<PAGE>
PAGE 1
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, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-9618
NAVISTAR INTERNATIONAL CORPORATION
----------------------------------
(Exact name of registrant as specified in its charter)
Delaware 36-3359573
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
455 North Cityfront Plaza Drive, Chicago, Illinois 60611
-------------------------------------------------- -------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 836-2000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of August 31, 1998, the number of shares outstanding of the registrant's
common stock was 67,047,309.
<PAGE>
PAGE 2
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
INDEX
-----
Page
Reference
---------
Part I. Financial Information:
Item 1. Financial Statements:
Statement of Income --
Three Months and Nine Months
Ended July 31, 1998 and 1997......................... 3
Statement of Financial Condition --
July 31, 1998, October 31, 1997 and July 31, 1997...... 4
Statement of Cash Flow --
Nine Months Ended July 31, 1998 and 1997............... 5
Notes to Financial Statements.............................. 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition... 13
Part II. Other Information:
Item 1. Legal Proceedings............................... 21
Item 6. Exhibits and Reports on Form 8-K................ 21
Signature ................................................ 22
<PAGE>
PAGE 3
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements
<TABLE>
<CAPTION>
STATEMENT OF INCOME (Unaudited)
---------------------------------------------------------------------------------------
Millions of dollars, except per share data
---------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
-------------------------------------------
Three Months Ended Nine Months Ended
July 31 July 31
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales and revenues
Sales of manufactured products ........... $1,804 $1,526 $5,456 $4,259
Finance and insurance revenue ............ 57 45 149 133
Other income ............................. 13 15 38 41
------ ------ ------ ------
Total sales and revenues ............... 1,874 1,586 5,643 4,433
------ ------ ------ ------
Costs and expenses
Cost of products and services sold ....... 1,550 1,320 4,707 3,688
Postretirement benefits .................. 40 50 128 158
Engineering and research expense ......... 43 28 124 90
Marketing and administrative expense ..... 99 97 294 267
Interest expense ......................... 31 20 77 57
Financing charges on sold receivables .... 6 4 21 16
Insurance claims and underwriting expense. 24 11 42 28
------ ------ ------ ------
Total costs and expenses ............... 1,793 1,530 5,393 4,304
------ ------ ------ ------
Income before income taxes ........... 81 56 250 129
Income tax expense ................... 31 21 95 49
------ ------ ------ ------
Net income ............................... 50 35 155 80
Less dividends on Series G Preferred stock - 7 11 21
------ ------ ------ ------
Net income applicable to common stock .... $ 50 $ 28 $ 144 $ 59
====== ====== ====== ======
Earnings per share
Basic ............................... $ .73 $ .38 $ 2.05 $ .80
Diluted ............................. $ .72 $ .38 $ 2.02 $ .80
Average shares outstanding (millions)
Basic ............................... 68.6 72.9 69.9 73.3
Diluted ............................. 69.5 73.6 70.9 73.6
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
PAGE 4
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION (Unaudited)
- ----------------------------------------------------------------------------------------
Millions of dollars
- ----------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
--------------------------------------------
July 31 October 31 July 31
1998 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
- ------------------------------------------
Cash and cash equivalents ................ $ 269 $ 609 $ 212
Marketable securities .................... 556 356 503
------ ------ ------
825 965 715
Receivables, net ......................... 1,583 1,755 1,379
Inventories .............................. 553 496 521
Property, net of accumulated
depreciation and amortization
of $895, $847 and $893 ................. 1,007 835 772
Investments and other assets ............. 325 319 287
Intangible pension assets ................ 212 212 267
Deferred tax asset, net ................. 842 934 976
------ ------ ------
Total assets ............................. $5,347 $5,516 $4,917
====== ====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
- ------------------------------------------
Liabilities
Accounts payable, principally trade ...... $1,051 $1,100 $ 864
Debt: Manufacturing operations ........... 440 92 98
Financial services operations ...... 1,122 1,224 957
Postretirement benefits liability ........ 911 1,186 1,221
Other liabilities ........................ 1,033 894 814
------ ------ ------
Total liabilities .................... 4,557 4,496 3,954
------ ------ ------
Commitments and contingencies
Shareowners' equity
Series G convertible preferred stock
(liquidation preference $240 million) .. $ - $ 240 $ 240
Series D convertible junior preference
stock (liquidation preference
$4 million) ............................ 4 4 4
Common stock (75.3, 52.2 and 52.2 million
shares issued) ......................... 2,138 1,659 1,662
Class B Common stock (0.0, 23.1 and 23.1
million shares issued) ................ - 471 471
Retained earnings (deficit) .............. (1,168) (1,301) (1,364)
Common stock held in treasury, at cost ... (184) (53) (50)
------ ------ ------
Total shareowners' equity ............ 790 1,020 963
------ ------ ------
Total liabilities and shareowners' equity. $5,347 $5,516 $4,917
====== ====== ======
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
PAGE 5
STATEMENT OF CASH FLOW (Unaudited)
------------------------------------------------------------------------------
For the Nine Months Ended July 31 (Millions of dollars)
------------------------------------------------------------------------------
Navistar International
Corporation and
Consolidated Subsidiaries
-------------------------
1998 1997
------ ------
Cash flow from operations
Net income ................................ $ 155 $ 80
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization ........... 119 89
Deferred income taxes ................... 95 45
Postretirement benefits funding in excess
of expense ............................ (283) (119)
Other, net .............................. (31) (51)
Change in operating assets and liabilities
Receivables ............................. 154 (40)
Inventories ............................. (59) (40)
Prepaid and other current assets ........ (10) 3
Accounts payable ........................ (103) 48
Other liabilities ....................... 151 19
------ ------
Cash provided by operations ............... 188 34
------ ------
Cash flow from investment programs
Purchase of retail notes and lease
receivables ............................. (919) (703)
Collections/sales of retail notes
and lease receivables .................. 1,000 1,007
Purchase of marketable securities ......... (469) (417)
Sales or maturities of marketable
securities .............................. 274 315
Capital expenditures ...................... (180) (89)
Property and equipment leased to others ... (111) (29)
Other investment programs, net ............ (7) 3
------ ------
Cash provided by (used in) investment
programs ................................ (412) 87
------ ------
Cash flow from financing activities
Issuance of debt .......................... 440 176
Principal payments on debt ................ (110) (37)
Net decrease in notes and debt outstanding
under bank revolving credit facility
and asset-backed and other commercial paper
programs ................................ (137) (494)
Mexican credit facility ................... 73 -
Repurchase of common stock ................ (159) (20)
Proceeds from reissuance of Treasury shares 28 -
Redemption of Series G Preferred Stock .... (240) -
Dividends paid ............................ (11) (21)
------ ------
Cash used in financing activities ......... (116) (396)
------ ------
Cash and cash equivalents
Decrease during the period .............. (340) (275)
At beginning of the year ................ 609 487
------ ------
Cash and cash equivalents
at end of the period .................... $ 269 $ 212
====== ======
See Notes to Financial Statements.
<PAGE>
PAGE 6
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note A. Summary of Accounting Policies
Navistar International Corporation is a holding company whose principal
operating subsidiary is Navistar International Transportation Corp.
(Transportation). As used hereafter, "company" or "Navistar" refers to Navistar
International Corporation and its consolidated subsidiaries. The consolidated
financial statements include the results of the company's manufacturing
operations and its wholly owned financial services subsidiaries. The effects of
transactions between the manufacturing and financial services operations have
been eliminated to arrive at the consolidated totals.
The accompanying unaudited financial statements have been prepared in
accordance with accounting policies described in the 1997 Annual Report on Form
10-K and should be read in conjunction with the disclosures therein.
In the opinion of management, these interim financial statements reflect
all adjustments, consisting of normal recurring accruals, necessary to present
fairly the financial position, results of operations and cash flow for the
periods presented. Interim results are not necessarily indicative of results for
the full year. Certain 1997 amounts have been reclassified to conform with the
presentation used in the 1998 financial statements.
Note B. Supplemental Cash Flow Information
Consolidated interest payments during the first nine months of 1998 and
1997 were $73 million and $57 million, respectively. Consolidated tax payments
made during the first nine months of both 1998 and 1997 were not material.
Note C. Income Taxes
The benefit of Net Operating Loss (NOL) carryforwards is recognized as a
deferred tax asset in the Statement of Financial Condition, while the Statement
of Income includes income taxes calculated at the statutory rate. The amount
reported does not represent cash payment of income taxes except for certain
state income, foreign withholding and federal alternative minimum taxes which
are not material. In the Statement of Financial Condition, the deferred tax
asset is reduced by the amount of deferred tax expense or increased by a
deferred tax benefit recorded during the year. Until the company has utilized
its significant NOL carryforwards, the cash payment of federal income taxes will
be minimal.
<PAGE>
PAGE 7
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note D. Inventories
Inventories are as follows:
July 31 October 31 July 31
Millions of dollars 1998 1997 1997
- --------------------------------------------------------------------------------
Finished products............. $ 253 $ 225 $ 261
Work in process............... 114 106 129
Raw materials and supplies.... 186 165 131
-------- -------- --------
Total inventories............. $ 553 $ 496 $ 521
======== ======== ========
Note E. Financial Instruments
The company purchases collateralized mortgage obligations (CMOs) that
have predetermined fixed-principal payment patterns which are relatively
certain. At July 31, 1998, these instruments totaled $82 million and the
unrecognized gain was not material.
At July 31, 1998, the company had borrowed $73 million under the Mexican
credit facility. Approximately half of this borrowing is denominated in Mexican
pesos. At quarter end, $23 million of a Mexican subsidiary's receivables were
pledged as collateral for bank borrowings.
In June 1998, Navistar Financial Corporation (NFC) sold $501 million of
retail notes, net of unearned finance income, recognizing a gain of $8 million
on the sale. The proceeds of $482 million, net of underwriting fees and credit
enhancements, were used by NFC for general working capital purposes. In
anticipation of the June 1998 sale of retail receivables, NFC entered into $400
million of forward treasury locks. These hedge agreements were closed in
conjunction with the pricing of the sale and resulted in an immaterial gain.
NFC also entered into $450 million of forward treasury locks in
anticipation of a November 1998 sale of retail receivables. This hedge agreement
will be closed in conjunction with the pricing of the sale and any resulting
gain or loss will be included in the gain or loss on the sale of receivables
recognized in November 1998.
The company periodically enters into forward contracts in order to reduce
exposure to exchange rate risk between the U.S. dollar and the Canadian dollar
related to committed Canadian dollar truck sales. At July 31, 1998 these hedge
agreements totaled $70 million and the unrealized gain was not material.
<PAGE>
PAGE 8
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Earnings Per Share
In the first quarter of 1998, the company adopted Statement of Financial
Accounting Standards No. 128, "Earnings per Share," which replaces the
presentation of primary earnings per share and fully diluted earnings per share
with a presentation of basic earnings per share and diluted earnings per share.
Basic earnings per share excludes dilution and is computed by dividing income
available to common shareowners by the weighted-average number of basic common
shares outstanding for the period. Diluted earnings per share assumes the
issuance of common stock for other potentially dilutive equivalent shares
outstanding. All prior-period earnings per share data has been restated. The
adoption of this new accounting standard did not have a material effect on the
company's reported earnings per share amounts.
Earnings per share was computed as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
----------------------- -----------------------
Millions of dollars,
except share and per share data 1998 1997 1998 1997
- ------------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income............................................. $ 50 $ 35 $ 155 $ 80
Less dividends on Series G Preferred Stock............. - 7 11 21
-------- -------- -------- --------
Net income applicable to common stock
(Basic and Diluted).................................. $ 50 $ 28 $ 144 $ 59
======== ======== ======== ========
Average shares outstanding (millions)
Basic................................................ 68.6 72.9 69.9 73.3
Dilutive effect of options outstanding
and other dilutive securities................... .9 .7 1.0 .3
-------- -------- -------- --------
Diluted.............................................. 69.5 73.6 70.9 73.6
======== ======== ======== ========
Earnings per share
Basic................................................ $ .73 $ .38 $ 2.05 $ .80
Diluted.............................................. $ .72 $ .38 $ 2.02 $ .80
</TABLE>
Unexercised employee stock options to purchase .3 million and 1.0 million
shares of Navistar common stock during the three months ended July 31, 1998 and
1997, respectively, and to purchase .4 million and 2.3 million shares of
Navistar common stock during the nine months ended July 31, 1998 and 1997,
respectively, were not included in the computation of diluted shares outstanding
because the exercise prices were greater than the average market price of
Navistar common stock. Additionally, the diluted calculation excludes the
effects of the conversion of the Series G preferred stock as such conversion
would produce anti-dilutive results. See Note H for discussion of the February
1998 redemption of the Series G preferred stock and the company's repurchase of
shares in conjunction with the June secondary offering.
<PAGE>
PAGE 9
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note G. New Accounting Pronouncements
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits." This statement revises standards
for disclosures about pension and other postretirement benefit plans and is
effective for fiscal years beginning after December 15, 1997. This standard
expands or modifies disclosure and, accordingly will have no impact on the
company's reported financial position, results of operations and cash flows.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This statement defines whether
or not certain costs related to the development or acquisition of internal use
software should be expensed or capitalized and is effective for fiscal years
beginning after December 15, 1998. The company is currently assessing the impact
of this statement on its results of operations and financial position.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" to establish accounting and reporting
standards for derivative instruments. This statement requires recognition of all
derivative instruments in the statement of financial position as either assets
or liabilities, measured at fair value, and is effective for fiscal years
beginning after June 15, 1999. This statement additionally requires changes in
the fair value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives. The
company is currently assessing the impact of this statement on its results of
operations, financial position and cash flows.
Note H. Debt and Equity Offerings
During the second quarter, the company's manufacturing operations issued
$100 million 7% Senior Notes due 2003 and $250 million 8% Senior Subordinated
Notes due 2008. The proceeds of the Senior Notes were used to prepay an 8%
Secured Note due 2002 and were used to redeem the 9% Sinking Fund Debentures on
June 15, 1998. The proceeds of the Senior Subordinated Notes were used to redeem
the company's $240 million, $6.00 Series G Convertible Cumulative Preferred
Stock and to pay accumulated and unpaid dividends thereon. Excess proceeds from
both debt issues were used for general working capital purposes.
On June 8, 1998, a secondary public offering of the common stock of the
company was completed, in which the Navistar International Transportation Corp.
Retiree Supplemental Benefit Trust (the Trust) sold approximately 19.9 million
shares of common stock at an offering price of $26.50 per share. These
shares represented the Class B Common Stock held by the Trust which
<PAGE>
PAGE 10
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note H. Debt and Equity Offerings (continued)
automatically converted into Common Stock upon the sale. In conjunction with
this offering, the company and certain of the company's pension plans
purchased 2 million and 3 million, respectively, of the shares being offered.
The company did not receive any proceeds from the sale of the shares in the
offering but paid expenses related to the offering of $14 million pursuant to a
pre-existing agreement with the Trust. These offering fees were included in
insurance claims and underwriting expense during the third quarter of 1998. On
June 26, 1998 the underwriters exercised their over-allotment option and elected
to purchase 1.1 million shares from the company at $26.50 per share. The company
offset the dilution through open market purchases; at quarter-end, 713,000
shares had been purchased and in August, an additional 340,000 shares were
purchased.
<PAGE>
PAGE 11
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note I. Supplemental Financial Information
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
July 31 July 31
------------------- -------------------
Condensed Statement of Income 1998 1997 1998 1997
- ------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales of manufactured products....... $ 1,804 $ 1,526 $ 5,456 $ 4,259
Other income......................... 12 12 35 36
-------- -------- -------- --------
Total sales and revenues............. 1,816 1,538 5,491 4,295
-------- -------- -------- --------
Cost of products sold................ 1,542 1,315 4,686 3,673
Postretirement benefits.............. 40 50 128 158
Engineering and research expense..... 43 28 124 90
Marketing and administrative expense. 94 89 271 243
Other expenses....................... 46 23 104 64
-------- -------- -------- --------
Total costs and expenses............. 1,765 1,505 5,313 4,228
-------- -------- -------- --------
Income before income taxes
Manufacturing operations........... 51 33 178 67
Financial services operations...... 30 23 72 62
-------- -------- -------- --------
Income before income taxes....... 81 56 250 129
Income tax expense............... 31 21 95 49
-------- -------- -------- --------
Net income........................... $ 50 $ 35 $ 155 $ 80
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
July 31 October 31 July 31
Condensed Statement of Financial Condition 1998 1997 1997
- ------------------------------------------ --------- ---------- --------
<S> <C> <C> <C>
Cash, cash equivalents
and marketable securities................. $ 670 $ 802 $ 553
Inventories................................. 537 483 497
Property and equipment, net................. 788 706 653
Equity in nonconsolidated subsidiaries...... 324 322 310
Other assets................................ 829 864 789
Deferred tax asset, net..................... 842 934 976
--------- -------- --------
Total assets........................... $ 3,990 $ 4,111 $ 3,778
========= ======== ========
Accounts payable, principally trade......... $ 949 $ 1,060 $ 826
Postretirement benefits liabilities......... 903 1,178 1,213
Other liabilities........................... 1,348 853 776
Shareowners' equity......................... 790 1,020 963
--------- -------- --------
Total liabilities
and shareowners' equity............ $ 3,990 $ 4,111 $ 3,778
========= ======== ========
</TABLE>
<PAGE>
PAGE 12
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note I. Supplemental Financial Information (continued)
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
Nine Months Ended
July 31
-----------------------
Condensed Statement of Cash Flow 1998 1997
- --------------------------------------------- -------- --------
Cash flow from operations
Net income................................... $ 155 $ 80
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization.............. 94 72
Deferred income taxes...................... 95 45
Postretirement benefits funding
in excess of expense..................... (283) (145)
Other, net................................. (14) (29)
Change in operating assets and liabilities... 44 67
-------- --------
Cash provided by operations.................. 91 90
-------- --------
Cash flow from investment programs
Purchase of marketable securities............ (421) (337)
Sales or maturities of marketable securities. 221 216
Capital expenditures......................... (180) (89)
Receivable from Navistar Financial Corporation (8) (99)
Other investment programs, net .............. - 4
-------- --------
Cash used in investment programs............. (388) (305)
-------- --------
Cash flow from financing activities.......... (35) (60)
-------- --------
Cash and cash equivalents
Decrease during the period................... (332) (275)
At beginning of the year..................... 573 452
-------- --------
Cash and cash equivalents at end of the period $ 241 $ 177
======== ========
<PAGE>
PAGE 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Certain statements under this caption constitute "forward-looking
statements" under the Reform Act, which involve risks and uncertainties.
Navistar International Corporation's actual results may differ significantly
from the results discussed in such forward-looking statements. Factors that
might cause such a difference include, but are not limited to, those discussed
under the heading "Business Environment."
Third Quarter Ended July 31, 1998
---------------------------------
The company reported net income of $50 million, or $0.72 per diluted
common share for the third quarter ended July 31, 1998, compared with net income
of $35 million, or $0.38 per diluted common share for the comparable quarter
last year.
The company's manufacturing operations reported income before income
taxes of $51 million compared with pretax income of $33 million in the third
quarter of 1997 reflecting an increase in the demand for trucks and engines. The
financial services operations' pretax income for the third quarter of 1998 was
$30 million compared with $23 million in the prior year reflecting increased
finance receivable balances.
Sales and Revenues. Third quarter 1998 industry retail sales of Class 5 through
8 trucks totaled 102,200 units, which is 10% higher than the 92,700 units sold
during this period in 1997. Class 8 heavy truck sales of 60,400 units during the
third quarter of 1998 were 17% higher than the 1997 level of 51,800 units.
Industry sales of Class 5, 6 and 7 medium trucks, including school buses,
increased slightly to 41,800 units from 40,900 in the prior year quarter.
Industry sales of school buses, which accounted for 20% of the medium truck
market, decreased 13%.
Sales and revenues for the third quarter of 1998 totaled $1,874 million,
18% higher than the $1,586 million reported for the comparable quarter in 1997.
Sales of trucks, mid-range diesel engines and service parts for the third
quarter of 1998 totaled $1,804 million compared with $1,526 million reported for
the same period in 1997.
The company maintained its position as sales leader in the combined
United States and Canadian Class 5 through 8 truck market with a 27.5% market
share for the third quarter of 1998, a slight decrease from the 27.9% market
share for third quarter of the previous year. (Sources: American Automobile
Manufacturers Association, Canadian Vehicle Manufacturers Association, and R.L.
Polk & Company.)
Shipments of mid-range diesel engines by the company to other original
equipment manufacturers during the third quarter of 1998 totaled 47,700 units, a
14% increase from the same period of 1997. Higher shipments to Ford Motor
Company to meet consumer demand for the light trucks and vans which use this
engine were the primary reason for the increase.
<PAGE>
PAGE 14
Service parts sales of $220 million in the third quarter of 1998 increased
12% from the prior year's level.
Finance and insurance revenue of $57 million in the third quarter of 1998
increased 3% from 1997, primarily as a result of increased retail notes and
lease financing receivables.
Costs and expenses. Manufacturing gross margin was 14.5% for the third quarter
of 1998 compared with 13.8% for the same period in 1997. The increase in gross
margin is primarily due to improved pricing and operating efficiencies partially
offset by an increase in the provision for employee profit sharing.
Postretirement benefits plan expense decreased to $40 million in 1998
from $50 million in the third quarter of 1997 mainly as a result of higher
expected return on plan assets.
Engineering and research expense increased $15 million from the third
quarter of 1997 to $43 million, reflecting the company's continuing investment
in its Next Generation Vehicle (NGV) program.
The $11 million increase in interest expense is primarily due to the
issuance of $350 million of Senior and Senior Subordinated Notes by the
company's manufacturing operations during February 1998, partially offset by the
repayment of $75 million of other debt.
Insurance claims and underwriting expense of $24 million includes $14
million of expenses related to the secondary public offering of 19.9 million
shares of the company's common stock as further described in the liquidity and
capital resources section.
Nine Months Ended July 31, 1998
-------------------------------
Pretax income for the first nine months of 1998 was $250 million compared
with $129 million reported for the same period of 1997. The company's
manufacturing operations reported income before income taxes of $178 million
during this period, compared with $67 million reported in 1997 reflecting an
increase in the demand for trucks and engines. The financial services
operations' pretax income for the first nine months of 1998 was $72 million, an
increase from the $62 million reported in 1997. This change is primarily a
result of an increase in finance receivable balances.
Manufacturing operations' sales and revenues during this period totaled
$5,491 million, an increase of 28% from 1997. During the first nine months of
1998, sales of trucks increased 35% while sales of diesel engines to original
equipment manufacturers increased 17%. Service parts sales were 6% higher than
in the same period of 1997. Finance and insurance revenue was $149 million
during the first three quarters of 1998 compared with $133 million in 1997.
Industry retail sales of Class 5 through 8 trucks during the first nine
months of 1998 totaled 286,500 units, an increase from the 252,300 units sold
during this period in 1997. The company remained the sales leader in the
combined United States and Canadian Class 5 through 8 truck market for the first
three quarters of the year with a 28.5% market share, an increase over the 27.1%
market share reported for the same period last year.
<PAGE>
PAGE 15
Manufacturing gross margin for the first nine months of 1998 was 14.1%
compared with 13.8% in 1997. Consolidated marketing and administrative expense
increased to $294 million during this period compared with $267 million during
the first three quarters of 1997 reflecting investment in the company's
five-point truck strategy and an increase in the provision for payment to
employees as provided by the company's performance incentive programs. The
factors which influenced postretirement benefits expense, engineering and
research expense, interest expense and insurance claims and underwriting expense
during the third quarter of 1998, as stated above, were also primarily
responsible for the changes during the first nine months of the year.
Liquidity and Capital Resources
Cash flow is generated from the manufacture and sale of trucks, mid-range
diesel engines and service parts as well as product financing and insurance
coverage provided to the company's dealers and retail customers by the financial
services operations.
Historically, funds to finance the company's products are obtained from a
combination of commercial paper, short- and long-term bank borrowings, medium-
and long-term debt issues, sales of finance receivables and equity capital.
Insurance operations are funded through internal operations.
Total cash, cash equivalents and marketable securities of the company
amounted to $825 million at July 31, 1998, $965 million at October 31, 1997 and
$715 million at July 31, 1997.
Cash provided by operations during the first nine months of 1998
totaled $188 million, $154 million more than the same period in 1997, primarily
from net income of $155 million. In addition to regular postretirement benefit
payments, the company contributed $200 million to the Retiree Health Care Base
Plan Trust and $100 million to the hourly pension plan during the first nine
months of 1998. An additional $100 million contribution to the hourly pension
plan was paid in the fourth quarter of 1998.
The net change of $133 million in operating assets and liabilities
included a $154 million reduction in receivables partially offset by a $103
million decrease in accounts payable reflecting the seasonality of truck sales
and production. In addition, there was a $151 million increase in other
liabilities primarily due to the timing of cash payments including those related
to the company's repurchase of shares during the quarter, payments to employees
as required by the company's profit sharing and performance incentive programs,
and the increase in accrued interest from the company's new debt.
During the first three quarters of 1998, investment programs used $412
million in cash driven by a net increase in marketable securities of $195
million and a $111 million net increase in property and equipment leased to
others. Additionally, other investment activities used $180 million to fund
capital expenditures for construction of a truck assembly facility in Mexico, to
increase mid-range diesel engine capacity, and for truck product improvements.
Partially offsetting these factors was a net decrease in retail notes and lease
receivables of $81 million.
<PAGE>
PAGE 16
Financing activities used cash of $240 million for the redemption of the
Series G Preferred Stock and for the payment of $11 million of related
dividends. Cash was also used to reduce notes and debt outstanding under the
bank revolving credit facility and asset-backed and other commercial paper
programs by $137 million. In addition, $159 million of common stock was
repurchased during the first nine months of 1998 offset by $28 million of
proceeds from the reissuance of the Treasury shares. Financing activities
provided a $330 million net increase in long-term debt primarily due to the
issuance of $100 million 7% Senior Notes due 2003 and $250 million 8% Senior
Subordinated Notes due 2008 offset by the $26 million used to repay the 8%
Secured Note due 2002 and by the $45 million used to redeem the company's 9%
Sinking Fund Debentures due June 2004. Additionally, $73 million was borrowed
under the Mexican credit facility, of which approximately half is denominated in
Mexican pesos.
On June 8, 1998, a secondary public offering of the common stock of the
company was completed, in which the Navistar International Transportation Corp.
Retiree Supplemental Benefit Trust (the Trust) sold approximately 19.9 million
shares of common stock at an offering price of $26.50 per share. These
shares represented the Class B Common Stock held by the Trust which
automatically converted into Common Stock upon the sale. In conjunction with
this offering, the company and certain of the company's pension plans purchased
2 million and 3 million, respectively, of the shares being offered. The company
did not receive any proceeds from the sale of the shares in the offering
but paid expenses related to the offering of $14 million pursuant to a
pre-existing agreement with the Trust. These offering fees were included in
insurance claims and underwriting expense during the third quarter of 1998. On
June 26, 1998 the underwriters exercised their over-allotment option and elected
to purchase 1.1 million shares from the company at $26.50 per share. The company
offset the dilution through open market purchases; at quarter-end, 713,000
shares had been purchased and in August, an additional 340,000 shares were
purchased.
Receivable sales were a significant source of funding in 1998 and 1997.
During the first nine months of 1998 and of 1997, NFC sold $1,001 million and
$987 million, respectively, of retail notes through Navistar Financial Retail
Receivables Corporation (NFRRC). The amount remaining under NFRRC's shelf
registration as of July 31, 1998 was $472 million. On August 28, 1998, NFRRC
filed a shelf registration with the Securities and Exchange Commission (SEC)
providing for the issuance of an additional $2,500 million of asset-backed
securities. Upon acceptance of the additional shelf registration by the SEC,
NFRRC will have $2,972 million available for the issuance of asset-backed
securities. At July 31, 1998, NFC has a revolving wholesale note trust that
provides for the funding of $700 million of wholesale notes. All eligible
wholesale notes are sold to the trust.
At July 31, 1998, available funding under NFC's amended and restated credit
facility and the asset-backed commercial paper facility was $716 million, of
which $149 million was used to back short-term debt. The remaining $567 million,
when combined with unrestricted cash and cash equivalents made $572 million
available to fund the general business purposes of NFC at July 31, 1998.
Additionally, in July 1998, Navistar Financial Securities Corporation, a wholly
owned subsidiary of NFC, issued a $200 million tranche of investor certificates
which matures in July 2008.
<PAGE>
PAGE 17
The company purchases collateralized mortgage obligations (CMOs) that
have predetermined fixed-principal payment patterns which are relatively
certain. At July 31, 1998 these instruments totaled $82 million and the
unrecognized gain was not material. At quarter end, $23 million of a Mexican
subsidiary's receivables were pledged as collateral for bank borrowings.
The Company periodically enters into forward contracts in order to reduce
exposure to exchange rate risk between the U.S. dollar and the Canadian dollar
related to committed Canadian dollar truck sales. At July 31, 1998 these hedge
agreements totaled $70 million and the unrealized gain was not material.
NFC entered into $400 million of forward treasury locks in anticipation
of the June 1998 sale of retail receivables. These hedge agreements were closed
in conjunction with the pricing of the sale and resulted in an immaterial gain.
NFC also entered into $450 million of forward treasury locks in
anticipation of a November 1998 sale of retail receivables. This hedge agreement
will be closed in conjunction with the pricing of the sale and any resulting
gain or loss will be included in the gain or loss on the sale of receivables
recognized in November 1998.
Impacting future liquidity, the company had outstanding capital
commitments of $106 million at July 31, 1998, primarily for increased
manufacturing capacity at the Indianapolis engine plant, improvements to
existing facilities and products and for completion of construction of a truck
assembly facility in Mexico. Additionally, during the quarter, the company
approved a plan for up to $600 million in capital spending over the next six
years in order to develop and manufacture a next generation version of diesel
engines. Approximately $90 million of this amount was approved for spending in
1999.
It is the opinion of management that, in the absence of significant
unanticipated cash demands, current and forecasted cash flow will provide a
basis for financing operating requirements and capital expenditures. Management
also believes that collections on the outstanding receivables portfolios as well
as funds available from various funding sources will permit the financial
services operations to meet the financing requirements of the company's dealers
and customers.
Year 2000
The company has identified all significant applications that will require
modification to ensure Year 2000 compliance. Internal and external resources are
being used to make the required modifications and test Year 2000 compliance. The
company plans to complete the modifications and testing process of all
significant applications by July 1999, which is prior to any anticipated impact
on its operating systems. The total cost of the Year 2000 project has not been
and is not anticipated to be material to the company's financial position or
results of operations and will be funded through operating cash flows.
<PAGE>
PAGE 18
The costs of the project and the date on which the company believes it
will complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events,
including the continued availability of certain resources, third party
modification plans and other factors. However, there can be no guarantee that
these estimates will be achieved and actual results could differ materially from
those anticipated. Specific factors that might cause such material differences
include, but are not limited to, the availability and cost of personnel trained
in this area, the ability to locate and correct all relevant computer codes, and
similar uncertainties.
In addition, the company has communicated with others with whom it does
significant business to determine their Year 2000 compliance readiness and the
extent to which the company is vulnerable to any third party Year 2000 issues.
However, there can be no guarantee that the systems or products of other
companies, including the company's dealers, on which the company relies will be
timely converted, or that a failure to convert by another company, or a
conversion that is incompatible with the company's systems, would not have a
material adverse affect on the company.
Impact of Government Regulation
For model year 1998, the U.S. EPA has issued conditional certification of
conformance for electronically-controlled diesel engines while it investigates
whether these engines fully comply with regulations concerning nitrogen oxide
emissions. In particular, the U.S. EPA is focusing on whether certain
electronics strategies used to attain fuel economy have an adverse impact on
nitrogen oxide emissions. In connection with its investigation the U.S. EPA has
made demand upon Navistar that it enter into a consent decree providing, among
other things, for the payment of fines in excess of $100,000 for alleged
violations of U.S. EPA emissions standards. Navistar believes the diesel engines
manufactured by it are in compliance with all applicable U.S. EPA standards and
is engaged in confidential discussions with the U.S. EPA in an effort to resolve
this issue. It is premature at this time to predict the final results of these
discussions.
Income Taxes
The deferred tax assets are net of valuation allowances since it is more
likely than not that some portion of the deferred tax asset may not be realized
in the future through the generation of taxable income. Extensive analysis has
historically been performed on an annual basis to determine the amount of the
deferred tax asset. Such analysis is based on the premise that the company is
and will continue to be a going concern and that it is more likely than not that
deferred tax benefits will be realized through the generation of future taxable
income. Management reviews all available evidence, both positive and negative,
to assess the long-term earnings potential of the company using a number of
alternatives to evaluate financial results in economic cycles at various
industry volume conditions based upon the company's existing operating
structure. As a result of the continued successful implementation of its
manufacturing strategy, including the reinstatement of the NGV Program, the
continued strength of industry volume conditions, changes in the company's
operating structure and other positive operating indicators, management has
initiated an extensive review of its projected future taxable income. Other
positive operating indicators include an increase in the company's combined
market share of Class 5 through 8 trucks and the opening of its Mexican assembly
facility. This review which is expected to be completed by the end of the fiscal
year may result in a reduction to the valuation allowance.
<PAGE>
PAGE 19
New Pronouncements
In February 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits." This statement revises
standards for disclosures about pension and other postretirement benefit plans
and is effective for fiscal years beginning after December 15, 1997. This
standard expands or modifies disclosure and, accordingly will have no impact on
the company's reported financial position, results of operations and cash flows.
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This statement defines which
costs related to the development or acquisition of internal use software should
be expensed or capitalized and is effective for fiscal years beginning after
December 15, 1998. The company is currently assessing the impact of this
statement on its results of operations and financial position.
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" to establish accounting and reporting
standards for derivative instruments. This statement requires recognition of all
derivative instruments in the statement of financial position as either assets
or liabilities, measured at fair value, and is effective for fiscal years
beginning after June 15, 1999. This statement additionally requires changes in
the fair value of derivatives to be recorded each period in current earnings or
comprehensive income depending on the intended use of the derivatives. The
company is currently assessing the impact of this statement on its results of
operations, financial position and cash flows.
Business Environment
Sales of Class 5 through 8 trucks have been cyclical, with demand
affected by such economic factors as industrial production, construction, demand
for consumer durable goods, interest rates and the earnings and cash flow of
dealers and customers. Reflecting the stability of the general economy, demand
for new trucks remained strong during the third quarter of 1998. An improvement
in the number of new truck orders has increased the company's order backlog to
68,700 units at July 31, 1998 from 38,900 units at July 31, 1997. Historically,
retail deliveries have been impacted by the rate at which new truck orders are
received. Therefore, the company continually evaluates order receipts and
backlog throughout the year and will balance production with demand as
appropriate.
A stronger than expected economy has led the company to increase its
estimates of demand. The company currently projects 1998 United States and
Canadian Class 8 heavy truck demand to be 230,000 units, a 17% increase from
1997. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast
at 127,000 units, an 8% increase from 1997. Demand for school buses is expected
to decline slightly in 1998 to 32,000 units. At the currently forecasted 1998
demand of 389,000 units, the entire truck industry, including both manufacturers
and suppliers, is operating at or near capacity.
<PAGE>
PAGE 20
Mid-range diesel engine shipments by the company to original equipment
manufacturers in 1998 are expected to be 217,000 units, 17% higher than in 1997.
The company's service parts sales are projected to grow 9% to $861 million.
During March 1998, the company announced that it has been awarded the
right to negotiate an extended term agreement to supply diesel engines for
select Ford Motor Company under 8,500 lbs. GVW light duty trucks and sport
utility vehicles beginning with the 2002 model year.
<PAGE>
PAGE 21
Navistar International Corporation and Consolidated Subsidiaries
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings
Incorporated herein by reference from Item 3 - "Legal Proceedings"
in the company's definitive Form 10-K dated December 22, 1997,
Commission File No. 1-9618.
Item 6. Exhibits and Reports on Form 8-K
10-Q Page
---------
(a) Exhibits:
3. Articles of Incorporation and By-Laws. E-1
4. Instruments Defining the Rights of
Security Holders, Including Indentures E-2
(b) Reports on Form 8-K:
A current report on Form 8-K, which was filed on May 14,
1998, included information relating to the company's
second quarter 1998 financial results.
<PAGE>
PAGE 22
SIGNATURE
---------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
NAVISTAR INTERNATIONAL CORPORATION
- ----------------------------------
(Registrant)
/s/ Mark T. Schwetschenau
- -----------------------------------
Mark T. Schwetschenau
Vice President and Controller
(Principal Accounting Officer)
September 11, 1998
<PAGE>
EXHIBIT 3
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
ARTICLES OF INCORPORATION AND BY-LAWS
The following documents of Navistar International Corporation are
incorporated herein by reference:
3.1 Restated Certificate of Incorporation of Navistar International
Corporation effective July 1, 1993, filed as Exhibit 3.2 to Form
10-K dated October 31, 1993, which was filed on January 27, 1994,
Commission File No. 1-9618, and amended as of May 4, 1998.
3.2 The By-Laws of Navistar International Corporation effective April
14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K
dated October 31, 1995, which was filed on January 26, 1996, on
Commission File No. 1-9618.
E-1
<PAGE>
EXHIBIT 4
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
The following instruments of Navistar International Corporation and its
principal subsidiary Navistar International Transportation Corp. and its
principal subsidiary Navistar Financial Corporation defining the rights of
security holders are incorporated herein by reference.
4.1 Indenture, dated as of November 15, 1993, between Navistar
Financial Corporation and Bank of America, Illinois formerly
known as Continental Bank, National Association, as Trustee, for
8 7/8% Senior Subordinated Notes due 1998 for $100,000,000. Filed
on Registration No. 33-50541.
4.2 Indenture, dated as of May 30, 1997, by and between Navistar
Financial Corporation and The Fuji Bank and Trust Company, as
Trustee, for 9% Senior Subordinated Notes due 2002 for
$100,000,000. Filed on Registration No. 333-30167.
4.3 $125,000,000, Credit Agreement dated as of November 26, 1997, as
amended by Amendment No. 1 dated as of February 4, 1998, among
Navistar International Corporation Mexico, S.A. de C.V., Navistar
International Corporation, certain banks, certain Co-Arranger
banks, Bank of Montreal, as Paying Agent, and Bancomer, S.A.,
Institucion de Banca Multiple, Grupo Financiero, as Peso Agent
and Collateral Agent. The Registrant agrees to furnish to the
Commission upon request a copy of such agreement which it has
elected not to file under the provisions of Regulation 601(b) (4)
(iii).
4.4 Indenture, dated as of February 4, 1998, by and between Navistar
International Corporation and Harris Trust and Savings Bank, as
Trustee, for 7% Senior Notes due 2003 for $100,000,000. Filed on
Registration No. 333-47063.
4.5 Indenture, dated as of February 4, 1998, by and between Navistar
International Corporation and Harris Trust and Savings Bank, as
Trustee, for 8% Senior Subordinated Notes due 2008 for
$250,000,000. Filed on Registration No. 333-47063.
4.6 $160,000,000 Mexican pesos, Credit Agreement dated as of May 26,
1998 by and between Arrendadora Financiera Navistar S.A., de
C.V., and Banco Nacional de Mexico, S.A. de C.V. The Registrant
agrees to furnish to the Commission upon request a copy of such
agreement which it has elected not to file under the provisions
of Regulation 601(b)(4)(iii).
4.7 $6,000,000, Credit Agreement dated as of May 26, 1998 by and
between Arrendadora Financiera Navistar S.A. de C.V., and Banco
Nacional de Mexico, S.A. de C.V. The Registrant agrees to furnish
to the Commission upon request a copy of such agreement which it
has elected not to file under the provisions of Regulation
601(b)(4)(iii).
E-2
<PAGE>
EXHIBIT 4
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS,
INCLUDING INDENTURES
4.8 $20,000,000 Revolving Credit Agreement dated as of June 5, 1998
by and between Servicios Financieros Navistar, S.A. de C.V. and
The First National Bank of Chicago. The Registrant agrees to
furnish to the Commission upon request a copy of such agreement
which it has elected not to file under the provisions of
Regulation 601(b)(4)(iii).
4.9 $20,000,000 Revolving Credit Agreement dated as of June 5, 1998
by and between Arrendadora Financiera Navistar, S.A. de C.V. and
The First National Bank of Chicago. The Registrant agrees to
furnish to the Commission upon request a copy of such agreement
which it has elected not to file under the provisions of
Regulation 601(b)(4)(iii).
======
Instruments defining the rights of holders of other unregistered long-term
debt of Navistar and its subsidiaries have been omitted from this exhibit index
because the amount of debt authorized under any such instrument does not exceed
10% of the total assets of the Registrant and its consolidated subsidiaries. The
Registrant agrees to furnish a copy of any such instrument to the Commission
upon request.
E-3
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 269
<SECURITIES> 556
<RECEIVABLES> 1618
<ALLOWANCES> 35
<INVENTORY> 553
<CURRENT-ASSETS> 0<F1>
<PP&E> 1902
<DEPRECIATION> 895
<TOTAL-ASSETS> 5347
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<BONDS> 1562
0
4
<COMMON> 2138
<OTHER-SE> (1352)
<TOTAL-LIABILITY-AND-EQUITY> 5347
<SALES> 5456
<TOTAL-REVENUES> 5643
<CGS> 4707
<TOTAL-COSTS> 5393
<OTHER-EXPENSES> 128
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 77
<INCOME-PRETAX> 250
<INCOME-TAX> 95
<INCOME-CONTINUING> 155
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<NET-INCOME> 155
<EPS-PRIMARY> 2.05<F2>
<EPS-DILUTED> 2.02
<FN>
<F1>The company has adopted an unclassified presentation in the Statement of
Financial Condition.
<F2>Amount represents Basic Earnings Per Share.
</FN>
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