<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, 1997
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
For the transition period from to
Commission file number 1-5236
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
-------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-1264810
------------------------------- -----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611
-------------------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 836-2000
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------------------------------ ---------------------
Sinking fund debentures: 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 December 15, 1997, the number of shares outstanding of the
registrant's capital stock was 1,000.
Document Incorporated by Reference
----------------------------------
Navistar Financial Corporation 1997 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 I(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, 1997
INDEX
10-K Page
---------
PART I
Item 1. Business ..................................... 3
Item 2. Properties .................................... 8
Item 3. Legal Proceeding .............................. 9
Item 4. Submission of Matters to a
Vote of Security Holders (A) ................ 9
PART II
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters ............. 9
Item 6. Selected Financial Data (A) ................... 9
Item 7. Management's Discussion and Analysis of
Results of Operations and Financial Condition 10
Item 8. Financial Statements and Supplementary Data ... 17
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure ...... 47
PART III
Item 10. Directors and Executive Officers
of the Registrant (A) ....................... 47
Item 11. Executive Compensation (A) .................... 47
Item 12. Security Ownership of Certain Beneficial
Owners and Management (A) ................... 47
Item 13. Certain Relationships
and Related Transactions (A) ................ 47
PART IV
Item 14. Exhibits, Financial Statement Schedule
and Reports on Form 8-K ..................... 47
INDEPENDENT AUDITORS' REPORT ........................... 45
INDEPENDENT AUDITORS' CONSENT .......................... 46
SIGNATURES
Principal Accounting Officer .......................... 48
Directors ............................................. 49
POWER OF ATTORNEY ....................................... 49
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
I(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 "Parent Company." During September 1997,
Transportation transferred its interest in the Mexican manufacturing
subsidiary to the Parent Company. The transfer was recorded at the
Mexican subsidiary's net book value. Accordingly, this subsidiary's
financial position and operating results, which were not material, are
excluded from Transportation's 1997 financial statements.
Transportation operates in two principal industry segments:
manufacturing and financial services. Manufacturing operations are
responsible for the manufacture and marketing of medium and heavy
trucks, including school buses, mid-range diesel engines and service
parts primarily in the United States and Canada as well as in selected
export markets. Based on assets and revenues, manufacturing operations
represent the majority of Transportation's business activities. The
financial services operations consist of Navistar Financial Corporation
(NFC), its domestic insurance subsidiary and Transportation's foreign
finance and insurance subsidiaries. NFC's primary business is the
retail and wholesale financing of products sold by the manufacturing
operations and its dealers within the United States and the providing of
commercial physical damage and liability insurance to the manufacturing
operations' dealers and retail customers and to the general public
through an independent insurance agency system. Industry segment data
for 1997, 1996 and 1995 is summarized in Note 14 to the Financial
Statements, which is incorporated herein by reference.
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 industry retail deliveries in the
combined United States and Canadian markets for the five years ended
October 31, in thousands of units:
YEARS ENDED OCTOBER 31,
---------------------------
1997 1996 1995 1994 1993
----- ----- ----- ----- -----
Class 5, 6 and 7 medium trucks and
school buses ................... 150.6 145.8 151.8 134.2 122.5
Class 8 heavy trucks ............. 196.8 195.4 228.8 205.4 166.4
----- ----- ----- ----- -----
Total .......................... 347.4 341.2 380.6 339.6 288.9
===== ===== ===== ===== =====
Source: Monthly data provided by the American Automobile
Manufacturers Associations (AAMA) in the United States and Canada, and
other sources.
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The Class 5 through 8 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 competition 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, utility and distribution.
TRANSPORTATION MARKET SHARE
Transportation delivered 99,500 Class 5 through 8 trucks, including
school buses, in the United States and Canada in fiscal 1997, a 6%
increase from the 94,000 units delivered in 1996. Transportation's
combined share of the Class 5 through 8 truck market was 28.6% in 1997
and 27.5% in 1996. Transportation has been the leader in combined
market share for Class 5 through 8 trucks, including school buses, in
the United States and Canada in each of its last 17 fiscal years based
on data obtained from the American Automobile Manufacturers Association,
the United States Motor Vehicle Manufacturers Association and R.L. Polk
& Company.
PRODUCTS
The following table illustrates the percentage of Transportation's
manufacturing sales by class of product based on dollar amount:
YEARS ENDED OCTOBER 31,
---------------------------
PRODUCT CLASS 1997 1996 1995
- ------------- ---- ---- ----
Class 5, 6 and 7 medium trucks and
school buses ................... 34% 35% 32%
Class 8 heavy trucks ............. 37 35 42
Service parts .................... 13 14 12
Engines .......................... 16 16 14
--- --- ---
Total .......................... 100% 100% 100%
=== === ===
Transportation manufactures a full line of products in the common
carrier, private carrier, government/service, leasing, construction,
energy/petroleum and student transportation markets. Transportation
offers 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 while Class 5, 6 and 7
medium trucks are powered by a proprietary line of mid-range diesel
engines manufactured by Transportation. Based upon information published
by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck
shipments represented 87% of all medium truck shipments for fiscal year
1997 in the United States and Canada.
Transportation's truck and bus 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. During 1997, the
company announced plans for approximately $350 million in capital
spending and $300 million in development expense over the next six years
for development of the next generation truck.
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ENGINE AND 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 in the United States and
Canada. Transportation also sells engines for industrial, agricultural
and marine applications. Transportation is the leading supplier of mid-
range diesel engines in the 160-300 horsepower range according to data
supplied by Power Systems Research of Minneapolis, Minnesota.
Transportation has an agreement to supply its 7.3 liter (7.3L)
electronically controlled diesel engine to Ford Motor Company (Ford)
through the year 2002 for use in all of its diesel-powered light trucks
and vans. Sales of this engine to Ford currently account for
approximately 87% of Transportation's 7.3L sales. Shipments of engines
to all original equipment manufacturers totaled a record 184,000 units
in 1997, an increase of 13% from the 163,200 units shipped in 1996.
During 1997, Transportation entered into a ten-year agreement, effective
with model year 2003, to supply Ford with a 7.3L replacement product.
SERVICE PARTS
In the United States and Canada, Transportation operates 7 regional
parts distribution centers, which allows it to offer 24-hour
availability and same day shipment of the parts most frequently
requested by customers. Navistar also operates a parts distribution
center in Mexico.
Transportation's service parts program is vital to the maintenance
of the relationship with its customers and dealers. The sale of
replacement parts does not represent a separate and distinct business of
Transportation. Transportation's truck group makes decisions about the
pricing of trucks and replacement parts based upon a variety of factors
which integrally link the pricing and sale of replacement parts with the
sale of medium and heavy trucks, including school buses. The acceptable
price for dealers and fleet truck sales is determined by not only
looking at the market price of the individual trucks themselves, but
also by analyzing the amount of future replacement parts that will be
purchased from Transportation over the truck's life cycle and the total
expected profit contribution, including future replacement parts,
expected to be realized on each sale. Accordingly, the pricing of
trucks and replacement parts is not independently determined.
MARKETING AND DISTRIBUTION
Transportation's truck products are distributed in virtually all
key markets in the United States and Canada. Transportation's truck
distribution and service network in these countries was composed of
954, 957 and 958 dealers and retail outlets at October 31, 1997, 1996
and 1995, respectively. Included in these totals were 514, 504 and 490
secondary and associate locations at October 31, 1997, 1996 and 1995,
respectively. Navistar also has a dealer network in Mexico composed of
38 and 23 dealer locations at October 31, 1997 and 1996, respectively.
Navistar's retail dealer activity is supported by 5 regional
operations in the United States and general offices in Canada and
Mexico. Transportation has a national account sales group, responsible
for 99 major national account customers. Transportation's network of
16 Used Truck Centers in the United States provides trade-in support to
the company's dealers and national accounts group, and markets all makes
and models of reconditioned used trucks to owner-operators and fleet
buyers. Trucks, components and service parts are exported for wholesale
and retail sale to more than 70 countries around the world.
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FINANCIAL SERVICES
NFC is a financial services organization that provides wholesale,
retail and lease financing of new and used trucks sold by
Transportation and its dealers in the United States. NFC 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
1997 and 1996, NFC provided wholesale financing for 94% of the new truck
units sold by Transportation to its dealers and distributors in the
United States and retail and lease financing for 13% and 16%,
respectively, of all new truck units sold or leased by Transportation to
retail customers.
NFC's wholly owned domestic 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.
Harbour Assurance Company of Bermuda Limited offers a variety of
programs to the company, including general liability insurance, ocean
cargo coverage for shipments to and from foreign distributors, and
reinsurance coverage for various Transportation policies.
IMPORTANT SUPPORTING OPERATIONS
In the United States, Transportation has a third party sales
financing agreement with Associates Commercial Corporation to provide
wholesale financing to certain of its truck dealers and retail financing
to their customers. Navistar International Corporation Canada also has
an agreement with a subsidiary of General Electric Capital Canada, Inc.
to provide financing for Canadian dealers and customers.
RESEARCH AND DEVELOPMENT
Research and development activities, which are directed toward the
introduction of new products and improvements of existing products and
processes used in their manufacture, totaled $92 million, $101 million,
and $91 million for 1997, 1996 and 1995, respectively.
BACKLOG
The backlog of unfilled truck orders (subject to cancellation or
return in certain events) at October 31, 1997, 1996 and 1995 was $2,360
million, $1,254 million and $2,581 million, respectively.
Although the backlog of unfilled orders is one of many indicators
of market demand, other factors such as changes in production rates,
available capacity, new product introductions and competitive pricing
actions may affect point-in-time comparisons.
EMPLOYEES
The company employed 16,060, 14,186 and 16,078 individuals at
October 31, 1997, 1996 and 1995, respectively.
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LABOR RELATIONS
At October 31, 1997, the United Automobile, Aerospace and
Agricultural Implement Workers of America (UAW) represented 8,079 of
Transportation's active employees in the United States, and the Canadian
Auto Workers (CAW) represented 2,142 of Transportation's active
employees in Canada. Other unions represented 955 of Transportation's
active employees in the United States and Canada. Transportation entered
into a collective bargaining agreement with the UAW in 1995, which would
have expired on October 1, 1998. During August 1997, the company's
collective bargaining agreement with the UAW was extended through
October 1, 2002. This contract allows the company to focus its assembly
plants, simplify current product lines, invest in new product
development, and achieve more competitive wage, benefit and productivity
levels. In addition, Transportation entered into a collective
bargaining agreement with the CAW in 1996, which expires on October 24,
1999.
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 are an important part of its
worldwide sales and marketing efforts, and provide instant
identification of its products and services in the marketplace. 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 and engine products. A
majority 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, Transportation maintains contingent
business interruption insurance for storms, fire and water damage.
While Transportation believes that it has adequate assurances of
continued supply, the inability of a supplier to deliver could have an
adverse effect on production at certain of the company's manufacturing
locations.
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<PAGE 8>
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
research and tooling costs to redesign its engine product lines to meet
the United States Environmental Protection Agency (U.S. EPA) and
California Air Resources Board (CARB) emission standards effective for
the 1998 model year. In addition to the 1998 standards, Transportation,
along with other engine manufacturers, has signed a voluntary agreement
(Statement of Principles) with U.S. EPA and CARB to achieve new
reductions in ozone-causing exhaust emissions by 2004. In October 1997,
as a result of the Statement of Principles, the U.S. EPA issued a final
rule defining heavy-duty emission requirements for the 2004 model year.
Transportation will also provide engines that satisfy 1998 Clean Fuel
Fleet Vehicle requirements and must also satisfy California's emission
standards in 2002 for engines used in medium-size vehicles (which
includes vehicles up to 14,000 lbs. Gross Vehicle Weight Rating).
Transportation expects that its diesel engines will be able to meet all
of these standards within the required time frame.
Effective with the 1998 model year, Canada's emission standards
mirror those of the U.S. EPA and require the sale of low-sulfur diesel
fuel effective October 1, 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.
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 two sites
formerly owned by Transportation, Wisconsin Steel in Chicago, Illinois,
and Solar Turbine in San Diego, California. In 1994, Transportation
recorded a $33 million charge as a loss of discontinued operations for
environmental liabilities and cleanup cost at these two sites. It is
not expected that the costs of compliance with foreseeable environmental
requirements will have a material effect on Transportation's financial
position or operating results.
ITEM 2. PROPERTIES
In the United States and Canada, Transportation owns and operates
eight manufacturing and assembly operations, which contain approximately
nine million square feet of floor space. Four facilities manufacture
and assemble trucks, two plants manufacture diesel engines and two
locations produce gray iron castings. The Parent Company also
manufactures trucks at a facility owned and operated through a joint
venture in the U.S. and is constructing a truck assembly facility in
Mexico. In addition, Transportation owns or leases other significant
properties in the United States and Canada including vehicle and parts
distribution centers, sales offices, an engineering center and its
headquarters in Chicago.
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<PAGE 9>
Transportation's principal research and engineering facilities are
located in Fort Wayne, Indiana, and Melrose Park, Illinois. In
addition, certain research is conducted at its manufacturing plants.
All of Transportation's plants are being utilized and have been
maintained adequately, are in good operating condition and are suitable
for its current needs through productive utilization of the facilities.
These facilities, together with planned capital expenditures, are
expected to meet Transportation's manufacturing needs in the foreseeable
future.
A majority of the activity of the financial services operations is
conducted from its leased headquarters in Rolling Meadows, Illinois.
The financial services operations also lease six other office locations
in the United States.
ITEM 3. LEGAL PROCEEDINGS
Transportation and its subsidiaries are subject to various claims
arising in the ordinary course of business, and are parties to various
legal proceedings which constitute ordinary routine litigation
incidental to the business of the company and 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.
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
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ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS ........ 42
ITEM 6. SELECTED FINANCIAL DATA
Intentionally omitted. See the index page to this Report for
explanation.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act, which involve risks and uncertainties.
Navistar International Transportation Corp.'s actual results may differ
significantly from the results discussed in such forward-looking
statements. Factors that might cause such a difference include, but are
not limited to, those discussed under the caption "Business
Environment."
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 "Parent Company" or "Navistar." Transportation's
manufacturing operations are engaged in the manufacture and marketing of
Class 5 through 8 trucks, including school buses, mid-range diesel
engines and service parts primarily in the United States and Canada.
These products are also sold to distributors in selected export markets.
The financial services operations 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 an independent insurance agency system. During
September 1997, Transportation transferred its interest in the Mexican
manufacturing subsidiary to the Parent Company. The transfer was
recorded at the Mexican subsidiary's net book value. Accordingly, this
subsidiary's financial position and operating results, which were not
material, are excluded from Transportation's 1997 financial statements.
The discussion and analysis reviews the operating and financial
results, and liquidity and capital resources of manufacturing operations
and financial services operations. Manufacturing operations include the
financial results of the financial services operations included on a
one-line basis under the equity method of accounting. Financial
services operations include Navistar Financial Corporation (NFC), its
domestic insurance subsidiary as well as Transportation's foreign
finance and insurance companies. See Note 1 to the Financial
Statements.
RESULTS OF OPERATIONS
Transportation reported net income of $90 million for 1997
reflecting higher sales of manufactured products. Transportation
reported a net loss of $41 million in 1996 and reported net income of
$102 million in 1995. The net loss in 1996 included a one-time $35
million charge for costs related to the termination of the next
generation truck (NGT) program. In August 1997, Transportation and the
United Auto Workers reached agreement on a master contract extension
that enabled the company to reinstate this program. The remaining
accrual for the 1996 charge at the time of the announcement was not
material.
Transportation's manufacturing operations reported income before
income taxes of $53 million in 1997 compared with a pretax loss of $87
million in 1996 and pretax income of $96 million in 1995. The increase
in 1997 reflects higher sales of trucks and diesel engines as well as
the effects of improved pricing and various cost improvement
initiatives. The decrease in 1996 from 1995 reflects a decline in
demand for trucks as well as the charge for termination of the company's
next generation truck program.
Transportation's financial services operations had income before
income taxes of $78 million, $83 million and $62 million in 1997, 1996
and 1995, respectively.
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NFC's pretax income in 1997 was $75 million, a 7% decrease from $81
million in 1996. The change is primarily a result of lower income on
sales of retail receivables and a decline in wholesale financing
activity. The reduced gains on sales resulted from lower margins on
retail notes reflecting higher market interest rates prior to the date
of sale. NFC's pretax income increased $22 million in 1996 from the $59
million reported in 1995 primarily due to higher income on sales of
retail notes and an increased volume of wholesale financing.
Earnings from the foreign finance and insurance subsidiaries were
$3 million, $2 million and $3 million in 1997, 1996 and 1995,
respectively.
Sales and Revenues. Industry retail sales of Class 5 through 8 trucks
totaled 347,400 units in 1997, a 2% increase from the 341,200 units sold
in 1996, but 9% lower than the 380,600 units sold in 1995. Class 8
heavy truck sales totaled 196,800 units, comparable to the 195,400 units
sold in 1996 but a decrease of 14% from the 228,800 units sold in 1995.
Industry sales of Class 5, 6 and 7 medium trucks, including school
buses, totaled 150,600 units in 1997, a 3% increase from 1996 when
145,800 units were sold, and comparable to the 151,800 units sold in
1995. Industry sales of school buses, which accounted for 22% of the
medium truck market, increased slightly from 1996 to 33,200 units.
Sales and revenues of $6,300 million in 1997 were 10% higher than
the $5,731 million reported in 1996 and comparable to the $6,326 million
reported in 1995. Sales of trucks, mid-range diesel engines and service
parts totaled $6,107 million in 1997, 11% above the $5,508 million
reported for 1996 and comparable to the $6,125 million reported in 1995.
Transportation maintained its position as sales leader in the
combined United States and Canadian Class 5 through 8 truck market in
1997 with a 28.6% market share, an increase from the 27.5% share in 1996
and the 26.7% share in 1995. (Sources: American Automobile
Manufacturer's Association, the United States Motor Vehicle
Manufacturer's Association and R. L. Polk & Company.) In 1997,
Transportation's share of the Class 8 heavy truck market increased to
18.6% from 17.1% in 1996 and 18.4% in 1995.
Shipments of mid-range diesel engines by Transportation to other
original equipment manufacturers during 1997 were a record 184,000
units, a 13% increase from 1996 and a 19% improvement over 1995. Higher
shipments to Ford Motor Company to meet consumer demand for the light
trucks and vans which use this engine was the primary reason for the
increase.
Service parts sales of $806 million in 1997 increased from the $760
million reported in 1996 and were 10% higher than the $730 million
reported in 1995 as a result of dealer and national account volume
growth.
Finance and insurance revenue for 1997 was $174 million, 12% lower
than the $197 million reported in 1996 primarily as a result of a
decline in wholesale financing activity. Revenues from financial
services operations increased 18% between 1996 and 1995 primarily as a
result of higher income on sales of retail notes.
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Costs and Expenses. Manufacturing gross margin was 14.2% of sales in
1997, compared with 12.5% in 1996 and 13.8% in 1995. The increase in
gross margin is primarily due to lower production costs and improved
pricing offset by a provision for employee profit sharing. Factors
which contributed to the change in gross margin between 1996 and 1995
included lower sales volumes, more competitive pricing and the costs of
terminating the next generation truck program.
Engineering and research expense was $124 million in 1997, $129
million in 1996 and $113 million in 1995, reflecting continuing
investment in new truck and engine products as well as improvements to
existing products.
Marketing and administrative expense was $358 million in 1997
compared with $319 million in 1996 and $307 million in 1995. The change
between 1997 and 1996 is the result of higher sales and distribution
costs, and an increase in the provision for payment to employees as
provided by the company's performance incentive programs. The $12
million increase in the expense between 1996 and 1995 reflects
investment in the implementation of Transportation's strategy to reduce
costs and complexity in its manufacturing processes.
Interest expense decreased to $156 million in 1997 from $168
million in 1996 and $173 million in 1995. The decreases in 1997 and
1996 were the result of lower wholesale note funding requirements and
declining interest rates.
Finance service charges on sold receivables were $23 million in
1997, 4% lower than in 1996 and 23% lower than in 1995.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow is generated from the manufacture and sale of trucks,
mid-range diesel engines and service parts as well as product financing
and insurance coverage provided to Transportation's dealers and retail
customers by the financial services operations.
Historically, funds to finance Transportation's products are
obtained from a combination of commercial paper, short- and long-term
bank borrowings, medium- and long-term debt issues, sales of finance
receivables and equity capital. NFC's current debt ratings have made
bank borrowings and sales of finance receivables the most economic
sources of cash. Insurance operations are funded through internal
operations.
Total cash, cash equivalents and marketable securities of
Transportation amounted to $291 million at October 31, 1997, $348
million at October 31, 1996 and $668 million at October 31, 1995.
Cash provided by operations during 1997 totaled $138 million,
primarily from net income of $90 million, and $68 million of other
noncash items, principally depreciation. These amounts were partially
offset by a net change in operating assets and liabilities of $20
million.
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<PAGE 13>
The net change in operating assets and liabilities of $20 million
includes a $275 million increase in receivables, reflecting continued
strong demand for the company's products, offset by a $271 million
increase in accounts payable as a result of increased production in the
fourth quarter.
Investment programs included a net decrease in marketable
securities, as sales of securities exceeded purchases by $24 million.
During 1997, the purchase of $970 million of retail notes and lease
receivables was funded with $958 million in proceeds from the sale of
receivables and principal collections of $94 million. Other investment
activities used $42 million for an increase in property and equipment
leased to others and $90 million to fund capital expenditures to
increase mid-range diesel engine capacity and for truck product
improvements.
Financing activities used cash of $46 million for principal
payments on long-term debt and $285 million to reduce notes and debt
outstanding under the bank revolving credit facility and asset-backed
and other commercial paper programs offset by an increase of $209
million in long-term debt.
During 1997 and 1996, NFC supplied 94% of the wholesale financing
of new trucks sold to Transportation's dealers compared with 93% in
1995. NFC's share of the retail financing of new trucks sold in the
United States decreased to 13% in 1997 from 16% in 1996 and 14% in 1995
due to the highly competitive commercial financing market.
The sale of finance receivables is a significant source of funding
for the financial services operations. During 1997, 1996 and 1995, NFC
sold $987 million, $985 million and $740 million, respectively, of
retail notes through Navistar Financial Retail Receivables Corporation
(NFRRC), a wholly owned subsidiary. The net proceeds from these sales
were used for general working capital purposes. In November 1997, NFC
sold an additional $500 million of retail notes through NFRRC.
NFRRC has filed registration statements with the Securities and
Exchange Commission which provide for the issuance of up to $5,000
million of asset-backed securities. At October 31, 1997, the remaining
shelf registration available to NFRRC for issuance of asset-backed
securities was $1,473 million. See Note 8 to the Financial Statements.
NFC has a $925 million contractually committed bank revolving
credit facility and a $400 million asset-backed commercial paper program
supported by a bank liquidity facility which mature in March 2001. NFC
also utilizes a $600 million revolving wholesale note trust that
provides for the continuous sale of eligible wholesale notes on a daily
basis. The trust is comprised of two $100 million tranches of investor
certificates maturing serially from 1998 to 1999, and two $200 million
tranches maturing in 2003 and 2004. At October 31, 1997 the remaining
shelf registration available for issuance of investor certificates was
$200 million.
At October 31, 1997, available funding under NFC's amended and
restated credit facility and the asset-backed commercial paper facility
was $532 million and $14 million, respectively, of which $141 million
was used to back short-term debt at October 31, 1997.
<PAGE>
<PAGE 14>
Transportation finances capital expenditures principally through
internally generated cash. Capital leasing is used to fund selected
projects based on economic and operating factors. Transportation had
outstanding capital commitments of $79 million at October 31, 1997
primarily for increased manufacturing capacity at the Indianapolis
engine plant. In addition, Navistar has outstanding capital commitments
of $58 million for construction of a truck assembly facility in Mexico.
Transportation has announced plans for approximately $350 million
in capital spending over the next six years for the NGT program. Capital
expenditures for 1998 are expected to be approximately triple the
current year's level. Approximately $25 million is to be spent in 1998
for the NGT program. Additional capital expenditures are planned for
increased manufacturing capacity at the Indianapolis engine plant, and
improvements to existing facilities and products. The company's
investment in the NGT program will also include $300 million in
development expense over the next six years, of which approximately $50
million is planned for 1998.
In November 1997, Transportation contributed $200 million to the
Retiree Health Care Base Trust and contributed $100 million to the
hourly pension plan.
NFC's maximum exposure under all receivable sale recourse
provisions at October 31, 1997 was $246 million; however, management
believes that the allowance for credit losses on sold receivables is
adequate.
At October 31, 1997, the Canadian operating subsidiary was
contingently liable for retail customers' contracts and leases financed
by a third party. The company is subject to maximum recourse of $261
million on retail contracts and $13 million on retail leases. In
addition, as of October 31, 1997, the company is contingently liable for
approximately $49 million for various guarantees and buyback programs;
however, based on historical loss trends, the company's exposure is not
considered material.
The Canadian operating subsidiary, NFC and certain other
subsidiaries included in financial services operations are parties to
agreements which result in the restriction of amounts which can be
distributed to Transportation in the form of dividends, loans or
advances. As of October 31, 1997, the maximum amount of dividends which
were available for distribution under the most restrictive covenants was
$62 million.
The Parent Company and Transportation are obligated under certain
agreements with public and private lenders of NFC 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, 1997.
Management continues to evaluate current and forecasted cash flow
as a basis for financing operating requirements and capital
expenditures. Management believes that collections on the outstanding
receivables portfolios as well as funds available from various funding
sources will permit the financial services operations to meet the
financing requirements of the company's dealers and customers.
<PAGE>
<PAGE 15>
ENVIRONMENTAL MATTERS
In the fourth quarter of 1994, Transportation recorded a $33
million charge as a loss of discontinued operations related to
environmental liabilities at production facilities of two formerly owned
businesses, Wisconsin Steel and Solar Turbine, Inc. Included in the
charge was an anticipated $11 million payment to the Economic
Development Administration, a division of the U.S. Department of
Commerce, in settlement of commercial and environmental disputes related
to the Wisconsin Steel property. In 1997, the U.S. Department of
Justice and Transportation approved the final consent decree related to
the Wisconsin Steel property and Transportation paid $11 million to the
Economic Development Administration.
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 known as the Superfund law. These
cases involve sites which allegedly have received wastes from current or
former company locations. 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 PRPs and/or federal or state
regulatory agencies for the cleanup of these sites, a reasonable
estimate is calculated of Transportation's share, if any, of the
probable costs and is provided for in the financial statements. These
obligations generally are recognized no later than completion of the
remedial feasibility study and are not discounted to their present
value. Transportation reviews its accruals on a regular basis and
believes that, based on these calculations, its share of the potential
additional costs for the cleanup of each site will not have a material
effect on Transportation's financial results.
DERIVATIVE FINANCIAL INSTRUMENTS
As disclosed in Notes 1 and 10 to the Financial Statements,
Transportation uses derivative financial instruments to transfer or
reduce the risks of foreign exchange and interest rate volatility, and
potentially increase the return on invested funds. Transportation's
policy does not allow the use of derivatives for speculative purposes.
Transportation's manufacturing operations, as conditions warrant,
hedge foreign exchange exposure on the purchase of parts and materials
from foreign countries and its exposure from sales of manufactured
products in other countries. Contracted purchases of commodities for
manufacturing may be hedged up to one year. The manufacturing
operations had no foreign exchange exposure at October 31, 1997.
NFC uses interest rate caps, interest rate swaps and forward
interest rate contracts when needed to convert floating rate funds to
fixed and vice versa to match its asset portfolio. NFC also uses
forward interest rate contracts to manage its exposure to fluctuations
in funding costs from the anticipated securitization and sale of retail
notes. During 1997, NFC entered into $500 million of interest rate hedge
agreements in anticipation of the November 1997 sale of retail
receivables. These hedge agreements were closed in conjunction with the
pricing of the sale, and the loss at October 31, 1997, which was not
material, was deferred and reduced the gain recognized on the sale of
receivables in November 1997.
Both manufacturing operations and NFC purchase collateralized
mortgage obligations that have relatively stable cash flow patterns in
relation to interest rate changes.
<PAGE>
<PAGE 16>
YEAR 2000
Transportation has made and will make certain investments in its
software systems and applications to ensure that Transportation is Year
2000 compliant. The financial impact to Transportation has not been and
is not anticipated to be material to its financial position or results
of operations.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income" (SFAS 130), and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS
131 establishes standards for reporting information about operating
segments, and related disclosures about products and services,
geographic areas and major customers. These statements are effective
for fiscal years beginning after December 15, 1997. These standards
expand or modify disclosures and, accordingly, will have no impact on
Transportation's reported financial position, results of operations and
cash flows. Transportation is assessing the impact of SFAS 131 on its
reported segments.
BUSINESS ENVIRONMENT
Sales of Class 5 through 8 trucks are cyclical, with demand
affected by such economic factors as industrial production,
construction, demand for consumer durable goods, interest rates and the
earnings and cash flow of dealers and customers. Reflecting the
stability of the general economy, demand for new trucks remained strong
during 1997. An improvement in the number of new truck orders has
increased the company's order backlog to 45,300 units at October 31,
1997 from 20,900 units at October 31, 1996. Retail deliveries in 1998
continue to be highly dependent on the rate at which new truck orders
are received. The company will evaluate order receipts and backlog
throughout the year and will balance production with demand as
appropriate.
The company currently projects 1998 United States and Canadian
Class 8 heavy truck demand to be 195,000 units, a slight decrease from
1997. Class 5, 6 and 7 medium truck demand, excluding school buses, is
forecast at 116,000 units, slightly lower than in 1997. Demand for
school buses is expected to decrease 8% in 1998 to 30,500 units. Mid-
range diesel engine shipments by the company to original equipment
manufacturers in 1998 are expected to be 215,700 units, 17% higher than
in 1997. The company's service parts sales are projected to grow 9% to
approximately $875 million.
During August 1997, the company's current master contract with the
United Auto Workers (UAW) was extended through October 1, 2002. This
contract allows the company to focus its assembly plants, simplify
current product lines, invest in new product development, and achieve
more competitive wage, benefit and productivity levels.
During 1997, the company entered into a ten-year agreement,
effective with model year 2003, to supply newly designed, advanced
technology engines through the year 2012 to Ford Motor Company for use
in its diesel-powered light trucks and vans. The company's current
engine agreement with Ford was extended through model year 2002.
<PAGE>
<PAGE 17>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index To Financial Statements
Page
----
Navistar International Transportation Corp.:
Statement of Income ........................ 18
Statement of Financial Condition ........... 19
Statement of Cash Flow ..................... 20
Notes to Financial Statements .............. 21
Independent Auditors' Report ............... 45
Finance and Insurance Subsidiaries:
The financial statements of Navistar Financial Corporation for the
years ended October 31, 1997, 1996 and 1995 appearing on pages 8 through
34 in the Annual Report on Form 10-K for Navistar Financial Corporation
for the fiscal year ended October 31, 1997, Commission File No. 1-4146-
1, are incorporated herein by reference and filed as Exhibit 28.1 to
this Form 10-K.
<PAGE>
<PAGE 18>
<TABLE>
<CAPTION>
STATEMENT OF INCOME
- ---------------------------------------------------------------------------------
For the Years Ended October 31 (Millions of dollars)
- ---------------------------------------------------------------------------------
Navistar International Transportation Corp.
and Consolidated Subsidiaries
------------------------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
Sales and revenues
Sales of manufactured products ... $6,107 $5,508 $6,125
Finance and insurance revenue .... 174 197 167
Other income ..................... 19 26 34
------ ------ ------
Total sales and revenues ....... 6,300 5,731 6,326
------ ------ ------
Costs and expenses
Cost of products and services sold 5,257 4,828 5,289
Postretirement benefits .......... 215 220 206
Engineering and research expense.. 124 129 113
Marketing and
administrative expense ......... 358 319 307
Interest expense ................. 156 168 173
Financing charges
on sold receivables ............ 23 24 30
Insurance claims
and underwriting expense ....... 36 47 50
------ ------ ------
Total costs and expenses ....... 6,169 5,735 6,168
------ ------ ------
Income (loss) before
income taxes ................. 131 (4) 158
Income tax expense ............. (41) (37) (56)
------ ------ ------
Net income (loss) ................ $ 90 $ (41) $ 102
====== ====== ======
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 19>
STATEMENT OF FINANCIAL CONDITION
- --------------------------------------------------------------------------------
As of October 31 (Millions of dollars)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Navistar International
Transportation Corp. and
Consolidated Subsidiaries
-------------------------
1997 1996
ASSETS ------ ------
- -----------------------------------
<S> <C> <C>
Cash and cash equivalents .................... $ 164 $ 204
Marketable securities ........................ 127 144
------ ------
291 348
Receivables, net ............................. 1,827 1,646
Inventories .................................. 471 463
Property and equipment, net .................. 752 770
Investments and other assets ................. 317 211
Intangible pension assets .................... 212 314
------ ------
Total assets ................................. $3,870 $3,752
====== ======
LIABILITIES AND SHAREOWNER'S EQUITY
- -----------------------------------
Liabilities
Accounts payable, principally trade .......... $1,082 $ 820
Debt due Parent Company ...................... 833 884
Debt:
Manufacturing operations ................... 92 115
Financial services operations .............. 1,224 1,305
Postretirement benefits liability ............ 1,186 1,351
Other liabilities ............................ 868 806
------ ------
Total liabilities ........................ 5,285 5,281
------ ------
Commitments and contingencies
Shareowner's equity
Capital stock (1,000 shares issued) .......... 786 786
Retained earnings (deficit) .................. (2,201) (2,315)
------ ------
Total shareowner's equity .................... (1,415) (1,529)
------ ------
Total liabilities and shareowner's equity .... $3,870 $3,752
====== ======
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 20>
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOW
- --------------------------------------------------------------------------------------
For the years Ended October 31 (Millions of dollars)
- --------------------------------------------------------------------------------------
Navistar International
Transportation Corp. and
Consolidated Subsidiaries
----------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Cash flow from operations
Net income (loss) ................................ $ 90 $ (41) $ 102
Adjustments to reconcile net income (loss) to cash
provided by (used in) operations:
Depreciation and amortization .................. 120 105 86
Other, net ..................................... (52) (15) (11)
Change in operating assets and liabilities:
Receivables ................................. (275) 173 (65)
Inventories ................................. (14) (48) 35
Accounts payable ............................ 271 (109) 63
Other liabilities ........................... (2) (100) 80
-------- -------- --------
Cash provided by (used in) operations ......... 138 (35) 290
-------- -------- --------
Cash flow from investment programs
Purchase of retail notes and lease receivables .. (970) (1,108) (1,099)
Collections/sales of retail notes
and lease receivables ......................... 1,052 1,107 850
Purchase of marketable securities ............... (84) (243) (272)
Sales or maturities of marketable securities .... 108 326 226
Capital expenditures ............................ (90) (117) (139)
Property and equipment leased to others ......... (42) (73) (19)
Other investment programs, net .................. 21 (1) 5
-------- -------- --------
Cash used in investment programs .............. (5) (109) (448)
-------- -------- --------
Cash flow from financing activities
Issuance of debt ................................ 209 - -
Principal payments on debt ...................... (46) (136) (121)
Net increase (decrease)in notes and debt
outstanding under bank revolving credit
facility and asset-backed and other
commercial paper programs ..................... (285) 81 312
Net decrease in loan from
Navistar International Corporation............. (51) (39) (45)
-------- -------- --------
Cash (used in) provided by financing activities (173) (94) 146
-------- -------- --------
Cash and cash equivalents
Decrease during the year ...................... (40) (238) (12)
At beginning of the year ...................... 204 442 454
-------- -------- --------
Cash and cash equivalents at end of the year .... $ 164 $ 204 $ 442
======== ======== ========
- --------------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements.
</TABLE>
<PAGE>
<PAGE 21>
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
==========
NOTES TO FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1997
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" or "Navistar." The consolidated financial statements include
the results of Transportation's manufacturing operations and its wholly
owned financial services subsidiaries. The effects of transactions
between the manufacturing and financial services operations have been
eliminated to arrive at the consolidated totals. The distinction
between current and long-term assets and liabilities in the Statement of
Financial Condition is not meaningful when finance, insurance and
manufacturing operations are combined; therefore, Transportation has
adopted an unclassified presentation. Certain 1996 and 1995 amounts
have been reclassified to conform with the presentation used in the 1997
financial statements.
Transportation operates in two principal industry segments:
manufacturing and financial services. Manufacturing operations are
responsible for the manufacture and marketing of medium and heavy
trucks, including school buses, mid-range diesel engines and service
parts primarily in the United States and Canada as well as in selected
export markets. Based on assets and revenues, manufacturing operations
represent the majority of Transportation's business activities. The
financial services operations consist of Navistar Financial Corporation
(NFC), its domestic insurance subsidiary and Transportation's foreign
finance and insurance companies. NFC's primary business is the retail
and wholesale financing of products sold by the manufacturing operations
and its dealers within the United States and the providing of commercial
physical damage and liability insurance to the manufacturing operations'
dealers and retail customers and to the general public through an
independent insurance agency system. During September 1997, a Mexican
subsidiary was transferred, at the Mexican subsidiary's net book value,
to become a wholly owned subsidiary of the Parent Company. Accordingly,
this subsidiary's financial position and operating results, which were
not material, are excluded from Transportation's 1997 financial
statements.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
Manufacturing operations recognize shipments of new trucks and
service parts to independent dealers and retail customers as sales.
Price allowances, expected in the normal course of business, and the
cost of special incentive programs are recorded at the time of sale.
Engine sales are recognized at the time of shipment to original
equipment manufacturers. An allowance for losses on receivables is
maintained at an amount that management considers appropriate in
relation to the outstanding receivables portfolio and it is charged when
receivables are determined to be uncollectible.
<PAGE>
<PAGE 22>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Revenue Recognition (continued)
Financial services operations recognize finance charges on retail
notes and finance leases as income over the term of the receivables
utilizing the interest method. Interest due from interest-bearing
notes and accounts is recognized on the accrual basis. Operating lease
revenues are recognized on a straight-line basis over the life of the
lease. Selected receivables are sold and securitized to public and
private investors with limited recourse. Gains or losses on sales of
receivables are credited or charged to revenue in the period in which
the sale occurs. Financial services operations continue to service the
sold receivables and receive a fee for such services from the investor.
An allowance for losses is maintained at a level deemed appropriate
based on such factors as overall portfolio quality, historical loss
experience and current economic conditions.
Insurance premiums are earned on a prorata 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.
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, United States 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 are classified as available-for-sale
securities and are reported at fair value. The difference between
amortized cost and fair value is recorded as an adjustment to
shareowner's equity.
Inventories
Inventories are valued at the lower of average cost or market.
Property and Other Long-Lived Assets
Significant expenditures for replacement of equipment, tooling and
pattern equipment, and major rebuilding of machine tools are
capitalized. Depreciation and amortization are generally provided on
the straight-line basis over the estimated useful lives of the assets,
which average 35 years for buildings and improvements and eight years
for machinery and equipment. Gains and losses on property disposals are
included in other income and expense. The carrying amount of all long-
lived assets is evaluated periodically to determine if adjustment to the
depreciation and amortization period or to the unamortized balance is
warranted. Such evaluation is based principally on the expected
utilization of the long-lived assets and the projected, undiscounted
cash flows of the operations in which the long-lived assets are
deployed.
<PAGE>
<PAGE 23>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
Engineering and Research Expense
Engineering and research expense includes research and development
expenses and routine ongoing costs associated with improving existing
products and manufacturing processes. Research and development
expenses, which include activities for the introduction of new truck and
diesel engine products and major improvements to existing products and
processes, totaled $92 million, $101 million and $91 million in 1997,
1996 and 1995, respectively.
Product Related Costs
Transportation accrues warranty expense at the time of end product
sale. Product liability expense is accrued based on the estimate of
total future payments to settle product liability claims.
Income Taxes
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 with the Parent Company
(Tax Agreement) which requires Transportation to compute its separate
federal income tax expense based on its adjusted book income. Any
resulting tax liability is paid to the Parent Company. In addition,
under the Tax Agreement, Transportation is required to pay to the Parent
Company any tax payments received from its subsidiaries. The effect of
the Tax Agreement is to allow the Parent Company rather than
Transportation to utilize U.S. operating losses and net operating loss
carryforwards generated in earlier years.
Derivative Financial Instruments
Transportation uses derivatives to transfer or reduce risks of
foreign exchange and interest rate volatility and to potentially
increase the return on invested funds. NFC uses derivatives such as
forward contracts and interest rate swaps to reduce its exposure to
interest rate volatility. NFC's primary use of such financial
instruments is to hedge the fair value of its fixed rate receivables
against changes in market interest rates in anticipation of
securitization and sale of such receivables. The anticipated
transactions are probable of occurrence and their significant terms and
characteristics have been identified.
All derivative financial instruments are held for purposes other
than trading, and company policy prohibits the use of derivatives for
speculative purposes. Gains or losses related to hedges of anticipated
sales of receivables are deferred and are recognized in income when the
receivables are sold. At all times, the principal balance of
receivables owned and expected to be sold by NFC exceeds the notional
amount of open derivative contracts.
<PAGE>
<PAGE 24>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
1. SUMMARY OF ACCOUNTING POLICIES (continued)
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS 130), and Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS 131). SFAS 130 establishes standards for
reporting and display of comprehensive income and its components. SFAS
131 establishes standards for reporting information about operating
segments and related disclosures about products and services, geographic
areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or
modify current disclosures and, accordingly, will have no impact on
Transportation's reported financial position, results of operations and
cash flows. Transportation is assessing the impact of SFAS 131 on its
reported segments.
2. 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. In addition, as part of the
1993 restructured retiree health care and life insurance plans, profit
sharing payments to an independent retiree trust are required. The cost
of postretirement benefits is segregated as a separate component in the
Statement of Income and is as follows:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Pension expense ................. $ 129 $ 160 $ 110
Health/life insurance ........... 66 60 70
Profit sharing provision to Trust 20 - 26
------ ------ ------
Total postretirement
benefits expense .............. $ 215 $ 220 $ 206
====== ====== ======
In the Statement of Financial Condition, the postretirement
benefits liability of $1,186 million in 1997 and $1,351 million in 1996
includes $445 million and $607 million, respectively, for pension and
$741 million and $744 million, respectively, for postretirement health
care and life insurance benefits. Included in investments and other
assets on the Statement of Financial Condition is a prepaid pension
asset of $120 million in 1997 and $38 million in 1996.
Pension Benefits
Generally, the pension plans are noncontributory 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 year, all legal funding requirements have been met.
Plan assets are invested primarily in dedicated portfolios of long-term
fixed income securities with more recent contributions invested in
equity securities.
<PAGE>
<PAGE 25>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
Pension Expense
Net pension expense included in the Statement of Income is composed
of the following:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Service cost for benefits
earned during the period ..... $ 34 $ 34 $ 24
Interest on projected
benefit obligation ........... 238 231 232
Net amortization costs and other 99 104 57
Less expected return on assets . (242) (209) (203)
------ ------ ------
Net pension expense ............ $ 129 $ 160 $ 110
====== ====== ======
Actual return on assets ........ $ 505 $ 188 $ 398
====== ====== ======
"Amortization costs" include amortization of cumulative gains and
losses over the expected remaining service life of employees,
amortization of the initial transition liability over 15 years, the
expense related to yearly lump-sum payments to retirees required by
negotiated labor contracts and amortization of plan amendments,
recognized over the remaining service life of employees, except for
those plan amendments arising from negotiated labor contracts, which are
amortized over the length of the contract.
Pension Assets and Liabilities
Included in the Statement of Financial Condition is the minimum
pension liability for certain unfunded pension plans. Underfunded
accumulated benefit obligations in the amount of $504 million and $623
million are offset by intangible pension assets of $212 million and $314
million and accumulated reductions in shareowner's equity of $292
million and $309 million at October 31, 1997 and October 31, 1996,
respectively. The minimum pension liability will change from year to
year as a result of revisions to actuarial assumptions, experience gains
or losses and settlement rate changes.
<PAGE>
<PAGE 26>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
2.POSTRETIREMENT BENEFITS (continued)
Pension Assets and Liabilities (continued)
The funded status of Transportation's plans as of October 31, 1997
and 1996 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 1997 1996 1997 1996
- ------------------------------------------------------------------------
Actuarial present value of:
Vested benefits ........ $(1,122) $ (59) $(1,857) $(2,672)
Nonvested benefits ..... (80) (7) (207) (270)
------- ------- ------- -------
Accumulated
benefit obligation . (1,202) (66) (2,064) (2,942)
Effect of projected
future compensation
levels ................. (30) (3) (3) (23)
------- ------- ------- -------
Projected benefit
obligation ............. (1,232) (69) (2,067) (2,965)
Plan assets at fair value. 1,279 91 1,621 2,336
------- ------- ------- -------
Funded status at October 31 47 22 (446) (629)
Unamortized pension costs:
Net losses ........... 29 11 293 332
Prior service costs .. 12 6 77 113
(Asset) liability
at date of transition 32 (1) 135 200
Adjustment for the
minimum liability ...... - - (504) (623)
------- ------- ------- -------
Net asset (liability) .... $ 120 $ 38 $ (445) $ (607)
======= ======= ======= =======
The weighted average rate assumptions used in determining pension
costs and the projected benefit obligation were:
1997 1996 1995
- --------------------------------------------------------------------
Discount rate used to determine
present value of projected
benefit obligation at end of year 7.3% 8.1% 7.8%
Expected long-term rate
of return on plan assets
for the year .................... 9.8% 9.0% 9.9%
Expected rate of increase
in future compensation levels ... 3.5% 3.5% 3.5%
<PAGE>
<PAGE 27>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
2. POSTRETIREMENT BENEFITS (continued)
Other Postretirement Benefits
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.
In 1993, a trust was established to provide a vehicle for funding
the health care liability through company contributions and retiree
premiums. The funds in this trust are invested primarily in equity
securities. Transportation was required to make a prefunding
contribution of $200 million to the trust on or prior to June 30, 1998.
This contribution was made during November 1997.
The components of expense for other postretirement benefits
included in the Statement of Income are as follows:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Service cost for benefits earned
during the year ................ $ 13 $ 14 $ 10
Interest cost on the
accumulated benefit obligation
and other ...................... 96 84 90
Less expected return
on assets ...................... (43) (38) (30)
------ ------ ------
Net other postretirement
benefits expense ............... $ 66 $ 60 $ 70
====== ====== ======
Actual return on assets .......... $ 102 $ 46 $ 65
====== ====== ======
The funded status of other postretirement benefits as of October 31
is as follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Accumulated other postretirement
benefit obligation (APBO):
Retirees and their dependents .... $ (952) $ (773)
Active employees eligible
to retire ...................... (221) (244)
Other active participants ........ (201) (208)
------ ------
Total APBO ....................... (1,374) (1,225)
Plan assets at fair value ........ 486 401
------ ------
APBO in excess of plan assets .... (888) (824)
Unamortized prior service cost ... (5) (6)
Unrecognized net loss ............ 152 86
------ ------
Net liability ................... $ (741) $ (744)
====== ======
The weighted average expected return on plan assets was 11.1% for
1997, 10.5% for 1996 and 10% for 1995. The weighted average of discount
rates used to determine the accumulated other postretirement benefit
obligation was 7.4% and 8.2% at October 31, 1997 and 1996,
respectively. For 1998, the weighted average rate of increase in the
per capita cost of covered health care benefits is projected to be 8.2%.
The rate is projected to decrease to 5.0% by the year 2004 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 $167
million and the associated expense recognized for the year ended
October 31, 1997 would increase by an estimated $16 million.<PAGE>
<PAGE 28>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. INCOME TAXES
The Parent Company files a consolidated U.S. federal income tax
return which includes Transportation and its U.S. subsidiaries. Under
the 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; if a loss is reported, the federal income tax benefit from
such loss is recognized 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 (NOL) carryforwards
generated in earlier years. As of October 31, 1997, Transportation's
subsidiaries had $20 million of domestic NOL carryforwards available to
offset their future taxable income.
The domestic and foreign components of income (loss) before income
taxes consist of the following:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Domestic ......................... $ 127 $ (1) $ 147
Foreign .......................... 4 (3) 11
------ ------ ------
Total income (loss)
before income taxes ............ $ 131 $ (4) $ 158
====== ====== ======
Taxes on income (loss) are analyzed by categories as follows:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Current:
Federal ........................ $ 39 $ 30 $ 46
State and local ................ 7 7 9
------ ------ ------
Total current expense ..... 46 37 55
Deferred (benefit) expense ....... (5) - 1
------ ------ ------
Total income tax expense ......... $ 41 $ 37 $ 56
====== ====== ======
The difference between the provision for income taxes and income
taxes computed using the U.S. federal statutory rate is as follows:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Amount computed using the
U.S. federal statutory rate .... $ 46 $ (1) $ 55
Increase (decrease)
in taxes resulting from:
State income taxes, net ...... 7 7 9
Difference between U.S.
and foreign tax rates ...... (2) 1 (4)
Current year loss for which
no benefit is available .... - 29 -
Utilization of subsidiaries'
net losses ..................... (8) - (4)
Other ............................ (2) 1 -
------ ------ ------
Provision for income taxes ....... $ 41 $ 37 $ 56
====== ====== ======
<PAGE>
<PAGE 29>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
3. INCOME TAXES (continued)
Pursuant to the Tax Agreement, all U.S. income taxes are paid by
the Parent Company to the federal tax authorities. Transportation's
consolidated tax payments to certain state and local governments were $2
million each year during 1997, 1996 and 1995, respectively.
Taxpaying 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. The components
of the deferred tax asset (liability) at October 31 are as follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
United States
- -------------
Deferred tax asset--net
operating loss carryforwards ... $ 7 $ 13
Less valuation allowance ......... (7) (13)
------ ------
Net deferred tax asset ........... $ - $ -
====== ======
Foreign
- -------
Deferred tax asset
--postretirement benefits ...... $ 19 $ 19
Less valuation allowance ......... (19) (19)
------ ------
Net deferred tax asset .......... - -
Deferred tax liabilities
--prepaid pension assets ....... (16) (16)
------ ------
Net deferred tax liability ....... $ (16) $ (16)
====== ======
A valuation allowance has been provided for those NOL carryforwards
and temporary differences which are estimated to expire before they are
utilized. The total valuation allowance decreased $6 million during
1997, resulting from utilization of domestic NOL carryforwards by
Transportation's subsidiaries for which an allowance had previously been
provided.
<PAGE>
<PAGE 30>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
4. MARKETABLE SECURITIES
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.
Information related to the company's marketable securities at
October 31 is as follows:
1997 1996
------------------ -------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- --------------------------------------------------------------------
Corporate securities . $ 30 $ 30 $ 32 $ 32
U.S. government
securities ......... 27 28 49 48
Mortgage and
asset-backed
securities ......... 38 38 42 42
Foreign government
securities ......... 10 10 5 5
------ ------ ------ ------
Total debt securities 105 106 128 127
Equity securities .... 16 21 14 17
------ ------ ------ ------
Total marketable
securities ......... $ 121 $ 127 $ 142 $ 144
====== ====== ====== ======
Contractual maturities of marketable debt securities at October 31
are as follows:
1997 1996
------------------ -------------------
Amortized Fair Amortized Fair
Millions of dollars Cost Value Cost Value
- --------------------------------------------------------------------
Due in one year or less $ 17 $ 18 $ 22 $ 21
Due after one year
through five years . 15 15 35 35
Due after five
years through
ten years .......... 25 25 23 23
Due after ten years .. 10 10 6 6
------ ------ ------ ------
67 68 86 85
Mortgage and
asset-backed
securities ......... 38 38 42 42
------ ------ ------ ------
Total debt securities. $ 105 $ 106 $ 128 $ 127
====== ====== ====== ======
Gross gains and losses realized on sales or maturities of
marketable securities were not material for each of the two years. At
October 31, 1997 and 1996, a domestic insurance subsidiary had $15
million and $17 million, respectively, of marketable securities which
were on deposit with various state departments of insurance or otherwise
not available. These securities are included in total marketable
securities balances at October 31, 1997 and 1996.
<PAGE>
<PAGE 31>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
5. RECEIVABLES
Receivables at October 31 are summarized by major classification as
follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Accounts receivable .............. $ 618 $ 551
Due from affiliates .............. 125 -
Retail notes and lease financing . 706 733
Wholesale notes .................. 46 101
Amounts due from sales
of receivables ................. 233 264
Notes receivable ................. 101 -
Other ............................ 29 28
Allowance for losses ............. (31) (31)
------ ------
Total receivables, net ....... $1,827 $1,646
====== ======
NFC 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 NFC's funding for retail and wholesale notes comes
from sales of receivables by NFC to third parties with limited recourse.
Proceeds from sales of retail notes receivable, net of underwriting
costs, were $958 million in 1997, $982 million in 1996 and $727 million
in 1995. Uncollected sold retail and wholesale receivable balances
totaled $1,968 million and $1,866 million as of October 31, 1997 and
1996, respectively.
Contractual maturities of accounts receivable, retail notes and
lease financing and wholesale notes, including unearned finance income,
at October 31, 1997 were: 1998 - $1,022 million, 1999 - $195 million,
2000 - $161 million, 2001 - $131 million, 2002 - $91 million, and 2003
and thereafter - $18 million. Unearned finance income totaled $123
million at October 31, 1997. Notes receivable are due upon demand from
a limited partnership that invests in S&P 500 stock index arbitrage.
<PAGE>
<PAGE 32>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
6. INVENTORIES
Inventories at October 31 are as follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Finished products ................ $ 209 $ 242
Work in process .................. 105 97
Raw materials and supplies ....... 157 124
------ ------
Total inventories ................ $ 471 $ 463
====== ======
7. PROPERTY AND EQUIPMENT
At October 31, property and equipment includes the following:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Land ............................. $ 13 $ 12
------ ------
Buildings, machinery
and equipment at cost:
Plants ....................... 1,200 1,241
Distribution ................. 86 79
Construction in progress ..... 41 58
Other ........................ 258 222
------ ------
Subtotal ................... 1,585 1,600
------ ------
Total property ............... 1,598 1,612
Less accumulated depreciation
and amortization ........... (846) (842)
------ ------
Total property and
equipment, net ........... $ 752 $ 770
====== ======
Total property includes property under capitalized lease
obligations of $25 million at October 31, 1997 and 1996. In addition,
total property includes vehicles under operating leases to third parties
of $150 million at October 31, 1997 and $116 million at October 31,
1996.
<PAGE>
<PAGE 33>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. DEBT
Due Parent Company
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Manufacturing operations
Current maturities of debt
due Parent Company ........... $ 45 $ 42
------ ------
Subordinated Parent Company Note:
9.05% Stock Purchase Agreement
(Class B Common), due 2003 ... 295 349
9.0% Loan Agreement, due 2013. 493 493
------ ------
Long-term debt due
Parent Company ............... 788 842
------ ------
Total debt due Parent Company .. $ 833 $ 884
====== ======
Debt
Millions of dollars
- --------------------------------------------------------------------
Manufacturing operations
Notes payable and current
maturities of long-term debt . $ 13 $ 14
------ ------
9% Sinking Fund Debentures,
due 2004 ..................... 45 53
8% Secured Note, due 2002,
secured by plant assets ...... 21 26
Capitalized leases and other ... 13 22
------ ------
Total long-term debt ....... 79 101
------ ------
Manufacturing operations debt .... 92 115
------ ------
Financial services operations
Commercial paper ............... 141 99
Capitalized leases ............. 13 -
------ ------
Total short-term debt ...... 154 99
------ ------
Asset-backed commercial paper
program, variable rate,
due 2001 ..................... 400 402
Bank revolver, variable rate,
due 2001 ..................... 393 704
------ ------
Total senior debt .......... 793 1,106
------ ------
8 7/8% Subordinated Senior
Notes due 1998 ............... 94 100
9% Subordinated Senior
Notes due 2002 ............... 100 -
------ ------
Total subordinated term debt 194 100
------ ------
Capitalized leases, 5.2% to 5.6%,
due 2002 ..................... 83 -
------ ------
Total long-term debt ....... 1,070 1,206
------ ------
Financial services operations debt 1,224 1,305
------ ------
Total debt ....................... $1,316 $1,420
====== ======
<PAGE>
<PAGE 34>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. DEBT (continued)
The effective annual interest rate for Manufacturing notes payable
was 8.28% for 1997 and 8.91% for 1996. Consolidated interest payments
were $149 million, $168 million and $169 million in 1997, 1996 and 1995,
respectively.
NFC issues commercial paper with varying terms and has short-term
borrowings with various banks on a noncommitted basis. Compensating
cash balances and commitment fees are not required under these
borrowings.
The aggregate annual maturities and sinking fund requirements for
debt for the years ended October 31 are as follows:
Financial
Manufacturing Services
Millions of dollars Operations Operations Total
- --------------------------------------------------------------------
1998 ................. $ 58 $ 154 $ 212
1999 ................. 64 111 175
2000 ................. 68 25 93
2001 ................. 73 820 893
2002 ................. 78 114 192
Thereafter ........... 584 - 584
Weighted average interest
rate on total debt,
including short-term,
and the effect of
discounts and related
amortization
for the years ended:
October 31, 1997 . 9.7% 6.4% 8.0%
October 31, 1996 . 9.2% 6.5% 7.8%
At October 31, 1997, NFC has a $925 million contractually committed
bank revolving credit facility and a $400 million asset-backed
commercial paper (ABCP) program supported by a bank liquidity facility.
Available funding under the ABCP program is comprised of a $400 million
liquidity facility plus $14 million of trust certificates issued in
connection with the formation of the ABCP trust.
Available funding under the amended and restated credit facility
and the ABCP program was $546 million, of which $141 million provided
funding backup for the outstanding short-term debt at October 31, 1997.
The remaining $405 million when combined with unrestricted cash and cash
equivalents made $416 million available to fund the general business
purposes of NFC at October 31, 1997.
<PAGE>
<PAGE 35>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
8. DEBT (continued)
NFC'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 transferring an undivided
ownership interest in such notes to investors in exchange for pass-
through notes and certificates. 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 NFC
or affiliated companies.
NFSC has in place a $600 million revolving wholesale note trust
that provides for the continuous sale of eligible wholesale notes on a
daily basis. The trust is comprised of two $100 million tranches of
investor certificates maturing in 1998 and 1999 and two $200 million
tranches maturing in 2003. At October 31, 1997, the remaining shelf
registration available to NFSC for issuance of investor certificates was
$200 million.
During 1997, NFC sold $987 million of retail notes, net of unearned
finance income, through NFRRC to two individual owner trusts. The owner
trusts in turn sold notes and certificates to investors. The net
proceeds, after underwriting costs and credit enhancements, were used by
NFC for general working capital purposes. At October 31, 1997, the
remaining shelf registration available to NFRRC for issuance of asset-
backed securities was $1,473 million.
In November 1997, NFC sold $500 million of retail notes, net of
unearned finance income, through NFRRC. The net proceeds were used for
general working capital purposes.
During 1997, NFC entered into sale/leaseback agreements involving
vehicles that were already subject to retail finance and operating
leases with end users. The remaining balance as of October 31, 1997 is
classified under Financial Services operations as capitalized leases.
These agreements grant a security interest in the underlying vehicles
and lease receivables to the purchasers.
<PAGE>
<PAGE 36>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
9. OTHER LIABILITIES
Major classifications of other liabilities at October 31 are as
follows:
Millions of dollars 1997 1996
- --------------------------------------------------------------------
Product liability and warranty ... $ 285 $ 293
Loss reserves and unearned premiums 99 113
Employee incentive programs ...... 93 10
Payroll, commissions
and employee related benefits .. 71 73
Long-term disability
and workers' compensation ...... 54 55
Taxes ............................ 59 46
Environmental .................... 27 23
Interest ......................... 13 9
Other ............................ 167 184
------ ------
Total other liabilities ...... $ 868 $ 806
====== ======
During the fourth quarter of 1996, the company recorded a one-time
$35 million charge for termination of its next generation truck program.
In August 1997, the company and the United Auto Workers reached
agreement on a master contract extension that enabled the company to
reinstate its next generation truck program. The remaining accrual at
the time of the announcement was not material.
<PAGE>
<PAGE 37>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts of financial instruments, as reported in the
Statement of Financial Condition and described in various Notes to the
Financial Statements, and their fair values at October 31 are as
follows:
1997 1996
----------------- -----------------
Carrying Fair Carrying Fair
Millions of dollars Amount Value Amount Value
- ------------------------------------------------------------------
Receivables, net ..... $1,827 $1,836 $1,646 $1,649
Investments and
other assets ....... 317 328 211 219
Debt ................. 2,149 2,165 2,304 2,358
Cash and cash equivalents approximate fair value. The cost and
fair value of marketable securities are disclosed in Note 4.
Customer receivables, receivables due from affiliates, wholesale
notes, retail and wholesale accounts, notes receivable, 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
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 by discounting expected cash flows at estimated
current market rates.
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 NFC'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.
<PAGE>
<PAGE 38>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
10. FINANCIAL INSTRUMENTS (continued)
Derivatives Held or Issued for Purposes Other Than Trading
Transportation uses derivatives to transfer or reduce risks of
foreign exchange and interest rate volatility and to potentially
increase the return on invested funds.
NFC manages its exposure to fluctuations in interest rates by
limiting the amount of fixed rate assets funded with variable rate debt,
by selling fixed rate retail receivables on a fixed rate basis and, to a
lesser extent, by utilizing derivative financial instruments. These
instruments may include interest rate swaps, interest rate caps and
forward interest rate contracts. NFC manages exposure to counter-party
credit risk by entering into derivative financial instruments with major
financial institutions that can be expected to fully perform under the
terms of such agreements. Notional amounts are used to measure the
volume of derivative financial instruments and do not represent exposure
to credit loss.
NFC enters into forward interest rate contracts to manage its
exposure to fluctuations in the fair value and resulting funding costs
from the anticipated securitization and sale of retail notes. NFC
manages interest rate risk by entering into either forward contracts to
sell fixed debt securities or interest rate swaps whose fair values are
highly correlated with the fair value of NFC's receivables. Gains or
losses incurred with the closing of these agreements are included as a
component of the gain or loss on sale of receivables.
During 1997, NFC entered into $500 million of interest rate hedge
agreements in anticipation of the November 1997 sale of retail
receivables. These hedge agreements were closed in conjunction with the
pricing of the sale, and the loss at October 31, 1997, which was not
material, was deferred and included in the gain recognized on the sale
of receivables in November 1997.
<PAGE>
<PAGE 39>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS,
AND LEASES
Commitments, contingencies and restricted assets
At October 31, 1997, commitments for capital expenditures in
progress were approximately $79 million. Navistar has additional
commitments of $58 million for capital expenditures in progress.
NFC's maximum exposure under all receivable sale recourse
provisions at October 31, 1997 was $246 million; however, management
believes that the allowance for credit losses on sold receivables is
adequate.
At October 31, 1997, 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 $261
million on retail contracts and $13 million on retail leases. In
addition, as of October 31, 1997, Transportation is contingently liable
for approximately $49 million for various guarantees and buyback
programs; however, based on historical loss trends, Transportation's
exposure is not considered material.
The Canadian operating subsidiary, NFC and certain other
subsidiaries included in financial services operations are parties to
agreements that may result in the restriction of amounts which can be
distributed to Transportation in the form of dividends or loans and
advances. At October 31, 1997, the maximum amount of dividends which
were available for distribution under the most restrictive covenants was
$62 million.
The Parent Company and Transportation are obligated under certain
agreements with public and private lenders of NFC 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, 1997.
Concentrations
At October 31, 1997, Transportation employed 10,593 hourly workers
and 5,434 salaried workers in the United States and Canada.
Approximately 93% of the hourly employees and 23% of the salaried
employees are represented by unions. Of these represented employees,
91% of the hourly workers and 94% of the salaried workers are
represented by the United Automobile, Aerospace, and Agricultural
Implement Workers of America (UAW) or the National Automobile,
Aerospace, and Agricultural Implement Workers of Canada (CAW). During
August 1997, Transportation's current master contract with the UAW was
extended from October 1, 1998 through October 1, 2002. The collective
bargaining agreement with the CAW expires on October 24, 1999.
Reflecting higher consumer demand for light trucks and vans, sales
of mid-range diesel engines to Ford Motor Company were 14% of
consolidated sales and revenues in 1997 and 1996 and 12% in 1995.
During 1997, the company entered into a ten-year agreement, effective
with model year 2003, to continue supplying Ford Motor Company with
diesel engines for use in its diesel-powered light trucks and vans.
<PAGE>
<PAGE 40>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
11. COMMITMENTS, CONTINGENCIES, RESTRICTED ASSETS, CONCENTRATIONS,
AND LEASES (continued)
Leases
Transportation has long-term noncancellable leases for use of
various equipment and facilities. Lease terms are generally for five 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.
The majority of Transportation's lease payments are for operating
leases. At October 31, 1997, future minimum lease payments under
operating leases having lease terms in excess of one year are: 1998 -
$33 million, 1999 - $31 million, 2000 - $29 million, 2001 - $16 million,
2002 - $11 million and thereafter - $12 million. Total operating lease
expense was $37 million in 1997, $32 million in 1996 and $37 million in
1995. Income received from sublease rentals was $6 million in 1997,
1996 and 1995, respectively.
12. LEGAL PROCEEDINGS
Transportation and its subsidiaries are subject to various claims
arising in the ordinary course of business, and are parties to various
legal proceedings which constitute ordinary routine litigation
incidental to the business of the company and its subsidiaries. In the
opinion of Transportation's management, none of these proceedings or
claims is material to the business or the financial condition of
Transportation.
13. ENVIRONMENTAL MATTERS
In the fourth quarter of 1994, Transportation recorded a $33
million charge as a loss of discontinued operations related to
environmental liabilities at production facilities of two formerly owned
businesses, Wisconsin Steel and Solar Turbine, Inc. Included in the
charge was an anticipated $11 million payment to the Economic
Development Administration, a division of the U.S. Department of
Commerce, in settlement of commercial and environmental disputes related
to the Wisconsin Steel property. In 1997, the U.S. Department of
Justice and Transportation approved the final consent decree related to
the Wisconsin Steel property and Transportation paid the $11 million to
the Economic Development Administration.
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 known as the Superfund law. These
cases involve sites which allegedly have received wastes from current or
former company locations. 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 PRPs and/or federal or state
regulatory agencies for the cleanup of these sites, a reasonable
estimate is calculated of Transportation's share, if any, of the
probable costs and is provided for in the financial statements. These
obligations generally are recognized no later than completion of the
remedial feasibility study and are not discounted to their present
value. Transportation reviews its accruals on a regular basis and
believes that, based on these calculations, its share of the potential
additional costs for the cleanup of each site will not have a material
effect on Transportation's financial results.
<PAGE>
<PAGE 41>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
14. INDUSTRY SEGMENT DATA
Information concerning operations by industry segment is as follows:
Financial
Manufacturing Services
Millions of dollars Operations Operations Consolidated
- ---------------------------------------------------------------------
October 31, 1997
- ----------------
Total sales
and revenues ....... $6,120 $ 239 $6,300
Operating profit ..... 868 101 919
Depreciation
and amortization ... 97 23 120
Capital expenditures . 90 - 90
Identifiable assets .. 2,465 1,857 3,870
October 31, 1996
- ----------------
Total sales
and revenues ....... $5,527 $ 258 $5,731
Operating profit ..... 689 109 754
Depreciation
and amortization ... 90 15 105
Capital expenditures . 117 - 117
Identifiable assets .. 2,241 1,843 3,752
October 31, 1995
- ----------------
Total sales
and revenues ....... $6,152 $ 235 $6,326
Operating profit ..... 844 80 869
Depreciation
and amortization ... 75 11 86
Capital expenditures . 139 - 139
Identifiable assets .. 2,533 1,922 4,081
Intersegment sales and revenues were not material in 1997, 1996 or
1995. Transactions between manufacturing operations and financial
services operations have been eliminated from the consolidated column.
<PAGE>
<PAGE 42>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
15. SHAREOWNER'S EQUITY
The number of authorized shares of Transportation's capital stock
at October 31, 1997 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.
Shareowner's equity for the years ended October 31 is as follows:
Millions of dollars 1997 1996 1995
- --------------------------------------------------------------------
Common Stock ..................... $ 786 $ 786 $ 786
------- ------- -------
Retained earnings (deficit)
Balance at beginning of the year . (2,315) (2,308) (2,283)
Net income (loss) ................ 90 (41) 102
Minimum pension liability
adjustment/other ............... 24 34 (127)
------- -------- --------
Balance at end of the year ....... (2,201) (2,315) (2,308)
------- ------- -------
Total shareowner's equity ........ $(1,415) $(1,529) $(1,522)
======= ======= =======
16. SELECTED QUARTERLY FINANCIAL DATA (Unaudited)
<TABLE>
<CAPTION>
1st Quarter 2nd Quarter 3rd Quarter 4th Quarter
----------- ----------- ----------- -----------
(Millions
of dollars) 1997 1996 1997 1996 1997 1996 1997 1996
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales and
revenues $1,289 $1,427 $1,543 $1,474 $1,578 $1,383 $1,890 $1,447
Manufactur-
ing gross
margin 13.6% 12.2% 13.8% 13.7% 13.8% 12.6% 15.3% 11.6%
Net income
(loss) $ (15) $ 6 $ 16 $ (2) $ 20 $ (9) $ 69 $ (36)
</TABLE>
<PAGE>
<PAGE 43>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
17. SUPPLEMENTAL FINANCIAL INFORMATION,
AS OF OCTOBER 31 AND FOR THE YEARS THEN ENDED (Unaudited)
Navistar International Transportation Corp.(with financial services
operations on an equity basis)
(Millions of dollars)
<TABLE>
<CAPTION>
Condensed Statement of Income 1997 1996 1995
- ----------------------------- -------- -------- --------
<S> <C> <C> <C>
Sales of manufactured products $ 6,107 $ 5,508 $ 6,125
Other income ................. 13 19 27
-------- -------- --------
Total sales and revenues 6,120 5,527 6,152
-------- -------- --------
Cost of products
and services sold .......... 5,239 4,819 5,281
Postretirement benefits ...... 214 219 205
Engineering and
research expense ........... 124 129 113
Marketing and
administrative expense ..... 325 282 277
Other expenses ............... 165 165 180
-------- -------- --------
Total costs and expenses ..... 6,067 5,614 6,056
-------- -------- --------
Income (loss) before
income taxes
Manufacturing operations . 53 (87) 96
Financial services
operations ............. 78 83 62
-------- -------- --------
Income (loss) before
income taxes ....... 131 (4) 158
Income tax expense ........... (41) (37) (56)
-------- -------- --------
Net income (loss) ............ $ 90 $ (41) $ 102
======== ======== ========
Condensed Statement
of Financial Condition 1997 1996
- ------------------------------ -------- --------
Cash, cash equivalents
and marketable securities .. $ 128 $ 174
Inventories .................. 471 463
Property and equipment net ... 623 666
Equity in nonconsolidated
subsidiaries ............... 322 306
Other assets ................. 921 632
-------- --------
Total assets ............ $ 2,465 $ 2,241
======== ========
Accounts payable ............. $ 1,042 $ 772
Postretirement benefits
liabilities ................ 1,178 1,344
Other liabilities ............ 1,660 1,654
Shareowner's equity .......... (1,415) (1,529)
-------- --------
Total liabilities
and shareowner's equity $ 2,465 $ 2,241
======== ========
</TABLE>
<PAGE>
<PAGE 44>
==========
NOTES TO FINANCIAL STATEMENTS--(Continued)
17. SUPPLEMENTAL FINANCIAL INFORMATION,
AS OF OCTOBER 31 AND FOR THE YEARS THEN ENDED (Unaudited)
(continued)
Navistar International Transportation Corp.(with financial services
operations on an equity basis)
<TABLE>
<CAPTION>
Condensed Statement
of Cash Flow 1997 1996 1995
- ----------------------------- -------- -------- --------
<S> <C> <C> <C>
Cash flow from operations
Net income (loss) ........... $ 90 $ (41) $ 102
Adjustments to reconcile
net income (loss) to cash
provided by (used in)
operations:
Depreciation
and amortization ...... 97 90 75
Equity in earnings of
nonconsolidated
companies, net of
dividends received .. (8) (24) (28)
Other, net ............ (21) 3 (68)
Change in operating
assets and liabilities ... 38 (180) 192
-------- -------- --------
Cash provided by
(used in) operations ..... 196 (152) 273
-------- -------- --------
Cash flow from investment
programs
Purchase of marketable
securities ............... - (158) (196)
Sales or maturities
of marketable securities . 5 239 145
Capital expenditures ....... (90) (117) (139)
Loan to NFC ................ (99) - -
Other investment
programs, net ............ 21 (3) 5
-------- -------- --------
Cash used in
investment programs ...... (163) (39) (185)
-------- -------- --------
Cash flow from
financing activities ..... (75) (57) (66)
-------- -------- --------
Cash and cash equivalents
Increase (decrease)
during the year .......... (42) (248) 22
At beginning of the year ... 170 418 396
-------- -------- --------
Cash and cash equivalents
at end of the year ....... $ 128 $ 170 $ 418
======== ======== ========
</TABLE>
<PAGE>
<PAGE 45>
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED 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, 1997 and 1996, and the results of their
operations and their cash flow for each of the three years in the period
ended October 31, 1997, 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.
Deloitte & Touche LLP
December 15, 1997
Chicago, Illinois
<PAGE>
<PAGE 46>
Exhibit 23
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------
INDEPENDENT AUDITORS' CONSENT
-----------------------------
Navistar International Transportation Corp.:
We consent to the incorporation by reference in the Registration
Statements, including post-effective amendments, No. 2-70979 and
No. 33-26847 of Navistar International Transportation Corp. on Form S-8
of our reports on Navistar International Transportation Corp. and
Navistar Financial Corporation dated December 15, 1997, appearing and
incorporated by reference in this Annual Report on Form 10-K of
Navistar International Transportation Corp. for the year ended
October 31, 1997.
Deloitte & Touche LLP
December 22, 1997
Chicago, Illinois
<PAGE>
<PAGE 47>
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.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE
AND REPORTS ON FORM 8-K
Financial Statements
- --------------------
See Index to Financial Statements in Item 8.
Schedule Page
- -------- ----
II - 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 ....................... 46
(24) Power of Attorney ................................... 49
(27) Financial Data Schedule ............................. N/A
(28.1) Navistar Financial Corporation Annual Report
on Form 10-K for the fiscal year ended
October 31, 1997 .................................. 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, 1997.
<PAGE>
<PAGE 48>
SIGNATURE
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED 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/ J. Steven Keate
- ------------------------------
J. Steven Keate December 22, 1997
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
<PAGE 49>
SIGNATURE
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------
POWER OF ATTORNEY
Each person whose signature appears below does hereby make,
constitute and appoint John R. Horne, J. Steven Keate 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/ John R. Horne
- -----------------------
John R. Horne Chairman, President December 22, 1997
and Chief Executive
Officer and Director
(Principal Executive
Officer)
/s/ Robert C. Lannert
- -----------------------
Robert C. Lannert Executive Vice President December 22, 1997
and Chief Financial
Officer and Director
(Principal Financial
Officer)
<PAGE>
<PAGE 50>
<TABLE>
<CAPTION>
SCHEDULE II
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
============
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
FOR THE YEARS ENDED OCTOBER 31, 1997, 1996 AND 1995
(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
----------- ------------- --------- ----------------- ----------- ------ -------
<S> <S> <C> <C> <S> <C> <C>
Reserves deducted from
assets to which they
apply:
1997
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustments,
receivables .... receivable .... $ 31 $ 14 less recoveries ... $ 14 $ 31
===== ===== ===== =====
1996
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustments,
receivables .... receivable .... $ 28 $ 21 less recoveries ... $ 18 $ 31
===== ===== ===== =====
1995
----
Uncollectible notes
and accounts
Allowance for written off and
losses on Notes and accounts reserve adjustments,
receivables .... receivable .... $ 25 $ 4 less recoveries ... $ 1 $ 28
===== ===== ===== =====
</TABLE>
F-1
<PAGE 1>
EXHIBIT 3
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED 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 October 27, 1995, filed as Exhibit
3.1 on Annual Report on Form 10-K dated October 31, 1996, which
was filed on January 26, 1996, Commission File No. 1-5236.
3.2 The By-Laws of Navistar International Transportation Corp.
effective February 14, 1995, filed as Exhibit 3.2 on Annual
Report on Form 10-K dated October 31, 1996 which was filed
on January 26, 1996, on Commission File No. 1-5236.
E-1
<PAGE 1>
EXHIBIT 4
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED 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 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.
4.3 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.
4.4 Indenture, dated as of May 30, 1997, by and between Navistar
Financial Corporation and The Fuji Bank and Trust Company, as
Trustee, for 9% Senior Subordinated Notes due 2002 for
$100,000,000. Filed on Registration No. 333-30167.
======
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 CONSOLIDATED 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,
among Navistar Financial Corporation as Servicer, Navistar
Financial Securities Corporation as Seller, and Manufacturers
Hanover Trust Company as Trustee. Filed on Registration
No. 33-36767.
10.2 Navistar 1994 Performance Incentive Plan. Filed as Appendix
to Proxy Statement dated January 27, 1994. Commission File No.
1-9618.
10.3 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.
10.4 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.
10.5 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.
10.6 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.
10.7 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.
10.8 Indenture dated as of May 25, 1995, between Navistar
Financial 1995-A Owner Trust and The Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1995-A
Owner Trust. Filed on Registration 33-55865.
E-3
<PAGE>
<PAGE 2>
EXHIBIT 10 (CONTINUED)
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
-------------------------------------------
MATERIAL CONTRACTS
10.9 Indenture dated as of November 1, 1995, between Navistar
Financial 1995-B Owner Trust and The Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1995-B
Owner Trust. Filed on Registration 33-55825.
10.10 Amendment No. 2 dated as of March 29, 1996, to the Amended
and Restated Credit Agreement dated as of November 4, 1994,
as amended by Amendment No. 1 dated as of December 15, 1995,
among Navistar Financial, certain banks, certain Co-Arranger
banks, and Morgan Guaranty Trust Company of New York, as
Administrative Agent filed on Form 8-K dated June 5, 1996.
Commission File No. 1-4146-1.
10.11 Indenture dated as of May 30, 1996, between Navistar
Financial 1996-A Owner Trust and The Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1996-A
Owner Trust. Filed on Registration No. 33-55865.
10.12 Indenture dated as of November 6, 1996, between Navistar
Financial 1996-B Owner Trust and The Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1996-B
Owner Trust. Filed on Registration No. 33-55865.
10.13 Indenture dated as of May 7, 1997, between Navistar
Financial 1997-A Owner Trust and The Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1997-A
Owner Trust. Filed on Registration No. 33-55865.
10.14 Amendment No. 3 dated as of May 27, 1997, to the Amended and
Restated Credit Agreement dated as of November 4, 1994, as
amended by Amendment No. 1 dated as of December 15, 1995 and
Amendment No. 2 dated as of March 29, 1996, among the 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 June 17, 1997.
Commission File No. 1-4146-1.
10.15 Form of Executive Severance Agreement which is executed with
all executive officers dated June 16, 1997. Filed as Exhibit
10.5 to Form 10-Q dated September 12, 1997. Commission File
No. 1-5236.
10.16 Navistar International Corporation Stock Ownership Program.
Filed as Exhibit 10.20 to Form 10-Q dated September 12, 1997.
Commission File No. 1-5236.
10.17 Indenture dated as of November 5, 1997, between Navistar
Financial 1997-B Owner Trust and The Bank of New York, as
Indenture Trustee, with respect to Navistar Financial 1997-B
Owner Trust. Filed on Registration No. 33-64249.
E-4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> OCT-31-1997
<PERIOD-END> OCT-31-1997
<CASH> 164
<SECURITIES> 127
<RECEIVABLES> 1858
<ALLOWANCES> (31)
<INVENTORY> 471
<CURRENT-ASSETS> 0<F1>
<PP&E> 1598
<DEPRECIATION> (846)
<TOTAL-ASSETS> 3870
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2149
0
0
<COMMON> 786
<OTHER-SE> (2201)
<TOTAL-LIABILITY-AND-EQUITY> 3870
<SALES> 6107
<TOTAL-REVENUES> 6300
<CGS> 5257
<TOTAL-COSTS> 6169
<OTHER-EXPENSES> 215
<LOSS-PROVISION> 14
<INTEREST-EXPENSE> 156
<INCOME-PRETAX> 131
<INCOME-TAX> (41)
<INCOME-CONTINUING> 90
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 90
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>The company has adopted an unclassified presentation in the Statement of
Financial Condition.
</FN>
</TABLE>
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, 1997
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 847-734-4000
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 November 30, 1997, 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
I(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, 1997
<TABLE>
<CAPTION>
INDEX
10-K Page
PART I
<S> <C> <C>
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................................. 1
Item 6. Selected Financial Data (A)................................. 1
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations (A)..................... 2
Item 8. Financial Statements........................................ 8
Independent Auditors' Report................................ 31
Supplementary Financial Data................................ 32
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure......................... 35
PART III
Item 10. Directors and Executive Officers of the
Registrant (A).............................................. 35
Item 11. Executive Compensation (A).................................. 35
Item 12. Security Ownership of Certain Beneficial Owners
and Management (A).......................................... 35
Item 13. Certain Relationships and Related
Transactions (A)............................................ 35
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K......................................... 35
SIGNATURES- Principal Accounting Officer ............................... 36
- Directors.............................................. 37
POWER OF ATTORNEY....................................................... 37
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 I(1) (a) and (b) of Form 10-K and is,
therefore, filing this Form with the reduced disclosure format.
</TABLE>
<PAGE>
PART I
Item 1. Business
The registrant, Navistar Financial Corporation ("NFC"), was incorporated in
Delaware in 1949 and is a wholly-owned subsidiary of Navistar International
Transportation Corp. ("Transportation"), which is wholly-owned by Navistar
International Corporation ("Navistar"). As used herein, the "Corporation" refers
to Navistar Financial Corporation and its wholly-owned subsidiaries unless the
context otherwise requires.
The Corporation is a financial services organization that provides
wholesale, retail and lease financing in the United States for sales of new and
used trucks sold by Transportation and Transportation's dealers. The Corporation
also finances wholesale accounts and selected retail accounts receivable of
Transportation. 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. 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 an independent insurance agency
system.
Item 2. Properties
The Corporation's properties principally consist of office equipment and
leased office space in Rolling Meadows, Illinois; Columbus, Ohio; Atlanta,
Georgia; Plano, Texas; Mt. Laurel, New Jersey; and San Ramon, California. The
office equipment owned and in use by the Corporation is not significant in
relation to the total assets of the Corporation.
Item 3. Legal Proceedings
There were no material pending legal proceedings other than ordinary,
routine litigation incidental to the business of the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
Intentionally omitted. See the index page of this Report for explanation.
PART II
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters
See Note 13 to Consolidated Financial Statements.
Item 6. Selected Financial Data
Intentionally omitted. See the index page to this Report for explanation.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
Certain statements under this caption constitute "forward-looking
statements" under the Securities Reform Act, which involve risks and
uncertainties. Navistar Financial Corporation's actual results may differ
significantly from the results discussed in such forward-looking statements.
Factors that might cause such a difference include, but are not limited to,
those discussed under the heading "Business Outlook".
Financing Volume
In fiscal 1997 industry demand for Class 5 through 8 trucks was slightly
higher than 1996 and 9% lower than 1995. Financing support provided to retail
customers over the last three years was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Retail and Lease Financing: ($ millions)
Finance market share of new International
trucks sold in the U.S. 13.2% 16.3% 14.4%
Purchases of receivables and
equipment leased to others $1,036 $1,135 $1,113
Serviced retail notes and lease
financing balances (including
sold notes) at October 31 $2,253 $2,200 $1,960
</TABLE>
During 1997, the Corporation's finance market share fell below 1996
performance due to the highly competitive commercial financing market. As a
result of the lower finance market share, purchases of receivables and equipment
leased to others in 1997 were below 1996. Purchases of receivables and equipment
leased to others in 1996 were consistent with those of 1995 as the increase in
finance market share was offset by the lower industry demand for Class 5 through
8 trucks.
Financing support provided to Transportation's dealers over the last three
years was as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Wholesale Financing: ($ millions)
Percent of wholesale financing of
new International trucks sold to
Transportation's dealers in the U.S. 94% 94% 93%
Purchases of receivables $2,773 $2,706 $2,979
Serviced wholesale note balances
(including sold notes) at
October 31 $ 691 $ 685 $ 854
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Financing Volume (continued)
In spite of the strong liquidity in the commercial financing market, the
Corporation's finance percentage of new International trucks sold to
Transportation's dealers remained at 94%. In 1997 the volume of receivables
purchased was slightly higher than 1996 and 7% below 1995 in response to the
truck industry demand. Although dealer inventory levels at October 31, 1997 were
comparable to the 1996 year end levels, fiscal 1997 average dealer inventory
levels were approximately 22% below 1996. In response to the continued strong
customer demand, Transportation's dealers significantly increased the level of
truck inventory during the fourth quarter of fiscal 1997. Wholesale note
balances at October 31, 1996 were 25% below 1995 year end balances. This
significant decline occurred primarily in the fourth quarter of fiscal 1996 as
average dealer inventory levels during fiscal 1996 were approximately 22% higher
than fiscal 1995.
Results of Operations
The components of net income over the last three years were as follows:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Income before income taxes: ($ millions)
Finance operations $68.6 $74.2 $53.1
Insurance operations 6.0 6.3 5.6
Income before taxes 74.6 80.5 58.7
Taxes on income 28.9 31.1 22.5
Net income $45.7 $49.4 $36.2
Return on average equity 16.1% 18.1% 15.0%
</TABLE>
The Corporation's 1997 return on average equity of 16.1% was below its
record 18.1% in 1996 primarily due to lower average dealer inventory levels and
gains on sales of retail notes, partially offset by lower borrowing costs and
provision for losses. Income in 1996 was 37% higher than 1995 primarily as a
result of higher gains on sales of retail notes and higher average wholesale
note balances.
Finance Operations:
Retail note and lease financing revenue for 1997 was $106 million compared
with $98 million and $73 million in 1996 and 1995, respectively. Included in
these amounts is operating lease revenue of $29 million, $14 million and $9
million in 1997, 1996 and 1995, respectively. The higher operating lease revenue
is the result of an increase in operating lease balances due to a market shift
toward lease financing. For operating leases, the Corporation recognizes the
entire lease payment as revenue and records depreciation expense on the assets
under lease.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations (Continued)
Also included in retail note and lease finance revenue are gains on sales
of retail note receivables of $13 million, $20 million and $5 million in 1997,
1996 and 1995, respectively, on sales of $987 million, $985 million and $740
million, respectively. The higher gains on sales in fiscal 1996 resulted from
higher margins on retail notes due to declining market interest rates prior to
the sale in November 1995. During a declining interest rate environment, NFC's
acquisition spreads may improve as the Corporation's cost of borrowing differs
from the time when interest rates are quoted to borrowers and the time when such
notes are acquired. In addition, unless hedged, the effective interest rate for
each sale is based on a market interest rate at the time of the sale, which may
be up to six months after the Corporation acquired the retail notes.
In fiscal 1997 wholesale note revenue decreased 36.2% from 1996 primarily
as a result of lower average outstanding note balances and lower yields in
response to the competitive commercial financing market. Wholesale note revenue
increased 5% in 1996 to $57 million as a result of higher average outstanding
note balances offset in part by lower average yields relating to a lower prime
interest rate.
Borrowing costs decreased 10.6% in 1997 to $73 million from $82 million in
1996 primarily due to lower wholesale funding requirements and lower borrowing
rates. During 1997 the Corporation's weighted average interest rate on all debt
declined to 6.4% from 6.5% in 1996. The Corporation's 1996 borrowing costs of
$82 million were slightly less than the $84 million in 1995 due to a decline in
the Corporation's weighted average interest rate offset in part by higher debt
balances to support receivable balances. During 1996, the Corporation's weighted
average interest rate on all debt declined to 6.5% from 7.4% in 1995 primarily
due to lower market interest rates and the maturity of high fixed rate public
debt during 1995 and 1996. The ratio of debt to equity was 4.3:1, 4.7:1 and
5.2:1 at October 31, 1997, 1996, and 1995, respectively.
Credit, collection and administrative expenses increased to $31 million in
1997 from $28 million in 1996 and 1995. The increase in 1997 compared with 1996
and 1995 was primarily due to employee related costs, retail marketing efforts
and training and development programs.
The provision for losses on receivables totaled $3 million in 1997 compared
with $9 million in 1996 and $3 million in 1995. During 1997 and 1996 competitive
freight rates and higher fuel costs have impacted NFC's customers' abilities to
meet obligations and have resulted in higher delinquencies, repossessions and
credit losses as compared to 1995. Notes and account write-offs (recoveries),
including sold notes totaled $2 million in 1997, $5 million in 1996 and $(1)
million in 1995. The Corporation's allowance for losses as a percentage of
serviced finance receivables was .72%, .74% and .62% at October 31, 1997, 1996
and 1995, respectively.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Results of Operations - Finance Operations (Continued)
Depreciation and other expenses in 1997 increased to $19 million from $9
million in 1996. The increase is primarily the result of a larger investment in
equipment under operating leases.
Insurance Operations:
Harco National Insurance Company's ("Harco") pretax income was $6 million
in each of the three years ended October 31, 1997. Harco's gross premiums
written in 1997 were $49 million, 10% and 8% below 1996 and 1995, respectively.
The insurance industry continues to be over capitalized which results in a
highly competitive market and places pressure on Harco's volume and margins. The
ratio of losses to earned premiums during 1997 was 70% compared to 73% and 71%
in 1996 and 1995, respectively. The loss ratio improvement is primarily due to
favorable experience in the liability lines.
Liquidity and Funds Management
Navistar Financial has traditionally obtained the funds to provide
financing to Transportation's dealers and retail customers from sales of
receivables, commercial paper, short and long-term bank borrowings, medium and
long-term debt issues and equity capital. The Corporation's current debt ratings
have made sales of finance receivables the most economical source of cash. The
Corporation's insurance operation generates its funds through internal
operations and has no external borrowings.
Operations provided $142 million in cash in 1997 primarily due to the cash
provided from net income of $46 million and an increase in accounts payable to
affiliated companies of $107 million. Investing activities used $1 million in
cash. During 1997, the purchase of $1,036 million of receivables and equipment
leased to others was funded primarily with $958 million of proceeds from the
sale of receivables and principal collections of $94 million. The cash provided
by operations and the $209 million of proceeds from the issuance of long term
debt were used principally to lower bank borrowings by $311 million and to pay
dividends of $40 million. See also the "Statements of Consolidated Cash Flow" on
page 11.
Over the last three years, operations provided $225 million in cash and
proceeds from the sale of retail receivables totaled $2,667 million. These
amounts were used principally to fund the purchase of receivables and equipment
leased to others of $3,007, net of principal collections on the receivables, and
to pay dividends of $75 million.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Funds Management (Continued)
Receivable sales were a significant source of funding in 1997 and 1996.
Through the asset-backed public market, the Corporation has been able to fund
fixed rate retail note receivables at rates offered to companies with investment
grade ratings. During fiscal 1997 and 1996, the Corporation sold $987 and $985
million, respectively, of retail notes, through Navistar Financial Retail
Receivables Corporation ("NFRRC"), a wholly-owned subsidiary, to owner trusts,
which in turn, sold notes and certificates to investors. At October 31, 1997,
the remaining shelf registration available to NFRRC for issuance of asset-backed
securities was $1,473 million.
At October 31, 1997, Navistar Financial Securities Corporation ("NFSC"), a
wholly-owned subsidiary of the Corporation, had in place a $600 million
revolving wholesale note trust that provides for the continuous sale of eligible
wholesale notes on a daily basis. During 1997, a $100 million tranche matured
and the trust issued a $200 million tranche of investor certificates which
matures in 2003. The trust is funded by securities sold to the public comprised
of two $100 million tranches of investor certificates maturing in 1998 and 1999
and two $200 million tranches of investor certificates maturing in 2003 and
2004. At October 31, 1997, the remaining shelf registration available to NFSC
for issuance of investor certificates was $200 million.
On May 30, 1997, the Corporation sold $100 million of Senior Subordinated
Notes due June 2002. The net proceeds from the sale of the Notes offered were
approximately $98 million after the deduction of underwriting fees and certain
other expenses.
During fiscal 1997, the Corporation entered into sale/leaseback agreements
involving vehicles subject to retail finance leases and operating leases with
end users. Total proceeds were $111 million and the outstanding capital lease
obligations at October 31, 1997 were $96 million.
The Corporation has a $925 million bank revolving credit facility and a
$400 million asset-backed commercial paper ("ABCP") program supported by a bank
liquidity facility, which mature in March 2001. See Note 10 to the Consolidated
Financial Statements for further discussion.
In November 1997, the Corporation sold $500 million of retail notes through
NFRRC to an owner trust, which in turn, sold notes to investors. A gain of $7
million was recognized on the 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 and, to a lesser extent, by utilizing derivative financial
instruments. See Notes 1 and 14 to the Consolidated Financial Statements.
Corporate policy prohibits the use of derivatives for speculative purposes.
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations (continued)
Liquidity and Funds Management (Continued)
Under a state law enacted February 14, 1997, the Corporation was relieved
of any liability under the Notice of Deficiency issued on February 1, 1994 by
the Illinois Department of Revenue to the Corporation for the fiscal years 1989
through 1991. See Note 8 to the Consolidated Financial Statements for further
discussion.
Year 2000
The Corporation has and will continue to make certain investments in its
information systems and applications to ensure they are year 2000 compliant.
Spending for these modifications has not had and is not expected to have a
material impact on the Corporation's financial condition or results of
operations in any given year.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS No. 131 establishes standards for reporting information
about operating segments, and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
disclosures and, accordingly, will have no impact on the Corporation's reported
financial condition, results of operations or cash flows.
Business Outlook
The truck industry in 1998 is forecasted to be consistent with 1997. The
competitive commercial financing market will continue to put pressure on the
Corporation's retail and wholesale financing activity and margins.
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 1998 and beyond.
<PAGE>
<TABLE>
<CAPTION>
Page
Item 8. Financial Statements and Supplementary Data
Navistar Financial Corporation and Subsidiaries:
<S> <C>
Statements of Consolidated Income and Retained Earnings
for the years ended October 31, 1997, 1996 and 1995.............. 9
Statements of Consolidated Financial Condition as of
October 31, 1997 and 1996 ....................................... 10
Statements of Consolidated Cash Flow for the years ended
October 31, 1997, 1996 and 1995.................................. 11
Notes to Consolidated Financial Statements......................... 12
Independent Auditors' Report....................................... 31
Supplementary Financial Data....................................... 32
</TABLE>
<PAGE>
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Statements of Consolidated Income and Retained Earnings
- -------------------------------------------------------------------------------
Millions of Dollars
<TABLE>
<CAPTION>
For the years ended October 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues
Retail notes and lease financing.............. $105.8 $ 97.7 $ 73.3
Wholesale notes............................... 36.1 56.6 54.1
Accounts...................................... 31.2 26.6 29.2
Servicing fee income.......................... 20.0 20.5 18.3
Insurance premiums earned..................... 33.3 42.0 44.6
Marketable securities......................... 8.5 9.4 8.7
Total..................................... 234.9 252.8 228.2
Expenses
Cost of borrowing:
Interest expense.......................... 65.9 73.2 75.1
Other..................................... 7.0 8.4 9.1
Total..................................... 72.9 81.6 84.2
Credit, collection and administrative......... 31.0 28.2 27.9
Provision for losses on receivables........... 2.5 9.3 2.6
Insurance claims and underwriting............. 35.1 44.4 46.7
Depreciation expense and other................ 18.8 8.8 8.1
Total..................................... 160.3 172.3 169.5
Income Before Taxes................................ 74.6 80.5 58.7
Taxes on Income.................................... 28.9 31.1 22.5
Net Income......................................... 45.7 49.4 36.2
Retained Earnings
Beginning of year............................. 107.4 84.0 56.8
Dividends paid................................ (40.0) (26.0) (9.0)
End of year................................... $113.1 $107.4 $ 84.0
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Statements of Consolidated Financial Condition
- -------------------------------------------------------------------------------
Millions of Dollars
<TABLE>
<CAPTION>
As of October 31 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents.............................. $ 10.7 $ 6.7
Marketable Securities.................................. 114.2 128.1
Receivables
Finance receivables............................... 1,223.2 1,205.2
Allowance for losses.............................. (12.0) (11.6)
Receivables, net.............................. 1,211.2 1,193.6
Amounts Due from Sales of Receivables.................. 233.3 264.3
Equipment on Operating Leases, Net..................... 124.1 101.1
Repossessions.......................................... 13.0 13.2
Other Assets........................................... 104.1 86.8
Total Assets........................................... $1,810.6 $1,793.8
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt........................................ $ 141.0 $ 99.4
Accounts Payable and Other Liabilities................. 191.3 86.4
Senior and Subordinated Debt........................... 1,082.7 1,206.4
Dealers' Reserves...................................... 22.2 22.3
Unpaid Insurance Claims and Unearned Premiums.......... 85.6 99.6
Commitments and Contingencies
Shareowner's Equity
Capital stock (Par value $1.00, 1,600,000 shares
issued and outstanding) and paid-in capital..... 171.0 171.0
Retained earnings................................. 113.1 107.4
Unrealized gains on marketable securities......... 3.7 1.3
Total......................................... 287.8 279.7
Total Liabilities and Shareowner's Equity.............. $1,810.6 $1,793.8
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
Navistar Financial Corporation and Subsidiaries
- -------------------------------------------------------------------------------
Statements of Consolidated Cash Flow
- -------------------------------------------------------------------------------
Millions of Dollars
<TABLE>
<CAPTION>
For the years ended October 31 1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flow From Operations
Net income.................................... $ 45.7 $ 49.4 $ 36.2
Adjustments to reconcile net income to
cash provided from operations:
Gains on sales of receivables................. (13.4) (20.2) (5.2)
Depreciation and amortization................. 22.5 15.3 11.1
Provision for losses on receivables........... 2.5 9.3 2.6
Increase (decrease) in accounts payable
to affiliated companies..................... 107.0 (65.0) 73.2
Other......................................... (22.3) (17.3) (6.7)
Total................................... 142.0 (28.5) 111.2
Cash Flow From Investing Activities
Proceeds from sold retail notes............... 958.2 982.1 726.8
Purchase of retail notes and
lease receivables........................... (969.7) (1,069.0) (1,089.3)
Principal collections on retail notes and
lease receivables........................... 93.8 70.2 113.2
Acquisitions (over)/under cash collections of
wholesale notes and accounts receivable..... (59.9) 163.0 (77.1)
Purchase of marketable securities............. (65.3) (63.0) (61.9)
Proceeds from sales and maturities of
marketable securities....................... 84.8 67.7 67.3
Purchase of equipment leased to others........ (66.3) (65.9) (23.9)
Sale of equipment leased to others............ 23.8 9.7 5.2
Total................................... (0.6) 94.8 (339.7)
Cash Flow From Financing Activities
Net increase (decrease) in short-term debt.... 41.6 48.9 (368.7)
Net (decrease) increase in bank
revolving credit facility usage............. (311.0) (56.0) 405.0
Net (decrease) increase in asset-backed
commercial paper facility usage............. (15.3) 88.1 275.8
Principal payments on long-term debt.......... (21.6) (117.5) (100.0)
Proceeds from long-term debt.................. 208.9 - -
Dividends paid to Transportation.............. (40.0) (26.0) (9.0)
Total................................... (137.4) (62.5) 203.1
Increase/(Decrease) in Cash and
Cash Equivalents.............................. 4.0 3.8 (25.4)
Cash and Cash Equivalents at Beginning of Year.. 6.7 2.9 28.3
Cash and Cash Equivalents at End of Year........ $ 10.7 $ 6.7 $ 2.9
Supplementary disclosure of cash
flow information:
Interest paid................................. $ 59.7 $ 76.3 $ 74.3
Income taxes paid............................. $ 23.8 $ 32.2 $ 14.6
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE YEARS ENDED OCTOBER 31, 1997
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").
Nature of Operations
The Corporation is a financial services organization that provides retail,
wholesale and lease financing of products sold by Transportation and its dealers
within the United States. The Corporation also 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.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue on Receivables
Revenue from finance receivables is recognized using the interest method.
Revenue on operating leases is recognized on a straight-line basis over the life
of the lease. Recognition of revenue is suspended when management determines the
collection of future income is not probable. Income recognition is resumed if
collection doubts are removed.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
Allowance for Losses on Receivables
The allowance for losses on receivables is established through a charge to
the provision for losses. The allowance is an estimate of the amount adequate to
absorb losses on existing receivables that may become uncollectible. The
allowance is maintained at an amount management considers appropriate in
relation to the outstanding receivables portfolio based on such factors as
overall portfolio quality, historical loss experience and current economic
conditions.
Under various agreements, Transportation and its dealers may be liable for
a portion of customer losses or may be required to repurchase the repossessed
collateral at the receivable principal value. The Corporation's losses are net
of these benefits. Receivables are charged off to the allowance for losses as
soon as the receivable is determined to be uncollectible.
Receivable Sales
The Corporation securitizes and sells 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. Gains or losses on sales of receivables are
credited or charged to financing revenue in the period in which the sales occur.
An adequate allowance for credit losses is provided prior to the receivable
sales.
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 related premiums are earned. The
liability for unpaid insurance claims includes provisions for reported claims
and an estimate of unreported claims based on past experience. Such provisions
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.
The Corporation's wholly-owned insurance subsidiary, Harco National
Insurance Company ("Harco"), limits its exposure on any single loss occurrence
by ceding reinsurance to other insurance enterprises. Reinsurance receivables,
including amounts related to unpaid insurance claims and prepaid reinsurance
premiums, are reported as other assets in the Statements of Consolidated
Financial Condition.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
Income Taxes
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.
Marketable Securities
Marketable securities are classified as available-for-sale and are reported
at fair value. The difference between amortized cost and fair value is recorded
as an adjustment to shareowner's equity, net of applicable deferred taxes.
Derivative Financial Instruments
The Corporation uses derivatives such as forward contracts and interest
rate swaps to reduce its exposure to interest rate volatility. The Corporation's
primary use of such financial instruments is to hedge the fair value of its
fixed rate receivables against changes in market interest rates in anticipation
of the sale of such receivables.
All derivative financial instruments are held for purposes other than
trading, and the Corporation's policy prohibits the use of derivatives for
speculative purposes. Gains or losses related to hedges of anticipated sales of
receivables are deferred and are recognized as income when the receivables are
sold. The principal balance of receivables expected to be sold by the
Corporation equals or exceeds the notional amount of open derivative contracts.
New Accounting Standards
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," ("SFAS
No. 130") and Statement of Financial Accounting Standards No. 131, "Disclosures
about Segments of an Enterprise and Related Information," ("SFAS No. 131"). SFAS
No. 130 establishes standards for reporting and display of comprehensive income
and its components. SFAS No. 131 establishes standards for reporting information
about operating segments, and related disclosures about products and services,
geographic areas and major customers. These statements are effective for fiscal
years beginning after December 15, 1997. These standards expand or modify
disclosures and, accordingly, will have no impact on the Corporation's reported
financial condition, results of operations or cash flows.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
1. SUMMARY OF ACCOUNTING POLICIES (Continued)
Reclassification
Certain amounts for prior years have been reclassified to conform with the
presentation used in the 1997 financial statements.
2. TRANSACTIONS WITH AFFILIATED COMPANIES
Wholesale Notes, Wholesale Accounts and Retail Accounts
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 from Transportation at the
principal amount of the receivables. Revenue collected from Transportation was
$54.7 in 1997, $49.8 in 1996 and $55.7 in 1995
Retail Notes and Lease Financing
In accordance with agreements between the Corporation and Transportation,
Transportation may be liable for certain losses on the finance receivables and
may be required to repurchase the repossessed collateral at the receivable
principal value. Losses recorded by Transportation were $10.1 in 1997, $9.5 in
1996 and $0.6 in 1995.
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. No income
maintenance payments were required during the three-year period ended October
31, 1997.
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 $2.1 in 1997 and $2.4 in 1996 and 1995.
Accounts Payable
Accounts payable and other liabilities include $131.5 and $24.5 payable to
Transportation at October 31, 1997 and 1996, respectively.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
3. INDUSTRY SEGMENTS
Information by industry segment is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Finance operations....................... $ 193.5 $ 201.6 $ 175.1
Insurance operations..................... 41.4 51.2 53.1
Total revenues......................... $ 234.9 $ 252.8 $ 228.2
Income before taxes:
Finance operations....................... $ 68.6 $ 74.2 $ 53.1
Insurance operations..................... 6.0 6.3 5.6
Total income before taxes.............. $ 74.6 $ 80.5 $ 58.7
Assets at end of year:
Finance operations....................... $1,659.3 $1,626.9 $1,701.9
Insurance operations..................... 151.3 166.9 172.8
Total assets at end of year............ $1,810.6 $1,793.8 $1,874.7
</TABLE>
4. MARKETABLE SECURITIES
The fair value of marketable securities is 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 following
table sets forth, by type of security issuer, the amortized cost and estimated
fair values at October 31:
<TABLE>
<CAPTION>
1997 1996
----------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. government and
agency securities................. $ 26.6 $ 27.1 $ 41.7 $ 41.5
Mortgage and
asset-backed secuurities.......... 37.8 38.2 42.4 42.2
Corporate debt and other securities... 30.3 30.1 30.6 30.3
Total debt securities............. 94.7 95.4 114.7 114.0
Equity securities..................... 13.5 18.8 11.3 14.1
Total............................. $ 108.2 $ 114.2 $ 126.0 $ 128.1
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
4. MARKETABLE SECURITIES (Continued)
Net unrealized gains and losses on marketable securities were $6.0 and $2.1
at October 31, 1997 and 1996, respectively. Unrealized losses were not material.
Contractual maturities of marketable debt securities at October 31, 1997,
are as follows:
<TABLE>
<CAPTION>
Amortized Fair
Cost Value
- -------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less.................................. $ 17.4 $ 17.4
Due after one year through five years.................... 11.8 11.8
Due after five years through ten years................... 18.1 18.5
Due after ten years...................................... 9.6 9.5
56.9 57.2
Mortgage- and asset-backed securities.................... 37.8 38.2
Total (Excludes equity securities)................... $ 94.7 $ 95.4
</TABLE>
Actual maturities may differ from the contractual maturities because of
prepayments by the issuers.
Proceeds from sales or maturities of marketable securities available for
sale were $84.8 during 1997 and $67.7 during 1996. The related realized gains
and losses were not material.
All marketable securities at October 31, 1997 and 1996 were held by Harco,
of which $14.5 and $16.7, 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>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Retail notes and lease financing....................... $ 706.5 $ 733.3
Wholesale notes........................................ 45.7 100.5
Accounts:
Retail 396.6 314.7
Wholesale......................................... 74.4 56.7
Total......................................... 471.0 371.4
Total finance receivables................ $1,223.2 $1,205.2
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (continued)
Contractual maturities of finance receivables including unearned finance
income at October 31, 1997, are summarized as follows:
<TABLE>
<CAPTION>
Retail Wholesale Accounts
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Due in fiscal year:
1998 .................................... $239.4 $ 40.7 $471.0
1999 .................................... 190.1 5.0 -
2000 .................................... 160.9 - -
2001 .................................... 130.5 - -
2002 .................................... 90.6 - -
Due after 2002................................. 17.8 - -
Gross finance receivables............... 829.3 45.7 471.0
Unearned finance income........................ 122.8 - -
Total finance receivables............... $706.5 $ 45.7 $471.0
</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's primary business is to provide wholesale, retail and
lease financing for new and used trucks sold by Transportation and
Transportation's dealers, and as a result the Corporation's receivables and
leases have significant concentration in the trucking industry. On a geographic
basis, there is not a disproportionate concentration of credit risk in any area
of the United States. The Corporation retains as collateral a security interest
in the equipment associated with wholesale notes, retail notes and leases other
than accounts.
The Corporation sells finance receivables to public and private investors
with limited recourse provisions. Outstanding sold receivable net balances at
October 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Retail notes............................................ $1,422.2 $1,366.4
Wholesale notes......................................... 545.5 500.0
Total.............................................. $1,967.7 $1,866.4
</TABLE>
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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
5. FINANCE RECEIVABLES (Continued)
During fiscal 1997, in two separate sales, the Corporation sold a total of
$987 of retail notes, net of unearned finance income, through NFRRC to two
individual owner trusts. The owner trusts, in turn, sold notes and certificates
to investors. At October 31, 1997, the remaining shelf registration available to
NFRRC for issuance of asset-backed securities was $1,473.
NFSC has in place a revolving wholesale note trust that provides for the
continuous sale of eligible wholesale notes up to $600. During 1997, a $100
tranche of investor certificates matured and NFSC issued a $200 tranche of
investor certificates. The trust is comprised of two $100 tranches of investor
certificates maturing in 1998 and 1999 and two $200 tranches of investor
certificates maturing in 2003 and 2004. At October 31, 1997, the remaining shelf
registration available to NFSC for issuance of investor certificates was $200.
NFRRC and NFSC 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. The terms
of retail receivable sales require the Corporation to maintain cash reserves
with the trusts as credit enhancement for public sales. The cash reserves held
by the trusts are restricted for use by the securitized sales agreements. The
maximum exposure under all receivable sale recourse provisions at October 31,
1997 was $245.8; however, management believes the reserves to be adequate.
On January 1, 1997, the Corporation adopted Statement of Financial
Accounting Standards No. 125 ("SFAS No. 125"), "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities", for all
applicable transactions. SFAS No. 125 requires that amounts previously
classified as excess servicing be reclassified as interest only receivables and
that such amounts be recorded at estimated fair value. Restatement of the
financial statements of prior periods is not permitted. The new standard did not
have a material effect on the Corporation's net income or financial condition.
The following is a summary of amounts included in "Amounts Due from Sales
of Receivables" as of October 31:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Cash held and invested by trusts............................ $ 90.8 $ 85.2
Subordinated retained interests in wholesale receivables.... 99.9 85.4
Subordinated retained interests in retail receivables....... 47.4 96.0
Interest only receivables................................... 7.7 -
Excess servicing............................................ - 10.1
Allowance for credit losses................................. (12.5) (12.4)
Total.................................................. $233.3 $264.3
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
6. INVESTMENT IN OPERATING LEASES
Operating leases at year-end were as follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Investment in operating leases
Vehicles and other equipment, at cost........................ $150.0 $116.4
Less: Accumulated depreciation.............................. (25.9) (15.3)
Net investment in operating leases........................... $124.1 $101.1
</TABLE>
Future minimum rentals on operating leases are as follows: 1998, $30.1;
1999, $26.8; 2000, $20.4; 2001, $12.6 and $3.6 thereafter. Each of these assets
is depreciated on a straight-line basis over the term of the lease in an amount
necessary to reduce the leased vehicle to its estimated residual value at the
end of the lease term.
7. ALLOWANCE FOR LOSSES
The allowance for losses on receivables is summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Total allowance for losses at beginning of year....... $24.0 $19.6 $16.2
Provision for losses.................................. 2.5 9.3 2.6
Net (losses) recoveries (charged)
credited to allowance............................ (2.0) (4.9) 0.8
Total allowance for losses at end of year.... $24.5 $24.0 $19.6
Allowance pertaining to:
Owned notes...................................... $12.0 $11.6 $10.4
Sold notes....................................... 12.5 12.4 9.2
Total..........................................$24.5 $24.0 $19.6
</TABLE>
8. TAXES ON INCOME
Taxes on income are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
Federal.......................................... $29.6 $26.4 $18.9
State and local.................................. 4.1 4.4 3.1
Total current................................ 33.7 30.8 22.0
Deferred (primarily Federal).......................... (4.8) 0.3 0.5
Total........................................ $28.9 $31.1 $22.5
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
8. TAXES ON INCOME (continued)
The effective tax rate of approximately 38% in each of the three years
ended October 31, 1997 differs from the statutory United States Federal tax rate
of 35% primarily because of state and local income taxes. Deferred tax assets
and liabilities at October 31, comprised the following:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Other postretirement benefits............................... $3.0 $2.9
Deferred tax liabilities:
Depreciation and other...................................... 2.2 6.9
Unrealized gains on marketable securities................... 2.3 0.8
Total deferred tax liabilities.......................... 4.5 7.7
Net deferred tax liabilities............................ $1.5 $4.8
</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 $12 million. The Department had taken the position that
nearly 100% of NFC's income during these years should be attributed to and taxed
by Illinois. On February 14, 1997, a state law was enacted which negated the
Department's position and relieved NFC of the aforementioned Notice of
Deficiency.
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.
Information regarding short-term debt is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Aggregate obligations outstanding:
Daily average.................................. $109.7 $ 68.2 $ 37.8
Maximum month-end balance...................... 145.0 117.8 81.1
Weighted average interest rate:
On average daily borrowing..................... 6.1% 6.0% 6.4%
At October 31.................................. 6.1% 5.9% 6.3%
</TABLE>
Unused commitments under the Corporation's bank revolving credit facility
and bank liquidity facility supporting the asset-backed commercial paper program
are used as backup for outstanding short-term borrowings. See also Note 10 to
the Consolidated Financial Statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT
Senior and Subordinated Debt outstanding at October 31 is summarized as
follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Bank revolving credit, at variable rates,
due March 2001........................................$ 393.0 $ 704.0
Funding under asset-backed commercial
paper program ("ABCP"), at variable
rates, due March 2001................................. 399.9 402.4
Capital lease obligations, 5.19% to 5.62%,
due serially through 2003............................. 95.8 -
Subordinated term debt:
Senior Notes, 8 7/8%, due November 1998............... 94.0 100.0
Senior Notes, 9%, due June 2002....................... 100.0 -
Total senior and subordinated debt...........$1,082.7 $1,206.4
</TABLE>
The weighted average interest rate on total debt, including short-term debt
and the effect of discounts and related amortization, was 6.4%, 6.5% and 7.4% in
1997, 1996 and 1995, respectively. The aggregate annual maturities and required
payments of debt are as follows:
<TABLE>
<S> <C>
Fiscal year ended October 31,
1998 $ 12.6
1999 111.0
2000 25.4
2001 819.6
2002 and thereafter 114.1
Total $1,082.7
</TABLE>
At October 31, 1997, the Corporation has a $925 contractually committed
bank revolving credit facility and a $400 ABCP program supported by a bank
liquidity facility. Available funding under the ABCP program is comprised of the
$400 liquidity facility plus $14 of trust certificates issued in connection with
the formation of the ABCP trust. Under the terms of the ABCP program, Truck
Retail Instalment Paper Company ("TRIP"), a special purpose wholly-owned
subsidiary of NFC, purchases eligible receivables from NFC. All assets of TRIP
are pledged to a Trust that funds the receivables with A1/P1 rated commercial
paper.
Available funding under the amended and restated credit facility and the
ABCP program was $546, of which $141 provided funding backup for the outstanding
short-term debt at October 31, 1997. The remaining $405 when combined with
unrestricted cash and cash equivalents made $416 available to fund the general
business purposes of the Corporation at October 31, 1997. Under the terms of the
revolving credit facility, the Corporation is required to maintain tangible net
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
10. SENIOR AND SUBORDINATED DEBT (Continued)
worth at a minimum of $175 and a debt to tangible net worth ratio of no greater
than 7 to 1. Consistent with the previous revolving credit agreement, the
amended agreement grants security interests in substantially all of the
Corporation's assets to the Corporation's debtholders. Compensating cash
balances are not required under the restated revolving credit facility. Facility
fees are paid quarterly regardless of usage.
Under the terms of the 8 7/8% Subordinated debt agreement, the aggregate
principal balances of subordinated debt may not exceed 75% of consolidated
tangible net worth.
During fiscal 1997, the Corporation entered into sale/leaseback agreements
involving vehicles subject to retail finance and operating leases with end
users. The balance, as of October 31, 1997, is classified under senior and
subordinated debt as capital lease obligations. These agreements grant to the
purchasers a security interest in the underlying end user leases.
11. RETIREMENT BENEFITS
The Corporation provides postretirement benefits to substantially all of
its employees. Expenses associated with postretirement benefits include pension
expense for employees, retirees and surviving spouses, and postretirement health
care and life insurance expense for employees, retirees, surviving spouses and
dependents.
Pension Benefits
Generally pension benefits are non-contributory with benefits related to an
employee's length of service and compensation rate. Plan assets are primarily
invested in a dedicated portfolio of long-term fixed income securities with the
remainder invested in high quality equity securities.
Pension Expense
Net pension (income) expense includes the following:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during
the period....................................$ 0.8 $ 0.7 $ 0.5
Interest cost on projected benefit
obligation.................................... 3.0 2.9 2.8
Return on assets - actual (gain) loss........... (9.7) (3.2) (9.1)
- deferred gain (loss)......... 5.7 (0.4) 5.8
Net amortization costs and other costs.......... - 0.1 -
Net pension (income) expense..............$(0.2) $ 0.1 -
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
Pension Assets and Liabilities
The plans' funded status and reconciliation to the Statements 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
--------------------------------------------
1997 1996 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of:
Vested benefits................. $ (35.8) $ (31.5) $ (2.2) $ (2.0)
Non-vested benefits............. (4.4) (4.0) (0.1) (0.1)
Accumulated benefit
obligation.................. (40.2) (35.5) (2.3) (2.1)
Effect of projected future
compensation levels......... (1.4) (1.0) (0.1) -
Total projected benefit
obligation.................. (41.6) (36.5) (2.4) (2.1)
Plan assets at fair value.......... 50.1 42.7 - -
Funded status at October 31..... 8.5 6.2 (2.4) (2.1)
Unrecognized net losses (gains).... (7.3) (5.5) 0.8 0.4
Unrecognized plan amendments....... 0.4 0.5 - -
Unrecognized net obligation
as of transition date....... 0.1 0.1 - -
Net asset (liability)......... $ 1.7 $ 1.3 $ (1.6) $ (1.7)
</TABLE>
The weighted average rate assumptions used in determining the projected
benefit obligation and pension expense were:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rate used to determine the present value
of the projected benefit obligations................. 7.2% 7.9% 7.5%
Expected long-term rate of return on plan assets.......... 9.6% 8.9% 9.9%
Expected rate of increase in future
compensation levels.................................. 3.5% 3.5% 3.5%
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
Other Postretirement Benefits
The components of expense for other postretirement benefits that are
included in the Statements of Consolidated Income and Retained Earnings include
the following:
<TABLE>
<CAPTION>
1997 1996 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost for benefits earned during the year....... $ 0.4 $ 0.4 $ 0.3
Interest cost on the accumulated benefit
obligation........................................ 0.9 0.8 0.8
Expected return on assets - actual (gain) loss......... (0.2) 0.8 (1.5)
- deferred gain (loss)....... (0.3) (1.3) 1.2
Total cost of other postretirement benefits............ $ 0.8 $ 0.7 $ 0.8
</TABLE>
The funded status of other postretirement benefits as of October 31 were as
follows:
<TABLE>
<CAPTION>
1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated other postretirement benefit obligation (APBO):
Retirees and their dependents............................... $(6.2) $(4.9)
Active employees eligible to retire......................... (2.0) (2.9)
Other active participants................................... (3.4) (3.4)
Total APBO ................................................. (11.6) (11.2)
Plan assets at fair value................................... 4.4 3.9
APBO in excess of plan assets............................... (7.2) (7.3)
Unrecognized net loss....................................... 1.0 1.5
Net liability............................................... $(6.2) $(5.8)
</TABLE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
11. RETIREMENT BENEFITS (Continued)
The expected return on plan assets was 11.1% for 1997, 10.5% for 1996 and
10.0% for 1995. The weighted average of discount rates used to determine the
accumulated postretirement benefit obligation was 7.4% and 8.1% at October 31,
1997 and 1996, respectively. For 1998, the weighted average rate of increase in
the per capita cost of covered health care benefits is projected to be 8.1%. The
rate is projected to decrease to 5.0% in the year 2004 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 $1.7 and the associated expense
recognized for the year ended October 31, 1997, would increase by an estimated
$0.2.
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, 1997, future minimum lease commitments under
noncancelable operating leases with remaining terms in excess of one year are as
follows:
<TABLE>
<S> <C>
Year Ended October 31,
1998............................................. $ 1.7
1999............................................. 1.7
2000............................................. 1.4
2001............................................. 0.2
2002............................................. -
Thereafter....................................... -
Total........................................ $ 5.0
</TABLE>
13. SHAREOWNER'S EQUITY
The number of authorized shares of capital stock as of October 31, 1997 and
1996, 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.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS
Fair Value of Financial Instruments
The carrying amounts and estimated fair values of the Corporation's
financial instruments were as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Financial assets:
Finance receivables:
Retail notes.................... $ 607.0 $ 619.0 $ 662.5 $ 672.1
Wholesale notes and accounts.... 516.7 516.7 471.9 471.9
Amounts due from sales of
receivables..................... 233.3 230.3 264.3 258.1
Financial liabilities:
Senior and subordinated debt...... $1,082.7 $1,086.0 $1,206.4 $1,207.4
</TABLE>
Cash and cash equivalents approximate fair value. The cost and fair value
of marketable securities are disclosed in Note 4.
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
re-price frequently, the carrying amount approximates fair value. For wholesale
notes and retail and wholesale accounts, which also reprice frequently, the
carrying amounts approximate fair value as a result of the short term nature of
the receivables.
The fair value of cash deposits included above in amounts due from sales of
receivables approximates their carrying value. The fair values of other amounts
due from sales of receivables were derived by discounting expected cash flows at
estimated current market rates.
For variable-rate debt that reprices frequently, the carrying amount
approximates fair value. For fixed rate debt, the fair value is estimated based
on quoted market prices where available and, where not available, on quoted
market prices of debt with similar characteristics.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
14. FINANCIAL INSTRUMENTS (Continued)
Derivatives Held or Issued for Purposes Other Than Trading
The Corporation manages its exposure to fluctuations in interest rates by
limiting the amount of fixed rate assets funded with variable rate debt by
selling fixed rate retail receivables on a fixed rate basis and, to a lesser
extent, by utilizing derivative financial instruments. These derivative
financial instruments may include interest rate swaps, interest rate caps and
forward interest rate contracts. The Corporation manages exposure to
counter-party credit risk by entering into derivative financial instruments with
major financial institutions that can be expected to fully perform under the
terms of such agreements. Notional amounts are used to measure the volume of
derivative financial instruments and do not represent exposure to credit loss.
The Corporation enters into forward interest rate contracts to manage its
exposure to fluctuations in the fair value of the retail notes anticipated to be
sold. The Corporation manages interest rate risk by entering into forward
contracts to sell fixed debt securities or forward interest rate swaps whose
fair value is highly correlated with that of the Corporation's receivables.
Gains or losses incurred with the closing of these agreements are included as a
component of the gain or loss on sale of receivables.
During the second half of fiscal 1997 the Corporation entered into $500 of
interest rate hedge agreements in anticipation of the November 1997 sale of
retail receivables. These hedge agreements, which were closed in conjunction
with the pricing of the sale, resulted in an immaterial loss which was deferred
and included in the gain on the sale of retail receivables recognized in
November 1997.
15. LEGAL PROCEEDINGS
The Corporation is subject to various claims arising in the ordinary course
of business, and are parties to various legal proceedings which constitute
ordinary routine litigation incidental to the business of the Corporation. 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
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MILLIONS OF DOLLARS
16. SUBSEQUENT EVENT
In November 1997, the Corporation sold $500 of retail notes, net of
unearned finance income, through NFRRC to an owner trust which, in turn, sold
notes to investors. A gain of $7.2 was recognized on the sale.
17. QUARTERLY FINANCIAL INFORMATION (unaudited)
<TABLE>
<CAPTION>
1997
----------------------------------------------
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues........................ $58.1 $57.3 $62.5 $57.0 $234.9
Interest expense................ 14.3 17.2 16.7 17.7 65.9
Provision for loss
on receivables.............. 0.7 0.5 0.3 1.0 2.5
Net income...................... 13.4 9.3 13.4 9.6 45.7
</TABLE>
<TABLE>
<CAPTION>
1996
----------------------------------------------
1st 2nd 3rd 4th Fiscal
Quarter Quarter Quarter Quarter Year
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues......................... $68.7 $60.7 $67.0 $56.4 $252.8
Interest expense................. 17.1 19.7 18.8 17.6 73.2
Provision for loss
on receivables............... 1.1 1.6 1.7 4.9 9.3
Net income....................... 16.6 8.7 15.6 8.5 49.4
</TABLE>
<PAGE>
- -------------------------------------------------------------------------------
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 protection
of assets from unauthorized use and the execution and recording of transactions
in accordance with management's authorization. The system of internal controls
which provides for appropriate division of responsibility is supported by
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 connection 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 circumstances to respond appropriately to the
recommendations presented. Management believes that the Corporation's system of
internal controls accomplishes the objectives set forth in the first sentence of
this paragraph.
John J. Bongiorno
President and Chief Executive Officer
Phyllis E. Cochran
Vice President and Controller
<PAGE>
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, 1997 and 1996 and the results of
their operations and their cash flow for each of the three years in the period
ended October 31, 1997 in conformity with generally accepted accounting
principles.
/s/DELOITTE & TOUCHE LLP
Deloitte & Touche LLP
December 15, 1997
Chicago, Illinois
<PAGE>
SUPPLEMENTARY FINANCIAL DATA
Five Year Summary of Financial and Operating Data
Dollar amounts in millions
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Results of Operations:
Revenues.................$ 234.9 $ 252.8 $ 228.2 $ 210.8 $ 231.9
Net income ............... 45.7 49.4 36.2 34.0 22.5
Dividends paid ........... 40.0 26.0 9.0 25.6 22.6
Percent of net income to
average shareowner's
equity................. 16.1% 18.1% 15.0% 15.1% 10.3%
Financial Data:
Finance receivables, net.$1,211.2 $1,193.6 $1,370.9 $1,094.0 $1,270.2
Total assets ............ 1,810.6 1,793.8 1,874.7 1,534.8 1,625.2
Total debt .............. 1,223.7 1,305.8 1,330.3 1,091.5 1,199.2
Shareowner's equity ..... 287.8 279.7 256.7 225.6 219.4
Debt to equity ratio ..... 4.3:1 4.7:1 5.2:1 4.8:1 5.5:1
Senior debt to capital
funds ratio........... 2.1:1 3.2:1 3.4:1 3.0:1 3.4:1
Number of employees at
October 31............... 358 352 360 353 339
</TABLE>
<PAGE>
SUPPLEMENTARY FINANCIAL DATA (Continued)
Gross Finance Receivables and Leases Acquired
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ Millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Wholesale notes............$2,772.8 $2,705.8 $2,979.4 $2,306.6 $1,977.6
Retail notes and leases:
New...................... 976.2 1,064.1 1,075.0 861.9 730.0
Used .................... 270.3 281.7 242.3 217.2 168.4
Total................. 1,246.5 1,345.8 1,317.3 1,079.1 898.4
Total ................$4,019.3 $4,051.6 $4,296.7 $3,385.7 $2,876.0
</TABLE>
Serviced (including sold notes) Retail Notes and
Leases With Installments Past Due Over 60 Days
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
At October 31 ($ Millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Original amount of notes
and leases...................... $ 31.8 $ 14.0 $ 4.2 $ 3.1 $ 3.6
Balance of notes and leases......... 16.2 8.0 2.2 1.3 1.3
Balance as a percent of
total outstanding............... 0.64% 0.32% 0.10% 0.07% 0.09%
</TABLE>
Retail Note and Lease Repossessions (including sold notes)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Retail note and lease repossessions
acquired as a percentage
of average serviced retail
note and lease balances.............. 2.69% 3.08% 0.92% 0.93% 1.94%
</TABLE>
<PAGE>
SUPPLEMENTARY FINANCIAL DATA (Continued)
Credit Loss Experience on Serviced (including sold notes) Receivables
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
($ Millions) 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net losses (recoveries):
Retail notes and leases ............ $2.2 $5.1 $ .3 $ .6 $(.1)
Wholesale notes .................... (.2) (.2) (.9) .1 .8
Accounts - - (.2) .2 -
Total .......................... $2.0 $4.9 $(.8) $ .9 $ .7
Percent net losses (recoveries) to liquidations:
Retail notes and leases ............ .18% .48% .03% .07% (.01)%
Wholesale notes .................... (.01) (.01) (.03) .01 .04
Total .......................... .05% .13% (.02)% .03% .03%
Percent net losses (recoveries) to related average gross receivables
outstanding:
Retail notes and leases ............ .09% .22% .02% .04% -
Wholesale notes .................... (.02) (.02) (.13) .03 .16
Accounts - - (.05) .08 -
Total .......................... .06% .14% (.03)% .04% .03%
</TABLE>
<PAGE>
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
See Index to Exhibits.
Reports on Form 8-K
No reports on Form 8-K were filed for the three months ended October
31, 1997.
<PAGE>
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 December 22, 1997
Phyllis E. Cochran
Vice President and Controller
(Principal Accounting Officer)
<PAGE>
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 execute,
deliver and file, for and on such person's behalf, and in such person's name and
capacity or capacities as stated below, any amendment, exhibit or supplement to
the Form 10-K Report making such changes in the report as such attorney-in-fact
deems appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S><C> <C> <C>
/s/JOHN J. BONGIORNO President and Chief Executive December 22, 1997
John J. Bongiorno Officer; Director
(Principal Executive Officer)
/s/R. WAYNE CAIN Vice President and Treasurer; December 22, 1997
R. Wayne Cain Director
(Principal Financial Officer)
/s/PHYLLIS E. COCHRAN Vice President and Controller; December 22, 1997
Phyllis E. Cochran Director
(Principal Accounting Officer)
/s/JORDAN H. FEIGER Vice President, Operations; December 22, 1997
Jordan H. Feiger Director
/s/JOHN R. HORNE Director December 22, 1997
John R. Horne
/s/THOMAS M. HOUGH Director December 22, 1997
Thomas M. Hough
</TABLE>
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
SIGNATURES (Continued)
<TABLE>
<CAPTION>
Signature Title Date
<S><C> <C> <C>
/s/ROBERT C. LANNERT Director December 22, 1997
Robert C. Lannert
/s/J. STEVEN KEATE Director December 22, 1997
J. Steven Keate
/s/THOMAS D. SILVER Director December 22, 1997
Thomas D. Silver
</TABLE>
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
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.
4.1 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.
4.2 Indenture dated as of May 30, 1997 by and between the Corporation and The
Fuji Bank and Trust Company, as Trustee, for 9% Senior Subordinated Notes
due 2002 for $100,000,000. Filed on Registration No. 333-30167.
10.1 Pooling and Servicing Agreement dated as of December 1, 1990, among
Navistar Financial Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, and The Chase Manhattan Bank (survivor
in the merger between The Chase Manhattan Bank and Chemical Bank which
was the survivor in the merger between Chemical Bank 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 Master Inter-company 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.
10.4 Inter-company 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.
10.5 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.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.6 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.
10.7 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.
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.
10.9 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.
10.10 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.
10.11 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.
10.12 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.
10.13 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.
10.14 Liquidity Agreement dated as of November 7, 1994, among NFC Asset Trust,
as Borrower, hemical 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.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.15 Appendix A to Liquidity Agreement at Exhibit 10.20. Filed on Form 8-K
dated November 4, 1994. Commission File No. 1-4146-1.
10.16 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.
10.17 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.
10.18 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.
10.19 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.
10.20 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.
10.21 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.
10.22 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.
10.23 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.
10.24 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.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.25 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.
10.26 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.
10.27 Indenture dated as of December 15, 1994, between Navista 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.
10.28 Purchase Agreement dated as of May 25, 1995, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1995-A Owner Trust. Filed on Registration
No. 33-55865.
10.29 Pooling and Servicing Agreement dated as of May 25, 1995, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1995-A Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.30 Trust Agreement dated as of May 25, 1995, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1995-A Owner Trust.
Filed on Registration No. 33-55865.
10.31 Indenture dated as of May 25, 1995, between Navistar Financial 1995-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1995-A Owner Trust. Filed on Registration No.
33-55865.
10.32 Pooling and Servicing Agreement dated as of June 8, 1995, among Navistar
Financial Corporation, as Servicer, Navistar Financial Securities
Corporation, as Seller, The Chase Manhattan Bank (survivor in the merger
between The Chase Manhattan Bank and Chemical Bank which was the survivor
in the merger between Chemical Bank and Manufacturers Hanover Trust
Company), as 1990 Trust Trustee, and The Bank of New York, as Master
Trust Trustee. Filed on Registration No. 33-87374.
10.33 Series 1995-1 Supplement to the Pooling and Servicing Agreement dated as
of June 8, 1995, among the Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, and The Bank of New York, as Master
Trust Trustee on behalf of the Series 1995-1 Certificateholders. Filed on
Registration No. 33-87374.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.34 Class A-4 Supplement to the 1990 Pooling and Servicing Agreement dated
June 8, 1995, among the Corporation, as Servicer, Navistar Financial
Securities Corporation, as Seller, and Chemical Bank (Successor to
Manufacturers Hanover Trust Company), as Trustee. Filed on Registration
No. 33-87374.
10.35 Purchase Agreement dated as of June 8, 1995, between the Corporation and
Navistar Financial Securities Corporation, as Purchaser, with respect to
the Dealer Note Master Trust. Filed on Registration No. 33-87374.
10.36 Purchase Agreement dated as of November 1, 1995, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1995-B Owner Trust. Filed on Registration
No. 33-55865.
10.37 Pooling and Servicing Agreement dated as of November 1, 1995, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1995-B Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.38 Trust Agreement dated as of November 1, 1995, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1995-B Owner Trust.
Filed on Registration No. 33-55865.
10.39 Indenture dated as of November 1, 1995, between Navistar Financial 1995-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1995-B Owner Trust. Filed on Registration No.
33-55865.
10.40 Amendment No. 1 dated as of March 29, 1996, to the Loan and Security
Agreement dated as of November 7, 1994, between Truck Retail Instalment
Paper Corp. ("TRIP") and NFC Asset Trust (the "Trust") filed on Form 8-K
dated June 5, 1996. Commission File No. 1-4146-1.
10.41 Amendment No. 1 and Consent dated as of March 29, 1996, to the Liquidity
Agreement dated as of November 7, 1994, among NFC Asset Trust, certain
lenders, and Chemical Bank, as Administrative Agent for the lenders filed
on Form 8-K dated June 5, 1996. Commission File No. 1-4146-1.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.42 Amendment No. 2 dated as of March 29, 1996, to the Amended and Restated
Credit Agreement dated as of November 4, 1994, as amended by Amendment
No. 1 dated as of December 15, 1995, 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 June 5, 1996.
Commission File No. 1-4146-1.
10.43 Purchase Agreement dated as of May 30, 1996, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1996-A Owner Trust. Filed on Registration
No. 33-55865.
10.44 Pooling and Servicing Agreement dated as of May 30, 1996, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1996-A Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.45 Trust Agreement dated as of May 30, 1996, between Navistar Financial
Retail Receivables Corporation, s Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1996-A Owner Trust.
Filed on Registration No. 33-55865.
10.46 Indenture dated as of May 30, 1996, between Navistar Financial 1996-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1996-A Owner Trust. Filed on Registration No.
33-55865.
10.47 Purchase Agreement dated as of November 6, 1996, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1996-B Owner Trust. Filed on Registration
No. 33-55865.
10.48 Pooling and Servicing Agreement dated as of November 6, 1996, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1996-B Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.49 Trust Agreement dated as of November 6, 1996, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chemical Bank Delaware, as
Owner Trustee, with respect to Navistar Financial 1996-B Owner Trust.
Filed on Registration No. 33-55865.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.50 Indenture dated as of November 6, 1996, between Navistar Financial 1996-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1996-B Owner Trust. Filed on Registration No.
33-55865.
10.51 Purchase Agreement dated as of May 7, 1997, between the Corporation and
Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1997-A Owner Trust, as Issuer. Filed on
Registration No. 33-55865.
10.52 Pooling and Servicing Agreement dated as of May 7, 1997, among the
Corporation, as Servicer, Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1997-A Owner Trust, as
Issuer. Filed on Registration No. 33-55865.
10.53 Trust Agreement dated as of May 7, 1997, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chase Manhattan Bank
Delaware, as Owner Trustee, with respect to Navistar Financial 1997-A
Owner Trust. Filed on Registration No. 33-55865.
10.54 Indenture dated as of May 7, 1997, between Navistar Financial 1997-A
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1997-A Owner Trust. Filed on Registration No.
33-55865.
10.55 Amendment No. 3 dated as of May 27, 1997, to the Amended and Restated
Credit Agreement dated as of November 4, 1994, as amended by Amendment
No. 1 dated as of December 15, 1995 and Amendment No. 2 dated as of March
29, 1996, 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 June 17, 1997. Commission File No.
1-4146-1.
10.56 Series 1997-1 Supplement to the Pooling and Servicing Agreement dated as
of August 19, 1997, among Navistar Financial Corporation, as Servicer,
Navistar Financial Securities Corporation, as Seller, and the Bank of New
York, as Master Trust Trustee on behalf of the Series 1997-1
Certificateholders. Filed on Registration No. 333-30737.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX TO EXHIBITS
10.57 Class A-5 Supplement to the 1990 Pooling and Servicing Agreement dated
August 19, 1997, among Navistar Financial Corporation, as Servicer,
Navistar Financial Securities Corporation, as Seller, and The Chase
Manhattan Bank (survivor in the merger between The Chase Manhattan Bank
and Chemical Bank which was the survivor in the merger between Chemical
Bank and Manufacturers Hanover Trust Company), as Trustee. Filed on
Registration No. 333-30737.
10.58 Purchase Agreement dated as of November 5, 1997, between the Corporation
and Navistar Financial Retail Receivables Corporation, as Purchaser, with
respect to Navistar Financial 1997-B Owner Trust, as Issuer. Filed on
Registration No. 33-64249.
10.59 Pooling and Servicing Agreement dated as of November 5, 1997, among the
Corporation, as Servicer, and Navistar Financial Retail Receivables
Corporation, as Seller, and Navistar Financial 1997-B Owner Trust, as
Issuer. Filed on Registration No. 33-64249.
10.60 Trust Agreement dated as of November 5, 1997, between Navistar Financial
Retail Receivables Corporation, as Seller, and Chase Manhattan Bank
Delaware, as Owner Trustee, with respect to Navistar Financial 1997-B
Owner Trust. Filed on Registration No. 33-64249.
10.61 Indenture dated as of November 5, 1997, between Navistar Financial 1997-B
Owner Trust and The Bank of New York, as Indenture Trustee, with respect
to Navistar Financial 1997-B Owner Trust. Filed on Registration No.
33-64249.
