<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 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 June 10, 1998, the number of shares outstanding of the registrant's
common stock was 67,066,977.
- 1 -
<PAGE>
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
--------------------------
INDEX
---------
Page
Reference
---------
Part I. Financial Information:
Item 1. Financial Statements:
Statement of Income --
Three Months and Six Months
Ended April 30, 1998 and 1997........................... 3
Statement of Financial Condition --
April 30, 1998, October 31, 1997 and April 30, 1997....... 4
Statement of Cash Flow --
Six Months Ended April 30, 1998 and 1997.................. 5
Notes to Financial Statements................................. 6
Item 2. Management's Discussion and Analysis
of Results of Operations and Financial Condition... 12
Item 6. Exhibits and Reports on Form 8-K .................. 19
Part II. Other Information:
Item 1. Legal Proceedings.................................. 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports on Form 8-K................... 19
Signature ................................................... 20
- 2 -
<PAGE>
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 Six Months Ended
April 30 April 30
------------------ ----------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Sales and revenues
Sales of manufactured products ........... $1,981 $1,493 $3,653 $2,733
Finance and insurance revenue ............ 47 43 92 88
Other income ............................. 14 15 24 26
------ ------ ------ ------
Total sales and revenues ............... 2,042 1,551 3,769 2,847
------ ------ ------ ------
Costs and expenses
Cost of products and services sold ....... 1,703 1,292 3,157 2,368
Postretirement benefits .................. 43 57 88 108
Engineering and research expense ......... 46 32 81 62
Marketing and administrative expense ..... 97 87 195 170
Interest expense ......................... 29 20 46 37
Financing charges on sold receivables .... 7 5 15 12
Insurance claims and underwriting expense. 9 9 18 17
------ ------ ------ ------
Total costs and expenses ............... 1,934 1,502 3,600 2,774
------ ------ ------ ------
Income before income taxes ........... 108 49 169 73
Income tax expense ................... 41 19 64 28
------ ------ ------ ------
Net income ............................... 67 30 105 45
Less dividends on Series G Preferred stock 4 7 11 14
------ ------ ------ ------
Net income applicable to common stock .... $ 63 $ 23 $ 94 $ 31
====== ====== ====== ======
Earnings per share
Basic ............................... $ .90 $ .31 $ 1.32 $ .41
Diluted ............................. $ .89 $ .31 $ 1.30 $ .41
Average shares outstanding (millions)
Basic ............................... 69.2 73.6 70.6 73.6
Diluted ............................. 70.5 73.7 71.7 73.7
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF FINANCIAL CONDITION (Unaudited)
- ----------------------------------------------------------------------------------------
Millions of dollars
- ----------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
--------------------------------------------
April 30 October 31 April 30
1998 1997 1997
---------- ---------- ----------
<S> <C> <C> <C>
ASSETS
- ------------------------------------------
Cash and cash equivalents ................ $ 453 $ 609 $ 237
Marketable securities .................... 491 356 533
------ ------ ------
944 965 770
Receivables, net ......................... 2,044 1,755 1,618
Inventories .............................. 576 496 503
Property, net of accumulated
depreciation and amortization
of $892, $847 and $869 ................. 968 835 748
Investments and other assets ............. 334 319 303
Intangible pension assets ................ 212 212 267
Deferred tax asset, net ................. 871 934 995
------ ------ ------
Total assets ............................. $5,949 $5,516 $5,204
====== ====== ======
LIABILITIES AND SHAREOWNERS' EQUITY
- ------------------------------------------
Liabilities
Accounts payable, principally trade ...... $1,214 $1,100 $ 907
Debt: Manufacturing operations ........... 464 92 109
Financial services operations ...... 1,592 1,224 1,213
Postretirement benefits liability ........ 910 1,186 1,200
Other liabilities ........................ 977 894 816
------ ------ ------
Total liabilities .................... 5,157 4,496 4,245
------ ------ ------
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 (55.4, 52.2 and 51.0 million
shares issued) ......................... 1,750 1,659 1,642
Class B Common stock (19.9, 23.1 and 24.3
million shares issued) ................ 388 471 491
Retained earnings (deficit) .............. (1,212) (1,301) (1,388)
Common stock held in treasury, at cost ... (138) (53) (30)
------ ------ ------
Total shareowners' equity ............ 792 1,020 959
------ ------ ------
Total liabilities and shareowners' equity. $5,949 $5,516 $5,204
====== ====== ======
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
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<PAGE>
STATEMENT OF CASH FLOW (Unaudited)
------------------------------------------------------------------------------
For the Six Months Ended April 30 (Millions of dollars)
------------------------------------------------------------------------------
Navistar International
Corporation and
Consolidated Subsidiaries
-------------------------
1998 1997
------ ------
Cash flow from operations
Net income ............................... $ 105 $ 45
Adjustments to reconcile net income
to cash used in operations:
Depreciation and amortization .......... 79 60
Deferred income taxes .................. 64 26
Postretirement benefits funding in excess
of expense ........................... (283) (145)
Other, net ............................. (17) (18)
Change in operating assets and liabilities:
Receivables ............................ (192) (63)
Inventories ............................ (81) (18)
Prepaid and other current assets ....... (11) (4)
Accounts payable ....................... 80 93
Other liabilities ...................... 91 19
------ ------
Cash used in operations .................. (165) (5)
------ ------
Cash flow from investment programs
Purchase of retail notes and lease
receivables ............................ (576) (445)
Collections/sales of retail notes
and lease receivables ................. 520 518
Purchase of marketable securities ........ (355) (332)
Sales or maturities of marketable
securities ............................. 223 195
Capital expenditures ..................... (124) (58)
Property and equipment leased to others .. (88) (16)
Other investment programs, net ........... (2) 4
------ ------
Cash used in investment programs ......... (402) (134)
------ ------
Cash flow from financing activities
Issuance of debt ......................... 441 79
Principal payments on debt ............... (61) (18)
Net increase (decrease) in notes and debt
outstanding under bank revolving
credit facility and asset-backed and other
commercial paper programs .............. 312 (158)
Mexican credit facility .................. 54 -
Repurchase of common stock ............... (84) -
Redemption of Series G Preferred Stock ... (240) -
Dividends paid ........................... (11) (14)
------ ------
Cash provided by (used in)
financing activities ................... 411 (111)
------ ------
Cash and cash equivalents
Decrease during the period ............. (156) (250)
At beginning of the year ............... 609 487
------ ------
Cash and cash equivalents
at end of the period ................... $ 453 $ 237
====== ======
See Notes to Financial Statements.
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<PAGE>
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 six months of 1998 and
1997 were $42 million and $37 million, respectively. Consolidated tax payments
made during the first six months of 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.
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<PAGE>
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note D. Inventories
Inventories are as follows:
April 30 October 31 April 30
Millions of dollars 1998 1997 1997
- ------------------------------------------------------------------------------
Finished products........... $ 261 $ 225 $ 268
Work in process............. 141 106 101
Raw materials and supplies.. 174 165 134
-------- -------- --------
Total inventories........... $ 576 $ 496 $ 503
======== ======== ========
Note E. Financial Instruments
The company purchases collateralized mortgage obligations (CMOs) that
have predetermined fixed-principal payment patterns which are relatively
certain. These instruments totaled $71 million at April 30, 1998. At April 30,
the unrecognized gain on the CMOs was not material.
Servicios Financieros Navistar, S.A. de C.V., a wholly-owned financial
services subsidiary of the company, periodically enters into forward contracts
in order to reduce exposure to exchange rate risk between the U.S. dollar and
the Mexican peso. At April 30, 1998, these hedge agreements totaled $21 million
with no expected net gain or loss.
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.
NFC entered into $400 million of forward treasury locks in anticipation
of a 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 a $100 million forward treasury lock 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.
- 7 -
<PAGE>
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 Six Months Ended
April 30 April 30
--------------------- ---------------------
Millions of dollars,
except share and per share data 1998 1997 1998 1997
- ------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Net Income................................. $ 67 $ 30 $ 105 $ 45
Less dividends on Series G Preferred Stock. 4 7 11 14
-------- -------- -------- --------
Net income applicable to common stock
(Basic and Diluted)...................... $ 63 $ 23 $ 94 $ 31
======== ======== ======== ========
Average shares outstanding (millions)......
Basic.................................... 69.2 73.6 70.6 73.6
Dilutive effect of options outstanding
and other dilutive securities....... 1.3 .1 1.1 .1
-------- -------- ---------- --------
Diluted.................................. 70.5 73.7 71.7 73.7
======== ======== ========= ========
Earnings per share
Basic.................................... .90 .31 1.32 .41
Diluted.................................. .89 .31 1.30 .41
</TABLE>
Unexercised employee stock options to purchase .3 million and 3.1 million
shares of Navistar common stock during the three months ended April 30, 1998 and
1997, respectively, and to purchase .5 million and 2.9 million shares of
Navistar common stock during the six months ended April 30, 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.
- 8 -
<PAGE>
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.
Note H. Debt and Equity Offerings
On February 4, 1998 the company 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 will be used to
redeem the 9% Sinking Fund Debentures on June 15, 1998. (The company called the
9% Sinking Fund Debentures during May 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 will be 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 sold approximately 19.9 million shares of
common stock at an offering price of $26.50 per share. 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. Navistar has
also granted the underwriters an option to purchase up to an additional 1.3
million shares to cover over-allotments, if any. The company did not receive any
proceeds from the sale of the shares in the offering but will pay expenses
related to this offering estimated at $14 million, which will be expensed in the
third quarter of 1998.
- 9 -
<PAGE>
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 Six Months Ended
April 30 April 30
---------------------- ---------------------
Condensed Statement of Income 1998 1997 1998 1997
- ------------------------------------------ -------- -------- -------- --------
<S> <C> <C> <C> <C>
Sales of manufactured products............ $ 1,981 $ 1,493 $ 3,653 $ 2,733
Other income.............................. 12 14 22 24
-------- -------- -------- --------
Total sales and revenues.................. 1,993 1,507 3,675 2,757
-------- -------- -------- --------
Cost of products sold.................... 1,696 1,287 3,144 2,358
Postretirement benefits.................. 43 57 88 108
Engineering and research expense......... 46 32 81 62
Marketing and administrative expense..... 88 78 177 154
Other expenses........................... 31 20 58 41
-------- -------- -------- --------
Total costs and expenses................. 1,904 1,474 3,548 2,723
-------- -------- -------- --------
Income before income taxes
Manufacturing operations............... 89 33 127 34
Financial services operations.......... 19 16 42 39
-------- -------- -------- --------
Income before income taxes........... 108 49 169 73
Income tax expense................... 41 19 64 28
-------- -------- -------- --------
Net income............................... $ 67 $ 30 $ 105 $ 45
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
April 30 October 31 April 30
Condensed Statement of Financial Condition 1998 1997 1997
- ------------------------------------------ -------- -------- --------
<S> <C> <C> <C>
Cash, cash equivalents
and marketable securities............... $ 750 $ 802 $ 610
Inventories............................... 562 483 473
Property and equipment, net............... 764 706 637
Equity in nonconsolidated subsidiaries.... 327 322 306
Other assets.............................. 874 864 780
Deferred tax asset, net................... 871 934 995
-------- -------- --------
Total assets......................... $ 4,148 $ 4,111 $ 3,801
======== ======== ========
Accounts payable, principally trade....... $ 1,142 $ 1,060 $ 862
Postretirement benefits liabilities....... 902 1,178 1,192
Other liabilities......................... 1,312 853 788
Shareowners' equity....................... 792 1,020 959
-------- -------- --------
Total liabilities
and shareowners' equity.......... $ 4,148 $ 4,111 $ 3,801
======== ======== ========
</TABLE>
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<PAGE>
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:
Six Months Ended
April 30
-----------------------
Condensed Statement of Cash Flow 1998 1997
- ------------------------------------------------ -------- --------
Cash flow from operations
Net income...................................... $ 105 $ 45
Adjustments to reconcile net income
to cash provided by operations:
Depreciation and amortization................. 64 49
Postretirement benefits funding
in excess of expense........................ (283) (145)
Deferred income taxes......................... 64 26
Other, net.................................... (9) -
Change in operating assets and liabilities...... 104 101
-------- --------
Cash provided by operations..................... 45 76
-------- --------
Cash flow from investment programs
Purchase of marketable securities............... (330) (280)
Sales or maturities of marketable securities.... 196 134
Capital expenditures............................ (124) (58)
Receivable from Navistar Financial Corporation.. (8) (98)
Other investment programs, net ................. (2) 4
-------- --------
Cash used in investment programs................ (268) (298)
-------- --------
Cash flow from financing activities............. 36 (21)
-------- --------
Cash and cash equivalents
Decrease during the period...................... (187) (243)
At beginning of the year........................ 573 452
-------- --------
Cash and cash equivalents at end of the period.. $ 386 $ 209
======== ========
- 11 -
<PAGE>
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."
Second Quarter Ended April 30, 1998
-----------------------------------
The company reported net income of $67 million, or $0.89 per diluted
common share for the second quarter ended April 30, 1998, compared with net
income of $30 million, or $0.31 per diluted common share for the comparable
quarter last year.
The company's manufacturing operations reported income before income
taxes of $89 million compared with pretax income of $33 million in the second
quarter of 1997 reflecting an increase in the demand for trucks and engines. The
financial services operations' pretax income for the second quarter of 1998 was
$19 million compared with $16 million in the prior year reflecting increased
finance receivable balances.
Sales and Revenues. Second quarter 1998 industry retail sales of Class 5 through
8 trucks totaled 96,600 units, which is 10% higher than the 87,500 units sold
during this period in 1997. Class 8 heavy truck sales of 56,500 units during the
second quarter of 1998 were 15% higher than the 1997 level of 49,000 units.
Industry sales of Class 5, 6 and 7 medium trucks, including school buses,
increased 4% to 40,100 units. Industry sales of school buses, which accounted
for 18% of the medium truck market, increased 2%.
Sales and revenues for the second quarter of 1998 totaled $2,042 million,
32% higher than the $1,551 million reported for the comparable quarter in 1997.
Sales of trucks, mid-range diesel engines and service parts for the second
quarter of 1998 totaled $1,981 million compared with $1,493 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 29.6% market
share for the second quarter of 1998, an increase from the 26.9% market share
reported in 1997. (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 second quarter of 1998 totaled 56,000 units,
a 16% 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.
- 12 -
<PAGE>
Service parts sales of $217 million in the second quarter of 1998 increased
7% from the prior year's level.
Finance and insurance revenue of $47 million in the second quarter of
1998 increased 9% from 1997, primarily as a result of increased retail notes and
lease financing receivables.
Costs and expenses. Manufacturing gross margin was 14.4% of sales for the second
quarter of 1998 compared with 13.8% for the same period in 1997.
Consolidated marketing and administrative expense increased to $97
million in 1998 from $87 million in the second quarter of 1997 reflecting
investment in the implementation of the company's truck strategy to reduce costs
and complexity in its manufacturing processes and an increase in the provision
for payment to employees as provided by the company's performance incentive
programs.
Postretirement benefits expense decreased to $43 million in 1998 from $57
million in the second quarter of 1997 mainly as a result of higher excepted
return on plan assets.
Engineering and research expense increased $14 million from the second
quarter of 1997 to $46 million, reflecting the company's investment in its NGV
program.
The $9 million increase in interest expense is primarily due to the
issuance of $350 million of Senior and Senior Subordinated Notes during February
1998.
Six Months Ended April 30, 1998
-------------------------------
Pretax income for the first six months of 1998 was $169 million compared
with $73 million reported for the same period of 1997. The company's
manufacturing operations reported income before income taxes of $127 million
during this period, compared with $34 million reported in 1997. The financial
services operations' pretax income for the first six months of 1998 was $42
million, an increase from the $39 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
$3,675 million, an increase of 33% from 1997. During the first six months of
1998, sales of trucks increased 44% while sales of diesel engines to original
equipment manufacturers increased 16%. Service parts sales were 3% higher than
in the same period of 1997. Finance and insurance revenue was $92 million during
the first two quarters of 1998 compared with $88 million in 1997.
Industry retail sales of Class 5 through 8 trucks during the first six
months of 1998 totaled 182,200 units, an increase from the 159,600 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
two quarters of the year with a 29.4% market share, an increase over the 26.7%
market share reported for the same period last year.
- 13 -
<PAGE>
Manufacturing gross margin for the first six months of 1998 was 13.9%
compared with 13.7% in 1997. Consolidated marketing and administrative expense
was $195 million during this period compared with $170 million during the first
two quarters of 1997. The factors which influenced marketing and administrative
expense, postretirement benefits expense, engineering and research expense, and
interest expense during the second quarter of 1998 were also primarily
responsible for the changes during the first half 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.
NFC's current debt ratings have made sales of finance receivables the most
economic source of funding. Insurance operations are funded through internal
operations.
Total cash, cash equivalents and marketable securities of the company
amounted to $944 million at April 30, 1998, $965 million at October 31, 1997 and
$770 million at April 30, 1997.
Cash used in operations during the first six months of 1998 totaled $165
million primarily from excess postretirement benefits funding of $283 million
and from a net change in operating assets and liabilities of $113 million offset
by net income of $105 million, $64 million of noncash deferred taxes and $62
million of other noncash items, principally depreciation. 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 six months of 1998. The net change in operating assets and
liabilities included a $192 million increase in receivables primarily due to
strong sales during the first six months of 1998. The $81 million increase in
inventory, the $91 million increase in other liabilities and the $80 million
increase in accounts payable were primarily due to timing of cash payments and
higher production volume.
Investment programs used $402 million in cash reflecting a net increase
in marketable securities of $132 million and a net increase in retail notes and
lease receivables of $56 million. Other investment activities used $88 million
for property and equipment leased to others and $124 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.
- 14 -
<PAGE>
Financing activities provided a $380 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. Cash was also provided by an
increase of $312 million in notes and debt outstanding under the bank revolving
credit facility and other commercial paper program as well as $54 million of
borrowings under the Mexican credit facility. These increases were offset by the
$240 million redemption of the Series G Preferred Stock and payment of $11
million of related dividends. In addition, $83 million was used to repurchase
3.2 million shares of Class B common stock during the first quarter.
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 sold approximately 19.9 million shares of
common stock at an offering price of $26.50 per share. 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. Navistar has
also granted the underwriters an option to purchase up to an additional 1.3
million shares to cover over-allotments, if any. The company did not receive any
proceeds from the sale of the shares in the offering but will pay expenses
related to this offering estimated at $14 million, which will be expensed in the
third quarter of 1998.
During May 1998, the company called its 9% Sinking Fund Debentures due
June 2004. These debentures will be redeemed on June 15, 1998 for approximately
$47 million including accrued interest.
Receivable sales were a significant source of funding in 1998 and 1997.
During the first six months of 1998 and of 1997, NFC sold $500 million and $486
million, respectively, of retail notes through Navistar Financial Retail
Receivables Corporation (NFRRC). NFRRC has filed registration statements with
the Securities and Exchange Commission which provide for the issuance of up to
$5,000 million of asset-backed securities. At April 30, 1998, the remaining
shelf registration available to NFRRC was $973 million.
At April 30, 1998, available funding under NFC's amended and restated
credit facility and the asset-backed commercial paper facility was $242 million,
of which $138 million was used to back short-term debt at April 30, 1998. The
remaining $104 million, when combined with unrestricted cash and cash
equivalents made $143 million available to fund the general business purposes of
NFC at April 30, 1998.
The company purchases collateralized mortgage obligations (CMOs) that have
predetermined fixed-principal payment patterns which are relatively certain.
These instruments totaled $71 million at April 30, 1998. At April 30, the
unrecognized gain on the CMOs was not material.
Servicios Financieros Navistar, S.A. de C.V., a wholly-owned financial
services subsidiary, periodically enters into forward contracts in order to
reduce exposure to exchange rate risk between the U.S. dollar and the Mexican
peso. At April 30, 1998, these hedge agreements totaled $21 million with no
expected net gain or loss.
- 15 -
<PAGE>
In June 1998, the 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.
NFC entered into $400 million of forward treasury locks in anticipation
of a 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 a $100 million forward treasury lock 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 had outstanding capital commitments of $124 million at April
30, 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.
Management continues to evaluate current and forecasted cash flow as a
basis for financing operating requirements and capital expenditures. Management
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.
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.
- 16 -
<PAGE>
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.
- 17 -
<PAGE>
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.
Business Environment
Sales of Class 5 through 8 trucks are 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 second quarter of 1998. An improvement in the
number of new truck orders has increased the company's order backlog to 65,400
units at April 30, 1998 from 34,900 units at April 30, 1997. Retail deliveries
in 1998 continue to be highly dependent on the rate at which new truck orders
are received. The company will evaluate 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. Mid-range diesel engine shipments
by the company to original equipment manufacturers in 1998 are expected to be
215,500 units, 17% higher than in 1997. The company's service parts sales are
projected to grow 9% to $875 million.
At the currently forecasted 1998 demand of 389,000 units, the entire
truck industry is operating at or near capacity while the company's
manufacturing facilities are near capacity. Additionally, constraints have been
placed on the company's ability to meet certain customers' demands because of
component parts availability.
During March 1998, the company announced that it has been selected 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.
- 18 -
<PAGE>
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 4. Submission of Matters to a Vote of Security Holders
The company's Annual Meeting of Shareowners was held on March 24,
1998. The following three nominees were elected to the Board of
Directors to serve three year terms expiring at the 2001 Annual
Meeting of Shareowners. There were no broker nonvotes nor
abstentions for any of the nominees. The number of votes cast for,
or withheld, for each nominee for director was as follows:
Shares Voted Shares
Nominees "FOR" "WITHHELD"
------------------ ------------ ----------
John R. Horne 44,394,815 612,787
Michael N. Hammes 44,373,473 634,130
William F. Patient 44,411,312 596,290
The names of the remaining directors who did not stand for
election at the Annual Meeting and whose terms of office as
directors continue after such meeting are William F. Andrews,
John D. Correnti, Allen J. Krowe, Jerry E. Dempsey, Robert C.
Lannert, John F. Fiedler, Walter J. Laskowski, William C. Craig
and John T. Grigsby, Jr.
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
10. Material Contracts E-3
(b) Reports on Form 8-K:
A current report on Form 8-K was filed on March 6, 1998
to state earnings per share for the five years ended
October 31, 1997 under Statement of Financial
Accounting Standards No. 128.
- 19 -
<PAGE>
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/ J. Steven Keate
- ----------------------------------
J. Steven Keate
Vice President and Controller
(Principal Accounting Officer)
June 12, 1998
- 20 -
<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 March 1, 1968, between Navistar
International Transportation Corp. and Manufacturers Hanover
Trust Company, as Trustee, and succeeded by FIDATA Trust Company
of New York, as successor Trustee, for 6 1/4% Sinking Fund
Debentures due 1998 for $50,000,000. Filed on Registration No.
2-28150.
4.2 Indenture, dated as of June 15, 1974, between Navistar
International Transportation Corp. and Harris Trust and Savings
Bank, as Trustee, and succeeded by Commerce Union Bank, now known
as Sovran Bank/Central South, as successor Trustee, for 9%
Sinking Fund Debentures due 2004 for $150,000,000. Filed on
Registration No. 2-51111.
4.3 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.
4.4 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.
4.5 $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).
4.6 Indenture, dated as of February 4, 1998, by and between Navistar
International Corporation and Harris Trust and Savings Bank, as
Trustee, pursuant to which the 7% Senior Notes due 2003 have been
issued. Filed on Registration No. 333-47063.
4.7 Indenture, dated as of February 4, 1998, by and between Navistar
International Corporation and Harris Trust and Savings Bank,
as Trustee, pursuant to which the 8% Senior Subordinated Notes
due 2008 have been issued. Filed on Registration No. 333-47063.
======
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-2
<PAGE>
EXHIBIT 10
NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
----------------------------------
MATERIAL CONTRACTS
The following documents of Navistar International Corporation are included
herein.
Form 10-Q Page
--------------
10.21 Navistar International Corporation E-4
1998 Interim Stock Plan
E-3
<PAGE>
EXHIBIT 10.21
NAVISTAR INTERNATIONAL CORPORATION
1998 INTERIM STOCK PLAN
SECTION I
PURPOSE OF THE PLAN
The purpose of this Navistar International Corporation 1998 Interim
Stock Plan ("Plan") is to provide an additional plan for the issuance of stock
options and restricted stock for shares of the common stock of Navistar
International Corporation to employees of Navistar International Corporation and
its subsidiaries ("Corporation") to attract and retain highly qualified
personnel, to provide key employees who hold positions of major responsibility
the opportunity to earn incentive awards commensurate with the quality of
individual performance, the achievement of performance goals and ultimately the
increase in shareowner value. This 1998 Plan is separate from and intended to
supplement the Navistar 1994 Performance Incentive Plan ("1994 Plan").
SECTION II
DEFINITIONS
The terms used in this Plan are defined as specified in the 1994 Plan
unless the context indicates to the contrary.
SECTION III
ELIGIBILITY
Management will, from time to time, select and recommend to the Committee
on Organization of the Board of Directors of Navistar International Corporation
("Committee") Employees who are to become Participants in the Plan. However, no
executive officer of the Corporation shall participate in this Plan, except that
options or restricted stock may be issued to a person not previously employed by
the Corporation as an inducement essential to his entering into an employment
contract as an executive officer of the Corporation. Employees will be selected
from those who, in the opinion of management, have substantial responsibility in
a managerial or professional capacity. Employees selected for participation in
the Plan may also be participants in the 1994 Plan, and participation in this
Plan will not be considered participation in a plan that would affect their
participation in the 1994 Plan.
E-4
<PAGE>
SECTION IV
STOCK OPTIONS
The Committee may grant Nonqualified Stock Options to Participants in the
amount and at the time that the Committee approves. No Incentive Stock Options
shall be granted. Options shall be granted under the same terms and conditions
as options granted under the 1994 Plan, but subject to the limitation on the
number of shares contained in this Plan.
SECTION V
RESTRICTED SHARES
The Committee may award restricted shares for the purposes and under the
same terms and conditions as specified in Sections VI and VIII, and the other
provisions of the 1994 Plan, but subject to the limitations on the number of
shares contained in this Plan.
SECTION VI
ADMINISTRATION OF THE PLAN
Full power and authority to construe, interpret and administer the Plan is
vested in the Committee. Decisions of the Committee will be final, conclusive
and binding upon all parties, including the Corporation, shareowners and
employees. The foregoing will include, but will not be limited to, all
determinations by the Committee as to (i) the approval of Employees for
participation in the Plan, (ii) the amount of the Awards, (iii) the performance
levels at which different percentages of the Awards would be earned and all
subsequent adjustments to such levels and (iv) the determination of all Awards.
Any person who accepts any Award hereunder agrees to accept as final, conclusive
and binding all determinations of the Committee. The Committee will have the
right, in the case of employees not employed in the United States, to vary from
the provision of the Plan to the extent the Committee deems appropriate in order
to preserve the incentive features of the Plan.
SECTION VII
MODIFICATION, AMENDMENT OR TERMINATION
The Committee may modify without the consent of the Participant (i) the
Plan, (ii) the terms of any option previously granted or (iii) the terms of
Restricted Shares previously awarded at any time, provided that, no such
modification will, without the approval of the Board of Directors of the
Corporation, increase the number of shares of Common Stock available hereunder.
The Committee may terminate the Plan at any time.
E-5
<PAGE>
SECTION VIII
RESERVATION OF SHARES
The total number of shares of stock reserved and available for delivery
pursuant to this Plan is 500,000 shares of common stock of Navistar
International Corporation.
SECTION IX
TERM OF THE PLAN
The Plan shall be effective on the date of adoption by the Board of
Directors and continue for a term of one year thereafter. Provided that, the
Committee shall annually review the need for the continuation of the Plan and
may amend or terminate the plan as provided herein.
SECTION X
GOVERNING LAW
The Plan will be governed by and interpreted pursuant to the laws of the
State of Delaware, the place of incorporation of the Corporation.
E-6
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<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1998
<CASH> 453
<SECURITIES> 491
<RECEIVABLES> 2078
<ALLOWANCES> 34
<INVENTORY> 576
<CURRENT-ASSETS> 0<F1>
<PP&E> 1860
<DEPRECIATION> 892
<TOTAL-ASSETS> 5949
<CURRENT-LIABILITIES> 0<F1>
<BONDS> 2056
0
4
<COMMON> 2138
<OTHER-SE> (1350)
<TOTAL-LIABILITY-AND-EQUITY> 5949
<SALES> 3653
<TOTAL-REVENUES> 3769
<CGS> 3157
<TOTAL-COSTS> 3600
<OTHER-EXPENSES> 88
<LOSS-PROVISION> 4
<INTEREST-EXPENSE> 46
<INCOME-PRETAX> 169
<INCOME-TAX> 64
<INCOME-CONTINUING> 105
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 105
<EPS-PRIMARY> 1.32<F2>
<EPS-DILUTED> 1.30
<FN>
<F1>The company has adopted an unclassified presentation in the Statement of
Financial Condition.
<F2>Amount represents Basic Earnings Per Share.
</FN>
</TABLE>
