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 July 31, 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 August 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>
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 Nine Months Ended July 31, 1999 and 1998....... 2
Statements of Consolidated Financial Condition --
July 31, 1999; October 31, 1998; and July 31, 1998.............. 3
Statements of Consolidated Cash Flow --
Nine Months Ended July 31, 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>
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 Nine Months Ended
July 31 July 31
------------------ -----------------
1999 1998 1999 1998
------- ------- ------- ------
<S> <C> <C> <C> <C>
Revenue
Retail notes and lease financing....$ 42.4 $ 40.0 $119.2 $ 99.8
Wholesale notes..................... 16.6 13.2 47.6 33.0
Accounts............................ 8.9 8.5 26.4 25.2
Servicing fee income................ 6.0 5.2 17.7 15.9
Insurance premiums earned........... 8.9 8.5 25.9 24.4
Marketable securities............... 2.3 3.9 6.7 7.7
------ ------ ------ ------
Total........................... 85.1 79.3 243.5 206.0
Expense
Cost of borrowing
Interest.......................... 20.6 23.2 64.3 59.2
Other............................. 1.5 2.0 4.7 5.5
------ ------ ------ ------
Total........................... 22.1 25.2 69.0 64.7
------ ------ ------ ------
Credit, collection and
administrative................... 10.9 9.3 31.7 25.9
Provision for (recovery of) losses
on receivables................... 1.3 (2.6) 4.5 (1.4)
Insurance claims and underwriting.. 9.8 10.6 29.2 27.7
Depreciation and other............. 11.6 7.9 32.1 21.0
------ ------ ------ ------
Total.......................... 55.7 50.4 166.5 137.9
------ ------ ------ ------
Income Before Taxes on Income........ 29.4 28.9 77.0 68.1
Taxes on Income...................... 11.7 11.2 29.8 26.3
------ ------ ------ ------
Net Income........................... 17.7 17.7 47.2 41.8
Retained Earnings
Beginning of period................ 113.5 110.2 109.0 113.1
Dividends paid..................... 20.0 15.0 45.0 42.0
------ ------ ------ ------
End of period...................... $111.2 $112.9 $111.2 $112.9
====== ====== ====== ======
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION (Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
July 31 October 31 July 31
1999 1998 1998
ASSETS
<S> <C> <C> <C>
Cash and Cash Equivalents................... $ 6.7 $ 14.1 $ 4.9
Marketable Securities....................... 104.0 108.0 110.0
Finance Receivables
Retail notes and lease financing.......... 661.8 915.9 624.6
Wholesale notes........................... 338.9 224.9 66.6
Accounts.................................. 295.1 382.9 316.5
-------- -------- --------
1,295.8 1,523.7 1,007.7
Allowance for losses...................... (9.9) (12.8) (10.3)
-------- -------- --------
Finance Receivables, Net.............. 1,285.9 1,510.9 997.4
Amounts Due from Sales of Receivables....... 270.3 245.9 259.9
Equipment on Operating Leases, Net.......... 255.3 217.7 213.4
Repossessions............................... 21.0 14.4 16.3
Other Assets................................ 86.6 101.9 82.6
-------- -------- --------
Total Assets................................ $2,029.8 $2,212.9 $1,684.5
======== ======== ========
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Borrowings....................... $ 17.9 $ 21.8 $ 148.8
Accounts Payable to Affiliates.............. 73.1 136.8 119.9
Other Liabilities........................... 48.7 57.1 48.2
Senior and Subordinated Debt................ 1,505.3 1,611.2 972.7
Dealers' Reserves........................... 24.9 24.0 24.0
Unpaid Insurance Claims and
Unearned Premiums......................... 77.6 80.5 84.7
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......................... 111.2 109.0 112.9
Accumulated other comprehensive income.... 0.1 1.5 2.3
-------- -------- --------
Total.............................. 282.3 281.5 286.2
-------- -------- --------
Total Liabilities and Shareowner's Equity... $2,029.8 $2,212.9 $1,684.5
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOW (Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
Nine Months Ended
July 31
1999 1999
--------- --------
<S> <C> <C>
Cash Flow From Operations
Net Income..............................................$ 47.2 $ 41.8
Adjustments to reconcile net income to cash
provided from operations:
Gains on sales of receivables......................... (11.5) (15.3)
Depreciation and amortization......................... 34.0 25.0
Provision for (recovery of) losses on receivables..... 4.5 (1.4)
Decrease in accounts payable to affiliates............ (63.7) (11.6)
Other................................................. (16.3) (14.3)
------- -------
Total............................................... (5.8) 24.2
------- -------
Cash Flow From Investing Activities
Proceeds from sold retail notes......................... 1,193.4 931.9
Purchase of retail notes and lease receivables..........(1,026.4) (918.7)
Principal collections on retail notes and
lease receivables..................................... 42.5 68.5
Acquisitions (over) under cash collections of
wholesale notes and accounts receivable............... (8.5) 118.7
Purchase of marketable securities....................... (39.0) (33.2)
Proceeds from sales and maturities of
marketable securities................................. 43.0 37.8
Purchase of equipment leased to others.................. (80.7) (124.9)
Sale of equipment leased to others...................... 11.1 13.3
------- -------
Total............................................... 135.4 93.4
------- -------
Cash Flow From Financing Activities
Net (decrease) increase in short-term borrowings........ (3.9) 7.8
Net increase (decrease) in bank revolving
credit facility usage................................. 40.0 (48.0)
Net decrease in asset-backed commercial paper
facility usage........................................ (117.6) (97.1)
Proceeds from long-term debt............................ 108.3 91.5
Principal payments of long-term debt.................... (118.8) (35.6)
Dividends paid to Transportation........................ (45.0) (42.0)
------- -------
Total............................................... (137.0) (123.4)
------- -------
Decrease in Cash and Cash Equivalents..................... (7.4) (5.8)
Cash and Cash Equivalents at Beginning of Period.......... 14.1 10.7
------- -------
Cash and Cash Equivalents at End of Period................$ 6.7 $ 4.9
======= =======
Supplemental disclosure of cash flow information
Interest paid...........................................$ 72.4 $ 65.5
======= =======
Income taxes paid.......................................$ 26.7 $ 25.9
======= =======
</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 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>
July 31 October 31 July 31
1999 1998 1998
($ Millions)
<S> <C> <C> <C>
Retail notes $1,950.0 $1,445.4 $1,670.7
Wholesale notes 600.0 700.0 672.8
-------- -------- --------
Total $2,550.0 $2,145.4 $2,343.5
======== ======== ========
</TABLE>
In the first three quarters of fiscal 1999, in two separate sales, the
Corporation sold a total of $1,260 million of retail notes, net of unearned
finance income, through Navistar Financial Retail Receivables Corporation,
a wholly owned subsidiary of the Corporation. The Corporation sold $545
million of retail notes in November 1998 to a multi-seller asset-backed
commercial paper conduit sponsored by a major financial institution and
$715 million of retail notes in June 1999 to an owner trust which, in turn,
issued securities which were sold to investors. Aggregate gains of $12
million were recognized on the sales. The proceeds of $1,211 million, net
of underwriting fees and credit enhancements, were used by the Corporation
for general working capital purposes.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The allowance for losses on receivables is summarized as follows:
<TABLE>
<CAPTION>
July 31 October 31 July 31
1999 1998 1998
($ Millions)
<S> <C> <C> <C>
Allowance pertaining to:
Owned notes $ 9.9 $12.8 $10.3
Sold notes 16.3 12.6 14.4
----- ----- -----
Total $26.2 $25.4 $24.7
===== ===== =====
</TABLE>
3. In September 1999, the Corporation entered into a total of $150 million of
forward treasury locks in anticipation of a November 1999 sale of retail
receivables. These locks were entered into to reduce exposure to future
changes in interest rates. The Corporation intends to close these positions
on the pricing date of the sale. Any resulting gain or loss will be
included in the gain or loss on the sale of receivables recognized in
November 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 July 31, 1999 the
notional amount was $399 million and the interest rate cap had a fair value
of $2 million.
4. In order to facilitate the securitization of the Corporation's retail and
wholesale receivables the Corporation has established, over the years,
three special purpose corporations (Navistar Financial Securities
Corporation, Navistar Financial Retail Receivables Corporation and Truck
Retail Instalment Paper Corporation). In connection with the sale and
leaseback of certain of its leasing portfolio assets, the Corporation and
its subsidiary, Harco Leasing, Inc. ("Harco"), have established Navistar
Leasing Company ("NLC"), a Delaware business trust. NLC holds legal title
to leased vehicles and is the lessor on substantially all leases originated
by the Corporation. The assets of NLC have been and will continue to be
allocated into various beneficial interests issued by NLC. Harco owns one
such beneficial interest in NLC and Harco has transferred other beneficial
interests issued by NLC to purchasers under sale/leaseback agreements.
Neither the beneficial interests held by purchasers under sale/leaseback
agreements or the assets represented thereby, nor legal interest in any
assets of NLC, are available to Harco, the Corporation or its creditors.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
5. Effective November 1, 1998, the Corporation adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" which
establishes standards for reporting and display of comprehensive income and
its components. Financial statements for prior periods have been
reclassified as required by the statement. The Corporation's total
comprehensive income was as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended July 31 Ended July 31
1999 1998 1999 1998
($ Millions)
<S> <C> <C> <C> <C>
Net Income . . . . . . . . . . . . . $17.7 $17.7 $47.2 $41.8
Changes in unrealized losses on
marketable securities . . . . . . . (1.2) (2.7) (1.4) (1.4)
----- ----- ----- -----
Total Comprehensive Income. . . . $16.5 $15.0 $45.8 $40.4
===== ===== ===== =====
</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 nine months of fiscal 1999 industry retail sales for Class 5
through 8 trucks was approximately 20% higher than 1998. The Corporation's
retail financing acquisitions during the first nine months of fiscal 1999,
including retail notes and finance and operating leases, were $1,107 million, 6%
higher than 1998. The increase is primarily the result of the strong truck
industry demand. The Corporation's finance market share of new International
trucks sold in the U.S. was 16.5% in fiscal 1999 and 1998. Serviced retail notes
and lease financing balances were $2,867 million and $2,514 million at July 31,
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 during the first nine months of fiscal 1999 and
1998, respectively. Serviced wholesale note balances were $1,036 million at July
31, 1999, a 21% increase compared to July 31, 1998 due to the strong industry
demand.
Results of Operations
The components of net income for the three and nine month periods ended July 31
are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended July 31 Ended July 31
---------------- ---------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Income before income taxes:
Finance operations........................ $28.0 $27.3 $73.7 $63.9
Insurance operations...................... 1.4 1.6 3.3 4.2
----- ----- ----- -----
Income before taxes................... 29.4 28.9 77.0 68.1
Taxes on income............................. 11.7 11.2 29.8 26.3
----- ----- ----- -----
Net income............................ $17.7 $17.7 $47.2 $41.8
===== ===== ===== =====
</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)
1999 pretax income was $29 million for the third quarter and $77 million fiscal
year to date, which was consistent with and $9 million higher than the
respective periods in 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. This was offset, in part, by a
higher provision for losses, higher costs to service the larger portfolio, and
the competitive commercial financing market which continued to put pressure on
retail and wholesale finance margins.
Retail note and lease revenue increased to $119 million in the first nine months
of 1999, $19 million higher than the same period in 1998. The increase is
primarily the result of higher retail financing activities and continued growth
in lease financing, offset in part by lower yields. Included in retail note and
lease revenue is operating lease revenue of $45 million and $32 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 was $48 million in the first nine months of 1999 compared
to $33 million for the comparable period 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.
Borrowing costs increased $4 million to $69 million during the first nine months
of 1999 primarily as a result of 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 reduction in borrowing costs of $9 million for the first nine
months of fiscal year 1999. The Corporation's weighted average interest rate on
all debt decreased during the first nine months of 1999 to 5.6% from 6.4% in
1998 primarily due to lower average interest rates and the maturity of high
yield subordinated debt.
Credit, collection and administrative expenses increased to $32 million during
the first nine months of 1999 from $26 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)
Provision for losses on receivables totaled $5 million for the first nine months
of 1999 compared to a net recovery of $1 million in 1998. The increase in 1999
was primarily due to the increase in serviced finance receivable balances and a
non-recurring loss recovery in the third quarter of 1998. Notes and account
write-offs, net of recoveries, including sold notes, were $4 million in 1999 and
$2 million of recoveries in 1998. The Corporation's allowance for losses as a
percentage of serviced finance receivables was .62%, .64% and .64% at July 31,
1999, October 31, 1998 and July 31, 1998.
Depreciation and other expenses during the first nine months of 1999 was $32
million compared to $21 million in the comparable period of 1998. The increase
is primarily the result of a larger investment in equipment under operating
leases.
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-.
The Corporation's operations used $6 million in cash in the first nine months of
1999 as the cash provided from net income was offset by a decrease in accounts
payable to affiliated companies. Investing activities provided $135 million in
cash during this period principally as a result of the sale of retail notes,
offset in part by the purchase of retail notes and lease receivables. The cash
generated from investing activities was used primarily to lower borrowings in
the asset-backed commercial paper facility and to pay dividends to
Transportation of $45 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 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 nine months of fiscal 1999, the Corporation sold
$1,260 million of retail notes, net of unearned finance income, through Navistar
Financial Retail Receivables Corporation ("NFRRC"), a wholly owned subsidiary.
The Corporation sold $545 million of retail notes in November 1998 to a
multi-seller asset-backed commercial paper conduit sponsored by a major
financial institution and $715 million of retail notes in June 1999 to an owner
trust which, in turn, issued securities which were sold to investors. During the
first nine months of fiscal 1998 the Corporation sold $1,001 million of retail
notes, net of unearned finance income, through NFRRC, to owner trusts which, in
turn, issued securities which were sold to investors. As of July 31, 1999, the
remaining shelf registration available to NFRRC for the public issuance of
asset-backed securities was $2,257 million.
As of July 31, 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 July 31, 1999, available funding under the bank revolving credit facility and
the asset-backed commercial paper facility was $220 million, of which $18
million provided funding backup for the outstanding short-term debt. The
remaining $202 million, when combined with unrestricted cash and cash
equivalents, made $209 million available to fund the general business purposes
of the Corporation.
In September 1999, the Corporation entered into a total of $150 million of
forward treasury locks in anticipation of a November 1999 sale of retail
receivables. These locks were entered into to reduce exposure to future changes
in interest rates. The Corporation intends to close these positions on the
pricing date of the sale. Any resulting gain or loss will be included in the
gain or loss on the sale of receivables recognized in November 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 July 31, 1999 the notional amount was $399 million and the
interest rate cap had a fair value of $2 million.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
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 anticipates that the modifications and testing
process of all significant IT systems will be substantially complete by the
end of September 1999, which is prior to any anticipated impact on its operating
systems.
As of July 31, 1999 the Corporation believes it has remediated approximately 94%
of its non-compliant IT systems. Total costs connected with the remediation of
the Corporation's significant IT systems during the first nine months of 1999
totaled $2 million, and for fiscal 1998 and 1997 totaled $3 million and $1
million, respectively. Estimated future costs are not material. 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 for the end
of September 1999. Management reviews the progress under the action plan on
a weekly basis. Contingency plans have been developed that define how the
company will continue to operate critical business processes in the event of a
Year 2000 problem. Review, cataloging and testing will continue prior to
activation in December 1999.
<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 nine months ended
July 31, 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 September 13, 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> JUL-31-1999
<CASH> 6,700
<SECURITIES> 104,000
<RECEIVABLES> 1,295,800
<ALLOWANCES> (9,900)
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 14,500
<DEPRECIATION> (8,800)
<TOTAL-ASSETS> 2,029,800
<CURRENT-LIABILITIES> 0
<BONDS> 1,505,300
0
0
<COMMON> 171,000
<OTHER-SE> 111,300
<TOTAL-LIABILITY-AND-EQUITY> 2,029,800
<SALES> 0
<TOTAL-REVENUES> 85,100
<CGS> 0
<TOTAL-COSTS> 22,200
<OTHER-EXPENSES> 11,600
<LOSS-PROVISION> 1,300
<INTEREST-EXPENSE> 20,600
<INCOME-PRETAX> 29,400
<INCOME-TAX> (11,700)
<INCOME-CONTINUING> 17,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 17,700
<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>
