NAVISTAR INTERNATIONAL TRANSPORTATION CORP, 10-Q, 1998-06-12

NAVISTAR INTERNATIONAL TRANSPORTATION CORP
10-Q, 1998-06-12
MOTOR VEHICLES & PASSENGER CAR BODIES

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<PAGE>

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 30, 1998

( ) 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 1-5236

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

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
--- ---

APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of June 10, 1998, the number of shares outstanding of the registrant's Common
Stock was 1,000.

THE REGISTRANT IS A WHOLLY OWNED SUBSIDIARY OF NAVISTAR INTERNATIONAL
CORPORATION AND MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTIONS H(1) (a)
AND (b) OF THE FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED
DISCLOSURE FORMAT.

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<PAGE>
NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
--------------------------

INDEX
---------
Page
Reference
---------
Part I. Financial Information:

Item 1. Financial Statements:

Statement of Income --
Three Months and Six Months
Ended April 30, 1998 and 1997....................... 3

Statement of Financial Condition --
April 30, 1998, October 31, 1997 and April 30, 1997... 4

Statement of Cash Flow --
Six Months Ended April 30, 1998 and 1997.............. 5

Notes to Financial Statements............................. 6

Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition............ 10

Part II. Other Information:

Item 1. Legal Proceedings............................... 16

Item 6. Exhibits and Reports on Form 8-K................ 16

Signature.................................................. 17

Exhibit 3....................................................... E-1
Exhibit 4....................................................... E-2
Exhibit 10...................................................... E-3

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<PAGE>

PART I - FINANCIAL INFORMATION
------------------------------

ITEM 1. Financial Statements
<TABLE>
<CAPTION>
STATEMENT OF INCOME (Unaudited)
---------------------------------------------------------------------------------------
Millions of dollars
---------------------------------------------------------------------------------------
Navistar International
Transportation Corp.
and Consolidated Subsidiaries
-------------------------------------------
Three Months Ended Six Months Ended
April 30 April 30
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales and revenues
Sales of manufactured products .......... $1,955 $1,493 $3,607 $2,733
Finance and insurance revenue ........... 47 43 92 88
Other income ............................ 6 7 12 11
------ ------ ------ ------
Total sales and revenues .............. 2,008 1,543 3,711 2,832
------ ------ ------ ------

Costs and expenses
Cost of products and services sold ...... 1,677 1,292 3,117 2,368
Postretirement benefits ................. 43 57 88 108
Engineering and research expense ........ 46 32 81 62
Marketing and administrative expense .... 95 87 191 170
Interest expense ........................ 43 41 82 79
Financing charges on sold receivables ... 7 5 15 12
Insurance claims and underwriting expense 9 9 18 17
------ ------ ------ ------
Total costs and expenses .............. 1,920 1,523 3,592 2,816
------ ------ ------ ------

Income before income taxes .......... 88 20 119 16
Income tax expense .................. 11 4 20 15
------ ------ ------ ------
Net income .............................. $ 77 $ 16 99 $ 1
====== ====== ====== ======
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>

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<PAGE>

<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION (Unaudited)
- ----------------------------------------------------------------------------------------
Millions of dollars
- ----------------------------------------------------------------------------------------
Navistar International Transportation Corp.
and Consolidated Subsidiaries
--------------------------------------------
April 30 October 31 April 30
1998 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
- -----------------------------------
Cash and cash equivalents ......... $ 106 $ 164 $ 40
Marketable securities ............. 127 127 132
------ ------ ------
233 291 172
Receivables, net .................. 2,026 1,827 1,614
Inventories ....................... 547 484 503
Property, net of accumulated
depreciation and amortization
of $890, $846, and $874.......... 824 752 748
Investments and other assets ...... 304 304 301
Intangible pension assets ......... 212 212 267
------ ------ ------
Total assets ...................... $4,146 $3,870 $3,605
====== ====== ======
LIABILITIES AND SHAREOWNER'S EQUITY
- -----------------------------------
Liabilities
Accounts payable, principally trade $1,129 $1,082 $ 907
Debt due Parent Company ........... 833 833 881
Debt:
Manufacturing operations ........ 61 92 109
Financial services operations ... 1,592 1,224 1,213
Postretirement benefits liability . 910 1,186 1,200
Other liabilities ................. 936 868 801
------ ------ ------
Total liabilities ............. 5,461 5,285 5,111
------ ------ ------

Commitments and contingencies

Shareowner's equity
Capital stock (1,000 shares issued) 786 786 786
Retained earnings (deficit) ....... (2,101) (2,201) (2,292)
------ ------ ------
Total shareowner's equity ..... (1,315) (1,415) (1,506)
------ ------ ------
Total liabilities $4,146 $3,870 $3,605
and shareowner's equity ......... ====== ====== ======

<FN>
See Notes to Financial Statements.
</FN>
</TABLE>

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<PAGE>

STATEMENT OF CASH FLOW (Unaudited)
--------------------------------------------------------------------------
For the Six Months Ended April 30 (Millions of dollars)
--------------------------------------------------------------------------
Navistar International
Transportation Corp. and
Consolidated Subsidiaries
-------------------------
1998 1997
------ ------
Cash flow from operations
Net income ..................................... $ 99 $ 1
Adjustments to reconcile net income
to cash used in operations:
Depreciation and amortization ................ 79 60
Postretirement benefits funding in excess
of expense ................................. (283) (145)
Other, net ................................... (18) (16)
Change in operating assets and liabilities:
Receivables .................................. (145) (69)
Inventories .................................. (62) (18)
Prepaid and other current assets ............. (10) (5)
Accounts payable ............................. 51 93
Other liabilities ............................ 76 18
------ ------
Cash used in operations ........................ (213) (81)
------ ------
Cash flow from investment programs
Purchase of retail notes and lease receivables . (576) (445)
Collections/sales of retail notes
and lease receivables ....................... 520 518
Purchase of marketable securities .............. (26) (53)
Sales or maturities of marketable securities ... 28 66
Capital expenditures ........................... (62) (58)
Property and equipment leased to others ........ (88) (16)
Other investment programs, net ................. 16 5
------ ------
Cash (used in) provided by investment programs . (188) 17
------ ------

Cash flow from financing activities
Issuance of debt ............................... 92 79
Principal payments on debt ..................... (61) (18)
Net increase (decrease) in notes and debt
outstanding under bank revolving credit
facility and asset-backed and other commercial
paper programs ............................... 312 (158)
Net decrease in loan from Navistar International
Corporation .................................. - (3)
------ ------
Cash provided by (used in) financing activities. 343 (100)
------ ------
Cash and cash equivalents
Decrease during the period ................... (58) (164)
At beginning of the year ..................... 164 204
------ ------
Cash and cash equivalents at end of the period . $ 106 $ 40
====== ======
See Notes to Financial Statements.

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<PAGE>

Navistar International Transportation Corp. and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note A. Summary of Accounting Policies

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 accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the 1997 Annual Report on Form
10-K and should be read in conjunction with the disclosures therein.

In the opinion of management, these interim financial statements reflect
all adjustments, consisting of normal recurring accruals, necessary to present
fairly the financial position, results of operations and cash flow for the
periods presented. Interim results are not necessarily indicative of results for
the full year. Certain 1997 amounts have been reclassified to conform with the
presentation used in the 1998 financial statements.

Note B. Supplemental Cash Flow Information

Consolidated interest payments during the first six months of 1998 and 1997
were $85 million and $79 million, respectively.

Note C. 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 (Tax Agreement) with the Parent Company, which requires
Transportation to compute its separate federal income tax expense based on its
adjusted book income. Any resulting tax liability is paid to the Parent Company.
In addition, under the Tax Agreement, Transportation is required to pay to the
Parent Company any tax payments received from its subsidiaries. The effect of
the Tax Agreement is to allow the Parent Company rather than Transportation to
utilize U.S. operating losses and loss carryforwards generated in earlier years.

Note D. Inventories

Inventories are as follows:

April 30 October 31 April 30
Millions of dollars 1998 1997 1997
- -------------------------------------------------------------------------------
Finished products........... $ 245 $ 222 $ 268
Work in process............. 141 105 101
Raw materials and supplies.. 161 157 134
-------- -------- --------
Total inventories........... $ 547 $ 484 $ 503
======== ======== ========

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<PAGE>

Navistar International Transportation Corp. and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note E. Financial Instruments

Transportation purchases collateralized mortgage obligations (CMOs)
that have predetermined fixed-principal payment patterns which are relatively
certain. These instruments totaled $36 million at April 30, 1998. At April 30,
the unrecognized gain on the CMOs was not material.

In June 1998, Navistar Financial Corporation, (NFC) sold $501 million of
retail notes, net of unearned finance income, recognizing a gain of $8 million
on the sale. The proceeds of $482 million, net of underwriting fees and credit
enhancements, were used by NFC for general working capital purposes.

NFC entered into $400 million of forward treasury locks in anticipation
of a June 1998 sale of retail receivables. These hedge agreements were closed in
conjunction with the pricing of the sale and resulted in an immaterial gain.

NFC also entered into a $100 million forward treasury lock in
anticipation of a November 1998 sale of retail receivables. This hedge agreement
will be closed in conjunction with the pricing of the sale and any resulting
gain or loss will be included in the gain or loss on the sale of receivables
recognized in November 1998.

Note F. New Accounting Pronouncements

In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement revises
standards for disclosures about pension and other postretirement benefit plans
and is effective for fiscal years beginning after December 15, 1997. This
standard expands or modifies disclosure and, accordingly will have no impact on
Transportation's reported financial position, results of operations and cash
flows.

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement defines whether
or not certain costs related to the development or acquisition of internal use
software should be expensed or capitalized and is effective for fiscal years
beginning after December 15, 1998. Transportation is currently assessing the
impact of this statement on its results of operations and financial position.

Note G. Debt and Equity Offerings

On February 4, 1998 Navistar issued $100 million 7% Senior Notes due 2003
and $250 million 8% Senior Subordinated Notes due 2008. The proceeds of the
Senior Notes were used to prepay an 8% Secured Note due 2002 and will be used to
redeem the 9% Sinking Fund Debentures on June 15, 1998. (The company called the
9% Sinking Fund Debentures during May 1998). The proceeds of the Senior

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<PAGE>

Navistar International Transportation Corp. and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note G. Debt and Equity Offerings (continued)

Subordinated Notes were used to redeem the Parent Company's $240 million, $6.00
Series G Convertible Cumulative Preferred Stock and to pay accumulated and
unpaid dividends thereon. Excess proceeds from both debt issues will be used for
general working capital purposes.

On June 8, 1998, a secondary public offering of the common stock of the
Parent Company was completed, in which the Navistar International Transportation
Corp. Retiree Supplemental Benefit Trust sold approximately 19.9 million shares
of common stock at an offering price of $26.50 per share. In conjunction with
this offering, the company and certain of the company's pension plans purchased
2 million and 3 million, respectively, of the shares being offered. Navistar has
also granted the underwriters an option to purchase up to an additional 1.3
million shares to cover over-allotments, if any. The company did not receive any
proceeds from the sale of the shares in the offering but will pay expenses
related to this offering estimated at $14 million, which will be expensed in the
third quarter of 1998.

Note H. Supplemental Financial Information

Navistar International Transportation Corp. (with financial services operations
operations on an equity basis) in millions of dollars:

<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30 April 30
-------------------- --------------------
Condensed Statement of Income 1998 1997 1998 1997
- ---------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales of manufactured products...... $ 1,955 $ 1,493 $ 3,607 $ 2,733
Other income........................ 5 7 10 9
-------- -------- -------- --------
Total sales and revenues............ 1,960 1,500 3,617 2,742
-------- -------- -------- --------

Cost of products sold............... 1,670 1,287 3,104 2,358
Postretirement benefits............. 43 57 88 108
Engineering and research expense.... 46 32 81 62
Marketing and administrative expense 86 79 173 154
Other expenses...................... 46 41 94 83
-------- -------- -------- --------
Total costs and expenses............ 1,891 1,496 3,540 2,765
-------- -------- -------- --------

Income before income taxes
Manufacturing operations.......... 69 4 77 (23)
Financial services operations..... 19 16 42 39
-------- -------- -------- --------
Income before income taxes...... 88 20 119 16
Income tax expense.............. 11 4 20 15
-------- -------- -------- --------
Net income.......................... $ 77 $ 16 $ 99 $ 1
======== ======== ======== ========
</TABLE>

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<PAGE>

Navistar International Transportation Corp. and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note H. Supplemental Financial Information (continued)

Navistar International Transportation Corp. (with financial services operations
on an equity basis) in millions of dollars:

<TABLE>
<CAPTION>
April 30 October 31 April 30
1998 1997 1998
-------- ---------- --------
<S> <C> <C> <C>
Condensed Statement of Financial Condition
- ------------------------------------------
Cash, cash equivalents
and marketable securities............... $ 39 $ 128 $ 12
Inventories............................... 533 471 473
Property and equipment, net............... 620 623 637
Equity in nonconsolidated subsidiaries.... 323 322 306
Other assets.............................. 868 921 775
-------- -------- --------
Total assets.............................. $ 2,383 $ 2,465 $ 2,203
======== ======== ========

Accounts payable, principally trade....... $ 1,095 $ 1,042 $ 862
Postretirement benefits liabilities....... 902 1,178 1,192
Other liabilities......................... 1,701 1,660 1,655
Shareowner's equity....................... (1,315) (1,415) (1,506)
-------- -------- --------
Total liabilities
and shareowner's equity........... $ 2,383 $ 2,465 $ 2,203
======== ======== ========
</TABLE>

Six Months Ended
April 30
-----------------------
Condensed Statement of Cash Flow 1998 1997
- ----------------------------------------------- -------- --------
Cash flow from operations
Net income..................................... $ 99 $ 1
Adjustments to reconcile net income
to cash used in operations:
Depreciation and amortization............. 64 49
Postretirement benefits funding
in excess of expense.................... (283) (145)
Other, net................................ (10) -
Change in operating assets and liabilities 127 94
-------- -------
Cash used in operations........................ (3) (1)
-------- -------

Cash flow from investment programs
Sales or maturities of marketable securities... - 5
Capital expenditures........................... (62) (58)
Receivable from Navistar Financial Corporation. (8) (98)
Other investment programs, net ................ 16 4
-------- --------
Cash used in investment programs............... (54) (147)
-------- -------

Cash flow from financing activities............ (32) (10)
-------- --------

Cash and cash equivalents
Decrease during the period..................... (89) (158)
At beginning of the year....................... 128 170
-------- --------
Cash and cash equivalents at end of the period. $ 39 $ 12
======== ========

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<PAGE>

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION

RESULTS OF OPERATIONS

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 heading "Business Environment."

Second Quarter Ended April 30, 1998

Transportation reported net income of $77 million for the second quarter
ended April 30, 1998, compared with net income of $16 million for the comparable
quarter last year.

Transportation's manufacturing operations reported income before income
taxes of $69 million compared with pretax income of $4 million in the second
quarter of 1997 reflecting an increase in the demand for trucks and engines. The
financial services operations' pretax income for the second quarter of 1998 was
$19 million compared with $16 million in the prior year reflecting increased
finance receivable balances.

Sales and Revenues. Second quarter 1998 industry retail sales of Class 5 through
8 trucks totaled 96,600 units, which is 10% higher than the 87,500 units sold
during this period in 1997. Class 8 heavy truck sales of 56,500 units during the
second quarter of 1998 were 15% higher than the 1997 level of 49,000 units.
Industry sales of Class 5, 6 and 7 medium trucks, including school buses,
increased 4% to 40,100 units. Industry sales of school buses, which accounted
for 18% of the medium truck market, increased 2%.

Sales and revenues for the second quarter of 1998 totaled $2,008 million,
30% higher than the $1,543 million reported for the comparable quarter in 1997.
Sales of trucks, mid-range diesel engines and service parts for the second
quarter of 1998 totaled $1,955 million compared with $1,493 million reported for
the same period in 1997.

The company maintained its position as sales leader in the combined
United States and Canadian Class 5 through 8 truck market with a 29.6% market
share for the second quarter of 1998, an increase from the 26.9% market share
reported in 1997. (Sources: American Automobile Manufacturers Association,
Canadian Vehicle Manufacturers Association, and R.L. Polk & Company.)

Shipments of mid-range diesel engines by the company to other original
equipment manufacturers during the second quarter of 1998 totaled 56,000 units,
a 16% increase from the same period of 1997. Higher shipments to Ford Motor
Company to meet consumer demand for the light trucks and vans which use this
engine were the primary reason for the increase.

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<PAGE>

Service parts sales of $217 million in the second quarter of 1998
increased 7% from the prior year's level.

Finance and insurance revenue of $47 million in the second quarter of 1998
increased 9% from 1997, primarily as a result of increased retail notes and
lease financing receivables.

Costs and expenses. Manufacturing gross margin was 14.6% of sales for the
second quarter of 1998 compared with 13.8% for the same period in 1997.

Consolidated marketing and administrative expense increased to $95
million in 1998 from $87 million in the second quarter of 1997 reflecting
investment in the implementation of the company's truck strategy to reduce costs
and complexity in its manufacturing processes and an increase in the provision
for payment to employees as provided by the company's performance incentive
programs.

Postretirement benefits expense decreased to $43 million in 1998 from $57
million in the second quarter of 1997 mainly as a result of higher excepted
return on plan assets.

Engineering and research expense increased $14 million from the second
quarter of 1997 to $46 million, reflecting the company's investment in its NGV
program.

Six Months Ended April 30, 1998
-------------------------------

Pretax income for the first six months of 1998 was $119 million compared
with $16 million reported for the same period of 1997. The company's
manufacturing operations reported income before income taxes of $77 million
during this period, compared with a pretax loss of $23 million reported in 1997.
The financial services operations' pretax income for the first six months of
1998 was $42 million, an increase from the $39 million reported in 1997. This
change is primarily a result of an increase in finance receivable balances.

Manufacturing operations' sales and revenues during this period totaled
$3,617 million, an increase of 32% from 1997. During the first six months of
1998, sales of trucks increased 42% while sales of diesel engines to original
equipment manufacturers increased 16%. Service parts sales were 3% higher than
in the same period of 1997. Finance and insurance revenue was $92 million during
the first two quarters of 1998 compared with $88 million in 1997.

Industry retail sales of Class 5 through 8 trucks during the first six
months of 1998 totaled 182,200 units, an increase from the 159,600 units sold
during this period in 1997. The company remained the sales leader in the
combined United States and Canadian Class 5 through 8 truck market for the first
two quarters of the year with a 29.4% market share, an increase over the 26.7%
market share reported for the same period last year.

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<PAGE>

Manufacturing gross margin for the first six months of 1998 was 13.9%
compared with 13.7% in 1997. Consolidated marketing and administrative expense
was $191 million during this period compared with $170 million during the first
two quarters of 1997. The factors which influenced marketing and administrative
expense, postretirement benefits expense and engineering and research expense
during the second quarter of 1998 were also primarily responsible for the
changes during the first half of the year.

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 the company'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 sales of finance receivables the
most economic source of funding. Insurance operations are funded through
internal operations.

Total cash, cash equivalents and marketable securities of Transportation
amounted to $233 million at April 30, 1998, $291 million at October 31, 1997 and
$172 million at April 30, 1997.

Cash used in operations during the first six months of 1998 totaled $213
million primarily from excess postretirement benefits funding of $283 million
and from a net change in operating assets and liabilities of $90 million offset
by net income of $99 million and $61 million of other noncash items, principally
depreciation. In addition to regular postretirement benefit payments, the
company contributed $200 million to the Retiree Health Care Base Plan Trust and
$100 million to the hourly pension plan during the first six months of 1998. The
net change in operating assets and liabilities included a $145 million increase
in receivables primarily due to strong sales during the first six months of
1998. The $62 million increase in inventory, the $76 million increase in other
liabilities and the $51 million increase in accounts payable were primarily due
to timing of cash payments and higher production volume.

Investment programs used $188 million in cash reflecting a net increase
in retail notes and lease receivables of $56 million and $88 million for
property and equipment leased to others. In addition, $62 million was used to
fund capital expenditures to increase mid-range diesel engine capacity and for
truck product improvements.

Financing activities provided $343 million in cash primarily due to an
increase of $312 million in notes and debt outstanding under the bank revolving
credit facility and other commercial paper program as well as a $31 million net
increase in debt.

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<PAGE>

During May 1998, the company called its 9% Sinking Fund Debentures due June
2004. These debentures will be redeemed on June 15, 1998 for approximately $47
million including accrued interest.

Receivable sales were a significant source of funding in 1998 and 1997.
During the first six months of 1998 and of 1997, NFC sold $500 million and $486
million, respectively, of retail notes through Navistar Financial Retail
Receivables Corporation (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 April 30, 1998, the remaining
shelf registration available to NFRRC was $973 million.

At April 30, 1998, available funding under NFC's amended and restated
credit facility and the asset-backed commercial paper facility was $242 million,
of which $138 million was used to back short-term debt at April 30, 1998. The
remaining $104 million, when combined with unrestricted cash and cash
equivalents made $143 million available to fund the general business purposes of
NFC at April 30, 1998.

Transportation purchases collateralized mortgage obligations (CMOs) that
have predetermined fixed-principal payment patterns which are relatively
certain. These instruments totaled $36 million at April 30, 1998. At April 30,
the unrecognized gain on the CMOs was not material.

In June 1998, NFC sold $501 million of retail notes, net of unearned
finance income, recognizing a gain of $8 million on the sale. The proceeds of
$482 million, net of underwriting fees and credit enhancements, were used by NFC
for general working capital purposes.

- 13 -

<PAGE>

The company had outstanding capital commitments of $107 million at April
30, 1998, primarily for increased manufacturing capacity at the Indianapolis
engine plant and improvements to existing facilities and products.

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 Transportation's dealers and
customers.

Year 2000

Transportation has identified all significant applications that will
require modification to ensure Year 2000 compliance. Internal and external
resources are being used to make the required modifications and test Year 2000
compliance. Transportation plans to complete the modifications and testing
process of all significant applications by July 1999, which is prior to any
anticipated impact on its operating systems. The total cost of the Year 2000
project has not been and is not anticipated to be material to Transportation's
financial position or results of operations and will be funded through operating
cash flows.

The costs of the project and the date on which Transportation believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.

In addition, Transportation has communicated with others with whom it
does significant business to determine their Year 2000 compliance readiness and
the extent to which the company is vulnerable to any third party Year 2000
issues. However, there can be no guarantee that the systems or products of other
companies, including Transportation's dealers, on which Transportation relies
will be timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with Transportation's systems, would not have a
material adverse affect on Transportation.

Impact of Government Regulation

For model year 1998, the U.S. EPA has issued conditional certification of
conformance for electronically-controlled diesel engines while it investigates
whether these engines fully comply with regulations concerning nitrogen oxide
emissions. In particular, the U.S. EPA is focusing on whether certain
electronics strategies used to attain fuel economy have an adverse impact on
nitrogen oxide emissions. In connection with its investigation the U.S. EPA has
made demand upon Transportation that it enter into a consent decree providing,
among other things, for the payment of fines in excess of $100,000 for alleged
violations of U.S. EPA emissions standards. Transportation believes the diesel
engines manufactured by it are in compliance with all applicable U.S. EPA
standards and is engaged in confidential discussions with the U.S. EPA in an
effort to resolve this issue. It is premature at this time to predict the final
results of these discussions.

- 14 -

<PAGE>

New Pronouncements

In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This statement defines which
costs related to the development or acquisition of internal use software should
be expensed or capitalized and is effective for fiscal years beginning after
December 15, 1998. Transportation is currently assessing the impact of this
statement on its results of operations and financial position.

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 the second quarter of 1998. An improvement in the
number of new truck orders has increased Transportation's order backlog to
65,400 units at April 30, 1998 from 34,900 units at April 30, 1997. Retail
deliveries in 1998 continue to be highly dependent on the rate at which new
truck orders are received. Transportation will evaluate order receipts and
backlog throughout the year and will balance production with demand as
appropriate.

A stronger than expected economy has led Transportation to increase its
estimates of demand. Transportation currently projects 1998 United States and
Canadian Class 8 heavy truck demand to be 230,000 units, a 17% increase from
1997. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast
at 127,000 units, an 8% increase from 1997. Demand for school buses is expected
to decline slightly in 1998 to 32,000 units. Mid-range diesel engine shipments
by the company to original equipment manufacturers in 1998 are expected to be
215,500 units, 17% higher than in 1997. Transportation's service parts sales are
projected to grow 9% to $875 million.

At the currently forecasted 1998 demand of 389,000 units, the entire
truck industry is operating at or near capacity while Transportation's
manufacturing facilities are near capacity. Additionally, constraints have been
placed on Transportation's ability to meet certain customers' demands because of
component parts availability.

During March 1998, Transportation announced that it has been selected to
negotiate an extended term agreement to supply diesel engines for select Ford
Motor Company under 8,500 lbs. GVW light duty trucks and sport utility vehicles.

- 15 -

<PAGE>

Navistar International Transportation Corp. and Consolidated Subsidiaries

PART II - OTHER INFORMATION
---------------------------

Item 1. Legal Proceedings

Incorporated herein by reference from Item 3 - "Legal Proceedings"
in Transportation's definitive Form 10-K dated December 22, 1997,
Commission File No. 1-5236.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:
10-Q Page
---------

3. Articles of Incorporation and By-Laws E-1
4. Instruments Defining Rights of Security
Holders, Including Indentures E-2
10. Material Contracts E-3

(b) Reports on Form 8-K:

No reports on Form 8-K were filed for the three months
ended April 30, 1998.

- 16 -

<PAGE>

SIGNATURE
-----------------

Pursuant to the requirements 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
Vice President and Controller
(Principal Accounting Officer)

June 12, 1998

- 17 -

<PAGE>

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>

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 Transportation 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>

EXHIBIT 10

NAVISTAR INTERNATIONAL TRANSPORTATION CORP.
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
MATERIAL CONTRACTS

The following documents of Navistar International Transportation Corp. are
included herein.

Form 10-Q Page
--------------

10.18 Navistar International Corporation E-4
1998 Interim Stock Plan

E-3

<PAGE>

EXHIBIT 10.18

NAVISTAR INTERNATIONAL CORPORATION
1998 INTERIM STOCK PLAN

SECTION I
PURPOSE OF THE PLAN

The purpose of this Navistar International Corporation 1998 Interim
Stock Plan ("Plan") is to provide an additional plan for the issuance of stock
options and restricted stock for shares of the common stock of Navistar
International Corporation to employees of Navistar International Corporation and
its subsidiaries ("Corporation") to attract and retain highly qualified
personnel, to provide key employees who hold positions of major responsibility
the opportunity to earn incentive awards commensurate with the quality of
individual performance, the achievement of performance goals and ultimately the
increase in shareowner value. This 1998 Plan is separate from and intended to
supplement the Navistar 1994 Performance Incentive Plan ("1994 Plan").

SECTION II
DEFINITIONS

The terms used in this Plan are defined as specified in the 1994 Plan
unless the context indicates to the contrary.

SECTION III
ELIGIBILITY

Management will, from time to time, select and recommend to the Committee
on Organization of the Board of Directors of Navistar International Corporation
("Committee") Employees who are to become Participants in the Plan. However, no
executive officer of the Corporation shall participate in this Plan, except that
options or restricted stock may be issued to a person not previously employed by
the Corporation as an inducement essential to his entering into an employment
contract as an executive officer of the Corporation. Employees will be selected
from those who, in the opinion of management, have substantial responsibility in
a managerial or professional capacity. Employees selected for participation in
the Plan may also be participants in the 1994 Plan, and participation in this
Plan will not be considered participation in a plan that would affect their
participation in the 1994 Plan.

E-4

<PAGE>

SECTION IV
STOCK OPTIONS

The Committee may grant Nonqualified Stock Options to Participants in the
amount and at the time that the Committee approves. No Incentive Stock Options
shall be granted. Options shall be granted under the same terms and conditions
as options granted under the 1994 Plan, but subject to the limitation on the
number of shares contained in this Plan.

SECTION V
RESTRICTED SHARES

The Committee may award restricted shares for the purposes and under the
same terms and conditions as specified in Sections VI and VIII, and the other
provisions of the 1994 Plan, but subject to the limitations on the number of
shares contained in this Plan.

SECTION VI
ADMINISTRATION OF THE PLAN

Full power and authority to construe, interpret and administer the Plan is
vested in the Committee. Decisions of the Committee will be final, conclusive
and binding upon all parties, including the Corporation, shareowners and
employees. The foregoing will include, but will not be limited to, all
determinations by the Committee as to (i) the approval of Employees for
participation in the Plan, (ii) the amount of the Awards, (iii) the performance
levels at which different percentages of the Awards would be earned and all
subsequent adjustments to such levels and (iv) the determination of all Awards.
Any person who accepts any Award hereunder agrees to accept as final, conclusive
and binding all determinations of the Committee. The Committee will have the
right, in the case of employees not employed in the United States, to vary from
the provision of the Plan to the extent the Committee deems appropriate in order
to preserve the incentive features of the Plan.

SECTION VII
MODIFICATION, AMENDMENT OR TERMINATION

The Committee may modify without the consent of the Participant (i) the
Plan, (ii) the terms of any option previously granted or (iii) the terms of
Restricted Shares previously awarded at any time, provided that, no such
modification will, without the approval of the Board of Directors of the
Corporation, increase the number of shares of Common Stock available hereunder.
The Committee may terminate the Plan at any time.

E-5

<PAGE>

SECTION VIII
RESERVATION OF SHARES

The total number of shares of stock reserved and available for delivery
pursuant to this Plan is 500,000 shares of common stock of Navistar
International Corporation.

SECTION IX
TERM OF THE PLAN

The Plan shall be effective on the date of adoption by the Board of
Directors and continue for a term of one year thereafter. Provided that, the
Committee shall annually review the need for the continuation of the Plan and
may amend or terminate the plan as provided herein.

SECTION X
GOVERNING LAW

The Plan will be governed by and interpreted pursuant to the laws of the
State of Delaware, the place of incorporation of the Corporation.

E-6

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</TABLE>