<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, 1994
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
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(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, 1995 the number of shares outstanding of the
registrant's capital stock was 1,000.
Document Incorporated by Reference
----------------------------------
Navistar Financial Corporation 1994 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.
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NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
FORM 10-K
Year Ended October 31, 1994
INDEX
10-K Page
---------
PART I
Item 1. Business ........................................... 3
Item 2. Properties ......................................... 11
Item 3. Legal Proceedings .................................. 11
Item 4. Submission of Matters to a Vote
of Security Holders (A) .......................... 13
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters ................ 13
Item 6. Selected Financial Data (A) ....................... 13
Item 7. Management's Discussion and Analysis
of Results of Operations and Financial Condition 14
Item 8. Financial Statements and Supplementary Data ....... 23
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure .......... 62
PART III
Item 10. Directors and Executive Officers
of the Registrant (A) .......................... 62
Item 11. Executive Compensation (A) ....................... 62
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A) ............................. 62
Item 13. Certain Relationships and Related Transactions (A) 62
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K ......................... 63
INDEPENDENT AUDITORS' REPORT .................................. 60
INDEPENDENT AUDITORS' CONSENT ................................. 61
SIGNATURES
Principal Accounting Officer ................................ 64
Directors ................................................... 65
POWER OF ATTORNEY ............................................. 65
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.
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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 Class 5 through 8 diesel trucks, including
school bus chassis, mid-range diesel engines and service parts in the
United States and Canada and in selected export markets. Transportation
is the industry market share leader in the combined Class 5 through 8
truck market in the United States and Canada, 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 Class 5, 6 and 7 medium trucks and for sale to
original equipment manufacturers. Transportation markets its products
through an extensive distribution network which includes 951 dealer and
distribution outlets in the United States and Canada. 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
The market in which Transportation competes 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, 1994, in
thousands of units.
YEARS ENDED OCTOBER 31,
-----------------------
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Class 5, 6 and 7 medium trucks
and school bus chassis ..... 134.2 122.5 118.3 120.1 149.8
Class 8 heavy trucks ......... 205.4 166.4 125.2 109.0 139.0
----- ----- ----- ----- -----
Total ...................... 339.6 288.9 243.5 229.1 288.8
===== ===== ===== ===== =====
Source: Based upon monthly data by the American Automobile
Manufacturers Associations (AAMA) in the United States and Canada and
other sources.
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The truck market in the United States and Canada 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 and Mitsubishi) are competing in the United States and Canadian
markets. 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 91,600 Class 5 through 8 trucks in the
United States and Canada in fiscal 1994, a 15% increase from the 79,800 in
1993. Transportation's combined share of the Class 5 through 8 truck
market in 1994 was 27%. Transportation has been the leader in combined
market share for Class 5 through 8 trucks, including school bus chassis,
in the United States and Canada in each of its last 14 fiscal years.
PRODUCTS AND SERVICES
The following table illustrates the percentage of Transportation's
sales by class of product based on dollar amount:
YEARS ENDED OCTOBER 31,
--------------------------
PRODUCT CLASS 1994 1993 1992
- ------------- ---- ---- ----
Class 5, 6 and 7 medium trucks
and school bus chassis .... 32% 31% 36%
Class 8 heavy trucks ......... 42 44 39
Service parts ................ 14 14 15
Engines ...................... 12 11 10
--- --- ---
Total ...................... 100% 100% 100%
=== === ===
Transportation offers a full line of Class 5 through 8 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 Class 8 heavy truck
image. In 1994, new products were introduced including integrated sleeper
cabs (Pro Sleeper) in four sizes, anti-lock brakes as standard equipment
on 9000 series conventionals and cabovers, and changes in the 5000 series
of trucks (Paystar) which improve weight distribution. In addition, the
new T444E diesel engine was introduced in 1994 as the first fully
electronic mid-range diesel engine produced. This engine will further
enhance Class 5, 6 and 7 medium truck operating performance and life.
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Transportation was recognized at the industry's largest trade show of
the year by winning the award for the "Most Significant Powered Vehicle"
for the 9200 Premium Conventional tractor with the all-new 51" Hi-Rise Pro
Sleeper. According to a recent survey conducted by J. D. Power and
Associates on 1994 Medium-Duty Truck Customer Satisfaction, Navistar
ranked number one in customer satisfaction in product and service for
Class 5, 6 and 7 medium conventional trucks for the second consecutive
year.
For over two decades, Transportation has been the leading supplier of
school bus chassis in the United States. Chassis are sold through dealers
and national account managers for delivery to the ultimate customers:
school districts and contractors. Transportation manufactures chassis for
conventional 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 Class 8 heavy trucks
generally use diesel engines purchased from outside suppliers however, in
1994, it began offering the new T444E engine for use in its heavy trucks.
Class 5, 6 and 7 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 and Class 5
through 8 truck 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 Class 5, 6 and 7 medium truck shipments
represented 81% of all medium truck shipments for fiscal year 1994 in the
United States and Canada.
Transportation's truck manufacturing operations in the United States
and Canada consist principally of the assembly of components manufactured
by its suppliers, although Transportation produces its own mid-range
diesel truck engines, sheet metal components (including cabs) and
miscellaneous other parts.
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The following is a summary of Transportation's truck manufacturing
capacity utilization for the five years ended October 31, 1994.
YEARS ENDED OCTOBER 31,
-----------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
Production units ............ 94,993 88,274 73,901 70,502 80,737
Total production capacity ... 112,966 106,032 106,088 106,762 114,402
Capacity utilization ........ 84.1% 83.3% 69.7% 66.0% 70.6%
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 Class 5, 6 and 7
medium trucks, school buses, selected Class 8 heavy truck models and for
sale to original equipment manufacturers. Production in 1994 totalled
192,400 units, an increase of 9.7% from the 175,500 units produced in
1993.
Transportation has completed a major capital investment in its engine
products and facilities to manufacture a new generation of mid-range
diesel engines in both the in-line six cylinder and V-8 configurations.
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 are offered
in a wider horsepower range than previously offered, which will give
Transportation an opportunity to expand the number of applications for its
engines and broaden its customer base. Transportation believes that its
family of diesel engines, each designed to provide superior performance in
customer applications, offers both the lowest cost of ownership and
excellent value to its customers.
In September 1993, Transportation introduced three new in-line six
cylinder engines that replaced its long-standing DT family of engines in
International Class 5, 6 and 7 medium trucks. These new engines, the DT
466 [175-230 HP], DT 466 High Torque [195-250 HP] and the International
530 [250-300 HP] offer displacements of 466 and 530 cubic inches. These
in-line six cylinder products feature 20 percent longer life as a result
of larger main and rod bearings, stronger crankshafts, and gear driven
accessories. In 1995, full electronic control of the fuel system will be
incorporated into three new six-cylinder engine models, the DT 466E, DT
466E High Torque and International 530E. These electronically controlled
engines will offer the customer a flexible array of features such as
cruise control, self diagnostics and an engine protection system.
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Transportation is the first to offer a totally electronic mid-range
diesel engine family which meets emissions standards without the use of
catalytic converters. With the introduction of the 8.7 Liter 530 and 530E
engines, Transportation offers to customers who, in the past have only
been able to purchase larger 10 Liter class engines, a lighter-weight,
more cost-effective product.
In February 1994, Transportation replaced the 7.3 Liter V-8 diesel
engine with an entirely new product. The T444E is a 444 cubic inch V-8
engine with an electronically controlled fuel injection system. This new
diesel engine offers 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 7.3 Liter V-8 product. The new V-8 also meets current
emissions requirements cost-effectively and includes such optional
features as electronic cruise control, electronically controlled power
take-off and diagnostic capabilities.
Based on U.S. registrations published by R.L. Polk & Company, the
T444E electronically controlled diesel engine is the leading engine of its
class. In addition to its strong contribution to the market position of
Transportation's medium trucks, a light truck version, marketed as the 7.3
Liter Direct Injection Diesel, has had significant external sales.
Transportation has entered into an agreement to supply this new V-8
product to a major automotive company through the year 2000 for use in all
of its diesel-powered light trucks and vans. Sales of this engine to the
automotive company currently accounts for approximately 88% of
Transportation's 444E sales. Shipments to all original equipment
manufacturers totalled a record 130,600 units in 1994, an increase of 11%
from the 118,200 units shipped in 1993.
The following is a summary of Transportation's engine capacity
utilization for the five years ended October 31, 1994.
YEARS ENDED OCTOBER 31,
-----------------------
1994 1993 1992 1991 1990
------- ------- ------- ------- -------
Engine production units ..... 192,446 175,464 148,991 126,103 160,434
Total production capacity ... 188,000 166,260 166,260 166,720 166,720
Capacity utilization ........ 102.4% 105.5% 89.6% 75.6% 96.2%
Total production capacity varies as a result of changes in product
mix.
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 on Transportation's new
V-8 engine and Detroit Diesel's electronic alternative fuel technology.
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SERVICE PARTS
The service parts business is a significant contributor to
Transportation's sales and gross margin and to the maintenance of its
Class 5 through 8 truck and engine customer base. In the United States
and Canada, 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 the United States and Canada. 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 1994, 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
United States and Canadian Operations. Transportation's truck
products are distributed in virtually all key markets in the United States
and Canada 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 the United States and Canada was
composed of 951, 950 and 952 dealers and retail outlets at October 31,
1994, 1993 and 1992, respectively. Included in these totals were 473, 467
and 460 secondary and associate locations at October 31, 1994, 1993 and
1992, respectively.
Retail dealer activity is supported by 5 regional operations in the
United States and a general office in Canada. A national account sales
group is responsible for 155 major national account customers.
Transportation's 10 retail and 4 wholesale used truck centers in the
United States and Canada provide sales and trade-in benefits to its
dealers and retail customers.
International Operations. Transportation exports trucks, components
and service parts, both wholesale and retail, to more than 70 countries
around the world. In 1994, 5,100 trucks were exported while 5,300 trucks
were exported in 1993. Cumulatively, from 1986 through 1994,
Transportation was the leading North American exporter of Class 6-8
trucks, according to data provided by the AAMA.
In Mexico, Transportation has an agreement with DINA Camiones, S.A.
(DINA) to supply product technology, components and technical services for
assembly of DINA trucks and buses. In 1994, Transportation exported
almost 10,000 engines to DINA, bringing the total engines shipped to
approximately 30,000 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.
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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. 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 1994 and 1993, Navistar Financial provided wholesale financing for
93% and 90%, respectively, of the new truck units sold by Transportation
to its dealers and distributors in the United States. Navistar Financial
also provided retail financing in fiscal 1994 for approximately 15% of the
new truck units sold by Transportation and its dealers and distributors in
the United States, unchanged from fiscal 1993.
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 1994 and
1993, Associates provided 7% and 10%, 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 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 products are
introduced and improvements are made, in accordance with operating plans
and market requirements and not on a predetermined cycle.
During 1994, capital expenditures totalled $87 million. Major
program expenditures included continued investment in machinery and
equipment at the Melrose Park, Illinois and Indianapolis, Indiana engine
facilities to manufacture mid-range diesel engines used in trucks and
school bus chassis manufactured by Transportation and also sold to
original equipment manufacturers. Other expenditures were made for truck
product improvements, modernization of facilities and compliance with
environmental regulations.
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During 1993, capital expenditures totalled $110 million. Major
product program expenditures included investment at the Melrose Park,
Illinois and Indianapolis, Indiana engine facilities to manufacture a new
series of mid-range diesel engines for use within Transportation's truck
products and for sale to original equipment manufactures. Other
expenditures were made for truck product improvements, modernization of
facilities and compliance with environmental regulations. In 1992,
capital expenditures were $55 million.
Product development is an ongoing process at Transportation.
Research and development activities are directed toward the introduction
of new products and improvements of existing products and processes used
in their manufacture. Spending for company-sponsored activities totalled
$95 million in 1994 and 1993 and $90 million in 1992.
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
------------- ------------------- ------
1994 ...... $ 4,197 64,841
1993 ...... $ 1,353 23,939
1992 ...... $ 1,124 20,456
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 1992 through 1994:
TOTAL
AT OCTOBER 31 EMPLOYMENT
------------- ----------
1994 ....................... 14,909
1993 ....................... 13,611
1992 ....................... 13,944
To meet the increased customer demand, additional production workers
were employed at the Chatham, Ontario and Springfield, Ohio Truck
Facilities and at the Melrose Park, Illinois and Indianapolis, Indiana
Engine Facilities.
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LABOR RELATIONS
At October 31, 1994, the United Automobile, Aerospace and
Agricultural Implement Workers of America (UAW) represented 8,278 of
Transportation's active employees in the United States, and the Canadian
Auto Workers (CAW) represented 1,873 active employees in Canada. Other
unions represented 1,015 active employees in the United States and Canada.
Transportation entered into collective bargaining agreements with the UAW
and CAW in 1993 which expire on October 1, 1995 and October 24, 1996,
respectively.
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 for
storms, fire and water damage. In 1994, as a result of industry-wide
growth and demand, several suppliers experienced capacity constraints
which created interruptions in the flow of supplies to Transportation.
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IMPACT OF GOVERNMENT REGULATION
Truck and engine manufacturers continue to face increasing
governmental regulation of their products, especially in the areas of
environment and safety. Transportation believes its products comply with
all applicable environmental and safety regulations.
As a diesel engine manufacturer, Transportation has incurred
significant research and tooling costs to totally redesign its engine
product lines to meet United States Environmental Protection Agency (U.S.
EPA) and California Air Resources Board (CARB) emission standards
effective in the 1994 model year. Transportation faces significant
additional outlays through 1998 to meet further tightening of these
standards. Transportation expects that its diesel engines will be able to
meet all of these standards in the required time-frame. However,
compliance with California's 1998 Ultra-Low-Emission Vehicle (ULEV)
standards for medium-size vehicles (which includes vehicles up to 14,000
lbs. Gross Vehicle Weight Rating - GVWR) will require the use of
alternative fuels. Transportation expects to have products available to
meet these standards prior to 1998.
Emissions regulations in Canada and Mexico are similar, but not
identical, to the U.S. federal regulations. Although Canada's regulations
impose standards equivalent only to the U.S. standards for the 1990 model
year, diesel engine manufacturers, including Transportation, have
voluntarily signed several memorandums of understanding with the Canadian
federal government, agreeing to sell only engines meeting the 1994 U.S.
emission standards in model years 1995 to 1997. Mexico has adopted the
U.S. heavy diesel engine emission standards as of the 1994 model year but
has conditioned compliance on the availability of low-sulfur diesel fuel.
The Mexican government is expected to complete the conversion of diesel
fuel supplies nationwide to low-sulfur fuel in mid-1995.
Truck manufacturers are also subject to various noise standards
imposed by federal, state and local regulations. The engine is one of a
truck's primary noise sources, and 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. Transportation believes it is in compliance with
the Safety Act and the Safety Standards.
Expenditures to comply with various environmental regulations
relating to the control of air, water and land pollution at production
facilities and to control noise levels and emissions from Transportation's
products have not been material except for the Wisconsin Steel and Solar
Turbine sites.
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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 sought
to recover a noncompliance penalty, measured as the costs allegedly saved
by Transportation by not complying with the VOC Regulations at the
assembly plant.
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 asked the judge to impose fines of up to $25,000 per violation
of the VOC Regulations per day since December 31, 1982. In November 1994,
Transportation and U.S. EPA concluded a settlement of both the
administrative action and the court action. The settlement included a
payment of $2.7 million by Transportation.
OTHER MATTERS
- -------------
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.
Transportation appealed the verdict and in order to do so was required to
post a bond collateralized with $30 million in cash. In November 1994,
the Court of Appeals of the State of Oklahoma reversed the verdict and
entered judgement in favor of Transportation on virtually all aspects of
the case. The bond and related collateral will be released when the order
of the Court of Appeals is filed.
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Transportation and the Economic Development Administration (EDA), a
division of the U.S. Department of Commerce reached an agreement in the
fourth quarter of 1994 in settlement of commercial and environmental
disputes related to the Wisconsin Steel property. EDA and Transportation
became 90% and 10% beneficiaries, respectively, of a trust which was
created after the party that purchased Wisconsin Steel filed for
bankruptcy. At the time of bankruptcy, EDA had guaranteed repayment of
90% and Transportation of 10% of loans made to Wisconsin Steel. The
settlement provides that EDA transfer its interest in the trust to
Transportation, which in turn will assume responsibility for completing
the investigation of the environmental condition at the site and for any
cleanup work that may be necessary. Transportation has agreed to pay EDA
$11 million to settle various commercial issues as well as reimburse them
for a portion of environmental response costs spent by EDA. The
Department of Justice must approve the final settlement before the
interest in the trust, or the property, is transferred to Transportation.
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 15>
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 ....... 57
ITEM 6. SELECTED FINANCIAL DATA
Intentionally omitted. See the index page
to this Report for explanation.
<PAGE>
<PAGE 16>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Transportation manufactures and markets Class 5 through 8 trucks,
including school bus chassis, mid-range diesel engines and service parts
in the United States and Canada. 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 coverage to Transportation's
dealers and retail customers and to the general public through the
independent insurance agency system.
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 Navistar Financial Corporation
(Navistar Financial) and other 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.
Results of Operations
Significant Events Affecting 1994 Results of Operations
In July 1993, Transportation implemented a restructured retiree
health care and life insurance plan (the Plan) which provides retirees
with modified health care and life insurance benefits for life. As part
of the restructuring, 25.6 million Class B Common shares, originally
valued at $513 million, were purchased by Transportation from the Parent
Company and contributed to an independent retiree Supplemental Benefit
Trust. In October 1993, the Parent Company completed a public offering of
23.6 million Common shares from which net proceeds of $492 million were
realized. The net proceeds were lent to Transportation which used $300
million to pre-fund a portion of the $1,086 million postretirement health
care and life insurance benefits liability while the remainder was used
for working capital purposes. Implementation of the Plan and the
subsequent partial funding reduced 1993 and ongoing postretirement
benefits expense.
In 1993, Transportation recorded a $1,144 million charge for the
cumulative effect of changes in accounting policy with the adoption of
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). See Notes 4 and 5 to the Financial Statements
for further information.
<PAGE>
<PAGE 17>
Consolidated
The components of net income (loss) for the three years ended October
31 are as follows:
Millions of dollars 1994 1993 1992
- -------------------------------------------------------------------------
Income (loss) before Supplemental Trust
contribution and income taxes .......... $ 62 $ 51 $ (151)
Supplemental Trust contribution:
- Manufacturing ........................ - (509) -
- Financial Services ................... - (4) -
Income tax expense ....................... (22) (19) (15)
-------- -------- --------
Income (loss) of continuing operations ... 40 (481) (166)
Loss of discontinued operations .......... (33) - (65)
Cumulative effect of accounting changes .. - (1,144) -
-------- -------- --------
Net income (loss) ........................ $ 7 $ (1,625) $ (231)
======== ======== ========
As a result of the strong demand for trucks, diesel engines and
service parts, consolidated sales and revenues of $5,330 million in 1994
were 13% higher than the $4,715 million reported in 1993 and 37% above the
$3,892 million reported in 1992.
Reflecting the sales and revenues increase and lower postretirement
benefits costs, the Company reported income before income taxes and
discontinued operations of $62 million for 1994, an increase from the $51
million reported in 1993 prior to the Supplemental Trust contribution, and
$213 million above the $151 million loss for 1992. Net income of $7
million in 1994 included a $33 million charge to discontinued operations
recorded in the fourth quarter for environmental liabilities at production
facilities of two formerly owned businesses. In accordance with a tax
agreement between Transportation and the Parent Company, see Note 5 to the
Financial Statements, a $13 million tax benefit relating to the $33
million charge was recorded on the Parent Company's Statement of Income
(Loss). Further discussion of this charge is provided in Note 6 to the
Financial Statements.
For 1993, the loss of continuing operations was $481 million after
the one-time charge of $513 million for the Supplemental Trust
contribution, and income tax expense of $19 million. The net loss for
1993 of $1,625 million included the $1,144 million charge for the
cumulative effect of adoption of SFAS 106 and SFAS 109. 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 related to a previously owned business.
<PAGE>
<PAGE 18>
Manufacturing
The components of Manufacturing income (loss), excluding Financial
Services and before income taxes, are as follows:
Millions of dollars 1994 1993 1992
- -------------------------------------------------------------------------
Income before Supplemental Trust
contribution and income taxes .......... $ 2 $ (14) $ (203)
Supplemental Trust contribution .......... - (509) -
-------- -------- --------
Income (loss) before income taxes ........ $ 2 $ (523) $ (203)
======== ======== ========
Manufacturing, excluding Financial Services, reported income before
income taxes of $2 million, a $16 million increase from the $14 million
loss reported in 1993 before the one-time Supplemental Trust contribution.
The improvement in 1994 operating results over 1993 reflects record sales
of Class 8 heavy trucks and mid-range diesel engines. Sales of Class 5, 6
and 7 medium trucks and service parts also increased. The year-over-year
earnings improvement includes a $37 million reduction in postretirement
benefits expense to $171 million as a result of the restructured
postretirement health care and life insurance benefit plan and a $300
million pre-funding of a portion of the remaining postretirement liability
in the 1993 fourth quarter. The increase in operating income in 1993 over
1992 is attributable to the higher sales volume, improved selling prices
and programs implemented to reduce the Company's cost structure. The $203
million loss before income taxes in 1992 included a $47 million charge for
two voluntary product recalls.
Sales and Revenues. As a result of continued improvement in the
economies of the United States and Canada, 1994 industry retail sales of
Class 5 through 8 trucks totalled 339,600 units, an 18% growth from 1993
and 39% above the 243,500 units sold in 1992. Class 8 heavy truck
industry sales increased 24% from the 1993 level to 205,400 units as a
result of broad based demand from owner/operators and large fleet
customers. Industry sales of Class 5, 6 and 7 medium trucks, including
school bus chassis, were up 10% to 134,200 units reflecting increased
demand across a wide variety of vocations including maintenance leasing,
government and beverage. Industry sales of school bus chassis, which
accounted for about 22% of the medium truck market, increased 6% from 1993
and 9% from 1992.
Transportation's sales of trucks, diesel engines and service parts
for 1994 totalled $5,153 million, 14% above the $4,510 million reported
for 1993 and 40% higher than the $3,685 million recorded in 1992. Truck
shipments totalled 95,000 units in 1994, an increase of 9% and 30% from
1993 and 1992, respectively. Transportation maintained its position as
sales leader in the combined United States and Canadian Class 5 through 8
truck market in 1994 with a 27.0% market share.
<PAGE>
<PAGE 19>
To take advantage of current demand, Transportation took several
measures to increase truck production during 1994. During the second
quarter of 1994, Transportation added a second production shift at the
Chatham, Ontario truck assembly facility to increase production of its
premium conventional Class 8 heavy trucks. In the third quarter of 1994,
Transportation employed additional production workers at its Springfield,
Ohio truck facilities to increase production of Class 5, 6 and 7 medium
trucks.
Shipments of mid-range diesel engines by Transportation to original
equipment manufacturers during 1994 were a record 130,600 units, an 11%
increase from 1993 and a 34% improvement over 1992. 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.
To meet increased demand, additional production workers were employed at
both the Melrose Park, Illinois and Indianapolis, Indiana engine
facilities.
Service parts sales, following an 11% growth in 1993 to $632 million,
experienced a further increase of 13% to $714 million in 1994. The
improvement in sales during the two year period was principally driven by
higher sales to dealer and national retail accounts, export business
expansion and higher selling prices.
Other income increased to $18 million in 1994 from $10 million in
1993 and $12 million in 1992 as a result of increased earnings on higher
cash, cash equivalent and marketable securities balances.
Operating Costs and Expenses. Manufacturing gross margin (sales less
cost of sales) was 12.7% of sales in 1994 compared with 13.1% in 1993 and
13.2% in 1992, excluding one-time product recall expenses. The favorable
impact on gross margin from the higher 1994 sales volume was more than
offset by a $28 million increase in the provision for payment to employees
as required by Transportation's profit sharing agreements, additional
costs to meet customer delivery commitments and excess costs incurred with
the introduction of new truck and engine products. Factors which led to
the change in gross margin between 1993 and 1992 included higher sales
volume, improved price realization and the impact of cost improvement
programs offset by increases in purchased material and labor costs and a
higher level of startup costs for new products.
Postretirement benefits, which include pension expense for employees,
retirees and surviving spouses and postretirement health care and life
insurance coverage for employees, retirees, surviving spouses and
dependents totalled $171 million in 1994. Pension expense of $107 million
in 1994 was about level with 1993 and 1992. A 37% reduction in
postretirement health care and life insurance expense from $102 million in
1993 to $64 million in 1994 was primarily the result of pre-funding $300
million of the retiree health care benefit plan liability in October 1993.
A similar 30% reduction in such costs was achieved between 1993 and 1992
as a result of the implementation of the restructured retiree benefit plan
in 1993, partially offset by an increase in expense as a result of the
adoption of SFAS 106.
<PAGE>
<PAGE 20>
In 1994, 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 $97 million in 1994 from $94 million in 1993 and $92 million
in 1992 reflecting the development and introduction of new heavy truck
products, a new series of diesel engines as well as continuing development
of existing products.
Marketing and administrative expense of $237 million was 3% higher
than in 1993 primarily as a result of higher sales and distribution
expense and the provision for payment to employees as provided by the
Company's management incentive program. Interest expense of $100 million
was $71 million higher than in 1993 and $88 million higher than in 1992.
The increase is the result of interest payments on obligations to the
Parent Company. Finance service charges on sold receivables increased to
$66 million, an 18% increase over 1993 and 27% higher than 1992, as a
result of higher truck sales and increased interest rates.
Financial Services
Income of the subsidiaries comprising Financial Services is as
follows:
Millions of dollars 1994 1993 1992
- -------------------------------------------------------------------------
Navistar Financial Corporation:
Finance Operations ..................... $ 50 $ 52 $ 36
Insurance Operations ................... 5 1 10
Supplemental Trust contribution ........ - (4) -
-------- -------- --------
Total Navistar Financial ............. 55 49 46
Foreign Subsidiaries ..................... 5 12 6
-------- -------- --------
Total income before income taxes ..... 60 61 52
Income tax expense ....................... (22) (22) (20)
-------- -------- --------
Income before cumulative effect
of accounting changes .................. 38 39 32
Cumulative effect of accounting changes .. - (9) -
-------- -------- --------
Net income ............................... $ 38 $ 30 $ 32
======== ======== ========
<PAGE>
<PAGE 21>
Navistar Financial's income before income taxes in 1994 was $55
million, a 12% increase from $49 million in 1993, which included a $4
million one-time charge for Navistar Financial's portion of the
Supplemental Trust contribution. Finance Operations' income in 1994 was
$2 million lower than 1993 as a result of lower margins on retail
financing as rising interest costs could not be offset fully by increased
retail note pricing. The decline in retail note income was offset in part
by an increased volume of wholesale financing to support the increased
demand for trucks. Navistar Financial's insurance subsidiary's income
increased $4 million over 1993 as a result of improved underwriting
results on truck liability insurance. The increase in Navistar
Financial's income before income taxes between 1993 and 1992 was primarily
the result of higher gains on sales of retail notes, partially offset by
higher loss experience in the insurance subsidiary and the Supplemental
Trust contribution.
Earnings from the foreign finance subsidiaries decreased to $5
million in 1994 from $12 million in 1993 as earnings in 1993 included a
one-time benefit of $6 million resulting from lower loss reserve
requirements.
Navistar Financial revenue for 1994 was $210 million, 9% below 1993
as a higher proportion of retail notes were financed through the sale of
receivables. When receivables are sold only the net gains on the sales,
rather than the individual components of revenue and expense, are reported
in the Statement of Income (Loss). The decrease in retail note and lease
revenue resulting from the receivable sales was partially offset by higher
average wholesale note and account balances, improved average yields as a
result of a higher prime interest rate and increased income from servicing
fees on sold notes. Navistar Financial's revenues were unchanged between
1993 and 1992.
Interest expense for Navistar Financial declined to $63 million in
1994 from $75 million in 1993 and $82 million in 1992. The decrease
between 1994 and 1993 was the result of reduced debt required to finance
the lower level of owned retail receivables, offset in part by higher
interest rates. The decline in interest expense between 1993 and 1992 was
primarily the result of lower interest rates.
Liquidity and Capital Resources
Consolidated
Total cash, cash equivalents and marketable securities of
Transportation amounted to $624 million and $493 million at October 31,
1994 and 1993, respectively. At October 31, 1994 and 1993, approximately
$138 million and $133 million in marketable securities, respectively, were
held by the Company's insurance subsidiaries and not available for general
corporate purposes.
The following discussion has been organized to discuss separately the
cash flows of the Company's Manufacturing and Financial Services
operations.
<PAGE>
<PAGE 22>
Manufacturing
Liquidity available to Manufacturing is summarized below.
Millions of dollars 1994 1993 1992
- -------------------------------------------------------------------------
Cash and cash equivalents ................ $ 396 $ 262 $ 125
======== ======== ========
Cash, cash equivalents
and marketable securities .............. $ 428 $ 316 $ 132
======== ======== ========
The following is a summary of Manufacturing's cash flow for fiscal
1994.
Millions of dollars 1994
- ---------------------------------------------------------------
Cash and cash equivalents
provided by (used in):
Operations ........................... $ 150
Investment programs .................. 58
Financing activities ................. (74)
--------
Increase in cash and cash equivalents .... $ 134
========
Operations. In 1994, operations provided $150 million in cash as
follows:
Millions of dollars 1994
- -------------------------------------------------------------------------
Net income ............................... $ 7
Items not affecting cash:
Loss of discontinued operations 33
Depreciation and other items ........... 48
Change in operating assets
and liabilities:
Increase in receivables .............. $ (51)
Increase in inventories ... .......... (19)
Increase in accounts payable ......... 87
Increase in accrued liabilities/other. 45 62
-------- --------
Cash provided by operations .............. $ 150
========
<PAGE>
<PAGE 23>
The loss of discontinued operations reflects a charge to income taken
in the 1994 fourth quarter for environmental liabilities at production
facilities of two formerly owned businesses, with cash expenditures to
occur in future periods. Receivables are higher as a result of the
increase in Transportation's sales and the cessation of the sale of
certain receivables. The changes in inventories and accounts payable
reflect higher truck and engine production schedules in 1994. The
increase in accrued liabilities is a result of the provision for payment
to employees as required by Transportation's profit sharing agreements as
well as the timing of the payment of other liabilities.
Investment programs. Investment programs provided $58 in cash during
1994 primarily reflecting $87 million in proceeds from a sale/leaseback
agreement, the return of $30 million in cash used to collateralize a bond
related to a legal proceeding and a $22 million net decrease in marketable
securities offset by capital expenditures of $87 million.
Financing programs. Cash used for financing programs in 1994
consisted of $42 million used for principal payments on long-term debt and
$32 million in payments on a loan due the Parent Company.
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.
Historically, 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.
Navistar Financial's current debt ratings have made commercial paper,
short-term bank borrowings and sales of finance receivables the most
economic sources of cash. During 1994, receivable sales were a
significant source of funding for Navistar Financial. Insurance
operations are funded from premiums and income from investments.
Liquidity available to Financial Services is summarized below.
Millions of dollars 1994 1993 1992
- -------------------------------------------------------------------------
Cash and cash equivalents ............... $ 58 $ 44 $ 103
======== ======== ========
Cash, cash equivalents
and marketable securities ............. $ 196 $ 177 $ 246
======== ======== ========
<PAGE>
<PAGE 24>
The cash flow for Financial Services for 1994 is summarized as
follows:
Millions of dollars 1994
- ---------------------------------------------------------------
Cash and cash equivalents
provided by (used in):
Operations .......................... $ 20
Investment programs ................. 130
Financing activities ................ (136)
--------
Increase in cash and cash equivalents ... $ 14
========
Operations. Operations provided $20 million in cash in 1994
primarily from net income of $38 million, offset by other non-cash items
principally $12 million in gains on sales of receivables. Navistar
Financial supplied 93% of the wholesale financing of new trucks to
Transportation's dealers compared with 90% in 1993 and 89% in 1992.
Navistar Financial's share of retail financing of new trucks sold to
customers in the United States was 15.3% in 1994 and 1993 up from 13.7% in
1992.
Investment programs. The Financial Services' investment programs
provided $130 million in cash principally as a result of the sale of
retail notes.
Financing programs. Financial Services used $136 million in 1994 for
financing activities. Working capital needs are funded through a
combination of short-term bank borrowings, commercial paper and a bank
revolving credit facility. During 1994, there was a net decrease in debt
of $108 million and cash dividends of $28 million paid to Transportation.
At October 31, 1994, 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. Unused commitments under the credit and purchase
facilities were $595 million, $419 million of which was used to back
short-term debt at October 31, 1994. The remaining $176 million, when
combined with unrestricted cash and cash equivalents, made $204 million
available to fund the general business purposes of Navistar Financial at
October 31, 1994. In November 1994, Navistar Financial amended and
restated its $727 million bank revolving credit facility. See Note 14 to
the Financial Statements.
In addition to its committed credit facilities, Navistar Financial
also utilizes a $300 million revolving wholesale note sales trust
providing for the continuous sales 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.
<PAGE>
<PAGE 25>
Environmental Matters
As disclosed in Notes 6 and 18 to the Financial Statements, a $33
million charge was recorded as a loss of discontinued operations. The
charge was related to environmental liabilities at production facilities
of two formerly owned businesses, Wisconsin Steel in Chicago, Illinois and
Solar Turbines, Inc. in San Diego, California.
In November 1994, a settlement was reached with the United States
Environmental Protection Agency for both the administrative action and the
court action related to enforcement notices regarding emissions of
volatile organic compounds from painting activities at Transportation's
Springfield, Ohio assembly and body facilities. The settlement included a
payment of $2.7 million which was accrued as of October 31, 1994.
In addition, 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 current or former Company locations. The Superfund law
requires environmental investigation and/or cleanup where waste products
from various manufacturing processes and operations have been stored,
treated or disposed.
Based on information available to Transportation which in most cases
consists of data related to quantities and characteristics of material
generated at or shipped to each site, as well as cost estimates from PRP's
and/or Federal or State regulatory agencies, for the investigation and
cleanup of these sites, 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,
other than the Wisconsin Steel and Solar sites, is not material. The
anticipated cleanup costs of current PRP actions at October 31, 1994, and
the environmental cleanup costs of the Wisconsin Steel and Solar Turbine
sites, are reflected in Transportation's $31 million accrued liability.
Transportation reviews its accruals as additional information becomes
available.
Business Outlook
Based on current record order backlogs, order receipt trends and key
market indicators, Transportation currently projects 1995 United States
and Canadian Class 5, 6 and 7 medium truck demand, including school bus
chassis, to be 151,000 units, a 12% increase from 1994, while Class 8
heavy truck demand is forecast at 205,000 units, level with 1994. Diesel
engine shipments by Transportation to original equipment manufacturers in
1995 are expected to be approximately 161,600 units, or 24% higher than
1994. Sales of service parts by Transportation are forecast to grow 6% to
$755 million.
<PAGE>
<PAGE 26>
Transportation's focus in 1995 will be to further improve product
gross margins through increased manufacturing productivity and lower
design and material costs.
It is the opinion of management that, in the absence of significant
unanticipated cash demands, current and forecasted cash flow will provide
a basis for financing operating requirements, interest payments and
capital expenditures. 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 27>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Financial Statements
Page
----
Navistar International Transportation Corp.:
Statement of Income (Loss) .................................... 28
Statement of Financial Condition .............................. 29
Statement of Cash Flow ........................................ 30
Statement of Shareowner's Equity .............................. 32
Notes to Financial Statements ................................. 33
Independent Auditors' Report .................................. 65
Finance and Insurance Subsidiaries:
The financial statements of Navistar Financial Corporation for the
years ended October 31, 1994, 1993 and 1992 appearing on pages 9 through
11 in the Annual Report on Form 10-K for Navistar Financial Corporation
for the fiscal year ended October 31, 1994, 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 28>
<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
1994 1993 1992 Reference 1994 1993 1992 1994 1993 1992
------ ------ ------ --------- ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <S> <C> <C> <C> <C> <C> <C>
Sales and revenues
Sales of manufactured product .... $5,153 $4,510 $3,685 $5,153 $4,510 $3,685 $ - $ - $ -
Finance and insurance revenue .... 152 181 177 - - - 202 223 217
Other income ..................... 25 24 30 18 10 12 12 14 18
------ ------ ------ ------ ------ ------ ------ ------ ------
Total sales and revenues ..... 5,330 4,715 3,892 5,171 4,520 3,697 214 237 235
------ ------ ------ ------ ------ ------ ------ ------ ------
Costs and expenses
Cost of products and services sold 4,500 3,923 3,249 4,498 3,917 3,246 2 6 3
Postretirement benefits .......... 172 209 255 Note 4 171 208 254 1 1 1
Supplemental Trust contribution .. - 513 - Note 14 - 509 - - 4 -
Engineering expense .............. 97 94 92 97 94 92 - - -
Marketing and
administrative expense ......... 264 257 274 237 230 244 27 27 30
Interest expense ................. 165 108 99 100 29 12 70 79 87
Financing charges
on sold receivables ............ 16 14 12 66 56 52 - - -
Insurance claims
and underwriting expense ....... 54 59 62 - - - 54 59 62
------ ------ ------ ------ ------ ------ ------ ------ ------
Total costs and expenses ....... 5,268 5,177 4,043 5,169 5,043 3,900 154 176 183
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income taxes
Manufacturing .................. - - - 2 (523) (203) - - -
Financial Services ............. - - - 60 61 52 - - -
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
before income taxes ........ 62 (462) (151) 62 (462) (151) 60 61 52
Income tax expense ........... (22) (19) (15) Note 5 (22) (19) (15) (22) (22) (20)
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) of continuing
operations ..................... 40 (481) (166) 40 (481) (166) 38 39 32
Loss of discontinued operations .. (33) - (65) Note 6 (33) - (65) - - -
------ ------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before
cumulative effect of changes
in accounting policy ........... 7 (481) (231) 7 (481) (231) 38 39 32
Cumulative effect of changes Notes 4
in accounting policy ........... - (1,144) - & 5 - (1,144) - - (9) -
------ ------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) ................ $ 7 $(1,625) $ (231) $ 7 $(1,625) $ (231) $ 38 $ 30 $ 32
====== ====== ====== ====== ====== ====== ====== ====== ======
<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 29>
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION
- ------------------------------------------------------------------------------
As of October 31 (Millions of dollars)
- ------------------------------------------------------------------------------
Navistar International
Transportation Corp. and
Consolidated Subsidiaries Manufacturing* Financial Services*
------------------------- Note ------------------ ------------------
1994 1993 Reference 1994 1993 1994 1993
------ ------ --------- ------ ------ ------ ------
ASSETS
- -----------------------------------
<S> <C> <C> <S> <C> <C> <C> <C>
Cash and cash equivalents ............... $ 454 $ 306 $ 396 $ 262 $ 58 $ 44
Marketable securities ................... 170 187 Note 7 32 54 138 133
Receivables, net ........................ 1,521 1,552 Note 8 180 125 1,351 1,443
Inventories ............................. 429 411 Note 9 429 411 - -
Prepaid pension assets .................. 63 82 Note 4 62 81 1 1
Property and equipment, net ............. 578 636 Note 10 549 608 29 28
Equity in Financial Services
subsidiaries .......................... - - 249 241 - -
Investments and other assets ............ 163 224 149 201 14 23
Intangible pension assets ............... 309 340 309 340 - -
------ ------ ------ ------ ------ ------
Total assets ............................ $3,687 $3,738 $2,355 $2,323 $1,591 $1,672
====== ====== ====== ====== ====== ======
LIABILITIES AND SHAREOWNER'S EQUITY
- -----------------------------------
Liabilities
Accounts payable ........................ $ 836 $ 754 Note 12 $ 779 $ 685 $ 70 $ 85
Accrued liabilities ..................... 437 383 Note 13 405 359 29 24
Short-term debt ......................... 558 213 Note 14 39 58 519 155
Long-term debt due Parent Company ....... 932 971 Note 14 932 971 - -
Long-term debt .......................... 696 1,194 Note 14 124 150 572 1,044
Other long-term liabilities ............. 290 282 Note 15 281 273 9 9
Loss reserves and unearned premiums ..... 136 107 - - 136 107
Postretirement benefits liability ....... 1,299 1,352 Note 4 1,292 1,345 7 7
------ ------ ------ ------ ------ ------
Total liabilities ................... 5,184 5,256 3,852 3,841 1,342 1,431
------ ------ ------ ------ ------ ------
Shareowner's equity
Capital stock (1,000 shares issued) ..... 785 785 Note 19 785 785 178 178
Retained earnings (deficit) ............. (2,288) (2,311) (2,288) (2,311) 73 63
Accumulated foreign currency translation
adjustments and net unrealized holding
gains (losses) on marketable securities 6 8 6 8 (2) -
------ ------ ------ ------ ------ ------
Total shareowner's equity ............... (1,497) (1,518) (1,497) (1,518) 249 241
------ ------ ------ ------ ------ ------
Total liabilities and shareowner's equity $3,687 $3,738 $2,355 $2,323 $1,591 $1,672
====== ====== ====== ====== ====== ======
<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 CASH FLOW
Navistar International
Transportation Corp.
and Consolidated Subsidiaries
--------------------------------------
For the Years Ended October 31 Note
(Millions of dollars) 1994 1993 1992 Reference
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <S>
Cash flow from operations
Net income (loss) ............................... $ 7 $ (1,625) $ (231)
Adjustments to reconcile net income (loss)
to cash provided by (used in) operations:
Depreciation and amortization ................. 72 75 77
Supplemental Trust contribution ............... - 513 - Note 14
Equity in earnings of Financial Services,
net of dividends received ................... - - -
Allowance for losses on receivables
and dealer loans ............................ (2) 19 24
Provision for loss of discontinued operations . 33 - 65 Note 6
Cumulative effect of changes in accounting
policy ...................................... - 1,144 - Notes 4 & 5
Other, net .................................... (22) (16) (58)
Change in operating assets and liabilities .... (64) (101) 63 Note 3
-------- -------- --------
Cash provided by (used in) continuing operations 24 9 (60)
-------- -------- --------
Cash flow from investment programs
Purchase of retail notes and lease receivables .. (916) (770) (659)
Principal collections on retail notes
and lease receivables ......................... 181 337 409
Sale of retail notes receivables ................ 995 558 249 Note 8
Acquisitions (over) under cash collections
of wholesale notes and accounts receivable .... - - - Note 3
Purchase of marketable securities ............... (468) (265) (192)
Sales or maturities of marketable securities .... 483 230 210
Proceeds from property sold under sale/leaseback. 87 - -
Capital expenditures ............................ (87) (110) (55)
Net increase in property and equipment
leased to others .............................. (5) (14) (4)
Base Program Trust pre-funding .................. - (300) - Note 4
Other investment programs, net .................. 36 (48) (45)
--------- -------- --------
Cash provided by (used in) investment programs. 306 (382) (87)
--------- -------- --------
Cash flow from financing activities
Issuance of long-term debt ...................... 100 - -
Principal payments on long-term debt ............ (222) (114) (170)
Net increase (decrease) in short-term debt ...... 344 72 (176)
Increase (decrease) in debt outstanding under
bank revolving credit facility ................ (372) - 507
Loan from Navistar International Corporation .... (32) 493 -
Dividends paid .................................. - - -
-------- -------- --------
Cash provided by (used in) financing activities (182) 451 161
-------- -------- --------
Cash and cash equivalents
Increase (decrease) during the year ........... 148 78 14
At beginning of the year ...................... 306 228 214
-------- -------- --------
Cash and cash equivalents at end of the year .... $ 454 $ 306 $ 228
======== ======== ========
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 31>
<TABLE>
<CAPTION>
Manufacturing* Financial Services*
- ------------------------------------ ----------------------------------
1994 1993 1992 1994 1993 1992
- --------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C>
$ 7 $ (1,625) $ (231) $ 38 $ 30 $ 32
68 69 74 4 6 3
- 509 - - 4 -
(10) (10) (15) - - -
(4) 17 19 2 2 5
33 - 65 - - -
- 1,144 - - 9 -
(6) (10) (45) (16) (7) (12)
62 72 149 (8) 19 (17)
- -------- -------- -------- -------- -------- --------
150 166 16 20 63 11
- -------- -------- -------- -------- -------- --------
- - - (916) (770) (659)
- - - 181 337 409
- - - 995 558 249
- - - (118) (187) (66)
(409) (190) (64) (59) (75) (128)
431 144 89 52 86 121
87 - - - - -
(87) (110) (55) - - -
- - - (5) (14) (4)
- (300) - - - -
36 (48) (33) - - (13)
- -------- -------- -------- -------- -------- --------
58 (504) (63) 130 (65) (91)
- -------- -------- -------- -------- -------- --------
- - - 100 - -
(42) (15) (11) (180) (99) (159)
- (3) 8 344 75 (184)
- - - (372) - 507
(32) 493 - - - -
- - - (28) (33) (20)
- -------- -------- -------- -------- -------- --------
(74) 475 (3) (136) (57) 144
- -------- -------- -------- -------- -------- --------
134 137 (50) 14 (59) 64
262 125 175 44 103 39
- -------- -------- -------- -------- -------- --------
$ 396 $ 262 $ 125 $ 58 $ 44 $ 103
======== ======== ======== ======== ======== ========
<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 32>
<TABLE>
<CAPTION>
STATEMENT OF SHAREOWNER'S EQUITY Navistar International Transportation
For the Years Ended October 31, 1994, 1993 and 1992 Corp. and Consolidated Subsidiaries
EQUITY (Millions of dollars)
-------------------------------------------------
ACCUMULATED
SHARES TRANSLATION
OUTSTANDING RETAINED ADJUSTMENT/
CAPITAL CAPITAL EARNINGS UNREALIZED
STOCK STOCK (DEFICIT) GAINS/(LOSSES) TOTAL
--------- -------- --------- -------------- ---------
<S> <C> <C> <C> <C> <C>
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)
Net income ...................................... - - 7.0 - 7.0
Adjustment for excess pension liability
over intangible pension assets ................ - - 16.2 - 16.2
Translation adjustments ......................... - - - .1 .1
Unrealized loss-marketable securities ........... - - - (2.3) (2.3)
-------- -------- -------- -------- ---------
Balance at October 31, 1994 ....................... 1,000 $ 785.3 $(2,288.0) $ 5.8 $(1,496.9)
======== ======== ========= ======== =========
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 33>
NAVISTAR INTERNATIONAL TRANSPORTATION CORP. AND SUBSIDIARIES
==========
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1994
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 the United States
and Canada 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 Navistar Financial Corporation
(Navistar Financial), and other foreign finance and insurance companies.
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.
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, the Company has adopted an unclassified
presentation. Certain 1993 and 1992 amounts have been reclassified to
conform with the presentation used in the 1994 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, U.S. government securities and floating
rate notes are classified as cash equivalents in the Statement of
Financial Condition and Statement of Cash Flow.
Marketable Securities
Marketable securities, which are classified as available-for-sale
securities, are reported at fair value in accordance with SFAS 115,
"Accounting for Certain Investments in Debt and Equity Securities" which
Transportation elected to apply as of October 31, 1994. Marketable
securities at October 31, 1993, are reported at cost or amortized cost
which approximates market value. See Note 7 to the Financial Statements.
<PAGE>
<PAGE 34>
==========
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, $95 million and $90 million in 1994, 1993 and 1992, 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.
The adoption of SFAS 109 did 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 in the financial statements of the
Parent Company.
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.
<PAGE>
<PAGE 35>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
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 but 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 1994, Transportation adopted SFAS 113, "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts" and SFAS
119, "Disclosure About Derivative Financial Instruments and Fair Value of
Financial Instruments". In addition, Transportation has elected to apply
SFAS 115, "Accounting for Certain Investments in Debt and Equity
Securities" as of October 31, 1994. Implementation of these standards did
not have a material effect on the Company's financial results. See Notes
7, 8 and 16 to the Financial Statements.
<PAGE>
<PAGE 36>
==========
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 1994 1993 1992
- -------------------------------------------------------------------------
Sales and revenues
Finance and insurance income ........... $ (50) $ (42) $ (40)
Other income ........................... (5) - -
-------- -------- --------
$ (55) (42) $ (40)
======== ======== ========
Costs and expenses
Interest expense ....................... $ (5) $ - $ -
Financing charges on sold receivables .. (50) (42) (40)
-------- -------- --------
$ (55) $ (42) $ (40)
======== ======== ========
Income before income taxes,
Financial Services ..................... $ (60) $ (61) $ (52)
======== ======== ========
STATEMENT OF FINANCIAL CONDITION
Millions of dollars 1994 1993
- ---------------------------------------------------------------
Receivables, net ......................... $ (10) $ (16)
Equity in Financial Services
subsidiaries ........................... (249) (241)
-------- --------
Total assets ............................. $ (259) $ (257)
======== ========
Accounts payable ......................... $ (13) $ (16)
Accrued liabilities ...................... 3 -
Shareowner's equity, Financial Services .. (249) (241)
-------- --------
Total liabilities
and shareowner's equity ................ $ (259) $ (257)
======== ========
<PAGE>
<PAGE 37>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. FINANCIAL STATEMENT ELIMINATIONS (continued)
STATEMENT OF CASH FLOW
Millions of dollars 1994 1993 1992
- -------------------------------------------------------------------------
Cash and cash equivalents
provided by (used in):
Operations ........................... $ (146) $ (220) $ (87)
Investment programs .................. 118 187 67
Financing activities ................. 28 33 20
-------- -------- --------
Increase (decrease) during the year
in cash and cash equivalents ............ $ - $ - $ -
======== ======== ========
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 1994 1993 1992
- ------------------------------------------------------------------------
MANUFACTURING
(Increase) decrease in receivables ..... $ (51) $ 1 $ (118)
(Increase) in inventories .............. (19) (51) (37)
(Increase) in prepaid
and other current assets ............. (4) (10) (9)
Increase in accounts payable ........... 87 122 187
Increase in accrued liabilities ........ 49 10 126
-------- -------- --------
Manufacturing change in operating assets
and liabilities ...................... 62 72 149
-------- -------- --------
FINANCIAL SERVICES
(Increase) decrease in receivables ..... (1) 2 8
Increase (decrease) in accounts payable
and accrued liabilities .............. (7) 17 (25)
-------- -------- --------
Financial Services change
in operating assets and liabilities .. (8) 19 (17)
-------- -------- --------
Eliminations/reclassifications (a) ....... (118) (192) (69)
-------- -------- --------
Change in operating assets and liabilities $ (64) $ (101) $ 63
======== ======== ========
(a) Eliminations and reclassifications to the Statement of Cash Flow
primarily consist of "Acquisitions (over) under cash collections"
relating to Financial Services' 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.
<PAGE>
<PAGE 38>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. POSTRETIREMENT BENEFITS
Transportation provides postretirement benefits to substantially all
of its employees. Costs associated with postretirement benefits include
pension expense for employees, retirees and surviving spouses, and
postretirement health care and life insurance expense 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 1994 1993 1992
- -------------------------------------------------------------------------
Pension expense .......................... $ 108 $ 107 $ 109
Health/life insurance .................... 64 102 146
-------- --------- --------
Total postretirement benefits expense .... $ 172 $ 209 $ 255
======== ======== ========
In the Statement of Financial Condition, the postretirement benefits
liability of $1,299 million in 1994 and $1,352 million in 1993 includes
$549 million and $600 million, respectively, for pension and $750 million
and $752 million, respectively, 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 United States and Canadian 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.
Legislation known as the "Retirement Protection Act," was passed by
the United States Congress amending the "Employee Retirement Income
Security Act," (ERISA) and the Internal Revenue Code. The measure will
require the accelerated funding of underfunded defined benefit pension
plans and will increase the premiums paid to the Pension Benefit Guaranty
Corporation. Transportation intends to fund its defined benefit plans at,
or in excess of, the government requirements.
<PAGE>
<PAGE 39>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
In addition to providing pension benefits, Transportation provides
health care and life insurance for a majority of its retired employees,
spouses and certain dependents in the United States and Canada. For most
retirees in the United States, 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, eliminated certain benefits and provided for cost sharing
between Transportation and participants 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 Company
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, originally valued at $513 million, to potentially reduce retiree
premiums, co-payments and deductibles and provide additional benefits in
the future.
Pension Expense
Net pension expense included in the Statement of Income (Loss) is
composed of the following:
Millions of dollars 1994 1993 1992
- ------------------------------------------------------------------------
Service cost-benefits earned
during the period ...................... $ 34 $ 27 $ 25
Interest on projected benefit obligation . 211 220 219
Other pension costs ...................... 50 43 54
Less expected return on assets ........... (187) (183) (189)
-------- -------- --------
Net pension expense ...................... $ 108 $ 107 $ 109
======== ======== ========
Actual return on assets .................. $ (127) $ 427 $ 218
"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 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. Since
the adoption of the standard on pension accounting in 1988, the cumulative
actual returns on plan assets exceeded cumulative expected returns by $117
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 $359 million.
<PAGE>
<PAGE 40>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
Pension Assets and Liabilities
Included in the Statement of Financial Condition is the minimum
pension liability for certain unfunded pension obligations. The unfunded
liability in excess of the unamortized prior service cost and net
transition obligation was recorded as a reduction in shareowner's equity
of $213 million as of October 31, 1994 and $229 million as of October 31,
1993. The change in the minimum pension liability at October 31, 1994
resulted from changes in actuarial assumptions, experience losses and
settlement rate changes.
The funded status of Transportation's plans as of October 31, 1994
and 1993, 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 1994 1993 1994 1993
- -------------------------------------------------------------------------
Actuarial present value of:
Vested benefits ........... $ (81) $ (87) $ (2,282) $ (2,618)
Non-vested benefits ....... (5) (4) (223) (213)
-------- -------- -------- --------
Accumulated benefit
obligation ............ (86) (91) (2,505) (2,831)
Effect of projected future
compensation levels ..... (2) (6) (21) (40)
-------- -------- -------- --------
Projected benefit obligation. (88) (97) (2,526) (2,871)
Plan assets at fair value ... 118 122 1,968 2,262
-------- -------- -------- --------
Funded status at October 31 . 30 25 (558) (609)
Unamortized pension costs:
Net losses .............. 7 26 235 260
Prior service costs ..... 14 1 43 49
(Asset) liability
at date of transition . (1) (1) 266 301
Adjustment for the minimum
liability ................. - - (522) (570)
-------- -------- -------- --------
Net asset (liability) ....... $ 50 $ 51 $ (536) $ (569)
======== ======== ======== ========
As shown above, in 1994 for all plans, the sum of the $50 million net
asset and the $536 million net liability was $486 million and is the
amount recognized in the Statement of Financial Condition at October 31,
1994. This total includes $63 million of prepaid pension assets
representing advance contributions to certain plans, and $549 million of
net pension liabilities included in the $1,299 million postretirement
benefits liability in the Statement of Financial Condition.
<PAGE>
<PAGE 41>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
Pension Assets and Liabilities (continued)
In 1993, 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 $1,352 million postretirement benefits liability in the
Statement of Financial Condition.
The weighted average rate assumptions used in determining pension
costs and the projected benefit obligation were:
Millions of dollars 1994 1993 1992
- ------------------------------------------------------------------------
Discount rate used to determine
present value of projected
benefit obligation ..................... 9.3% 7.3% 8.8%
Expected long-term rate
of return on plan assets ............... 8.1% 8.8% 9.2%
Expected rate of increase
in future compensation levels .......... 3.5% 3.5% 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 increase in the discount rate to 9.3% in 1994 from
7.3% in 1993 reflects higher long-term interest rates during the past
year.
Other Postretirement Benefits
Transportation adopted SFAS 106, "Employers' Accounting for
Postretirement Benefits Other Than Pensions," for its United States and
Canadian plans in fiscal 1993 and recognized the transition obligation as
a one-time non-cash charge to earnings. The cumulative effect of this
change in accounting policy was $1,149 million. The $1,144 million
cumulative charge for the changes in accounting policy reported in the
Statement of Income (Loss) for 1993 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, as discussed in Note 5 to the
Financial Statements.
<PAGE>
<PAGE 42>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
Other Postretirement Benefits (continued)
The components of expense for other postretirement benefits included
in the Statement of Income (Loss) are as follows:
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
Service cost - benefits earned
during the year ........................ $ 10 $ 12
Interest cost on the
accumulated benefit obligation ......... 81 91
Expected return on assets ................ (27) (1)
-------- --------
Net other postretirement benefits expense. $ 64 $ 102
======== ========
The funded status of other postretirement benefits as of October 31
is as follows:
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
Accumulated other postretirement
benefit obligation (APBO):
Retirees and their dependents ............ $ (662) $ (753)
Active employees eligible to retire ...... (198) (160)
Other active participants ................ (178) (173)
-------- --------
Total APBO ............................... (1,038) (1,086)
Plan assets at fair value ................ 308 302
-------- --------
APBO in excess of plan assets ............ (730) (784)
Unrecognized net (gain) loss ............. (20) 32
-------- --------
Net liability ............................ $ (750) $ (752)
======== ========
In October 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. 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 the
Parent Company's Common Stock through such date, but not to exceed $500
million. Additionally, Transportation is required to annually pre-fund an
amount equal to annual service cost. These funds will be used to pay a
portion of current benefits; the remainder to be invested with plan assets
which consist primarily of equity securities. The expected return on plan
assets was 9% at October 31, 1994 and 1993.
<PAGE>
<PAGE 43>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. POSTRETIREMENT BENEFITS (continued)
Other Postretirement Benefits (continued)
The weighted average of discount rates used in the United States and
Canada to determine the accumulated postretirement benefit obligation was
9.0% and 7.5% at October 31, 1994 and 1993, respectively, based on the
estimated income of high-quality fixed income securities which could be
purchased to effectively settle the obligation. For 1995, the weighted
average rate of increase in the per capita cost of covered health care
benefits is projected to be 10.0%. The rate is projected to decrease to
5% by 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 $100 million and the associated expense
recognized for the year ended October 31, 1994 would increase by an
estimated $11 million. Conversely, a decrease in the cost trend rate
would lower the accumulated postretirement benefit obligation and the
associated expense.
5. INCOME TAXES
Transportation adopted SFAS 109, "Accounting for Income Taxes" in
fiscal 1993. 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 years in which the differences are expected to reverse.
Recognition of a 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. Under a
tax allocation agreement with the Parent Company (Tax Agreement), if
Transportation records income, it is required to compute its federal
income tax expense based on such income and report it in the Statement of
Income (Loss); whereas, if a loss is recorded, the federal income tax
benefits from such losses are recorded by the Parent Company. 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, 1994, Transportation had
$22 million of domestic NOLs available to offset future taxable income
generated by the subsidiaries.
<PAGE>
<PAGE 44>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES (continued)
Taxes on income (loss) are analyzed by categories as follows:
Millions of dollars 1994 1993 1992
- ------------------------------------------------------------------------
Current:
Federal ................................ $ 15 $ 12 $ 12
State and local ........................ 4 3 3
-------- -------- --------
Total current ........................ 19 15 15
Deferred taxes ........................... 3 4 -
-------- -------- --------
Total income tax expense
of continuing operations ............... $ 22 $ 19 $ 15
======== ======== ========
The difference between the provision for income taxes and income
taxes computed using the U.S. federal income tax statutory rate in 1994,
1993 and 1992 was as follows:
Millions of dollars 1994 1993 1992
- ------------------------------------------------------------------------
Amount computed using the
U.S. federal statutory rate ............ $ 5 $ (165) $ (68)
Increase (reduction)
in taxes resulting from:
State income taxes, net .............. 4 3 3
Current year losses for
which no benefit is available ...... 14 182 83
Other ................................ (1) (1) (3)
-------- -------- --------
Provision for income taxes
of continuing operations ............... $ 22 $ 19 $ 15
======== ======== ========
<PAGE>
<PAGE 45>
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. INCOME TAXES (continued)
The components of the deferred tax asset (liability), in millions of
dollars at October 31, are as follows:
1994 1993
-------- -------
United States
- -------------
Deferred tax asset,
net operating loss carryforwards ....... $ 8 $ 8
Less valuation allowance ................. (8) (8)
-------- --------
Net deferred tax assets ................ $ - $ -
======== ========
Foreign
- -------
Deferred tax assets:
Net operating loss carryforwards ....... $ 3 $ 11
Postretirement benefits ................ 16 16
-------- --------
Total deferred tax assets ............ 19 27
-------- --------
Deferred tax liabilities:
Prepaid pension assets ................. (16) (16)
-------- --------
Total deferred tax liabilities ....... (16) (16)
-------- --------
Total ................................ 3 11
Less valuation allowance ................. (19) (27)
-------- --------
Net deferred tax liabilities ......... $ (16) $ (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 valuation allowance decreased $8 million during
1994 resulting from recognizing tax benefits from the utilization of NOL
carryforwards attributable to 1994 foreign operating income and
fluctuations in foreign exchange rates.
<PAGE>
<PAGE 46>
==========
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
In the fourth quarter of 1994, Transportation recorded a $33 million
charge as a loss of discontinued operations for environmental liabilities
at production facilities of two formerly owned businesses, Wisconsin Steel
and Solar Turbine, Inc. See Note 18 to the Financial Statements.
Transportation reached a final agreement with the Economic
Development Administration (EDA), a division of the United States
Department of Commerce, in settlement of commercial and environmental
disputes related to the Wisconsin Steel site in Chicago, Illinois. The
terms of this agreement are described in Note 18 to the Financial
Statements. In addition, Transportation recorded a charge for potential
cleanup costs related to the former Solar Division located in San Diego,
California.
In 1992, a provision of $65 million was recorded 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
maturing August 15, 2002.
7. MARKETABLE SECURITIES
Transportation has elected to apply SFAS 115, "Accounting for Certain
Investments in Debt and Equity Securities" as of October 31, 1994. This
statement addresses the accounting and reporting for investments in equity
securities that have readily determinable fair values and for all
investments in debt securities. In accordance with its provisions, the
statement is not retroactive to prior financial statements.
<PAGE>
<PAGE 47>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. MARKETABLE SECURITIES (continued)
At October 31, 1994, all marketable securities are classified as
available-for-sale and reported at fair value in the Statement of
Financial Condition in accordance with SFAS 115. The fair value of
marketable securities is estimated based on quoted market prices, when
available. If a quoted price is not available, fair value is estimated
using quoted market prices for similar financial instruments. At October
31, 1993, marketable securities were reported at cost or amortized cost
which approximated market value.
Information related to the Company's marketable securities at October
31 is as follows:
1994
- -------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Millions of dollars Cost Gains Losses Value
- -------------------------------------------------------------------------
MANUFACTURING
U.S. government
securities .............. $ 32 $ - $ - $ 32
-------- -------- -------- --------
FINANCIAL SERVICES
Corporate securities ...... 28 - - 28
U.S. government securities. 67 - 2 65
Mortgage and
asset-backed securities . 28 - 1 27
Foreign government
securities .............. 9 - - 9
-------- -------- -------- --------
Financial Services
debt securities ......... 132 - 3 129
Financial Services
equity securities ....... 9 1 1 9
-------- -------- -------- --------
Financial Services
marketable securities ... 141 1 4 138
-------- -------- -------- --------
Total marketable securities . $ 173 $ 1 $ 4 $ 170
======== ======== ======== ========
<PAGE>
<PAGE 48>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. MARKETABLE SECURITIES (Continued)
1993
-------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Millions of dollars Cost Gains Losses Value
- -------------------------------------------------------------------------
MANUFACTURING
U.S. government
securities .............. $ 54 $ - $ - $ 54
-------- -------- -------- --------
FINANCIAL SERVICES
Corporate securities ...... 18 1 - 19
U.S. government
securities .............. 70 5 - 75
Mortgage and
asset-backed securities . 36 1 - 37
Foreign government
securities .............. 9 - - 9
-------- -------- -------- --------
Financial Services
debt securities ......... 133 7 - 140
-------- -------- -------- --------
Total marketable securities . $ 187 $ 7 $ - $ 194
======== ======== ======== ========
<PAGE>
<PAGE 49>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. MARKETABLE SECURITIES (continued)
Contractual maturities of marketable debt securities at October 31
are as follows:
1994 1993
------------------ ------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- -------------------------------------------------------------------------
MANUFACTURING
Due in one year or less ...... $ - $ - $ - $ -
Due after one year
through five years ......... 32 32 54 54
-------- -------- -------- --------
Manufacturing debt
securities ............. 32 32 54 54
-------- -------- -------- --------
FINANCIAL SERVICES
Due in one year or less ...... 17 17 6 6
Due after one year
through five years ......... 61 60 62 65
Due after five years
through ten years .......... 17 16 26 28
Due after ten years .......... 9 8 3 3
-------- -------- -------- --------
104 101 97 102
Mortgage and
asset-backed securities .... 28 28 36 38
-------- -------- -------- --------
Financial services
debt securities ........ 132 129 133 140
-------- -------- -------- --------
Total debt securities ........ $ 164 $ 161 $ 187 $ 194
======== ======== ======== ========
<PAGE>
<PAGE 50>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. MARKETABLE SECURITIES (Continued)
Proceeds from sales or maturities of investments in securities held
by Manufacturing and Financial Services were $483 million during 1994.
Gross gains and losses were not material. Shareowners' equity includes a
net unrealized holding loss of $3 million at October 31, 1994.
At October 31, 1994 and 1993, Financial Services had $30 million and
$27 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, 1994 and 1993.
8. RECEIVABLES
Receivables at October 31 are summarized by major classification as
follows:
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
MANUFACTURING
Customers .............................. $ 197 $ 149
Allowance for losses ................... (17) (24)
-------- --------
Manufacturing receivables, net ....... 180 125
-------- --------
FINANCIAL SERVICES
Retail notes and lease financing ....... 526 824
Wholesale notes ........................ 241 237
Accounts receivable .................... 370 251
Amounts due from sales of receivables .. 181 138
Reinsurance balance receivables ........ 41 5
-------- --------
Total accounts and notes receivables ... 1,359 1,455
Allowance for losses ................... (8) (12)
-------- --------
Financial Services receivables, net .. 1,351 1,443
-------- --------
Eliminations ......................... (10) (16)
-------- --------
Total receivables, net ................... $ 1,521 $ 1,552
======== ========
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 51>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. RECEIVABLES (continued)
Financial Services
During fiscal 1994, the Company's Financial Services' insurance
subsidiaries adopted SFAS 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts." This statement specifies
the accounting by insurance enterprises for the reinsurance (ceding) of
insurance contracts. It requires reinsurance receivables and prepaid
reinsurance premiums to be reported as assets. In accordance with the
standard, Financial Services' assets include $41 million of reinsurance
receivables at October 31, 1994. The restatement of the prior year's
Statement of Financial Condition is not required.
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 receivables by Navistar Financial to third
parties with limited recourse. Proceeds from sales of retail notes
receivable were $995 million in 1994, $558 million in 1993 and $249
million in 1992. Uncollected sold retail and wholesale receivable
balances totalled $1,334 million and $839 million as of October 31, 1994
and 1993, respectively. Navistar Financial's maximum exposure under all
receivable sale recourse provisions at October 31, 1994 is $177 million
which includes holdback reserves of $64 million, subordinated retained
interest in securitized receivable sales of $61 million and $52 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, 1994, are summarized below. Prepayments may cause the average
actual life to be shorter.
Retail Notes and Wholesale Accounts
Millions of dollars Lease Financing Notes Receivable
- -------------------------------------------------------------------------
Gross finance receivables
due in:
1995 ...................... $ 165 $ 136 $ 358
1996 ...................... 145 105 -
1997 ...................... 116 - -
1998 and thereafter ....... 161 - -
-------- -------- --------
Gross finance receivables 587 241 358
Unearned finance charges .... 61 - -
-------- -------- --------
Total finance receivables ... $ 526 $ 241 $ 358
======== ======== ========
<PAGE>
<PAGE 52>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INVENTORIES
Inventories at October 31 are as follows:
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
Finished products ........................ $ 169 $ 196
Work in process .......................... 103 73
Raw materials and supplies ............... 157 142
-------- --------
Total inventories ........................ $ 429 $ 411
======== ========
10. PROPERTY
At October 31, property includes the following:
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
MANUFACTURING
Land ................................... $ 8 $ 8
-------- --------
Buildings, machinery and equipment
at cost:
Plants ............................... 1,070 1,087
Distribution ......................... 71 72
Other ................................ 78 82
-------- --------
Subtotal ........................... 1,219 1,241
-------- --------
Total property ........................... 1,227 1,249
Less accumulated depreciation
and amortization ....................... (678) (641)
-------- --------
Manufacturing property, net ........ 549 608
-------- --------
FINANCIAL SERVICES
Total property ......................... 35 34
Less accumulated depreciation
and amortization ..................... (6) (6)
-------- --------
Financial Services property, net ..... 29 28
-------- --------
Total property and equipment, net .......... $ 578 $ 636
======== ========
Included in the gross property of Manufacturing is property under
capitalized lease obligations of $27 million at October 31, 1994, and $28
million at October 31, 1993.
<PAGE>
<PAGE 53>
==========
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 $34 million in 1994, 1993 and 1992.
Income received from sublease rentals was $6 million in 1994, 1993 and
1992.
At October 31, 1994, 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
- -------------------------------------------------------------------------
1995 ..................................... $ 4 $ 31
1996 ..................................... 3 30
1997 ..................................... 3 28
1998 ..................................... 3 26
Thereafter ............................... 11 91
-------- --------
Total minimum payments ................... 24 $ 206
========
Less imputed interest .................... (9)
--------
Present value of minimum lease payments. $ 15
========
Future income from subleases ........... $ 33
========
<PAGE>
<PAGE 54>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
12. ACCOUNTS PAYABLE
Major classifications of accounts payable at October 31 are as
follows:
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
MANUFACTURING
Trade .................................. $ 776 $ 669
Other .................................. 3 16
-------- -------
Manufacturing accounts payable ....... 779 685
-------- -------
FINANCIAL SERVICES
Other ................................... 57 69
Manufacturing ........................... 13 16
-------- -------
Financial Services accounts payable ... 70 85
-------- -------
Eliminations .............................. (13) (16)
-------- -------
Total accounts payable .................... $ 836 $ 754
======== =======
13. ACCRUED LIABILITIES
Major classifications of accrued liabilities at October 31 are as
follows:
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
MANUFACTURING
Product liability and warranty ......... $ 117 $ 108
Payroll and commissions ................ 65 59
Employee incentive programs ............ 35 -
Taxes .................................. 26 21
Employee related benefits .............. 29 35
Environmental .......................... 11 4
Other .................................. 122 132
-------- --------
Manufacturing accrued liabilities .... 405 359
-------- --------
FINANCIAL SERVICES
Interest ............................... 11 14
Other .................................. 18 10
-------- --------
Financial Services accrued liabilities 29 24
-------- --------
Eliminations ............................. 3 -
-------- --------
Total accrued liabilities ................ $ 437 $ 383
======== ========
<PAGE>
<PAGE 55>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. DEBT
Short-Term Debt
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
MANUFACTURING
Notes payable and
current maturities of long-term debt . $ 3 $ 25
Parent Company notes payable ........... 36 33
-------- --------
Manufacturing short-term debt ...... 39 58
-------- --------
FINANCIAL SERVICES
Commercial paper ....................... 19 -
Bank borrowings ........................ 400 75
Current maturities of long-term debt ... 100 80
-------- --------
Financial Services short-term debt . 519 155
-------- --------
Total short-term debt .................... $ 558 $ 213
======== ========
Navistar Financial issues commercial paper with varying terms and has
short-term borrowings with various banks on a non-committed basis.
Compensating cash balances and commitment fees are not required under
these borrowings.
<PAGE>
<PAGE 56>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. DEBT (continued)
Long-Term Debt
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
MANUFACTURING
Subordinated Parent Company Notes
9.05% Stock Purchase Agreement
(Class B Common) due 2003 .......... $ 439 $ 478
9% Loan Agreement, due 2013 .......... 493 493
-------- --------
Long-term debt due Parent Company ...... $ 932 $ 971
======== ========
------------------------------
MANUFACTURING
8 5/8% Sinking Fund Debentures, due 1995 $ - $ 9
6 1/4% Sinking Fund Debentures, due 1998 7 11
9% Sinking Fund Debentures, due 2004 ... 65 75
8% Secured Note, due 2002 .............. 37 37
Capitalized leases ..................... 13 15
Other .................................. 2 3
-------- --------
Manufacturing long-term debt ......... 124 150
-------- --------
FINANCIAL SERVICES
Senior Debentures and Notes
9.35% to 9.75%, medium-term,
due 1995 to 1996 ................... 117 217
Bank revolver, variable rate,
due November 1995 .................. 355 727
-------- --------
Total senior debt ................ 472 944
Subordinated Term Debt
Debentures, 11.95%,
due December 1995 .................. - 100
Senior notes, 8 7/8%,
due November 1998 .................. 100 -
-------- --------
Financial Services long-term debt .... 572 1,044
-------- --------
Total long-term debt ..................... $ 696 $ 1,194
======== ========
<PAGE>
<PAGE 57>
==========
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
- -------------------------------------------------------------------------
1996 ......................... $ 15 $ 472 $ 487
1997 ......................... 18 - 18
1998 ......................... 18 - 18
1999 ......................... 15 100 115
Thereafter ................... 58 - 58
Weighted average interest
rate on total debt
including short-term debt
and the effect of discounts
and related amortization .... 8.7% 7.1% 7.3%
Manufacturing's eight percent secured note, due 2002, is secured by
certain plant assets.
In conjunction with implementation of the restructured retiree health
care and life insurance 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
originally 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 used the remaining proceeds for working capital
purposes.
At October 31, 1994, 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. The bank revolving credit facility grants security
interests in substantially all of Navistar Financial's assets to the
debtholders. Unused commitments under the credit and purchase facilities
were $595 million, $419 million of which was used to back short-term debt
at October 31, 1994. The remaining $176 million, when combined with
unrestricted cash and cash equivalents, made $204 million available at
October 31, 1994 to fund the general business purposes of Navistar
Financial. At October 31, 1994, $377 million of sold notes were
outstanding under the retail notes purchase facility. 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.
<PAGE>
<PAGE 58>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. DEBT (continued)
Long-Term Debt (continued)
In November 1994, Navistar Financial amended and restated its $727
million bank revolving credit agreement extending the scheduled maturities
for 1996 to October 31, 1998 and expanding the commitment to $900 million.
In addition, the commitments to sell retail notes under the $600 million
retail notes purchase facility agreement were terminated and Navistar
Financial established a $300 million asset-backed commercial paper program
backed by a $300 million bank liquidity facility which terminates October
31, 1998. The amended revolving credit facility removes dividend
restrictions, provides that Navistar Financial maintain certain covenant
requirements and grants security interests in substantially all of its
assets consistent with the previous credit agreement. Facility fees will
be paid quarterly regardless of usage.
Under the terms of the asset-backed commercial paper program, a
special purpose wholly-owned subsidiary of Navistar Financial will
purchase retail notes and lease receivables. All assets of the subsidiary
will be pledged or sold to a Trust that will fund the receivables with
investment grade commercial paper. Navistar Financial will pay a
commitment fee on the unused portion of the $300 million asset-backed
commercial paper liquidity facility.
Navistar Financial's wholly-owned subsidiaries, Navistar Financial
Retail Receivables Corporation (NFRRC) and Navistar Financial Securities
Corporation (NFSC), have a limited purpose of purchasing retail and
wholesale receivables, respectively, and transfer an undivided ownership
interest in such notes to investors in exchange for pass-through notes and
certificates. In addition, the subsidiaries have limited recourse on the
sold receivables and their assets are available to satisfy the claims of
their creditors prior to such assets becoming available to Navistar
Financial or affiliated companies.
At October 31, 1994, 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 December 15, 1994, Navistar Financial sold $315 million of retail
notes, net of unearned finance income, through NFRRC to an owner trust
which, in turn, sold $304 million of notes and $11 million of certificates
to investors. The net proceeds of $314 million were used by Navistar
Financial for general working capital purposes and to establish a $19
million reserve account with the trust.
<PAGE>
<PAGE 59>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
14. DEBT (continued)
Long-Term Debt (continued)
During fiscal 1993, NFRRC filed a registration statement with the
Securities and Exchange Commission providing for the issuance from time to
time of $1,000 million of asset-backed securities. In fiscal 1994,
Navistar Financial sold $830 million of retail notes with net proceeds
from the sales of $828 million of which $57 million was established as a
cash reserve with the trusts as a credit enhancement. On October 7, 1994,
NFRRC filed an additional registration statement with the Securities and
Exchange Commission providing for the issuance from time to time of an
additional $2,000 million of asset-backed securities.
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.
Consolidated interest payments were $181 million, $93 million and $93
million in 1994, 1993 and 1992, respectively.
15. OTHER LONG-TERM LIABILITIES
Major classifications of other long-term liabilities at October 31
are as follows:
Millions of dollars 1994 1993
- -------------------------------------------------------------------------
MANUFACTURING
Product liability and warranty ......... $ 171 $ 170
Employee related disability ............ 46 50
Environmental .......................... 20 6
Other .................................. 44 47
-------- --------
Manufacturing other long-term
liabilities ........................ 281 273
FINANCIAL SERVICES
Product liability ...................... 9 9
-------- --------
Total other long-term liabilities ........ $ 290 $ 282
======== ========
<PAGE>
<PAGE 60>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
16. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts of financial instruments, as reported in the
Statement of Financial Condition and described in the various footnotes to
the Financial Statements and their fair values at October 31, are as
follows:
1994 1993
------------------ ------------------
Carrying Fair Carrying Fair
Millions of dollars Amount Value Amount Value
- -------------------------------------------------------------------------
Marketable securities ....... $ 173 $ 170 $ 187 $ 194
Receivables, net ............ 1,521 1,517 1,552 1,559
Investments and other assets. 163 185 224 269
Long-term debt .............. 1,628 1,625 2,165 2,198
Cash and cash equivalents approximate fair value. The method for
estimating the fair value of marketable securities is described in Note 8
to the Financial Statements.
Manufacturing's customer receivables and Navistar Financial's
wholesale notes and retail and wholesale accounts and other variable-rate
retail notes approximate fair value as a result 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 fair value of investments and other assets is estimated based on
quoted market prices or by discounting future cash flows.
The short-term debt and variable-rate borrowings under 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.
Derivatives Held or Issued for Purposes Other Than Trading
Derivatives are used by Transportation to transfer or reduce risks in
foreign exchange and purchase transactions, reduce interest rate risks and
potentially increase the return on invested funds.
<PAGE>
<PAGE 61>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
16. FINANCIAL INSTRUMENTS (continued)
Derivatives Held or Issued for Purposes Other Than Trading (continued)
The use of derivatives by Manufacturing is generally not material.
Collateralized Mortgage Obligations (CMO's) are purchased that have
relatively stable cash flow patterns in relation to interest rate changes.
At October 31, 1994, Manufacturing had no CMO's in its investment
portfolio. Manufacturing, as conditions warrant, has hedged its foreign
exchange exposure on the purchase of parts and materials from foreign
countries and its exposure from non-U.S. dollar foreign sales. Contracted
purchases of commodities for manufacturing may be hedged up to one year.
At October 31, 1994, there were no hedging instruments in effect.
Navistar Financial generally acquires floating rate wholesale
receivables and fixed rate retail receivables and funds floating rate
receivables with floating rate funding and fixed rate receivables with
fixed rate funding. Interest rate caps and swaps are used when needed to
convert floating rate funds to fixed and vice versa to match the asset
portfolio. In addition, Navistar Financial will use a variety of
contracts to lock in interest rates during the period in which retail
receivables are being sold. During fiscal 1994, Navistar Financial
entered into two short-term forward interest rate lock agreements related
to two sales of receivables. At October 31, 1994, there were no swap
agreements outstanding. One interest rate cap, purchased in 1985 for a
notional amount of $50 million, which serves to partially hedge the
interest cost of variable rate debt remains outstanding. The Financial
Services' insurance companies use CMO's and foreign exchange future
contracts to increase the yield on their investment portfolios. These
instruments totalled $24 million at October 31, 1994.
17. COMMITMENTS, CONTINGENT LIABILITIES AND RESTRICTIONS ON ASSETS
At October 31, 1994, commitments for capital expenditures in progress
were approximately $33 million.
At October 31, 1994, 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 $135
million on retail contracts and $14 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, 1994, these
subsidiaries had $340 million of net assets, of which $203 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,
1994.
<PAGE>
<PAGE 62>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
18. LEGAL PROCEEDINGS
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.
Transportation appealed the verdict and in order to do so was required to
post a bond collateralized with $30 million in cash. In November 1994,
the Court of Appeals of the State of Oklahoma reversed the verdict and
entered judgment in favor of Transportation on virtually all aspects of
the case. The bond and the related collateral will be released when the
order of the Court of Appeals is filed.
Transportation and the Economic Development Administration (EDA), a
division of the U.S. Department of Commerce, reached an agreement in the
fourth quarter of 1994 in settlement of commercial and environmental
disputes related to the Wisconsin Steel property. EDA and Transportation
became 90% and 10% beneficiaries, respectively, of a trust which was
created after the party that purchased Wisconsin Steel filed for
bankruptcy. At the time of bankruptcy, EDA had guaranteed repayment of
90% and Transportation of 10% of loans made to Wisconsin Steel. The
settlement provides that EDA transfer its interest in the trust to
Transportation, who in turn will assume responsibility for completing the
investigation of the environmental condition at the site and for any
cleanup work that may be necessary. Transportation has agreed to pay EDA
$11 million to settle various commercial issues as well as reimburse them
for a portion of environmental response costs spent by EDA. The
Department of Justice must approve the final settlement before the
interest in the trust, or the property, is transferred to Transportation.
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, 1994 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 63>
<TABLE>
<CAPTION>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
20. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
4th Quarter 3rd Quarter 2nd Quarter 1st Quarter
-------------- -------------- -------------- ---------------
(Millions of dollars,
except per share data) 1994 1993 1994 1993 1994 1993 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Consolidated Operations
Sales and revenues ....... $1,548 $1,305 $1,251 $1,127 $1,392 $1,243 $1,139 $1,040
====== ====== ====== ====== ====== ====== ====== ======
Net income (loss):
Income (loss) before
Supplemental
Trust contribution ... $ 43 $ 17 $ 7 $ 5 $ 11 $ 25 $ 1 $ 4
Supplemental Trust
contribution ......... - - - (513) - - - -
Income tax benefit
(expense) ............ (6) (5) (5) (3) (4) (5) (7) (6)
------ ------ ------ ------ ------ ------ ------ ------
Income (loss)
Continuing operations .. 37 12 2 (511) 7 20 (6) (2)
Discontinued operations. (33) - - - - - - -
Cumulative effect
of changes in
accounting policy (a). - - - - - - - (1,144)
------ ------ ------ ------ ------ ------ ------ -------
Net income (loss) ........ $ 4 $ 12 $ 2 $ (511) $ 7 $ 20 $ (6) $(1,146)
====== ====== ====== ======= ====== ====== ====== =======
Supplemental Data
Manufacturing
Sales and revenues ..... $1,509 $1,260 $1,215 $1,081 $1,355 $1,191 $1,092 $ 988
Gross margin ........... 201 171 154 134 160 162 140 126
Income (loss)
before taxes and
Financial Services ... 28 2 (7) (523) (1) 10 (18) (12)
Financial Services
Revenues ............... 54 57 51 56 50 62 59 62
Interest expense ....... 19 19 17 19 17 19 17 22
Income before taxes .... 15 15 14 15 12 15 19 16
<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 were restated.
</TABLE>
<PAGE>
<PAGE 64>
==========
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
20. SELECTED QUARTERLY FINANCIAL DATA (Unaudited) (continued)
FOURTH QUARTER 1994 RESULTS
Fourth quarter consolidated sales and revenues of $1,548 million were
19% higher than the same period a year ago. Company Class 5 through 8
truck retail deliveries increased 22%, reflecting a 20% improvement to
92,600 units in United States and Canadian industry retail sales. For the
fourth quarter, Transportation maintained its leadership in the combined
Class 5 through 8 market in the United States and Canada with a market
share of 28.3%, an increase from the 27.9% reported last year. Shipments
of 34,000 mid-range diesel engines by Transportation to original equipment
manufacturers were 4% higher than the same quarter of 1993 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
1993.
Income from continuing operations was $37 million, an increase from
the $12 million reported for the same period in 1993. Net income of $4
million included a $33 million charge to discontinued operations for
environmental liabilities at production facilities of two formerly owned
businesses. See Note 6 to the Financial Statements.
Manufacturing gross margin for the period was 13.4%, slightly below
the 13.6% for the fourth quarter of 1993. The favorable affect of higher
sales volume and improved performance was more than offset by the
provision for payment to employees as required by Transportation's profit
sharing agreements and the impact of additional costs incurred to meet
customer delivery commitments.
Financial Services income before taxes was $15 million unchanged from
the same period in 1993.
<PAGE>
<PAGE 65>
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
INDEPENDENT AUDITORS' REPORT
----------------------------
Navistar International Transportation Corp.:
We have audited the financial statements and financial statement
schedule of Navistar International Transportation Corp. and Consolidated
Subsidiaries listed in Item 8 and Item 14. These consolidated financial
statements and financial statement schedule are the responsibility of
Transportation's management. Our responsibility is to express an opinion
on these consolidated financial statements and financial statement
schedule 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, 1994 and 1993, and the results of their operations and
their cash flow for each of the three years in the period ended October
31, 1994, in conformity with generally accepted accounting principles.
Also, in our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
As discussed in Notes 1 and 4 to the Financial Statements, effective
November 1, 1992, Transportation changed its methods of accounting for
postretirement benefits other than pensions and for income taxes.
Deloitte & Touche LLP
December 12, 1994
Chicago, Illinois
<PAGE>
<PAGE 66>
EXHIBIT 23
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
INDEPENDENT AUDITORS' CONSENT
Navistar International Transportation Corp.:
We consent to the incorporation by reference in Post-Effective
Amendment No. 1 to Registration No. 2-70979 of Navistar International
Transportation Corp. on Form S-8 of our report dated December 12, 1994,
appearing in this Annual Report on Form 10-K of Navistar International
Transportation Corp. for the year ended October 31, 1994.
Deloitte & Touche LLP
January 27, 1995
Chicago, Illinois
<PAGE>
<PAGE 67>
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 68>
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
- --------- ----
VIII - Valuation and Qualifying Accounts and Reserves F-1
All other schedules are omitted because of the absence of the
conditions under which they are required or because information
called for is shown in the 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
(23) Independent Auditors' Consent .......................... 66
(24) Power of Attorney ...................................... 70
(28.1) Navistar Financial Corporation Annual Report on
Form 10-K for the fiscal year ended October 31, 1994 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
- -------------------
No reports on Form 8-K were filed for the three months ended
October 31, 1994.
<PAGE>
<PAGE 69>
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, 1995
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
<PAGE 70>
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, 1995
and Chief Executive Officer
and Director
(Principal Executive Officer)
/s/ John R. Horne
- ---------------------
John R. Horne President January 27, 1995
and Chief Operating Officer
and Director
/s/ Robert C. Lannert
- ---------------------
Robert C. Lannert Executive Vice President January 27, 1995
and Chief Financial Officer
and Director
<PAGE>
<PAGE 71>
<TABLE> SCHEDULE VIII
<CAPTION>
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
============
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1994, 1993 AND 1992
(MILLIONS OF DOLLARS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- -------- -------- -------- --------
BALANCE DEDUCTIONS FROM
DESCRIPTION AT RESERVES BALANCE
DESCRIPTION BEGINNING ADDITIONS CHARGED AT END
OF RESERVES DEDUCTED FROM OF YEAR TO INCOME DESCRIPTION AMOUNT OF YEAR
----------- ------------- --------- ----------------- ----------- ------ -------
Reserves deducted from
assets to which they
apply:
1994
----
<S> <S> <C> <C> <S> <C> <C>
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustments,
receivables .... receivable .... $ 36 $ 2 less recoveries ... $ 13 $ 25
===== ===== ===== =====
1993
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustments,
receivables .... receivable .... $ 34 $ 6 less recoveries ... $ 4 $ 36
===== ===== ===== =====
1992
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustments,
receivables .... receivable .... $ 27 $ 21 less recoveries ... $ 14 $ 34
===== ===== ===== =====
</TABLE>
F-1
<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 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.
4.5 Indenture, dated as of November 15, 1993, between Navistar
Financial Corporation and Bank of America, Illinois formerly
known as 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 Purchaser, with respect to
Dealer Note Trust 1990. 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, Bank of America, Illinois formerly known as
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 Bank of
America, Illinois formerly known as 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 Indenture dated as of November 10, 1993 between Navistar
Financial 1993-A Owner Trust and The Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1993-A
owner Trust. Filed on Registration Nol 33-50291.
10.7 Navistar 1994 Performance Incentive Plan. Filed as Appendix to
Proxy Statement dated January 27, 1994. Commission File
No. 1-9618.
10.8 Indenture dated as of May 3, 1994 between Navistar Financial
1994-A Owner Trust and The Bank of New York, as Indenture
Trustee, with respect to Navistar Financial 1994-A Owner Trust.
Filed on Registration No. 33-50291.
E-3
<PAGE>
<PAGE 2>
EXHIBIT 10 (CONTINUED)
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND SUBSIDIARIES
-------------------------------------------
MATERIAL CONTRACTS
10.9 Indenture dated as of August 3, 1994 between Navistar Financial
1994-B Owner Trust and The Bank of New York, as Indenture
Trustee, with respect to Navistar Financial 1994-B Owner Trust.
Filed on Registration No. 33-50291.
10.10 Amended and Restated Credit Agreement dated as of November 4,
1994 among Navistar Financial Corporation, certain banks,
certain Co-Arranger banks, and Morgan Guaranty Trust Company
of New York, as Administrative Agent. Filed on Form 8-K dated
November 4, 1994. Commission File No. 1-4146-1.
10.11 Liquidity Agreement dated as of November 7, 1994 among NFC
Asset Trust, as Borrower, Chemical Bank, Bank of America
Illinois, The Bank of Nova Scotia, and Morgan Guaranty Trust
Company of New York, as Co-Arrangers, and Chemical Bank, as
Administrative Agent. Filed on Form 8-K dated November 4, 1994.
Commission File No. 1-4146-1.
10.12 Indenture dated as of December 15, 1994 between Navistar
Financial 1994-C Owner Trust and the Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1994-C
Owner Trust. Filed on Registration No. 33-55865.
E-4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1994
<PERIOD-END> OCT-31-1994
<CASH> 454
<SECURITIES> 170
<RECEIVABLES> 1,546
<ALLOWANCES> (25)
<INVENTORY> 429
<CURRENT-ASSETS> 0<F1>
<PP&E> 1,262
<DEPRECIATION> (684)
<TOTAL-ASSETS> 3,687
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 1,628
<COMMON> 785
0
0
<OTHER-SE> (2,282)
<TOTAL-LIABILITY-AND-EQUITY> 3,687
<SALES> 5,153
<TOTAL-REVENUES> 5,330
<CGS> 4,500
<TOTAL-COSTS> 4,933
<OTHER-EXPENSES> 172
<LOSS-PROVISION> (2)
<INTEREST-EXPENSE> 165
<INCOME-PRETAX> 62
<INCOME-TAX> (22)
<INCOME-CONTINUING> 40
<DISCONTINUED> (33)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>The Company has adopted an unclassified presentation in the Statement of
Financial Condition
</FN>
</TABLE>
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, 1994
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 (I.R.S. Employer Identification No.)
incorporation or organization)
2850 West Golf Road
Rolling Meadows, Illinois 60008
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 708-734-4275
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark 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, 1994, the number of shares outstanding of the registrant's
common stock was 1,600,000.
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, 1994
INDEX
10-K Page
PART I
Item 1. Business (A) . . . . . . . . . . . . . . . . . . . 1
Item 2. Properties (A) . . . . . . . . . . . . . . . . . . 1
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . 1
Item 4. Submission of Matters to a Vote of
Security Holders (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) . . . . . . 3
Item 8. Financial Statements and Supplementary Data . . . . 8
Independent Auditors' Report. . . . . . . . . . . . 37
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure . . . . . . . . 38
PART III
Item 10. Directors and Executive Officers of the
Registrant (A) . . . . . . . . . . . . . . . . . . 38
Item 11. Executive Compensation (A) . . . . . . . . . . . . 38
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A). . . . . . . . . . . . . . . . . 38
Item 13. Certain Relationships and Related
Transactions (A). . . . . . . . . . . . . . . . . . 38
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . 38
SIGNATURES - Principal Accounting Officer . . . . . . . . 39
- Directors . . . . . . . . . . . . . . . . . . 40
POWER OF ATTORNEY. . . . . . . . . . . . . . . . . . . . . . . . 40
EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . E-1
(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>
<PAGE 1>
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 Trans-
portation 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
During 1992, auditors of the Illinois Department of Revenue ("Department")
began an income tax audit of NFC for the fiscal years ended October 31, 1989,
1990 and 1991. On February 1, 1994 the Department issued a Notice of
Deficiency to NFC for approximately $11.9 million. The Department has taken
the position that nearly 100% of NFC's income during these years should be
attributed to and taxed by Illinois. NFC maintains that the Department's
interpretation and application of the law is incorrect and improper, and that
the Department's intended result is constitutionally prohibited. NFC's
outside counsel is of the opinion that it is more likely than not that NFC's
position will prevail such that the Department's action will not have a
material impact on NFC's earnings and financial position.
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 $15 million in punitive damages.
Transportation appealed the verdict and, in November 1994, the Court of
Appeals of the State of Oklahoma reversed the verdict and entered judgment in
favor of Transportation on virtually all aspects of the case.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See the index page of this Report for
explanation.
<PAGE>
<PAGE 2>
PART II
Page
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . 27
Item 6. Selected Financial Data
Intentionally omitted. See the index page to this Report
for explanation. <PAGE>
<PAGE 3>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Results of Operations
As a result of the continued improvement in the economy during fiscal
1994, industry retail sales of Class 5 through 8 trucks surpassed 1993 by 18%.
The Corporation's financing of customers' purchases of new International
trucks during fiscal 1994 increased 18% compared to the prior year. During
1994, rising interest rates resulted in increased costs to fund retail note
acquisitions. Competition, coupled with liquidity in the commercial financing
markets, limited the Corporation's ability to increase customer finance rates
commensurate with the increase in funding costs, and as a result margins on
retail financing were lower in fiscal 1994. The strong truck industry and
economy continued to improve the financial strength of the International
dealers and customers and NFC's portfolio quality remained high during 1994.
The components of net income for the three years ended October 31 are as
follows:
<TABLE>
<CAPTION>
1994 1993 1992
----- ------ -----
($ Millions)
<S> <C> <C> <C>
Income before income taxes:
Finance operations . . . . . . . . . . . . . . . . . . . . . . . $49.9 $51.6 $36.6
Insurance operations . . . . . . . . . . . . .. . . . . . . . . 5.3 1.1 9.8
Supplemental Trust contribution. . . . . . . . . . . . . . . . . - (3.7) -
Income before taxes and cumulative effect. . . . . . . . . . . 55.2 49.0 46.4
----- ----- -----
Taxes on income. . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 17.7 16.9
Cumulative effect of changes in
accounting policy. . . . . . . . . . . . . . . . . . . . . . . - 8.8 -
----- ----- -----
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $34.0 $22.5 $29.5
===== ===== =====
</TABLE>
Income before taxes in 1994 was $55 million, a 12% increase from $49
million in 1993, which included a $3.7 million pretax charge for the
Corporation's portion of the Supplemental Trust contribution. Finance
operations' income in 1994 was $1.7 million lower than 1993 as a result of
lower margins on retail financing as rising interest costs could not be offset
fully by increased retail note pricing. The decline in retail note income was
offset in part by an increased volume of wholesale financing to support the
increased demand for trucks. The Corporation's insurance subsidiary's income
increased $4.2 million over 1993 as a result of improved underwriting results
on truck liability insurance. The increase in income before income taxes
between 1993 and 1992 was primarily the result of higher gains on sales of
retail notes, partially offset by higher loss experience in the insurance
subsidiary and the Supplemental Trust contribution. The more significant
elements of revenue and expense impacting net income for these years are
discussed in the following paragraphs.
Total revenue for 1994 was $210 million compared with $232 million and
$228 million in 1993 and 1992, respectively. Retail note and lease financing
revenue decreased to $69 million in 1994 from $102 million in 1993 as a higher
proportion of retail notes were financed through the sale of the receivables.
When receivables are sold only the net gains on the sales, rather than the
individual components of revenue and expense, are reported in the Statement
of Consolidated Income. During 1994, the Corporation gained access to the
strong, reliable and economically attractive asset backed securitized market<PAGE>
<PAGE 4>
and significantly increased the sales of retail notes. Retail note and lease
financing revenue was unchanged between 1993 and 1992.
Wholesale note revenue increased 22% in 1994 to $39 million and increased
13% in 1993 primarily as a result of higher average note balances in support
of increased demand for Transportation truck products. In addition, revenue
in 1994 increased from higher average yields relating to a higher prime
interest rate. 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 wholesale notes sold to the trust are not material
as a result of their short maturities.
Revenue from accounts increased in 1994 to $22 million from $18 million
and $15 million in 1993 and 1992, respectively. The increase in 1994 and 1993
resulted from higher average balances in support of increased demand for
Transportation truck products. In addition, revenue in 1994 increased from
higher average yields relating to a higher prime interest rate.
Servicing fee income increased to $17 million in 1994 from $11 million
in 1993 and $9 million in 1992 as a result of higher levels of sold note
receivable balances.
Insurance premiums earned by Harco decreased 11% to $51 million in 1994
from $57 million in 1993 and 5% in 1993 from 1992. The decrease in 1994 and
1993 reflects a reduction in written premiums in response to adverse loss
experience in 1993 and to increased competition. Harco's investment income
decreased to $8 million in 1994 compared with $10 million in 1993 and $13
million in 1992. The decrease in 1994 resulted from lower yields on invested
asset balances. The decrease in 1993 resulted from lower realized gains on
sales of marketable securities caused by the stabilization of interest rates
during 1993 and a decline in the yield on investments resulting from the lower
market interest rates available on new investments.
Interest expense decreased 16% in 1994 to $63 million from $75 million
and $82 million in 1993 and 1992, respectively. The decrease between 1994 and
1993 was the result of reduced debt required to finance the lower level of
owned retail receivables, offset in part by higher interest rates. The
decline in interest expense between 1993 and 1992 was primarily the result of
lower interest rates. The ratio of debt to equity decreased to 4.8:1 at
October 31, 1994 from 5.5:1 at October 31, 1993 and 1992.
On July 1, 1993, Navistar implemented a restructured retiree health care
and life insurance plan ("the Plan"), as discussed in note 11 to the
Consolidated 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 totaled $2.3 million in 1994
compared with $1.5 million in 1993 and $3.6 million in 1992. The increase in
the provision in 1994 reflects higher serviced portfolio balances and higher
losses on retail notes and wholesale accounts. Finance receivables are
written off against the allowance for losses as soon as they are determined
to be uncollectible based on a review of each problem obligor. Truck note and
account write-offs, including those on sold notes, totaled $.9 million in
1994, $.7 million in 1993, and $3.2 million in 1992. At October 31, 1994, the
<PAGE 5>
Corporation's allowance for losses equaled .65% of net financing receivables,
including sold receivables, compared with .69% and .77% as of October 31, 1993
and 1992, 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 decreased to $54 million in
1994 from $65 million and $62 million in 1993 and 1992, respectively. The
decline in expense in 1994 resulted from a $9 million decrease in losses
incurred in Harco's truck physical damage and liability insurance lines.
Additionally, insurance operating expenses decreased $3 million in 1994 over
1993, primarily as a result of decreased commission costs associated with
lower volumes of premiums written through general agents in 1994. The
increase in insurance claims and underwriting expense in 1993 resulted from
increased losses sustained in Harco's truck physical damage and liability
insurance lines.
Liquidity and Funds Management
The Corporation's operations are substantially dependent upon the
production and sale of Transportation's truck products. Navistar Financial
has traditionally obtained the funds to provide financing to Transportation's
dealers and retail customers from commercial paper, short- and long-term bank
borrowings, medium- and long-term debt issues, sales of receivables and equity
capital. The current 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.
The Corporation's serviced receivables portfolio, which includes sold
receivables, totaled $2.5 billion at October 31, 1994 up from $2.2 billion and
$1.8 billion at October 31, 1993 and 1992, respectively. During 1994, the
Corporation supplied 93% of the wholesale financing of new trucks sold to
Transportation's dealers, compared with 90% for 1993 and 89% for 1992.
Acquisitions of retail notes and leases, net of unearned financed, increased
19% to $916 million in 1994 after a 17% increase to $770 million in 1993 from
$659 million in 1992. The higher levels of acquisitions reflect increased
sales by Transportation, especially of heavy trucks. The Corporation's share
of the retail financing of new trucks manufactured by Transportation and sold
in the United States was 15.3% in 1994 and 1993 up from 13.7% in 1992.
Receivable sales were a significant source of funding during 1994 as
proceeds from sold retail notes were $995 million, an increase of $437 million
over 1993. Outstanding sold receivable balances totaled $1,334 million at
October 31, 1994 up from $839 million and $533 million at October 31, 1993 and
1992, respectively.
As a result of gaining access to the asset-backed public market in 1994,
the Corporation was able to fund fixed rate retail note receivables at rates
offered to companies with investment grade. In three separate receivable
sales during fiscal 1994, the Corporation sold $830 million retail notes
receivable, net of unearned finance, through its special purpose subsidiary,
Navistar Financial Retail Receivables Corporation ("NFRRC"). NFRRC
subsequently sold these notes to three individual owner trusts which, in turn,
sold interests in the notes to investors in exchange for fixed rate notes and
certificates. These three sales of retail notes, pursuant to a $1 billion
registration filed with the Securities and Exchange Commission in September
<PAGE 6>
1993, resulted in proceeds of $771 million, net of $57 million in cash
reserves with the trusts as credit enhancements, which reduced the
Corporation's short-term debt and borrowings under the revolving bank credit
facility. On October 7, 1994, NFRRC filed an additional registration with the
Securities and Exchange Commission providing for the issuance from time to
time of an additional $2 billion of asset-backed securities, bringing the
total amount available for issuance by NFRRC to $2.17 billion at fiscal year-
end.
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.
At October 31, 1994, the Corporation had 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 credit and purchase facilities were $595 million, of which $419 million
provided funding backup for the outstanding short-term debt at October 31,
1994. The remaining $176 million when combined with unrestricted cash and
cash equivalents made $204 million available to fund the general business
purposes of the Corporation.
In November 1994, as discussed in note 16 to the Consolidated Financial
Statements, the Corporation amended and restated its credit and purchase
facility agreements. The revolving credit agreement commitment was expanded
from $727 million to $900 million and the maturity date was extended to
October 31, 1998. In addition, the purchasers' commitments under the $600
million retail notes purchase facility agreement were terminated and the
Corporation established a $300 million asset-backed commercial paper program
supported by a bank liquidity facility with a maturity date of October 31,
1998. As of October 31, 1994, $377 million of sold notes were outstanding
under the retail notes purchase facility. Participants of the facility will
continue to own the receivables during the normal run-off. While the amended
revolving credit facility removes certain dividend restrictions, the
Corporation is required to maintain tangible net worth at a minimum of $175
million and a debt to tangible net worth ratio of no greater than 7 to 1.
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 subordinated 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.
On November 16, 1993, the Corporation sold $100 million of 8 7/8% Senior
Subordinated 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 also redeemed its 7 1/2% Senior Debentures due January 1994 on
December 15, 1993.
On December 15, 1994, the Corporation sold $315 of retail notes, net of
unearned finance income, through NFRRC to an owner trust which, in turn, sold
$304 of notes and $11 of certificates to investors. The proceeds of $314, net
<PAGE 7>
of $1 of underwriting fees, were used by the Corporation for general working
capital purposes and to establish a $19 reserve account with the trust as
credit enhancement for the public sale.
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. The Corporation will occasionally enter into a forward
interest rate lock agreement prior to a retail note receivables sale to
protect against rising interest rates.
Business Outlook
The truck industry is forecasted to continue to be strong in 1995. No
significant change from the current level of financing support for
Transportation truck product sales is anticipated by the Corporation.
Competition coupled with potentially higher interest rates will put pressure
on the Corporation's performance in 1995. Several financing institutions have
entered the truck retail financing market, and this will put pressure on the
Corporation's retail note acquisition activity. Higher funding costs will
impact retail note margins and gains on sales of retail notes compared to
1994.
Management believes that collections on the outstanding receivables
portfolio plus cash available from the Corporation's various funding sources
will permit Navistar Financial to meet the financing requirements of
Transportation's dealers and retail customers through 1995 and beyond.
<PAGE>
<PAGE 8>
Financial Statements and Supplementary Data Page
Navistar Financial Corporation and Subsidiaries:
Statement of Consolidated Income and Retained Earnings
for the years ended October 31, 1994, 1993 and 1992 . . . . 9
Statement of Consolidated Financial Condition as of
October 31, 1994 and 1993 . . . . . . . . . . . . . . . . . 10
Statement of Consolidated Cash Flow for the years ended
October 31, 1994, 1993 and 1992 . . . . . . . . . . . . . . 11
Notes to Consolidated Financial Statements . . . . . . . . . 12
Supplementary Financial Data. . . . . . . . . . . . . . . . . 32
Independent Auditors' Report . . . . . . . . . . . . . . . . 37
<PAGE>
<PAGE 9>
<TABLE>
<CAPTION>
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Income and Retained Earnings
Millions of dollars
Note
For the years ended October 31 1994 1993 1992 Reference
<S> <C> <C> <C> <C>
Revenues
Retail notes and lease financing . . . . . . . . . . . . . . . . . $ 69.3 $101.9 $100.7
Wholesale notes . . . . . . . . . . . . . . . . . . . . . . . . . . 39.0 32.0 28.3
Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22.2 17.5 14.8
Servicing fee income. . . . . . . . . . . . . . . . . . . . . . . . 17.3 10.6 8.6
Insurance premiums earned . . . . . . . . . . . . . . . . . . . . . 51.1 57.4 59.9
Marketable securities . . . . . . . . . . . . . . . . . . . . . . . 11.2 12.5 16.0
----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 210.1 231.9 228.3
----- ----- -----
Expenses
Cost of borrowing:
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . 62.7 74.6 82.2 9, 10
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7.1 4.7 4.5
----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69.8 79.3 86.7
Supplemental Trust expense. . . . . . . . . . . . . . . . . . . . . - 3.7 - 11
Credit, collection and administrative . . . . . . . . . . . . . . . 25.9 26.1 26.8
Provision for losses on receivables . . . . . . . . . . . . . . . . 2.3 1.5 3.6 6
Insurance claims and underwriting . . . . . . . . . . . . . . . . . 54.0 65.2 61.7
Other expense, net . . . . . . . . . . . . . . . . . . . . . . . . 2.9 7.1 3.1
----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 154.9 182.9 181.9
----- ----- -----
Income Before Taxes on Income and Cumulative
Effect of Changes in Accounting Policy. . . . . . . . . . . . . . . 55.2 49.0 46.4
Taxes on Income . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.2 17.7 16.9 8
----- ----- -----
Income Before Cumulative Effect of Changes
in Accounting Policy . . . . . . . . . . . . . . . . . . . . . . . 34.0 31.3 29.5
Cumulative Effect of Changes in Accounting Policy . . . . . . . . . . - 8.8 - 11
----- ----- -----
Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34.0 22.5 29.5
Retained Earnings
Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . 48.4 48.5 35.0
Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . (25.6) (22.6) (16.0)
----- ----- -----
End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 56.8 $ 48.4 $ 48.5 13
===== ===== =====
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE 10>
<TABLE>
<CAPTION>
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Financial Condition
Millions of dollars
Note
As of October 31 1994 1993 Reference
<S> <C> <C> <C>
ASSETS
Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . $ 28.3 $ 33.9
Marketable Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . 130.5 125.6 4
Receivables
Finance receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,124.0 1,281.1 5
Allowance for losses . . . . . . . . . . . . . . . . . . . . . . . . . . (8.2) (10.9) 6
------- -------
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,115.8 1,270.2
Amounts Due from Sales of Receivables . . . . . . . . . . . . . . . . . . . 180.6 138.4 5
Equipment on Operating Leases, Net. . . . . . . . . . . . . . . . . . . . . 26.6 25.1
Repossessions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.8 1.8
Reinsurance Receivables . . . . . . . . . . . . . . . . . . . . . . . . . . 33.7 - 7
Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.9 30.2
------- -------
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,544.2 $1,625.2
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 419.2 $ 75.0 9
Accounts Payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73.0 77.3
Accrued Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 3.1
Accrued Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11.3 14.4
Senior and Subordinated Debt . . . . . . . . . . . . . . . . . . . . . . . 672.3 1,124.2 10
Dealers' Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.8 17.3
Unpaid Insurance Claims and Unearned Premiums . . . . . . . . . . . . . . . 121.7 94.5 7
Shareowner's Equity 13
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital . . . . . . . . . . . . . . 171.0 171.0
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56.8 48.4
Unrealized losses on marketable securities. . . . . . . . . . . . . . . . (2.2) - 4
------- -------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 225.6 219.4
------- -------
Total Liabilities and Shareowner's Equity . . . . . . . . . . . . . . . . . $1,544.2 $1,625.2
======= =======
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE 11>
<TABLE>
<CAPTION>
Navistar Financial Corporation and Subsidiaries
Statement of Consolidated Cash Flow
Millions of dollars
Note
For the years ended October 31 1994 1993 1992 Reference
<S> <C> <C> <C> <C>
Cash Flow From Operations
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34.0 $ 22.5 $ 29.5
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables . . . . . . . . . . . . . . . . . . (11.8) (14.2) (5.5) 5
Depreciation and amortization . . . . . . . . . . . . . . . . . . 8.7 9.7 8.1
Provision for losses on receivables . . . . . . . . . . . . . . . 2.3 1.5 3.6 6
Cumulative effect of changes in
accounting policy . . . . . . . . . . . . . . . . . . . . . . . - 8.8 -
Supplemental Trust expense. . . . . . . . . . . . . . . . . . . . - 3.7 -
Decrease in accounts payable and
accrued liabilities . . . . . . . . . . . . . . . . . . . . . . (3.5) (1.8) (22.6)
Increase in deferred income taxes . . . . . . . . . . . . . . . . 3.1 3.7 2.8
Increase (decrease) in accounts payable
to affiliated companies . . . . . . . . . . . . . . . . . . . . (0.9) 14.3 5.9
Increase (decrease) in unpaid insurance
claims and unearned premiums, net of
reinsurance receivables . . . . . . . . . . . . . . . . . . . . (6.5) 10.7 3.6
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.4) (3.6) (12.9)
------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20.0 55.3 12.5
------ ------ ------
Cash Flow From Investing Activities
Purchase of retail notes and lease receivables. . . . . . . . . . . . (915.9) (770.2) (658.6)
Principal collections on retail notes and
lease receivables . . . . . . . . . . . . . . . . . . . . . . . . . 180.9 337.4 409.3
Proceeds from sold retail notes . . . . . . . . . . . . . . . . . . . 994.8 558.2 249.2
Acquisitions over cash collections of
wholesale notes and accounts receivable . . . . . . . . . . . . . . (140.0) (171.9) (85.2)
Purchase of marketable securities . . . . . . . . . . . . . . . . . . (51.8) (58.1) (85.7)
Proceeds from sales of marketable securities . . . . . . . . . . . . 45.1 64.8 76.9
Increase in property and equipment
leased to others. . . . . . . . . . . . . . . . . . . . . . . . . . (5.3) (14.2) (3.9)
------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.8 (54.0) (98.0)
------ ------ ------
Cash Flow From Financing Activities
Net increase (decrease) in bank
revolving credit facility usage . . . . . . . . . . . . . . . . . . (372.0) - 507.0
Principal payments on term debt . . . . . . . . . . . . . . . . . . . (80.0) (99.0) (158.5)
Principal payments on subordinated debt . . . . . . . . . . . . . . . (100.0) - -
Proceeds from issuance of subordinated debt . . . . . . . . . . . . . 100.0 - -
Net increase (decrease) in commercial paper . . . . . . . . . . . . . 19.2 - (143.8)
Net increase (decrease) in
short-term bank borrowings . . . . . . . . . . . . . . . . . . . . 325.0 75.0 (40.0)
Dividends paid to Transportation . . . . . . . . . . . . . . . . . . (25.6) (22.6) (16.0)
------ ------ ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (133.4) (46.6) 148.7
Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . (5.6) (45.3) 63.2
Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . 33.9 79.2 16.0
------ ------ ------
Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . $ 28.3 $ 33.9 $ 79.2
====== ====== ======
Supplementary disclosure of cash flow information:
Interest paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 64.8 $ 79.3 $ 79.9
Income taxes paid . . . . . . . . . . . . . . . . . . . . . . . . . . 22.1 13.5 18.9
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
<PAGE>
<PAGE 12>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1994
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Navistar
Financial 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 International 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
receivables 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
investors with limited recourse. The Corporation continues to service the
receivables, for which a servicing fee is received. Servicing fees are earned
on a level yield basis over the terms of the related sold receivables and are
included in servicing fee income. In a subordinated capacity, the Corporation
retains excess servicing cash flows, a limited interest in the principal
balances of the sold receivables and certain cash deposits provided as credit
enhancements for investors. Gains or losses on sales of receivables are
credited or charged to financing revenue in the period in which the sales
occur.
Insurance Operations
Insurance premiums are earned on a pro rata basis over the terms of the
policies. Commission costs and premium taxes incurred in acquiring business
are deferred and amortized on the same basis as such premiums are earned. The<PAGE>
<PAGE 13>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
liability for unpaid insurance claims includes provisions for reported claims
and an estimate of unreported claims based on past experience. Such provi-
sions include an estimate of loss adjustment expense. The estimated liability
for unpaid insurance claims is regularly reviewed and updated. Any change in
such estimate is reflected in current operations.
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 period 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
securities with original maturities of three months or less, except for such
securities held by the insurance operations which are included in marketable
securities.
Reclassification
Certain 1993 and 1992 amounts have been reclassified to conform with the
presentation used in the 1994 financial statements.
Changes in Accounting Policy
In the first quarter of fiscal 1994, the Corporation adopted 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 ("Harco"). This statement eliminates the practice
of reporting liabilities relating to reinsured contracts net of the effects
of ceded reinsurance. Disclosures relating to SFAS 113 are provided in note
7. Effective October 31, 1994, the Corporation adopted Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt and
Equity Securities" ("SFAS 115") and Statement of Financial Accounting
Standards No. 119, "Disclosure about Derivative Financial Instruments and Fair
Value of Financial Instruments" ("SFAS 119"). SFAS 115 establishes financial
accounting and reporting standards for investments in equity securities that
have readily determinable fair values and for all investments in debt
securities. SFAS 119 requires disclosures about the amounts, nature, and
terms of derivative financial instruments. Disclosures relating to SFAS 115
and SFAS 119 are provided in notes 4 and 14, respectively.
<PAGE>
<PAGE 14>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
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' Accounting for Postretirement Benefits Other Than Pensions" ("SFAS
106") retroactive to November 1, 1992. The cumulative effect of adopting
these changes in accounting policy resulted in an after tax charge to income
of $8.8. Periods prior to November 1, 1992 were not required to be restated
for the changes in accounting policy.
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 accounts, 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
customers. Revenue collected from Transportation for wholesale notes,
wholesale and retail accounts and leases was $50.7 in 1994, $41.2 in 1993 and
$38.6 in 1992.
Support Agreements
Under provisions of certain public and private financing arrangements,
agreements with Transportation and Navistar provide that the Corporation's
consolidated income before interest expense and income taxes will be
maintained at not less than 125% of its consolidated interest expense. Since
1984, no maintenance payments have been required under these agreements.
Administrative Expenses
The Corporation pays a fee to Transportation for data processing and
other administrative services based on the actual cost of services performed.
The amount of the fee was $2.5 in 1994, $2.3 in 1993 and $2.6 in 1992.
<PAGE>
<PAGE 15>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
2. TRANSACTIONS WITH AFFILIATED COMPANIES (Continued)
Short-Term Borrowings
During fiscal 1994, the Corporation had daily average short-term
borrowings from Transportation of $83 on which interest accrued at the
Corporation's incremental short-term borrowing rate. These borrowings,
including $4 of interest expense, were repaid during the year.
Accounts Payable
Accounts payable include $16.3 and $19.5 payable to Transportation at
October 31, 1994 and 1993, respectively.
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
financing for the sales of new and used trucks and related equipment by
Transportation and its dealers. To a lesser extent, the Corporation also
finances other commercial vehicles, primarily trailers, sold by independent
dealers. 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.
Information by industry segment is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Revenues:
Finance operations . . . . . . . . . . . . . . . . . . . . . . $ 149.9 $ 164.2 $ 155.5
Insurance operations . . . . . . . . . . . . . . . . . . . . . 60.2 67.7 72.8
-------- -------- --------
Total revenue . . . . . . . . . . . . . . . . . . . . . . . $ 210.1 $ 231.9 $ 228.3
======== ======== ========
Income before taxes on income and cumulative
effect of changes in accounting policy:
Finance operations . . . . . . . . . . . . . . . . . . . . . . $ 49.9 $ 47.9 $ 36.6
Insurance operations . . . . . . . . . . . . . . . . . . . . . 5.3 1.1 9.8
-------- -------- --------
Total income before taxes on income and
cumulative effect of changes in
accounting policy. . . . . . . . . . . . . . . . . . . . . $ 55.2 $ 49.0 $ 46.4
======== ======== ========
Assets at end of year:
Finance operations . . . . . . . . . . . . . . . . . . . . . . $1,363.5 $1,473.5 $1,459.2
Insurance operations . . . . . . . . . . . . . . . . . . . . . 180.7 151.7 149.5
-------- -------- --------
Total assets at end of year . . . . . . . . . . . . . . . . $1,544.2 $1,625.2 $1,608.7
======== ======== ========
</TABLE>
<PAGE>
<PAGE 16>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES
Effective October 31, 1994, the Corporation applied SFAS 115, "Accounting
for Certain Investments in Debt and Equity Securities." Marketable securities
at October 31, 1994 are classified as securities available-for-sale and are
stated at fair value. The fair value of marketable securities is estimated
based on quoted market prices, when available. If a quoted price is not
available, fair value is estimated using quoted market prices for similar
financial instruments. The Corporation's retained earnings as of October 31,
1994 were decreased by $2.2 for unrealized holding losses, net of income
taxes, and are included as a separate component of shareowner's equity in the
Statement of Consolidated Financial Condition. As the restatement of prior
years' financial statements is not permitted, marketable securities at October
31, 1993, consisting of investments in debt securities, were carried at
amortized cost. The following table sets forth, by type of security issuer,
the amortized cost and estimated market values at October 31, 1994 and 1993:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
October 31, 1994 Cost Gains Losses Value
<S> <C> <C> <C> <C>
U.S. government and federal
agency securities . . . . . . . . . . . $ 67.4 $ .4 $ 2.4 $ 65.4
Corporate debt securities. . . . . . . . . 27.7 - .4 27.3
Mortgage- and
asset-backed securities . . . . . . . . 28.3 .1 .7 27.7
Foreign governments. . . . . . . . . . . . 1.6 - - 1.6
------ ------ ------ ------
Total debt securities. . . . . . . . $125.0 $ .5 $ 3.5 $122.0
Equity securities. . . . . . . . . . . . . 8.8 .4 .7 8.5
------ ------ ------ ------
Total. . . . . . . . . . . . . . . . $133.8 $ .9 $ 4.2 $130.5
====== ====== ====== ======
<CAPTION>
October 31, 1993
<S> <C> <C> <C> <C>
U.S. government and federal
agency securities . . . . . . . . . . . $ 70.1 $ 4.4 $ - $ 74.5
Corporate debt securities. . . . . . . . . 17.8 .6 - 18.4
Mortgage- and
asset-backed securities . . . . . . . . 36.1 1.3 - 37.4
Foreign governments. . . . . . . . . . . . 1.6 .1 - 1.7
------ ------ ------ ------
Total debt securities. . . . . . . . $125.6 $ 6.4 $ - $132.0
====== ====== ====== ======
</TABLE>
<PAGE>
<PAGE 17>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES (Continued)
The amortized cost and estimated market values for investments in debt
securities at October 31, 1994 by contractual maturity, are shown below:
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
<C> <C>
Due in one year or less. . . . . . . . . . . . . . $ 16.9 $ 16.9
Due after one year through five years. . . . . . . 61.1 60.3
Due after five years through ten years . . . . . . 12.7 11.5
Due after ten years. . . . . . . . . . . . . . . . 6.0 5.6
------ ------
96.7 94.3
Mortgage- and asset-backed securities. . . . . . . 28.3 27.7
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . $125.0 $122.0
====== ======
</TABLE>
Proceeds from sales or maturities of marketable securities available-for-
sale were $45.1 during 1994 and $64.8 during 1993. Gross gains of $.9 and
$1.3 were realized on those sales or maturities in 1994 and 1993,
respectively. There were gross losses of $.2 in 1994 and 1993.
All marketable securities at October 31, 1994 and 1993 were held by Harco
National Insurance Company, of which $29.5 and $26.5, respectively, were on
deposit 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>
1994 1993
<S> <C> <C>
Retail notes and lease financing:
Truck . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 508.2 $ 802.9
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 20.6
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 526.3 823.5
-------- --------
Wholesale notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 240.0 212.5
-------- --------
Accounts:
Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 308.2 200.9
Wholesale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49.5 44.2
-------- --------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357.7 245.1
-------- --------
Total finance receivables . . . . . . . . . . . . . . . . . . . . . . $1,124.0 $1,281.1
======== ========
</TABLE>
<PAGE>
<PAGE 18>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
Contractual maturities of finance receivables including unearned finance
income at October 31, 1994 are summarized as follows:
<TABLE>
<CAPTION>
Retail Wholesale Accounts
<S> <C> <C> <C>
Due in:
1995 . . . . . . . . . . . . . . . . . . . . . . . . . . $ 165.3 $ 134.7 $ 357.7
1996 . . . . . . . . . . . . . . . . . . . . . . . . . . 144.9 105.0 -
1997 . . . . . . . . . . . . . . . . . . . . . . . . . . 116.2 .3 -
Due after 1997 . . . . . . . . . . . . . . . . . . . . . . 161.1 - -
-------- -------- --------
Gross finance receivables . . . . . . . . . . . . . . 587.5 240.0 357.7
Unearned finance income . . . . . . . . . . . . . . . . . 61.2 - -
-------- -------- --------
Total finance receivables . . . . . . . . . . . . . . $ 526.3 $ 240.0 $ 357.7
======== ======== ========
</TABLE>
The actual cash collections from finance receivables will vary from the
contractual cash flows because of sales, prepayments, extensions and renewals.
The contractual maturities, therefore, should not be regarded as a forecast
of future collections.
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>
1994 1993
<S> <C> <C>
Retail notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,034.4 $539.4
Wholesale notes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300.0 300.0
-------- ------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,334.4 $839.4
======== ======
</TABLE>
Gains or losses from the sales of receivables are recognized in the
period in which such sales occur. As the allowance for credit losses is
adequately provided prior to the receivable sales, gains from receivable sales
are not reduced for expected credit losses. Included in "Retail notes and
lease financing" revenue are gains totaling $11.8, $14.2 and $5.5 for the
fiscal years ended October 31, 1994, 1993 and 1992, respectively. Gains on
sales of wholesale receivables are not material as a result of their short
maturities.
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 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 the Corporation or
affiliated companies. At October 31, 1994, NFSC had in place a $300 revolving
<PAGE>
<PAGE 19>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
wholesale note sales trust providing 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 registration with the Securities and Exchange Commission
providing for the issuance from time to time of $1,000 of asset-backed
securities. During fiscal 1994, in three separate sales, the Corporation sold
$830 of retail notes, net of unearned finance income, through NFRRC to three
individual owner trusts. The owner trusts, in turn, sold $801 of notes and
$29 of certificates to investors. The proceeds of $828, net of $2 of
underwriting fees, were used by the Corporation for general working capital
purposes and to establish $57 in cash reserves with the trusts as credit
enhancement for the public sales. On October 7, 1994, NFRRC filed an
additional registration with the Securities and Exchange Commission providing
for the issuance from time to time of an additional $2,000 of asset-backed
securities, bringing the total amount available for issuance by NFRRC to
$2,170 at fiscal year-end.
The Corporation's retained interest in sold receivables and other related
amounts are generally restricted and subject to limited recourse provisions.
Holdback reserves were established pursuant to the limited recourse provisions
of the retail note sales to private investors. The securitized sales
structure requires the Corporation to maintain cash reserves with the trusts
as credit enhancement for public sales. The cash reserves are held by the
trusts and restricted for use by the securitized sales agreements. The
following is a summary of amounts included in "Amounts Due from Sales of
Receivables":
<TABLE>
<CAPTION>
October 31
1994 1993
<S> <C> <C>
Cash held by trusts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51.5 $ 9.6
Subordinated retained interests in receivables . . . . . . . . . . . . . . . 60.6 54.4
Holdback reserves. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64.4 69.4
Excess servicing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.1 8.9
Less allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . (8.0) (3.9)
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $180.6 $138.4
====== ======
</TABLE>
<PAGE>
<PAGE 20>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
6. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Total allowance for losses at beginning of year . . . . . . . . . . . . $14.8 $14.0 $13.6
Provision for losses . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3 1.5 3.6
Net losses charged to allowance . . . . . . . . . . . . . . . . . . . . (.9) (.7) (3.2)
----- ----- -----
Total allowance for losses at end of year . . . . . . . . . . . . . . $16.2 $14.8 $14.0
===== ===== =====
Allowance pertaining to:
Owned notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.2 $10.9 $12.4
Sold notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.0 3.9 1.6
----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16.2 $14.8 $14.0
===== ===== =====
</TABLE>
7. REINSURANCE RECEIVABLES
In the normal course of business, the Corporation's wholly-owned
insurance subsidiary, Harco National Insurance Company, limits its exposure
on any single loss occurrence by ceding reinsurance to other insurance
enterprises. SFAS No. 113, "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts", prescribes the accounting
standards for such reinsurance arrangements and was adopted by the Corporation
in the first quarter of fiscal 1994. This statement eliminates the practice
of reporting liabilities relating to reinsured contracts net of the effects
of reinsurance. It requires reinsurance receivables including amounts related
to unpaid insurance claims and prepaid reinsurance premiums to be reported as
assets. In accordance with SFAS 113, the Corporation's assets include $33.7
of reinsurance receivables at October 31, 1994. The adoption of SFAS 113 did
not have a material effect on the Corporation's financial results.
Restatement of prior years' financial statements is not required.
8. 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 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 generally
allows recognition of deferred tax assets if future realization is more likely
than not.
<PAGE>
<PAGE 21>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
8. TAXES ON INCOME (Continued)
Taxes on income are summarized as follows:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Current:
Federal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $15.1 $12.0 $12.7
State and local . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.0 2.0 1.4
----- ----- -----
Total current . . . . . . . . . . . . . . . . . . . . . . . . . . . 18.1 14.0 14.1
Deferred (primarily Federal) . . . . . . . . . . . . . . . . . . . . . . 3.1 3.7 2.8
----- ----- -----
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $21.2 $17.7 $16.9
===== ===== =====
</TABLE>
The effective tax rate of 38% in 1994 and 36% in 1993 and 1992 differs
from the statutory United States Federal tax rate of 35% in 1994 and 1993 and
34% in 1992 primarily because of state and local income taxes. Deferred tax
assets and liabilities at October 31, 1994 and 1993 are comprised of the
following:
<TABLE>
<CAPTION>
1994 1993
<S> <C> <C>
Deferred tax assets:
Other postretirement benefits . . . . . . . . . . . . . . . . . . . . . . . . . . $2.7 $2.7
Unrealized losses on marketable securities. . . . . . . . . . . . . . . . . . . . 1.2 -
---- ----
Total deferred tax assets. . . . . . . . . . . . . . . . . . . . . . . . . . . 3.9 2.7
Deferred tax liabilities:
Depreciation and other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.9 2.7
---- ----
Net deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . $2.0 $ -
==== ====
</TABLE>
During 1992, auditors of the Illinois Department of Revenue
("Department") began an income tax audit of NFC for the fiscal years ended
October 31, 1989, 1990 and 1991. On February 1, 1994 the Department issued
a Notice of Deficiency to NFC for approximately $11.9 million. The Department
has taken the position that nearly 100% of NFC's income during these years
should be attributed to and taxed by Illinois. NFC maintains that the
Department's interpretation and application of the law is incorrect and
improper, and that the Department's intended result is constitutionally
prohibited. NFC's outside counsel is of the opinion that it is more likely
than not that NFC's position will prevail such that the Department's action
will not have a material impact on NFC's earnings and financial position.
9. SHORT-TERM DEBT
Commercial paper is issued by the Corporation with varying terms. The
Corporation also has short-term borrowings with various banks on a non-
committed basis. Compensating cash balances and commitment fees are not
required under these agreements.<PAGE>
<PAGE 22>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
9. SHORT-TERM DEBT (Continued)
Short-Term Debt at October 31 is summarized as follows:
1994 1993
Commercial paper . . . . . . . . . . . . . . . . . . $ 19.2 $ -
Short-term bank borrowings . . . . . . . . . . . . . 400.0 75.0
------ ------
Total. . . . . . . . . . . . . . . . . . . . . . . $419.2 $ 75.0
====== ======
Information regarding short-term borrowings is as follows:
1994 1993 1992
Aggregate obligations outstanding:
Daily average. . . . . . . . . . . . $ 11.7 $ .6 $ 56.2
Maximum month-end balance. . . . . . 419.2 75.0 203.3
Weighted average interest rate:
On average daily borrowing . . . . . 5.4% 6.5% 5.5%
At October 31. . . . . . . . . . . . 5.6% 6.5% -
Unused commitments under the Corporation's bank revolving credit facility
and retail notes receivable purchase facility are used as backup for
outstanding short-term borrowings.
10. SENIOR AND SUBORDINATED DEBT
Senior and Subordinated Debt outstanding at October 31 is summarized as
follows:
1994 1993
Bank revolving credit, at variable rates,
due November 1995. . . . . . . . . . . . . . $ 355.0 $ 727.0
Senior term debt:
7 1/2% Debentures, due January 1994 . . . . - 75.0
Notes, medium-term, 9.50% to 9.75%,
due 1995 to 1996 . . . . . . . . . . . . . 217.5 222.5
Unamortized discount . . . . . . . . . . . . (.2) (.3)
------- -------
Total senior term debt . . . . . . . . . 217.3 297.2
------- -------
Subordinated term debt:
Debentures, 11.95%, due December 1995 . . . - 100.0
Senior Notes, 8 7/8%, due November 1998. . . 100.0 -
------- -------
Total subordinated term debt . . . . . . . 100.0 100.0
------- -------
Total senior and subordinated debt . . . $ 672.3 $1,124.2
======= =======
<PAGE>
<PAGE 23>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT (Continued)
The weighted average interest rate on total debt, including short-term
debt and the effect of discounts and related amortization, was 7.1%, 6.6% and
7.6% in 1994, 1993 and 1992, respectively. At October 31, 1994, all of the
Corporation's term debt was at a fixed rate of interest. The aggregate annual
maturities and required payments of debt are as follows: 1995, $100; 1996,
$472; and 1999, $100.
At October 31, 1994, the Corporation had $1,327 of committed credit
facilities. These facilities consisted of a contractually committed bank
revolving credit facility of $727 and a contractually committed retail notes
receivable purchase facility of $600. Unused commitments under the credit and
purchase facilities were $595, of which $419 provided funding backup for the
outstanding short-term debt at October 31, 1994. The remaining $176 when
combined with unrestricted cash and cash equivalents made $204 available to
fund the general business purposes of the Corporation at October 31, 1994.
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. The
Corporation also pays a facility fee on the $600 retail notes receivable
purchase facility. The bank revolving credit facility grants security
interests in substantially all of the Corporation's assets to the
Corporation's debtholders. In November 1994, the Corporation amended its
committed credit facilities. See note 16 for discussion of the subsequent
event.
On November 16, 1993, the Corporation sold $100 of 8 7/8% Senior
Subordinated Notes due 1998 and used the proceeds to redeem its 11.95%
Subordinated Debentures due December 1995 on December 16, 1993. The
Corporation also redeemed its 7 1/2% Senior Debentures due January 1994 on
December 15, 1993.
11. RETIREMENT BENEFITS
The Corporation 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 expense for employees, retirees,
surviving spouses and dependents.
The pension plans are non-contributory with benefits related to an
employee's length of service and compensation rate. The Corporation's policy
is to fund its qualified pension plan in accordance with applicable government
regulations and to make additional payments as necessary to maintain full
funding of the vested accumulated benefit obligation. For plan years which
ended during the current fiscal year, all legal funding requirements have been
met. Plan assets are primarily invested in a dedicated portfolio of long-term
fixed income securities.<PAGE>
<PAGE 24>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
In addition to providing pension benefits, the Corporation provides
health care and life insurance for a majority of its retired employees. For
most retirees, 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, provided 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 Trust 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.
Pension Expense
Net pension cost includes the following:
1994 1993 1992
Service cost-benefits earned during the period . $ 1.0 $ .6 $ .6
Interest cost on projected benefit obligation. . 2.7 2.8 2.7
Return on assets - actual gain (loss) . . 3.3 (8.4) (2.8)
- deferred gain (loss) . (6.8) 5.2 (.3)
Other costs (including amortization of
transition amount) . . . . . . . . . . . . . . .1 .1 .3
----- ----- -----
Net pension cost . . . . . . . . . . . . . . $ .3 $ .3 $ .5
===== ===== =====
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 amortized over the remaining average service life of active
employees.
<PAGE>
<PAGE 25>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
Pension Assets and Liabilities
The plans' funded status and reconciliation to the Statement of
Consolidated Financial Condition as of October 31 were as follows:
<TABLE>
<CAPTION>
Plan in Which Plan in Which
Assets Exceed Accumulated Benefits
Accumulated Benefits Exceed Assets
1994 1993 1994 1993
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits . . . . . . . . . . . $(25.8) $(32.8) $(1.8) $(1.9)
Non-vested benefits . . . . . . . . . (3.0) (2.4) (.1) (.1)
------ ------ ----- -----
Accumulated benefit
obligation . . . . . . . . . . . . (28.8) (35.2) (1.9) (2.0)
Effect of projected future
compensation levels . . . . . . . (.6) (3.5) - -
------ ------ ----- -----
Total projected benefit
obligation . . . . . . . . . . . . (29.4) (38.7) (1.9) (2.0)
Plan assets at fair value . . . . . . . 34.5 39.8 - -
------ ------ ----- -----
Funded status at October 31. . . . . . 5.1 1.1 (1.9) (2.0)
Unrecognized net losses (gains). . . . . (4.8) (.8) .2 .2
Unrecognized plan amendments . . . . . . .5 .6 - -
Unrecognized net obligation
as of transition date . . . . . . .2 .2 - -
------ ------ ----- -----
Net asset (liability) . . . . . . . $ 1.0 $ 1.1 $(1.7) $(1.8)
====== ====== ===== =====
</TABLE>
The weighted average rate assumptions used in determining the projected
benefit obligation and pension expense were:
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
Discount rate used to determine the present value
of the projected benefit obligations . . . . . . . . . . . . . . . . 9.2% 6.7% 8.1%
Expected long-term rate of return on plan assets . . . . . . . . . . . 9.0% 10.0% 10.0%
Expected rate of increase in future
compensation levels. . . . . . . . . . . . . . . . . . . . . . . . . 3.5% 3.5% 5.5%
</TABLE>
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 did not affect cash flow, but it
did change the timing of the recognition of costs.<PAGE>
<PAGE 26>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
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 Retained Earnings for 1994 and 1993 include the following:
1994 1993
Service cost - benefits earned during the year . . . . . . $ .2 $ .3
Interest cost on the accumulated benefit obligation. . . . .7 .6
Expected return on assets. . . . . . . . . . . . . . . . . (.2) -
----- -----
Total cost of postretirement benefits other than pensions. $ .7 $ .9
===== =====
The components of the liability for postretirement benefits other than
pensions as of October 31, 1994 were as follows:
1994 1993
Retirees and their dependents. . . . . . . . . . . . . . . $(4.2) $(4.6)
Active employees eligible to retire. . . . . . . . . . . . (2.2) (1.3)
Other active participants. . . . . . . . . . . . . . . . . (2.6) (2.7)
----- -----
Accumulated postretirement benefit obligation (APBO) . . . (9.0) (8.6)
Plan assets at fair value. . . . . . . . . . . . . . . . . 2.8 2.4
----- -----
APBO in excess of plan assets. . . . . . . . . . . . . . . (6.2) (6.2)
Unrecognized net loss. . . . . . . . . . . . . . . . . . . .7 .8
----- -----
Net liability recognized on the
Statement of Consolidated Financial Condition . . . . . $(5.5) $(5.4)
===== =====
The discount rate used to determine the accumulated postretirement
benefit obligation at October 31, 1994, was 8.9%, based on the estimated
income of high-quality fixed income securities which could be purchased to
effectively settle the obligation. For 1995, the weighted average rate of
increase in the per capita cost of covered health care benefits is projected
to be 10.0%. The rate is projected to decrease to 5.0% 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 $1.0 and the
associated expense recognized for the year ended October 31, 1994 would
increase by an estimated $.2. Conversely, a decrease in the cost trend rate
would lower the accumulated postretirement benefit obligation and the
associated expense.<PAGE>
<PAGE 27>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
12. LEASES
The Corporation is obligated under noncancelable operating leases for the
majority of its office facilities and equipment. These leases are generally
renewable and provide that property taxes and maintenance costs are to be paid
by the lessee. At October 31, 1994, future minimum lease commitments under
noncancelable operating leases with remaining terms in excess of one year are
as follows:
Year Ended October 31,
1995 . . . . . . . . . . . . . . . . . . . . . . . $1.5
1996 . . . . . . . . . . . . . . . . . . . . . . . 1.5
1997 . . . . . . . . . . . . . . . . . . . . . . . 1.4
1998 . . . . . . . . . . . . . . . . . . . . . . . 1.4
1999 . . . . . . . . . . . . . . . . . . . . . . . 1.3
Thereafter . . . . . . . . . . . . . . . . . . . . 1.3
----
Total . . . . . . . . . . . . . . . . . . . . . $8.4
====
13. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 1994
and 1993 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,
conversions and other rights. As discussed in note 16, the Corporation
amended and restated its bank credit facility in November 1994 which among
other things changed previous limitations on the Corporation's authority to
pay dividends to Transportation.
14. FINANCIAL INSTRUMENTS
The estimated fair value amounts have been determined by the Corporation,
using available market information and valuation methodologies as described
below. However, considerable judgment is required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates presented
herein are not necessarily indicative of the amounts that the Corporation
could realize in a current market exchange. The use of different market
assumptions or valuation methodologies may have a material effect on the
estimated fair value amounts.
The methods and assumptions used to estimate the fair value of each class
of financial instruments are summarized as follows:
Cash and Cash Equivalents
The carrying amount approximates fair value.
<PAGE>
<PAGE 27>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS (Continued)
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
market prices for similar financial instruments. The fair value of
marketable securities held by insurance affiliates at October 31, 1994 is
disclosed, as required, in note 4 and included below.
Finance Receivables
The fair value of truck retail notes is estimated by discounting the future
cash flows using an estimated discount rate reflecting current rates paid
to purchasers of similar types of receivables with similar credit, interest
rate and prepayment risks. 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
The fair values of excess servicing cash flows and other subordinated
amounts due the Corporation arising from receivable sale transactions were
derived by discounting expected cash flows at estimated current market
rates. The fair value of cash deposits approximates their carrying value.
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
values of notes and debentures are estimated based on quoted market prices
where available and, where not available, on quoted market prices of debt
with similar characteristics.
<PAGE>
<PAGE 29>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS (Continued)
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 are as follows:
<TABLE>
<CAPTION>
1994 1993
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents. . . . . . . . . . . $ 28.3 $ 28.3 $ 33.9 $ 33.9
Marketable securities. . . . . . . . . . . . . 130.5 130.5 125.6 132.0
Finance receivables:
Retail notes . . . . . . . . . . . . . . . . 464.4 470.5 765.6 776.7
Wholesale notes. . . . . . . . . . . . . . . 240.0 240.0 212.5 212.5
Accounts . . . . . . . . . . . . . . . . . . 357.7 357.7 245.1 245.1
Amounts due from sales of
receivables. . . . . . . . . . . . . . . . . 180.6 170.6 138.4 134.9
Financing liabilities:
Senior and subordinated debt . . . . . . . . . $672.3 $673.9 $1,124.2 $1,138.0
</TABLE>
Derivative Financial Instruments
The Corporation acquires floating rate wholesale receivables and fixed
rate retail receivables and generally funds floating rate receivables with
floating rate funding and fixed rate receivables with fixed rate funding and
equity. Interest rate caps and swaps are used when needed to convert floating
rate funds to fixed and vice versa to match the asset portfolio. In addition,
the Corporation will use a variety of contracts to lock in interest rates
during the period in which retail receivables are being sold. During fiscal
1994, the Corporation entered into two short-term forward interest rate lock
agreements related to two sales of receivables. At October 31, 1994, there
were no swap agreements outstanding and only one interest rate cap purchased
in 1985 for a notional amount of $50 million which serves to partially hedge
the interest cost of variable rate debt. The Corporation's wholly-owned
insurance subsidiary has investments in Collateralized Mortgage Obligations
of $18.2 and are included in the Corporation's marketable securities at
October 31, 1994.
15. LEGAL PROCEEDINGS
In May 1993, a jury issued a verdict in favor of Vernon Klein &
Equipment, Inc. and against Transportation and the Corporation in the amount
of $10.8 in compensatory damages and $15 in punitive damages. Transportation
appealed the verdict and, in November 1994, the Court of Appeals of the State <PAGE>
<PAGE 30>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
15. LEGAL PROCEEDINGS (Continued)
of Oklahoma reversed the verdict and entered judgment in favor of
Transportation on virtually all aspects of the case.
The Corporation 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 the
business of the Corporation and its subsidiaries. In the opinion of the
Corporation's management, none of these proceedings or claims are material to
the business or the financial condition of the Corporation.
16. SUBSEQUENT EVENTS
In November 1994, the Corporation amended and restated its $727 million
bank revolving credit agreement, extending the maturity date to October 31,
1998 and expanding the commitment to $900 million. In addition, the
purchasers' commitments under the $600 million retail notes purchase facility
agreement were terminated and the Corporation established a $300 million asset
backed commercial paper ("ABCP") program supported by a bank liquidity
facility with a maturity date of October 31, 1998. While the amended
revolving credit facility removes certain dividend restrictions, the
Corporation is required to maintain tangible net worth at a minimum of $175
million and a debt to tangible net worth ratio of no greater than 7 to 1.
Consistent with the previous revolving credit agreement, the restated
agreement grants security interests in substantially all of the Corporation's
assets to the Corporation's debtholders.
As of October 31, 1994, approximately $377 million of sold notes were
outstanding under the $600 million retail notes purchase facility.
Participants of the facility will continue to own the receivables during the
run off.
Under the terms of the ABCP program, a special purpose wholly-owned
subsidiary of NFC will purchase retail and lease receivables. All assets of
the subsidiary will be pledged to a Trust that will fund the receivables with
A1/P1 rated commercial paper. In addition, the assets may be sold to the
Trust.
Compensating cash balances are not required under the restated revolving
credit facility. Facility fees are paid quarterly regardless of usage. The
Corporation also pays a commitment fee on the unused portion of the $300
million ABCP liquidity facility.
On December 15, 1994, the Corporation sold $315 of retail notes, net of
unearned finance income, through NFRRC to an owner trust which, in turn, sold
$304 of notes and $11 of certificates to investors. The proceeds of $314, net
of $1 of underwriting fees, were used by the Corporation for general working
capital purposes and to establish a $19 reserve account with the trust as
credit enhancement for the public sale.<PAGE>
<PAGE 31>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
17. QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
1994
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . $58.0 $48.3 $50.6 $53.2 $210.1
Interest expense . . . . . . . . . 15.7 15.7 16.7 14.6 62.7
Provision for losses
on receivables . . . . . . . . . .8 .2 .1 1.2 2.3
Net income . . . . . . . . . . . . 10.9 8.0 8.6 6.5 34.0
<CAPTION>
1993
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
<S> <C> <C> <C> <C> <C>
Revenues . . . . . . . . . . . . . $60.9 $59.1 $56.4 $55.5 $231.9
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
</TABLE>
<PAGE>
<PAGE 32>
<TABLE>
<CAPTION>
SUPPLEMENTARY FINANCIAL DATA
Five Year Summary of Financial and Operating Data
Dollar amounts in millions
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Revenues and net income retained
Revenues . . . . . . . . . . . . $ 210.1 $ 231.9 $ 228.3 $ 235.9 $ 247.6
-------- -------- -------- -------- --------
Provision for losses on
receivables . . . . . . . . . . 2.3 1.5 3.6 5.8 3.5
Interest expense . . . . . . . . 62.7 74.6 82.2 90.3 110.1
Other charges, net . . . . . . . 89.9 106.8 96.1 86.6 78.6
Taxes on income . . . . . . . . . 21.2 17.7 16.9 20.2 20.4
Cumulative effect of changes in
accounting policy, net of
income taxes. . . . . . . . . . - 8.8 - - -
-------- ------- ------- ------- -------
Net income . . . . . . . . . . . 34.0 22.5 29.5 33.0 35.0
Dividends paid . . . . . . . . . 25.6 22.6 16.0 74.0 33.0
-------- ------- ------- ------- -------
Net income retained . . . . . . . $ 8.4 $ (.1) $ 13.5 $ (41.0) $ 2.0
======== ======== ======== ======== ========
Percent of net income to average
shareowner's equity . . . . . . 15.1% 10.3% 13.8% 15.0% 13.6%
Assets at end of year
Cash and cash equivalents . . . . $ 28.3 $ 33.9 $ 79.2 $ 16.0 $ 11.1
Marketable securities . . . . . . 130.5 125.6 130.5 119.1 103.3
Finance receivables:
Truck retail notes and
lease financing. . . . . 508.2 802.9 935.9 902.8 817.5
Wholesale notes . . . . . . . . 240.0 212.5 81.5 37.8 401.4
Accounts . . . . . . . . . . . 357.7 245.1 204.3 162.9 202.7
Other retail notes . . . . . . 18.1 20.6 19.2 25.2 24.5
------- ------- ------- ------- -------
Total . . . . . . . . . . . . 1,124.0 1,281.1 1,240.9 1,128.7 1,446.1
Allowance for losses . . . . . (8.2) (10.9) (12.4) (11.7) (11.7)
------- ------- ------- ------- -------
Finance receivables, net . . 1,115.8 1,270.2 1,228.5 1,117.0 1,434.4
Other assets . . . . . . . . . . 269.6 195.5 170.5 196.0 131.6
------- ------- ------- ------- -------
Total assets . . . . . . . . $1,544.2 $1,625.2 $1,608.7 $1,448.1 $1,680.4
======== ======== ======== ======== ========
Liabilities and shareowner's equity at end of year
Commercial paper. . . . . . . . . $ 19.2 $ - $ - $ 143.8 $ 558.1
Short-term bank borrowings . . . 400.0 75.0 - 40.0 70.0
Bank revolving credit . . . . . . 355.0 727.0 727.0 220.0 -
Medium-term notes . . . . . . . . 217.3 222.2 261.1 419.4 342.3
Long-term notes and debentures . - 75.0 135.0 135.0 184.9
Subordinated debt . . . . . . . . 100.0 100.0 94.9 93.7 92.6
------- ------- ------- ------- -------
Total debt . . . . . . . . . 1,091.5 1,199.2 1,218.0 1,051.9 1,247.9
Other liabilities . . . . . . . . 227.1 206.6 171.2 190.2 185.5
Shareowner's equity . . . . . . . 225.6 219.4 219.5 206.0 247.0
------- ------- ------- ------- -------
Total liabilities and
shareowner's equity . . . . $1,544.2 $1,625.2 $1,608.7 $1,448.1 $1,680.4
======== ======== ======== ======== ========
Debt to equity ratio . . . . . . 4.8:1 5.5:1 5.5:1 5.1:1 5.1:1
Senior debt to capital funds ratio 3.0:1 3.4:1 3.6:1 3.2:1 3.4:1
Gross insurance premiums written. $ 59.0 $ 65.8 $ 69.2 $ 66.3 $ 55.8
Number of employees . . . . . . . 353 339 364 353 368
</TABLE>
<PAGE>
<PAGE 33>
SUPPLEMENTARY FINANCIAL DATA (Continued)
Gross Finance Receivables and Leases Acquired
<TABLE>
<CAPTION>
Dollar amounts in millions 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Wholesale notes . . . . . . . . . . . $2,306.6 $1,977.6 $1,547.7 $1,461.0 $1,601.4
Retail notes and leases:
New . . . . . . . . . . . . . . . 861.9 730.0 591.8 554.4 512.6
Used . . . . . . . . . . . . . . 217.2 168.4 185.9 192.8 189.7
------- ------- ------- ------- -------
Total . . . . . . . . . . . . . 1,079.1 898.4 777.7 747.2 702.3
======= ======= ======= ======= =======
Total . . . . . . . . . . . . . . . $3,385.7 $2,876.0 $2,325.4 $2,208.2 $2,303.7
<CAPTION>
Analysis of Finance Retail Notes Acquired
Average Down Payment
Contractual as a Percent Average
Term of Retail Monthly
in Months Sales Price Installment
Number of
Year Units New Used New Used New Used
<C> <C> <C> <C> <C> <C> <C> <C>
1994. . . . . . . . . . 17,331 54 38 6.6% 13.9% $1,311 $921
1993. . . . . . . . . . 15,879 53 34 6.2 17.0 1,248 786
1992. . . . . . . . . . 14,227 52 35 6.6 14.1 1,239 845
1991 . . . . . . . . . 13,768 52 37 7.2 13.5 1,286 875
1990 . . . . . . . . . 13,950 53 37 8.8 16.5 1,327 766
</TABLE>
<PAGE>
<PAGE 34>
SUPPLEMENTARY FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
Analysis of Gross Retail Notes and Lease Financing
With Installments Past Due Over 60 Days
At October 31 ($ Millions) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Original amount of notes
and leases . . . . . . . . . . . . . . . . . . $ 1.3 $ 2.6 $ 4.3 $ 3.9 $ 6.1
Balance of notes and leases . . . . . . . . . . . .5 .7 2.1 1.9 3.9
Balance as a percent of
total outstanding . . . . . . . . . . . . . . . .09% .08% .19% .18% .40%
<CAPTION>
Analysis of Repossessions
1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Repossessions acquired as a
percentage of average retail
note gross balance. . . . . . . . .97% 1.95% 3.70% 4.54% 5.61%
</TABLE>
<PAGE>
<PAGE 35>
SUPPLEMENTARY FINANCIAL DATA (Continued)
<TABLE>
<CAPTION>
Analysis of Loss Experience
($ Millions) 1994 1993 1992 1991 1990
<S> <C> <C> <C> <C> <C>
Net losses:
Retail notes and leases . . . . . . . . . . . . . . $ .6 $(.1) $2.4 $3.0 $2.0
Wholesale notes . . . . . . . . . . . . . . . . . . .1 .8 .8 2.8 .4
Accounts. . . . . . . . . . . . . . . . . . . . . . .2 - - - -
---- ---- ---- ---- ----
Total . . . . . . . . . . . . . . . . . . . . $ .9 $ .7 $3.2 $5.8 $2.4
==== ==== ==== ==== ====
Percent net losses (recoveries) to liquidations:
Retail notes and leases . . . . . . . . . . . . . . .07% (.01)% .27% .41% .26%
Wholesale notes . . . . . . . . . . . . . . . . . . .01 .04 .06 .19 .03
Total . . . . . . . . . . . . . . . . . . . . .03% .03% .13% .26% .10%
Percent net losses to related
average gross receivables outstanding:
Retail notes and leases . . . . . . . . . . . . . . .04% -% .17% .21% .13%
Wholesale notes . . . . . . . . . . . . . . . . . . .03 .16 .20 .66 .10
Accounts. . . . . . . . . . . . . . . . . . . . . . .08 - - - -
Total . . . . . . . . . . . . . . . . . . . . .04% .03% .16% .29% .11%
<FN>
Includes loss experience on sold notes.
</TABLE>
<PAGE>
<PAGE 36>
Navistar Financial Corporation and Subsidiaries
Statement of Financial Reporting Responsibility
Management of Navistar Financial Corporation and its subsidiaries is
responsible for the preparation and for the integrity and objectivity of the
accompanying financial statements and other financial information in this
report. The financial statements have been prepared in accordance with
generally accepted accounting principles and include amounts that are based
on management's estimates and judgments.
The accompanying financial statements have been audited by Deloitte &
Touche LLP, independent auditors. Management has made available to Deloitte
& Touche LLP all the Corporation's financial records and related data, as well
as the minutes of Directors' meetings. Management believes that all
representations made to Deloitte & Touche LLP during its audit were valid and
appropriate.
Management is responsible for establishing and maintaining a system of
internal controls throughout its operations that provides reasonable assurance
as to the integrity and reliability of the financial statements, the protec-
tion 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 written policies and procedures that are updated by management
as necessary. The system is tested and evaluated regularly by the parent
Company's internal auditors as well as by the independent auditors in connec-
tion with their annual audit 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 cir-
cumstances to respond appropriately to the recommendations presented. Manage-
ment believes that the Corporation's system of internal controls accomplishes
the objectives set forth in the first sentence of this paragraph.
John J. Bongiorno
President and Chief Executive Officer
Phyllis E. Cochran
Vice President and Controller<PAGE>
<PAGE 37>
Navistar Financial Corporation and Subsidiaries
Independent Auditors' Report
Navistar Financial Corporation:
We have audited the financial statements of Navistar Financial Corporation
and its subsidiaries listed in Item 8. These consolidated financial
statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the accompanying consolidated financial statements present
fairly, in all material respects, the financial position of Navistar Financial
Corporation and its subsidiaries at October 31, 1994 and 1993, and the results
of their operations and their cash flow for each of the three years in the
period ended October 31, 1994 in conformity with generally accepted accounting
principles.
As discussed in Note 1 to the consolidated financial statements, effective
November 1, 1992, Navistar Financial Corporation changed its method of
accounting for postretirement benefits other than pensions and for income
taxes.
Deloitte & Touche LLP
December 12, 1994
Chicago, Illinois
<PAGE>
<PAGE 38>
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
All schedules 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
Exhibit Form 10-K
Number Description Page
(3) Articles of Incorporation and By-Laws
of the Registrant. . . . . . . . . . . . . . . . . . E-1
(4) Instruments Defining the Rights of Security
Holders, including Indentures. . . . . . . . . . . . . E-2
(10) Material Contracts . . . . . . . . . . . . . . . . . . E-3
(24) Power of Attorney. . . . . . . . . . . . . . . . . . . 40
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended October 31,
1994.<PAGE>
<PAGE 39>
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)
By: /s/PHYLLIS E. COCHRAN January 27,1995
Phyllis E. Cochran
Vice President and Controller
(Principal Accounting Officer)<PAGE>
<PAGE 40>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
Exhibit 24
POWER OF ATTORNEY
Each person whose signature appears below does hereby make, constitute and
appoint John J. Bongiorno, Phyllis E. Cochran 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 exe-
cute, deliver and file, for and on such person's behalf, and in such person's
name and capacity or capacities as stated below, any amendment, exhibit or
supplement to the Form 10-K Report making such changes in the report as such
attorney-in-fact deems appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
Signature Title Date
/s/ JOHN J. BONGIORNO President and Chief Executive January 27, 1995
John J. Bongiorno Officer; Director
(Principal Executive Officer)
/s/ R. WAYNE CAIN Vice President and January 27, 1995
R. Wayne Cain Treasurer; Director
(Principal Financial Officer)
/s/ JAMES C. COTTING Director January 27, 1995
James C. Cotting
/s/ PHYLLIS E. COCHRAN Vice President and January 27, 1995
Phyllis E. Cochran Controller; Director
(Principal Accounting Officer)
/s/ THOMAS M. HOUGH Director January 27, 1995
Thomas M. Hough<PAGE>
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
SIGNATURES (Continued)
Signature Title Date
/s/ JOHN R. HORNE Director January 27, 1995
John R. Horne
/s/ ROBERT C. LANNERT Director January 27, 1995
Robert C. Lannert
/s/ ROBERT I. MORRISON Director January 27, 1995
Robert I. Morrison
/s/ THOMAS D. SILVER Director January 27, 1995
Thomas D. Silver
<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-l.
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 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.
4.2 Indenture, dated as of November 15, 1993 between the Corporation
and Bank of America Illinois, formerly known as 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:
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, Bank of
America Illinois, formerly known as 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 Bank of America Illinois, formerly
known as 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.
E-3<PAGE>
Exhibit 10 (continued)
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MATERIAL CONTRACTS
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 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.
10.12 Pooling and Servicing Agreement dated as of November 10, 1993 among
the Corporation, as Servicer, and Navistar Financial Retail
Receivables Corporation, as Seller, and Navistar Financial 1993-A
Owner Trust, as Issuer. Filed on Registration No. 33-50291.
10.13 Trust Agreement dated as of November 10, 1993 between Navistar
Financial Retail Receivables Corporation, as Seller, and Chemical
Bank Delaware, as Owner Trustee, with respect to Navistar Financial
1993-A Owner Trust. Filed on Registration No. 33-50291.
10.14 Indenture dated as of November 10, 1993 between Navistar Financial
1993-A Owner Trust and The Bank of New York, as Indenture Trustee,
with respect to Navistar Financial 1993-A Owner Trust. Filed on
Registration No. 33-50291.
10.15 Purchase Agreement dated as of May 3, 1994 between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser,
with respect to Navistar Financial 1994-A Owner Trust. Filed on
Registration No. 33-50291.
10.16 Pooling and Servicing Agreement dated as of May 3, 1994 among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1994-A Owner Trust,
as Issuer. Filed on Registration No. 33-50291.
10.17 Trust Agreement dated as of May 3, 1994 between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank
Delaware, as Owner Trustee, with respect to Navistar Financial
1994-A Owner Trust. Filed on Registration No. 33-50291.
E-4<PAGE>
Exhibit 10 (continued)
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MATERIAL CONTRACTS
10.18 Indenture dated as of May 3, 1994 between Navistar Financial 1994-A
Owner Trust and The Bank of New York, as Indenture Trustee, with
respect to Navistar Financial 1994-A Owner Trust. Filed on
Registration No. 33-50291.
10.19 Purchase Agreement dated as of August 3, 1994 between the
Corporation and Navistar Financial Retail Receivables Corporation,
as Purchaser, with respect to Navistar Financial 1994-B Owner Trust.
Filed on Registration No. 33-50291.
10.20 Pooling and Servicing Agreement dated as of August 3, 1994 among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1994-B Owner Trust,
as Issuer. Filed on Registration No. 33-50291.
10.21 Trust Agreement dated as of August 3, 1994 between Navistar
Financial Retail Receivables Corporation, as Seller, and Chemical
Bank Delaware, as Owner Trustee, with respect to Navistar Financial
1994-B Owner Trust. Filed on Registration No. 33-50291.
10.22 Indenture dated as of August 3, 1994 between Navistar Financial
1994-B Owner Trust and The Bank of New York, as Indenture Trustee,
with respect to Navistar Financial 1994-B Owner Trust. Filed on
Registration No. 33-50291.
10.23 Amended and Restated Credit Agreement dated as of November 4, 1994
among the Corporation, certain banks, certain Co-Arranger banks, and
Morgan Guaranty Trust Company of New York, as Administrative Agent.
Filed on Form 8-K dated November 4, 1994. Commission File No. 1-
4146-1.
10.24 Liquidity Agreement dated as of November 7, 1994 among NFC Asset
Trust, as Borrower, Chemical Bank, Bank of America Illinois, The
Bank of Nova Scotia, and Morgan Guaranty Trust Company of New York,
as Co-Arrangers, and Chemical Bank, as Administrative Agent. Filed
on Form 8-K dated November 4, 1994. Commission File No. 1-4146-1.
10.25 Appendix A to Liquidity Agreement at Exhibit 10.24. Filed on Form
8-K dated November 4, 1994. Commission File No. 1-4146-1.
10.26 Collateral Trust Agreement dated as of November 7, 1994 between NFC
Asset Trust and Bankers Trust Company, as Trustee. Filed on Form
8-K dated November 4, 1994. Commission File No. 1-4146-1.
E-5<PAGE>
Exhibit 10 (continued)
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MATERIAL CONTRACTS
10.27 Administration Agreement dated as of November 7, 1994 between NFC
Asset Trust and the Corporation, as Administrator. Filed on Form
8-K dated November 4, 1994. Commission File No. 1-4146-1.
10.28 Trust Agreement dated as of November 7, 1994 between Truck Retail
Instalment Paper Corp., as Depositor, and Chemical Bank Delaware, as
Owner Trustee. Filed on Form 8-K dated November 4, 1994.
Commission File No. 1-4146-1.
10.29 Servicing Agreement dated as of November 7, 1994 between the
Corporation, as Servicer, and Truck Retail Instalment Paper Corp.
Filed on Form 8-K dated November 4, 1994. Commission File No. 1-
4146-1.
10.30 Servicing Agreement dated as of November 7, 1994 between the
Corporation, as Servicer, and NFC Asset Trust. Filed on Form 8-K
dated November 4, 1994. Commission File No. 1-4146-1.
10.31 Receivables Purchase Agreement dated as of November 7, 1994 between
Truck Retail Instalment Paper Corp., as Seller, and NFC Asset Trust,
as Purchaser. Filed on Form 8-K dated November 4, 1994. Commission
File No. 1-4146-1.
10.32 Retail Receivables Purchase Agreement dated as of November 7, 1994
between Truck Retail Instalment Paper Corp. and the Corporation.
Filed on Form 8-K dated November 4, 1994. Commission File No. 1-
4146-1.
10.33 Lease Receivables Purchase Agreement dated as of November 7, 1994
between Truck Retail Instalment Paper Corp. and Navistar Leasing
Corporation. Filed on Form 8-K dated November 4, 1994. Commission
File No. 1-4146-1.
10.34 Purchase Agreement dated as of December 15, 1994 between the
Corporation and Navistar Financial Retail Receivables Corporation,
as Purchaser, with respect to Navistar Financial 1994-C Owner Trust.
Filed on Registration No. 33-55865.
10.35 Pooling and Servicing Agreement dated as of December 15, 1994 among
the Corporation, as Servicer, and Navistar Financial Retail
Receivables Corporation, as Seller, and Navistar Financial 1994-C
Owner Trust, as Issuer. Filed on Registration No. 33-55865.
E-6<PAGE>
Exhibit 10 (continued)
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
MATERIAL CONTRACTS
10.36 Trust Agreement dated as of December 15, 1994 between Navistar
Financial Retail Receivables Corporation, as Seller, and Chemical
Bank Delaware, as Owner Trustee, with respect to Navistar Financial
1994-C Owner Trust. Filed on Registration No. 33-55865.
10.37 Indenture dated as of December 15, 1994 between Navistar Financial
1994-C Owner Trust and The Bank of New York, as Indenture Trustee,
with respect to Navistar Financial 1994-C Owner Trust. Filed on
Registration No. 33-55865.
E-7<PAGE>
