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, 1997
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission File Number 1-4146-1
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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
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 May 31, 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 INSTRUCTIONS H(1)(a) AND (b) OF FORM 10-Q AND
IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE
FORMAT.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Statement of Consolidated Income and Retained Earnings--
Three Months and Six Months Ended April 30, 1997 and 1996 2
Statement of Consolidated Financial Condition --
April 30, 1997; October 31, 1996; and April 30, 1996 3
Statement of Consolidated Cash Flow --
Six Months Ended April 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition 9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 14
Signature 14
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS (Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30 April 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Revenue
Retail notes and lease financing . . . . . $ 26.2 $ 20.9 $ 51.9 $ 48.1
Wholesale notes . . . . . . . . . . . . . . 9.3 15.3 18.5 31.4
Accounts . . . . . . . . . . . . . . . . . 7.1 6.0 14.3 12.8
Servicing fee income . . . . . . . . . . . 4.5 5.0 10.1 10.6
Insurance premiums earned . . . . . . . . . 8.1 10.7 16.5 21.1
Marketable securities . . . . . . . . . . . 2.1 2.8 4.1 5.4
Total . . . . . . . . . . . . . . . . 57.3 60.7 115.4 129.4
Expense
Cost of borrowing
Interest . . . . . . . . . . . . . . . 17.2 19.7 31.5 36.8
Other . . . . . . . . . . . . . . . . . 1.4 2.2 3.0 5.3
Total . . . . . . . . . . . . . . . . 18.6 21.9 34.5 42.1
Credit, collection and administrative . . . 7.5 7.0 14.5 13.8
Provision for losses on receivables . . . . 0.5 1.6 1.2 2.7
Insurance claims and underwriting . . . . . 9.7 13.6 17.6 24.5
Depreciation expense and other. . . . . . . 5.8 2.1 10.5 4.9
Total . . . . . . . . . . . . . . . . 42.1 46.2 78.3 88.0
Income Before Taxes on Income . . . . . . . 15.2 14.5 37.1 41.4
Taxes on Income . . . . . . . . . . . . . . 5.9 5.8 14.4 16.1
Net Income . . . . . . . . . . . . . . . . . 9.3 8.7 22.7 25.3
Retained Earnings
Beginning of period . . . . . . . . . . . . 120.8 90.6 107.4 84.0
Dividends paid . . . . . . . . . . . . . . 30.0 0.0 30.0 10.0
End of period . . . . . . . . . . . . . . . $100.1 $ 99.3 $100.1 $99.3
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED FINANCIAL CONDITION (Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
April 30 October 31 April 30
1997 1996 1996
ASSETS
<S> <C> <C> <C>
Cash and Cash Equivalents . . . . . . . . . . . $ 2.8 $ 6.7 $ 6.7
Marketable Securities . . . . . . . . . . . . 122.3 128.1 125.0
Finance Receivables
Retail notes and lease financing . . . . . 681.1 733.3 746.4
Wholesale notes . . . . . . . . . . . . . . 200.8 100.5 323.9
Accounts . . . . . . . . . . . . . . . . . . 358.2 371.4 298.6
1,240.1 1,205.2 1,368.9
Allowance for losses . . . . . . . . . . . . (12.0) (11.6) (10.4)
Finance Receivables, Net . . . . . . . . 1,228.1 1,193.6 1,358.5
Amounts Due from Sales of Receivables . . . . . 209.1 264.3 267.3
Equipment on Operating Leases, Net . . . . . . 107.3 101.1 54.0
Repossessions . . . . . . . . . . . . . . . . . 29.9 13.2 9.8
Reinsurance Receivables . . . . . . . . . . . . 23.6 21.2 22.8
Other Assets . . . . . . . . . . . . . . . . . 59.3 65.6 58.6
Total Assets . . . . . . . . . . . . . . . . . $1,782.4 $1,793.8 $1,902.7
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Borrowings . . . . . . . . . . . . . $ 145.0 $ 99.4 $ 49.3
Accounts Payable
Affiliated companies . . . . . . . . . . . . 126.2 24.5 49.0
Other . . . . . . . . . . . . . . . . . . . 39.9 42.2 56.7
Total . . . . . . . . . . . . . . . . . . 166.1 66.7 105.7
Dealers' Reserves . . . . . . . . . . . . . . . 22.0 22.3 22.5
Unpaid Insurance Claims and Unearned Premiums . 92.0 99.6 103.8
Accrued Income Taxes . . . . . . . . . . . . . 9.6 10.8 10.9
Accrued Interest . . . . . . . . . . . . . . . 7.5 8.9 11.0
Senior and Subordinated Debt . . . . . . . . . 1,067.8 1,206.4 1,328.8
Shareowner's Equity
Capital stock (Par value $1.00, 1,600,000
shares issued and outstanding)
and paid-in capital . . . . . . . . . . . 171.0 171.0 171.0
Retained earnings . . . . . . . . . . . . . 100.1 107.4 99.3
Unrealized gains (losses) on marketable
securities . . . . . . . . . . . . . . . 1.3 1.3 0.4
Total . . . . . . . . . . . . . . . . . . 272.4 279.7 270.7
Total Liabilities and Shareowner's Equity . . . $1,782.4 $1,793.8 $1,902.7
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOW (Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
Six Months Ended
April 30
1997 1996
<S> <C> <C>
Cash Flow From Operations
Net income . . . . . . . . . . . . . . . . . . . . . . . $ 22.7 $ 25.3
Adjustments to reconcile net income to cash
provided from operations:
Gains on sales of receivables . . . . . . . . . . . . . (6.9) (12.2)
Depreciation and amortization . . . . . . . . . . . . . 10.8 7.8
Provision for losses on receivables . . . . . . . . . . 1.2 2.7
Increase (decrease) in accounts payable to affiliates . 3.4 (69.4)
Other . . . . . . . . . . . . . . . . . . . . . . . . . (13.3) 3.7
Total . . . . . . . . . . . . . . . . . . . . . . . 17.9 (42.1)
Cash Flow From Investing Activities
Proceeds from sold retail notes . . . . . . . . . . . . . 481.0 514.2
Purchase of retail notes and lease receivables . . . . . . (444.5) (575.6)
Principal collections on retail notes and
lease receivables. . . . . . . . . . . . . . . . . . . . 43.3 47.1
Acquisitions (over) under cash collections of wholesale
notes and accounts receivable . . . . . . . . . . . . . (71.1) 12.1
Purchase of marketable securities. . . . . . . . . . . . . (46.5) (36.1)
Proceeds from sales and maturities
of marketable securities . . . . . . . . . . . . . . . 53.9 42.4
Increase in property and equipment leased to others. . . . (16.0) (19.2)
Total . . . . . . . . . . . . . . . . . . . . . . . 0.1 (15.1)
Cash Flow From Financing Activities
Net increase (decrease) in short-term borrowings . . . . . 45.6 (1.2)
Net decrease in bank revolving credit facility usage . . . (204.0) (50.0)
Net increase in asset-backed commercial paper
facility usage . . . . . . . . . . . . . . . . . . . . 0.3 93.3
Proceeds from long-term debt . . . . . . . . . . . . . . . 78.9 0.0
Principal payments on long-term debt . . . . . . . . . . . (11.0) 0.0
Net increase in advance from Transportation . . . . . . . 98.3 28.9
Dividends paid to Transportation . . . . . . . . . . . . . (30.0) (10.0)
Total . . . . . . . . . . . . . . . . . . . . . . . (21.9) 61.0
(Decrease) increase in Cash and Cash Equivalents . . . . . . (3.9) 3.8
Cash and Cash Equivalents at Beginning of Period . . . . . . 6.7 2.9
Cash and Cash Equivalents at End of Period . . . . . . . . $ 2.8 $ 6.7
Supplemental disclosure of cash flow information
Interest paid . . . . . . . . . . . . . . . . . . . . . $ 32.1 $ 37.9
Income taxes paid . . . . . . . . . . . . . . . . . . . $ 15.3 $ 16.5
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. The consolidated financial statements include the accounts
of Navistar Financial Corporation ("NFC") and its wholly-owned
subsidiaries ("Corporation"). Navistar International
Transportation Corp. ("Transportation"), which is wholly-owned
by Navistar International Corporation ("Navistar"), is the
parent company of NFC.
The accompanying unaudited financial statements and notes
have been prepared in accordance with the accounting
policies set forth in the Corporation's 1996 Annual Report
on Form 10-K and should be read in conjunction with the
Notes to the Consolidated Financial Statements 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 interim periods presented. Interim results are not
necessarily indicative of results to be expected for the
full year. Certain 1996 amounts have been reclassified to
conform with the presentation used in the 1997 financial
statements.
2. Finance receivable balances do not include receivables
sold by the Corporation to public and private investors with
limited recourse provisions. Uncollected sold receivables
balances, net of unearned finance income, are as follows:
<TABLE>
<CAPTION>
April 30 October 31 April 30
1997 1996 1996
($Millions)
<S> <C> <C> <C>
Retail notes . . . . . . . . . . $1,373.7 $1,366.4 $1,325.4
Wholesale notes . . . . . . . . 400.0 500.0 500.0
Total . . . . . . . . . . . $1,773.7 $1,866.4 $1,825.4
</TABLE>
In November 1996, the Corporation sold $487 million of
retail notes, net of unearned finance income, through Navistar
Financial Retail Receivables Corporation ("NFRRC"), a wholly-
owned subsidiary, to an owner trust which, in turn, sold $455
million of notes and $32 million of certificates to investors.
The proceeds, net of underwriting fees and credit enhancements,
were $474 million.
On January 1, 1997, the Corporation adopted Statement of
Financial Accounting Standards No. 125 ("SFAS No. 125"),
"Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities", for all applicable
transactions. SFAS No. 125 requires that amounts previously
classified as excess servicing be reclassified as interest
only receivables and that such amounts be recorded at
estimated fair value. Restatement of the financial
statements of prior periods is not permitted. The new
standard did not have a material effect on the Corporation's
net income or financial condition.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The Corporation's subordinated retained interests in sold
receivables are generally restricted and subject to limited
recourse provisions. The terms of retail receivable sales
require the Corporation to maintain cash reserves with the
trusts as credit enhancement for public sales. The cash
reserves held by the trusts are restricted for use by the
securitized sales agreements. The following is a summary of
amounts included in "Amounts Due from Sales of Receivables":
<TABLE>
<CAPTION>
April 30 October 31 April 30
1997 1996 1996
($ Millions)
<S> <C> <C> <C>
Cash held and invested by
trusts . . . . . . . . . . . . $ 75.7 $ 85.2 $ 80.3
Subordinated retained interests
in wholesale receivables . . . 69.4 85.4 85.8
Subordinated retained interests
in retail receivables . . . . . 67.3 96.0 99.7
Interest only receivables. . . . . 9.2 - -
Excess servicing . . . . . . . . . - 10.1 12.8
Allowance for credit losses . . . (12.5) (12.4) (11.3)
Total . . . . . . . . . . . $209.1 $264.3 $267.3
</TABLE>
The allowance for losses on receivables is summarized as
follows:
<TABLE>
<CAPTION>
April 30 October 31 April 30
1997 1996 1996
($Millions)
<S> <C> <C> <C>
Allowance pertaining to:
Owned notes . . . . . . . . . $12.0 $11.6 $10.4
Sold notes . . . . . . . . . 12.5 12.4 11.3
Total . . . . . . . . . . $24.5 $24.0 $21.7
</TABLE>
On May 7, 1997, the Corporation sold $500 million of retail
notes, net of unearned finance income, through "NFRRC" to an
owner trust, which in turn, sold $500 million of notes to
investors. The proceeds, net of underwriting fees and credit
enhancements, were $477 million. A gain of $6.4 million was
recognized on the sale.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
3. Average short-term debt outstanding during the first six
months of fiscal 1997 and 1996, which included commercial paper
and bank borrowings, was approximately $126 million and $56
million, at an average cost of 5.9% and 6.1%, respectively.
The weighted average interest rate on all debt, including short-
term debt and the effect of discounts and related amortization,
was 6.2% and 6.6% for the first six months of fiscal 1997 and
1996, respectively.
Accounts payable due to affiliated companies at April 30,
1997 and 1996 include an inter-company advance of $98.3 million
and $28.9 million, respectively. The advance, which is payable
to Transportation, accrues interest at the Corporation's
incremental short-term borrowing rate. There was no inter-
company advance outstanding at October 31, 1996.
4. The Corporation has $1,325 million of contractually
committed support facilities, consisting of a $925 million bank
revolving credit facility and a $400 million asset-backed
commercial paper ("ABCP") program supported by a bank liquidity
facility. Each of these facilities has a maturity date of
March 31, 2001. At April 30, 1997, unused commitments under
these facilities were $440 million, of which $145 million
provided funding backup for the outstanding short-term debt.
The remaining $295 million, when combined with unrestricted
cash and cash equivalents, made $298 million available to fund
the general business purposes of the Corporation at April 30,
1997.
In the first quarter of fiscal 1997, the Corporation entered
into two sale-leaseback transactions involving vehicles that
were subject to retail leases with end users. The aggregate
value of the leased vehicles was approximately $75 million.
In these transactions, the Corporation transferred the
vehicles to third party lessors and simultaneously leased the
vehicles back from the lessors. In each transaction, the
Corporation pledged the associated retail leases to the
lessors as collateral. As of April 30, 1997 the outstanding
capital lease obligation was $68 million.
In May 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 $97.5 million
after deduction of the underwriting compensation and certain
other estimated expenses. The Corporation used the net
proceeds to repurchase $6.0 million of its outstanding Senior
Subordinated Notes due November 1998 and to reduce
outstanding indebtedness under the bank revolving credit
facility.
Effective May 27, 1997, the Corporation amended and restated
its bank revolving credit facility to permit the Corporation
to lend up to $100 million to Transportation, secured by
Transportation's service parts and new and used truck
inventories, and to enable the Corporation, with certain
covenant limitations, to make loans to Transportation's
Mexican finance affiliates.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. The Corporation manages its exposure to fluctuations in
interest rates and limits 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.
During March through April 1997, the Corporation entered into
$500 million of forward interest rate lock agreements on a U.S.
Treasury security maturing in 1999 related to the May 1997 sale
of retail receivables. These hedge agreements, which were
closed in conjunction with the pricing of the sale, resulted in
a $0.7 million loss which was deferred at April 30, 1997, and
netted against the gain on the sale of receivables recognized in
May 1997.
In April 1997, the Corporation entered into a $100 million
forward interest rate lock agreement on a U.S. Treasury security
maturing in March 2002 related to the May 1997 subordinated debt
issue. The hedge agreement, which was closed in conjunction
with the pricing of the subordinated debt, resulted in a $0.9
million loss which will be amortized and included in interest
expense over the life of the subordinated debt.
In the third quarter of fiscal 1997, the Corporation entered
into $100 million of forward starting swaps related to the
anticipated November 1997 sale of retail receivables. The
swap agreements start on October 31, 1997 and expire on July
15, 1999. The Corporation intends to close these positions
in October 1997 on the pricing date of the sale. The gain or
loss which will result from the swap transaction will be
included in the gain or loss on the sale of receivables
recognized in November 1997.
6. 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 has 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 will negate
the Department's position and will relieve NFC of the
aforementioned Notice of Deficiency.
The Corporation and its subsidiaries are subject to various
other claims arising in the ordinary course of business, and
are parties to various legal proceedings which constitute
ordinary routine litigation incidental to the business of the
Corporation and its subsidiaries. In the opinion of the
Corporation's management, none of these proceedings or claims
are material to the business or the financial condition of
the Corporation.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
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 the first six months of fiscal 1997 industry demand for Class
5 through 8 trucks declined approximately 5% compared with the
same period of 1996. In the first half of 1997, the
Corporation's retail financing acquisitions, including retail
notes and finance and operating leases, were $472 million or 18%
lower than the comparable period of fiscal 1996. The decrease
is primarily the result of the lower industry demand and the
highly competitive commercial financing market. The
Corporation's share of the retail financing of new trucks
manufactured by Transportation and sold in the United States was
13% during the first half of 1997 compared with 18% during the
first six months of 1996. Serviced retail notes and lease
financing balances were $2.2 billion at April 30, 1997 and
October 31, 1996 compared with $2.1 billion at April 30, 1996.
During the first six months of fiscal 1997 and 1996, the
Corporation supplied 95% of the wholesale financing of new
trucks sold to Transportation's dealers, slightly above the 94%
supplied in the comparable period of 1996. Transportation's
dealers have reduced inventory levels from year ago levels in
part due to lower customer demand. Serviced wholesale note
balances were $670 million at April 30, 1997 compared with $676
million at October 31, 1996 and $910 million at April 30, 1996.
Owned finance receivables and lease balances, including retained
interests in sold retail and wholesale receivables, were $1.4
billion at April 30, 1997 and October 31, 1996 and $1.5 billion
at April 30, 1996. Owned balances as of April 1997 were $0.1
billion lower than April 1996 primarily as a result of lower
wholesale financing activity, offset in part by lower sold
wholesale balances due to the maturity of one tranche of the
wholesale note trust. Net sold retail receivable balances were
$1.4 billion at April 30, 1997 and October 31, 1996 compared to
$1.3 billion at April 30, 1996. Sold wholesale notes receivable
declined to $400 million from $500 million at October 31, 1996
and April 30, 1996.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
Results of Operations
The components of net income for the three and six month periods
ended April 30 are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended April 30 Ended April 30
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Income before income taxes:
Finance operations. . . . . . . . . . . $14.9 $14.7 $34.4 $39.7
Insurance operations. . . . . . . . . . 0.3 (.2) 2.7 1.7
Income before taxes. . . . . . . . . 15.2 14.5 37.1 41.4
Taxes on income . . . . . . . . . . . . . 5.9 5.8 14.4 16.1
Net income . . . . . . . . . . . . . $ 9.3 $ 8.7 $22.7 $25.3
</TABLE>
In the second quarter of fiscal 1997, the Corporation's pretax
income of $15.2 million was $.7 million higher than the second
quarter of fiscal 1996. The Corporation experienced lower
borrowing costs due to the maturity of high yield fixed rate
debt in the third quarter of fiscal 1996 and a reduction in
provision for losses due to lower retail financing activities.
Pretax income during the first six months of 1997 decreased $4.3
million to $37.1 million compared to 1996 primarily as a result
of lower wholesale financing activities and lower gains on sales
of retail notes partially offset by lower borrowing costs due to
the maturity of the high yield fixed rate debt.
Retail note and lease revenue increased $3.8 million to $51.9 in
the first half of 1997 compared to 1996. The increase is
primarily the result of higher average owned finance receivables
and investment in operating leases offset, in part, by lower
gains on sales of retail notes. Gains on sales of retail notes
receivable during the first half of 1997 were $6.9 million on
$487 million sold compared with gains of $12.2 million on $525
million sold in the first half of 1996. The higher gains 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, the
Corporation's acquisition spreads improve as the Corporation's
cost of borrowing differs from the time when interest rates are
quoted to borrowers and the time when notes are acquired. In
addition, the effective interest rate for each sale is based on
market interest rates at the time of the sale, which may be up
to six months after the Corporation acquired the retail notes.
Wholesale note revenue decreased 41% in 1997 to $18.5 million as
a result of lower average wholesale note balances and lower
average yields relating to a lower prime interest rate.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
Results of Operations (continued)
Borrowing costs declined $7.6 million to $34.5 million during the
first half of 1997 due to lower wholesale funding requirements
and lower borrowing rates. The Corporation's weighted average
interest rate on all debt declined to 6.2% from 6.6% in the
first six months of 1996 primarily due to the maturity of high
fixed rate public debt in June 1996 and lower market interest
rates.
The provision for losses decreased $1.5 million to $1.2 million
during the first six months of 1997 as compared to the same
period of fiscal 1996. The lower provision for losses in 1997
is a result of lower retail financing activities. The
Corporation's allowance for losses as a percentage of serviced
finance receivables was .77%, .74% and .65% at April 30, 1997,
October 31, 1996 and April 30, 1996, respectively.
Depreciation expense and other during the first six months of
1997 was $10.5 million compared to $4.9 million in the
comparable period of 1996. The increase is primarily the result
of a larger investment in equipment under operating leases.
Harco Insurance Company ("Harco"), the Corporation's wholly-owned
insurance subsidiary, had pretax income of $2.7 million in the
first six months of fiscal 1997 up $1.0 million from the first
six months of fiscal 1996. This increase was primarily due to
improved loss experience in Harco's liability insurance lines,
offset in part by lower earned premiums in Harco's physical
damage and liability lines.
Liquidity and Funds Management
The Corporation's operations are substantially dependent upon the
production and sale of Transportation's truck products in the
United States. 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 current debt ratings of the
Corporation have made bank borrowings and sales of finance
receivables the most economical sources of financing. The
Corporation's insurance operation generates its funds through
internal operations and has no external borrowings.
Operations provided $17.9 million in cash in the first six months
of 1997. Investment activities provided $0.1 million in cash
during this period principally as a result of the proceeds from
sold retail notes offset by the purchase of retail notes and the
maturity of one $100 million tranche of sold wholesale notes.
The cash generated by operations was used to reduce financing
activities by $21.9 million.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (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 the first six months of fiscal 1997 and 1996 the
Corporation sold $487 million and $525 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 April 30, 1997, the remaining shelf registration available to
NFRRC for issuance of asset-backed securities was $2.0 billion.
The Corporation has a revolving wholesale note trust that
provides for the continuous sale of eligible wholesale notes on
a daily basis. The trust is funded by securities sold to the
public comprised of three $100 million tranches of investor
certificates maturing serially from 1997 to 1999 and a $200
million tranche maturing in 2004. As of April 30, 1997, $100
million of the tranche maturing in 1997 has been paid, and the
outstanding securities are $400 million.
In the first quarter of fiscal 1997, the Corporation entered into
two sale-leaseback transactions involving vehicles that were
subject to retail leases with end users. The aggregate value of
the leased vehicles was approximately $75 million. In these
transactions, the Corporation transferred the vehicles to third
party lessors and simultaneously leased the vehicles back from
the lessors. In each transaction, the Corporation pledged the
associated retail leases to the lessors as collateral. As of
April 30, 1997, the outstanding capital lease obligation was $68
million.
At April 30, 1997, available funding under the amended and
restated bank revolving credit facility and the asset-backed
commercial paper facility was $440 million, of which $145
million provided funding backup for the outstanding short-term
debt. The remaining $295 million, when combined with
unrestricted cash and cash equivalents, made $298 million
available to fund the general business purposes of the
Corporation.
The Corporation paid dividends of $30.0 million to Transportation
during the first six months of 1997 compared with $10.0 million
of dividends paid during the first half of 1996. The
Corporation's debt to equity ratio was 4.5:1 at April 30, 1997,
4.7:1 at October 31, 1996 and 5.1:1 at April 30, 1996.
In May 1997, the Corporation sold $500 million of retail notes,
net of unearned finance income, through NFRRC to an owner trust
which in turn sold notes to investors. A gain of approximately
$6.4 million was recognized on the sale.
In May 1997, the Corporation issued $100 million of Senior
Subordinated Notes due June 2002. The Company used the net
proceeds to repurchase $6.0 million of its outstanding Senior
Subordinated Notes due November 1998 and to reduce outstanding
indebtedness under the bank revolving credit facility.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
Liquidity and Funds Management (continued)
The Corporation manages sensitivity to interest rate changes by
funding floating rate assets with floating rate debt, primarily
by borrowing under the bank revolving credit agreement. Fixed
rate assets are funded 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 to the
Consolidated Financial Statements. Corporate policy prohibits
the use of derivatives for speculative purposes.
Under a state law enacted February 14, 1997, the Corporation will
be relieved of any liability under the Notice of Deficiency
issued by the Illinois Department of Revenue ("Department") to
the Corporation for the fiscal years 1989 through 1991. See
Note 6 to the Consolidated Financial Statements for further
discussion.
Business Outlook
Fiscal 1997 full year demand for heavy trucks is expected to be
below fiscal 1996 levels and correspondingly the Corporation's
profitability and wholesale and retail financing activity are
anticipated to be lower. Competition will continue to put
pressure on the Corporation's retail note acquisition activity
and retail note margins.
Management believes that collections on the outstanding
receivables portfolio plus funds 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 1997 and beyond.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
No reports on Form 8-K were filed during the six months ended
April 30, 1997.
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 Financial Corporation
(Registrant)
Date June 13, 1997 /s/ P. E. Cochran
P. E. Cochran
Vice President and Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF CONSOLIDATED INCOME AND RETAINED EARNINGS AND THE STATEMENT
OF CONSOLIDATED FINANCIAL CONDITION AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1997<F1>
<PERIOD-END> APR-30-1997
<CASH> 2,800
<SECURITIES> 122,300
<RECEIVABLES> 1,240,100
<ALLOWANCES> (12,000)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 11,200
<DEPRECIATION> (5,800)
<TOTAL-ASSETS> 1,782,400
<CURRENT-LIABILITIES> 0
<BONDS> 1,067,800
0
0
<COMMON> 171,000
<OTHER-SE> 101,400
<TOTAL-LIABILITY-AND-EQUITY> 1,782,400
<SALES> 0
<TOTAL-REVENUES> 57,300
<CGS> 0
<TOTAL-COSTS> 18,600
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 500
<INTEREST-EXPENSE> 17,200
<INCOME-PRETAX> 15,200
<INCOME-TAX> 5,900
<INCOME-CONTINUING> 9,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,300
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<FN>
<F1>THE CORPORATION'S STATEMENT OF FINANCIAL CONDITION IS UNCLASSIFIED;
THEREFORE, THE DISTINCTION BETWEEN CURRENT AND LONG-TERM ASSETS AND
LIABILITIES IS NOT AVAILABLE.
</FN>
</TABLE>
