)
Other financing activities
(3
)
 
1

Net cash provided by (used in) financing activities
468

 
(217
)
Effect of exchange rate changes on cash and cash equivalents
1

 
33

Increase (decrease) in cash and cash equivalents
107

 
(365
)
Cash and cash equivalents at beginning of the period
804

 
912

Cash and cash equivalents at end of the period
$
911

 
$
547


See Notes to Consolidated Financial Statements
8



Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit
(Unaudited)
(in millions)
Series D
Convertible
Junior
Preference
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Common
Stock
Held in
Treasury,
at cost
 
Stockholders'
Equity
Attributable
to Non-controlling
Interests
 
Total
Balance as of October 31, 2016
$
2

 
$
9

 
$
2,499

 
$
(4,963
)
 
$
(2,640
)
 
$
(205
)
 
$
5

 
$
(5,293
)
Net income (loss)

 

 

 
(105
)
 

 

 
18

 
(87
)
Total other comprehensive income

 

 

 

 
228

 

 

 
228

Stock-based compensation

 

 
4

 

 

 

 

 
4

Stock ownership programs

 

 
(13
)
 

 

 
15

 

 
2

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(21
)
 
(21
)
Issuance of common stock

 
2

 
254

 

 

 

 

 
256

Stock issuance costs

 

 
(11
)
 

 

 

 

 
(11
)
Other

 
(1
)
 

 

 

 

 

 
(1
)
Balance as of July 31, 2017
$
2

 
$
10

 
$
2,733

 
$
(5,068
)
 
$
(2,412
)
 
$
(190
)
 
$
2

 
$
(4,923
)
Balance as of October 31, 2015
$
2

 
$
9

 
$
2,499

 
$
(4,866
)
 
$
(2,601
)
 
$
(210
)
 
$
7

 
$
(5,160
)
Net income (loss)

 

 

 
(63
)
 

 

 
24

 
(39
)
Total other comprehensive income

 

 

 

 
89

 

 

 
89

Stock-based compensation

 

 
3

 

 

 

 

 
3

Stock ownership programs

 

 
(4
)
 

 

 
4

 

 

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(28
)
 
(28
)
Acquisition of remaining ownership interest from non-controlling interest holder

 

 
1

 

 

 

 

 
1

Balance as of July 31, 2016
$
2

 
$
9

 
$
2,499

 
$
(4,929
)
 
$
(2,512
)
 
$
(206
)
 
$
3

 
$
(5,134
)


See Notes to Consolidated Financial Statements
9



Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Description of the Business
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer collectively to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Parts, Global Operations (collectively called "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively called "Financial Services operations"). These segments are discussed in Note 11, Segment Reporting.
Our fiscal year ends on October 31. As such, all references to 2017 and 2016 contained within this Quarterly Report on Form 10-Q relate to the fiscal year, unless otherwise indicated.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our Manufacturing operations, which include majority-owned dealers ("Dealcors"), and our Financial Services operations, including VIEs 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 United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, 2016, which should be read in conjunction with the disclosures therein. In our opinion, these interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.
Variable Interest Entities
We have an interest in several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our VIEs that we are the primary beneficiary because we have the power to direct the activities of the VIE that most significantly impact its economic performance and we have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of these VIEs. Assets of these entities are not readily available to satisfy claims against our general assets.
We are the primary beneficiary of our Blue Diamond Parts, LLC ("BDP") joint venture with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of $35 million and $51 million and liabilities of $13 million and $16 million as of July 31, 2017 and October 31, 2016, respectively, including $3 million and $6 million of cash and cash equivalents, at the respective dates, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have recourse to our general credit.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of $901 million and $865 million as of July 31, 2017 and October 31, 2016, respectively, and liabilities of $773 million and $722 million as of July 31, 2017 and October 31, 2016, respectively, all of which are involved in securitizations that are treated as asset-backed debt. In addition, our Consolidated Balance Sheets include secured assets of $242 million and $249 million as of July 31, 2017 and October 31, 2016, respectively, and corresponding liabilities of $156 million and $136 million, at the respective dates, which are related to other secured transactions that do not qualify for sale accounting treatment, and therefore, are treated as borrowings secured by operating and finance leases. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent that the related VIEs are required to make principal and interest payments. Investors in securitizations of these entities have no recourse to our general credit.

10




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

We also have an interest in other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.
We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Equity in income of non-consolidated affiliates includes our share of the net income of these entities.
Inventories
Inventories are valued at the lower of cost or market. Cost is principally determined using the first-in, first-out method. Our gross used truck inventory decreased to $280 million at July 31, 2017 from $410 million at October 31, 2016, offset by reserves of $174 million and $208 million, respectively.
In valuing our used truck inventory, we are required to make assumptions regarding the level of reserves required to value inventories at their net realizable value ("NRV"). Our judgments and estimates for used truck inventory are based on an analysis of current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. The NRV is subject to change based on numerous conditions, including age, specifications, mileage, timing of sales, market mix and current and forecasted pricing. While calculations are made after taking these factors into account, significant management judgment regarding expectations for future events is involved. Future events that could significantly influence our judgment and related estimates include general economic conditions in markets where our products are sold, actions of our competitors, and the ability to sell used trucks in a timely manner.
The following table presents the activity in our used truck reserve:
 
Nine Months Ended July 31,
(in millions)
2017
 
2016
Balance at beginning of period
$
208

 
$
110

Additions charged to expense(A)
102

 
124

Deductions/Other adjustments(B)
(136
)
 
(68
)
Balance at end of period
$
174

 
$
166

_________________________
(A)
Additions charged to expense reflect the increase of the reserve for inventory on hand. During the second quarter of 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and lower domestic pricing to enable higher sales velocity. In the third quarter of 2017 and 2016, we recorded a charge of $14 million and $40 million, respectively, in Costs of Products Sold in our Consolidated Statements of Operations.
(B)
Deductions/Other adjustments reflect reductions of the reserve primarily related to the sale of units to certain export markets and our currency translation adjustments.
Property and Equipment
We report land, buildings, leasehold improvements, machinery and equipment (including tooling and pattern equipment), furniture, fixtures, and equipment, and equipment leased to others at cost, net of depreciation. We initially record assets under capital lease obligations at the lower of their fair value or the present value of the aggregate future minimum lease payments. We depreciate our assets using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets.
We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the carrying value. During the third quarter of 2017, we identified a triggering event related to continued economic weakness in Brazil which resulted in the decline in forecasted results for the Brazilian asset group. The Brazilian asset group is included in the Global Operations segment. As a result, we estimated the recoverable amount of the asset group and determined that the sum of the undiscounted future cash flows exceeds the carrying value and the asset group was not impaired. Significant adverse changes to our business environment and future cash flows could cause us to record impairment charges in future periods, which could be material.
 

11




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity:
 
Nine Months Ended July 31,
(in millions)
2017
 
2016
Balance at beginning of period
$
818

 
$
994

Costs accrued and revenues deferred
137

 
141

Currency translation adjustment

 
2

Adjustments to pre-existing warranties(A)
(4
)
 
70

Payments and revenues recognized
(292
)
 
(339
)
Balance at end of period
659

 
868

Less: Current portion
340

 
423

Noncurrent accrued product warranty and deferred warranty revenue
$
319

 
$
445

_________________________
(A)
Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historic and expected trends. Our warranty liability is generally affected by component failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.
In the second quarter of 2016, we recorded a charge for adjustments to pre-existing warranties of $46 million or $0.56 per diluted share. The pre-existing charges primarily related to increases in both claim frequency and cost of repair across both the Medium Duty and Big Bore engine families. These charges increase the reserve for Navistar's standard warranty obligations as well as the loss positions related to our Big Bore extended service contract.
Extended Warranty Programs
The amount of deferred revenue related to extended warranty programs was $280 million and $325 million at July 31, 2017 and October 31, 2016, respectively. Revenue recognized under our extended warranty programs was $28 million and $109 million for the three and nine months ended July 31, 2017, respectively, and $37 million and $113 million for the three and nine months ended July 31, 2016, respectively.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, income tax contingency accruals and valuation allowances, product warranty accruals, used truck inventory valuations, asbestos and other product liability accruals, asset impairment charges, restructuring charges and litigation-related accruals. Actual results could differ from our estimates.
Concentration Risks
Our financial condition, results of operations, and cash flows are subject to concentration risks related to our significant unionized workforce. As of July 31, 2017, approximately 6,600, or 94%, of our hourly workers and approximately 900, or 17%, of our salaried workers, are represented by labor unions and are covered by collective bargaining agreements. Our future operations may be affected by changes in governmental procurement policies, tax policies, budget considerations, changing national defense requirements, and political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).








12




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

Recently Issued Accounting Standards
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, "Business Combinations" (Topic 805). This ASU provides a new framework for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This ASU creates an initial screening test (Step 1) that reduces the population of transactions that an entity needs to analyze to determine whether there is an input and substantive processes in the acquisition or disposal (Step 2). Fewer transactions are expected to involve acquiring or selling a business. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. Adoption will require a prospective transition. We do not expect the impact of this ASU to have a material effect on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows" (Topic 230). This ASU requires that a statement of cash flows explain the change during the period in the total of cash, and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. Adoption will require a retrospective transition. We do not expect the impact of this ASU to have a material effect on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes” (Topic 740). This ASU update requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. Adoption will require a modified retrospective transition. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The ASU sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, and certain off-balance sheet credit exposures. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Adoption will require a modified retrospective transition. Our effective date is November 1, 2020. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Our effective date for this ASU is November 1, 2019. Adoption will require a modified retrospective transition. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition." This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which postponed the effective date of ASU No. 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted on the original effective date for fiscal years beginning after December 15, 2016. Our effective date for this ASU is November 1, 2018. We are in the process of completing our initial assessment of the potential impact on our consolidated financial statements and have not concluded on our adoption methodology.
2. Restructurings and Impairments
Restructuring charges are recorded based on restructuring plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities.

13




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)


Restructuring Liability
The following tables summarize the activity in the restructuring liability, which excludes pension and other postretirement contractual termination benefits:
(in millions)
Balance at October 31, 2016
 
Additions
 
Payments
 
Adjustments
 
Balance at July 31, 2017
Employee termination charges
$
5

 
$
15

 
$
(11
)
 
$

 
$
9

Lease vacancy
1

 

 
(1
)
 

 

Other
1

 

 

 

 
1

Restructuring liability
$
7

 
$
15

 
$
(12
)
 
$

 
$
10

(in millions)
Balance at
October 31, 2015
 
Additions
 
Payments
 
Adjustments
 
Balance at July 31, 2016
Employee termination charges
$
62

 
$
4

 
$
(58
)
 
$
2

 
$
10

Lease vacancy
5

 

 
(4
)
 

 
1

Other
1

 

 

 

 
1

Restructuring liability
$
68

 
$
4

 
$
(62
)
 
$
2

 
$
12

North American Manufacturing Restructuring Activities
We continue to focus on our core Truck and Parts businesses and evaluate our portfolio of assets to validate their strategic and financial fit. This allows us to close or divest non-strategic businesses, and identify opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure. For those areas that fall outside our strategic businesses, we are evaluating alternatives which could result in additional restructuring and other related charges in the future, including but not limited to: (i) impairments, (ii) costs for employee and contractor termination and other related benefits, and (iii) charges for pension and other postretirement contractual benefits and curtailments. These charges could be significant.
Chatham restructuring activities
In the third quarter of 2011, we committed to close our Chatham, Ontario heavy truck plant, which had been idled since June 2009. At that time, we recognized curtailment and contractual termination charges related to postretirement plans. Based on a ruling regarding pension benefits received from the Financial Services Tribunal in Ontario, Canada, in the third quarter of 2014, we recognized an additional charge of $14 million related to the 2011 closure of the Chatham, Ontario plant. Unsuccessful efforts to appeal the ruling in the Ontario court system ended in December 2015. On April 25, 2016, we filed a qualified partial wind-up report for approval by the Financial Services Commission of Ontario ("FSCO"). On January 12, 2017, FSCO issued its approval of the partial wind-up report. On February 27, 2017, we finalized the resolution of statutory severance pay for former employees related to the closure of our Chatham, Ontario plant, resulting in a charge of $6 million in the first quarter of 2017. During the third quarter of 2017, we finalized the Chatham closure agreement. This resulted in the release of $66 million in other post-employment benefit ("OPEB") liabilities. In addition, a pension settlement accounting charge of $23 million was recorded as a result of lump-sum payments made to certain pension plan participants. These charges and benefits were recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations.
Melrose Park Facility restructuring activities
In the third quarter of 2017, we committed to a plan to cease engine production at our plant in Melrose Park, Illinois. (“Melrose Park Facility”) in the second quarter of fiscal year 2018. As a result, in the third quarter of 2017, we recognized charges of $41 million in our Truck segment. The charges include $23 million related to pension and OPEB liabilities and $8 million for severance pay recorded in Restructuring charges in our Consolidated Statements of Operations. We also recorded $10 million of inventory reserves and other related charges Costs of products sold in our Consolidated Statements of Operations.
See Note 7, Postretirement benefits for further discussion.
Asset Impairments
In the three and nine months ended July 31, 2017, we concluded that we had a triggering event in connection with the sale of our fabrication business in Conway, Arkansas requiring the impairment of certain assets. As a result, we recorded charges of $5 million in our Truck segment. In August 2017, we completed the sale of the business.

14




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)


In the three and nine months ended July 31, 2017, we concluded that we had triggering events related to certain assets under operating leases. As a result, we recorded charges of $1 million and $8 million, respectively, in our Truck segment.
In the three and nine months ended July 31, 2016, we concluded that we had triggering events related to certain long-lived assets. As a result, we recorded impairment charges of $11 million and $16 million, respectively, in our Truck segment.
In the nine months ended July 31, 2016, we concluded that we had a triggering event in connection with the potential sale of Pure Power Technologies, LLC ("PPT"), a components business focused on air and fuel systems, requiring the impairment of certain assets. As a result, we recorded charges of $3 million in our Truck segment. In February 2016, we completed the sale of PPT.
These charges were recorded in Asset impairment charges in our Consolidated Statements of Operations.
See Note 9, Fair Value Measurements, for information on the valuation of impaired operating leases and other assets.
3. Finance Receivables
Finance receivables are receivables of our Financial Services operations. Finance receivables generally consist of wholesale notes and accounts, as well as retail notes, finance leases and accounts. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts. Total assets of our Financial Services operations net of intercompany balances were $2.2 billion and $2.1 billion as of July 31, 2017 and October 31, 2016, respectively. Included in total assets of our Financial Services operations were finance receivables of $1.8 billion and $1.7 billion as of July 31, 2017 and October 31, 2016, respectively. We have two portfolio segments of finance receivables that we distinguish based on the type of customer and nature of the financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.
Our Finance receivables, net in our Consolidated Balance Sheets consist of the following:
(in millions)
July 31, 2017
 
October 31, 2016
Retail portfolio
$
520

 
$
499

Wholesale portfolio
1,291

 
1,199

Total finance receivables
1,811

 
1,698

Less: Allowance for doubtful accounts
23

 
21

Total finance receivables, net
1,788

 
1,677

Less: Current portion, net(A)
1,557

 
1,457

Noncurrent portion, net
$
231

 
$
220

_________________________
(A)
The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash flows because of prepayments, extensions, delinquencies, credit losses, and renewals.
Securitizations
Our Financial Services operations transfer wholesale notes, retail accounts receivable, finance leases, and operating leases to special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities issued. In addition to servicing receivables, our continued involvement in the SPEs may include an economic interest in the transferred receivables and, in some cases, managing exposure to interest rate changes on the securities using interest rate swaps or interest rate caps. There were no transfers of finance receivables that qualified for sale accounting treatment as of July 31, 2017 and October 31, 2016, and as a result, the transferred finance receivables are included in our Consolidated Balance Sheets and the related interest earned is included in Finance revenues.
We transfer eligible finance receivables into wholesale note owner trusts in order to issue asset-backed securities. These trusts are VIEs of which we are determined to be the primary beneficiary and, therefore, the assets and liabilities of the trusts are included in our Consolidated Balance Sheets. The outstanding balance of finance receivables transferred into these VIEs was $820 million and $829 million as of July 31, 2017 and October 31, 2016, respectively. Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $122 million and $108 million as of July 31, 2017 and October 31, 2016, respectively. For more information on assets and liabilities of consolidated VIEs and other securitizations accounted for as secured borrowings by our Financial Services segment, see Note 1, Summary of Significant Accounting Policies.

15




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

Finance Revenues
The following table presents the components of our Finance revenues in our Consolidated Statements of Operations:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions)
2017

2016
 
2017
 
2016
Retail notes and finance leases revenue
$
11

 
$
9

 
$
30

 
$
28

Wholesale notes interest
28

 
29

 
75

 
81

Operating lease revenue
17

 
17

 
50

 
49

Retail and wholesale accounts interest
6

 
5

 
17

 
19

Gross finance revenues
62

 
60

 
172

 
177

Less: Intercompany revenues
27

 
26

 
70

 
75

Finance revenues
$
35

 
$
34

 
$
102

 
$
102

4. Allowance for Doubtful Accounts
Our two finance receivables portfolio segments, retail and wholesale, each consist of one class of receivable based on: (i) initial measurement attributes of the receivables, and (ii) the assessment and monitoring of risk and performance of the receivables. For more information, see Note 3, Finance Receivables.
The following tables present the activity related to our allowance for doubtful accounts for our retail portfolio segment, wholesale portfolio segment, and trade and other receivables:
 
Three Months Ended July 31, 2017
 
Three Months Ended July 31, 2016
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
21

 
$
2

 
$
28

 
$
51

 
$
21

 
$
4

 
$
26

 
$
51

Provision for doubtful accounts, net of recoveries
(1
)
 
1

 
1

 
1

 
2

 
(1
)
 

 
1

Charge-off of accounts
(1
)
 

 

 
(1
)
 
(3
)
 

 
(1
)
 
(4
)
Other(A)
1

 

 

 
1

 
(2
)
 

 
2

 

Allowance for doubtful accounts, at end of period
$
20

 
$
3

 
$
29

 
$
52

 
$
18

 
$
3

 
$
27

 
$
48

 
Nine Months Ended July 31, 2017
 
Nine Months Ended July 31, 2016
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
19

 
$
2

 
$
28

 
$
49

 
$
22

 
$
4

 
$
22

 
$
48

Provision for doubtful accounts, net of recoveries
5

 
1

 
2

 
8

 
5

 
(1
)
 
4

 
8

Charge-off of accounts
(5
)
 

 
(1
)
 
(6
)
 
(7
)
 

 
(2
)
 
(9
)
Other(A)
1

 

 

 
1

 
(2
)
 

 
3

 
1

Allowance for doubtful accounts, at end of period
$
20

 
$
3

 
$
29

 
$
52

 
$
18

 
$
3

 
$
27

 
$
48

____________________

(A)
Amounts include impact from currency translation.
The accrual of interest income is discontinued on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. In certain cases, we continue to collect payments on our impaired finance receivables.

16




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

The following table presents information regarding impaired finance receivables:
 
July 31, 2017
 
October 31, 2016
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Impaired finance receivables with specific loss reserves
$
20

 
$

 
$
20

 
$
15

 
$

 
$
15

Impaired finance receivables without specific loss reserves

 

 

 

 

 

Specific loss reserves on impaired finance receivables
9

 

 
9

 
8

 

 
8

Finance receivables on non-accrual status
20

 

 
20

 
15

 

 
15

The average balances of the impaired finance receivables in the retail portfolio were $19 million and $18 million during the nine months ended July 31, 2017 and 2016, respectively. See Note 9, Fair Value Measurements, for information on the valuation of impaired finance receivables.
We use the aging of our receivables as well as other inputs when assessing credit quality. The following table presents the aging analysis for finance receivables:
 
July 31, 2017
 
October 31, 2016
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Current, and up to 30 days past due
$
465

 
$
1,290

 
$
1,755

 
$
449

 
$
1,198

 
$
1,647

30-90 days past due
39

 
1

 
40

 
37

 

 
37

Over 90 days past due
16

 

 
16

 
13

 
1

 
14

Total finance receivables
$
520

 
$
1,291

 
$
1,811

 
$
499

 
$
1,199

 
$
1,698

5. Inventories
The following table presents the components of Inventories in our Consolidated Balance Sheets:
(in millions)
July 31,
2017
 
October 31,
2016
Finished products
$
631

 
$
678

Work in process
66

 
46

Raw materials
282

 
220

Total inventories, net
$
979

 
$
944


17




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

6. Debt
The following tables present the components of Notes payable and current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheets:
(in millions)
July 31, 2017

October 31, 2016
Manufacturing operations
 
 
 
Senior Secured Term Loan Credit Facility, as amended, due 2020, net of unamortized discount of $9 and $14, respectively, and unamortized debt issuance costs of $11 and $7, respectively
$
1,001

 
$
1,009

8.25% Senior Notes, due 2022 net of unamortized discount of $14 and $15, respectively, and unamortized debt issuance costs of $14 and $12, respectively
1,422

 
1,173

4.50% Senior Subordinated Convertible Notes, due 2018, net of unamortized discount of $6 and $10, respectively, and unamortized debt issuance costs of $1 at both dates
193

 
189

4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $17 and $24, respectively, and unamortized debt issuance costs of $3 and $4, respectively
391

 
383

Financing arrangements and capital lease obligations
36

 
42

Loan Agreement related to 6.50% Tax Exempt Bonds, due 2040, net of unamortized debt issuance costs of $5 at both dates
220

 
220

Financed lease obligations
127

 
52

Other
34

 
28

Total Manufacturing operations debt
3,424

 
3,096

Less: Current portion
114

 
71

Net long-term Manufacturing operations debt
$
3,310

 
$
3,025

(in millions)
July 31, 2017
 
October 31, 2016
Financial Services operations
 
 
 
Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2022, net of unamortized debt issuance costs of $6 at both dates
$
822

 
$
753

Bank credit facilities, at fixed and variable rates, due dates from 2017 through 2023, net of unamortized debt issuance costs of $2 and $3, respectively
774

 
861

Commercial paper, at variable rates, program matures in 2022
100

 
96

Borrowings secured by operating and finance leases, at various rates, due serially through 2022
100

 
98

Total Financial Services operations debt
1,796

 
1,808

Less: Current portion
851

 
836

Net long-term Financial Services operations debt
$
945

 
$
972

Manufacturing Operations
Senior Secured Term Loan Credit Facility
In February 2017, the Senior Secured Term Loan Credit Facility ("Term Loan") was amended, pursuant to which the Company's remaining approximately $1.0 billion loan was repriced and provisions regarding European Union bail-in legislation were inserted. The amendment reduces the interest rate applicable to the outstanding loan by 1.50%. Under the terms of the amendment, the interest rate on the outstanding loan is based, at our option, on an adjusted Eurodollar Rate, plus a margin of 4.00%, or a Base Rate, plus a margin of 3.00%. In connection with the amendment, we paid a consent fee equal to 0.25% of the aggregate principal amount, a call protection fee equal to 1.00% of the aggregate principal amount, and certain other fees. During the second quarter of 2017, we recorded a charge of $4 million related to certain third party fees and debt issuance costs associated with the repricing of our Term Loan. The remaining debt issuance costs were recorded as a direct deduction from the carrying amount of the Term Loan and will be amortized through Interest expense over the remaining life of the Term Loan.




18




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

Senior Notes
In October 2009, we completed the sale of $1.0 billion aggregate principal amount of our 8.25% Senior Notes due 2022 ("Senior Notes"). In March 2013, we completed the sale of an additional $300 million aggregate principal amount of Senior Notes. In January 2017, we issued an additional $250 million aggregate principal amount of Senior Notes. Interest related to the Senior Notes is payable on May 1 and November 1 of each year until the maturity date of November 1, 2021. The Senior Notes are senior unsecured obligations of the Company.
We received net proceeds of approximately $250 million from the January 2017 issuance of additional Senior Notes, which included accrued interest of $4 million, offset by underwriter fees of $4 million. The debt issuance costs were recorded as a direct deduction from the carrying amount of the Senior Notes and will be amortized through Interest expense over the remaining life of the Senior Notes. As a result of the transaction, the effective interest rate of the Senior Notes is now 8.5%. The proceeds from the January 2017 sale of additional Senior Notes are being used for general corporate purposes, including working capital and capital expenditures.
Amended and Restated Asset-Based Credit Facility
In August 2017, we amended and extended our Amended and Restated Asset-Based Credit Facility which was originally due in May 2018. The 2017 amendment extended the maturity date to August 2022, subject to a springing maturity based upon the maturity of our Term Loan and Senior Notes, and reduced the revolving facility from $175 million to a maximum of $125 million. Our borrowing capacity under the amended facility was previously subject to a $35 million liquidity block and is now subject to a $13 million liquidity block, less outstanding standby letters of credit issued under this facility, and is impacted by inventory levels at certain aftermarket parts inventory locations. As of July 31, 2017, we had no borrowings, and we have limited availability to borrow under the Amended and Restated Asset-Based Credit Facility. However, we maintain capacity under our various debt arrangements to incur incremental debt.
Financial Services Operations
Asset-backed Debt
In November 2016, the maturity date of the variable funding notes ("VFN") facility was extended from May 2017 to November 2017, and the maximum capacity was reduced from $500 million to $450 million. In May 2017, the VFN was extended to May 2018, and the maximum capacity was reduced to $425 million. The VFN facility is secured by assets of the wholesale note owner trust.
In May 2017, Truck Retail Accounts Corporation ("TRAC"), one of our consolidated SPEs, renewed its $100 million revolving facility to April 2018. Borrowings under this facility are secured by eligible retail accounts receivable.
In June 2017, Navistar Financial Securities Corporation ("NFSC") issued $250 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $250 million of investor notes that matured in June 2017.
Bank Credit Facilities
In May 2016, NFC amended and extended its 2011 bank credit facility which was originally due in December 2016. The 2016 amendment extended the maturity date to June 2018 and initially reduced the revolving portion of the facility from $500 million to $400 million. In December 2016, and in accordance with the amendment, the revolving portion of the facility was reduced to a maximum of $275 million, the term loan portion of the facility was paid down to $82 million, and the quarterly principal payments were reduced from $9 million to $2 million. The borrowings on the revolving portion of the facility totaled $274 million as of July 31, 2017. The balance of the term loan portion of the facility was $78 million as of July 31, 2017. The amendment allows NFC to increase revolving or term loan commitments, subject to obtaining commitments from existing or new lenders to provide additional or increased revolving commitments and/or additional term loans, to permit a maximum total facility size of $700 million after giving effect to any such increase and without taking into account the non-extended loans and commitments.
Commercial Paper
Effective February 2017, our Mexican financial services operation entered into a five-year commercial paper program for up to ₱1.8 billion (the equivalent of approximately US$102 million at July 31, 2017). This program replaced the program that matured in December 2016.

19




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

7. Postretirement Benefits
Defined Benefit Plans
We provide postretirement benefits to a substantial portion of our employees and retirees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, surviving spouses and dependents.
Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the three and nine months ended July 31, 2017, we contributed $21 million and $67 million, respectively, and for the three and nine months ended July 31, 2016, $20 million and $60 million, respectively, to our pension plans to meet regulatory funding requirements. We expect to contribute approximately $46 million to our pension plans during the remainder of 2017.
We primarily fund OPEB obligations, such as retiree medical, in accordance with the 1993 Settlement Agreement (the "1993 Settlement Agreement"), which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of our then applicable retiree health care and life insurance benefits. Contributions for the three and nine months ended July 31, 2017, and 2016, as well as anticipated contributions for the remainder of 2017, are not material.
Components of Net Periodic Benefit Expense
Net periodic benefit expense included in our Consolidated Statements of Operations, and other amounts recognized in our Consolidated Statements of Stockholders' Deficit, for the periods ended July 31 is comprised of the following:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
Pension Benefits
 
Health and Life
Insurance Benefits
 
Pension Benefits
 
Health and Life
Insurance Benefits
(in millions)
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost for benefits earned during the period
$
2

 
$
2

 
$
1

 
$
1

 
$
6

 
$
7

 
$
4

 
$
4

Interest on obligation
27

 
29

 
11

 
14

 
80

 
88

 
35

 
44

Amortization of cumulative loss
30

 
26

 
6

 
8

 
89

 
78

 
17

 
24

Amortization of prior service benefit

 

 

 

 

 

 

 
(1
)
Settlements
23

 

 

 

 
23

 

 

 

Contractual termination benefits
9

 
1

 
4

 
4

 
10

 
3

 
4

 
4

Curtailments and other

 

 
(58
)
 

 

 

 
(58
)
 

Premiums on pension insurance
4

 
4

 

 

 
12

 
12

 

 

Expected return on assets
(40
)
 
(41
)
 
(5
)
 
(6
)
 
(119
)
 
(125
)
 
(17
)
 
(19
)
Net periodic benefit expense
$
55

 
$
21

 
$
(41
)
 
$
21

 
$
101

 
$
63

 
$
(15
)
 
$
56

In 2016, we changed the approach utilized to estimate the service cost and interest cost components of net periodic benefit cost for our major defined benefit postretirement plans. Historically, we estimated the service cost and interest cost components using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. In 2016, we began using a spot rate approach for the estimation of service and interest cost for our major plans by applying specific spot rates along the yield curve to the relevant projected cash flows to provide a better estimate of service and interest costs.
In April 2016, we filed a qualified partial wind-up report for approval by FSCO related to the 2011 closure of our Chatham, Ontario plant. FSCO provided formal approval in January 2017. As a result of an ongoing administration review ordered in conjunction with the partial wind-up, we recognized $1 million of contractual termination charges in the first quarter of 2017. During the third quarter of 2017, we finalized the Chatham closure agreement. This resulted in the release of $66 million in other postemployment benefit ("OPEB") liabilities. In addition, a pension settlement accounting charge of $23 million was recorded as a result of lump-sum payments made to certain pension plan participants. These charges and benefits were recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 2, Restructurings and Impairments for further discussion. As a result of the pension and OPEB plan remeasurements in connection with the finalization of the Chatham closure agreement, net actuarial gains of $21 million were recognized as a component of Accumulated other comprehensive loss in the third quarter of 2017.


20




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

In the third quarter of 2017, we committed to a plan to cease engine production at our Melrose Park Facility in the second quarter of fiscal year 2018. As a result, in the third quarter of 2017, we recognized $9 million of pension and $4 million of OPEB contractual termination benefits charges and $10 million of OPEB curtailment charges. These charges were recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 2, Restructurings and Impairments for further discussion. A pension curtailment gain of $2 million and net actuarial gains of $91 million resulting from pension and OPEB remeasurements in connection with our Melrose Park Facility announcement were recognized as a component of Accumulated other comprehensive loss in the third quarter of 2017.
Also, in the third quarter of 2017, in accordance with the intraperiod tax allocation rules, we recorded a net benefit of $35 million related to domestic continuing operations in Income tax expense in our Consolidated Statements of Operations, and an offsetting reduction in Other comprehensive income due to the remeasurement of certain pension and OPEB plans.
Defined Contribution Plans and Other Contractual Arrangements
Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. We deposit the matching contribution annually. Many participants covered by the plans receive annual Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $7 million and $22 million in the three and nine months ended July 31, 2017, and 2016, respectively.
In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees pursuant to a certain Retiree Supplemental Benefit Program under the 1993 Settlement Agreement ("Supplemental Benefit Program"), is not part of our consolidated financial statements.
Our contingent profit sharing obligations under a certain Supplemental Benefit Trust Profit Sharing Plan ("Supplemental Benefit Trust Profit Sharing Plan") will continue until certain funding targets defined by the 1993 Settlement Agreement are met. We have recorded no profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits. For more information on pending arbitration regarding the Supplemental Benefit Trust Profit Sharing Plan, see Note 10, Commitments and Contingencies.
8. Income Taxes
We compute, on a quarterly basis, an estimated annual effective tax rate considering ordinary income and related income tax expense. For all periods presented, U.S. and certain foreign results are excluded from ordinary income due to ordinary losses for which no benefit can be recognized. Ordinary income refers to income (loss) before income tax expense excluding significant unusual or infrequently occurring items. The tax effect of a significant unusual or infrequently occurring item is recorded in the interim period in which the item occurs. Items included in income tax expense in the periods in which they occur include the tax effects of cumulative changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment regarding the ability to realize deferred tax assets in future years. In the third quarter of 2017, in accordance with the intraperiod tax allocation rules, we recorded a net benefit of $35 million in Income tax expense related to domestic continuing operations, and an offsetting reduction in Other comprehensive income, which resulted from gains due to the remeasurement of certain pension and OPEB plans. The net benefit was offset by an increase in foreign taxes in Canada and Mexico. For more information, see Note 7, Postretirement Benefits.
We have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. We continue to maintain a valuation allowance on the majority of our U.S. deferred tax assets as well as certain foreign deferred tax assets that we believe, on a more-likely-than-not basis, will not be realized based on current forecasted results. For all remaining deferred tax assets, while we believe that it is more likely than not that they will be realized, we believe that it is reasonably possible that additional deferred tax asset valuation allowances could be required in the next twelve months.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of July 31, 2017, the amount of liability for uncertain tax positions was $49 million. The liability at July 31, 2017 has a recorded offsetting tax benefit associated with various issues that total $14 million. If the unrecognized tax benefits are recognized, all would impact our effective tax rate. However, to the extent

21




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

we continue to maintain a full valuation allowance against certain deferred tax assets, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carryforward, which would be offset by a full valuation allowance.
We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. For the three and nine months ended July 31, 2017, total interest and penalties related to our uncertain tax positions resulted in an income tax expense of less than $1 million, and $1 million, respectively.
We have open tax years back to 2001 with various significant taxing jurisdictions including the U.S., Canada, Mexico, and Brazil. In connection with the examination 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, or the sustainability of tax credits to reduce income taxes payable. We believe we have sufficient accruals for our contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.
9. Fair Value Measurements
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:
Level 1—based upon quoted prices for identical instruments in active markets,
Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
Level 3—based upon one or more significant unobservable inputs.
The following section describes key inputs and assumptions in our valuation methodologies:
Cash Equivalents and Restricted Cash Equivalents—We classify highly liquid investments, with an original maturity of 90 days or less, including U.S. Treasury bills, federal agency securities, and commercial paper, as cash equivalents. The carrying amounts of cash and cash equivalents and restricted cash approximate fair value because of the short-term maturity and highly liquid nature of these instruments.
Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and primarily include investments in U.S. government securities and commercial paper with an original maturity greater than 90 days. We use quoted prices from active markets to determine fair value.
Derivative Assets and Liabilities—We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs. In certain cases, market data is not available and we estimate inputs such as in situations where trading in a particular commodity is not active. Measurements based upon these unobservable inputs are classified within Level 3.
Guarantees—We provide certain guarantees of payments and residual values, to which losses are generally capped, to specific counterparties. The fair value of these guarantees includes a contingent component and a non-contingent component that are based upon internally developed models using unobservable inputs. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 10, Commitments and Contingencies.
Impaired Finance Receivables and Impaired Assets Under Operating Leases— Fair values of the underlying collateral are determined by current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. For more information regarding impaired finance receivables, see Note 4, Allowance for Doubtful Accounts, and for more information regarding impaired assets under operating leases, see Note 2, Restructuring and Impairments.
Impaired Property, Plant and Equipment— We measure the fair value by discounting future cash flows expected to be received from the operation of, or disposition of, the asset or asset group that has been determined to be impaired. For more information regarding the impairment of property, plant and equipment, see Note 2, Restructuring and Impairments.

22




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

The following table presents the financial instruments measured at fair value on a recurring basis:
 
As of July 31, 2017
 
As of October 31, 2016
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Level 1
 
Level 2
 
Level 3
 
Total
Assets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Marketable securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury bills
$
3

 
$

 
$

 
$
3

 
$
6

 
$

 
$

 
$
6

Other
59

 

 

 
59

 
40

 

 

 
40

Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Commodity forward contracts(A)

 
2

 

 
2

 

 
2

 

 
2

Foreign currency contracts(A)

 
1

 

 
1

 

 

 

 

Interest rate caps(B)

 
1

 

 
1

 

 
1

 

 
1

Total assets
$
62

 
$
4

 
$

 
$
66

 
$
46

 
$
3

 
$

 
$
49

Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Derivative financial instruments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency contracts(C)
$

 
$
9

 
$

 
$
9

 
$

 
$

 
$

 
$

Guarantees

 

 
19

 
19

 

 

 
23

 
23

Total liabilities
$

 
$
9

 
$
19

 
$
28

 
$

 
$

 
$
23

 
$
23

_________________________
(A)
The asset value of commodity forward contracts and foreign currency contracts is included in Other current assets in the accompanying Consolidated Balance Sheets.
(B)
The asset value of interest rate caps is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.
(C)
The liability value of foreign currency contracts is included in Other current liabilities in the accompanying Consolidated Balance Sheets.
The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions)
2017
 
2016
 
2017
 
2016
Guarantees, at beginning of period
$
(19
)
 
$
(19
)
 
$
(23
)
 
$
(10
)
Transfers out of Level 3

 

 

 

Net terminations (issuances)

 
(5
)
 
1

 
(16
)
Settlements

 
1

 
3

 
3

Guarantees, at end of period
$
(19
)
 
$
(23
)
 
$
(19
)
 
$
(23
)
In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash, and Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables generally consist of retail and wholesale accounts and retail and wholesale notes. The carrying amounts of Trade and other receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest rate terms. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below.
The fair values of our retail notes are estimated by discounting expected cash flows at estimated current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.
The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.5% Tax Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax Exempt Bonds is classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.


23




Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)

The following tables present the carrying values and estimated fair values of financial instruments:
 
As of July 31, 2017
 
Estimated Fair Value
 
Carrying Value
(in millions)
Level 1
 
Level 2
 
Level 3
 
Total
 
Assets