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, 2000
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, 2000, the number of shares outstanding of the registrant's
common stock was 1,600,000.
THE REGISTRANT IS A WHOLLY-OWNED SUBSIDIARY OF INTERNATIONAL TRUCK AND ENGINE
CORPORATION. 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, 2000 and 1999...... 2
Statements of Consolidated Financial Condition --
July 31, 2000; October 31, 1999; and July 31, 1999............. 3
Statements of Consolidated Cash Flow --
Nine Months Ended July 31, 2000 and 1999....................... 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
2000 1999 2000 1999
<S> <C> <C> <C> <C>
Revenue
Retail notes.......................... $ 17.8 $ 23.0 $ 49.4 $ 64.1
Lease financing....................... 23.4 19.4 68.2 55.1
Wholesale notes....................... 17.0 16.6 52.6 47.6
Accounts.............................. 10.9 8.9 34.3 26.4
Servicing fee income.................. 8.8 6.0 23.3 17.7
Insurance premiums earned............. 12.8 8.9 34.4 25.9
Marketable securities................. 1.8 2.3 5.5 6.7
Total............................ 92.5 85.1 267.7 243.5
Expense
Cost of borrowing
Interest............................ 26.8 20.6 73.8 64.3
Other............................... 1.5 1.5 4.4 4.7
Total............................ 28.3 22.1 78.2 69.0
Credit, collection
and administrative.................. 9.9 10.9 32.5 31.7
Provision for losses on receivables... 3.0 1.3 6.7 4.5
Insurance claims and underwriting..... 14.5 9.8 37.6 29.2
Depreciation expense and other........ 13.7 11.6 39.0 32.1
Total............................ 69.4 55.7 194.0 166.5
Income Before Taxes on Income........... 23.1 29.4 73.7 77.0
Taxes on Income......................... 8.9 11.7 28.1 29.8
Net Income.............................. 14.2 17.7 45.6 47.2
Retained Earnings
Beginning of period................... 129.6 113.5 111.2 109.0
Dividends paid........................ (6.0) (20.0) (19.0) (45.0)
End of period......................... $137.8 $111.2 $137.8 $111.2
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE>
NAVISTAR FINANCIAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED FINANCIAL CONDITION (Unaudited)
(Millions of dollars)
<TABLE>
<CAPTION>
July 31 October 31 July 31
2000 1999 1999
ASSETS
<S> <C> <C> <C>
Cash and Cash Equivalents.................. $ 86.6 $ 38.6 $ 6.7
Marketable Securities...................... 105.3 101.7 104.0
Finance Receivables
Retail notes............................. 714.8 851.9 489.2
Lease financing.......................... 218.0 187.8 172.6
Wholesale notes.......................... 106.1 528.7 338.9
Accounts................................. 336.5 507.5 295.1
1,375.4 2,075.9 1,295.8
Allowance for losses..................... (11.2) (13.4) (9.9)
Finance Receivables, Net............... 1,364.2 2,062.5 1,285.9
Amounts Due from Sales of Receivables...... 335.1 244.5 270.3
Equipment on Operating Leases, Net......... 314.6 266.7 255.3
Repossessions.............................. 42.0 21.0 21.0
Other Assets............................... 100.2 114.1 86.6
Total Assets............................... $2,348.0 $2,849.1 $2,029.8
LIABILITIES AND SHAREOWNER'S EQUITY
Short-Term Debt............................ $ - $ 34.5 $ 17.9
Net Accounts Payable to Affiliates......... 72.3 706.9 73.1
Other Liabilities.......................... 52.7 49.5 48.7
Senior and Subordinated Debt............... 1,806.0 1,675.8 1,505.3
Dealers' Reserves.......................... 24.7 24.2 24.9
Unpaid Insurance Claims
and Unearned Premiums.................... 85.8 77.9 77.6
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........................ 137.8 111.2 111.2
Accumulated other comprehensive
(loss) income.......................... (2.3) (1.9) 0.1
Total................................ 306.5 280.3 282.3
Total Liabilities and Shareowner's Equity.. $2,348.0 $2,849.1 $2,029.8
</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
2000 1999
<S> <C> <C>
Cash Flow From Operations
Net Income.......................................... $ 45.6 $ 47.2
Adjustments to reconcile net income to cash
provided by operations:
Gains on sales of receivables..................... (2.5) (11.5)
Depreciation and amortization..................... 41.2 34.0
Provision for losses on receivables............... 6.7 4.5
Decrease in accounts payable to affiliates........ (634.6) (63.7)
Other............................................. 7.2 (16.3)
Total........................................... (536.4) (5.8)
Cash Flow From Investing Activities
Proceeds from sold retail notes..................... 973.7 1,193.4
Purchase of retail notes and lease receivables...... (980.4) (1,026.4)
Principal collections on retail notes and
lease receivables................................. 55.6 42.5
Proceeds from sold wholesale notes.................. 358.5 -
Acquisitions under (over) cash collections of
wholesale notes and accounts receivable........... 174.0 (8.5)
Purchase of marketable securities................... (25.3) (39.0)
Proceeds from sales and maturities
of marketable securities.......................... 22.0 43.0
Purchase of equipment leased to others.............. (69.2) (80.7)
Sale of equipment leased to others.................. 18.1 11.1
Total........................................... 527.0 135.4
Cash Flow From Financing Activities
Net decrease in short-term borrowings............... (34.5) (3.9)
Net increase in bank revolving
credit facility usage............................. 55.0 40.0
Net increase (decrease) in asset-backed
commercial paper facility usage................... 15.0 (117.6)
Proceeds from long-term debt........................ 102.9 108.3
Principal payments of long-term debt................ (62.0) (118.8)
Dividends paid to International..................... (19.0) (45.0)
Total........................................... 57.4 (137.0)
Decrease in Cash and Cash Equivalents................. 48.0 (7.4)
Cash and Cash Equivalents at Beginning of Period...... 38.6 14.1
Cash and Cash Equivalents at End of Period............ $ 86.6 $ 6.7
Supplemental disclosure of cash flow information
Interest paid....................................... $ 76.8 $ 72.4
Income taxes paid................................... $ 28.8 $ 26.7
</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. Effective February 23, 2000,
Transportation changed its name to International Truck and Engine
Corporation ("International").
The accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the Corporation's 1999
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 condition and cash flow
for the interim periods presented. Interim results are not necessarily
indicative of results to be expected for the full year.
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:
July 31 October 31 July 31
2000 1999 1999
($ Millions)
Retail notes $1,975.8 $1,696.0 $1,950.0
Wholesale notes 959.3 600.0 600.0
Total $2,935.1 $2,296.0 $2,550.0
In the first three quarters of fiscal 2000, in two separate sales, the
Corporation sold a total of $1,008 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 $533
million of retail notes in November 1999 to two multi-seller asset-backed
commercial paper conduits sponsored by a major financial institution and
$475 million of retail notes in March 2000 to an owner trust which, in
turn, sold notes to investors. Aggregate gains of $3 million were
recognized on the sales.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In July 2000, Navistar Financial Securities Corporation ("NFSC"), a wholly
owned subsidiary of the Corporation, issued a $212 million tranche of
investor certificates which mature in June 2005.
In January 2000, NFSC sold $300 million of variable funding certificates,
to a conduit sponsored by a major financial institution. As of July 31,
2000, NFSC had $175 million of variable funding certificates outstanding,
and reduced its maximum capacity from $300 million to $200 million.
The variable funding certificates mature in 2001.
At July 31, 2000, NFSC has in place a revolving wholesale note trust that
provides for the funding of $959 million of eligible wholesale notes.
The allowance for losses on receivables is summarized as follows:
July 31 October 31 July 31
2000 1999 1999
($ Millions)
Allowance pertaining to:
Owned notes $11.2 $13.4 $ 9.9
Sold notes 15.0 12.8 16.3
Total $26.2 $26.2 $26.2
3. As of July 31, 2000, the Corporation was a party to a total of $350 million
of forward starting swaps in anticipation of an October 2000 sale of retail
receivables. Any gain or loss will be included in the gain or loss on the
sale of receivables recognized in October 2000.
In November 1999, the Corporation sold fixed rate retail receivables on a
variable rate basis and entered into an interest rate swap agreement to
hedge the future cash flows of the amounts due from the sale of
receivables. In March 2000, the Corporation transferred all the rights and
obligations of the swap to the conduit. Under the terms of the agreement,
the Corporation will make or receive payments based on the differential
between the transferred swap notional amount and the securitization
transaction net outstanding balance. The net settlement is included in
retail notes revenue.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
In November 1998, the Corporation sold fixed rate retail receivables to a
multi-seller asset-backed commercial paper conduit sponsored by a major
financial institution on a variable rate basis. For the protection of investors,
the Corporation issued an interest rate cap. The notional amount of the cap
amortizes based on the expected outstanding principal balance of the sold retail
receivables. Under the terms of the cap agreement, the Corporation will make
payments if interest rates exceed certain levels. As of July 31, 2000 the cap
had a notional amount of $253 million and a fair value of $2 million.
4. The Corporation's total comprehensive income was as follows:
Three Months Nine Months
Ended July 31 Ended July 31
2000 1999 2000 1999
($ Millions)
Net Income ......................... $14.2 $17.7 $45.6 $47.2
Changes in unrealized losses on
marketable securities ............ 0.1 (1.2) (0.4) (1.4)
Total Comprehensive Income ...... $14.3 $16.5 $45.2 $45.8
5. On November 1, 2000, the Corporation will adopt Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and
Hedging Activities" as amended. This statement standardizes the accounting
for derivative instruments by requiring that an entity recognize all
derivatives as assets or liabilities in the statement of financial
condition and measure them at fair value. When certain criteria are met,
it also provides for matching the gain or loss recognition on the
hedging instrument with the recognition of (a) the changes in the fair
value or cash flows of the hedged asset or liability attributable to the
hedged risk or (b) the earnings effect of the hedged forecasted
transaction. The Corporation is currently assessing the impact of adoption
on its financial statements. Based on the Corporation's current portfolio
of instruments subject to the statement, it is not expected that adoption
of this statement will have a material effect on the Corporation's
results of operations, financial condition, or cash flows. The
Corporation's initial assessment, which is subject to change for
subsequent events that occur before adoption, indicates that the
transition adjustment will be immaterial.
<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 2000 industry retail sales for Class 5
through 8 trucks was consistent with 1999. The Corporation's retail financing
acquisitions during the first nine months of fiscal 2000, including retail notes
and finance and operating leases, were $1,050 million, which was also consistent
with 1999. The Corporation's finance market share of new International trucks
sold in the U.S. was 16.4% and 16.5% in fiscal 2000 and 1999, respectively.
Serviced retail notes and lease financing balances were $3,223 million and
$2,867 million at July 31, 2000 and 1999, respectively.
In spite of the continued strong liquidity in the commercial financing market,
the Corporation provided 96% of the wholesale financing of new trucks sold to
International's dealers during the first nine months of fiscal 2000 and 1999.
Serviced wholesale note balances were $1,223 million at July 31, 2000, an 18%
increase compared to July 31, 1999.
Results of Operations
The components of net income for the three and nine month periods ended July 31
are as follows:
Three Months Nine Months
Ended July 31 Ended July 31
------------- -------------
2000 1999 2000 1999
Income before income taxes:
Finance operations.................... $23.0 $28.0 $71.6 $73.7
Insurance operations.................. 0.1 1.4 2.1 3.3
Income before taxes............... 23.1 29.4 73.7 77.0
Taxes on income........................... 8.9 11.7 28.1 29.8
Net income........................ $14.2 $17.7 $45.6 $47.2
<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)
Pre-tax income was $23 million in the third quarter of fiscal 2000 compared to
$29 million in 1999. The decrease was primarily the result of a $6 million gain
on the sale of retail note receivables recognized in June 1999 and higher losses
on retail receivables offset, in part by higher wholesale note revenue. Pre-tax
income was $74 million in the first nine months of fiscal 2000 compared to $77
million in 1999. The decrease was primarily the result of lower gains on sales
of retail note receivables and higher losses on retail receivables offset, in
part, by higher wholesale note revenue.
Retail note financing revenue decreased $15 million to $49 million in the first
nine months of 2000 compared to 1999. The decrease is primarily the result of
lower gains on the sale of retail note receivables and a decrease in owned
retail note balances. Gains on the sales of retail note receivables were $3
million and $12 million in the first nine months of fiscal 2000 and 1999,
respectively. The lower gains reflect lower retail note margins and increased
funding rates offered to the Corporation in the asset-backed market.
Lease financing revenue increased $13 million to $68 million in the first nine
months of 2000 compared to 1999. The increase is primarily the result of
continued growth in lease financing.
Wholesale note revenue was $53 million in the first nine months of 2000 compared
to $48 million for the comparable period in fiscal 1999 due primarily to the
higher level of wholesale financing activity and an increase in the average
prime interest rate.
Retail and wholesale account revenue was $34 million in the first nine months of
2000 compared to $26 million in 1999. The increase was primarily the result of
higher average balances and an increase in the average prime rate.
Servicing fee income was $23 million in the first nine months of 2000 compared
to $18 million in 1999. The increase was primarily the result of higher average
sold receivable balances.
Borrowing costs increased $9 million to $78 million during the first nine months
of 2000 primarily as a result of higher average receivable funding requirements
and higher average interest rates, partially offset by 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 $14 million for
the first nine months of fiscal year 2000. The Corporation's weighted average
interest rate on all debt increased during the first nine months of 2000 to 6.3%
from 5.6% in 1999 primarily due to higher average market interest rates.
<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 $7 million for the first nine months
of 2000 compared to $5 million in 1999. The increase in 2000 was primarily due
to an increase in repossession frequency and pricing pressure in the used truck
market. The Corporation's allowance for losses as a percentage of serviced
finance receivables was .55%, .55% and .62% at July 31, 2000, October 31, 1999
and July 31, 1999, respectively.
Depreciation and other expenses during the first nine months of 2000 was $39
million compared to $32 million in the comparable period of 1999. The increase
is primarily the result of a larger investment in equipment under operating
leases.
Insurance Operations:
Harco National Insurance Company's pretax income in the first nine months of
fiscal 2000 was $1 million lower than 1999. The increase in liability losses was
partially offset by an increase in premiums earned on liability business.
Liquidity and Funds Management
The Corporation has traditionally obtained the funds to provide financing to
International'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 February 2000, Standard and Poors raised the Corporation's senior debt
ratings from BB+ to BBB-, while the subordinated debt ratings were also raised
from BB- to BB+. 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.
Operations used $536 million in cash in the first nine months of 2000 primarily
as a result of the decrease of $635 million in accounts payable to affiliates.
To fund the cash used for operations, investing and finance activities provided
$584 million in cash during this period primarily as a result of the sale of
retail and wholesale notes and proceeds from long term debt, partially offset by
the purchases of retail notes and lease receivables.
<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 2000 and 1999.
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. In the first three quarters of fiscal 2000, in two separate sales, the
Corporation sold a total of $1,008 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 $533 million of
retail notes in November 1999 to two multi-seller asset-backed commercial paper
conduits sponsored by a major financial institution and $475 million of retail
notes in March 2000 to an owner trust which, in turn, sold notes to investors.
Aggregate gains of $3 million were recognized on the sales. As of July 31, 2000,
the remaining shelf registration available to NFRRC for the public issuance of
asset-backed securities was $1,783 million.
In July 2000, Navistar Financial Securities Corporation ("NFSC"), a wholly owned
subsidiary of the Corporation, issued a $212 million tranche of investor
certificates which mature in June 2005.
In January 2000, NFSC sold $300 million of variable funding certificates, to a
conduit sponsored by a major financial institution. As of July 31, 2000, NFSC
had $175 million of variable funding certificates outstanding, and reduced its
maximum capacity from $300 million to $200 million. The variable funding
certificates mature in 2001.
At July 31, 2000, NFSC has in place a revolving wholesale note trust that
provides for the funding of $959 million of eligible wholesale notes.
At July 31, 2000, available funding under the bank revolving credit facility and
the asset-backed commercial paper facility was $33 million. When combined with
unrestricted cash and cash equivalents, $120 million was available to fund the
general business purposes of the Corporation.
As of July 31, 2000, the Corporation was a party to a total of $350 million of
forward starting swaps in anticipation of an October 2000 sale of retail note
receivables. Any gain or loss will be included in the gain or loss on the sale
of receivables recognized in October 2000.
<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 1999, the Corporation sold fixed rate retail receivables on a
variable rate basis and entered into an interest rate swap agreement to hedge
the future cash flows of the amounts due from the sale of receivables. In March
2000, the Corporation transferred all the rights and obligations of the swap to
the conduit. Under the terms of the agreement, the Corporation will make or
receive payments based on the differential between the transferred swap notional
amount and the securitization transaction net outstanding balance. The net
settlement is included in retail notes revenue.
In November 1998, the Corporation sold fixed rate retail receivables to a
multi-seller asset-backed commercial paper conduit sponsored by a major
financial institution on a variable rate basis. For the protection of investors,
the Corporation issued an interest rate cap. The notional amount of the cap
amortizes based on the expected outstanding principal balance of the sold retail
receivables. Under the terms of the cap agreement, the Corporation will make
payments if interest rates exceed certain levels. As of July 31, 2000 the cap
had a notional amount of $253 million and a fair value of $2 million.
Year 2000
As described in the 1999 Annual Report on Form 10-K, the Corporation had
instituted a corporate-wide Year 2000 readiness project to identify all
significant information technology ("IT") applications which would require
modification or replacement, and to establish appropriate remediation and
contingency plans to avoid an impact on the company's ability to continue to
provide its products and services. Through the date of this report, the company
has not experienced any significant Year 2000 problems but will continue to
monitor its critical systems over the next several months. In the event that
significant issues arise, the company's contingency plans remain in place.
Total costs connected with the remediation of the Corporation's significant IT
systems totaled $2 million in 1999, $3 million in 1998 and $1 million in 1997.
Costs in the first nine months of fiscal year 2000 were not material.
Approximately 25% of the total costs, representing investment in purchased IT
systems, were capitalized and will be depreciated over three to five years. The
total cost of the Year 2000 project has not had a material impact on the
Corporation's financial position or results of operations and has been funded
through operating cash flows.
<PAGE>
NAVISTAR FINANCIAL CORPORATION
AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION (continued)
New Accounting Pronouncements
On November 1, 2000, the Corporation will adopt Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended. This statement standardizes the accounting for
derivative instruments by requiring that an entity recognize all derivatives as
assets or liabilities in the statement of financial condition and measure them
at fair value. When certain criteria are met, it also provides for matching the
gain or loss recognition on the hedging instrument with the recognition of (a)
the changes in the fair value or cash flows of the hedged asset or liability
attributable to the hedged risk or (b) the earnings effect of the hedged
forecasted transaction. The Corporation is currently assessing the impact of
adoption on its financial statements. Based on the Corporation's current
portfolio of instruments subject to the statement, it is not expected that
adoption of this statement will have a material effect on the Corporation's
results of operations, financial condition, or cash flows. The Corporation's
initial assessment, which is subject to change for subsequent events that occur
before adoption, indicates that the transition adjustment will be immaterial.
Business Outlook
The truck industry in 2000 is forecasted to decrease approximately 13% from
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. Additionally,
high fuel costs may impact the financial strength of the Corporation's customers
and the Corporation's ability to maintain the current level of portfolio
quality.
Management believes that collections on the outstanding receivables portfolio
plus cash available from the Corporation's various funding sources will permit
Navistar Financial Corporation to meet the financing requirements of
International's dealers and retail customers through 2000 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, 2000.
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 14, 2000 /s/R. D. Markle
R. D. Markle
Vice President and Controller
(Principal Accounting Officer)
