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, 1999
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, 1999, 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>
1
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
INDEX
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Statements of Consolidated Income and Retained Earnings --
Three Months and Six Months Ended April 30, 1999 and 1998...... 2
Statements of Consolidated Financial Condition --
April 30, 1999; October 31, 1998; and April 30, 1998........... 3
Statements of Consolidated Cash Flow --
Six Months Ended April 30, 1999 and 1998....................... 4
Notes to Consolidated Financial Statements..................... 5
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition............................. 8
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 14
Signature ............................................................ 14
<PAGE>
4
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED INCOME AND RETAINED EARNINGS (Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30 April 30
------------------ ----------------
1999 1998 1999 1998
------ ------ ------ -----
Revenue
<S> <C> <C> <C> <C>
Retail notes and lease financing . . .$ 37.3 $ 30.9 $ 76.8 $ 59.8
Wholesale notes . . . . . . . . . . . . 16.3 11.5 31.0 19.8
Accounts . . . . . . . . . . . . . . . 9.2 7.1 17.5 16.7
Servicing fee income . . . . . . . . . 5.5 5.0 11.7 10.7
Insurance premiums earned . . . . . . . 8.5 8.0 17.0 15.9
Marketable securities . . . . . . . . . 2.4 1.6 4.4 3.8
------ ------ ------ ------
Total . . . . . . . . . . . . . 79.2 64.1 158.4 126.7
------ ------ ------ ------
Expense
Cost of borrowing:
Interest . . . . . . . . . . . . 21.5 20.3 43.7 36.0
Other . . . . . . . . . . . . . . 1.5 1.6 3.2 3.5
------ ------ ------ ------
Total . . . . . . . . . . . . . 23.0 21.9 46.9 39.5
Credit, collection and administrative . 10.7 8.5 20.8 16.6
Provision for losses on receivables . . 1.9 0.8 3.2 1.2
Insurance claims and underwriting . . . 9.1 8.0 19.4 17.1
Depreciation and other. . . . . . . . . 10.6 7.6 20.5 13.1
------ ------ ------ ------
Total . . . . . . . . . . . . . 55.3 46.8 110.8 87.5
------ ------ ------ ------
Income Before Taxes on Income . . . . . . 23.9 17.3 47.6 39.2
Taxes on Income . . . . . . . . . . . . . 8.9 6.6 18.1 15.1
------ ------ ------ ------
Net Income . . . . . . . . . . . . . . . . 15.0 10.7 29.5 24.1
Retained Earnings
Beginning of period . . . . . . . . . . 111.5 114.5 109.0 113.1
Dividends paid . . . . . . . . . . . . 13.0 15.0 25.0 27.0
------ ------ ------ ------
End of period . . . . . . . . . . . . .$113.5 $110.2 $113.5 $110.2
====== ====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION (Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
April 30 October 31 April 30
1999 1998 1998
ASSETS
<S> <C> <C> <C>
Cash and Cash Equivalents . . . . . . . . $ 13.0 $ 14.1 $ 39.2
Marketable Securities . . . . . . . . . . 103.5 108.0 113.3
Finance Receivables
Retail notes and lease financing . . 1,025.1 915.9 772.4
Wholesale notes . . . . . . . . . . 452.7 224.9 308.0
Accounts . . . . . . . . . . . . . . 471.6 382.9 379.3
-------- -------- --------
1,949.4 1,523.7 1,459.7
Allowance for losses . . . . . . . . (13.5) (12.8) (12.2)
-------- -------- --------
Finance Receivables, Net . . . . 1,935.9 1,510.9 1,447.5
Amounts Due from Sales of Receivables . . 237.8 245.9 211.1
Equipment on Operating Leases, Net . . . 236.0 217.7 198.9
Repossessions . . . . . . . . . . . . . . 19.6 14.4 13.8
Other Assets . . . . . . . . . . . . . . 105.6 101.9 93.7
-------- -------- --------
Total Assets . . . . . . . . . . . . . . $2,651.4 $2,212.9 $2,117.5
======== ======== ========
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Borrowings . . . . . . . . . . $ 15.0 $ 21.8 $ 138.4
Accounts Payable to Affiliates. . . . . . 564.9 136.8 84.0
Other Liabilities . . . . . . . . . . . . 51.9 57.1 49.9
Senior and Subordinated Debt . . . . . . 1,631.2 1,611.2 1,453.4
Dealers' Reserves . . . . . . . . . . . . 24.4 24.0 23.2
Unpaid Insurance Claims and
Unearned Premiums . . . . . . . . . . . 78.2 80.5 82.4
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 . . . . . . . . . 113.5 109.0 110.2
Accumulated other comprehensive
income . . . . . . . . . . . . . . 1.3 1.5 5.0
-------- -------- --------
Total . . . . . . . . . . . . . 285.8 281.5 286.2
-------- -------- --------
Total Liabilities and
Shareowner's Equity . . . . . . . . . . $2,651.4 $2,212.9 $2,117.5
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOW (Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
Six Months Ended
April 30
1999 1998
Cash Flow From Operations
<S> <C> <C>
Net income . . . . . . . . . . . . . . . . . . . $ 29.5 $ 24.1
Adjustments to reconcile net income to cash
provided from operations:
Gains on sales of receivables . . . . . . . (5.7) (7.2)
Depreciation and amortization . . . . . . . 22.0 15.2
Provision for losses on receivables . . . . 3.2 1.2
Increase (decrease) in accounts
payable to affiliates. . . . . . . . . . . 428.1 (47.5)
Other . . . . . . . . . . . . . . . . . . . (13.0) (9.7)
------ ------
Total . . . . . . . . . . . . . . . . . 464.1 (23.9)
------ ------
Cash Flow From Investing Activities
Proceeds from sold retail notes . . . . . . . . . 511.6 465.3
Purchase of retail notes and
lease receivables . . . . . . . . . . . . . . (662.2) (576.4)
Principal collections on retail notes and
lease receivables . . . . . . . . . . . . . . 31.5 54.8
Acquisitions over cash collections of wholesale
notes and accounts receivable . . . . . . . . (299.1) (153.8)
Purchase of marketable securities . . . . . . . (20.7) (15.8)
Proceeds from sales and maturities
of marketable securities . . . . . . . . . . . 26.1 19.3
Purchase of equipment leased to others . . . . . (46.6) (90.9)
Sale of equipment leased to others . . . . . . . 7.7 2.7
------ ------
Total . . . . . . . . . . . . . . . . . (451.7) (294.8)
------ ------
Cash Flow From Financing Activities
Net decrease in short-term debt . . . . . . . . (6.8) (2.6)
Net increase in bank revolving
credit facility usage. . . . . . . . . . . . . 40.0 302.0
Net increase in asset-backed
commercial paper facility usage. . . . . . . . 11.3 12.1
Proceeds from long-term debt . . . . . . . . . 73.3 91.5
Principal payments of long-term debt . . . . . (106.3) (28.8)
Dividends paid to Transportation . . . . . . . (25.0) (27.0)
------ ------
Total . . . . . . . . . . . . . . . . (13.5) 347.2
------ ------
(Decrease) Increase in Cash and Cash Equivalents . . (1.1) 28.5
Cash and Cash Equivalents at Beginning of Period . . 14.1 10.7
------ ------
Cash and Cash Equivalents at End of Period . . . . . $ 13.0 $ 39.2
====== ======
Supplemental disclosure of cash flow information
Interest paid . . . . . . . . . . . . . . . . . $ 49.4 $ 37.9
====== ======
Income taxes paid . . . . . . . . . . . . . . . $ 15.3 $ 19.5
======= ======
</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 the Corporation.
The accompanying unaudited financial statements have been prepared in
accordance with the accounting policies described in the Corporation's 1998
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 results of operations, financial position and cash flow
for the interim periods presented. Interim results are not necessarily
indicative of results to be expected for the full year. Certain 1998
amounts have been reclassified to conform with the presentation used in the
1999 financial statements.
2. Finance receivable balances do not include receivables sold by the
Corporation to public and private investors with limited recourse
provisions. Outstanding sold receivable balances are as follows:
<TABLE>
<CAPTION>
April 30 October 31 April 30
1999 1998 1998
($ Millions)
<S> <C> <C> <C>
Retail notes . . . . . . . . . . $1,493.4 $1,445.4 $1,417.7
Wholesale notes . . . . . . . . 600.0 700.0 500.0
-------- -------- --------
Total . . . . . . . . . . $2,093.4 $2,145.4 $1,917.7
======== ======== ========
</TABLE>
In November 1998, the Corporation sold $545 million of retail notes, net
of unearned finance income, through Navistar Financial Retail Receivables
Corporation ("NFRRC"), a wholly owned subsidiary of the Corporation, to a
multi-seller asset-backed commercial paper conduit sponsored by a major
financial institution. A gain of $6 million was recognized on the sale. The
proceeds of $526 million, net of fees and credit enhancements, were used by
the Corporation for general working capital purposes.
In June 1999, the Corporation sold $715 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 $6 million was recognized on the sale.
The proceeds of $685 million, net of underwriting fees and credit
enhancements, were used by the Corporation for general working capital
purposes.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The allowance for losses on receivables is summarized as follows:
<TABLE>
<CAPTION>
April 30 October 31 April 30
1999 1998 1998
($ Millions)
Allowance pertaining to:
<S> <C> <C> <C>
Owned notes . . . . . . . . . $13.5 $12.8 $12.2
Sold notes . . . . . . . . . 12.7 12.6 12.5
----- ----- -----
Total . . . . . . . . . . $26.2 $25.4 $24.7
===== ===== =====
</TABLE>
3. In anticipation of the June 1999 sale of retail receivables, the
Corporation was a party to a total of $500 million of forward treasury
locks. The Corporation closed these positions on the pricing date of the
sale. The resulting $2 million gain was included in the gain on the sale
of receivables recognized in June 1999.
In November 1998, the Corporation sold fixed rate retail receivables on a
variable rate basis. For the protection of investors, the Corporation
issued an interest rate cap. Under the terms of the agreement, the
Corporation will make payments if interest rates exceed certain levels.
The notional amount of the cap amortizes based on the expected
outstanding principal balance of the sold retail receivables. As of April
30, 1999 the notional amount was $490 million and the interest rate cap
had a fair value of $2 million.
4. In order to facilitate the securitization of the Corporation's retail and
wholesale receivables the Corporation has established, over the years,
three special purpose corporations (Navistar Financial Securities
Corporation, Navistar Financial Retail Receivables Corporation and Truck
Retail Instalment Paper Corporation). In connection with the sales and
leasebacks of certain of its leasing portfolio assets, the Corporation
and its subsidiary, Harco Leasing, Inc. ("Harco"), have established
Navistar Leasing Company ("NLC"), a Delaware business trust. NLC holds
legal title to leased vehicles and is the lessor on substantially
all leases originated. The assets of NLC have been and will continue to
be allocated into various beneficial interests issued by NLC. Harco
owns one such beneficial interest in NLC and Harco has transferred other
beneficial interests issued by NLC to purchasers under sale/leaseback
agreements. Neither the beneficial interests held by purchasers under
sale/leaseback agreements and the assets represented thereby, nor legal
interest in any assets of NLC, will be available to Harco, the
Corporation or its creditors.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Effective November 1, 1998, the Corporation adopted Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income"
which establishes standards for reporting and display of comprehensive
income and its components. Financial statements for prior periods have
been reclassified as required by the statement. The Corporation's total
comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Six Months
Ended April 30 Ended April 30
1999 1998 1999 1998
($ Millions)
<S> <C> <C> <C> <C>
Net Income . . . . . . . . . . . . $15.0 $10.7 $29.5 $24.1
Unrealized gains (losses) on
marketable securities . . . . . 0.0 1.1 (0.2) 1.3
----- ----- ----- -----
Total Comprehensive Income. . . $15.0 $11.8 $29.2 $25.3
===== ===== ===== =====
</TABLE>
<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, which involve risks and uncertainties,
constitute "forward-looking statements" under the Securities Reform Act.
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 headings "Year 2000" and "Business Outlook."
Financing Volume
In the first half of fiscal 1999 industry retail sales for Class 5 through 8
trucks was approximately 21% higher than 1998. The Corporation's retail
financing acquisitions during the first six months of fiscal 1999, including
retail notes and finance and operating leases, were $709 million, 6% higher than
1998. The increase is primarily the result of the strong truck industry demand
offset in part by a decline in the Corporation's finance market share of new
International trucks sold in the U.S. from 15.9% in 1998 to 15.1% in fiscal
1999. The decline in market share is due to the highly competitive commercial
financing market. Serviced retail notes and lease financing balances were $2,755
million and $2,394 million at April 30, 1999 and 1998, respectively.
In spite of the continued strong liquidity in the commercial financing market,
the Corporation provided 96% and 94% of the wholesale financing of new trucks
sold to Transportation's dealers in the first six months of fiscal 1999 and
1998, respectively. Serviced wholesale note balances were $1,150 million at
April 30, 1999, a 29% increase compared to April 30, 1998 due to the strong
industry demand.
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
1999 1998 1999 1998
Income before income taxes:
<S> <C> <C> <C> <C>
Finance operations. . . . . . . . . . . $22.1 $15.7 $45.7 $36.6
Insurance operations. . . . . . . . . . 1.8 1.6 1.9 2.6
----- ----- ----- -----
Income before taxes. . . . . . . . . 23.9 17.3 47.6 39.2
Taxes on income . . . . . . . . . . . . . 8.9 6.6 18.1 15.1
----- ----- ----- -----
Net income . . . . . . . . . . . . . $15.0 $10.7 $29.5 $24.1
===== ===== ===== =====
</TABLE>
<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)
Finance Operations:
During the second quarter of fiscal 1999, the Corporation's pretax income of $24
million was $7 million higher than the corresponding period of fiscal 1998.
Pretax income during the first six months of 1999 increased $8 million to $48
million compared to the same period of 1998. The improvement for both periods
was due primarily to higher finance receivable balances resulting from an
increase in Transportation's sales and a higher level of average outstanding
accounts payable to affiliates which reduced debt levels, offset, in part, by
higher costs to service the larger portfolio and an increase in year 2000 costs.
Retail note and lease revenue increased $17 million to $77 million in the first
half of 1999 compared to 1998. The increase is primarily the result of higher
retail financing activities and an increase in operating lease balances due to
continued growth in lease financing, offset in part by lower yields. Included in
retail note and lease revenue is operating lease revenue of $29 million and $20
million in 1999 and 1998, respectively. For operating leases, the Corporation
recognizes the entire lease payment as revenue and records depreciation expense
on the assets under lease.
Wholesale note revenue increased to $31 million in the first half of 1999
compared to $20 million in fiscal 1998 due primarily to the higher level of
wholesale financing activity, offset in part by lower yields in response to the
lower average prime interest rate.
Retail and wholesale account revenue was $18 million in the first half of 1999
compared to $17 million in 1998. The increase was primarily the result of higher
average balances, offset in part by lower yields in response to the lower
average prime interest rate.
Borrowing costs increased $7 million to $47 million during the first half of
1999 due primarily to higher average receivable funding requirements, partially
offset by lower average interest rates and the higher level of average
outstanding accounts payable to affiliates which reduced debt levels. The higher
level of average outstanding accounts payable to affiliates reduced debt levels
and resulted in a second quarter reduction in borrowing costs of $4 million. The
Corporation's weighted average interest rate on all debt decreased during the
first six months of 1999 to 5.6% from 6.3% in the first half of 1998 primarily
due to lower average interest rates and the maturity of high yield subordinated
debt.
Credit, collection and administrative expenses increased to $21 million during
the first six months of 1999 from $17 million in 1998. The increase in 1999 was
primarily due to higher costs to service the larger portfolio and costs
associated with year 2000 initiatives.
<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)
Finance Operations (continued):
Provision for losses on receivables totaled $3 million in the first six months
of 1999 compared with $1 million in 1998. The increase in 1999 was primarily due
to the increase in serviced finance receivable balances. The Corporation's
allowance for losses as a percentage of serviced finance receivables was .60%,
.64% and .68% at April 30, 1999, October 31, 1998 and April 30, 1998.
Depreciation and other expenses during the first six months of 1999 was $21
million compared to $13 million in the comparable period of 1998. The increase
is primarily the result of a larger investment in equipment under operating
leases.
Insurance Operations:
Harco National Insurance Company's pretax income was $1 million less for the
first six months of fiscal 1999 than during the comparable 1998 period. The
decline was due primarily to adverse loss experience in liability lines
partially offset by gains on sales of securities.
Liquidity and Funds Management
The Corporation has traditionally obtained the funds to provide financing to
Transportation's dealers and retail customers from sales of finance receivables,
commercial paper, short and long-term bank borrowings, medium and long-term debt
and equity capital. The Corporation's current debt ratings have made sales of
finance receivables the most economical source of funding. The Corporation's
insurance subsidiary generates its funds through internal operations and has no
external borrowings.
In May 1999, Moody's and Duff and Phelps raised the Corporation's senior debt
ratings from Ba1 and BBB- to Baa3 and BBB, respectively, while also raising the
subordinated debt ratings from Ba3 and BB+ to Ba2 and BBB-, respectively. In
January 1998, Standard and Poors raised the Corporation's senior debt ratings
from BB to BB+, while the subordinated debt ratings were also raised from B+ to
BB-.
<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)
Operations provided $464 million in cash in the first six months of 1999
primarily as a result of an increase in accounts payable to affiliated companies
and net income. Investing activities used $452 million in cash during this
period principally as a result of the purchase of retail notes and lease
receivables and acquisitions over cash collections of wholesale notes and
accounts receivable, offset in part by proceeds from sold retail notes. To
finance the increase in receivable balances and pay dividends of $25 million to
Transportation, the Corporation increased its financing activities by $14
million.
Receivable sales were a significant source of funding in both 1999 and 1998.
Through the asset-backed markets, 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 1999, the Corporation sold $545
million of retail notes, net of unearned finance income, through Navistar
Financial Retail Receivables Corporation ("NFRRC"), a wholly owned subsidiary,
to a multi-seller asset-backed commercial paper conduit sponsored by a major
financial institution. During the first six months of fiscal 1998 the
Corporation sold $500 million of retail notes, net of unearned finance income,
through NFRRC, to owner trusts which, in turn, issued securities which were sold
to investors.
In June 1999, the Corporation sold $715 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 $6 million was recognized on the sale, which will be
reflected in the Corporation's third quarter revenues. Following the June 1999
sale of retail receivables, the remaining shelf registration available to NFRRC
for the public issuance of asset-backed securities was $2,257 million.
As of April 30, 1999, Navistar Financial Securities Corporation, a wholly-owned
subsidiary of the Corporation, had a revolving wholesale note trust that
provides for the funding of $600 million of eligible wholesale notes.
At April 30, 1999, available funding under the bank revolving credit facility
and the asset-backed commercial paper facility was $72 million, of which $15
million provided funding backup for the outstanding short-term debt. The
remaining $57 million, when combined with unrestricted cash and cash
equivalents, made $70 million available to fund the general business purposes of
the Corporation.
In anticipation of the June 1999 sale of retail receivables, the Corporation was
a party to a total of $500 million of forward treasury locks. The Corporation
closed these positions on the pricing date of the sale. The resulting $2 million
gain was included in the gain on the sale of receivables recognized in June
1999.
<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)
In November 1998, the Corporation sold fixed rate retail receivables on a
variable rate basis. For the protection of investors, the Corporation issued an
interest rate cap. Under the terms of the agreement, the Corporation will make
payments if interest rates exceed certain levels. The notional amount of the cap
amortizes based on the expected outstanding principal balance of the sold retail
receivables. As of April 30, 1999 the notional amount was $490 million and the
interest rate cap had a fair value of $2 million.
Year 2000
The Corporation has identified all significant information technology ("IT")
applications that will require remediation, which in some cases will involve the
replacement of systems, to ensure Year 2000 compliance. Internal and external
resources are being used to make the required modifications and to test for Year
2000 compliance. The Corporation plans to complete the modifications and testing
process of all significant IT systems by August 1999, which is prior to any
anticipated impact on its operating systems.
As of April 30, 1999 the Corporation believes it has remediated approximately
90% of its non-compliant IT systems. Total costs connected with the remediation
of the Corporation's significant IT systems during the first six months of 1999
totaled $1.6 million, and for fiscal 1998 and 1997 totaled $3.7 million and $1.1
million, respectively. Estimated future costs total $1.5 million. Approximately
25% of the total costs, representing investment in new IT systems, will be
capitalized and depreciated over three to five years. The total cost of the Year
2000 project has not had nor is it anticipated to have a material impact on the
Corporation's financial position or results of operations and will be funded
through operating cash flows.
While certain aspects of the Corporation's businesses could operate on a manual
basis for a period of time, in the event Year 2000 compliance for its
significant IT systems is not reached, the Corporation currently believes that
the most reasonably likely worst case scenario would be the inability to sustain
its current level of performance and customer service. Additionally, a
significant failure of the banking systems or key entities in the financial
markets could adversely affect the Corporation's ability to access various
credit and money markets. The Corporation is therefore committed to taking all
appropriate actions to achieve Year 2000 compliance for its significant IT
systems before the millennium date change. The Corporation has developed a
detailed plan, which includes an anticipated remediation completion date for
each significant IT system and a scheduled overall completion date of August
1999. Management reviews the progress under the action plan on a weekly basis.
Whenever management concludes a material risk exists that a significant IT
system will not be remediated by the scheduled overall completion date, a
contingency plan is developed.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
Year 2000 (continued)
The Corporation has initiated formal communications with all significant third
party suppliers which provide operational support and non-IT systems to
determine the extent to which the Corporation would be vulnerable in the event
that one or more of those third parties fail to remediate their own Year 2000
issues. The Corporation has received assurances from its significant suppliers
of cash management services that they will be able to operate in the Year 2000
and beyond, without interruption in service. While the Corporation believes that
it does not have significant exposure to other significant suppliers' Year 2000
problems, it is seeking compliance assurances from such other significant
suppliers.
The costs of the project and the date on which the Corporation believes it will
complete the Year 2000 remediation 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 qualified personnel, the ability to
locate and correct all relevant computer codes and similar uncertainties.
Business Outlook
The truck industry is forecasted to remain strong in fiscal 1999. The
competitive commercial financing market will continue to put pressure on the
Corporation's retail and wholesale financing activity and margins. Increased
volatility in the capital markets is likely to put additional pressure on the
funding rates offered to the Corporation in the asset-backed public market,
commercial paper markets and other debt financing markets.
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 1999 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, 1999.
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 11, 1999 /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 ON 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-31-1999<F1>
<PERIOD-END> APR-30-1999
<CASH> 13,000
<SECURITIES> 103,500
<RECEIVABLES> 1,949,400
<ALLOWANCES> (13,500)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 13,900
<DEPRECIATION> (8,400)
<TOTAL-ASSETS> 2,651,400
<CURRENT-LIABILITIES> 0
<BONDS> 1,631,200
0
0
<COMMON> 171,000
<OTHER-SE> 114,800
<TOTAL-LIABILITY-AND-EQUITY> 2,651,400
<SALES> 0
<TOTAL-REVENUES> 79,200
<CGS> 0
<TOTAL-COSTS> 21,300
<OTHER-EXPENSES> 10,600
<LOSS-PROVISION> 1,900
<INTEREST-EXPENSE> 21,500
<INCOME-PRETAX> 23,900
<INCOME-TAX> (8,900)
<INCOME-CONTINUING> 15,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,000
<EPS-BASIC> 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>
