PAGE 1
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
( X ) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended October 31, 1993
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-5236
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
-------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1264810
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611
- -------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 836-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------------------------------ -----------------------
Sinking fund debentures: 8-5/8%, due 1995 New York Stock Exchange
Sinking fund debentures: 6-1/4%, due 1998 New York Stock Exchange
Sinking fund debentures: 9%, due 2004 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
----
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months and (2) has been
subject to such filing requirements for the past 90 days: Yes X No
--- ----
As of January 20, 1994 the number of shares outstanding of the
registrant's capital stock was 1,000.
Document Incorporated by Reference
----------------------------------
Navistar Financial Corporation 1993 Annual Report on Form 10-K (Part IV)
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL
CORPORATION AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION J(1)
(a) AND (b) OF FORM 10-K AND IS, THEREFORE, FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.
<PAGE>
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NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
FORM 10-K
Year Ended October 31, 1993
INDEX
10-K Page
---------
PART I
Item 1. Business .................................... 3
Item 2. Properties .................................. 13
Item 3. Legal Proceedings ........................... 13
Item 4. Submission of Matters to a Vote
of Security Holders (A) ................... 16
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters ........... 16
Item 6. Selected Financial Data (A) ................. 16
Item 7. Management's Discussion and Analysis
of Results of Operations
and Financial Condition ................... 17
Item 8. Financial Statements and Supplementary Data . 28
Independent Auditors' Report ................ 62
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .... 64
PART III
Item 10. Directors and Executive Officers
of the Registrant (A) ..................... 64
Item 11. Executive Compensation (A) .................. 64
Item 12. Security Ownership of Certain Beneficial
Owners and Management (A) ................. 64
Item 13. Certain Relationships
and Related Transactions (A) ............... 64
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K ................... 65
SIGNATURES
Principal Accounting Officer ......................... 67
Directors ............................................ 68
POWER OF ATTORNEY ...................................... 68
SCHEDULES .............................................. F-1
EXHIBITS ............................................... E-1
(A) Omitted or amended as the registrant is a wholly-owned
subsidiary of Navistar International Corporation and meets the
conditions set forth in General Instructions J(1) (a) and (b)
of Form 10-K and is, therefore, filing this Form with the
reduced disclosure format.
<PAGE>
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PART I
Item 1. BUSINESS
Navistar International Transportation Corp., hereinafter referred to
as "the Company" and "Transportation," is the wholly-owned subsidiary of a
holding company, Navistar International Corporation, hereinafter referred
to as "Navistar" and the "Parent Company."
Transportation, operates in one principal business segment, the
manufacture and marketing of medium and heavy diesel trucks, including
school bus chassis, mid-range diesel engines and service parts in North
America and in selected export markets. Transportation is the industry
market share leader in the North American combined medium and heavy truck
market, offering a full line of diesel-powered products in the common
carrier, private carrier, government/service, leasing, construction,
energy/petroleum and student transportation markets. Transportation also
produces mid-range diesel engines for use in its medium trucks and for
sale to original equipment manufacturers. Transportation markets its
products through an extensive distribution network which includes 950
North American dealer and distribution outlets. Service and customer
support are also supplied at these outlets. As a further extension of its
business, Transportation provides financing and insurance for its dealers,
distributors and retail customers through its wholly-owned subsidiary,
Navistar Financial Corporation, referred to as "Navistar Financial". See
"Important Supporting Operations".
THE MEDIUM AND HEAVY TRUCK INDUSTRY
Transportation competes in the North American market for medium and
heavy trucks, including school bus chassis, which spans weight classes 5
and above (16,000 lbs. and over). This market is subject to considerable
volatility as it moves in response to cycles in the overall business
environment and is particularly sensitive to the industrial sector which
generates a significant portion of the freight tonnage hauled. Government
regulation has impacted and will continue to impact trucking operations
and efficiency and the specifications of equipment.
The following table shows retail deliveries in the combined United
States and Canadian markets for the five years ended October 31, 1993, in
thousands of units.
YEARS ENDED OCTOBER 31,
-----------------------
1993 1992 1991 1990 1989
----- ----- ----- ----- -----
Medium trucks
and school bus chassis .. 122.5 118.3 120.1 149.8 162.8
Heavy trucks .............. 166.4 125.2 109.0 139.0 172.2
----- ----- ----- ----- -----
Total ..................... 288.9 243.5 229.1 288.8 335.0
===== ===== ===== ===== =====
Source: Based upon monthly data by the American Automobile
Manufacturers Associations (AAMA) in the United States and Canada and
other sources.
<PAGE>
PAGE 4
The North American truck market is highly competitive. Major
domestic competitors include PACCAR, Ford and General Motors, as well as
foreign-controlled manufacturers, such as Freightliner, Mack and Volvo GM.
In addition, manufacturers from Japan (Hino, Isuzu, Nissan, Mitsubishi)
are attempting to increase their North American sales levels. The
intensity of this competitiveness, which is expected to continue, results
in price discounting and margin pressures throughout the industry. In
addition to the influence of price, market position is driven by product
quality, engineering, styling and utility and a comprehensive distribution
system.
TRANSPORTATION MARKET SHARE
Transportation delivered 79,800 medium and heavy trucks in North
America in fiscal 1993, compared to a total of 69,300 for fiscal 1992, an
increase of 15.1% in overall units. Transportation's combined share of
the medium and heavy truck market in 1993 was 27.6%; continuing its
leadership in combined market share in North America over the last 13
fiscal years.
PRODUCTS AND SERVICES
The following table illustrates the percentage of Transportation's
sales by class of product by dollar amount:
YEARS ENDED OCTOBER 31,
--------------------------
PRODUCT CLASS 1993 1992 1991
- ------------- ---- ---- ----
Medium trucks
and school bus chassis ........ 35% 40% 44%
Heavy trucks .................... 40 34 31
Service parts ................... 14 16 16
Engines ......................... 11 10 9
---- ---- ----
Total ......................... 100% 100% 100%
==== ==== ====
Transportation offers a full line of medium and heavy trucks, with
the objective of serving the customer better and more effectively by
addressing requirements for increased performance and value.
Transportation has made continuing improvements in its heavy truck image
and performance and has responded to drivers' desires for increased
amenities with the introduction of new sleeper compartments, interiors and
aerodynamic chassis skirts for premium conventional models. New interiors
were also introduced for cabover and severe service trucks. In addition,
new mid-range DT 408 and DT 466 diesel engines were introduced into the
medium model trucks which meet 1994 diesel emission control standards
without the need for catalytic converters. These engines will further
enhance medium truck operating performance and life.
<PAGE>
PAGE 5
In 1993, Transportation introduced new products including the 9200
model premium conventional tractor as well as other enhancements to its
products to improve operating performance and durability. In addition,
Transportation has launched special "NavTrucks" programs to meet the needs
of customers in targeted regional vocations. Each NavTruck program
tailors existing medium, heavy and severe service truck models to an
individual regional vocation by packaging appropriate vehicle
specifications and marketing programs.
According to a recent survey conducted by J. D. Power and Associates
on 1993 Medium-Duty Truck Customer Satisfaction, Navistar ranked number
one in customer satisfaction in product and service for medium
conventional trucks.
For over two decades, Transportation has been the leading supplier of
school bus chassis in the United States. Chassis have traditionally been
sold to body companies, which complete the buses and deliver them to the
ultimate customer. Transportation manufactures chassis for conventional
and transit-style school buses, as well as chassis for use in small
capacity buses designed to meet the needs of disabled students. In
addition to its traditional chassis business, Transportation has invested
in American Transportation Corporation (AmTran), a manufacturer of school
bus bodies. Through its relationship with AmTran, Transportation
participates in the trend toward the integrated design and manufacture of
school buses, which offers the potential for improved production and
marketing efficiencies and a reduction in the school bus order cycle.
Transportation offers only diesel-powered trucks and buses because of
their improved fuel economy, ease of serviceability and greater durability
over gasoline-powered vehicles. Transportation's heavy trucks use
diesel engines purchased from outside suppliers, while its medium trucks
are powered by diesel engines manufactured by Transportation. In 1993,
Transportation launched its all new world class series of in-line six
cylinder diesel engines for bus, medium and heavy models. Transportation
is the leading supplier of mid-range diesel engines in the 150-300
horsepower range according to data supplied by a private research firm,
Power Systems Research of Minneapolis, Minnesota. Based upon information
published by R.L. Polk & Company, diesel-powered medium truck shipments
represented 81% of all medium truck shipments for fiscal year 1993 in
North America.
Transportation's North American truck manufacturing operations
consist principally of the assembly of components manufactured by its
suppliers, although Transportation produces its own medium range truck
engines, sheet metal components (including cabs) and miscellaneous other
parts.
<PAGE>
PAGE 6
The following is a summary of Transportation's truck manufacturing
capacity utilization for the five years ended October 31, 1993.
YEARS ENDED OCTOBER 31,
-------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
Production units .......... 88,274 73,901 70,502 80,737 90,897
Total production
capacity ................ 106,032 106,088 106,762 114,402 119,325
Capacity utilization ...... 83.3% 69.7% 66.0% 70.6% 76.2%
Total production capacity varies as a result of changes in the number
of days of production during a year as well as changes in production
constraints.
ENGINE & FOUNDRY
Transportation builds diesel engines for use in its medium trucks and
for sale to original equipment manufacturers. Production in 1993 totalled
175,500 units, an increase of 18% from the 149,000 units produced in 1992.
In 1993, Transportation produced the DTA 466 (195-270 horsepower), DTA 360
(170-190 horsepower) and 7.3 liter (155-190 horsepower) mid-range diesel
engines. In September 1993, the DT 408 (175-230 horsepower) was
introduced which replaced the DTA 360 while the DT 466 (195-275
horsepower) replaced the DTA 466. Transportation believes that its family
of mid-range diesel engines, each designed to provide superior performance
in customer applications, offers both the lowest cost of ownership and
excellent durability to users.
Based on U.S. registrations published by R.L. Polk & Company, the 7.3
liter diesel engine is the leading engine of its class. In addition to
its strong contribution to the market position of Transportation's medium
trucks, the 7.3 liter engine and the predecessor 6.9 liter engine have had
significant external sales.
Engine sales to original equipment manufacturers are primarily made
to a major automotive company, which currently accounts for approximately
91% of sales, and to DINA Camiones, S.A. (DINA), a major truck
manufacturer in Mexico. The automotive company uses the engine in all of
its diesel-powered light trucks and vans having a gross vehicle weight
between 8,500 pounds and 14,000 pounds. Shipments to original equipment
manufacturers totalled a record 118,200 units in 1993, an increase of 21%
from the 97,400 units shipped in 1992.
In addition to the use of foundry castings in its products,
Transportation sells castings to other original equipment manufacturers.
Sales of rough grey iron engine blocks and cylinder heads to Consolidated
Diesel Corporation (CDC) for its B and C engines were 24,700 tons in 1993
and represented 26% of total foundry capacity. 1993 was the fifth year of
a five year agreement with CDC.
<PAGE>
PAGE 7
The following is a summary of Transportation's engine capacity
utilization for the five years ended October 31, 1993.
YEARS ENDED OCTOBER 31,
-------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- ------- -------
Engine production units ... 175,464 148,991 126,103 160,434 169,797
Total production
capacity ................ 166,260 166,260 166,720 166,720 167,242
Capacity utilization ...... 105.5% 89.6% 75.6% 96.2% 101.5%
Total production capacity varies as a result of changes in product
mix.
Transportation recently completed a major capital improvement program
in its engine facilities to manufacture a new generation of mid-range
diesel engines in both the in-line six cylinder and V-8 configurations to
be used in its trucks and school bus chassis and also sold to other
original equipment manufacturers. This new generation of engines is
designed to respond to customer demands for engines that have more power,
improved fuel economy, longer life, and meet current emission requirements
through 1997. The engines also will be offered in a wider horsepower
range, which will give Transportation an opportunity to expand the number
of applications for its engines and broaden its customer base.
In September 1993, Transportation introduced three new in-line six
cylinder engines that replaced its current DT family of engines in
International medium trucks. These new engines, which offer displacements
of 408, 466 and 530 cubic inches and encompass a horsepower range from 175
to 300, feature 20 percent longer life as a result of larger main and rod
bearings, stronger crankshafts, gear driven accessories and, in 1994,
electronically controlled fuel systems will be introduced. With their
expanded horsepower range and larger displacement, Transportation will
also be able to offer the new engines as a lighter-weight, more cost-
effective product, which meets emission standards, to customers who
currently buy heavier engines from other suppliers.
The 7.3 Liter V-8 diesel engine product will also be replaced in
February 1994, when Transportation begins production of an entirely new
product, with electronically controlled fuel injection. This new diesel
engine will offer significant customer advantages, with a 10 to 15 percent
improvement in fuel economy, 30 to 40 percent enhancement in durability,
and improved power and torque, when compared to Transportation's existing
V-8 product. The new V-8 also will meet the 1994 emissions requirements
cost-effectively and will allow such options as cruise control,
electronically controlled power take-off and diagnostics capabilities.
Transportation has entered into an agreement to supply the new 7.3 Liter
engine to a major automotive company through the year 2000 for use in all
of its diesel-powered light trucks and vans.
Transportation is exploring the development of alternative fuel
engines, including engines powered by compressed natural gas.
Transportation has entered into an agreement with Detroit Diesel
Corporation to develop a natural gas engine based upon one of
Transportation's existing engines and Detroit Diesel's electronic
alternative fuel technology.
<PAGE>
PAGE 8
SERVICE PARTS
The service parts business is a significant contributor to
Transportation's sales and gross margin and to the maintenance of its
medium and heavy truck customer base. In North America, Transportation
operates seven regional parts distribution centers, which allows it to
offer 24-hour availability and same day shipment of the parts most
frequently requested by customers. Transportation is undertaking
initiatives to increase parts sales outside of North America. As
customers have explored ways to reduce their costs and improve efficiency,
Transportation and its dealers have established programs to help them
manage the parts and maintenance aspects of their businesses more
efficiently. Transportation also offers a "Fleet Charge" program, which
allows participating customers to purchase parts on credit at all of its
dealer locations at consistent and competitive prices. In 1993, service
parts sales increased as a result of higher net selling prices, export
business expansion and growth in dealer and national accounts.
MARKETING AND DISTRIBUTION
North American Operations. Transportation's truck products are
distributed in virtually all key markets in North America through the
largest retail organization specializing in medium and heavy trucks. As
part of its continuing program to adapt to changing market conditions,
Transportation has been assisting dealers to expand their operations to
better serve their customer base. Transportation's truck distribution and
service network in North America was composed of 950, 952 and 919 dealers
and retail outlets at October 31, 1993, 1992 and 1991, respectively.
Included in these totals were 467, 460 and 415 secondary and associate
locations at October 31, 1993, 1992 and 1991, respectively.
Retail dealer activity is supported by 5 regional operations in the
United States and a Canadian general office. Transportation has a
national account sales group responsible for its 175 major national
account customers.
Transportation's 10 retail and 6 wholesale North American used truck
centers provide sales and trade-in benefits to its dealers and retail
customers.
International Operations. International Operations exports trucks,
components and service parts, both wholesale and retail, to more than 70
countries around the world and is active in procurement of United States
Government business worldwide. Transportation exported 5,300 trucks in
1993 and 4,900 trucks in 1992 and cumulatively, from 1986 through 1992,
was the leading North American exporter of Class 6-8 trucks from the
United States and Canada, according to data provided by the AAMA.
In Mexico, Transportation has an agreement with DINA to supply
product technology, components and technical services for assembly of DINA
trucks and buses. In 1993, Transportation exported almost 7,000 engines
to DINA, bringing the total engines shipped to approximately 20,000 over
the past three years. Transportation also has initiated sales of the in-
line six cylinder family of mid-range diesel engines to Perkins Group,
Ltd., of Peterborough, England, for worldwide distribution and to Detroit
Diesel Corporation, the North American distributor of Perkins.
<PAGE>
PAGE 9
NAVISTAR FINANCIAL CORPORATION
Navistar Financial is engaged in the wholesale, retail and to a
lesser extent lease financing of new and used trucks sold by
Transportation and its dealers in the United States. Navistar Financial
also finances wholesale accounts and selected retail accounts receivable
of Transportation. To a minor extent, sales of new products (including
trailers) of other manufacturers are also financed regardless of whether
designed or customarily sold for use with Transportation's truck products.
During fiscal 1993 and 1992, Navistar Financial provided wholesale
financing for 90% and 89%, respectively, of the new truck units sold by
Transportation to its dealers and distributors, and retail financing for
approximately 15% and 14%, respectively, of the new truck units sold by
Transportation and its dealers and distributors in the United States.
Navistar Financial's wholly-owned insurance subsidiary, Harco
National Insurance Company, provides commercial physical damage and
liability insurance coverage to Transportation's dealers and retail
customers and to the general public through an independent insurance
agency system.
IMPORTANT SUPPORTING OPERATIONS
Third Party Sales Financing Agreements. In the United States,
Transportation has an agreement with Associates Commercial Corporation
(Associates) to provide wholesale financing to certain of its truck
dealers and retail financing to their customers. During fiscal 1993 and
1992, Associates provided 10% and 11%, respectively, of the wholesale
financing utilized by Transportation's dealers and distributors.
Navistar International Corporation Canada has an agreement with a
subsidiary of General Electric Canadian Holdings Limited to provide
financing for Canadian dealers and customers.
Foreign Insurance Subsidiaries. Harbour Assurance Company of
Bermuda Limited offers a variety of programs to Transportation, including
general liability insurance, ocean cargo coverage for shipments to and
from foreign distributors and reinsurance coverage for various
Transportation policies. The company also writes minimal third party
coverage and provides a variety of insurance programs to Transportation,
its dealers, distributors and customers.
CAPITAL EXPENDITURES AND RESEARCH AND DEVELOPMENT
Transportation designs and manufactures its trucks and diesel engines
to meet or exceed specific industry requirements. New models are
introduced and improvements of current models are made, from time to time,
in accordance with operating plans and market requirements and not on a
predetermined cycle.
<PAGE>
PAGE 10
During 1993, capital expenditures totalled $110 million. Major
product program expenditures included continued investment in machinery
and equipment at the Melrose Park, Illinois and Indianapolis, Indiana
engine facilities to manufacture a new generation of mid-range diesel
engines to be used in trucks and school bus chassis manufactured by
Transportation and also sold to other original equipment manufacturers.
Transportation began introducing these engines in the fall of 1993. Other
expenditures were made for truck product improvements, modernization of
facilities and compliance with environmental regulations.
Capital expenditures totalled $55 million in 1992. Major product
program expenditures included machinery and equipment to manufacture the
new series of mid-range diesel engines at the Melrose Park, Illinois and
Indianapolis, Indiana engine facilities. Other expenditures were made for
truck product improvements, modernization of facilities and compliance
with environmental regulations. In 1991, capital expenditures were $77
million.
Product development is an ongoing process at Transportation.
Research and development activities are directed toward the introduction
of new products and improvement of existing products and processes used in
their manufacture. Spending for company-sponsored activities totalled $95
million, $90 million and $87 million for 1993, 1992 and 1991,
respectively.
BACKLOG
The backlog of unfilled truck orders (subject to cancellation or
return in certain events) was as follows:
AT OCTOBER 31 MILLIONS OF DOLLARS UNITS
------------- ------------------- -------
1993 ....... $ 1,353 23,939
1992 ....... $ 1,124 20,456
1991 ....... $ 613 13,534
Although the backlog of unfilled orders is one of many indicators of
market demand, many factors may affect point-in-time comparisons such as
changes in production rates, available capacity, new product introductions
and competitive pricing actions.
EMPLOYEES
The following table summarizes employment levels as of the end of
fiscal years 1991 through 1993:
TOTAL
AT OCTOBER 31 EMPLOYMENT
------------- ----------
1993 ......................... 13,611
1992 ......................... 13,944
1991 ......................... 13,471
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PAGE 11
LABOR RELATIONS
At October 31, 1993, the United Automobile, Aerospace and
Agricultural Implement Workers of America (UAW) represented approximately
7,144 of Transportation's active employees in the U.S., and the Canadian
Auto Workers (CAW) represented approximately 1,393 active employees in
Canada. Other unions represented approximately 1,342 active employees in
North America. Transportation entered into collective bargaining
agreements with the UAW and CAW in 1993 which expire on October 1, 1995
and October 24, 1996, respectively. These agreements permit greater
productivity and efficiency, manufacturing flexibility and customer
responsiveness, which will contribute to a reduction in costs and the goal
of improved profitability.
PATENTS AND TRADEMARKS
Transportation continuously obtains patents on its inventions and
thus owns a significant patent portfolio. Additionally, many of the
components which Transportation purchases for its products are protected
by patents that are owned or controlled by the component manufacturer.
Transportation has licenses under third party patents relating to its
products and their manufacture, and Transportation grants licenses under
its patents. The royalties paid or received under these licenses are not
significant. No particular patent or group of patents is considered by
Transportation to be essential to its business as a whole.
Like all businesses which offer well-known products or services,
Transportation's primary trademarks symbolize its goodwill and provide
instant identification of its products and services in the marketplace and
thus, are an important part of its worldwide sales and marketing efforts.
To support these efforts, Transportation maintains, or has pending,
registrations of its primary trademarks in those countries in which it
does business or expects to do business.
RAW MATERIALS AND ENERGY SUPPLIES
Transportation purchases raw materials, parts and components from
numerous outside suppliers but relies upon some suppliers for a
substantial number of components for its truck products. Transportation's
purchasing strategies have been designed to improve access to the lowest
cost, highest quality sources of raw materials, parts and components, and
to reduce inventory carrying requirements. A portion of Transportation's
requirements for raw materials and supplies is filled by single source
suppliers.
The impact of an interruption in supply will vary by commodity. Some
parts are generic to the industry while others are of a proprietary design
requiring unique tooling which would require time to recreate. However,
Transportation's exposure to a disruption in production as a result of an
interruption of raw materials and supplies is no greater than the industry
as a whole. In order to remedy any losses resulting from an interruption
in supply, contingent business interruption insurance is maintained.
Transportation does not currently foresee critical shortages of raw
materials and supplies.
<PAGE>
PAGE 12
IMPACT OF GOVERNMENT REGULATION
Truck and engine manufacturers have faced continually increasing
governmental regulation of their products especially in the environmental
and safety areas. In particular, diesel engine manufacturers will be
required to achieve lower emission levels in terms of unburned
hydrocarbons, particulates and oxides of nitrogen. These regulations have
and will impose significant research, design and tooling costs on diesel
engine manufacturers. They may also result in the use of after-treatment
equipment, such as particulate traps and catalytic converters, which will
add to the cost of the vehicle emission control system.
Transportation's engines are subject to extensive regulatory
requirements. Specific emissions standards for diesel engines are imposed
by the U.S. Environmental Protection Agency (the U.S. EPA) and by other
regulatory agencies such as the California Air Resources Board (CARB).
Transportation believes that its diesel engine products comply with all
applicable emissions requirements currently in effect. Transportation's
ability to comply with emissions requirements which may be imposed in the
future is an important element in maintaining and improving its position
in the diesel engine marketplace. Capital and operating expenditures will
continue to be required to comply with these emissions requirements.
The 1990 Clean Air Act amendments established the U.S. emissions
standards for on-highway diesel engines produced through 2001. Insofar as
light and medium heavy duty diesel engines are concerned, the CARB
standards are similar to those adopted by the U.S. EPA. Transportation's
products meet the U.S. EPA and CARB standards for on-highway diesel
engines produced through 1993. Transportation expects that its engines
will satisfy all U.S. EPA and CARB on-highway emissions control
requirements applicable through 1997.
In North America, both Canada and Mexico are expected to adopt U.S.
emissions standards. Various diesel engine manufacturers, including
Transportation, have voluntarily signed a memorandum of understanding with
the Canadian government, pursuant to which these manufacturers have agreed
to sell only U.S. certified engines in Canada beginning in 1995. In June
1993, Mexico proposed a regulatory program that incorporates U.S.
standards and test procedures. This program is expected to be in place in
1994.
Truck manufacturers are subject to various noise standards imposed by
federal, state and local regulations. The engine is one of a truck's
primary noise sources, and Transportation therefore works closely with
original equipment manufacturers to develop strategies to reduce engine
noise. Transportation is also subject to the National Traffic and Motor
Vehicle Safety Act (Safety Act) and Federal Motor Vehicle Safety Standards
(Safety Standards) promulgated by the National Highway Traffic Safety
Administration and believes it is in compliance with the Safety Act and
the Safety Standards.
<PAGE>
PAGE 13
Expenditures to comply with various environmental regulations
relating to the control of air, water and land pollution at production
facilities and to control noise levels and emissions from Transportation's
products have not been material. Investigations into the nature and
extent of cleanup activities under the Superfund law are being conducted
at two sites formerly owned by Transportation. The eventual scope, timing
and cost of such activities as well as the availability of defenses to any
such claims, and possible claims against third parties and insurance
companies are not known and cannot be reasonably estimated; however,
substantial claims could be asserted against Transportation. See
Environmental Matters in Management's Discussion and Analysis.
ITEM 2. PROPERTIES
Transportation has 7 manufacturing and assembly plants in the United
States and 1 in Canada. All plants are owned by Transportation. The
aggregate floor space of these 8 plants is approximately 8 million square
feet.
Transportation also owns or leases other significant properties in
the United States and Canada, including a paint facility, a small
component fabrication plant, vehicle and parts distribution centers, sales
offices, engineering centers and its headquarters in Chicago.
ITEM 3. LEGAL PROCEEDINGS
ENVIRONMENTAL MATTERS
Beginning in March 1984, Transportation received several enforcement
notices from the U.S. EPA, all of which relate to Transportation's
painting activities at its Springfield, Ohio assembly and body plants.
The notices alleged that these painting activities violated the Federal
Clean Air Act because the paint contained volatile organic compounds (VOC)
in greater quantities than permitted under applicable Ohio regulations
(the VOC Regulations).
In an administrative action instituted under Section 120 of the Clean
Air Act, begun in September 1984, U.S. EPA seeks to recover a
noncompliance penalty, measured as the costs allegedly saved by
Transportation by not complying with the VOC Regulations at the assembly
plant. Transportation has calculated that it did not save any costs. The
case went to a hearing before an administrative law judge who ruled in
early 1987 that Transportation was liable for a noncompliance penalty in
an amount to be determined in a subsequent hearing. All Transportation
appeals of this ruling were denied. No hearing to determine the amount of
the noncompliance penalty has yet been scheduled.
<PAGE>
PAGE 14
In a court action instituted under Section 113(b) of the Clean Air
Act, the United States filed civil complaints pertaining to the assembly
plant (filed on April 30, 1985) and the body plant (filed on November 3,
1986) in the U.S. District Court in the Southern District of Ohio. These
complaints ask the judge to impose fines of up to $25,000 per violation of
the VOC Regulations per day since December 31, 1982, and also ask the
judge to issue an injunction prohibiting Transportation from continuing
the alleged violations. In March 1993, the judge granted the United
States motion for partial summary judgment, ruling that Transportation
violated the VOC Regulations at the assembly plant during the period from
December 31, 1982 to April 30, 1985. The judge has not yet made any
determination as to fines for the violation.
Transportation built a new paint facility adjacent to the assembly
plant which replaced some of the painting activities formerly performed at
the assembly plant and the body plant. New technology at the paint
facility reduces or destroys VOCs emitted in the painting operations.
These reductions enabled Transportation to apply for a bubble variance, an
administrative exemption which permits Transportation to comply with the
VOC Regulations by averaging VOC emissions from the assembly and body
plants with VOC emissions from the paint facility. Ohio EPA issued the
bubble variance to Transportation in February 1989. U.S. EPA approved the
bubble variance in December 1990, effective January 1991.
In November 1993, Transportation received a settlement offer from
U.S. EPA to settle all allegations contained in both the administrative
action and the court action in exchange for a payment of $2.7 million.
Transportation is pursuing settlement discussions to resolve these cases.
OTHER MATTERS
In July 1992, Transportation announced its decision to change its
retiree health care benefit plans and concurrently filed a declaratory
judgment class action lawsuit in the U.S. District Court for the Northern
District of Illinois (Illinois Court) to confirm its right to change these
benefits. A countersuit was filed against Transportation by its unions in
the U.S. District Court for the Southern District of Ohio (Ohio Court).
On October 16, 1992, Transportation withdrew its declaratory judgment
action in the Illinois Court and began negotiations with the UAW to
resolve issues affecting both retirees and employees. On December 17,
1992, Transportation announced that a tentative agreement had been reached
with the UAW on restructuring retiree health care and life insurance
benefits (the Settlement Agreement). During the third quarter of 1993,
all court, regulatory agency and shareowner approvals required to
implement the Settlement Agreement concerning retiree health care benefit
plans were obtained. The Settlement Agreement became effective and the
restructured retiree health care and life insurance plan was implemented
on July 1, 1993.
In May 1993, a jury issued a verdict in favor of Vernon Klein Truck &
Equipment, Inc. and against Transportation in the amount of $10.8 million
in compensatory damages and $15 million in punitive damages. In order to
appeal the verdict in the case, Transportation was required to post a bond
collateralized with $30 million in cash. This amount has been recorded as
restricted cash on the Statement of Financial Condition. The amount of
any potential liability is uncertain and Transportation believes that
there are meritorious arguments for overturning or diminishing the
verdict.
<PAGE>
PAGE 15
Transportation and its subsidiaries are subject to various other
claims arising in the ordinary course of business, and are parties to
various legal proceedings which constitute ordinary routine litigation
incidental to its business and that of its subsidiaries. In the opinion
of Transportation's management, none of these proceedings or claims are
material to the business or the financial condition of the Company.
<PAGE>
PAGE 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Intentionally omitted. See the index page of this Report for
explanation.
PART II
Page
--------
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS 59
ITEM 6. SELECTED FINANCIAL DATA
Intentionally omitted. See the index page to this Report for
explanation.
<PAGE>
PAGE 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Transportation manufactures and markets medium and heavy trucks,
including school bus chassis, mid-range diesel engines and service parts
in North America. These products also are sold to distributors in
selected export markets. Its financial services subsidiaries provide
wholesale, retail and lease financing, and commercial physical damage and
liability insurance, principally to Transportation's dealers and retail
customers.
As discussed in Note 1 to the Financial Statements, finance and
insurance operations are materially different from the manufacturing and
marketing of trucks, diesel engines and service parts. Therefore, this
discussion and analysis reviews separately the operating and financial
results of "Manufacturing" and "Financial Services." Manufacturing
includes the consolidated financial results of Transportation's
manufacturing operations with its wholly-owned financial services
subsidiaries included on a one-line basis under the equity method of
accounting. Financial Services includes Transportation's wholly-owned
subsidiary, Navistar Financial Corporation (Navistar Financial), and other
wholly-owned foreign finance and insurance companies.
Management's discussion and analysis of results of operations should
be read in conjunction with the Financial Statements and the Notes to the
Financial Statements.
Significant Events
During 1993, Transportation negotiated collective bargaining
agreements with the United Automobile, Aerospace and Agricultural
Implement Workers of America (UAW) and most of its other unions,
restructured its retiree health care and life insurance plans and its
Parent Company completed a public offering of common shares. These events
are part of a program to reduce Transportation's operating cost structure
and enable it to compete successfully.
On January 23, 1993, a new labor agreement was ratified by the
members of the UAW. This agreement, which expires on October 1, 1995,
permits greater productivity and efficiency, manufacturing flexibility and
customer responsiveness.
On July 1, 1993, Transportation implemented a restructured retiree
health care and life insurance plan (the Plan) which previously had been
approved by the U.S. District Court in Dayton, Ohio on May 27, 1993, and
by the Parent Company's shareowners on June 29, 1993. The Plan provides
retirees with modified health care and life insurance benefits for life.
The Parent Company's shareowners also approved a one-for-ten reverse stock
split of its Common Stock and approved the issuance of 25.6 million shares
of Class B Common Stock. The Class B shares, valued at $513 million, were
purchased by Transportation from the Parent Company and contributed to a
separate independent retiree Supplemental Benefit Trust as a part of the
Plan.
<PAGE>
PAGE 18
The Plan reduced Transportation's liability for retiree health care
and life insurance benefits from approximately $2.6 billion to $1.1
billion worldwide. On October 21, 1993, the Parent Company completed a
public offering of 23.6 million Common shares, from which it realized net
proceeds of $492 million. The net proceeds were lent to Transportation
which used $300 million to pre-fund benefit liabilities under the Plan.
Transportation will use the remaining proceeds for working capital
purposes.
Results of Operations
Consolidated
The components of net income (loss) for the three years ended October
31 are as follows:
Millions of dollars 1993 1992 1991
- -----------------------------------------------------------------------
Income (loss) before
Supplemental Trust contribution
and income taxes ...................... $ 51 $ (151) $ (189)
Supplemental Trust contribution:
- Manufacturing ......................... (509) - -
- Financial Services .................... (4) - -
Income tax expense ........................ (19) (15) (22)
------- ------- -------
Income (loss)
of continuing operations................. (481) (166) (211)
Discontinued operations ................... - (65) -
Cumulative effect of accounting changes ... (1,144) - -
------- ------- -------
Net loss ................................. $(1,625) $ (231) $ (211)
======= ======= =======
Reflecting improved operating results in both manufacturing
operations and financial services, Transportation reported income of $51
million in 1993 before the Supplemental Trust contribution and income
taxes compared with a pretax loss of $151 million last year and a pretax
loss of $189 million in 1991. The 1993 loss of continuing operations was
$481 million after the one-time charge for the Supplemental Trust
contribution of $513 million and income tax expense of $19 million.
In the 1993 third quarter, Transportation adopted Statement of
Financial Accounting Standards No. 106 (SFAS 106), "Employers' Accounting
for Postretirement Benefits Other Than Pensions," and Statement of
Financial Accounting Standards No. 109 (SFAS 109), "Accounting for Income
Taxes" retroactive to November 1, 1992. Prior years were not restated.
As a result of Transportation's Tax Agreement with the Parent Company,
substantially all of the deferred tax asset and corresponding income tax
benefit resulting from adopting SFAS 106 and SFAS 109 is reflected on the
financial statements of the Parent Company and, therefore, had minimal
effect on Transportation's cumulative effect of changes in accounting
policy. The cumulative effect of these changes resulted in a charge to
income of $1,144 million.
<PAGE>
PAGE 19
Transportation incurred a net loss of $1,625 million for 1993. The
net loss of $231 million for 1992 included a $65 million charge to
discontinued operations for the settlement of suits brought by the Pension
Benefit Guaranty Corporation (PBGC) related to a previously owned
business.
Consolidated sales and revenues of $4,694 million in 1993 were 21%
higher than the $3,871 million reported in 1992 and 36% above the $3,460
million reported in 1991 as a result of a strong cyclical recovery in the
demand for trucks, diesel engines and service parts.
Manufacturing
Manufacturing reported a loss of $14 million before a one-time $509
million charge for the Supplemental Trust contribution and income taxes.
Losses of $203 million and $249 million were recorded in 1992 and 1991,
respectively. The 1992 results included a $47 million one-time charge for
a voluntary product recall.
The components of Manufacturing loss, excluding Financial Services
and before taxes, are as follows:
Millions of dollars 1993 1992 1991
- -----------------------------------------------------------------------
Pretax loss before
Supplemental Trust contribution
and income taxes ...................... $ (14) $ (203) $ (249)
Supplemental Trust contribution ........... (509) - -
------ ------ ------
Loss before income taxes ............ $ (523) $ (203) $ (249)
====== ====== ======
The improvement in 1993 operating results is the result of increased
sales volume, higher selling prices and programs implemented to improve
Transportation's cost structure. Cost improvement programs included
implementation of the restructured retiree benefit Plan and continued
investment in new products and processes to increase efficiency and lower
manufacturing hours per unit. The reduction in the loss between 1992 and
1991 was primarily the result of increased sales volume, ongoing cost
improvement programs and lower financing charges offset in part by higher
health care costs, reduced interest income and an increase in interest
expense on obligations to the Parent Company.
Sales. Reflecting improvements in the U.S. and Canadian economies,
1993 North American industry retail sales of medium and heavy trucks
totalled 288,900 units, a 19% increase over 1992 and a 26% increase from
the 229,100 units sold in 1991. Compared with 1992 levels, heavy truck
industry sales increased 33% to 166,400 units, led by higher demand from
major leasing companies and large fleet operators. Industry sales of
medium trucks, including school bus chassis, increased 4% to 123,000
units. Medium truck industry shipments were up 4% from 1992 and 11% from
1991. Industry sales of school bus chassis, about 25% of the medium truck
market, increased 3% from 1992 but were 19% below 1991. The demand for
school buses reflects the timing of state and local government funding of
student transportation.
<PAGE>
PAGE 20
Transportation's sales of trucks, diesel engines and service parts
during 1993 totalled $4,510 million, 22% above the $3,685 million reported
for 1992 and 38% higher than the $3,259 million recorded in 1991. The
sales increase principally reflects the improved demand for heavy trucks,
higher shipments of mid-range diesel engines to original equipment
manufacturers and improved sales of service parts. Retail deliveries of
medium and heavy trucks totalled 79,800 units in 1993, an increase of 15%
from 1992 and 19% higher than in 1991. Transportation maintained its
position as sales leader in the North American combined medium and heavy
truck market in 1993 with a 27.6% market share.
Shipments of mid-range diesel engines to original equipment
manufacturers during 1993 totalled a record 118,200 units, an increase of
21% from 1992 and 58% from 1991. Higher shipments to a major automotive
manufacturer to meet consumer demand for the light trucks and vans which
use this engine was the primary reason for the increase.
Service parts sales of $632 million in 1993 were 11% higher than the
$571 million reported in 1992 and 19% higher than the $530 million in
1991. The increase between 1993 and 1992 was the result of growth in
sales to dealers and national fleets and improved price realization. The
increase between 1992 and 1991 was the result of higher net selling
prices, export business expansion and sales growth in dealer and national
retail accounts.
Operating Costs and Expenses. Manufacturing gross margin, the
relationship of sales to cost of sales, was 13.2% in 1993. Gross margin
in 1992, excluding one-time product recall expenses, was 13.0%, an
increase from 11.5% in 1991. Factors which led to the improvement in
gross margin between 1993 and 1992 included higher sales volume, improved
price realization and programs implemented to improve Transportation's
cost structure. These favorable effects were partially offset by
increases in purchased material and labor costs and a higher level of
manufacturing start-up costs for new truck and engine products. The
improvement in gross margin between 1992 and 1991 was primarily the result
of higher sales volume combined with the impact of cost improvement
programs.
Postretirement benefits, which include pension expense for employees
and retirees and postretirement health care and life insurance coverage
for employees, retirees, surviving spouses and dependents, totalled $208
million in 1993. Pension expense of $107 million in 1993 was about level
with 1992 and 1991. A 30% reduction in retiree health care and life
insurance expense in 1993 to $101 million was primarily the result of an
$87 million year-over-year decline in expense following implementation in
1993 of the new retiree benefit plan partially offset by a $41 million
increase in expense related to the adoption of SFAS 106. This statement
requires the accrual of the expected cost of providing postretirement
benefits during employees' active service periods. Prior to 1993, the
cost of these benefits was recorded as payments were made. From 1991 to
1992, postretirement benefit expense other than pensions increased from
$138 million to $146 million as cost containment programs only partially
offset health care economic cost increases.
<PAGE>
PAGE 21
In 1993, Transportation continued its commitment to allocate
resources for improvement of existing products and processes and the
development of new truck and diesel engine products. Engineering expense
increased to $94 million in 1993 from $92 million in 1992 and $88 million
in 1991 reflecting the completion of the development and introduction of a
new series of diesel engines as well as continuing development of new and
existing truck products.
Marketing and administrative expense of $225 million was about equal
to the amounts reported in 1992 and 1991. Interest expense of $29 million
was $17 million higher than in 1992 and $12 million higher than in 1991.
The increase is the result of higher interest payments on obligations to
the Parent Company. The decrease in interest expense between 1992 and
1991 is the result of lower interest payments to the Parent Company and
the differing levels of capitalized interest on major capital projects.
Finance service charges on sold receivables increased 8% to $56 million in
1993 reflecting higher truck sales. These charges decreased 20% between
1992 and 1991 as a result of lower interest rates. The provision for
losses on receivables was reduced to $5 million in 1993 from $18 million
in 1992 following improvements in the economy and improved credit review
procedures. Interest income declined to $9 million in 1993 from $12
million in 1992 primarily as a result of a reduction in the amount of
marketable securities held by Transportation through most of the year and
lower interest rates.
Discontinued Operations. A provision was recorded in the third
quarter of 1992 as a loss of discontinued operations for the settlement
for $65 million of the litigation commonly referred to as the Wisconsin
Steel Pension Plan Cases.
Financial Services
Income of the subsidiaries comprising Financial Services is as
follows:
Millions of dollars 1993 1992 1991
- -----------------------------------------------------------------------
Income before Supplemental Trust
contribution and income taxes:
Navistar Financial Corporation ......... $ 53 $ 46 $ 53
Foreign Subsidiaries ................... 12 6 7
---- ---- ----
Total ................................ 65 52 60
Supplemental Trust contribution ............ (4) - -
Income tax expense ......................... (22) (20) (23)
---- ---- ----
Income before cumulative effect
of accounting changes ................... 39 32 37
Cumulative effect of accounting changes ... (9) - -
---- ---- ----
Net income ............................... $ 30 $ 32 $ 37
==== ==== ====
<PAGE>
PAGE 22
Navistar Financial's income in 1993 before the one-time charge for
the Supplemental Trust contribution and income taxes was $53 million
compared with $46 million in 1992. The increase was primarily the result
of increased income from sales of retail notes receivable partially offset
by higher loss experience from Navistar Financial's insurance subsidiary.
Earnings from the foreign subsidiaries increased $6 million as a result of
lower loss reserve requirements.
During the third quarter of 1993, Navistar Financial adopted SFAS 106
and SFAS 109 retroactive to November 1, 1992. The cumulative effect of
adopting these changes in accounting policy resulted in an after-tax
charge to income of $9 million.
Income before income taxes for Navistar Financial decreased 13%
between 1992 and 1991 as a result of lower margins earned on the finance
receivables portfolio partially offset by a lower provision for credit
losses. Earnings from Navistar Financial's insurance subsidiary were
equal to 1991.
Total Navistar Financial revenue for 1993 was $220 million, unchanged
from 1992 and 3% below 1991. During 1993, increased revenues from higher
average wholesale note and account balances were offset by lower revenues
from the insurance subsidiary. The decline in revenues in 1992 from 1991
reflects a decrease in retail and wholesale notes financed. These
decreases were partially offset by an increase in revenues from Navistar
Financial's insurance subsidiary.
Interest expense for Navistar Financial declined to $75 million in
1993 from $82 million in 1992 and $90 million in 1991. The declines in
1993 and 1992 primarily reflect the effect of lower interest rates.
The provision for losses on receivables decreased to $1 million in
1993 from $3 million in 1992 and $6 million in 1991. The decreases in the
provision reflect lower losses on both retail and wholesale notes.
Liquidity and Capital Resources
Consolidated
Total cash, cash equivalents and marketable securities amounted to
$493 million and $378 million at October 31, 1993 and 1992, respectively.
At October 31, 1993 and 1992, approximately $160 million and $165 million,
respectively, was held by Transportation's insurance subsidiaries and not
available for general corporate purposes.
The following discussion has been organized to discuss separately the
cash flows of Transportation's Manufacturing and Financial Services
operations.
Manufacturing
Liquidity available to Manufacturing in the form of cash, cash
equivalents and marketable securities totalled $316 million at October 31,
1993, $132 million at October 31, 1992, and $207 million at October 31,
1991.
<PAGE>
PAGE 23
Cash and cash equivalents of Manufacturing totalled $262 million at
October 31, 1993, an increase from the $125 million at October 31, 1992.
Summarized below is the cash flow for fiscal 1993.
Millions of dollars 1993
- ------------------------------------------------------------------------
Cash and cash equivalents provided by (used in):
Operations ....................................... $ 166
Investment programs .............................. (504)
Financing activities ............................. 475
-----
Increase in cash and cash equivalents .......... $ 137
=====
Operations. In 1993, operations provided $166 million in cash as
follows:
Millions of dollars 1993
- ------------------------------------------------------------------------
Net loss ........................................... $(1,625)
Items not affecting cash:
Supplemental Trust contribution .................. 509
Cumulative effect of accounting changes .......... 1,144
Depreciation and other items ..................... 66
Change in operating assets and liabilities:
Decrease in receivables ........................ $ 1
Increase in inventories ........................ (51)
Increase in accounts payable ................... 122 72
----- -------
Cash provided by continuing operations ............. $ 166
=======
The $72 million net change in operating assets and liabilities was
primarily the result of higher production schedules in 1993.
<PAGE>
PAGE 24
Investment programs. Investment programs used $504 million in cash
during 1993 including pre-funding $300 million of the retiree benefit Plan
liability, capital expenditures of $110 million, a net increase of $46
million in marketable securities and $30 million for the cash
collateralization of a bond related to current legal proceedings.
Financing programs. Financing activities provided $475 million in
cash in 1993 primarily from $493 million in funds loaned to Transportation
by the Parent Company. See Note 14 to the Financial Statements. This
increase in cash was offset by an $18 million reduction in debt.
Management's discussion of the future liquidity of manufacturing
operations is included in the Business Outlook section of Management's
Discussion and Analysis.
Financial Services
The Financial Services subsidiaries provide product financing and
insurance coverage to Transportation's dealers and retail customers.
Traditionally, funds to finance Transportation's products come from a
combination of commercial paper, short- and long-term bank borrowings,
medium- and long-term debt issues, sales of receivables and equity
capital. The lowering of Navistar Financial's debt ratings in fiscal 1992
restricted its ability to place commercial paper and term debt securities.
Accordingly, Navistar Financial increased its use of bank borrowings
through its revolving credit facility and sales of retail notes as funding
sources. Insurance operations are funded from premiums and income from
investments.
Total cash, cash equivalents and marketable securities of Financial
Services were $177 million at October 31, 1993, $246 million at October
31, 1992 and $189 million at October 31, 1991.
Cash and cash equivalents of Financial Services totalled $44 million
at October 31, 1993, $103 million at October 31, 1992 and $39 million at
October 31, 1991. The cash flow for Financial Services for 1993 is
summarized as follows:
Millions of dollars 1993
- -----------------------------------------------------------------------
Cash and cash equivalents provided by (used in):
Operations ....................................... $ 63
Investment programs .............................. (65)
Financing activities ............................. (57)
-----
Decrease in cash and cash equivalents .......... $ (59)
=====
Operations. Operations provided $63 million in cash in 1993
primarily from net income of $30 million, a $19 million decrease in
working capital and non-cash expense of $9 million for the cumulative
effect of the adoption of SFAS 106 and SFAS 109.
<PAGE>
PAGE 25
Investment Programs. The Financial Services investment programs
used $65 million in 1993 as a result of a net increase of $62 million in
retail and wholesale finance receivables and a $14 million increase in
property and equipment leased to others, partially offset by an $11
million decrease in marketable securities.
Navistar Financial supplied 90% of the wholesale financing of new
trucks to Transportation's dealers compared with 89% in 1992 and 1991.
Navistar Financial's share of retail financing of new trucks sold to
customers in the United States increased to 15.3% in 1993 from 13.7% in
1992 and 13.1% in 1991.
Financing Activities. Financial Services used $57 million in 1993
for financing activities consisting of $99 million for principal payments
on long-term debt and $33 million of dividends paid to Transportation.
Cash from financing activities was increased by $75 million of short-term
borrowings.
At October 31, 1993, Navistar Financial had $1,327 million of
committed credit facilities. The facilities consisted of a contractually
committed bank revolving credit facility of $727 million and a
contractually committed retail notes receivable purchase facility of $600
million. Unused commitments under the receivable purchase facility were
$157 million, $75 million of which was used to back the short-term bank
borrowings at October 31, 1993. The remaining $82 million, when combined
with unrestricted cash and cash equivalents, made $105 million available
to fund the general business purposes of Navistar Financial at October 31,
1993. The bank revolving credit facility was fully utilized at October
31, 1993. In addition to the committed credit facilities, Navistar
Financial also utilizes a $300 million revolving wholesale note sales
trust providing for the continuous sale of eligible wholesale notes on a
daily basis. The sales trust is composed of three $100 million pools of
notes maturing serially from 1997 to 1999.
Management's discussion of the future liquidity of financial services
operations is included in the Business Outlook section of Management's
Discussion and Analysis.
Environmental Matters
Transportation has been named a potentially responsible party (PRP),
in conjunction with other parties, in a number of cases arising under an
environmental protection law commonly known as the Superfund law. These
cases involve sites which allegedly have received wastes from its current
or former operations. The Superfund law requires environmental
investigation and/or cleanup where waste products from various
manufacturing processes and operations have been stored, treated or
disposed of.
<PAGE>
PAGE 26
Based on information available to Transportation which in most cases
includes estimates from PRPs and/or Federal or State regulatory agencies
for the investigation, cleanup costs at these sites, data related to
quantities and characteristics of material generated at or shipped to each
site, a reasonable estimate is calculated of Transportation's share, if
any, of the costs. Transportation believes that, based on these
calculations, its share of the costs for each site is not material and in
total the anticipated cleanup costs of current PRP actions at October 31,
1993 would not have a material impact on Transportation's financial
condition, liquidity or operating results except with respect to the
potential for liability discussed below. The anticipated costs associated
with the current PRP actions at October 31, 1993, are reflected in
Transportation's $10 million accrued liability. Transportation reviews
its accruals as additional information becomes available.
The present owner of Transportation's former Wisconsin Steel facility
in Chicago, Illinois has been investigating the nature and extent of any
required cleanup activities at this site. In addition, the present owner
of Transportation's former Solar Division in San Diego, California is
conducting similar activities with respect to that site. Environmental
protection agencies in each of these states are monitoring these
investigations. Both of the present owners have demanded that
Transportation pay for these activities. As to both sites, the eventual
scope, timing and cost of such activities as well as the availability of
defenses to any such claims, and possible claims against third parties and
insurance companies are not known and cannot be reasonably estimated;
however, substantial claims could be asserted against Transportation.
Business Outlook
Current economic trends indicate continued moderate growth in the
North American economy, resulting in improved market conditions for the
truck industry. Based on current order backlogs, order receipt trends and
key market indicators, Transportation currently projects 1994 North
American medium truck demand, including school bus chassis, to be 136,000
units, an 11% increase from 1993. Heavy truck demand is projected at
160,000 units, approximately level with 1993. Transportation's diesel
engine sales to original equipment manufacturers in 1994 are expected to
be about the same as in 1993. Sales of service parts by Transportation
are forecast to grow 3%.
As the Federal government and private industry consider solutions to
the rising cost of medical care, Transportation took decisive action with
implementation of a restructured retiree health care and life insurance
benefit plan on July 1, 1993 and a $300 million pre-funding of this
obligation. Transportation intends to further reduce retiree health care
costs by pre-funding an additional $200 million of the retiree health care
and life insurance benefit liability within the next five years.
Additional annual health care savings of up to $15 million are projected
from managed care programs for employees and certain retirees to be
implemented in 1994.
In 1994, the introduction of new truck and engine products, focused
marketing programs and implementation of programs to streamline marketing,
engineering and manufacturing processes are expected to further improve
Transportation's competitiveness. It is management's opinion that current
and forecasted cash flow will provide a basis for financing operating
requirements and capital expenditures.
<PAGE>
PAGE 27
In addition, management believes that collections on the outstanding
receivables portfolios as well as funds available from various funding
sources will permit the Financial Services subsidiaries to meet the
financing requirements of Transportation's dealers and customers.
<PAGE>
PAGE 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Financial Statements
Page
------
Navistar International Transportation Corp.:
Statement of Income (Loss) ......................... 29
Statement of Financial Condition ................... 30
Statement of Cash Flow ............................. 31
Statement of Shareowner's Equity ................... 33
Notes to Financial Statements ...................... 34
Independent Auditors' Report ....................... 62
Finance and Insurance Subsidiaries:
The financial statements of Navistar Financial Corporation for the
years ended October 31, 1993, 1992 and 1991 appearing on pages 5 through 7
in the Annual Report on Form 10-K for Navistar Financial Corporation for
the fiscal year ended October 31, 1993, Commission No. 1-4146-1, are
incorporated herein by reference and filed as Exhibit 28.1 to this Form
10-K.
Financial information regarding all Transportation subsidiaries
engaged in finance and insurance operations, including Navistar Financial
Corporation, appears as supplemental information to the Financial
Statements of Navistar International Transportation Corp. which follow.
<PAGE>
PAGE 29
<TABLE>
<CAPTION>
STATEMENT OF INCOME (LOSS)
- --------------------------------------------------------------------
For the Years Ended October 31 (Millions of dollars)
- --------------------------------------------------------------------
Navistar International
Transportation Corp. and
Consolidated Subsidiaries Manufacturing* Financial Services*
-------------------------- -------------------------- --------------------------
Note
1993 1992 1991 Reference 1993 1992 1991 1993 1992 1991
------ ------ ------ --------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
Sales and revenues
Manufacturing .............. $4,510 $3,685 $3,259 $4,510 $3,685 $3,259 $ - $ - $ -
Financial Services ......... 184 186 201 - - - 226 226 242
------ ------ ------ ------ ------ ------ ------ ------ ------
Total sales and revenues . 4,694 3,871 3,460 4,510 3,685 3,259 226 226 242
------ ------ ------ ------ ------ ------ ------ ------ ------
Costs and expenses
Cost of sales .............. 3,914 3,254 2,885 3,914 3,254 2,885 - - -
Postretirement benefits 209 255 239 Note 4 208 254 238 1 1 1
Supplemental Trust
contribution ............. 513 - - Note 14 509 - - 4 - -
Engineering expense ........ 94 92 88 94 92 88 - - -
Marketing and
administrative expense ... 240 244 245 225 226 223 15 18 22
Interest expense ........... 108 99 114 29 12 17 79 87 97
Financing charges
on sold receivables ...... 14 12 24 56 52 65 - - -
Insurance claims
and underwriting expense . 59 62 54 - - - 59 62 54
Provision for losses
on receivables ........... 6 21 26 5 18 20 1 3 6
Interest (income) .......... (9) (12) (9) (9) (12) (9) - - -
Other (income)
expense, net ............. 8 (5) (17) 2 (8) (19) 6 3 2
------ ------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses 5,156 4,022 3,649 5,033 3,888 3,508 165 174 182
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before income taxes
Manufacturing .......... - - - (523) (203) (249) - - -
Financial Services ..... - - - 61 52 60 - - -
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before income taxes. (462) (151) (189) (462) (151) (189) 61 52 60
Income tax expense ... (19) (15) (22) Note 5 (19) (15) (22) (22) (20) (23)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
of continuing operations . (481) (166) (211) (481) (166) (211) 39 32 37
Loss of discontinued
operations ............... - (65) - Note 6 - (65) - - - -
Cumulative effect
of changes Notes 4
in accounting policy ..... (1,144) - - & 5 (1,144) - - (9) - -
------- ------ ------ ------- ------ ------ ------ ------ ------
Net income (loss) .......... $(1,625) $ (231) $ (211) $(1,625) $ (231) $ (211) $ 30 $ 32 $ 37
======= ====== ====== ======= ====== ====== ====== ====== ======
<FN>
See Notes to Financial Statements. * "Manufacturing" includes the consolidated financial
results of Transportation's manufacturing operations
with its wholly-owned financial services subsidiaries
included under the equity method of accounting.
"Financial Services" includes Transportation's
wholly-owned subsidiary, Navistar Financial
Corporation, and other wholly-owned finance and
insurance subsidiaries. Transactions between
Manufacturing and Financial Services have been
eliminated from the "Navistar International
Transportation Corp. and Consolidated Subsidiaries"
columns. The basis of consolidation is described
in Note 1 while a summary of eliminations is shown
in Note 2.
</TABLE>
<PAGE>
PAGE 30
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------
As of October 31 (Millions of dollars)
- -----------------------------------------------------------------------------
Navistar International
Transportation Corp. and Financial
Consolidated Subsidiaries Manufacturing* Services*
------------------------- -------------- ---------------
Note
1993 1992 Reference 1993 1992 1993 1992
------ ------ --------- ------ ------ ------ ------
<S> <C> <C> <S> <C> <C> <C> <C>
ASSETS
- -----------------------------------
Cash and cash equivalents ....................... $ 306 $ 228 $ 262 $ 125 $ 44 $ 103
Marketable securities ........................... 187 150 Note 7 54 7 133 143
Receivables, net ................................ 1,542 1,479 Note 8 125 131 1,433 1,348
Inventories ..................................... 411 365 Note 9 411 365 - -
Prepaid pension assets .......................... 82 122 Note 4 81 121 1 1
Property and equipment, net ..................... 636 582 Note 10 608 563 28 19
Equity in Financial Services subsidiaries ....... - - 241 240 - -
Investments and other assets .................... 234 210 201 165 33 45
Intangible pension assets ....................... 340 370 340 370 - -
------ ------ ------ ------ ------ ------
Total assets .................................... $3,738 $3,506 $2,323 $2,087 $1,672 $1,659
====== ====== ====== ====== ====== ======
LIABILITIES AND SHAREOWNER'S EQUITY
- -----------------------------------
Liabilities
Accounts payable ................................ $ 754 $ 637 Note 12 $ 685 $ 581 $ 85 $ 56
Accrued liabilities ............................. 383 395 Note 13 359 362 24 33
Short-term debt ................................. 213 114 Note 14 58 15 155 99
Long-term debt due Parent Company ............... 971 - Note 14 971 - - -
Long-term debt .................................. 1,194 1,291 Note 14 150 172 1,044 1,119
Other long-term liabilities ..................... 264 294 Note 15 255 284 9 10
Loss reserves and unearned premiums ............. 107 102 - - 107 102
Postretirement benefits liability ............... 1,370 439 Note 4 1,363 439 7 -
------ ------ ------ ------ ------ ------
Total liabilities ........................... 5,256 3,272 3,841 1,853 1,431 1,419
------ ------ ------ ------ ------ ------
Shareowner's equity
Capital stock (1,000 shares issued) ............. 785 785 Note 19 785 785 178 178
Retained earnings (deficit) ..................... (2,311) (558) (2,311) (558) 63 62
Accumulated foreign currency translation
adjustments ................................... 8 7 8 7 - -
------ ------ ------ ------ ------ ------
Total shareowner's equity ....................... (1,518) 234 (1,518) 234 241 240
------ ------ ------ ------ ------ ------
Total liabilities and shareowner's equity ....... $3,738 $3,506 $2,323 $2,087 $1,672 $1,659
====== ====== ====== ====== ====== ======
<FN>
See Notes to Financial Statements. * "Manufacturing" includes the
consolidated financial results
of Transportation's manufacturing
operations with its wholly-
owned financial services
subsidiaries included under the
equity method of accounting.
"Financial Services" includes
Transportation's wholly-owned
subsidiary, Navistar Financial
Corporation, and other wholly-
owned finance and insurance
subsidiaries. Transactions
between Manufacturing and
Financial Services have been
eliminated from the "Navistar
International Transportation
Corp. and Consolidated
Subsidiaries" columns.
The basis of consolidation is
described in Note 1 while a
summary of eliminations is
shown in Note 2.
</TABLE>
<PAGE>
PAGE 31
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOW
Navistar International
Transportation Corp.
and Consolidated Subsidiaries
--------------------------------
For the Years Ended October 31 Note
(Millions of dollars) 1993 1992 1991 Reference
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <S>
Cash flow from operations
Net income (loss) ............................... $ (1,625) $ (231) $ (211)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operations:
Depreciation and amortization ................. 75 77 73
Supplemental Trust contribution ............... 513 - - Note 14
Equity in earnings of Financial Services,
net of dividends received ................... - - -
Allowance for losses on receivables
and dealer loans ............................ 19 24 27
Provision for loss of discontinued operations . - 65 - Notes 6
Cumulative effect of changes in accounting
policy ...................................... 1,144 - - Note 4 & 5
Other, net .................................... (16) (58) (22)
Change in operating assets and liabilities .... (101) 63 351 Note 3
-------- -------- --------
Cash provided by (used in) continuing operations 9 (60) 218
-------- -------- --------
Cash flow from investment programs
Purchase of retail notes and lease receivables .. (770) (659) (619)
Principal collections on retail notes
and lease receivables ......................... 337 409 310
Sale of retail notes receivables ................ 558 249 236 Note 8
Acquisitions (over) under cash collections
of wholesale notes and accounts receivable .... - - - Note 3
Purchase of marketable securities ............... (265) (192) (318)
Sales or maturities of marketable securities .... 230 210 332
Capital expenditures ............................ (110) (55) (77)
Net increase in property and equipment
leased to others .............................. (14) (4) (13)
Base Program Trust pre-funding .................. (300) - - Note 4
Special dividends from Financial Services ....... - - -
PBGC settlement - discontinued operations ....... - (20) - Note 6
Other investment programs, net .................. (48) (25) 21
-------- -------- --------
Cash provided by (used in) investment programs. (382) (87) (128)
-------- -------- --------
Cash flow from financing activities
Principal payments on long-term debt ............ (114) (170) (102)
Net increase (decrease) in short-term debt ...... 72 (184) (444)
Issuance of term debt and notes ................. - 8 118 Note 14
Net increase in debt outstanding under
bank revolving credit facility ................ - 507 220
Capital contribution from
Navistar International Corporation ............ - - 169
Loan from Navistar International Corporation .... 493 - 47 Note 14
Dividends paid .................................. - - -
-------- -------- --------
Cash provided by (used in) financing activities 451 161 8
-------- -------- --------
Cash and cash equivalents
Increase (decrease) during the year ........... 78 14 98 Note 3
At beginning of the year ...................... 228 214 116
-------- -------- --------
Cash and cash equivalents at end of the year .... $ 306 $ 228 $ 214
======== ======== ========
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
PAGE 32
<TABLE>
<CAPTION>
Manufacturing* Financial Services*
- ------------------------------------ ----------------------------------
1993 1992 1991 1993 1992 1991
- ---------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ (1,625) $ (231) $ (211) $ 30 $ 32 $ 37
69 74 71 6 3 2
509 - - 4 - -
(10) (15) 1 - - -
17 19 21 2 5 6
- 65 - - - -
1,144 - - 9 - -
(10) (45) (13) (7) (12) (10)
72 149 29 19 (17) (3)
- -------- -------- -------- -------- -------- --------
166 16 (102) 63 11 32
- -------- -------- -------- -------- -------- --------
- - - (770) (659) (619)
- - - 337 409 310
- - - 558 249 236
- - - (187) (66) 330
(190) (64) - (75) (128) (318)
144 89 - 86 121 332
(110) (55) (77) - - -
- - - (14) (4) (13)
(300) - - - - -
- - 40 - - -
- (20) - - - -
(48) (13) 19 - (13) 1
- -------- -------- -------- -------- -------- --------
(504) (63) (18) (65) (91) 259
- -------- -------- -------- -------- -------- --------
(15) (11) (12) (99) (159) (90)
(3) - - 75 (184) (444)
- 8 - - - 118
- - - - 507 220
- - 169 - - -
493 - 47 - - -
- - - (33) (20) (81)
- -------- -------- -------- -------- -------- --------
475 (3) 204 (57) 144 (277)
- -------- -------- -------- -------- -------- --------
137 (50) 84 (59) 64 14
125 175 91 103 39 25
- -------- -------- -------- -------- -------- --------
$ 262 $ 125 $ 175 $ 44 $ 103 $ 39
======== ======== ======== ======== ======== ========
- --------------------------------------------------------------------------
<FN>
* "Manufacturing" includes the consolidated financial results of
Transportation's manufacturing operations with its wholly-owned
financial services subsidiaries included under the equity method
of accounting. "Financial Services" includes Transportation's
wholly-owned subsidiary, Navistar Financial Corporation, and
other wholly-owned finance and insurance subsidiaries.
Transactions between Manufacturing and Financial Services
have been eliminated from the "Navistar International
Transportation Corp. and Consolidated Subsidiaries"
columns on the preceding page. The basis of consolidation
is described in Note 1 while a summary of eliminations is
shown in Note 2.
</TABLE>
<PAGE>
PAGE 33
<TABLE>
<CAPTION>
STATEMENT OF SHAREOWNER'S EQUITY Navistar International Transportation
For the Years Ended October 31, 1993, 1992 and 1991 Corp. and Consolidated Subsidiaries
EQUITY (Millions of dollars)
---------------------------------------------
ACCUMULATED
SHARES FOREIGN
OUTSTANDING RETAINED CURRENCY
CAPITAL CAPITAL EARNINGS TRANSLATION
STOCK STOCK (DEFICIT) ADJUSTMENTS TOTAL
--------- -------- --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
Balance at October 31, 1990 ....................... 1,000 $ 535.3 $ (69.9) $ 10.7 $ 476.1
Net loss ........................................ - - (211.4) - (211.4)
Capital contribution ............................ - 250.0 - - 250.0
Adjustment for excess pension liability
over intangible pension assets ................ - - (44.9) - (44.9)
Translation adjustment .......................... - - - .8 .8
-------- -------- -------- -------- ---------
Balance at October 31, 1991 ....................... 1,000 785.3 (326.2) 11.5 470.6
Net loss ........................................ - - (231.4) - (231.4)
Adjustment for excess pension liability
over intangible pension assets ................ - - (.8) - (.8)
Translation adjustments ......................... - - - (4.1) (4.1)
-------- -------- -------- -------- ---------
Balance at October 31, 1992 ....................... 1,000 785.3 (558.4) 7.4 234.3
Net loss ........................................ - - (1,624.7) - (1,624.7)
Adjustment for excess pension liability
over intangible pension assets ................ - - (128.1) - (128.1)
Translation adjustments ......................... - - - .6 .6
-------- -------- --------- -------- ---------
Balance at October 31, 1993 ....................... 1,000 $ 785.3 $(2,311.2) $ 8.0 $(1,517.9)
======== ======== ========= ======== =========
<FN>
At October 31, 1991, the Parent Company made a $250 million capital contribution to Transportation which included
a cash payment of $169 million, a $47 million reduction in notes payable and a transfer of marketable securities
of $34 million.
See Notes to Financial Statements.
</TABLE>
<PAGE>
PAGE 34
NAVISTAR INTERNATIONAL TRANSPORTATION CORP. AND SUBSIDIARIES
==========
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1993
1. SUMMARY OF ACCOUNTING POLICIES
Basis of Consolidation
Navistar International Transportation Corp., hereafter referred to as
"the Company" and "Transportation," is the wholly-owned subsidiary of
Navistar International Corporation, hereafter referred to as "Parent
Company." Transportation operates in one principal industry segment, the
manufacture and marketing of medium and heavy trucks, including school bus
chassis, mid-range diesel engines and service parts in North America and
selected export markets.
In addition to the consolidated financial statements, Transportation
has elected to provide financial information in a format that presents the
operating results, financial condition and cash flow from operations
designated as "Manufacturing" and "Financial Services." Manufacturing
includes the consolidated financial results of Transportation's
manufacturing operations with its wholly-owned financial services
subsidiaries included on a one-line basis under the equity method of
accounting. Financial Services includes Transportation's wholly-owned
subsidiary, Navistar Financial Corporation (Navistar Financial), and other
wholly-owned foreign finance and insurance companies. Through the first
two quarters of 1992, Financial Services included the results of Harbour
Assurance Company (U.K.) Ltd. This subsidiary was sold in July 1992.
Navistar Financial's primary business is the retail and wholesale
financing of products sold by Transportation and its dealers within the
United States and the providing of commercial physical damage and
liability insurance to Transportation's dealers and retail customers and
to the general public through an independent insurance agency system.
Harbour Bermuda's primary business is the insuring of general and product
liability risks of Transportation.
The effects of transactions between Manufacturing and Financial
Services have been eliminated to arrive at the consolidated totals. See
Note 2 to the Financial Statements. The distinction between current and
long-term assets and liabilities in the Statement of Financial Condition
is not meaningful when finance, insurance and manufacturing subsidiaries
are combined; therefore, Transportation has adopted an unclassified
presentation. Certain 1992 and 1991 amounts have been reclassified to
conform with the presentation used in the 1993 financial statements.
Cash and Cash Equivalents
All highly liquid financial instruments with maturities of three
months or less from date of purchase, consisting primarily of bankers'
acceptances, commercial paper and U.S. government securities, are
classified as cash equivalents in the Statement of Financial Condition and
Statement of Cash Flow.
Marketable Securities
Marketable securities are carried at cost or amortized cost which
approximates market value.
<PAGE>
PAGE 35
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Inventory
Inventory is valued at the lower of average cost or market.
Property
Significant expenditures for replacement of equipment, tooling and
pattern equipment, and major rebuilding of machine tools are capitalized.
Depreciation and amortization are generally computed on the straight-line
basis; gains and losses on property disposal are included in other income
and expense.
Research and Development
Activities related to new product development and major improvements
to existing products and processes are expensed as incurred and were $95
million, $90 million and $87 million in 1993, 1992 and 1991, respectively.
Engineering expense, as shown in the Statement of Income (Loss), includes
certain research and development expenses and routine ongoing costs
associated with improving existing products and processes.
Income Taxes
Under Statement of Financial Accounting Standards No. 109 (SFAS 109),
"Accounting for Income Taxes," recognition of a net deferred tax asset is
allowed if future realization is more likely than not. The Parent Company
files a consolidated U.S. federal income tax return which includes
Transportation and its U.S. subsidiaries. Transportation has a tax
allocation agreement (Tax Agreement) with the Parent Company which
requires Transportation to compute its separate federal income tax expense
based on its adjusted book income. Any resulting tax liability is paid to
the Parent Company. In addition, under the Tax Agreement, Transportation
is required to pay to the Parent Company any tax payments received from
its subsidiaries.
The effect of the Tax Agreement is to allow the Parent Company rather
than Transportation to utilize U.S. operating losses and loss
carryforwards generated in earlier years. As of October 31, 1993,
Transportation had $22 million of domestic net operating loss
carryforwards available to offset future taxable income generated by the
subsidiaries.
The adoption of SFAS 109 does not have a material impact on
Transportation, as a result of the Tax Agreement. Substantially all of
the deferred tax asset and corresponding income tax benefit resulting from
the adoption of SFAS 109 is reflected on the financial statements of the
Parent Company.
<PAGE>
PAGE 36
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue on Receivables
Finance charges on retail notes and finance leases are recognized as
income by Navistar Financial over the term of the receivables on the
accrual basis utilizing the actuarial method. Interest from interest-
bearing notes and accounts is recognized on the accrual basis. Gains or
losses on sales of receivables are credited or charged to revenue in the
period in which the sale occurs.
Losses on Receivables
The allowance for losses on receivables is maintained at an amount
management considers appropriate in relation to the outstanding
receivables portfolio. Receivables are charged to the allowance for
losses when they are determined to be uncollectible.
Receivable Sales
Navistar Financial sells and securitizes receivables to public and
private investors with limited recourse and continues to service the
receivables, for which a servicing fee is received from the investors.
Insurance Premiums and Loss Reserves
Premiums and underwriting costs of insurance operations are
recognized on a pro-rata basis over the terms of the policies.
Underwriting losses and outstanding loss reserve balances are based
on individual case estimates of the ultimate cost of settlement, including
actual losses, and determinations of amounts required for losses incurred
but not reported.
Changes in Accounting Policy
In the third quarter of fiscal 1993, Transportation adopted Statement
of Financial Accounting Standards No. 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions" (SFAS 106) and Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes"
(SFAS 109) retroactive to November 1, 1992. As required, previously
reported first and second quarter results for 1993 have been restated for
the effects of the changes in accounting policy. See Notes 4, 5 and 20 to
the Financial Statements.
<PAGE>
PAGE 37
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
2. FINANCIAL STATEMENT ELIMINATIONS
The consolidated columns of the financial statements represent the
summation of Manufacturing and Financial Services after intercompany
transactions between Manufacturing and Financial Services have been
eliminated. The following are the intercompany amounts which have been
eliminated to arrive at the consolidated financial statements. The
presence or absence of brackets indicates reductions or additions,
respectively, necessary to compute the consolidated amounts.
STATEMENT OF INCOME (LOSS)
Millions of dollars 1993 1992 1991
- ----------------------------------------------------------------------
Sales and revenues, Financial Services .... $ (42) $ (40) $ (41)
====== ====== ======
Costs and expenses
Financing charges on sold receivables ... $ (42) $ (40) $ (41)
====== ====== ======
Income before income taxes,
Financial Services ...................... $ (61) $ (52) $ (60)
====== ====== ======
STATEMENT OF FINANCIAL CONDITION
Millions of dollars 1993 1992
- -------------------------------------------------------------
Receivables, net .......................... $ (16) $ -
Equity in Financial Services subsidiaries . (241) (240)
------ ------
Total assets .............................. $ (257) $ (240)
====== ======
Accounts payable .......................... $ (16) $ -
Shareowner's equity, Financial Services ... (241) (240)
------ ------
Total liabilities and shareowner's equity . $ (257) $ (240)
====== ======
STATEMENT OF CASH FLOW
Millions of dollars 1993 1992 1991
- ----------------------------------------------------------------------
Cash and cash equivalents
provided by (used in):
Operations ........................... $ (220) $ (87) $ 288
Investment programs .................. 187 67 (369)
Financing activities ................. 33 20 81
------ ------ ------
Increase during the year
in cash and cash equivalents ........... $ - $ - $ -
====== ====== ======
<PAGE>
PAGE 38
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
3. INFORMATION RELATED TO THE STATEMENT OF CASH FLOW
The following provides information related to the change in operating
assets and liabilities included in cash and cash equivalents provided by
(used in) operations:
Millions of dollars 1993 1992 1991
- ----------------------------------------------------------------------
MANUFACTURING
(Increase) decrease in receivables ...... $ 1 $ (118) $ 42
(Increase) decrease in inventories ...... (51) (37) 13
(Increase) in prepaid
and other current assets .............. (10) (9) -
Increase (decrease) in accounts payable . 122 187 (100)
Increase in accrued liabilities ......... 10 126 74
------ ------ ------
Manufacturing change in operating
assets and liabilities ................ 72 149 29
------ ------ ------
FINANCIAL SERVICES
(Increase) decrease in receivables ...... 2 8 (3)
Increase (decrease) in accounts payable
and accrued liabilities ............... 17 (25) -
------ ------ ------
Financial Services change
in operating assets and liabilities ... 19 (17) (3)
------ ------ ------
Eliminations/reclassifications (a) ........ (192) (69) 325
------ ------ ------
Change in operating assets and liabilities. $ (101) $ 63 $ 351
====== ====== ======
(a) Eliminations and reclassifications to the Statement of Cash Flow
primarily consist of "Acquisitions (over) under cash collections"
relating to Navistar Financial's wholesale notes and accounts. These
amounts are included on a consolidated basis as a change in operating
assets and liabilities under cash flow from operations which differs
from the Financial Services classification in which net changes in
wholesale notes and accounts are classified as cash flow from
investment programs. In 1991, this amount included $300 million of
proceeds from Navistar Financial's initial offering of pass-through
certificates backed by certain wholesale notes receivable.
<PAGE>
PAGE 39
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
4. POSTRETIREMENT BENEFITS
Transportation provides postretirement benefits to substantially all
of its employees. Expenses associated with postretirement benefits
include pension expense for employees, retirees and surviving spouses, and
postretirement health care and life insurance coverage for employees,
retirees, surviving spouses and dependents. These costs are segregated as
a separate component in the Statement of Income (Loss) and are as follows:
Millions of dollars 1993 1992 1991
- ----------------------------------------------------------------------
Pension expense ........................... $ 107 $ 109 $ 101
Health/life insurance ..................... 102 146 138
------ ------ ------
Total postretirement benefits expense ..... $ 209 $ 255 $ 239
====== ====== ======
On the Statement of Financial Condition the postretirement benefits
liability of $1,370 million includes $600 million for pension and $770
million of liabilities for postretirement health care and life insurance
benefits.
Generally, the pension plans are non-contributory with benefits
related to an employee's length of service and compensation rate.
Transportation's policy is to fund its pension plans in accordance with
applicable government regulations and to make additional payments as funds
are available to achieve full funding of the vested accumulated benefit
obligation. The pension plans vary in the extent to which they are
funded, but for plan years which ended during the current fiscal year, all
legal funding requirements have been met. Plan assets are invested
primarily in dedicated portfolios of long-term fixed income securities.
In addition to providing pension benefits, Transportation provides
health care and life insurance for a majority of its retired employees in
the United States (U.S.) and Canada. For most retirees in the U.S., these
benefits are defined by the terms of an agreement between Transportation
and its employees, retirees and collective bargaining organizations (the
Settlement Agreement) which provides such benefits (the Plan). The Plan,
which was implemented on July 1, 1993, provides for cost sharing between
Transportation and retirees in the form of premiums, co-payments and
deductibles. A Base Program Trust has been established to provide a
vehicle for funding of the health care liability through Transportation's
contributions and retiree premiums. A separate independent Retiree
Supplemental Benefit Program was also established, which included
Transportation's contribution of the Parent Company's Class B Common Stock
valued at $513 million, to potentially reduce retiree premiums, co-
payments and deductibles and provide additional benefits in the future.
<PAGE>
PAGE 40
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
Pension Expense
Net pension expense included in the Statement of Income (Loss) is
composed of the following:
Millions of dollars 1993 1992 1991
- ----------------------------------------------------------------------
Service cost-benefits earned
during the period ....................... $ 27 $ 25 $ 20
Interest on projected benefit obligation .. 220 219 221
Other pension costs ....................... 43 54 54
Less expected return on assets ............ (183) (189) (194)
------ ------ ------
Net pension expense ....................... $ 107 $ 109 $ 101
====== ====== ======
Actual return on assets ................... $ 427 $ 218 $ 329
"Other pension costs" in the above table include principally the
amortization of the net transition obligation and amortization of the cost
of plan amendments. The net transition obligation of $467 million is
being amortized on a straight-line basis over 15 years through the year
2002. The costs of plan amendments resulting from negotiated contracts
are amortized principally over the average remaining service life of
active employees.
The determination of the projected benefit obligation is based on
actuarial assumptions and discount rates that reflect the current level of
interest rates. The return on assets is based on long-term expectations.
Annual differences between such expectations and actual experience are
deferred unless the cumulative amount exceeds a specified level. As of
October 31, 1993, the cumulative actual returns on plan assets exceeded
cumulative expected returns by $434 million. As a result of accumulated
reductions in the discount rate and net actuarial losses, the actual
projected benefit obligation exceeds the expected liability by $720
million.
Pension Assets and Liabilities
Included in the Statement of Financial Condition is an additional
pension liability based on the excess of accumulated benefit obligations
over the fair value of assets of Transportation's underfunded pension
plans and an intangible asset representing previously incurred pension
costs not yet expensed. The difference between the additional liability
and the intangible asset represents net accumulated gains and losses from
actuarial valuations, investment experience and changes in assumptions.
This difference resulted in accumulated charges to equity of $229 million
and $101 million as of October 31, 1993 and 1992, respectively.
<PAGE>
PAGE 41
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
Pension Assets and Liabilities (continued)
The funded status of Transportation's plans as of October 31, 1993
and 1992, and a reconciliation with amounts recognized in the Statement of
Financial Condition are provided below.
Plans in Which Plans in Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
--------------------- --------------------
Millions of dollars 1993 1992 1993 1992
- --------------------------------------------------------------------------
Actuarial present value of:
Vested benefits ............ $ (87) $ (71) $ (2,618) $ (2,235)
Non-vested benefits ........ (4) (6) (213) (204)
-------- -------- -------- --------
Accumulated benefit
obligation ............. (91) (77) (2,831) (2,439)
Effect of projected future
compensation levels ...... (6) (6) (40) (58)
-------- -------- -------- --------
Projected benefit obligation.. (97) (83) (2,871) (2,497)
Plan assets at fair value .... 122 98 2,262 2,070
-------- -------- -------- --------
Funded status at October 31 .. 25 15 (609) (427)
Unamortized pension costs:
Net losses ............... 26 38 260 151
Prior service costs ...... 1 1 49 54
(Asset) liability at
date of transition ..... (1) (2) 301 324
Adjustment for the
minimum liability .......... - - (570) (471)
-------- -------- -------- --------
Net asset (liability) ........ $ 51 $ 52 $ (569) $ (369)
======== ======== ======== ========
As shown above, for all plans, the sum of the $51 million net asset
and the $569 million net liability was $518 million and is the amount
recognized in the Statement of Financial Condition at October 31, 1993.
This total includes $82 million of prepaid pension assets representing
advance contributions to certain plans, and $600 million of net pension
liabilities included in the $1,370 million postretirement benefits
liability on the Statement of Financial Condition.
<PAGE>
PAGE 42
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
Pension Assets and Liabilities (continued)
The weighted average actuarial assumptions used in determining
pension costs and the projected benefit obligation were:
Millions of dollars 1993 1992 1991
- ----------------------------------------------------------------------
Discount rate used to determine
present value of projected benefit
obligation .............................. 7.3% 8.8% 9.1%
Expected long-term rate of return
on plan assets .......................... 8.8% 9.2% 10.1%
Expected rate of increase
in future compensation levels ........... 3.5% 5.5% 5.5%
Transportation uses a weighted average discount rate based on the
internal rate of return on its dedicated portfolio of high-quality bonds
and an estimated yield available on high-quality fixed income securities
which could be purchased to effectively settle the remaining portion of
the obligation. The decrease in the discount rate to 7.3% in 1993 from
8.8% in 1992 reflects the decline in long-term interest rates during the
past year. Transportation also reduced the assumption for future salary
increases from 5.5% to 3.5% to reflect current expectations.
Other Postretirement Benefits
Transportation adopted SFAS 106 for its U.S. and Canadian plans in
the third quarter of fiscal 1993, retroactive to November 1, 1992.
Transportation elected to recognize the SFAS 106 transition obligation as
a one-time non-cash charge to earnings. The cumulative effect of this
change in accounting policy, as of November 1, 1992, was $1,149 million.
Prior years have not been restated. The $1,144 million cumulative charge
for the changes in accounting policy reported on the Statement of Income
(Loss) includes the $1,149 million charge from the adoption of SFAS 106
which was partially offset by the $5 million benefit from the adoption of
SFAS 109.
Transportation's previous practice was to expense other
postretirement benefits on a pay-as-you-go basis. The effect of adopting
SFAS 106 in 1993 was an increase in annual expense of $41 million, or $25
million net of tax. The adoption of SFAS 106 does not affect cash flow,
but it does change the timing of the recognition of costs. SFAS 106
requires the accrual of the expected cost of providing postretirement
benefits during employees' active service periods.
<PAGE>
PAGE 43
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
Other Postretirement Benefits (continued)
The components of expense under SFAS 106 for postretirement benefits
other than pensions that are included in the Statement of Income (Loss)
for 1993 include the following:
Millions of dollars 1993
- -----------------------------------------------------------------------
Service cost - benefits earned during the year .... $ 12
Interest cost on the accumulated benefit obligation 91
Expected return on assets ......................... (1)
------
Total postretirement benefits other than pensions . $ 102
======
The funded status of postretirement benefits other than pensions as
of October 31, 1993, is as follows:
Millions of dollars 1993
- ------------------------------------------------------------------------
Accumulated postretirement benefit obligation (APBO):
Retirees and their dependents ..................... $ (765)
Active employees eligible to retire ............... (163)
Other active participants ......................... (176)
-------
Total APBO ........................................ (1,104)
Plan assets at fair value ......................... 302
-------
APBO in excess of plan assets ..................... (802)
Unrecognized net (gain)/loss ...................... 32
-------
Net liability ..................................... $ (770)
=======
During fiscal 1993, Transportation pre-funded $300 million of this
liability from proceeds lent to Transportation by the Parent Company as a
result of a public offering of Common Stock. According to the terms of
the Settlement Agreement, Transportation was required to fund at least
$100 million of this liability prior to January 1, 1994. Further,
Transportation will be required to make additional pre-funding
contributions to the liability on or prior to July 1, 1998, such that the
total of all pre-funding contributions will equal the total net proceeds
from all sales of Common Stock by the Parent Company through such date,
but not to exceed $500 million. Additionally, Transportation is required
to annually pre-fund an amount equal to annual service cost. Under the
terms of the Settlement Agreement, these funds will be used to pay a
portion of current benefits; the remainder to be invested primarily in
equities with an expected return of 9%.
<PAGE>
PAGE 44
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
Other Postretirement Benefits (continued)
The discount rate used to determine the accumulated postretirement
benefit obligation at October 31, 1993, was 7.5%, based on estimated
income on high-quality fixed income securities which could be purchased to
effectively settle the obligation. As interest rates have declined,
inflation rates and their effect on future health care cost trend rates
have been contained and are experiencing a downward trend. Combined with
internal containment programs and the government program on national
health care, the period to reach an ultimate ongoing inflation rate may
also shorten. For 1994, the weighted average rate of increase in the per
capita cost of covered medical benefits is projected to be 10.5% for
participants under the age of 65 and 8.5% for participants age 65 or over.
The rate of increase for drugs is projected to be 11.5% for all
participants. The rates are projected to decrease on an annual basis to
5% in the year 2003 and remain at that level each year thereafter. If the
cost trend rate assumptions were increased by one percentage point for
each year, the accumulated postretirement benefit obligation would
increase by approximately $120 million and the associated expense
recognized for the year ended October 31, 1993 would increase by an
estimated $13 million. Conversely, a decrease in the cost trend rate
would lower the accumulated postretirement benefit obligation and the
associated expense.
5. INCOME TAXES
During the third quarter of 1993, Transportation adopted SFAS 109,
"Accounting for Income Taxes," with retroactive application to November 1,
1992. Under SFAS 109, deferred tax assets and liabilities are generally
determined based on the difference between the financial statement and tax
bases of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to reverse. SFAS 109 allows
recognition of deferred tax assets if future realization is more likely
than not.
The Parent Company files a consolidated U.S. federal income tax
return which includes Transportation and its U.S. subsidiaries.
Transportation has a tax allocation agreement (Tax Agreement) with the
Parent Company which requires Transportation to compute its separate
federal income tax expense based on its adjusted book income. Any
resulting tax liability is paid to the Parent Company. In addition, under
the Tax Agreement, Transportation is required to pay to the Parent Company
any tax payments received from its subsidiaries. The effect of the Tax
Agreement is to allow the Parent Company rather than Transportation to
utilize U.S. operating losses and net operating loss carryforwards (NOLs)
generated in earlier years. As of October 31, 1993, Transportation had
$22 million of domestic NOLs available to offset future taxable income
generated by the subsidiaries.
<PAGE>
PAGE 45
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
5. INCOME TAXES (continued)
The adoption of SFAS 109 does not have a material impact on
Transportation, as a result of the Tax Agreement. Substantially all of
the deferred tax asset and corresponding income tax benefit resulting from
the adoption of SFAS 109 is reflected on the financial statements of the
Parent Company.
Taxes on income (loss) are analyzed by categories as follows:
Millions of dollars 1993 1992 1991
- ---------------------------------------------------------------------
Current:
Federal ................................ $ 12 $ 12 $ 17
State and local ........................ 3 3 5
------ ------ ------
Total current ........................ 15 15 22
Deferred taxes ........................... 4 - -
------ ------ ------
Total income tax expense ................. $ 19 $ 15 $ 22
====== ====== ======
The difference between the provision for income taxes and income
taxes computed using the U.S. federal income tax statutory rate in 1993,
1992 and 1991 was as follows:
Millions of dollars 1993 1992 1991
- ------------------------------------------------------------------------
Amount computed using the
U.S. federal statutory rate ............ $ (165) $ (68) $ (65)
Increase (reduction) in taxes
resulting from:
State income taxes, net ............. 3 3 4
Current year losses for
which no benefit is available ..... 182 83 87
Other................................ (1) (3) (4)
------ ------ ------
Provision for income taxes ............ $ 19 $ 15 $ 22
====== ====== ======
<PAGE>
PAGE 46
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
5. INCOME TAXES (continued)
The components of the deferred tax asset (liability), in millions of
dollars, are as follows:
October 31,1993
---------------
United States
- -------------
Deferred tax asset, net operating loss carryforwards $ 8
Less valuation allowance ............................ (8)
------
Net deferred tax assets ........................... $ -
======
Foreign
- -------
Deferred tax assets:
Net operating loss carryforwards .................. $ 11
Postretirement benefits ........................... 16
------
Total deferred tax assets ....................... 27
------
Deferred tax liabilities:
Prepaid pension assets ............................. (16)
------
Total deferred tax liabilities ................... (16)
------
Total ............................................ 11
Less valuation allowance ............................ (27)
------
Net deferred tax liabilities .................... $ (16)
======
A valuation allowance has been provided for those net operating loss
carryforwards and temporary differences which are estimated to expire
before they are utilized. Because the foreign tax carryforward period is
relatively short, a full allowance has been provided against the total
deferred tax assets. The U.S. valuation allowance increased by $4 million
during 1993 which is attributable to 1993 losses for which no tax benefits
have been recognized. The foreign valuation allowance decreased $6
million during 1993 resulting from recognizing tax benefits from the
utilization of NOL carryforwards attributable to 1993 foreign operating
income and fluctuations in foreign exchange rates.
<PAGE>
PAGE 47
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
5. INCOME TAXES (continued)
SFAS 109 requires that individual tax paying entities of
Transportation offset all deferred tax assets and liabilities within each
tax jurisdiction and present them in a single amount in the Statement of
Financial Condition. Amounts in different tax jurisdictions cannot be
offset against each other.
6. DISCONTINUED OPERATIONS
A provision of $65 million was recorded in the third quarter of 1992
as a loss of discontinued operations for the settlement of litigation
commonly referred to as the Wisconsin Steel Pension Plan Cases. The court
held Transportation liable for pension liabilities to former employees of
the Wisconsin Steel Division prior to its sale to EDC Holding Company in
1977. Under the terms of the settlement, the Company paid the Pension
Benefit Guaranty Corporation (PBGC) $20 million, issued to the PBGC
357,000 shares of Navistar International Corporation Common Stock and
delivered to the PBGC an eight percent ten-year note with a face amount of
$36.6 million and maturing August 15, 2002.
7. MARKETABLE SECURITIES
Marketable securities at October 31 are as follows:
Millions of dollars 1993 1992
- ------------------------------------------------------------------------
MANUFACTURING
Corporate and other securities .................... $ - $ -
U.S. government securities ........................ 54 7
------ ------
Manufacturing marketable securities ............. 54 7
------ ------
FINANCIAL SERVICES
Corporate securities .............................. 18 29
U.S. government and federal agency securities ..... 70 61
Mortgage and asset-backed securities .............. 36 39
Foreign government securities ..................... 9 14
------ ------
Financial Services marketable securities......... 133 143
------ ------
Total marketable securities ......................... $ 187 $ 150
====== ======
<PAGE>
PAGE 48
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
7. MARKETABLE SECURITIES (continued)
Additional information related to the Financial Services' marketable
securities carried at amortized cost at October 31, all of which are held
by insurance affiliates, is as follows:
1993
----------------------------
Gross
Amortized Unrealized Fair
Millions of dollars Cost Gains Value
- -------------------------------------------------------------------------
Corporate securities ........................ $ 18 $ 1 $ 19
U.S. government and federal agency securities 70 5 75
Mortgage and asset-backed securities ........ 36 1 37
Foreign government securities ............... 9 - 9
------ ------ ------
Total Financial Services
marketable securities ..................... $ 133 $ 7 $ 140
====== ====== ======
1992
----------------------------
Gross
Amortized Unrealized Fair
Millions of dollars Cost Gains Value
- -------------------------------------------------------------------------
Corporate securities ....................... $ 29 $ 1 $ 30
U.S. government and federal agency securities 61 2 63
Mortgage and asset-backed securities ........ 39 1 40
Foreign government securities ............... 14 - 14
------ ------ ------
Total Financial Services
marketable securities ..................... $ 143 $ 4 $ 147
====== ====== ======
Contractual maturities of Financial Services' marketable debt
securities at October 31, 1993 are as follows:
Amortized Fair
Millions of dollars Cost Value
- -------------------------------------------------------------------------
Due in one year or less ..................... $ 6 $ 6
Due after one year through five years ...... 62 65
Due after five years through ten years ...... 26 28
Due after ten years ......................... 3 3
------ ------
97 102
Mortgage and asset-backed securities ...... 36 38
------ ------
Total debt securities ................... $ 133 $ 140
====== ======
<PAGE>
PAGE 49
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
7. MARKETABLE SECURITIES (continued)
Proceeds from sales or maturities of investments in debt securities
were $86 million during 1993 and $121 million during 1992. Gross gains of
$6 million and $4 million were realized on such sales or maturities in
1993 and 1992, respectively. There were gross losses of $2 million in
1993 and 1992.
At October 31, 1993 and 1992, Financial Services had $27 million and
$20 million, respectively, of marketable securities on deposit with
various state departments of insurance or otherwise restricted as to use.
These securities are included in total marketable securities balances at
October 31, 1993 and 1992.
8. RECEIVABLES
Receivables at October 31 are summarized by major classification as
follows:
Millions of dollars 1993 1992
- ------------------------------------------------------------------------
MANUFACTURING
Customers ........................................ $ 149 $ 151
Allowance for losses ............................. (24) (20)
------ ------
Manufacturing receivables, net ................. 125 131
------ ------
FINANCIAL SERVICES
Retail notes and lease financing ................. 831 971
Wholesale notes .................................. 259 128
Accounts receivable .............................. 275 216
Amounts due from sales of receivables ............ 76 41
Reinsurance balance receivables .................. 5 6
------ ------
Total accounts and notes receivables ............. 1,446 1,362
Allowance for losses ............................. (13) (14)
------ ------
Financial Services receivables, net ............ 1,433 1,348
------ ------
Eliminations ................................... (16) -
------ ------
Total receivables, net.............................. $1,542 $1,479
====== ======
The allowance for losses of Manufacturing includes amounts associated
with receivables financed by the Financial Services' subsidiaries and
receivables on products sold to distributors in export markets.
<PAGE>
PAGE 50
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
8. RECEIVABLES (continued)
Financial Services
Navistar Financial purchases the majority of the wholesale notes
receivable and some retail notes and accounts receivable arising from
Transportation's operations in the United States.
A portion of Navistar Financial's funding for retail and wholesale
notes comes from sales of those receivables by Navistar Financial to third
parties with limited recourse. Proceeds from sales of receivables were
$1,741 million in 1993, $1,285 million in 1992 and $1,470 million in 1991.
Uncollected sold receivable balances totalled $839 million and $533
million as of October 31, 1993 and 1992, respectively. A portion of the
receivables is sold by Navistar Financial to third parties with recourse.
Navistar Financial's maximum exposure under all receivable sale recourse
provisions at October 31, 1993 is $130 million which includes holdback
reserves of $69 million, subordinated retained interest in securitized
receivable sales of $54 million and $6 million of certain cash deposits
established as a result of the securitized receivables recourse
provisions.
Contractual maturities of notes and lease financing outstanding at
October 31, 1993, are summarized as follows. Prepayments may cause the
average actual life to be shorter.
Retail Notes
and Lease Wholesale Accounts
Millions of dollars Financing Notes Receivable
- ------------------------------------------------------------------------
Gross finance receivables due in:
1994 ........................... $ 337 $ 145 $ 275
1995 ........................... 249 114 -
1996 ........................... 173 - -
1997 and thereafter ............ 165 - -
------- ------- -------
Gross finance receivables .... 924 259 275
Unearned finance charges ......... 93 - -
------- ------- -------
Total finance receivables ........ $ 831 $ 259 $ 275
======= ======= =======
<PAGE>
PAGE 51
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
9. INVENTORIES
Inventories at October 31 are as follows:
Millions of dollars 1993 1992
- ------------------------------------------------------------------------
Finished products .................................. $ 196 $ 180
Work in process .................................... 73 67
Raw materials and supplies ......................... 142 118
------ ------
Total inventories .................................. $ 411 $ 365
====== ======
10. PROPERTY
At October 31, property includes the following:
Millions of dollars 1993 1992
- ------------------------------------------------------------------------
MANUFACTURING
Land ............................................. $ 8 $ 8
------ ------
Buildings, machinery and equipment at cost:
Plants ......................................... 1,087 995
Distribution ................................... 72 72
Other .......................................... 82 76
------ ------
Subtotal ..................................... 1,241 1,143
------ ------
Total property ................................... 1,249 1,151
Less accumulated depreciation and amortization ... (641) (588)
------ ------
Manufacturing property, net .................... 608 563
------ ------
FINANCIAL SERVICES
Total property ................................... 34 24
Less accumulated depreciation and amortization ... (6) (5)
------ ------
Financial Services property, net ............... 28 19
------ ------
Total property and equipment, net .................. $ 636 $ 582
====== ======
Included in the gross property of Manufacturing is property under
capitalized lease obligations of $28 million at October 31, 1993, and $54
million at October 31, 1992.
<PAGE>
PAGE 52
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
11. LEASES
Transportation has long-term noncancellable leases for use of various
equipment and facilities. Lease terms are generally for 5 to 25 years and
in many cases provide for renewal options. Transportation is generally
obligated for the cost of property taxes, insurance and maintenance.
Transportation leases office buildings, distribution centers,
furniture and equipment, machinery and equipment and computer equipment.
Total operating lease expense was $30 million in 1993, 1992 and 1991.
Income received from sublease rentals was $6 million in 1993, 1992 and
1991.
At October 31, 1993, consolidated future minimum lease payments
required under capital and noncancellable operating leases having lease
terms in excess of one year are as follows:
Capital Operating
Millions of dollars Leases Leases
- -----------------------------------------------------------------
1994 ...................................... $ 4 $ 22
1995 ...................................... 4 20
1996 ...................................... 3 20
1997 ...................................... 3 19
Thereafter ................................ 13 72
------ ------
Total minimum payments .................... 27 $ 153
======
Less imputed interest ..................... (8)
------
Present value of minimum lease payments . $ 19
======
Future income from subleases ............ $ 39
======
<PAGE>
PAGE 53
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
12. ACCOUNTS PAYABLE
Major classifications of accounts payable at October 31 are as
follows:
Millions of dollars 1993 1992
- -----------------------------------------------------------------
MANUFACTURING
Trade ........................................ $ 669 $ 577
Other ........................................ 16 4
------ ------
Manufacturing accounts payable ............. 685 581
------ ------
FINANCIAL SERVICES
Other ........................................ 63 56
Manufacturing ................................ 22 -
------ ------
Financial Services accounts payable ........ 85 56
------ ------
Eliminations ................................... (16) -
------ ------
Total accounts payable ......................... $ 754 $ 637
====== ======
13. ACCRUED LIABILITIES
Major classifications of accrued liabilities at October 31 are as
follows:
Millions of dollars 1993 1992
- -----------------------------------------------------------------
MANUFACTURING
Employee related benefits ................... $ 35 $ 51
Product liability and warranty .............. 108 94
Payroll and commissions ..................... 59 67
Taxes ....................................... 21 22
Interest .................................... 4 4
Other ....................................... 132 124
------ ------
Manufacturing accrued liabilities ......... 359 362
------ ------
FINANCIAL SERVICES
Interest .................................... 14 20
Taxes ....................................... 5 5
Product liability ........................... 2 2
Other ....................................... 3 6
------ ------
Financial Services accrued liabilities .... 24 33
------ ------
Total accrued liabilities ..................... $ 383 $ 395
====== ======
<PAGE>
PAGE 54
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
14. DEBT
Short-Term Debt
Millions of dollars 1993 1992
- -------------------------------------------------------------------
MANUFACTURING
Notes payable and current maturities
of long-term debt .............................. $ 25 $ 15
Parent Company notes payable ..................... 33 -
------ ------
Manufacturing short-term debt .................. 58 15
------ ------
FINANCIAL SERVICES
Bank borrowings .................................. 75 -
Current maturities of long-term debt ............. 80 99
------ ------
Financial Services short-term debt ............. 155 99
------ ------
Total short-term debt .............................. $ 213 $ 114
====== ======
Long-Term Debt
Millions of dollars 1993 1992
- -------------------------------------------------------------------
MANUFACTURING
Subordinated Parent Company Notes
9.05% Stock Purchase Agreement
(Class B Common), due 2003 ................... $ 478 $ -
9% Loan Agreement, due 2013 .................... 493 -
------ ------
Long-term debt due Parent Company ................ $ 971 $ -
====== ======
-----------------------------------------------
MANUFACTURING
8 5/8% Sinking Fund Debentures, due 1995 ......... $ 9 $ 15
6 1/4% Sinking Fund Debentures, due 1998 ......... 11 14
9% Sinking Fund Debentures, due 2004 ............. 75 83
8% Secured Note, due 2002 ........................ 37 37
Capitalized leases ............................... 15 19
Other ............................................ 3 4
------ ------
Manufacturing long-term debt ................... 150 172
------ ------
FINANCIAL SERVICES
Senior Debentures and Notes
7 1/2%, due 1994 ............................... - 75
9.35% to 9.75%, medium-term, due 1994 to 1996 217 222
Bank revolver, variable rate, due November 1995 727 727
------ ------
Total senior debt ............................ 944 1,024
Subordinated Debentures, 11.95%, due December 1995 100 100
Unamortized discount ............................. - (5)
------ ------
Financial Services long-term debt .............. 1,044 1,119
------ ------
Total long-term debt ............................... $1,194 $1,291
====== ======
<PAGE>
PAGE 55
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
14. DEBT (continued)
Long-Term Debt (continued)
The aggregate annual maturities and sinking fund requirements for
long-term debt for the years ended October 31 are as follows:
Financial
Millions of dollars Manufacturing Services Total
- -------------------------------------------------------------------------
1995 .................................. 59 100 159
1996 .................................. 58 944 1,002
1997 .................................. 60 - 60
1998 .................................. 64 - 64
Thereafter ............................ 880 - 880
Weighted average interest rate on
total debt including short-term debt
and the effect of discounts and
related amortization ................ 9.0% 7.2% 7.2%
Manufacturing's eight percent secured note, due 2002, is secured by
certain plant assets.
In conjunction with approval of the Settlement Agreement and
implementation of the Plan, Transportation entered into a Stock Purchase
Agreement with the Parent Company at 9.05%, due 2003, for the purchase of
Class B Common Stock. Transportation contributed the stock, which was
valued at $513 million, to an independent retiree Supplemental Trust on
July 1, 1993.
On October 21, 1993, the Parent Company completed a public offering
of common shares. The proceeds were loaned to Transportation at 9%, due
2013. Transportation used $300 million to pre-fund benefit liabilities
under the Plan and will use the remaining proceeds for working capital
purposes.
At October 31, 1993, Navistar Financial had contractually committed
facilities of $1,327 million consisting of a bank revolving credit
facility of $727 million and a retail notes receivable purchase facility
of $600 million. In April 1993, Navistar Financial amended and restated
the credit and purchase facility agreements extending the maturity date of
these facilities to November 15, 1995. The amended and restated credit
facility granted security interests in substantially all of Navistar
Financial's assets, provided for a reduction in the credit facility
commitment in the amount of 50% of any new senior debt issued after April
30, 1993 with a term of three years or longer and permitted Navistar
Financial to declare a special dividend to Transportation not to exceed
$20 million upon implementation of the Plan.
<PAGE>
PAGE 56
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
14. DEBT (continued)
Long-Term Debt (continued)
Unused commitments under the credit and purchase facilities were $157
million, $75 million of which was used to back short-term bank borrowings
at October 31, 1993. The remaining $82 million, when combined with
unrestricted cash and cash equivalents, made $105 million available for
the general business purposes of Navistar Financial at October 31, 1993.
Compensating cash balances are not required under the revolving credit
facility, but commitment fees are paid on the unused portions of the bank
revolving credit and retail notes receivable purchase facilities.
Navistar Financial also pays a facility fee on the $600 million retail
notes receivable purchase facility.
Navistar Financial has two wholly-owned subsidiaries, Navistar
Financial Retail Receivables Corporation (NFRRC) and Navistar Financial
Securities Corporation (NFSC), which have a limited purpose of purchasing
retail and wholesale receivables, respectively, and transferring an
undivided ownership interest in such notes to investors in exchange for
pass-through notes and certificates. These subsidiaries have limited
recourse on the sold receivables and their assets are available to satisfy
the claims of their creditors prior to such assets becoming available to
Navistar Financial or affiliated companies.
At October 31, 1993, NFSC had in place a $300 million revolving
wholesale note sales trust providing for the continuous sale of wholesale
notes on a daily basis. The sales trust is comprised of three $100
million pools of notes maturing serially from 1997 to 1999.
On September 16, 1993, NFRRC filed a shelf registration with the
Securities and Exchange Commission providing for the issuance from time to
time of $1 billion of asset-backed securities. On November 10, 1993,
Navistar Financial sold $335 million of retail notes to NFRRC which, in
turn, sold to investors $323 million of notes and $12 million of
certificates issued by an owner trust. The net proceeds of $334 million
were used by Navistar Financial for general working capital purposes and
to establish a $25 million reserve account with the trust.
On November 16, 1993, Navistar Financial sold $100 million of 8 7/8%
Senior Subordinated Notes due 1998 and used the proceeds to redeem its
11.95% Subordinated Debentures due December 1995. Navistar Financial will
also redeem its 7 1/2% Senior Debentures due January 1994 on December 15,
1993.
Consolidated interest payments were $93 million in 1993 and 1992, and
$97 million in 1991.
<PAGE>
PAGE 57
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
15. OTHER LONG-TERM LIABILITIES
Major classifications of other long-term liabilities at October 31
are as follows:
Millions of dollars 1993 1992
- -------------------------------------------------------------------
MANUFACTURING
Product liability and warranty .............. $ 170 $ 183
Restructuring costs ......................... 8 16
Other ....................................... 77 85
------ ------
Manufacturing other long-term liabilities . 255 284
FINANCIAL SERVICES
Product liability ........................... 9 10
------ ------
Total other long-term liabilities ............. $ 264 $ 294
====== ======
16. FINANCIAL INSTRUMENTS
During fiscal 1993, Transportation adopted SFAS 107, "Disclosures
about Fair Value of Financial Instruments." This statement requires
disclosure of the fair value of financial instruments and a description of
the methods and assumptions used to estimate fair value.
The carrying amounts of financial instruments on a consolidated
basis, as reported on the Statement of Financial Condition and described
in the various footnotes to the financial statements and their fair values
at October 31, 1993, are as follows:
Carrying Fair
Millions of dollars Amount Value
- ------------------------------------------------------------------------
Marketable securities ....................... $ 187 $ 194
Receivables, net ............................ 1,542 1,558
Investments and other assets ................ 234 279
Long-term debt .............................. 2,165 2,198
The carrying amounts of cash and cash equivalents approximate fair
value.
The fair value of marketable securities is estimated based on quoted
market prices, when available. If a quoted market price is not available,
fair value is estimated using quoted market prices for similar financial
instruments. The fair value of Financial Services' marketable securities
held by insurance affiliates at October 31, 1993 is disclosed, as
required, in Note 7 to the Financial Statements, and included above.
<PAGE>
PAGE 58
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
16. FINANCIAL INSTRUMENTS (continued)
The carrying amounts of Manufacturing's customer receivables and
Navistar Financial's wholesale notes and retail and wholesale accounts and
other variable-rate retail notes approximate fair value because of the
short-term maturities of the financial instruments. The fair value of
Navistar Financial's truck retail notes is estimated based on quoted
market prices of similar sold receivables. The fair value of amounts due
from sales of receivables is estimated using cash flow analyses based on
interest rates currently offered by Navistar Financial's finance
operations.
The carrying amounts of short-term debt and variable-rate borrowings
under Navistar Financial's bank revolving credit agreement, which is
repriced frequently, approximate fair value. The fair value of long-term
debt is estimated based on quoted market prices, when available. If a
quoted market price is not available, fair value is estimated using quoted
market prices for similar financial instruments or discounting future cash
flows.
The fair value of investments and other assets is estimated based on
quoted market prices or by discounting future cash flows.
17. COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS ON ASSETS
At October 31, 1993, commitments for capital expenditures in progress
were approximately $17 million.
Transportation was contingently liable at October 31, 1993, for
approximately $4 million for guarantees of debt and for bid and
performance bonds. As of October 31, 1993, Harbour Bermuda was
contingently liable for claims in the amount of $5 million.
At October 31, 1993, the Canadian operating subsidiary was
contingently liable for retail customers' contracts and leases financed by
a third party. Transportation is subject to maximum recourse of $94
million on retail contracts and $9 million on retail leases. Based on
historical loss trends however, Transportation's exposure to loss is not
considered material.
The Canadian operating subsidiary and certain subsidiaries included
in Financial Services are parties to agreements which restrict the amounts
which can be distributed to Transportation in the form of dividends or
loans and advances which can be made. As of October 31, 1993, these
subsidiaries had $313 million of net assets, of which $238 million was
restricted as to distribution.
The Parent Company and Transportation are obligated under certain
agreements with public and private lenders of Navistar Financial to
maintain the subsidiary's income before interest expense and income taxes
at not less than 125% of its total interest expense. No income
maintenance payments were required for the three years ended October 31,
1993.
<PAGE>
PAGE 59
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
17. COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS ON ASSETS
(continued)
Transportation has been named as a potentially responsible party
(PRP), in conjunction with other parties, in a number of cases arising
under an environmental protection law commonly known as the Superfund law.
The anticipated known costs associated with the current PRP actions on
October 31, 1993, are reflected in Transportation's $10 million accrued
liability.
Investigations into the nature and extent of cleanup activities under
the Superfund law are being conducted at two sites formerly owned by
Transportation. The eventual scope, timing and cost of such activities as
well as the availability of defense to any such claims, and possible
claims against third parties and insurance companies are not known and
cannot be reasonably estimated; however, substantial claims could be
asserted against Transportation.
18. LEGAL PROCEEDINGS
In July 1992, Transportation announced its decision to change its
retiree health care benefit plans and concurrently filed a declaratory
judgment class action lawsuit in the U.S. District Court for the Northern
District of Illinois (Illinois Court) to confirm its right to change these
benefits. A countersuit was filed against Transportation by its unions in
the U.S. District Court for the Southern District of Ohio (Ohio Court).
On October 16, 1992, Transportation withdrew its declaratory judgment
action in the Illinois Court and began negotiations with the United
Automobile, Aerospace and Agricultural Implement Workers of America (UAW)
to resolve issues affecting both retirees and employees. On December 17,
1992, Transportation announced that a tentative agreement had been reached
with the UAW on restructuring retiree health care and life insurance
benefits (the Settlement Agreement). During the third quarter of 1993,
all court, regulatory agency and shareowner approvals required to
implement the Settlement Agreement concerning retiree health care benefit
plans were obtained. The Settlement Agreement became effective and the
restructured retiree health care and life insurance plan was implemented
on July 1, 1993.
In May 1993, a jury issued a verdict in favor of Vernon Klein Truck &
Equipment, Inc. and against Transportation in the amount of $10.8 million
in compensatory damages and $15 million in punitive damages. In order to
appeal the verdict in the case, Transportation was required to post a bond
collateralized with $30 million in cash. This amount has been recorded as
restricted cash on the Statement of Financial Condition. The amount of
any potential liability is uncertain and Transportation believes that
there are meritorious arguments for overturning or diminishing the
verdict.
Transportation and its subsidiaries are subject to various other
claims arising in the ordinary course of business, and are parties to
various legal proceedings which constitute ordinary routine litigation
incidental to its business and that of its subsidiaries. In the opinion
of Transportation's management, none of these proceedings or claims are
material to the business or the financial condition of Transportation.
19. SHAREOWNER'S EQUITY
The number of authorized shares of Transportation's capital stock at
October 31, 1993, was 100,000 with a par value of $1.00 per share and the
number of issued and outstanding shares was 1,000. All the issued and
outstanding stock is owned by Navistar International Corporation and no
shares are reserved for officers and employees or for options, warrants,
conversions and other rights.
<PAGE>
PAGE 60
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
<TABLE>
<CAPTION>
20. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
------------- -------------- -------------- ---------------
(Millions of dollars, Restated Restated
except per share data) 1993 1992 1993 1992 1993 1992 1993 1992
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Operations
Sales and revenues ....... $1,300 $1,139 $1,123 $ 917 $1,238 $ 913 $1,033 $ 902
====== ====== ====== ====== ====== ====== ====== ======
Net income (loss):
Income (loss)
before Supplemental
Trust contribution ..... $ 17 $ (32) $ 5 $ (51) $ 25 $ (35) $ 4 $ (33)
Supplemental Trust
contribution - - (513) - - - - -
Income tax expense ..... (5) (1) (3) (4) (5) (4) (6) (6)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
Continuing
operations ........... 12 (33) (511) (55) 20 (39) (2) (39)
Discontinued
operations ........... - - - (65) - - - -
Cumulative
effect of change
in accounting
policy (a):
SFAS 106,
net of income
taxes of
$5 million ....... - - - - - - (1,144) -
------ ------ ------ ------ ------ ------ ------- ------
Net income (loss) ........ $ 12 $ (33) $ (511) $ (120) $ 20 $ (39) $(1,146) $ (39)
====== ====== ====== ====== ====== ====== ======= ======
Supplemental Data
Manufacturing
Sales ................... $1,258 $1,096 $1,080 $ 870 $1,189 $ 871 $ 983 $ 848
Gross margin ............ 180 129 133 90 155 106 128 106
Income (loss)
before taxes and
Financial Services .... 2 (43) (523) (62) 10 (47) (12) (51)
Financial Services
Revenues ................ 54 52 53 57 59 53 60 64
Interest expense ........ 19 22 19 23 19 21 22 21
Income before taxes ..... 15 11 15 11 15 12 16 18
<FN>
Transactions between Manufacturing and Financial Services operations have been eliminated
from Consolidated operations. See Notes 1 and 2.
- ---------------------------------------------------------------------------------------------
(a) In the third quarter of 1993, Transportation adopted SFAS 106 and SFAS 109 retroactive
to November 1, 1992. As required, the previously reported results for the first
and second quarters of 1993 have been restated. Periods prior to November 1, 1992
are not required to be restated for the accounting changes.
</TABLE>
<PAGE>
PAGE 61
==========
NOTES TO FINANCIAL STATEMENTS-- (CONTINUED)
20. SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (continued)
FOURTH QUARTER 1993 RESULTS
Fourth quarter consolidated sales and revenues of $1,300 million were
14% higher than the same period a year ago. Transportation's medium and
heavy truck shipments increased 13% from the prior year's quarter. The
higher shipments reflect improvement in North American industry retail
sales of medium and heavy trucks which totalled 77,200 units, an increase
of 13%, from the same quarter last year. For the fourth quarter,
Transportation maintained its leadership in the North American combined
medium and heavy truck market with a market share of 27.9%. Shipments of
32,700 mid-range diesel engines to original equipment manufacturers were
18% higher than the same quarter of 1992 reflecting consumer demand for
the diesel-powered light trucks and vans which use this engine. Service
parts sales increased 11% from the fourth quarter of 1992.
Net income for the fourth quarter of 1993 was $12 million, an
increase from the $33 million loss for the same period in 1992. The 1992
loss included $23 million of expense related to a voluntary vehicle
recall.
Manufacturing gross margin for the period was 14.3% up from 13.9% in
the fourth quarter of 1992 prior to a one-time charge for vehicle recalls.
The increase in margin can be attributed primarily to increased sales
volume, higher net selling prices and savings from the restructured
retiree benefit Plan implemented July 1, 1993. Partially offsetting these
favorable factors was an increase in start-up costs associated with new
truck and engine product introductions.
Financial Services income before taxes increased to $15 million in
the fourth quarter of 1993 from $11 million in 1992. The increase in
income is primarily from higher earnings from wholesale financing and a
lower provision for credit losses.
<PAGE>
PAGE 62
==========
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
INDEPENDENT AUDITORS' REPORT
----------------------------
Navistar International Transportation Corp.:
We have audited the financial statements and financial statement
schedules of Navistar International Transportation Corp. and Consolidated
Subsidiaries listed in Item 8 and Item 14. These consolidated financial
statements and financial statement schedules are the responsibility of
Transportation's management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the accompanying consolidated financial statements
present fairly, in all material respects, the financial position of
Navistar International Transportation Corp. and Consolidated Subsidiaries
at October 31, 1993 and 1992, and the results of their operations and
their cash flow for each of the three years in the period ended October
31, 1993, in conformity with generally accepted accounting principles.
Also, in our opinion, such financial statement schedules, when considered
in relation to the basic consolidated financial statements taken as a
whole, present fairly in all material respects the information set forth
therein.
As discussed in Note 1, in accordance with the provisions of
Statements of Financial Accounting Standards No. 106 and No. 109,
effective November 1, 1992, Transportation changed its methods of
accounting for postretirement benefits other than pensions and for income
taxes.
Deloitte & Touche
December 15, 1993
Chicago, Illinois
<PAGE>
PAGE 63
Exhibit 24
==========
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
INDEPENDENT AUDITORS' CONSENT
Navistar International Transportation Corp.:
We consent to the incorporation by reference in this Post-Effective
Amendment No. 1 to Registration No. 2-70979 of Navistar International
Transportation Corp. on Form S-8 of our report dated December 15, 1993
(which includes an explanatory paragraph relating to the change in methods
of accounting for postretirement benefits other than pensions and for
income taxes as required by Statements of Financial Accounting Standards
No. 106 and No. 109) appearing in the Annual Report on Form 10-K of
Navistar International Transportation Corp. for the year ended October 31,
1993.
Deloitte & Touche
January 27, 1994
Chicago, Illinois
<PAGE>
PAGE 64
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEMS 10, 11, 12 AND 13
Intentionally omitted. See the index page to this Report for
explanation.
<PAGE>
PAGE 65
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
- --------------------
See Index to Financial Statements in Item 8.
Schedules Page
----
VII - Guarantees of Securities of Other Issuers .............. F-1
VIII - Valuation and Qualifying Accounts and Reserves ......... F-2
IX - Short-Term Borrowings .................................. F-4
X - Supplementary Income Statement Information ............. F-5
All schedules other than those indicated above are omitted because of
the absence of the conditions under which they are required or because
information called for is shown in the financial statements and notes
thereto.
Exhibits, Including those Incorporated by Reference Page
- --------------------------------------------------- ----
(3) Articles of Incorporation and By-Laws ................... E-1
(4) Instruments Defining the Rights
of Security Holders, including Indentures ............. E-2
(10) Material Contracts ...................................... E-3
(24) Independent Auditors' Consent . ......................... 63
(25) Power of Attorney ....................................... 68
(28.1) Navistar Financial Corporation Annual Report on Form 10-K
for the fiscal year ended October 31, 1993 ............ N/A
All exhibits other than those indicated above are omitted because of
the absence of the condition under which they are required or because
information called for is shown in the financial statements and notes
thereto.
Reports on Form 8-K
- -------------------
A report on Form 8-K dated December 9, 1992, was filed by
Transportation to describe developments in negotiations with the United
Automobile, Aerospace and Agricultural Implement Workers of America.
A report on Form 8-K dated December 9, 1992, was filed by
Transportation to disclose a change in credit rating.
A report on Form 8-K dated December 14, 1992, was filed by
Transportation to disclose a change in credit rating.
A report on Form 8-K dated December 18, 1992, was filed by
Transportation to announce a tentative agreement on restructuring retiree
health care and life insurance benefits.
<PAGE>
PAGE 66
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Reports on Form 8-K (continued)
- -------------------
A report on Form 8-K, dated May 14, 1993, was filed by Transportation
indicating Navistar Financial Corporation granted security interests in
substantially all of its assets pursuant to an Amended and Restated Credit
Agreement and amended and restated an existing revolving credit facility
and a retail notes receivable purchase facility.
A report on Form 8-K, dated May 28, 1993, was filed by Transportation
announcing court approval of a retiree health care and life insurance
benefit settlement.
A report on Form 8-K, dated July 1, 1993, was filed by Transportation
describing Parent Company shareowner approval of the postretirement health
care and life insurance benefits settlement as well as a one-for-ten
reverse split of the Common stock and Class B Common stock.
<PAGE>
PAGE 67
SIGNATURE
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
SIGNATURE
Pursuant to the requirements of Section 13 and 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
- -------------------------------------------
(Registrant)
/s/ Robert I. Morrison
- ----------------------------------
Robert I. Morrison January 27, 1994
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
PAGE 68
SIGNATURE
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
POWER OF ATTORNEY
Each person whose signature appears below does hereby make,
constitute and appoint John R. Horne, Robert I. Morrison and Robert A.
Boardman and each of them acting individually, true and lawful attorneys-
in-fact and agents with power to act without the other and with full power
of substitution, to execute, deliver and file, for and on such person's
behalf, and in such person's name and capacity or capacities as stated
below, any amendment, exhibit or supplement to the Form 10-K Report making
such changes in the report as such attorney-in-fact deems appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated:
Signature Title Date
- ----------------------- -------------------------- ----------------
/s/ James C. Cotting
- --------------------
James C. Cotting Chairman January 27, 1994
and Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ John R. Horne
- --------------------
John R. Horne President January 27, 1994
and Chief Operating Officer
and Director
/s/ Robert C. Lannert
- ---------------------
Robert C. Lannert Executive Vice President January 27, 1994
and Chief Financial Officer
and Director
<PAGE>
PAGE 69
<TABLE>
SCHEDULE VII
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
==========
GUARANTEES OF SECURITIES OF OTHER ISSUERS
OCTOBER 31, 1993
(MILLIONS OF DOLLARS)
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN F
-------- -------- -------- --------
NAME OF ISSUER OF
SECURITIES TOTAL
GUARANTEED BY TITLE OF ISSUE OF AMOUNT
PERSON FOR EACH CLASS GUARANTEED
WHICH STATEMENT IS OF SECURITIES AND NATURE OF
FILED GUARANTEED OUTSTANDING GUARANTEE
------------------ ----------------- ----------- ---------
<S> <S> <C> <S>
Guarantees by
Navistar
International
Transportation
Corp.:
Iowa Industrial
Hydraulics Industrial revenue
bonds ............ $ 2 Principal
=====
<FN>
NOTE: Columns D, E, and G are omitted as the answer would be "None".
</TABLE>
F-1
<PAGE>
PAGE 70
<TABLE>
SCHEDULE VIII
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
==========
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(MILLIONS OF DOLLARS)
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
----------- -------- -------- -------- --------
DESCRIPTION BALANCE ADDITIONS DEDUCTIONS FROM
DESCRIPTION AT CHARGED RESERVES BALANCE
OF DEDUCTED BEGINNING TO AT END
RESERVES FROM OF YEAR INCOME DESCRIPTION AMOUNT OF YEAR
----------- -------- -------- --------- ----------- ------ -------
<S> <S> <C> <C> <S> <C> <C>
Reserves deducted
from assets to
which they apply:
1993
----
Uncollectible
notes and
Allowance for Notes and accounts
losses on accounts written off,
receivables .. receivable .. $ 34 $ 6 less recoveries. $ 3 $ 37
===== ===== ===== =====
1992
----
Uncollectible
notes and
Allowance for Notes and accounts
losses on accounts written off,
receivables .. receivable .. $ 27 $ 21 less recoveries. $ 14 $ 34
===== ===== ===== =====
1991
----
Uncollectible
notes and
Allowance for Notes and accounts
losses on accounts written off,
receivables .. receivable .. $ 24 $ 26 less recoveries. $ 23 $ 27
===== ===== ===== =====
</TABLE>
F-2
<PAGE>
PAGE 71
<TABLE>
SCHEDULE VIII (CONTINUED)
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
==========
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(MILLIONS OF DOLLARS)
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE DEDUCTIONS FROM
AT RESERVES BALANCE
DESCRIPTION BEGINNING ADDITIONS CHARGED AT END
OF RESERVES OF YEAR TO INCOME AMOUNT OF YEAR
----------- --------- ----------------- ------ -------
<S> <C> <C> <C> <C>
Reserve for costs
relating to plant
closings or
disposal of
business
segment (a):
1993 $ 19 $ - $ 10 $ 9
====== ====== ====== ======
1992 $ 22 $ - $ 3 $ 19
====== ====== ====== ======
1991 $ 24 $ - $ 2 $ 22
====== ====== ====== ======
<FN>
(a) Includes current and non-current portion.
</TABLE>
F-3
<PAGE>
PAGE 72
<TABLE>
SCHEDULE IX
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
==========
SHORT-TERM BORROWINGS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(MILLIONS OF DOLLARS)
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- -------- -------- -------- -------- --------
WEIGHTED WEIGHTED
CATEGORY OF AVERAGE MAXIMUM AVERAGE
AGGREGATE BALANCE INTEREST AMOUNT AVERAGE INTEREST
SHORT-TERM AT END RATE AT MONTH AMOUNT RATE
BORROWINGS OF PERIOD OCTOBER 31 END BALANCE OUTSTANDING (a) DURING YEAR
(b)
- ---------- --------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
1993
- ----
Borrowings
from banks . $ 75 6.50% $ 75 $ 1 6.50%
-------- ======== --------
Total ... $ 75 6.50% $ 75 $ 1 6.50%
======== ======== ========
1992
- ----
Borrowings
from banks . $ - - $ 40 $ 12 5.60%
========
Commercial paper
borrowings . - - $ 163 44 5.47%
-------- ======== --------
Total ... $ - - $ 203 $ 56 5.50%
======== ======== ========
1991
- ----
Borrowings
from banks . $ 40 5.81% $ 175 $ 60 7.19%
========
Commercial paper
borrowings . 144 6.03% $ 512 316 7.12%
-------- ======== --------
Total ... $ 184 5.98% $ 687 $ 376 7.13%
======== ======== ========
<FN>
(a) The amount outstanding is calculated based on average daily borrowings outstanding.
(b) Calculated by dividing the actual interest for the year by the average daily balance
outstanding.
</TABLE>
F-4
<PAGE>
PAGE 73
<TABLE> SCHEDULE X
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
==========
SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(MILLIONS OF DOLLARS)
<CAPTION>
COLUMN A COLUMN B
-------- --------
CHARGED TO COSTS AND EXPENSES
---------------------------------------------
ITEM 1993 1992 1991
-------------- -------- -------- --------
<S> <C> <C> <C>
Maintenance and repairs ....... $ 64 $ 57 $ 61
Taxes, other than taxes on income:
Social security, unemployment
and other social insurance .. $ 50 $ 44 $ 44
Real estate, personal
property, etc. .............. $ 12 $ 17 $ 14
</TABLE>
F-5
PAGE 1
EXHIBIT 3
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
ARTICLES OF INCORPORATION AND BY-LAWS
The following documents of Navistar International Transportation Corp.
are incorporated herein by reference.
3.1 Restated Certificate of Incorporation of Navistar International
Transportation Corp. effective May 14, 1987, filed as Exhibit
3.1 to Form 8-K dated March 25, 1987, which was filed on Form
SE dated March 28, 1987, Commission File No. 1-5236.
3.2 The By-Laws of Navistar International Transportation Corp.
effective May 20, 1991, filed as Exhibit 3.2 on Annual Report
on Form 10-K dated October 31, 1991 which was filed on Form SE
dated January 27, 1992, on Commission File No. 1-5236.
E-1
PAGE 1
EXHIBIT 4
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
The following instruments of Navistar International Transportation
Corp. and its principal subsidiary Navistar Financial Corporation defining
the rights of security holders are incorporated herein by reference.
4.1 Indenture, dated as of March 1, 1968, between Navistar
International Transportation Corp. and Manufacturers Hanover
Trust Company, as Trustee, and succeeded by FIDATA Trust Company
of New York, as successor Trustee, for 6 1/4% Sinking Fund
Debentures due 1998 for $50,000,000. Filed on Registration
No. 2-28150.
4.2 Indenture, dated as of September 1, 1970, between Navistar
International Transportation Corp. and Morgan Guaranty Trust
Company, as Trustee, and succeeded by Commerce Union Bank, now
known as Sovran Bank/Central South, as successor Trustee, for
8 5/8% Sinking Fund Debentures due 1995 for $100,000,000.
Filed on Registration No. 2-38164.
4.3 Indenture, dated as of June 15, 1974, between Navistar
International Transportation Corp. and Harris Trust and Savings
Bank, as Trustee, and succeeded by Commerce Union Bank, now
known as Sovran Bank/Central South, as successor Trustee, for
9% Sinking Fund Debentures due 2004 for $150,000,000. Filed on
Registration No. 2-51111.
4.4 Indenture, dated as of January 15, 1973, between Navistar
Financial Corporation and Manufacturers Hanover Trust Company,
as Trustee, succeeded by Commerce Union Bank, now known as
Sovran Bank/Central South, as successor Trustee, for 7 1/2%
Debentures due 1994 for $75,000,000. Filed on Registration
No. 2-46636.
4.5 Indenture, dated as of November 1, 1985, between Navistar
Financial Corporation and Continental Bank N.A., as Trustee for
11.95% Subordinated Debentures due 1995 for $100,000,000
(including form of debenture). Filed on Registration
No. 33-1259-01.
4.6 Indenture, dated September 22, 1989, between Navistar Financial
Corporation, the First National Bank of Chicago, as Trustee,
succeeded by Bank One, Columbus, N.A., as successor Trustee, for
$400,000,000 of debt securities on terms to be determined at
time of sale. Filed on Registration No. 33-31003.
4.7 Indenture, dated as of November 15, 1993, between Navistar
Financial Corporation and Continental Bank, National
Association, as Trustee, for 8 7/8% Senior Subordinated Notes
due 1998 for $100,000,000. Filed on Registration No. 33-50541.
======
Instruments defining the rights of holders of other unregistered
long-term debt of Navistar and its subsidiaries have been omitted from
this exhibit index because the amount of debt authorized under any such
instrument does not exceed 10% of the total assets of the Registrant and
its consolidated subsidiaries. The Registrant agrees to furnish a copy of
any such instrument to the Commission upon request.
E-2
PAGE 1
EXHIBIT 10
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
MATERIAL CONTRACTS
The following documents of Navistar International Transportation Corp.
and its principal subsidiary Navistar Financial Corporation are
incorporated herein by reference.
10.1 Pooling and Servicing Agreement dated as of December 1, 1990,
between Navistar Financial Corporation as Servicer, Navistar
Financial Securities Corporation as Seller and Manufacturers
Hanover Trust Company as Trustee. Filed on Registration
No. 33-36767.
10.2 Form of Executive Severance Agreement which is executed with
all executive officers dated September 14, 1992. Commission
File No. 1-5236.
10.3 Amended and Restated Credit Agreement dated as of April 26,
1993, among Navistar Financial Corporation, certain banks, and
Chemical Bank, Continental Bank N.A. and Morgan Guaranty Trust
Company of New York, as Co-Agents. Filed on Form 8-K dated
April 30, 1993. Commission File No. 1-4146-1.
10.4 Security, Pledge and Trust Agreement between Navistar Financial
Corporation and Bankers Trust Company, Trustee, dated as of
April 26, 1993. Filed on Form 8-K dated April 30, 1993.
Commission File No. 1-4146-1.
10.5 Amended and Restated Purchase Agreement among Truck Retail
Instalment Paper Corp., as Seller, Navistar Financial
Corporation, certain purchasers, Chemical Bank and Continental
Bank N.A. as Co-Agents, and J. P. Morgan Delaware as
Administrative Agent, dated as of April 26, 1993. Filed on
Form 8-K dated April 30, 1993. Commission File No. 1-4146-1.
10.6 Administration Agreement dated as of November 10, 1993, between
Navistar Financial Corporation, The Bank of New York, as
Indenture Trustee, and Navistar Financial 1993-A Owner Trust.
Filed on Registration No. 33-50291.
E-3
<PAGE>
EXHIBIT 28.1
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended October 31, 1993
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 1-4146-1
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.)
2850 WEST GOLF ROAD 60008
ROLLING MEADOWS, ILLINOIS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE 708-734-4275
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
------------------- ------------------------
<S> <C>
7 1/2% Debentures, due 1994 New York Stock Exchange
11.95% Subordinated Debentures, due 1995 New York Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
AS OF DECEMBER 31, 1993, THE NUMBER OF SHARES OUTSTANDING OF THE REGISTRANT'S
COMMON STOCK WAS 1,600,000.
DOCUMENTS INCORPORATED BY REFERENCE
1993 ANNUAL REPORT TO SHAREOWNER (PARTS II AND IV)
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL
TRANSPORTATION CORP. AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION
J(1) (A) AND (B) OF FORM 10-K AND IS THEREFORE FILING THIS FORM WITH THE
REDUCED DISCLOSURE FORMAT.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
FORM 10-K
YEAR ENDED OCTOBER 31, 1993
Navistar Financial Corporation's 1993 Annual Report to Shareowner contains
much of the financial information required in this Form 10-K. Such information
is incorporated in this Form 10-K by reference to applicable pages of the 1993
Annual Report to Shareowner, a complete copy of which is provided herein.
Except for those pages specifically referred to herein as incorporated by
reference, the 1993 Annual Report to Shareowner shall not be deemed to be filed
with the Commission.
INDEX
<TABLE>
<CAPTION>
PAGE
----
<C> <C> <S> <C>
PART I Item 1. Business (A).......................................... 1
Item 2. Properties (A)........................................ 1
Item 3. Legal Proceedings..................................... 1
Submission of Matters to a Vote of Security Holders
Item 4. (A).................................................. 1
PART II Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters................................... 2
Item 6. Selected Financial Data (A)........................... 2
Item 7. Management's Discussion and Analysis of Financial
Condition and
Results of Operations (A)............................. 2
Item 8. Financial Statements and Supplementary Data........... 2
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................... 2
Directors and Executive Officers of the Registrant
PART III Item 10. (A).................................................. 2
Item 11. Executive Compensation (A)............................ 2
Security Ownership of Certain Beneficial Owners and
Item 12. Management (A)....................................... 2
Item 13. Certain Relationships and Related Transactions (A).... 2
Exhibits, Financial Statement Schedules and Reports on
PART IV Item 14. Form 8-K............................................. 2
INDEPENDENT AUDITORS' REPORT............................................. 4
SIGNATURES--Principal Accounting Officer................................. 4
--Directors.............................................................. 5
POWER OF ATTORNEY........................................................ 5
SCHEDULES................................................................ S-1
EXHIBITS................................................................. E-1
</TABLE>
- --------
(A) Omitted or amended as the registrant is a wholly-owned subsidiary of
Navistar International Transportation Corp. and meets the conditions set
forth in General Instructions J(1) (a) and (b) of Form 10-K and is,
therefore, filing this Form with reduced disclosure format.
i
<PAGE>
PART I
ITEM 1. BUSINESS
The registrant, Navistar Financial Corporation ("NFC"), was incorporated in
Delaware in 1949 and is a wholly-owned subsidiary of Navistar International
Transportation Corp. ("Transportation"), which is wholly-owned by Navistar
International Corporation ("Navistar"). As used herein, the "Corporation"
refers to Navistar Financial Corporation and its wholly-owned subsidiaries
unless the context otherwise requires.
The Corporation provides wholesale, retail, and to a lesser extent, lease
financing in the United States for sales of new and used trucks sold by
Transportation and Transportation's dealers. The Corporation also finances
wholesale accounts and selected retail accounts receivable of Transportation.
To a minor extent, sales of new products (including trailers) of other
manufacturers are also financed regardless of whether designed or customarily
sold for use with Transportation truck products. Harco National Insurance
Company, NFC's wholly-owned insurance subsidiary, provides commercial physical
damage and liability insurance coverage to Transportation's dealers and retail
customers, and to the general public through the independent insurance agency
system.
ITEM 2. PROPERTIES
The Corporation uses leased facilities to carry out most of the
administrative and finance sales activities.
ITEM 3. LEGAL PROCEEDINGS
In July 1992, Navistar announced its decision to change its retiree health
care benefit plans, including those of the Corporation. Navistar concurrently
filed a declaratory judgment class action lawsuit to confirm its right to
change these benefits in the U.S. District Court for the Northern District of
Illinois ("Illinois Court"). A countersuit was subsequently filed against
Navistar by its unions in the U.S. District Court for the Southern District of
Ohio. On October 16, 1992, Navistar withdrew its declaratory judgment action in
the Illinois Court and began negotiations with the United Automobile, Aerospace
and Agricultural Implement Workers of America ("UAW") to resolve issues
affecting both retirees and employees. On December 17, 1992, Navistar announced
that a tentative agreement had been reached with the UAW on restructuring
retiree health care and life insurance benefits ("the Settlement Agreement").
During the third quarter of 1993, all court, regulatory agency and shareowner
approvals required to implement the Settlement Agreement concerning retiree
health care benefit plans were obtained. The Settlement Agreement became
effective and the restructured retiree health care and life insurance plan was
implemented on July 1, 1993.
In May 1993, a jury issued a verdict in favor of Vernon Klein Truck &
Equipment, Inc. and against Transportation and the Corporation in the amount of
$10.8 million in compensatory damages and $15 million in punitive damages. The
amount of any potential liability is uncertain and Transportation and the
Corporation believe that there are meritorious arguments for overturning or
diminishing the verdict on appeal.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Intentionally omitted. See the index page of this Report for explanation.
1
<PAGE>
PART II
The information required by Items 5, 7 and 8 is incorporated by reference
from the 1993 Annual Report to Shareowner on the pages indicated:
<TABLE>
<CAPTION>
1993 ANNUAL
REPORT PAGE
-----------
<S> <C>
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS......................................... 16
ITEM 6. SELECTED FINANCIAL DATA
Intentionally omitted. See the index page of this Report for
explanation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS .................................. 21
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Navistar Financial Corporation and Subsidiaries:
Statement of Consolidated Income and Retained Earnings for the
years ended October 31, 1993, 1992 and 1991..................... 5
Statement of Consolidated Financial Condition as of October 31,
1993 and 1992................................................... 6
Statement of Consolidated Cash Flow for the years ended October
31, 1993, 1992 and 1991......................................... 7
Notes to Consolidated Financial Statements....................... 8
Independent Auditors' Report..................................... 20
</TABLE>
----------------
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEMS 10, 11, 12 AND 13
Intentionally omitted. See the index page of this Report for explanation.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements
See Index to Financial Statements in Item 8.
Financial Statement Schedules
<TABLE>
<CAPTION>
FORM 10-K
PAGE
---------
<S> <C>
I--Marketable Securities--Other Investments...................... S-1
IX--Short-Term Borrowings.......................................... S-2
</TABLE>
2
<PAGE>
All schedules other than Schedules I and IX indicated above are omitted
because of the absence of the conditions under which they are required or
because information called for is shown in the financial statements and notes
thereto in the 1993 Annual Report to Shareowner.
EXHIBITS, INCLUDING THOSE INCORPORATED BY REFERENCE
<TABLE>
<CAPTION>
EXHIBIT FORM 10-K
NUMBER DESCRIPTION PAGE
------- ----------- ---------
<C> <S> <C>
(3) Articles of Incorporation and By-Laws of the Registrant.. E-1
(4) Instruments Defining the Rights of Security Holders...... E-2
(10) Material Contracts....................................... E-3
Navistar Financial Corporation 1993 Annual Report to
(13) Shareowner............................................... N/A
(25) Power of Attorney........................................ 5
</TABLE>
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended October 31,
1993.
3
<PAGE>
INDEPENDENT AUDITORS' REPORT
Navistar Financial Corporation:
We have audited the statement of consolidated financial condition of Navistar
Financial Corporation and its subsidiaries as of October 31, 1993 and 1992 and
the related statements of consolidated income and retained earnings and of
consolidated cash flow for each of the three years in the period ended October
31, 1993, and have issued our report thereon dated December 1, 1993 (which
includes an explanatory paragraph relating to the change in methods of
accounting for postretirement benefits other than pensions and for income taxes
as required by Statements of Financial Accounting Standards No. 106 and No.
109); such consolidated financial statements and report are included in your
1993 Annual Report to Shareowner and are incorporated herein by reference. Our
audits also included the financial statement schedules of Navistar Financial
Corporation and its subsidiaries, listed in Item 14. These financial statement
schedules are the responsibility of Navistar Financial Corporation's
management. Our responsibility is to express an opinion based on our audits. In
our opinion, such financial statement schedules, when considered in relation to
the basic consolidated financial statements taken as a whole, present fairly in
all material respects the information set forth therein.
Deloitte & Touche
Chicago, Illinois
December 1, 1993
SIGNATURE
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)
January 27, 1994
/s/ Andrew C. Hill
By: _________________________________
Andrew C. Hill
Vice President and Controller
(Principal Accounting Officer)
4
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
EXHIBIT 25
POWER OF ATTORNEY
Each person whose signature appears below does hereby make, constitute and
appoint John J. Bongiorno, Andrew C. Hill and William W. Jones and each of them
acting individually, true and lawful attorneys-in-fact and agents with power to
act without the other and with full power of substitution, to execute, deliver
and file, for and on such person's behalf, and in such person's name and
capacity or capacities as stated below, any amendment, exhibit or supplement to
the Form 10-K Report making such changes in the report as such attorney-in-fact
deems appropriate.
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ John J. Bongiorno January 27, 1994
- ------------------------------------
John J. Bongiorno President and Chief
Executive Officer; Director
(Principal Executive
Officer)
/s/ R. Wayne Cain January 27, 1994
- ------------------------------------
R. Wayne Cain Vice President and
Treasurer; Director
(Principal Financial
Officer)
/s/ James C. Cotting
- ------------------------------------
James C. Cotting Director January 27, 1994
/s/ Andrew C. Hill January 27, 1994
- ------------------------------------
Andrew C. Hill Vice President and
Controller; Director
(Principal Accounting
Officer)
/s/ Thomas M. Hough
- ------------------------------------
Thomas M. Hough Director January 27, 1994
/s/ John R. Horne
- ------------------------------------
John R. Horne Director January 27, 1994
/s/ Robert C. Lannert
- ------------------------------------
Robert C. Lannert Director January 27, 1994
/s/ Robert I. Morrison
- ------------------------------------
Robert I. Morrison Director January 27, 1994
/s/ Thomas D. Silver
- ------------------------------------
Thomas D. Silver Director January 27, 1994
</TABLE>
5
<PAGE>
SCHEDULE I
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MARKETABLE SECURITIES--OTHER INVESTMENTS
AS OF OCTOBER 31, 1993
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- --------- ---------- ---------- -----------
NUMBER OF
SHARES OR
UNITS-- MARKET AMOUNT AT
PRINCIPAL VALUE OF WHICH
AMOUNT OF EACH ISSUE CARRIED IN
NAME OF ISSUER AND TITLE OF EACH BONDS AND COST OF AT BALANCE THE BALANCE
ISSUE NOTES EACH ISSUE SHEET DATE SHEET
-------------------------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C>
MARKETABLE SECURITIES
U.S. Government Obligations........ $74.8 $ 69.6 $ 74.5 $ 70.1
Foreign Government Obligations..... 1.6 1.7 1.6
Corporate Obligations.............. 17.9 18.4 17.8
Asset-backed Obligations........... 12.5 13.0 12.5
Mortgage-backed Obligations........ 23.6 24.4 23.6
------ ------ ------
Total............................ $125.2 $132.0 $125.6
====== ====== ======
</TABLE>
S-1
<PAGE>
SCHEDULE IX
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
SHORT-TERM BORROWINGS
FOR THE YEARS ENDED OCTOBER 31, 1993, 1992 AND 1991
(MILLIONS OF DOLLARS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E COLUMN F
-------- --------- ------------- ----------- ------------- -------------
WEIGHTED MAXIMUM AVERAGE WEIGHTED
AVERAGE AMOUNT AMOUNT AVERAGE
BALANCE INTEREST RATE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE AT END AT END DURING DURING DURING
SHORT-TERM BORROWINGS OF PERIOD OF PERIOD THE PERIOD THE PERIOD(1) THE PERIOD(2)
--------------------- --------- ------------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
1993
Borrowings from banks... $ 75.0 6.50% $ 75.0 $ .6 6.50%
Commercial paper
borrowings............. -- -- $ -- -- --
------ ------
Total............... $ 75.0 6.50% $ 75.0 $ .6 6.50%
====== ======
1992
Borrowings from banks... $ -- -- $ 40.0 $ 11.9 5.60%
Commercial paper
borrowings............. -- -- $163.3 44.3 5.47%
------ ------
Total............... $ -- -- $203.3 $ 56.2 5.50%
====== ======
1991
Borrowings from banks... $ 40.0 5.81% $170.0 $ 60.6 7.19%
Commercial paper
borrowings............. 143.8 6.03% $393.2 315.7 7.12%
------ ------
Total............... $183.8 5.98% $563.2 $376.3 7.13%
====== ======
</TABLE>
- --------
Notes:
(1)The amount outstanding is calculated based on average daily borrowings
outstanding.
(2)Calculated by dividing the actual interest for the year by the average daily
balance outstanding.
S-2
<PAGE>
EXHIBIT 3
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ARTICLES OF INCORPORATION AND BY-LAWS
The following documents of Navistar Financial Corporation are incorporated
herein by reference:
3.1 Restated Certificate of Incorporation of Navistar Financial
Corporation (as amended and in effect on December 15, 1987).
Filed on Form 8-K dated December 17, 1987. Commission File No.
1-4146-1.
3.2 The By-Laws of Navistar Financial Corporation (as amended
February 29, 1988). Filed on Form 10-K dated January 19, 1989.
Commission File No. 1-4146-1.
E-1
<PAGE>
EXHIBIT 4
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
The following instruments of Navistar Financial Corporation defining the
rights of security holders, including indentures, are incorporated herein by
reference:
4.1 Indenture, dated as of January 15, 1973, between the Corporation
and Manufacturers Hanover Trust Company, as Trustee, succeeded
by Commerce Union Bank, now known as Sovran Bank/Central South,
as successor Trustee, for 7 1/2% Debentures due 1994 for
$75,000,000. Filed on Registration No. 2-46636.
4.2 Indenture, dated November 1, 1985 between the Corporation and
Continental Bank N. A., as Trustee, succeeded by State Street
Bank and Trust Company, as successor Trustee, for 11.95%
Subordinated Debentures due 1995 for $100,000,000. Filed on
Registration No. 33-1259; 33-1259-01.
4.3 Indenture, dated September 22, 1989 between the Corporation and
The First National Bank of Chicago, as Trustee, succeeded by
Bank One, Columbus, NA, as successor Trustee, for $400,000,000
of debt securities on terms determined at time of sale. Filed on
Registration No. 33-31003.
4.4 Indenture, dated as of November 15, 1993 between the Corporation
and Continental Bank, National Association, as Trustee, for 8
7/8% Senior Subordinated Notes due 1998 for $100,000,000. Filed
on Registration No. 33-50541.
E-2
<PAGE>
EXHIBIT 10
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MATERIAL CONTRACTS
The following material contracts of Navistar Financial Corporation and
Navistar International Transportation Corp. are incorporated herein by
reference:
<TABLE>
<C> <S>
10.1 Pooling and Servicing Agreement dated as of December 1, 1990
between the Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, and Manufacturers Hanover
Trust Company, as Trustee. Filed on Registration No.
33-36767.
10.2 Purchase Agreement dated as of December 1, 1990 between the
Corporation and Navistar Financial Securities Corporation, as
Purchaser, with respect to the Dealer Note Trust 1990. Filed
on Registration No. 33-36767.
10.3 Pooling and Servicing Agreement dated as of December 1, 1991
between the Corporation, as Servicer, Navistar Financial
Retail Receivables Corporation, as Seller, and The Bank of
New York, as Trustee, with respect to Navistar Financial
1991-1 Grantor Trust. Commission File No. 1-4146-1.
10.4 Navistar Financial Grantor Trusts Standard Terms and
Conditions of Agreement Effective December 1, 1991 between
the Corporation, as Servicer, and Navistar Financial Retail
Receivables Corporation, as Seller, with respect to Navistar
Financial Grantor Trusts formed on or subsequent to December
1, 1991. Commission File No. 1-4146-1.
10.5 Purchase Agreement dated as of December 16, 1991 between the
Corporation and Navistar Financial Retail Receivables
Corporation, as Purchaser, with respect to Navistar Financial
1991-1 Grantor Trust. Commission File No. 1-4146-1.
10.6 Amended and Restated Credit Agreement dated as of April 26,
1993 among the Corporation, certain banks, and Chemical Bank,
Continental Bank N.A. and Morgan Guaranty Trust Company of
New York, as Co-Agents. Filed on Form 8-K dated April 30,
1993. Commission File No. 1-4146-1.
10.7 Security, Pledge and Trust Agreement between the Corporation
and Bankers Trust Company, Trustee, dated as of April 26,
1993. Filed on Form 8-K dated April 30, 1993. Commission File
No. 1-4146-1.
10.8 Amended and Restated Purchase Agreement among Truck Retail
Instalment Paper Corp., as Seller, the Corporation, certain
purchasers, Chemical Bank and Continental Bank N.A. as Co-
Agents, and J.P. Morgan Delaware as Administrative Agent,
dated as of April 26, 1993. Filed on Form 8-K dated April 30,
1993. Commission File No.
1-4146-1.
10.9 Master Intercompany Agreement dated as of April 26, 1993
between the Corporation and Transportation. Filed on Form 8-K
dated April 30, 1993. Commission File No.
1-4146-1.
10.10 Intercompany Purchase Agreement dated as of April 26, 1993
between the Corporation and Truck Retail Instalment Paper
Corp. Filed on Form 8-K dated April 30, 1993. Commission File
No. 1-4146-1.
10.11 Pooling and Servicing Agreement dated as of November 10, 1993
between the Corporation, as Servicer, and Navistar Financial
Retail Receivables Corporation, as Seller, and Navistar
Financial 1993-A Owner Trust. Filed on Registration No.
33-50291.
</TABLE>
E-3
<PAGE>
EXHIBIT 10 (CONTINUED)
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MATERIAL CONTRACTS
10.12 Purchase Agreement dated as of November 10, 1993 between the
Corporation and Navistar Financial Retail Receivables
Corporation, as Purchaser, with respect to Navistar Financial
1993-A Owner Trust. Filed on Registration No. 33-50291.
10.13 Administration Agreement dated as of November 10, 1993 between
the Corporation, The Bank of New York, as Indenture Trustee, and
Navistar Financial 1993-A Owner Trust. Filed on Registration No.
33-50291.
E-4
<PAGE>
NAVISTAR FINANCIAL LOGO
NAVISTAR FINANCIAL LOGO
1993
ANNUAL
REPORT
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Table of Contents
- --------------------------------------------------------------------------------
Business of Navistar Financial Corporation
- --------------------------------------------------------------------------------
Financial Highlights.......................................................... 1
President's Letter............................................................ 2
Statement of Consolidated Income and Retained Earnings........................ 5
Statement of Consolidated Financial Condition................................. 6
Statement of Consolidated Cash Flow........................................... 7
Notes to Consolidated Financial Statements.................................... 8
Statement of Financial Reporting Responsibility...............................19
Independent Auditors' Report..................................................20
Management's Discussion and Analysis..........................................21
Five Year Summary of Financial and Operating Data.............................25
Directors and Officers........................................................29
Information for Investors.....................................................30
Office Locations..............................................................31
Navistar Financial Corporation ("NFC") and subsidiaries (the "Corporation")
provide wholesale, retail, and to a lesser extent, lease financing in the
United States for sales of new and used trucks sold by its parent Company,
Navistar International Transportation Corp. ("Transportation"), and Transporta-
tion's dealers. The Corporation also finances wholesale accounts and selected
retail accounts receivable of Transportation. To a minor extent, sales of new
products (including trailers) of other manufacturers are also financed regard-
less of whether designed or customarily sold for use with Transportation truck
products. Harco National Insurance Company, NFC's wholly-owned insurance sub-
sidiary, provides commercial physical damage and liability insurance coverage
to Transportation's dealers and retail customers, and to the general public
through the independent insurance agency system.
- --------------------------------------------------------------------------------
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Financial Highlights
- --------------------------------------------------------------------------------
Dollar amounts in millions
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
FOR THE YEARS ENDED OCTOBER 31
NET INCOME
Income before taxes on income and cumulative effect of
changes in accounting policy:
Finance operations....................................... $ 47.9 $ 36.6
Insurance operations..................................... 1.1 9.8
-------- --------
Total................................................... 49.0 46.4
Taxes on income........................................... 17.7 16.9
Cumulative effect of changes in accounting policy, net of
income taxes............................................. 8.8 --
-------- --------
Total................................................... $ 22.5 $ 29.5
======== ========
DIVIDENDS PAID............................................. $ 22.6 $ 16.0
GROSS FINANCE RECEIVABLES AND LEASES ACQUIRED
Retail notes and leases................................... $ 898.4 $ 777.7
Wholesale notes........................................... 1,977.6 1,547.7
-------- --------
Total................................................... $2,876.0 $2,325.4
======== ========
GROSS INSURANCE PREMIUMS WRITTEN........................... $ 65.8 $ 69.2
CREDIT LOSS EXPERIENCE (includes sold notes)
Net losses charged off on receivables..................... $ .7 $ 3.2
Percent net losses to liquidations........................ .03% .13%
AS OF OCTOBER 31
FINANCE RECEIVABLES
Retail notes and lease financing.......................... $ 810.8 $ 951.7
Wholesale notes........................................... 259.0 128.0
Accounts.................................................. 245.1 204.3
Other notes............................................... 20.6 19.2
-------- --------
Total................................................... $1,335.5 $1,303.2
======== ========
CAPITALIZATION
Short-term bank borrowings................................ $ 75.0 $ --
Medium-term notes and debentures.......................... 297.2 396.1
Bank revolving credit..................................... 727.0 727.0
Subordinated debt......................................... 100.0 94.9
Shareowner's equity....................................... 219.4 219.5
-------- --------
Total................................................... $1,418.6 $1,437.5
======== ========
Debt to equity ratio...................................... 5.5:1 5.5:1
Senior debt to capital funds ratio........................ 3.4:1 3.6:1
NUMBER OF EMPLOYEES........................................ 339 364
</TABLE>
- --------------------------------------------------------------------------------
1
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
President's Letter
- --------------------------------------------------------------------------------
An improving economy in 1993
supported by historically low in-
terest rates helped to strengthen
the customers that Navistar Finan-
cial Corporation ("NFC")
serves and to improve the quality measures of its receivables portfolio.
Industry demand for truck products improved significantly over recent years
increasing Navistar International Transportation Corporation's
("Transportation's") retail unit deliveries by 15% over 1992 and growing NFC's
serviced receivables portfolio to its highest level since 1985.
Net income for the year and return on average equity fell below recent lev-
els as NFC recorded one time charges recognizing liabilities for various
postretirement benefits, principally health care, and for a trust to partially
fund these benefits in the future. Without these charges NFC's return on equity
would have exceeded 15%, the highest in NFC's 44 year history.
During the year, major initiatives were undertaken to renew existing sources
of funding as well as to access new sources to meet the growing financing needs
of Transportation's dealers and customers. Some of the more significant funding
accomplishments and some of the more important operating accomplishments are
briefly described below.
. NFC extended the contractual commitment from its banks to November 15, 1995
for both its $727 million revolving credit facility and its $600 million
retail notes receivable purchase facility.
. In September, the Corporation positioned itself to complete its first sale of
retail notes receivable in the public market by registering $1 billion of
retail note asset-backed securities with the Securities and Exchange
Commission. On November 10, the Corporation used part of this Registration to
sell $335 million of retail notes. The asset-backed notes received the
highest credit rating from Moody's Investors Service ("Moody's") and Standard
and Poor's Corporation ("Standard and Poor's").
. In December 1993, NFC redeemed its $100 million of 11.95% subordinated debt
due December 1995 using the proceeds from a new 8 7/8% subordinated issue due
November 1998. Standard and Poor's raised its rating for the Corporation's
subordinated debt to B+ from CCC, and Moody's and Duff and Phelps confirmed
their ratings of B2 and BB, respectively.
. In October, Standard and Poor's raised its rating for the Corporation's
senior debt from B- to BB and Moody's confirmed its previous rating of Ba3.
In November, Duff and Phelps confirmed a BB+ rating.
. NFC acquired the highest dollar volume of retail financing and leases since
1984 and increased its unit share of financing and leasing of new
Transportation truck products to 15.3% from 13.7% in 1992. This share was
also the highest achieved since 1984.
. 52 of Transportation's dealerships participated with NFC in developing joint
marketing plans. The plans, which are customized to meet each dealer's needs,
are designed to increase dealer profitability through increased retail
financing business. Of the participating dealership locations, 65% increased
the percentage of units financed with NFC, increasing the number of new
trucks financed at these locations by 39% during the plan period. This
activity was initiated in 1992. The number of participants increased
significantly in 1993. We expect the number of participating dealers to
ultimately reach 100 to 150.
. Guided by its retail information strategic plan, NFC continued the re-
engineering of its retail customer information systems and processes.
Implementation of the new systems and processes, which integrate with the re-
engineered credit approval processes completed last year, will occur in the
first quarter of 1994.
. For the seventh consecutive year, the A.M. Best Company affirmed their A+
rating for Harco National Insurance Company ("Harco"), the Corporation's
wholly-owned insurance subsidiary.
1993 RESULTS
The Corporation's net income for 1993 excluding special charges increased $4
million or 13% over 1992 as a result of a higher volume of retail receivables
sold, a reduction in administrative expense caused by the increase in sold re-
tail note balances and lower credit losses. Harco's results suffered from a se-
vere deterioration in the loss experience of its
- --------------------------------------------------------------------------------
2
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
President's Letter
- --------------------------------------------------------------------------------
truck liability program. Special charges for 1993 included a $9 million net of
tax charge for the adoption of new accounting standards for retiree benefits
and income taxes and a $2 million net of tax charge representing NFC's share of
a trust and of Navistar common stock established to help pay for retiree health
care benefits in the future.
RECEIVABLES
Serviced (owned and sold) truck receivable balances totaled $2.3 billion at
October 31, 1993, up 15% from the $2 billion level of 1992 and 1991.
Gross acqui-
sitions of re-
tail notes and
leases increased
15% to $898 mil-
lion, the high-
est level in al-
most ten years.
While some of
this increase is
attributable to TRUCK RECEIVABLES
NFC's success in SERVICED
expanding its CHART APPEARS HERE
share of new In-
ternational
truck financing,
a strong U.S.
industry coupled
with Transporta-
tion's continued
leadership in
the class 5 to 8
truck markets
was the
most significant contributing factor. NFC financed or leased 15.3% of the 1993
retail unit sales of new trucks manufactured by Transportation, up from 13.7%
in 1992 and the highest penetration in almost ten years. Significant progress
was made in providing medium truck financing as Transportation dealers sup-
ported NFC's effort to provide a finance quote to each retail customer as an
alternative to their traditional sources.
Serviced wholesale note balances increased to $559 million at October 31,
1993 from $402 million a year ago as Transportation and its dealers adjusted
their respective production and wholegoods inventory to meet a strong industry
demand. NFC's wholesale note acquisitions grew to $2 billion in 1993 up from
$1.5 billion in 1992 and 1991, with turnover increasing to 3.8 times in 1993
compared to 3.5 times in 1992 and 1991. NFC continued in its role as a major
provider of wholegoods financing to Transportation's dealers by financing 90%
of new International trucks sold to dealers during 1993 and 89% in both 1992
and 1991.
With a strengthened economy and improved credit and collection processes,
credit losses in 1993, including losses on sold notes, dropped to $.7 million
which is the lowest level ever and represent only .03% of average outstanding
balances. Total losses in 1992 were a more normal $3.2 million or .16% of aver-
age outstanding balances. Year-end delinquencies of retail notes were also down
from 1992 with balances having installments past due over 60 days at .08% of
serviced retail note balances compared to .19% at October 31, 1992. These sta-
tistics underscore the financial stability of the International dealers and the
retail customers that NFC serves.
FUNDING ACTIONS
In 1993, the Corporation positioned itself to utilize a strong, reliable and
inexpensive source of funding by securing access to the public asset-backed se-
curities market. In September, a $1 billion shelf registration of securities
backed by retail notes was completed allowing NFC to sell quickly into the pub-
lic market, which it did in November 1993. In 1992, the Corporation demon-
strated its ability to access the private retail asset-backed securities market
with a $209 million sale which received the highest credit rating from Moody's
and Standard and Poor's. The Corporation also has in place a $300 million re-
volving wholesale note sales trust which provides for the continuous sale of
all eligible wholesale notes on a daily basis. The wholesale note-backed secu-
rities mature annually in $100 million tranches beginning in 1997. Access to
this variety of asset-backed markets helps to assure that NFC will be able to
provide receivable financing support for Transportation's dealers and custom-
ers.
In April, the Corporation extended its $727 million committed revolving
credit line with 21 banks to November 1995 in return for granting a security
interest to debtholders in substantially all of the Corporation's assets. The
revolving credit facility was primarily used in 1993 to finance receivables
that earn interest that varies with the prime rate. NFC's $600 million retail
receivables purchase facility with 14 of the 21 revolver banks was also ex-
tended to November 1995. With the extensions of the bank facilities and NFC's
demonstrated ability to sell asset-backed securities in both public and private
markets, we are confident that funding is available to adequately support the
marketing efforts of Transportation and its dealers.
- --------------------------------------------------------------------------------
3
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
President's Letter
- --------------------------------------------------------------------------------
Over the years, NFC has followed a dividend policy designed to maintain a
reasonable debt to equity ratio that is acceptable to its lenders. During 1993,
regular dividends of $13 million and special dividends of $10 million were paid
to Transportation, resulting in a year-end debt to equity ratio of 5.5:1, iden-
tical to year-end 1992.
INSURANCE OPERATIONS
Written and earned premiums of Harco Na-
tional Insur-
ance Company
both de-
creased 4% in
1993 from
1992. The de-
creases re-
flect manage-
ment's deci-
sions to
limit writ- INSURANCE
ings in sev- PREMIUMS
eral states WRITTEN AND
in response EARNED
to recent CHART APPEARS HERE
loss experi-
ence and in-
creased com-
petition.
Several
large, well
capitalized
insurance
companies
have recently
entered the
truck physi-
cal damage
and liability
marketplace
creating ex-
cess capacity for these product lines and thereby limiting Harco's opportunity
to adjust pricing to experience.
Incurred losses for 1993 as a percent of earned premiums increased 9 per-
centage points over 1992 as a result of increased claim activity in Harco's
truck physical damage and liability insurance lines. Loss experience in 1993
was particularly bad in several states and action has been taken to be more se-
lective in writing truck liability in these jurisdictions.
Investment income decreased from lower gains on sales of marketable securi-
ties, lower investment yields and a lower average investment balance. The in-
vestment portfolio at October 31, 1993 was $126 million, down 3% from 1992.
Harco's investment portfolio had an estimated market value of $132 million.
Pretax income for Harco was $1.1 million for 1993 compared to $9.8 million
for the prior two years. Although competition and low interest rates will con-
tinue to pressure Harco's earnings in 1994, pretax income should increase as
actions taken in 1993 to improve operating results begin to take effect.
Gradual growth of the U.S. economy is likely in 1994, which will continue to
improve market conditions for the truck industry. Retail acquisitions should
again be strong, as NFC further develops its dealer sales and fleet finance
programs. Retail portfolio yield will decrease in 1994 as the portfolio contin-
ues to reprice to current interest rates. The lower retail yield will impact
retail margin and gains on sales of retail notes compared to 1993.
As we move into 1994, we will pursue strategies to increase our share of new
International truck retail financing, to maintain sound credit and underwriting
standards and to improve the quality and efficiency of the customer service
that we provide.
NFC values its relationships with its employees, its customers and its lend-
ers. The successes we realized in 1993 could not have been accomplished without
their dedication, support and loyalty. We look forward to 1994 and the chal-
lenges of better serving our customers.
/s/ John J. Bongiorno
- ---------------------
John J. Bongiorno
President and Chief Executive Officer
(PHOTO OF JOHN J. BONGIORNO APPEARS HERE)
- --------------------------------------------------------------------------------
4
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Statement of Consolidated Income and Retained Earnings
- --------------------------------------------------------------------------------
Millions of dollars
<TABLE>
<CAPTION>
Note
For the years ended October 31 1993 1992 1991 Reference
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Retail notes and lease financing............... $101.9 $100.7 $109.6
Wholesale notes................................ 32.0 28.3 36.6
Accounts....................................... 17.5 14.8 19.2
Insurance premiums earned...................... 57.4 59.9 51.7
Marketable securities.......................... 11.4 16.0 10.3
------ ------ ------
Total........................................ 220.2 219.7 227.4
------ ------ ------
EXPENSES
Cost of borrowing:
Interest expense.............................. 74.6 82.2 90.3 Note 8
Other......................................... 4.7 4.5 5.9
------ ------ ------
Total........................................ 79.3 86.7 96.2
Supplemental Trust expense..................... 3.7 -- -- Note 9
Credit, collection and administrative.......... 15.5 18.2 19.2
Provision for losses on receivables............ 1.5 3.6 5.8 Note 6
Insurance claims and underwriting.............. 65.2 61.7 50.6
Other expense, net............................. 6.0 3.1 2.4
------ ------ ------
Total........................................ 171.2 173.3 174.2
------ ------ ------
INCOME BEFORE TAXES ON INCOME AND CUMULATIVE EF-
FECT OF CHANGES IN ACCOUNTING POLICY........... 49.0 46.4 53.2
TAXES ON INCOME................................. 17.7 16.9 20.2 Note 7
------ ------ ------
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN
ACCOUNTING POLICY.............................. 31.3 29.5 33.0
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING POLI-
CY............................................. 8.8 -- -- Note 9
------ ------ ------
NET INCOME...................................... 22.5 29.5 33.0
RETAINED EARNINGS
Beginning of year.............................. 48.5 35.0 76.0
Dividends paid................................. (22.6) (16.0) (74.0)
------ ------ ------
End of year.................................... $ 48.4 $ 48.5 $ 35.0 Note 11
====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
5
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Statement of Consolidated Financial Condition
- --------------------------------------------------------------------------------
Millions of dollars
<TABLE>
<CAPTION>
Note
As of October 31 1993 1992 Reference
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS........................ $ 33.9 $ 79.2
MARKETABLE SECURITIES............................ 125.6 130.5 Note 4
RECEIVABLES
Finance receivables............................. 1,335.5 1,303.2 Note 5
Allowance for losses............................ (12.0) (12.4) Note 6
-------- --------
Receivables, net............................... 1,323.5 1,290.8
AMOUNTS DUE FROM SALES OF RECEIVABLES............ 75.5 40.7 Note 5
EQUIPMENT ON OPERATING LEASES, NET............... 25.1 16.0
REPOSSESSIONS.................................... 1.8 5.5
OTHER ASSETS..................................... 39.8 46.0
-------- --------
TOTAL ASSETS .................................... $1,625.2 $1,608.7
======== ========
LIABILITIES AND SHAREOWNER'S EQUITY
SHORT-TERM BANK BORROWINGS....................... $ 75.0 $ -- Note 8
ACCOUNTS PAYABLE................................. 77.3 46.7
ACCRUED INCOME TAXES............................. 3.1 3.2
ACCRUED INTEREST................................. 14.4 20.5
SENIOR AND SUBORDINATED DEBT..................... 1,124.2 1,218.0 Note 8
DEALERS' RESERVES................................ 17.3 17.0
UNPAID INSURANCE CLAIMS AND UNEARNED PREMIUMS.... 94.5 83.8
SHAREOWNER'S EQUITY Note 11
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital.... 171.0 171.0
Retained earnings............................... 48.4 48.5
-------- --------
Total.......................................... 219.4 219.5
-------- --------
TOTAL LIABILITIES AND SHAREOWNER'S EQUITY........ $1,625.2 $1,608.7
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
6
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Statement of Consolidated Cash Flow
- --------------------------------------------------------------------------------
Millions of dollars
<TABLE>
<CAPTION>
Note
For the years ended October 31 1993 1992 1991 Reference
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CASH FLOW FROM OPERATIONS
Net income..................................... $ 22.5 $ 29.5 $ 33.0
Adjustments to reconcile net income to cash
provided from operations:
Gains on sales of receivables................. (14.6) (6.0) (5.4) Note 5
Depreciation and amortization................. 9.7 8.1 5.3
Provision for losses on receivables........... 1.5 3.6 5.8 Note 6
Cumulative effect of changes in accounting
policy....................................... 8.8 -- --
Supplemental Trust expense.................... 3.7 -- --
Increase (decrease) in accounts payable and
accrued liabilities.......................... (1.8) (22.6) .8
Increase in deferred income taxes............. 3.7 2.8 1.0
Increase (decrease) in accounts payable to af-
filiated companies........................... 14.3 5.9 (12.3)
Increase in unpaid insurance claims and un-
earned premiums.............................. 10.7 3.6 9.5
Other......................................... (3.2) (12.4) (15.6)
------ ------ ------
Total........................................ 55.3 12.5 22.1
------ ------ ------
CASH FLOW FROM INVESTING ACTIVITIES
Purchase of retail notes and lease receiv-
ables........................................ (770.2) (658.6) (619.2)
Principal collections on retail notes and
lease receivables............................ 337.4 409.3 309.6
Proceeds from sold retail notes............... 558.2 249.2 236.3
Acquisitions under (over) cash collections of
wholesale notes and
accounts receivable.......................... (171.9) (85.2) 355.7
Purchase of marketable securities............. (58.1) (85.7) (63.0)
Proceeds from sales of marketable securities.. 64.8 76.9 47.0
Increase in property and equipment leased to
others....................................... (14.2) (3.9) (12.8)
------ ------ ------
Total........................................ (54.0) (98.0) 253.6
------ ------ ------
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in bank revolving credit facili-
ty........................................... -- 507.0 220.0
Principal payments on term debt............... (99.0) (158.5) (90.0)
Net decrease in commercial paper.............. -- (143.8) (414.3)
Net increase (decrease) in short-term bank
borrowings................................... 75.0 (40.0) (30.0)
Dividends paid to Transportation.............. (22.6) (16.0) (74.0)
Proceeds from issuance of term debt........... -- -- 117.5
------ ------ ------
Total........................................ (46.6) 148.7 (270.8)
------ ------ ------
INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.......................................... (45.3) 63.2 4.9
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.. 79.2 16.0 11.1
------ ------ ------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 33.9 $ 79.2 $ 16.0
====== ====== ======
Supplementary disclosure of cash flow informa-
tion:
Interest paid................................. $ 79.3 $ 79.9 $ 85.7
Income taxes paid............................. 13.5 18.9 20.0
</TABLE>
See Notes to Consolidated Financial Statements.
- --------------------------------------------------------------------------------
7
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
For the Three Years Ended October 31, 1993
Millions of dollars
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Navistar Fi-
nancial Corporation ("NFC") and its wholly-owned subsidiaries ("Corporation").
All significant intercompany accounts and transactions have been eliminated.
All of the Corporation's capital stock is owned by Navistar International
Transportation Corp. ("Transportation"), which is wholly-owned by Navistar In-
ternational Corporation ("Navistar").
Revenue on Receivables
Finance charges on retail notes and finance leases are recognized as income
over the term of the receivables on the accrual basis utilizing the actuarial
method. Interest from interest-bearing notes and accounts is taken into income
on the accrual basis.
Allowance for Losses on Receivables
The Corporation's allowance for losses on receivables is maintained at an
amount management considers appropriate in relation to the outstanding receiv-
ables portfolio. Receivables are charged off to the allowance for losses as
soon as they are determined to be uncollectible based on a note-by-note review,
after all prelitigation collection efforts have been exhausted.
Repossessions are carried at the lower of the unpaid net receivable balance
or estimated realizable value of the equipment.
Receivable Sales
The Corporation sells and securitizes receivables to public and private in-
vestors with limited recourse. The Corporation continues to service the receiv-
ables, for which a servicing fee is received. Gains or losses on sales of re-
ceivables are credited or charged to financing revenue in the period in which
the sale occurs.
Insurance Operations
Insurance premiums are earned on a pro rata basis over the terms of the pol-
icies. Commission costs and premium taxes incurred in acquiring business are
deferred and amortized on the same basis as such premiums are earned. The lia-
bility for unpaid insurance claims includes provisions for reported claims and
an estimate of unreported claims based on past experience. Such provisions in-
clude an estimate of loss adjustment expense.
Income Taxes
The tax effect of each item of revenue or expense reported in the Statement
of Consolidated Income and Retained Earnings is recognized in the current pe-
riod regardless of when the related tax is paid. Navistar and its subsidiaries
file a consolidated Federal income tax return which includes Transportation and
the Corporation. Federal income taxes for the Corporation are computed on a
separate consolidated return basis and are payable to Transportation.
Cash and Cash Equivalents
Cash and cash equivalents include money market funds and marketable securi-
ties with original maturities of three months or less, except for such securi-
ties held by the insurance operations which are included in marketable securi-
ties.
Reclassification
Certain 1992 and 1991 amounts have been reclassified to conform with the
presentation used in the 1993 financial statements.
Changes in Accounting Policy
In the third quarter of fiscal 1993, the Corporation adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109") and Statement of Financial Accounting Standards No. 106, "Employers' Ac-
counting for Postretirement Benefits Other Than Pensions" ("SFAS 106") retroac-
tive to November 1, 1992. Disclosures relating to SFAS 109 and SFAS 106 are
provided in notes 7 and 9, respectively. The cumulative effect of adopting
these changes in accounting policy retroactive to November 1, 1992 resulted in
an after tax charge to income of $8.8 in the first quarter of fiscal 1993. The
effect of adopting these changes was not material to the financial results of
the second quarter of fiscal 1993. Periods prior to November 1, 1992 are not
required to be restated for the changes in accounting policy. See note 14 for
the restated quarterly financial information.
- --------------------------------------------------------------------------------
8
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
New Accounting Pronouncements
In December 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"),
which is applicable to the Corporation's wholly-owned insurance subsidiary,
Harco National Insurance Company. This statement eliminates the practice of re-
porting liabilities relating to reinsured contracts net of the effects of rein-
surance. It requires reinsurance receivables (including amounts related to un-
paid insurance claims) and prepaid reinsurance premiums to be reported as as-
sets. This statement will be adopted in fiscal year 1994. The Corporation has
not yet determined the impact of SFAS 113 on the financial statements.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). This statement establishes financial accounting and reporting standards
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. Upon adoption of SFAS 115, the Cor-
poration's Statement of Consolidated Financial Condition classification of cash
equivalents and marketable securities will not change and the requirements of
SFAS 115 will be met through revised footnote disclosure. The effective date
for this new standard is for fiscal years beginning after December 15, 1993, or
fiscal 1995 for the Corporation. The Corporation has not yet determined the im-
pact on the financial statements nor when it will adopt SFAS 115.
2. TRANSACTIONS WITH AFFILIATED COMPANIES
The Corporation's primary business is the retail, wholesale, and to a lesser
extent, lease financing of products sold by Transportation and its dealers
within the United States.
Wholesale Notes, Wholesale Accounts and Retail Accounts Revenue
In accordance with the agreements between the Corporation and Transportation
relating to financing of wholesale notes, wholesale accounts and retail ac-
counts, the Corporation receives interest income from Transportation at agreed
upon interest rates applied to the average outstanding balances less interest
amounts paid by dealers on wholesale notes and wholesale accounts.
The Corporation purchases wholesale notes and accounts of dealers from
Transportation at the principal amount of the receivables. An acquisition fee
applicable to purchases of wholesale notes secured by new equipment is charged
to Transportation. The retail accounts are accounts of Transportation custom-
ers. Revenue collected from Transportation for wholesale notes, wholesale and
retail accounts and leases was $41.2 in 1993, $38.6 in 1992 and $41.4 in 1991.
Support Agreements
Under provisions of certain public and private financing arrangements,
agreements with Transportation and Navistar provide that the Corporation's con-
solidated income before interest expense and income taxes will be maintained at
not less than 125% of its consolidated interest expense. Since 1984, no mainte-
nance payments have been required under these agreements.
Administrative Expenses
The Corporation pays a fee to Transportation for data processing and other
services. The amount of the fee was $2.3 in 1993, $2.6 in 1992 and $2.4 in
1991.
Accounts Payable/Receivable
Accounts payable at October 31, 1993 include $19.5 payable to Transporta-
tion. Other assets at October 31, 1992 include $.8 due from Transportation.
3. INDUSTRY SEGMENTS
The Corporation is engaged in two industry segments in the United States:
finance and insurance. The Corporation provides wholesale, retail and lease fi-
nancing for the sales of new and used trucks and related equipment by Transpor-
tation and its dealers. To a lesser extent, the Corporation also finances other
commercial vehicles, primarily trailers, sold by independent dealers. Harco Na-
tional Insurance Company, NFC's wholly-owned insurance subsidiary, provides
commercial physical damage and liability insurance coverage to Transportation's
dealers and retail customers, and to the general public through the independent
insurance agency system.
- --------------------------------------------------------------------------------
9
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
Information by industry segment is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Finance operations................................. $ 152.5 $ 146.9 $ 166.3
Insurance operations............................... 67.7 72.8 61.1
-------- -------- --------
Total revenue..................................... $ 220.2 $ 219.7 $ 227.4
======== ======== ========
Income before taxes on income and cumulative effect
of changes in accounting policy:
Finance operations................................. $ 47.9 $ 36.6 $ 43.5
Insurance operations............................... 1.1 9.8 9.7
-------- -------- --------
Total income before taxes on income and cumulative
effect of changes in accounting policy........... $ 49.0 $ 46.4 $ 53.2
======== ======== ========
Assets at end of year:
Finance operations................................. $1,473.5 $1,459.2 $1,310.3
Insurance operations............................... 151.7 149.5 137.8
-------- -------- --------
Total assets at end of year....................... $1,625.2 $1,608.7 $1,448.1
======== ======== ========
</TABLE>
4. MARKETABLE SECURITIES
Marketable securities at October 31, 1993 and 1992 consist of investments in
debt securities and are carried at amortized cost. The following table sets
forth, by type of security issuer, the amortized cost and estimated market val-
ues at October 31, 1993 and 1992:
<TABLE>
<CAPTION>
GROSS GROSS
UNREAL- UNREAL- ESTIMATED
AMORTIZED IZED IZED MARKET
OCTOBER 31, 1993 COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and federal agency securi-
ties...................................... $ 70.1 $4.4 $-- $ 74.5
Foreign governments........................ 1.6 .1 -- 1.7
Corporate securities....................... 17.8 .6 -- 18.4
Mortgage- and asset-backed securities...... 36.1 1.3 -- 37.4
------ ---- --- ------
Total.................................... $125.6 $6.4 $-- $132.0
====== ==== === ======
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Unreal- Unreal- Estimated
Amortized ized ized Market
October 31, 1992 Cost Gains Losses Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and federal agency securi-
ties...................................... $ 61.1 $2.5 $.1 $ 63.5
Foreign governments........................ 1.6 .1 -- 1.7
Corporate securities....................... 29.1 .7 -- 29.8
Mortgage- and asset-backed securities...... 38.7 .9 .1 39.5
------ ---- --- ------
Total.................................... $130.5 $4.2 $.2 $134.5
====== ==== === ======
</TABLE>
The gross unrealized gains at October 31, 1993 are not expected to be real-
ized as a significant portion of the marketable securities are intended to
- --------------------------------------------------------------------------------
10
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
be held to maturity. The amortized cost and estimated market values at October
31, 1993, by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................................... $ 4.7 $ 4.7
Due after one year through five years...................... 61.6 64.9
Due after five years through ten years..................... 23.0 24.8
Due after ten years........................................ .2 .2
------ ------
89.5 94.6
Mortgage- and asset-backed securities...................... 36.1 37.4
------ ------
Total.................................................... $125.6 $132.0
====== ======
</TABLE>
Proceeds from sales or maturities of debt securities were $64.8 during 1993
and $76.9 during 1992. Gross gains of $1.3 and $3.1 and gross losses of $.2 and
$.1 were realized on those sales or maturities in 1993 and 1992, respectively.
All marketable securities at October 31, 1993 and 1992 were held by Harco
National Insurance Company, of which $26.5 and $19.7, respectively, were on de-
posit with various state departments of insurance or otherwise restricted as to
use.
5. FINANCE RECEIVABLES
Finance receivable balances, net of unearned finance income, at October 31
are summarized as follows:
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Retail notes and lease financing:
Truck....................................................... $ 810.8 $ 951.7
Other....................................................... 20.6 19.2
-------- --------
Total...................................................... 831.4 970.9
-------- --------
Wholesale notes.............................................. 259.0 128.0
-------- --------
Accounts:
Retail...................................................... 200.9 163.1
Wholesale................................................... 44.2 41.2
-------- --------
Total...................................................... 245.1 204.3
-------- --------
Total finance receivables................................. $1,335.5 $1,303.2
======== ========
</TABLE>
Contractual maturities of finance receivables including unearned finance in-
come at October 31, 1993 are summarized as follows:
<TABLE>
<CAPTION>
Retail Wholesale Accounts
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Due in:
1994................................................ $337.1 $144.6 $245.1
1995................................................ 248.6 114.2 --
1996................................................ 173.2 .2 --
Due after 1996....................................... 165.6 -- --
------ ------ ------
Gross finance receivables........................... 924.5 259.0 245.1
Unearned finance income.............................. 93.1 -- --
------ ------ ------
Total finance receivables.......................... $831.4 $259.0 $245.1
====== ====== ======
</TABLE>
The actual cash collections from finance receivables will vary from the con-
tractual cash flows because of sales, prepayments, extensions and renewals. The
contractual maturities, therefore, should not be regarded as a forecast of fu-
ture collections.
The Corporation sells finance receivables to public and private investors
with limited recourse provisions. Uncollected sold receivable net balances at
October 31 are as follows:
<TABLE>
<CAPTION>
1993 1992
- --------------------------------------------------------------------------------
<S> <C> <C>
Retail notes...................................................... $539.4 $259.1
Wholesale notes................................................... 300.0 274.3
------ ------
Total........................................................... $839.4 $533.4
====== ======
</TABLE>
Gains on sales of finance receivables are summarized below:
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Retail notes.................................................... $14.2 $5.5 $4.5
Wholesale notes................................................. .4 .5 .9
----- ---- ----
Total......................................................... $14.6 $6.0 $5.4
===== ==== ====
</TABLE>
The "Amounts Due From Sales of Receivables" primarily represents holdback
reserves established pursuant to the limited recourse provisions of certain re-
tail note sales. The Corporation's maximum exposure under all receivable sale
recourse provisions at October 31, 1993 is $129.7 which includes holdback re-
serves of $69.4, subordinated retained interest in
- --------------------------------------------------------------------------------
11
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
securitized receivable sales of $54.4 and certain cash deposits established
pursuant to securitized receivables recourse provisions of $5.9. The Corpora-
tion has included an allowance for estimated losses on sold receivables of $2.8
and $1.6 in 1993 and 1992, respectively. The allowance is determined on a basis
consistent with owned receivables and is included in "Amounts Due From Sales of
Receivables" in the Statement of Consolidated Financial Condition.
The securitized sales structures also require the Corporation to maintain
funds for payment of principal and/or interest to the investors in the event
that collections on the securitized notes are less than required. The Corpora-
tion's other assets at October 31, 1993 and 1992 include $9.6 of deposits held
by the sales trusts and are restricted for use by the securitized sales agree-
ments.
6. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Total allowance for losses at beginning of year............ $14.0 $13.6 $13.6
Provision for losses....................................... 1.5 3.6 5.8
Net losses charged to
allowance................................................. (.7) (3.2) (5.8)
----- ----- -----
Total allowance for losses at end of year................ $14.8 $14.0 $13.6
===== ===== =====
Allowance pertaining to:
Owned notes............................................... $12.0 $12.4 $11.7
Sold notes................................................ 2.8 1.6 1.9
----- ----- -----
Total.................................................... $14.8 $14.0 $13.6
===== ===== =====
</TABLE>
7. TAXES ON INCOME
During fiscal 1993, the Corporation adopted SFAS 109 "Accounting for Income
Taxes." Under SFAS 109, deferred tax assets and liabilities are generally de-
termined based on the difference between the financial statement and tax bases
of assets and liabilities using enacted tax rates in effect for the year in
which the differences are expected to reverse. SFAS 109 generally allows recog-
nition of deferred tax assets if future realization is more likely than not.
Taxes on income are summarized as follows:
<TABLE>
<CAPTION>
1993 1992 1991
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal..................................................... $12.0 $12.7 $17.4
State and local............................................. 2.0 1.4 1.8
----- ----- -----
Total current.............................................. 14.0 14.1 19.2
Deferred (primarily Federal)................................. 3.7 2.8 1.0
----- ----- -----
Total...................................................... $17.7 $16.9 $20.2
===== ===== =====
</TABLE>
The effective tax rate of 36% in 1993 and 1992 and 38% in 1991 differs from
the statutory United States Federal tax rate of 35% in 1993 and 34% in 1992 and
1991 primarily because of state and local income taxes. Deferred tax assets and
liabilities at October 31, 1993 and 1992 are comprised of the following:
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Other postretirement benefits....................................... $2.7 $ --
Deferred tax liabilities:
Depreciation and other.............................................. 2.7 1.7
---- ----
Net deferred tax liabilities....................................... $ -- $1.7
==== ====
</TABLE>
- --------------------------------------------------------------------------------
12
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
8. DEBT
Debt outstanding at October 31 is summarized as follows:
<TABLE>
<CAPTION>
1993 1992
- -------------------------------------------------------------------------------
<S> <C> <C>
Short-term bank borrowings................................. $ 75.0 $ --
Bank revolving credit, at variable rates, due November
1995...................................................... 727.0 727.0
Senior term debt:
Debentures:
7 5/8%, due February 1993................................ -- 60.0
7 1/2%, due January 1994................................. 75.0 75.0
Notes, medium-term, 9.35% to 9.75%, due 1994 to 1996...... 222.5 261.5
Unamortized discount...................................... (.3) (.4)
-------- --------
Total senior term debt.................................. 297.2 396.1
-------- --------
Subordinated term debt:
Debentures, 11.95%, due December 1995..................... 100.0 100.0
Unamortized discount...................................... -- (5.1)
-------- --------
Total subordinated term debt............................ 100.0 94.9
-------- --------
Total debt............................................. $1,199.2 $1,218.0
======== ========
</TABLE>
Information regarding commercial paper and short-term bank borrowings is as
follows:
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate obligations outstanding:
Daily average........................................... $ .6 $ 56.2 $376.3
Maximum month-end balance............................... $75.0 $203.3 $563.2
Weighted average interest rate:
On average daily borrowing.............................. 6.5% 5.5% 7.1%
At October 31........................................... 6.5% -- 6.0%
</TABLE>
The weighted average interest rate on total debt was 6.6%, 7.6% and 8.7% in
1993, 1992 and 1991, respectively. At October 31, 1992, all of the Corpora-
tion's term debt was at a fixed rate of interest. The aggregate annual maturi-
ties and required payments of debt are as follows: 1994, $80; 1995, $100; and
1996, $945.
At October 31, 1993, the Corporation had $1,327 of committed credit facili-
ties. These facilities consisted of a contractually committed bank revolving
credit facility of $727 and a contractually committed retail notes receivable
purchase facility of $600. In April 1993, the Corporation amended and restated
the credit and purchase facility agreements extending the maturity date of both
facilities to November 15, 1995, and the restated credit facility granted secu-
rity interests in substantially all of the Corporation's assets to the Corpora-
tion's debtholders.
Unused commitments under the credit and purchase facilities were $157, $75
of which was used as funding backup for the $75 short-term bank borrowings at
October 31, 1993. The remaining $82 when combined with unrestricted cash and
cash equivalents made $105 available to fund the general business purposes of
the Corporation at October 31, 1993. Compensating cash balances are not re-
quired under the revolving credit facility, but commitment fees are paid on the
unused portions of the bank revolving credit and retail notes receivable pur-
chase facilities. The Corporation also pays a facility fee on the $600 retail
notes receivable purchase facility.
The Corporation has two wholly-owned subsidiaries, Navistar Financial Retail
Receivables Corporation ("NFRRC") and Navistar Financial Securities Corporation
("NFSC"), which have a limited purpose of purchasing retail and wholesale re-
ceivables, respectively, and transferring an undivided ownership interest in
such notes to investors in exchange for pass-through notes and certificates.
These subsidiaries have limited recourse on the sold receivables and their as-
sets are available to satisfy the claims of their creditors prior to such as-
sets becoming available to the Corporation or affiliated companies. At October
31, 1993, NFSC had in place a $300 revolving wholesale note sales trust provid-
ing for the continuous sale of eligible wholesale notes on a daily basis. The
sales trust is comprised of three $100 pools of notes maturing serially from
1997 to 1999. On September 16, 1993, NFRRC filed a shelf registration with the
Securities and Exchange Commission providing for the issuance from time to time
of $1,000 of asset-backed securities. On November 10, 1993, the Corporation
sold $335 of retail notes through NFRRC to an owner
- --------------------------------------------------------------------------------
13
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
trust which, in turn, sold to investors $323 of notes and $12 of certificates.
The net proceeds of $334 were used by the Corporation for general working capi-
tal purposes and to establish a $25 reserve account with the trust.
On November 16, 1993, the Corporation sold $100 of 8 7/8% Senior Subordi-
nated Notes due 1998 and used the proceeds to redeem its 11.95% Subordinated
Debentures due December 1995 on December 16, 1993. The Corporation also re-
deemed its 7 1/2% Senior Debentures due January 1994 on December 15, 1993.
9. RETIREMENT BENEFITS
The Corporation has a pension plan covering substantially all of its employ-
ees. The plan is non-contributory and benefits are related to an employee's
length of service and compensation rate.
Funding of the plan is in compliance with the Employee Retirement Income Se-
curity Act. For the plan year which ended during the current fiscal year, the
funding obligation of the plan has been fulfilled. Plan assets are primarily
invested in a dedicated portfolio of long-term fixed-income securities.
In addition to providing pension benefits, the Corporation provides health
care and life insurance for a majority of its retired employees. For most re-
tirees, these benefits are defined by the terms of an agreement between
Navistar and its employees, retirees and collective bargaining organizations
which provides for postretirement health care and life insurance benefits ("the
Plan"). The Plan, which was implemented on July 1, 1993, provides for cost
sharing between Navistar and retirees in the form of premiums, co-payments and
deductibles. A Base Program Trust was established to provide a vehicle for
funding of the health care liability through Navistar contributions and retiree
premiums. A separate independent Retiree Supplemental Benefit Program was also
established to potentially reduce retiree premiums, co-payments and deductibles
and provide additional benefits in the future. During 1993, the Corporation
agreed to contribute $3.7 to the Supplemental Benefit Trust as its portion of
the Navistar liability.
Pension Expense
Net pension cost includes the following:
<TABLE>
<CAPTION>
1993 1992 1991
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost-benefits earned during the period............... $ .6 $ .6 $ .7
Interest cost on projected benefit obligation................ 2.8 2.7 2.5
Return on assets--actual gain................................ (8.4) (2.8) (6.4)
--deferred gain (loss)................................ 5.2 (.3) 3.8
Other costs (including
amortization of transition amount).......................... .1 .3 .4
---- ---- ----
Net pension cost........................................... $ .3 $ .5 $1.0
==== ==== ====
</TABLE>
The unrecognized net obligation as of the transition date is being amortized
on a straight-line basis over 15 years. The effect of plan amendments is amor-
tized over the remaining average service life of active employees.
- --------------------------------------------------------------------------------
14
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
Pension Assets and Liabilities
The plan's funded status and reconciliation to the Statement of Consolidated
Financial Condition as of October 31 were as follows:
<TABLE>
<CAPTION>
1993 1992
------------------ --------
PLAN ACCUMU- Plan
ASSETS LATED Assets
EXCEED BENEFITS Exceed
ACCUMU- EXCEED Accumu-
LATED PLAN lated
BENEFITS ASSETS Benefits
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Actuarial present value of:
Vested benefits................................. $(32.8) $(1.9) $(27.8)
Non-vested benefits............................. (2.4) (.1) (2.9)
------ ----- ------
Accumulated benefit obligation................. (35.2) (2.0) (30.7)
Effect of projected future compensation levels.. (3.5) -- (3.0)
------ ----- ------
Total projected benefit obligation............ (38.7) (2.0) (33.7)
Plan assets at fair value........................ 39.8 -- 33.3
------ ----- ------
Funded status at October 31..................... 1.1 (2.0) (.4)
Unrecognized net losses (gains).................. (.8) .2 .8
Unrecognized plan amendments..................... .6 -- .7
Unrecognized net obligation as of transition
date............................................ .2 -- .2
------ ----- ------
Net prepaid pension cost ..................... $ 1.1 $(1.8) $ 1.3
====== ===== ======
</TABLE>
For 1993 and 1992, the projected benefit obligation was determined using a
discount rate of 6.7% and 8.1%, respectively, a projected long-term rate of
compensation increase of 3.5% and 5.5%, respectively, and an assumed long-term
rate of return on plan assets of 10.0%.
Postretirement Benefits Other Than Pensions
During 1993, the Corporation adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions", retroactive to November 1, 1992.
SFAS 106 requires the accrual of the expected cost of providing postretirement
benefits during employees' active service periods. The Corporation's previous
practice was to charge the cost of these benefits against operations on a pay-
as-you-go basis. The adoption of SFAS 106 does not affect cash flow, but it
does change the timing of the recognition of costs. Under provisions of SFAS
106, prior years have not been restated.
The Corporation elected to recognize the SFAS 106 transition obligation as a
one-time non-cash charge to earnings. The cumulative effect of this change in
accounting policy, as of November 1, 1992, was $8.8, net of income taxes of
$5.4.
The components of expense under SFAS 106 for postretirement benefits other
than pensions that are included in the Statement of Consolidated Income and Re-
tained Earnings for 1993 include the following:
<TABLE>
<CAPTION>
Postretirement Benefits Other Than Pensions: 1993
- --------------------------------------------------------------------------------
<S> <C>
Service cost--benefits earned during the year.............................. $.3
Interest cost on the accumulated benefit obligation........................ .6
---
Total cost of postretirement benefits other than pensions................ $.9
===
</TABLE>
Postretirement benefit cost charged to expense in the comparable periods in
prior years was accounted for under the previous accounting policy and has not
been restated.
The components of the liability for postretirement benefits other than pen-
sions as of October 31, 1993, were as follows:
<TABLE>
<CAPTION>
Accumulated Postretirement Benefit Obligation: 1993
- ---------------------------------------------------------------------------------
<S> <C>
Retirees and their dependents............................................... $4.6
Active employees eligible to retire......................................... 1.3
Other active participants................................................... 2.7
----
Accumulated postretirement benefit obligation (APBO)........................ 8.6
Plan assets at fair value................................................... 2.4
----
APBO in excess of plan assets............................................... 6.2
Unrecognized net loss....................................................... .8
----
Net liability recognized on the Statement of Consolidated Financial Condi-
tion..................................................................... $5.4
====
</TABLE>
- --------------------------------------------------------------------------------
15
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
The discount rate used to determine the accumulated postretirement benefit
obligation at October 31, 1993, was 7.5%, based on an estimated yield available
on high-quality fixed income securities which could be purchased to effectively
settle the obligation. As interest rates have declined, inflation rates and
their effect on future health care cost trend rates have been contained and are
experiencing a downward trend. Combined with internal containment programs and
the government program on national health care, the period to reach an ultimate
ongoing rate of increase may also shorten. For 1994, the weighted average rate
of increase in the per capita cost of covered medical benefits is projected to
be 10.5% for participants under the age of 65 and 8.5% for participants age 65
or over. The rate of increase for drugs is projected to be 11.5% for all par-
ticipants. The rates decrease on an annual basis to 5.0% in the year 2002 and
remain at that level each year thereafter. If the cost trend rate assumptions
were increased by one percentage point for each year, the accumulated
postretirement benefit obligation would increase by approximately $1.1 and the
associated expense recognized for the year ended October 31, 1993 would in-
crease by an estimated $.1.
10. LEASES
The Corporation is obligated under noncancelable operating leases for the
majority of its office facilities and equipment. These leases are generally re-
newable and provide that property taxes and maintenance costs are to be paid by
the lessee. At October 31, 1993, future minimum lease commitments under noncan-
celable operating leases with remaining terms in excess of one year are as fol-
lows:
<TABLE>
<CAPTION>
Year Ended October 31,
- --------------------------------------------------------------------------------
<S> <C>
1994....................................................................... $1.7
1995....................................................................... 1.5
1996....................................................................... 1.4
1997....................................................................... 1.3
1998....................................................................... 1.3
Thereafter................................................................. 2.6
----
Total..................................................................... $9.8
====
</TABLE>
11. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 1993 and
1992 was 2,000,000 of which 1,600,000 shares were issued and outstanding. All
of the issued and outstanding capital stock is owned by Transportation and no
shares are reserved for officers and employees, or for options, warrants, con-
versions and other rights. Effective with the decline in the Corporation's debt
ratings in February 1992, ordinary dividends to Transportation are limited by
the bank revolving credit agreement to 50% of cumulative net income measured
quarterly beginning February 1, 1992. Under this provision at October 31, 1993,
$2.0 was available for ordinary dividends to Transportation in the first quar-
ter of fiscal 1994 or thereafter.
As discussed in note 8, the Corporation amended and restated its credit fa-
cility in April 1993. The restated credit facility permitted the Corporation to
declare special dividends to Transportation in an aggregate amount not to ex-
ceed $20 upon the effectiveness of a final settlement in the retiree health
care litigation. The implementation of a settlement agreement on July 1, 1993
which restructured postretirement health care and life insurance benefits, as
discussed in note 13, resulted in a $5 special dividend payment on July 31,
1993 and on September 24, 1993. At October 31, 1993, $10 was available for spe-
cial dividends to Transportation.
12. FINANCIAL INSTRUMENTS
During fiscal 1993, the Corporation adopted Statement of Financial Account-
ing Standards No. 107, "Disclosures about Fair Value of Financial Instruments"
("SFAS 107"). This statement requires disclosure of the fair value of financial
instruments, whether recognized or not recognized in the Statement of Consoli-
dated Financial Condition, for which it is practicable to estimate that value.
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
Cash and Cash Equivalents
The carrying amount approximates fair value.
Marketable Securities
Fair value is estimated based on quoted market price, if available. If a
quoted market price is not available, fair value is estimated using quoted mar-
ket prices for similar financial instruments. The fair value of marketable se-
curities held by insurance affiliates at
- --------------------------------------------------------------------------------
16
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
October 31, 1993 is disclosed, as required, in note 4 and included below.
Finance Receivables
The fair value of truck retail notes is estimated based on quoted market
prices of similar receivables sold in conjunction with securitization transac-
tions or in the principal-to-principal market, adjusted for differences in mar-
ket conditions. For other retail notes, primarily variable-rate notes that
reprice frequently, and for wholesale notes and retail and wholesale accounts,
the carrying amounts approximate fair value.
Amounts Due from Sales of Receivables
Fair values for holdbacks due from purchasers of retail notes and for excess
servicing fees receivable are estimated by discounting the expected future cash
flows at the Corporation's incremental borrowing rate.
Senior and Subordinated Debt
For variable-rate borrowings under the bank revolving credit agreement that
reprice frequently, the carrying amount approximates fair value. The fair val-
ues of notes and debentures are estimated based on quoted market prices where
available and, where not available, on quoted market prices of debt with simi-
lar characteristics.
The carrying amounts of financial instruments as reported in the Statement
of Financial Condition and described in the various notes to the financial
statements and their fair values at October 31, 1993 are as follows:
<TABLE>
<CAPTION>
CARRYING FAIR
AMOUNT VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
Financial assets:
Cash and cash equivalents................................... $ 33.9 $ 33.9
Marketable securities....................................... 125.6 132.0
Finance receivables:
Truck retail notes......................................... 752.9 764.5
Wholesale notes............................................ 259.0 259.0
Accounts................................................... 245.1 245.1
Amounts due from sales of receivables....................... 75.5 81.1
Financing liabilities
Senior and subordinated debt................................ $1,124.2 $1,138.0
</TABLE>
13. LEGAL PROCEEDINGS
Retiree Health Care Litigation
In July 1992, Navistar announced its decision to change its retiree health
care benefit plans and concurrently filed a declaratory judgment class action
lawsuit to confirm its right to change these benefits in the U.S. District
Court for the Northern District of Illinois ("Illinois Court"). A countersuit
was subsequently filed against Navistar by its unions in the U.S. District
Court for the Southern District of Ohio. On October 16, 1992, Navistar withdrew
its declaratory judgment action in the Illinois Court and began negotiations
with the United Automobile, Aerospace and Agricultural Implement Workers of
America ("UAW") to resolve issues affecting both retirees and employees. On De-
cember 17, 1992, Navistar announced that a tentative agreement had been reached
with the UAW on restructuring retiree health care and life insurance benefits
("the Settlement Agreement"). During the third quarter of fiscal 1993, all
court, regulatory agency and shareowner approvals required to implement the
Settlement Agreement concerning retiree health care benefit plans were ob-
tained. The Settlement Agreement became effective and the restructured retiree
health care and life insurance plan was implemented on July 1, 1993.
Vernon Klein Case
In May 1993, a jury issued a verdict in favor of Vernon Klein Truck & Equip-
ment, Inc. and against Transportation and the Corporation in the amount of
$10.8 in compensatory damages and $15 in punitive damages. The amount of any
potential liability is uncertain and Transportation and the Corporation believe
that there are meritorious arguments for overturning or diminishing the verdict
on appeal.
14. QUARTERLY FINANCIAL INFORMATION (unaudited)
As discussed in note 1, during the third quarter of 1993, the Corporation
adopted SFAS 106 and SFAS 109 retroactive to November 1, 1992. As required, the
previously reported results for the first quarter of 1993 have been restated.
The effect of adopting these changes was not material to the financial results
of the second quarter of 1993. Periods prior to November 1, 1992 are not re-
quired to be restated for the accounting changes.
- --------------------------------------------------------------------------------
17
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Millions of dollars
<TABLE>
<CAPTION>
1993
----------------------------------------
RESTATED
1ST 2ND 3RD 4TH FISCAL
QUARTER QUARTER QUARTER QUARTER YEAR
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $58.8 $56.6 $53.4 $51.4 $220.2
Interest expense....................... 20.8 18.8 17.6 17.4 74.6
Provision for losses on receivables.... .9 1.1 .3 (.8) 1.5
Net income............................. .9 8.8 5.2 7.6 22.5
<CAPTION>
1992
----------------------------------------
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues............................... $61.7 $50.2 $55.9 $51.9 $219.7
Interest expense....................... 20.1 19.3 21.4 21.4 82.2
Provision for losses on receivables.... 1.6 .8 .9 .3 3.6
Net income............................. 10.7 6.4 6.0 6.4 29.5
</TABLE>
- --------------------------------------------------------------------------------
18
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Statement of Financial Reporting Responsibility
- --------------------------------------------------------------------------------
Management of Navistar Financial Corporation and its subsidiaries is respon-
sible for the preparation and for the integrity and objectivity of the accompa-
nying financial statements and other financial information in this report. The
financial statements have been prepared in accordance with generally accepted
accounting principles and include amounts that are based on management's esti-
mates and judgments.
The accompanying financial statements have been audited by Deloitte & Tou-
che, independent auditors. Management has made available to Deloitte & Touche
all the Corporation's financial records and related data, as well as the min-
utes of Directors' meetings. Management believes that all representations made
to Deloitte & Touche during its audit were valid and appropriate.
Management is responsible for establishing and maintaining a system of in-
ternal controls throughout its operations that provides reasonable assurance as
to the integrity and reliability of the financial statements, the protection of
assets from unauthorized use and the execution and recording of transactions in
accordance with management's authorization. The system of internal controls
which provides for appropriate division of responsibility is supported by writ-
ten policies and procedures that are updated by management as necessary. The
system is tested and evaluated regularly by the parent Company's internal audi-
tors as well as by the independent auditors in connection with their annual au-
dit of the financial statements. The independent auditors conduct their audit
in accordance with generally accepted auditing standards and perform such tests
of transactions and balances as they deem necessary. Management considers the
recommendations of its internal auditors and independent auditors concerning
the Corporation's system of internal controls and takes the necessary actions
that are cost-effective in the circumstances to respond appropriately to the
recommendations presented. Management believes that the Corporation's system of
internal controls accomplishes the objectives set forth in the first sentence
of this paragraph.
/s/ John J. Bongiorno
- ---------------------
John J. Bongiorno
President and Chief Executive Officer
/s/ Andrew C. Hill
- ------------------
Andrew C. Hill
Vice President and Controller
- --------------------------------------------------------------------------------
19
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Independent Auditors' Report
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Navistar Financial Corporation,
Its Directors and Shareowner:
We have audited the accompanying statement of consolidated financial condi-
tion of Navistar Financial Corporation and its subsidiaries as of October 31,
1993 and 1992, and the related statements of consolidated income and retained
earnings and of consolidated cash flow for each of the three years in the pe-
riod ended October 31, 1993. These financial statements are the responsibility
of the Corporation's management. Our responsibility is to express an opinion on
these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing stan-
dards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of mate-
rial misstatement. An audit includes examining, on a test basis, evidence sup-
porting the amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement pre-
sentation. We believe that our audits provide a reasonable basis for our opin-
ion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Navistar Financial
Corporation and its subsidiaries at October 31, 1993 and 1992, and the results
of their operations and their cash flow for each of the three years in the pe-
riod ended October 31, 1993 in conformity with generally accepted accounting
principles.
As discussed in Note 1, in accordance with the provisions of Statements of
Financial Accounting Standards No. 106 and No. 109, effective November 1, 1992,
the Corporation changed its methods of accounting for postretirement benefits
other than pensions and for income taxes.
/s/ Deloitte & Touche
- ---------------------
Deloitte & Touche
December 1, 1993
Chicago, Illinois
- --------------------------------------------------------------------------------
20
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
Net income for 1993 was $23 million compared with $30 million and $33 mil-
lion in 1992 and 1991, respectively. The 1993 results included an after tax
charge of $8.8 million for the cumulative effect of adopting new accounting
standards for income taxes and postretirement benefits, as discussed in notes 7
and 9, respectively, to the Consolidated Financial Statements, and a $3.7 mil-
lion pretax charge for the Corporation's portion of a contribution by Navistar
which established a Supplemental Benefit Trust for retirees, as discussed in
note 9 to the Consolidated Financial Statements. Excluding these special
charges, the Corporation's pretax income for 1993 increased 14% over 1992 from
the gains and the associated favorable impact on servicing expenses related to
increased financing through sales of retail notes receivable and from lower
losses on receivables. Earnings from the Corporation's insurance subsidiary,
Harco National Insurance Company ("Harco"), were considerably lower in 1993 as
a result of higher losses in Harco's physical damage and liability insurance
lines and lower earnings from investments. The Corporation's pretax income for
1992 decreased 13% from 1991 as a result of lower interest margins earned on
the Corporation's finance receivables portfolio, partially offset by a lower
provision for credit losses. Earnings for Harco in 1992 were equivalent to 1991
as higher earned premium revenue and increased investment income were offset by
increased losses on liability insurance and higher sales commissions to general
agents. The more significant elements of revenue and expense impacting net in-
come for these years are discussed in the following paragraphs.
Total revenues for 1993 were unchanged from 1992 and slightly less than
1991. Although revenue from retail note and lease financing was consistent with
this trend, a greater portion of 1993 revenue came from gains on retail note
sales which increased to $15 million from $6 million in 1992 and $5 million in
1991. Revenue from owned retail notes decreased a similar amount in 1993 as a
result of lower average balances, related to the higher volume of note sales,
and a decline in average portfolio yield. Portfolio yield dropped during 1993
as liquidations of older higher yielding notes were replaced with acquisitions
at lower current interest rates. Retail note and lease financing revenue de-
creased in 1992 from 1991 as a result of a decline in average portfolio yield.
Wholesale note revenue increased 14% in 1993 to $32 million as a result of
higher average note balances in support of increased demand for Transportation
truck products. Average wholesale note balances in 1992 were equivalent to
1991. In December 1990, the Corporation sold $300 million of wholesale notes to
a revolving sales trust. This revolving wholesale arrangement provides for the
continuous sale of notes by the Corporation on a daily basis. Gains on whole-
sale notes sold to the trust do not vary significantly from year to year.
Revenue from accounts increased 20% in 1993 to $18 million slightly below
the 1991 level. The increase in 1993 from 1992 resulted from higher average
balances, which increased to $251 million in 1993 compared to $193 million in
both 1992 and 1991. The decrease in account revenue in 1992 from 1991 resulted
from a decline in average yield related to decreases in the prime rate.
Insurance premiums earned by Harco decreased 5% to $57 million in 1993 after
a 15% increase in 1992 over 1991. The decrease in 1993 reflects a reduction in
written premiums in response to recent loss experience and increased competi-
tion. The increase in 1992 was the result of increased coverage written through
Harco's independent insurance agency network which includes over 1,000 agents
nationwide. Harco's investment income decreased to $9 million in 1993 compared
with $13 million in 1992 and $10 million in 1991. The decrease in 1993 resulted
from lower realized gains on sales of marketable securities caused by the sta-
bilization of interest rates during 1993 and a decline in the yield on invest-
ments resulting from the lower market interest rates available on new invest-
ments. The increase in 1992 resulted from realized gains on sales of invest-
ments.
- --------------------------------------------------------------------------------
21
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Interest expense decreased 9% in 1993 to $75 million after a similar per-
centage decrease in 1992 from a level of $90 million in 1991. The decreases in
interest expense in 1993 and 1992 primarily reflect the effect of lower inter-
est rates. In 1993, average debt balances returned to their 1991 level after a
decline in 1992 coincident with finance receivable balances. The ratio of debt
to equity was 5.5:1 at October 31, 1993 and 1992 and 5.1:1 at October 31, 1991.
On July 1, 1993, Navistar implemented a restructured retiree health care and
life insurance plan ("the Plan"), as discussed in notes 9 and 13 to the Consol-
idated Financial Statements. As part of the Plan, Navistar contributed $300
million to pre-fund Plan benefit liabilities and common stock valued at $513
million to a Supplemental Benefit Trust to help pay for Plan benefits in the
future. The Corporation recognized $3.7 million of expense as its portion of
the Supplemental Benefit Trust contribution.
The provision for losses on receivables decreased to $1.5 million in 1993
from $3.6 million in 1992 and $5.8 million in 1991, reflecting lower losses on
retail and wholesale notes. Finance receivables are written off against the al-
lowance for losses as soon as they are determined to be uncollectible based on
a review of each problem obligor. Truck note write-offs, including those on
sold notes, totaled $.7 million in 1993, $3.2 million in 1992, and $5.8 million
in 1991. At October 31, 1993, the Corporation's allowance for losses equaled
.69% of net financing receivables, including sold receivables, compared with
.77% and .75% as of October 31, 1992 and 1991, respectively. The allowance is
maintained at a level which management considers appropriate in relation to the
outstanding receivables balance, taking into consideration loss experience,
current economic conditions and other factors.
Insurance claims and underwriting expense increased to $65 million in 1993
from $62 million and $51 million in 1992 and 1991, respectively. The increased
expenses in 1993 resulted from increased losses sustained in Harco's truck
physical damage and liability insurance lines. The increase in 1992 resulted
from the higher level of activity associated with the higher premium volume as
well as adverse truck liability loss experience. Insurance underwriting expense
increased $.3 million and $2.2 million in 1993 and 1992, respectively, primar-
ily as a result of increased commission costs associated with higher volumes of
premiums written through general agents in 1992.
LIQUIDITY AND FUNDS MANAGEMENT
The Corporation's operations are substantially dependent upon the production
and sale of Transportation's truck products. Navistar Financial has tradition-
ally obtained the cash to provide financing to Transportation and its customers
from commercial paper, short- and long-term bank borrowings, medium- and long-
term debt issues, sales of receivables and equity capital. Recently, the debt
ratings of the Corporation, detailed below, have made bank borrowings and sales
of finance receivables the most economical sources of cash. The Corporation's
insurance operations generate their funds through internal operations and have
no external borrowings.
During 1993, the Corporation supplied 90% of the wholesale financing of new
trucks sold to Transportation's dealers, compared with 89% for 1992 and 1991.
Gross acquisitions of retail notes and leases increased 15% to $898 million in
1993 after a 4% increase to $778 million in 1992 from $747 million in 1991. The
higher levels of acquisitions reflect increased sales by Transportation, espe-
cially of heavy trucks, and an increase in the Corporation's share of the re-
tail financing of new trucks manufactured by Transportation and sold in the
United States to 15.3% in 1993 from 13.7% in 1992 and 13.1% in 1991. Net fi-
nance receivables increased to $1,324 million at October 31, 1993 from $1,291
million and $1,163 million at October 31, 1992 and 1991, respectively. The Cor-
poration sold $576 million of retail notes in 1993 compared with $209 million
in 1992, and $220 million in 1991. Since December 1990, the Corporation has
utilized a $300 million revolving wholesale note sales trust providing for the
continuous sale of eligible wholesale notes on a daily basis. The sales trust
sold three $100 million tranches of floating rate pass-through certificates,
maturing serially from 1997 to 1999, to the public. No significant change from
the current level of financing support for Transportation truck product sales
is anticipated by the Corporation.
- --------------------------------------------------------------------------------
22
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
At October 31, 1993, the Corporation had a contractually committed bank re-
volving credit facility of $727 million and a contractually committed retail
notes receivable purchase facility of $600 million. In April 1993, the Corpora-
tion amended and restated the credit and purchase facility agreements extending
the maturity date of both facilities to November 15, 1995. The restated credit
facility granted security interests in substantially all of the Corporation's
assets to the Corporation's debtholders and permitted special dividends of $20
million upon the effectiveness of a final settlement in Navistar's retiree
health care litigation. The implementation of the Settlement Agreement on July
1, 1993, as discussed in note 13 to the Consolidated Financial Statements, re-
sulted in special dividend payments of $5 million on July 31, 1993 and on Sep-
tember 24, 1993. At October 31, 1993, $10 million was available for special
dividends to Transportation.
At October 31, 1993, the unused commitment under the receivable purchase fa-
cility was $157 million, $75 million of which provided funding backup for the
$75 million short-term bank borrowings at October 31, 1993. The remaining $82
million when combined with unrestricted cash and cash equivalents made $105
million available to fund the general business purposes of the Corporation. The
bank revolving credit facility was fully utilized at October 31, 1993.
In October 1993, ratings on the Corporation's debt were reviewed by Standard
and Poor's Corporation ("Standard and Poor's") and Moody's Investors Service,
Inc. ("Moody's"). Standard and Poor's raised its ratings for the Corporation's
debt from B- to BB for senior debt and from CCC to B+ for subordinated debt.
Moody's confirmed their previous ratings of Ba3 for senior debt and B2 for sub-
ordinated debt. In November 1993, Duff & Phelps confirmed their debt ratings of
BB+ for senior debt and BB for subordinated debt. The Corporation's commercial
paper is rated "not prime" by Moody's.
During 1992, ratings on the Corporation's debt were lowered by Moody's,
Standard and Poor's and Duff & Phelps. After the reduction in credit ratings,
the Corporation's commercial paper and uncommitted bank borrowings were refi-
nanced at maturity with borrowings from the Corporation's revolving bank line
of credit. At October 31, 1993 there were $75 million of short-term bank
borrowings outstanding compared with no outstanding commercial paper or short-
term bank borrowings at October 31, 1992. The changes in credit ratings did not
impact the Corporation's ability to sell retail notes through its receivables
purchase facility or through asset-backed transactions in the public and pri-
vate markets.
On November 10, 1993, the Corporation sold $335 million of retail notes re-
ceivable through its special purpose subsidiary, Navistar Financial Retail Re-
ceivables Corporation, to an owner trust which, in turn, sold interests in the
notes to investors in exchange for fixed rate notes and certificates. This sale
of retail notes, pursuant to a $1 billion shelf registration filed with the Se-
curities and Exchange Commission in September 1993, netted the Corporation pro-
ceeds of $334 million, of which $25 million was used to establish a cash re-
serve account for the trust and the remainder reduced bank revolver draw downs.
On November 16, 1993, the Corporation sold $100 million of 8 7/8% Senior Subor-
dinated Notes due 1998 to the public. On December 16, 1993, the net proceeds
from the 8 7/8% subordinated issue were used to redeem the Corporation's 11.95%
Subordinated Debentures due December 1995.
The Corporation manages sensitivity to interest rate changes by funding
floating rate assets with floating rate debt, primarily borrowings under the
bank revolving credit agreement, and fixed rate assets with fixed rate debt,
equity and floating rate debt. Management has limited the amount of fixed rate
assets funded with floating rate debt by selling retail receivables on a fixed
rate basis.
Management believes that collections on the outstanding receivables portfo-
lio plus cash available from the Corporation's various funding sources will
permit Navistar Financial to meet the financing requirements of Transporta-
tion's dealers and retail customers through 1994 and beyond.
- --------------------------------------------------------------------------------
23
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
In addition to the $10 million special dividend paid by the Corporation to
Transportation during 1993, the Corporation paid ordinary cash dividends to
Transportation of $13 million, compared with $16 million and $74 million in
1992 and 1991, respectively. Effective with the decline in the Corporation's
debt ratings in 1992, ordinary dividends to Transportation are limited by the
bank revolving credit agreement to 50% of cumulative net income measured quar-
terly from February 1, 1992. At October 31, 1993, $2 million was available for
regular dividend to Transportation in the first quarter of fiscal 1994 or
thereafter. Dividends in 1991 included a special dividend of $40 million paid
in January 1991 with proceeds received from the sale of wholesale notes re-
flecting the lower funding level required to support a lower average owned fi-
nance receivables balance. The Corporation's debt to equity ratio was 5.5:1, at
October 31, 1993 and 1992 and 5.1:1 at October 31, 1991.
ACCOUNTING STANDARDS
In December 1992, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" ("SFAS 113"),
which is applicable to the Corporation's wholly-owned insurance subsidiary,
Harco National Insurance Company. This statement eliminates the practice of re-
porting liabilities relating to reinsured contracts net of the effects of rein-
surance. It requires reinsurance receivables (including amounts related to un-
paid insurance claims) and prepaid reinsurance premiums to be reported as as-
sets. This statement will be adopted in fiscal year
1994. The Corporation has not yet determined the impact of SFAS 113 on the fi-
nancial statements.
In May 1993, the FASB issued Statement of Financial Accounting Standards No.
115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS
115"). This statement establishes financial accounting and reporting standards
for investments in equity securities that have readily determinable fair values
and for all investments in debt securities. Upon adoption of SFAS 115, the Cor-
poration's Statement of Financial Condition classification of cash equivalents
and marketable securities will not change and the requirements of SFAS 115 will
be met through revised footnote disclosure. The effective date for this new
standard is for fiscal years beginning after December 15, 1993, or fiscal 1995
for the Corporation. The Corporation has not yet determined the impact on the
financial statements nor when it will adopt SFAS 115.
- --------------------------------------------------------------------------------
24
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Five Year Summary of Financial and Operating Data
- --------------------------------------------------------------------------------
Dollar amounts in millions
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
REVENUES AND NET INCOME RE-
TAINED
Revenues.................... $ 220.2 $ 219.7 $ 227.4 $ 240.7 $ 248.1
-------- -------- -------- -------- --------
Provision for losses on re-
ceivables.................. 1.5 3.6 5.8 3.5 4.1
Interest expense............ 74.6 82.2 90.3 110.1 115.2
Other charges, net.......... 95.1 87.5 78.1 71.7 72.2
Taxes on income............. 17.7 16.9 20.2 20.4 20.4
Cumulative effect of changes
in accounting policy, net
of income taxes............ 8.8 -- -- -- --
-------- -------- -------- -------- --------
Net income.................. 22.5 29.5 33.0 35.0 36.2
Dividends paid.............. 22.6 16.0 74.0 33.0 80.0
-------- -------- -------- -------- --------
Net income retained......... $ (.1) $ 13.5 $ (41.0) $ 2.0 $ (43.8)
======== ======== ======== ======== ========
Percent of net income to av-
erage
shareowner's equity........ 10.3% 13.8% 15.0% 13.6% 11.9%
ASSETS AT END OF YEAR
Cash and cash equivalents... $ 33.9 $ 79.2 $ 16.0 $ 11.1 $ 15.6
Marketable securities....... 125.6 130.5 119.1 103.3 90.3
Finance receivables:
Retail notes and lease fi-
nancing................... 810.8 951.7 902.8 817.5 830.0
Wholesale notes............ 259.0 128.0 84.3 401.4 411.1
Accounts................... 245.1 204.3 162.9 202.7 179.5
Other notes................ 20.6 19.2 25.2 24.5 29.2
-------- -------- -------- -------- --------
Total..................... 1,335.5 1,303.2 1,175.2 1,446.1 1,449.8
Allowance for losses....... (12.0) (12.4) (11.7) (11.7) (10.4)
-------- -------- -------- -------- --------
Finance receivables, net.. 1,323.5 1,290.8 1,163.5 1,434.4 1,439.4
Other assets................ 142.2 108.2 149.5 131.6 113.8
-------- -------- -------- -------- --------
Total assets.............. $1,625.2 $1,608.7 $1,448.1 $1,680.4 $1,659.1
======== ======== ======== ======== ========
LIABILITIES AND SHAREOWNER'S
EQUITY AT END OF YEAR
Commercial paper............ $ -- $ -- $ 143.8 $ 558.1 $ 720.0
Short-term bank borrowings.. 75.0 -- 40.0 70.0 185.1
Bank revolving credit....... 727.0 727.0 220.0 -- --
Medium-term notes........... 222.2 261.1 419.4 342.3 55.0
Long-term notes and deben-
tures...................... 75.0 135.0 135.0 184.9 184.9
Subordinated debt........... 100.0 94.9 93.7 92.6 91.7
-------- -------- -------- -------- --------
Total debt................ 1,199.2 1,218.0 1,051.9 1,247.9 1,236.7
Other liabilities........... 206.6 171.2 190.2 185.5 177.4
Shareowner's equity......... 219.4 219.5 206.0 247.0 245.0
-------- -------- -------- -------- --------
Total liabilities and
shareowner's equity...... $1,625.2 $1,608.7 $1,448.1 $1,680.4 $1,659.1
======== ======== ======== ======== ========
Debt to equity ratio........ 5.5:1 5.5:1 5.1:1 5.1:1 5.0:1
Senior debt to capital funds
ratio...................... 3.4:1 3.6:1 3.2:1 3.4:1 3.4:1
</TABLE>
- --------------------------------------------------------------------------------
25
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Five Year Summary of Financial and Operating Data
- --------------------------------------------------------------------------------
GROSS FINANCE RECEIVABLES AND LEASES ACQUIRED
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
Dollar amounts in millions 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wholesale notes.................... $1,977.6 $1,547.7 $1,461.0 $1,601.4 $1,689.6
Retail notes and leases:
New............................... 730.0 591.8 554.4 512.6 599.0
Used.............................. 168.4 185.9 192.8 189.7 191.3
-------- -------- -------- -------- --------
Total............................ 898.4 777.7 747.2 702.3 790.3
-------- -------- -------- -------- --------
Total............................. $2,876.0 $2,325.4 $2,208.2 $2,303.7 $2,479.9
======== ======== ======== ======== ========
</TABLE>
- --------------------------------------------------------------------------------
ANALYSIS OF FINANCE RETAIL NOTES ACQUIRED
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Down
Payment
as a
Percent
Average of
Contractual Retail Average
Term in Sales Monthly
Months Price Installment
------------ --------- -----------
Number of
Year Units New Used New Used New Used
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993............................ 15,879 53 34 6.2% 17.0% $1,248 $786
1992............................ 14,227 52 35 6.6 14.1 1,239 845
1991............................ 13,768 52 37 7.2 13.5 1,286 875
1990............................ 13,950 53 37 8.8 16.5 1,327 766
1989............................ 15,380 53 37 8.2 17.9 1,264 777
</TABLE>
- --------------------------------------------------------------------------------
26
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Five Year Summary of Financial and Operating Data
- --------------------------------------------------------------------------------
Dollar amounts in millions
ANALYSIS OF GROSS RETAIL NOTES AND LEASE FINANCING WITH INSTALLMENTS PAST DUE
OVER 60 DAYS
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
At October 31 1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Original amount of notes and leases............... $2.6 $4.3 $3.9 $6.1 $4.8
Balance of notes and leases....................... .7 2.1 1.9 3.9 3.1
Balance as a percent of total outstanding........ .08% .19% .18% .40% .32%
</TABLE>
- --------------------------------------------------------------------------------
ANALYSIS OF REPOSSESSIONS
<TABLE>
- --------------------------------------------------------------------------------
<CAPTION>
1993 1992 1991 1990 1989
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance beginning of year............... $ 5.5 $ 11.6 $ 12.2 $ 10.1 $ 6.1
Acquisitions............................ 21.5 32.7 43.1 53.1 25.7
Dispositions............................ (25.2) (38.8) (43.7) (51.0) (21.7)
------ ------ ------ ------ ------
Balance end of year.................... $ 1.8 $ 5.5 $ 11.6 $ 12.2 $ 10.1
====== ====== ====== ====== ======
</TABLE>
Repossessions are recorded at the lower of book value or the realizable
value of the equipment. Costs of reconditioning are charged to individual re-
possessions.
- --------------------------------------------------------------------------------
27
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Five Year Summary of Financial and Operating Data
- --------------------------------------------------------------------------------
Dollar amounts in millions
ANALYSIS OF LOSS EXPERIENCE
<TABLE>
- -------------------------------------------------------------------------------
<CAPTION>
1993 1992 1991 1990 1989
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net losses (recoveries):
Retail notes and leases....................... $(.1) $2.4 $3.0 $2.0 $2.3
Wholesale notes............................... .8 .8 2.8 .4 .3
---- ---- ---- ---- ----
Total........................................ $ .7 $3.2 $5.8 $2.4 $2.6
==== ==== ==== ==== ====
Percent net losses (recoveries) to liquida-
tions:
Retail notes and leases....................... (.01)% .27% .41% .26% .34%
Wholesale notes............................... .04 .06 .19 .03 .02
Total........................................ .03% .13% .26% .10% .11%
Percent net losses to related average gross re-
ceivables outstanding:
Retail notes and leases....................... --% .17% .21% .13% .16%
Wholesale notes............................... .16 .20 .66 .10 .07
Total........................................ .03% .16% .29% .11% .13%
</TABLE>
Includes loss experience on sold notes.
- --------------------------------------------------------------------------------
28
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Directors and Officers
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS
JOHN J. BONGIORNO
President and Chief Executive
Officer
Navistar Financial Corporation
and
Group Vice President--General
Manager,
Financial Services
Navistar International Trans-
portation Corp.
R. WAYNE CAIN
Vice President and Treasurer
Navistar Financial Corporation
JAMES C. COTTING
Chairman of the Board and
Chief Executive Officer
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
ANDREW C. HILL
Vice President and Controller
Navistar Financial Corporation
JOHN R. HORNE
President and Chief Operating
Officer
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
THOMAS M. HOUGH
Vice President and Treasurer
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
ROBERT C. LANNERT
Executive Vice President and
Chief Financial Officer
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
ROBERT I. MORRISON
Vice President and Controller
Navistar International Corpora-
tion and
Navistar International Trans-
portation Corp.
THOMAS D. SILVER
Executive Vice President, Oper-
ations
Harco National Insurance Com-
pany
OFFICERS
JOHN J. BONGIORNO
President and Chief Executive
Officer
R. WAYNE CAIN
Vice President and Treasurer
ANDREW C. HILL
Vice President and Controller
LOREN C. BUNTROCK
Vice President, Field Opera-
tions
RONALD E. DIETZ
Vice President, Credit
DELBERT E. HARRISON
Vice President, Human Resources
WILLIAM W. JONES
General Counsel
GREGORY LENNES
Secretary
- --------------------------------------------------------------------------------
29
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Information for Investors
- --------------------------------------------------------------------------------
Navistar Financial Corporation's publicly held debentures are traded on the
New York Stock Exchange and quoted as "NavFin" in bond table listings in daily
newspapers.
A copy of the Corporation's 1993 Annual Report to the Securities and Ex-
change Commission on Form 10-K is available, without charge, upon written re-
quest to the Corporate Treasurer, 2850 West Golf Road, Rolling Meadows, IL
60008.
- --------------------------------------------------------------------------------
30
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------------------
Office Locations
- --------------------------------------------------------------------------------
ATLANTA, GEORGIA
3350 Northlake Parkway
Atlanta, GA 30345
Telephone: (404) 621-2700
COLUMBUS, OHIO
2500 Corporate Exchange Drive, Suite 340
Columbus, OH 43231-0325
Telephone: (614) 890-8000
PLANO, TEXAS
500 North Central Expressway
Suite 450
Plano, TX 75074
Telephone: (214) 881-3400
MT. LAUREL, NEW JERSEY
1000 Atrium Way, Suite 300
Mt. Laurel, NJ 08054
Telephone: (609) 778-3456
ROLLING MEADOWS, ILLINOIS
2850 West Golf Road
Rolling Meadows, IL 60008
Telephone: (708) 734-4500
SAN RAMON, CALIFORNIA
2682 Bishop Drive, Suite 121
San Ramon, CA 94583
Telephone: (510) 830-2241
- --------------------------------------------------------------------------------
31
<PAGE>
Navistar Financial Corporation
2850 West Golf Road
Rolling Meadows, Illinois 60008 FH-1001 Litho in U.S.A.
<PAGE>
GRAPHICS APPENDIX LIST
A bar graph comparing Truck Receivables Serviced for Years 1991, 1992 and 1993
appears on Page 3.
A bar graph comparing Insurance Premiums Written and Earned for Years 1991, 1992
and 1993 appears on Page 4.
A photo of John J. Bongiorno, President and Chief Executive Officer, appears
below his name on Page 4.
