UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2000
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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, 2000, the number of shares outstanding of the registrant's
common stock was 59,219,739.
<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, 2000 and 1999...... 3
Statement of Financial Condition
July 31, 2000, October 31, 1999 and July 31, 1999............. 4
Statement of Cash Flow
Nine Months Ended July 31, 2000 and 1999....................... 5
Notes to Financial Statements........................................... 6
Supplemental Financial Information...................................... 12
Item 2. Management's Discussion and Analysis of Results of
Operations and Financial Condition.................... 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk 20
Part II. Other Information:
Item 1. Legal Proceedings........................................ 20
Item 6. Exhibits and Reports on Form 8-K......................... 20
Signature .............................................................. 21
<PAGE>
PAGE 3
PART I - FINANCIAL INFORMATION
------------------------------
<TABLE>
ITEM 1. Financial Statements
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
------------------ ------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Sales and revenues
Sales of manufactured products .......... $ 1,841 $ 1,797 $ 6,240 $ 5,849
Finance and insurance revenue ........... 72 67 205 188
Other income ............................ 11 10 33 48
------- ------- ------- -------
Total sales and revenues ............ 1,924 1,874 6,478 6,085
------- ------- ------- -------
Costs and expenses
Cost of products and services sold ...... 1,528 1,480 5,184 4,848
Postretirement benefits ................. 48 45 157 159
Engineering and research expense ........ 66 73 213 197
Sales, general and administrative expense 107 112 357 361
Interest expense ........................ 37 32 105 99
Other expense ........................... 16 7 69 43
------- ------- ------- -------
Total costs and expenses ............ 1,802 1,749 6,085 5,707
------- ------- ------- -------
Income before income taxes ...... 122 125 393 378
Income tax (expense) benefit .... (26) 130 (129) 34
------- ------- ------- -------
Net income .............................. $ 96 $ 255 $ 264 $ 412
======= ======= ======= =======
Earnings per share
Basic................................ $ 1.62 $ 3.94 $ 4.32 $ 6.27
Diluted.............................. $ 1.60 $ 3.86 $ 4.26 $ 6.16
Average shares outstanding (millions)
Basic................................ 59.4 64.9 61.1 65.8
Diluted.............................. 60.1 66.2 61.9 66.9
------------------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
PAGE 4
<TABLE>
STATEMENT OF FINANCIAL CONDITION (Unaudited)
---------------------------------------------------------------------------------------------------------------------------
Millions of dollars
---------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and Consolidated Subsidiaries
--------------------------------------------------------
July 31 October 31 July 31
2000 1999 1999
---------------- ---------------- -----------------
<S> <C> <C> <C>
ASSETS
Current assets
Cash and cash equivalents.............................. $ 532 $ 243 $ 237
Marketable securities.................................. 55 138 137
Receivables, net....................................... 1,323 1,550 1,286
Inventories............................................ 718 625 743
Deferred tax asset, net................................ 213 229 207
Other assets........................................... 88 57 48
-------------- -------------- ---------------
Total current assets.......................................... 2,929 2,842 2,658
-------------- -------------- ---------------
Marketable securities......................................... 155 195 252
Finance and other receivables, net............................ 909 1,268 756
Property and equipment, net................................... 1,605 1,475 1,264
Investments and other assets.................................. 188 207 168
Prepaid and intangible pension assets......................... 314 274 243
Deferred tax asset, net...................................... 600 667 759
-------------- -------------- ---------------
Total assets ............................................... $ 6,700 $ 6,928 $ 6,100
============== ============== ===============
LIABILITIES AND SHAREOWNERS' EQUITY
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt. $ 131 $ 192 $ 160
Accounts payable, principally trade.................... 907 1,399 975
Other liabilities...................................... 721 911 769
-------------- -------------- ---------------
Total current liabilities..................................... 1,759 2,502 1,904
-------------- -------------- ---------------
Debt: Manufacturing operations............................... 538 445 467
Financial services operations.......................... 1,873 1,630 1,433
Postretirement benefits liability............................. 682 634 910
Other liabilities............................................. 449 426 356
-------------- -------------- ---------------
Total liabilities...................................... 5,301 5,637 5,070
-------------- -------------- ---------------
Commitments and contingencies
Shareowners' equity
Series D convertible junior preference stock.................. 4 4 4
Common stock (75.3 million shares issued)..................... 2,139 2,139 2,139
Retained earnings (deficit)................................... (40) (297) (431)
Accumulated other comprehensive loss.......................... (195) (197) (342)
Common stock held in treasury, at cost
(16.1 million, 12.1 million
and 11.7 million shares held)..................... (509) (358) (340)
-------------- -------------- ---------------
Total shareowners' equity.............................. 1,399 1,291 1,030
-------------- -------------- ---------------
Total liabilities and shareowners' equity..................... $ 6,700 $ 6,928 $ 6,100
============== ============== ===============
--------------------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
<PAGE>
PAGE 5
<TABLE>
STATEMENT OF CASH FLOW (Unaudited)
---------------------------------------------------------------------------------------------------------------------------
For the Nine Months Ended July 31 (Millions of dollars)
---------------------------------------------------------------------------------------------------------------------------
Navistar International Corporation
and
Consolidated Subsidiaries
------------------------------------
2000 1999
---------------- -----------------
<S> <C> <C>
Cash flow from operations
Net income........................................................... $ 264 $ 412
Adjustments to reconcile net income
to cash provided by (used in) operations:
Depreciation and amortization................................. 158 143
Deferred income taxes......................................... 103 132
Deferred tax asset valuation allowance adjustment............. - (178)
Other, net.................................................... (11) 3
Change in operating assets and liabilities:
Receivables................................................... 575 (18)
Inventories................................................... (91) (243)
Prepaid and other current assets.............................. 2 (11)
Accounts payable.............................................. (505) (287)
Other liabilities............................................. (176) (42)
--------------- ---------------
Cash provided by (used in) operations............................ 319 (89)
--------------- ---------------
Cash flow from investment programs
Purchases of retail notes and lease receivables...................... (1,027) (1,044)
Collections/sales of retail notes and lease receivables.............. 1,029 1,236
Purchases of marketable securities................................... (186) (309)
Sales or maturities of marketable securities......................... 309 595
Capital expenditures................................................. (248) (214)
Proceeds from sale/leaseback......................................... 81 -
Property and equipment leased to others.............................. (62) (81)
Investment in affiliates............................................. 6 (55)
Capitalized interest and other....................................... (27) (23)
--------------- ---------------
Cash (used in) provided by investment programs................... (125) 105
--------------- ---------------
Cash flow from financing activities
Issuance of debt..................................................... 207 134
Principal payments on debt........................................... (69) (120)
Net increase (decrease) in notes and debt outstanding under bank
revolving credit facility and commercial paper programs ......... 108 (57)
Purchases of common stock............................................ (151) (126)
--------------- ---------------
Cash provided by (used in) financing activities.................. 95 (169)
--------------- ---------------
Cash and cash equivalents
Increase (decrease) during the period............................ 289 (153)
At beginning of the year......................................... 243 390
--------------- ---------------
Cash and cash equivalents at end of the period....................... $ 532 $ 237
=============== ===============
-------------------------------------------------------------------------------------------------------------------------
<FN>
See Notes to Financial Statements.
</FN>
</TABLE>
<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 International Truck and Engine Corporation
(International), formerly Navistar International Transportation Corp. As used
hereafter, "company" or "Navistar" refers to Navistar International Corporation
and its consolidated subsidiaries. Navistar operates in three principal industry
segments: truck, engine (collectively called "manufacturing operations"), and
financial services. 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 1999 Annual Report on Form
10-K and should be read in conjunction with the disclosures therein.
In the opinion of management, these interim financial statements reflect
all adjustments, consisting of normal recurring accruals, necessary to present
fairly the 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 1999 amounts have been reclassified to conform with the
presentation used in the 2000 financial statements.
Note B. Supplemental Cash Flow Information
Consolidated interest payments during the first nine months of 2000 and
1999 were $95 million and $97 million, respectively. Consolidated tax payments
made during the first nine months of 2000 and 1999 were $28 million and $12
million, respectively.
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 income and withholding and federal alternative minimum
taxes. 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 United States federal income taxes will
be minimal.
Income tax expense during the third quarter of 2000 was reduced by $20
million for research and development tax credits that will be taken against
future income tax payments related to research and development activities that
occurred over the last 14 years. Income tax expense in the third quarter of 1999
was reduced by a $178 million reduction of the deferred tax asset valuation
allowance as further described in the 1999 Annual Report on Form 10-K.
<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 2000 1999 1999
--------------------------------------------------------------------------------
Finished products................. $ 425 $ 285 $ 340
Work in process................... 50 95 197
Raw materials and supplies........ 243 245 206
-------- ---------- --------
Total inventories.......... $ 718 $ 625 $ 743
======== ========== ========
Note E. Financial Instruments
In November 1999, Navistar Financial Corporation (NFC) sold $533 million
of fixed rate retail notes through Navistar Financial Retail Receivables
Corporation (NFRRC), a wholly owned subsidiary of NFC, on a variable rate basis
to two multi-seller asset-backed commercial paper conduits sponsored by a major
financial institution. NFC entered into an interest rate swap agreement to hedge
the future cash flows of the amounts due from the sale of receivables. In March
2000, NFC transferred all of the rights and obligations of the swap to the
conduit. Under the terms of the agreement, NFC will make or receive payments
based on the differential between the transferred swap notional amount and the
securitization transaction net outstanding balance. In March 2000, NFC sold $475
million of retail notes through NFRRC to an owner trust which, in turn, sold
notes to investors. The gains on these sales were not material.
In January 2000, NFC sold $300 million of variable funding certificates,
through Navistar Financial Securities Corporation (NFSC), a wholly owned
subsidiary of NFC, to a conduit sponsored by a major financial institution. As
of July 31, 2000, NFSC had $175 million of variable funding certificates
outstanding, and reduced its maximum capacity from $300 million to $200 million.
In July 2000, NFC issued a $212 million tranche of investor certificates which
mature in June 2005.
As of July 31, 2000, NFC was a party to a total of $350 million of
forward starting swaps in anticipation of an October 2000 sale of retail
receivables. Any gain or loss will be included in the gain or loss on the sale
of receivables recognized in October 2000.
In April 2000, the company entered into a $95 million forward contract
which expires in October 2001 to purchase Navistar's outstanding common shares.
As of July 31, 2000, the company held German mark forward contracts with
notional amounts of $85 million related to committed capital equipment
purchases. The company held other derivative contracts with notional amounts of
$34 million. The unrealized net loss on these contracts was $6 million.
At quarter end, $86 million of a Mexican finance subsidiary's receivables
were pledged as collateral for bank borrowings.
<PAGE>
PAGE 8
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note F. Earnings Per Share
Earnings per share was computed as follows:
<TABLE>
Three Months Ended Nine Months Ended
Millions of dollars, July 31 July 31
----------------------------- -----------------------------
Except share and per share data 2000 1999 2000 1999
----------------------------------------------------
--------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Net income ......................................... $ 96 $ 255 $ 264 $ 412
========= ========= ========= =========
Average shares outstanding (millions)
Basic......................................... 59.4 64.9 61.1 65.8
Dilutive effect of options outstanding
and other dilutive securities....... .7 1.3 .8 1.1
--------- --------- --------- ---------
Diluted....................................... 60.1 66.2 61.9 66.9
========= ========= ========= =========
Earnings per share
Basic......................................... $ 1.62 $ 3.94 $ 4.32 $ 6.27
Diluted....................................... $ 1.60 $ 3.86 $ 4.26 $ 6.16
</TABLE>
Unexercised employee stock options to purchase 1.5 million and .1 million
shares of Navistar common stock during the three months ended July 31, 2000 and
1999, respectively, and to purchase 1.0 million and .2 million shares of
Navistar common stock during the nine months ended July 31, 2000 and 1999,
respectively, were excluded from the computation of diluted shares outstanding
because the exercise prices were greater than the average market price of
Navistar common stock.
Note G. Comprehensive Income
Navistar's total comprehensive income was as follows:
<TABLE>
Three Months Ended Nine Months Ended
July 31 July 31
----------------------------- -----------------------------
Millions of dollars 2000 1999 2000 1999
----------------------------------------------------
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Net income ......................................... $ 96 $ 255 $ 264 $ 412
Other comprehensive income (loss)................... (2) (2) 2 (11)
--------- --------- --------- ---------
Total comprehensive income.................... $ 94 $ 253 $ 266 $ 401
========= ========= ========= =========
</TABLE>
<PAGE>
PAGE 9
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note H. Segment Data
Reportable operating segment data is as follows:
<TABLE>
Financial
Millions of dollars Truck Engine Services Total
--------------------------------------------------- -------------- -- --------------- -- --------------- -- -----------
For the quarter ended July 31, 2000
----------------------------------------------------------------
<S> <C> <C> <C> <C>
External revenues............................... $ 1,431 $ 410 $ 74 $ 1,915
Intersegment revenues........................... - 153 24 177
--------- --------- -------- --------
Total revenues............................. $ 1,431 $ 563 $ 98 $ 2,092
========= ========= ======== ========
Segment profit.................................. $ 44 $ 64 $ 24 $ 132
For the nine months ended July 31, 2000
----------------------------------------------------------------
External revenues............................... $ 4,945 $ 1,295 $ 213 $ 6,453
Intersegment revenues........................... - 513 69 582
--------- --------- -------- --------
Total revenues............................. $ 4,945 $ 1,808 $ 282 $ 7,035
========= ========= ======== ========
Segment profit.................................. $ 182 $ 201 $ 69 $ 452
As of July 31, 2000
----------------------------------------------------------------
Segment assets.................................. $ 1,942 $ 842 $ 2,591 $ 5,375
For the quarter ended July 31, 1999
----------------------------------------------------------------
External revenues............................... $ 1,399 $ 398 $ 70 $ 1,867
Intersegment revenues........................... - 155 19 174
--------- --------- -------- --------
Total revenues............................. $ 1,399 $ 553 $ 89 $ 2,041
========= ========= ======== ========
Segment profit.................................. $ 37 $ 80 $ 29 $ 146
For the nine months ended July 31, 1999
----------------------------------------------------------------
External revenues............................... $ 4,665 $ 1,184 $ 203 $ 6,052
Intersegment revenues........................... - 511 54 565
--------- --------- -------- --------
Total revenues............................. $ 4,665 $ 1,695 $ 257 $ 6,617
========= ========= ======== ========
Segment profit.................................. $ 179 $ 199 $ 79 $ 457
As of July 31, 1999
----------------------------------------------------------------
Segment assets.................................. $ 1,658 $ 686 $ 2,169 $ 4,513
</TABLE>
<PAGE>
PAGE 10
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note H. Segment Data (continued)
Reconciliation to the consolidated financial statements as of and for the
three months and nine months ended July 31 is as follows:
<TABLE>
Three Months Ended Nine Months Ended
July 31 July 31
---------------------------- ----------------------------
Millions of dollars 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Segment sales and revenues..................... $ 2,092 $ 2,041 $ 7,035 $ 6,617
Other income................................... 9 7 25 33
Intercompany................................... (177) (174) (582) (565)
-------- -------- -------- --------
Consolidated sales and revenues................ $ 1,924 $ 1,874 $ 6,478 $ 6,085
======== ======== ======== ========
Segment profit................................. $ 132 $ 146 $ 452 $ 457
Corporate items................................ (14) (22) (66) (83)
Manufacturing net interest income.............. 4 1 7 4
-------- -------- -------- --------
Consolidated pretax income..................... $ 122 $ 125 $ 393 $ 378
======== ======== ======== ========
As of July 31
----------------------------
2000 1999
----------------------------
<S> <C> <C>
Segment assets................................. $ 5,375 $ 4,513
Cash and marketable securities................. 437 441
Deferred taxes................................. 813 966
Corporate intangible pension assets............ 121 121
Other corporate and eliminations............... (46) 59
-------- --------
Consolidated assets............................ $ 6,700 $ 6,100
======== ========
</TABLE>
Note I. New Accounting Pronouncements
On November 1, 2000, the company will adopt Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended. This statement standardizes the accounting for
derivative instruments by requiring that an entity recognize all derivatives as
assets or liabilities in the statement of financial position and measure them at
fair value. When certain criteria are met, it also provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of (a) the changes in the fair value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction. The company is currently assessing the impact
of adoption on its financial statements. Based on the company's current
portfolio of instruments subject to the statement, it is not expected that
adoption of this statement will have a material effect on the company's results
of operations, financial condition, or cash flows.
<PAGE>
PAGE 11
Note I. New Accounting Pronouncements (continued)
The company's initial assessment, which is subject to change for
subsequent events that occur before adoption, indicates that the transition
adjustment to both earnings and comprehensive income is expected to be
immaterial.
Note J. Subsequent Event
During August 2000, the company announced it has begun the process of
implementing a restructuring plan designed to allow the company to meet its
financial objectives in the face of the long-anticipated sharp drop in demand
for new trucks and an extremely competitive marketplace. Part of this plan
involved the elimination of approximately 1,100 salaried and contract positions
representing approximately 15 percent of the company's white-collar workforce.
Charges related to the entire restructuring plan are still being determined and
will be recorded in the fourth quarter.
<PAGE>
PAGE 12
Navistar International Corporation and Consolidated Subsidiaries
Supplemental Financial Information (Unaudited)
The following supplemental financial information is provided based upon the
continuing interest of certain shareholders and creditors.
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
<TABLE>
Three Months Ended Nine Months Ended
July 31 July 31
----------------------------- -----------------------------
Condensed Statement of Income 2000 1999 2000 1999
----------------------------------------------------------
---------- ----------- ----------- ----------
<S> <C> <C> <C> <C>
Sales of manufactured products............................ $ 1,841 $ 1,797 $ 6,240 $ 5,849
Other income.............................................. 10 8 26 36
--------- ---------- ---------- ---------
Total sales and revenues............................ 1,851 1,805 6,266 5,885
--------- ---------- ---------- ---------
Cost of products sold..................................... 1,519 1,469 5,155 4,822
Postretirement benefits................................... 48 45 157 159
Engineering and research expense.......................... 66 73 213 197
Sales, general and administrative expense................. 94 100 314 322
Other expense............................................. 31 24 116 98
--------- ---------- ---------- ---------
Total costs and expenses............................ 1,758 1,711 5,955 5,598
--------- ---------- ---------- ---------
Income before income taxes
Manufacturing operations............................ 93 94 311 287
Financial services operations....................... 29 31 82 91
--------- ---------- ---------- ---------
Income before income taxes..................... 122 125 393 378
Income tax (expense) benefit................... (26) 130 (129) 34
--------- ---------- ---------- ---------
Net income ............................................... $ 96 $ 255 $ 264 $ 412
========= ========== ========== =========
July 31 October 31 July 31
Condensed Statement of Financial Condition 2000 1999 1999
----------------------------------------------------------
---------------- ----------------- -----------------
<S> <C> <C> <C>
Cash, cash equivalents
and marketable securities............................ $ 498 $ 386 $ 467
Inventories............................................... 676 604 722
Property and equipment, net............................... 1,267 1,188 993
Equity in nonconsolidated subsidiaries.................... 389 377 381
Other assets.............................................. 905 1,527 815
Deferred tax asset, net................................... 815 896 966
-------------- --------------- ---------------
Total assets...................................... $ 4,550 $ 4,978 $ 4,344
============== =============== ===============
Accounts payable, principally trade....................... $ 872 $ 1,386 $ 950
Postretirement benefits liability......................... 805 776 972
Other liabilities......................................... 1,474 1,525 1,392
Shareowners' equity....................................... 1,399 1,291 1,030
-------------- --------------- ---------------
Total liabilities and shareowners' equity......... $ 4,550 $ 4,978 $ 4,344
============== =============== ===============
</TABLE>
<PAGE>
PAGE 13
Navistar International Corporation and Consolidated Subsidiaries
Supplemental Financial Information (Unaudited)
Navistar International Corporation (with financial services operations on an
equity basis) in millions of dollars:
<TABLE>
Nine Months Ended
July 31
----------------------------------
Condensed Statement of Cash Flow 2000 1999
-----------------------------------------------------------------
---------------- -----------------
<S> <C> <C>
Cash flow from operations
Net income....................................................... $ 264 $ 412
Adjustments to reconcile net income
to cash used in operations:
Depreciation and amortization............................. 114 109
Deferred income taxes..................................... 103 132
Deferred tax asset valuation allowance
adjustment............................................. - (178)
Equity in earnings of investees, net of
dividends received..................................... (32) (17)
Other, net................................................ (23) 21
Change in operating assets and liabilities................... (678) (552)
-------------- --------------
Cash used in operations.......................................... (252) (73)
-------------- --------------
Cash flow from investment programs
Purchases of marketable securities............................... (135) (254)
Sales or maturities of marketable securities..................... 275 536
Capital expenditures............................................. (246) (203)
Proceeds from sale/leaseback..................................... 81 -
Receivable from financial services operations.................... 607 28
Investment in affiliates......................................... 5 (57)
Capitalized interest and other................................... (28) (31)
-------------- --------------
Cash provided by investment programs............................. 559 19
-------------- --------------
Cash used in financing activities................................ (54) (101)
-------------- --------------
Cash and cash equivalents
Increase (decrease) during the period............................ 253 (155)
At beginning of the year......................................... 167 351
-------------- --------------
Cash and cash equivalents at end of the period................... $ 420 $ 196
============== ==============
</TABLE>
<PAGE>
PAGE 14
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS
OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Certain statements under this caption that are not purely historical
constitute "forward-looking statements" under the Private Securities Litigation
Reform Act of 1995 and involve risks and uncertainties. These forward-looking
statements are based on current management expectations as of the date made. The
company assumes no obligation to update any forward-looking statements. 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
caption "Business Environment."
Third Quarter Ended July 31, 2000
----------------------------------
The company reported net income of $96 million, or $1.60 per diluted
common share for the third quarter ended July 31, 2000, compared with net income
of $255 million or $3.86 per diluted common share for the comparable quarter
last year. Net income for the third quarter of 2000 benefited from $20 million
of research and development tax credits. Net income for the third quarter of
1999 included the benefit of a $178 million reduction in the company's deferred
tax asset valuation allowance. Excluding the impact of these tax adjustments,
net income was $76 million and $77 million, respectively.
Consolidated income before income taxes was $122 million compared with
pretax income of $125 million in the third quarter of 1999. The truck segment's
profit increased 19% to $44 million due to increased manufacturing performance
measures and decreased spending on the company's next generation vehicle (NGV)
program compared to the same period last year. Engine segment profit decreased
$16 million to $64 million primarily from temporary increases in program
expenses related to the design of the company's next generation diesel (NGD)
engine and start-up expenses at the new Huntsville engine plant in anticipation
of the launch of NGD in 2002. The combined engine and truck segments' profits
contributed to manufacturing pretax income of $93 million, which was comparable
to the same period last year. The financial services segment's profit for the
third quarter of 2000 was $24 million, which was $5 million lower than the same
period last year. The decrease in third quarter profit was primarily a result of
a gain on the sale of retail note receivables recognized in June 1999.
Sales and Revenues. Consolidated sales and revenues for the third quarter of
2000 totaled $1,924 million, 3% higher than the $1,874 million reported for the
comparable quarter in 1999. The combined truck and engine segments' revenues
resulted in a $44 million increase in sales of manufactured products compared to
the same period in 1999 driven primarily by unit volume. The financial services
segment's revenues increased 10% to $98 million primarily as a result of
increased lease financing activities and insurance premiums earned.
<PAGE>
PAGE 15
United States (U.S.) and Canadian industry retail sales of Class 5
through 8 trucks totaled 111,900 units in the third quarter of 2000, which is 8%
lower than the 121,100 units sold during this period in 1999. Class 8 heavy
truck sales of 66,800 units during the third quarter of 2000 were 13% lower than
the 1999 level of 76,900 units. Industry sales of Class 5, 6 and 7 medium
trucks, including school buses, increased slightly to 45,100 units. Industry
sales of school buses, which accounted for 19% of the medium truck market,
increased 9% to 8,700 units.
The company's retail deliveries in the combined U.S. and Canadian Class 5
through 8 truck market increased 6%, contributing to an increase in market share
for the third quarter of 2000 to 25.3% from 22.0% for the same period last year.
(Sources: Ward's Communications and the Canadian Vehicle Manufacturers
Association.)
Shipments of mid-range diesel engines by the company to OEMs during the
third quarter of 2000 totaled 72,200 units, a 5% increase from the same period
of 1999. This increase resulted from higher shipments to Ford Motor Company to
meet consumer demand for the light trucks and vans which use this engine.
Costs and Expenses. Manufacturing gross margin was 17.5% of sales for the third
quarter of 2000 compared with 18.3% for the same period in 1999. Engineering and
research expense decreased $7 million from the third quarter of 1999 to $66
million. Approximately 85% of this decrease reflects a reduction in the amount
of spending on the company's NGV program. Other expense primarily includes
finance charges and insurance claims and underwriting fees.
Nine Months Ended July 31, 2000
-------------------------------
The company reported net income of $264 million, or $4.26 per diluted
common share for the first nine months ended July 31, 2000, compared with net
income of $412 million or $6.16 per diluted common share for the comparable
period last year. Net income for the first nine months of 2000 and 1999 included
the benefits of the previously mentioned tax related items of $20 million and
$178 million, respectively. Excluding the impact of these tax adjustments, net
income totaled $244 million and $234 million, respectively.
Consolidated pretax income for the first nine months of 2000 was $393
million compared with $378 million reported for the same period of 1999. The
combined truck and engine segments' profits along with a reduction in corporate
costs contributed to a $24 million increase in manufacturing pretax income,
compared to the same period last year. The financial services segment's profit
decreased $10 million primarily due to a first quarter 1999 legal settlement in
favor of an insurance subsidiary of the company which is included in other
income.
Sales and Revenues. Consolidated sales and revenues during the first nine months
of 2000 totaled $6,478 million, an increase of 6% from 1999. The truck and
engine segments' revenues were 6% higher. These increases were attributable to
increased shipments of trucks to customers and mid-range diesel engines to other
OEMs. The combined truck and engine segments' revenues resulted in a $391
million increase in sales of manufactured products, compared to the same period
last year. The financial services segment's revenues increased $25 million to
$282 million primarily as a result of increased lease financing activities and
insurance premiums earned.
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PAGE 16
Industry retail sales of Class 5 through 8 trucks during the first nine
months of 2000 totaled 346,300 units, a slight decrease from the 348,600 units
sold during this period in 1999. Class 8 heavy truck sales of 206,000 units
during the first nine months of 2000 were slightly lower than the 1999 level of
210,700 units. Industry sales of Class 5, 6 and 7 medium trucks, including
school buses, increased slightly to 140,300 units. Industry sales of school
buses, which accounted for 19% of the medium truck market, totaled 26,500 units
comparable with 1999.
The company's retail deliveries in the combined U.S. and Canadian Class 5
through 8 truck market increased slightly to 90,900 units, contributing to an
increase in market share for the first nine months of 2000 to 26.2% from the
25.9% reported in 1999. (Sources: Ward's Communications and the Canadian Vehicle
Manufacturers Association.)
Shipments of mid-range diesel engines by the company to OEMs during the
first nine months of 2000 totaled 227,000 units, a 14% increase from the same
period of 1999 due to higher shipments to Ford Motor Company. The engine
segment's revenues increased at a lower rate than units shipped due to a shift
in warranty administration liability between International and its customers.
Costs and Expenses. Manufacturing gross margin for the first nine months of 2000
was 17.4% compared with 17.6% in 1999. Engineering and research expense
increased $16 million from the first nine months of 1999 to $213 million due to
the company's continuing investment in its NGV and NGD programs. Other expense
primarily includes finance charges and insurance claims and underwriting fees.
Liquidity and Capital Resources
Cash flow is generated from the manufacture and sale of trucks and
mid-range diesel engines and their associated service parts as well as from
product financing and insurance coverage provided to the company's dealers and
retail customers by the financial services segment. The company's current debt
ratings have made sales of finance receivables the most economic source of
funding for Navistar Financial Corporation (NFC). Insurance operations are
self-funded.
The company had working capital of $1,170 million at July 31, 2000,
compared to $340 million at October 31, 1999. Cash provided by operations during
the first nine months of 2000 totaled $319 million primarily from net income of
$264 million, $103 million of noncash deferred taxes and $158 million of
depreciation and amortization, partially offset by a net change in operating
assets and liabilities of $195 million.
The net use of cash resulting from the change in operating assets and
liabilities included a $176 million decrease in other liabilities primarily due
to the timing of the payments required by the company's profit sharing and
performance incentive programs. The change also included a $505 million decrease
in accounts payable related to the timing of NGD program payments and a decrease
in truck and engine production levels compared to those at year end. These were
partially offset by a $575 million decrease in accounts receivable primarily due
to a net decrease in wholesale note and account balances.
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PAGE 17
Investment programs used $125 million in cash primarily reflecting a net
increase in property and equipment leased to others of $62 million and $248
million of capital expenditures primarily for the NGV and NGD programs. These
were partially offset by a net decrease in marketable securities of $123 million
and $81 million of proceeds from sale/leasebacks.
Cash provided by financing activities of $95 million resulted from a net
increase of $108 million in notes and debt outstanding under the bank revolving
credit facility and other commercial paper programs, and a $138 million net
increase in long-term debt which includes a $95 million forward contract which
the company used to purchase its outstanding common shares. Over the first nine
months of 2000, the company used cash to purchase $151 million of its common
stock.
NFC has traditionally obtained funds to provide financing to the
company's dealers and retail customers from sales of finance receivables,
commercial paper, short and long-term bank borrowings, medium and long-term debt
and equity capital. As of July 31, 2000, NFC's funding consisted of sold finance
receivables of $2,935 million, bank and other borrowings of $1,306 million,
subordinated debt of $100 million, capital lease obligations of $400 million and
equity of $307 million.
Through the asset-backed markets, NFC has been able to fund fixed rate
retail note receivables at rates offered to companies with investment grade
ratings. As further described in Note E, during the first nine months of 2000,
NFC sold a total of $1,008 million of retail notes through Navistar Financial
Retail Receivables Corporation (NFRRC), a wholly owned subsidiary of NFC. As of
July 31, 2000, the remaining shelf registration available to NFRRC for the
public issuance of asset-backed securities was $1,783 million.
In January 2000, NFC sold $300 million of variable funding certificates,
through Navistar Financial Securities Corporation (NFSC), a wholly owned
subsidiary of NFC, to a conduit sponsored by a major financial institution. As
of July 31, 2000, NFSC had $175 million of variable funding certificates
outstanding, and reduced its maximum capacity from $300 million to $200 million.
The variable funding certificates mature in 2001. In July 2000, NFC issued a
$212 million tranche of investor certificates which mature in June 2005.
At July 31, 2000, available funding under NFC's bank revolving credit
facility and the asset-backed commercial paper facility was $33 million. When
combined with unrestricted cash and cash equivalents, $120 million was available
to fund the general business purposes of NFC. Also, as of July 31, 2000, NFSC
had a revolving wholesale note trust that provides for the funding of $959
million of eligible wholesale notes.
As of July 31, 2000, NFC was a party to a total of $350 million of
forward starting swaps in anticipation of an October 2000 sale of retail note
receivables. Any gain or loss will be included in the gain or loss on the sale
of receivables recognized in October 2000.
As of July 31, 2000, the company held German mark forward contracts with
notional amounts of $85 million related to committed capital equipment
purchases. The company held other derivative contracts with notional amounts of
$34 million. The unrealized net loss on these contracts was $6 million.
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PAGE 18
Cash flow from the company's manufacturing operations, financial services
operations and financing capacity is sufficient to cover planned investment in
the business. The company had outstanding capital commitments of $383 million at
July 31, 2000, primarily for the NGV and NGD programs.
In February 2000, Standard and Poor's raised the company's and NFC's
senior debt ratings from BB+ to BBB-, and raised the company's and NFC's
subordinated debt ratings from BB- to BB+.
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
believes that collections on the outstanding receivables portfolios as well as
funds available from various sources will permit the financial services
operations to meet the financing requirements of the company's dealers and
customers.
Year 2000
As described in the 1999 Annual Report on Form 10-K, the company had
instituted a corporate-wide Year 2000 readiness project to identify all systems
which would require modification or replacement, and to establish appropriate
remediation and contingency plans to avoid an impact on the company's ability to
continue to provide its products and services. Through the date of this report,
the company has not experienced any significant Year 2000 problems but will
continue to monitor its critical systems over the next several months. In the
event that significant issues arise, the company's contingency plans remain in
place.
The company's total cost of the Year 2000 project, which is funded
through operating cash flows, is estimated to be $32 million including $26
million of estimated expense and $6 million of capital expenditures.
Approximately $25 million has been expensed and approximately $6 million has
been capitalized through July 31, 2000. The remaining costs are estimated to be
incurred through the remainder of fiscal year 2000.
New Accounting Pronouncements
On November 1, 2000, the company will adopt Statement of Financial
Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" as amended. This statement standardizes the accounting for
derivative instruments by requiring that an entity recognize all derivatives as
assets or liabilities in the statement of financial position and measure them at
fair value. When certain criteria are met, it also provides for matching the
timing of gain or loss recognition on the hedging instrument with the
recognition of (a) the changes in the fair value or cash flows of the hedged
asset or liability attributable to the hedged risk or (b) the earnings effect of
the hedged forecasted transaction. The company is currently assessing the impact
of adoption on its financial statements. Based on the company's current
portfolio of instruments subject to the statement, it is not expected that
adoption of this statement will have a material effect on the company's results
of operations, financial condition, or cash flows.
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PAGE 19
The company's initial assessment, which is subject to change for
subsequent events that occur before adoption, indicates that the transition
adjustment to both earnings and comprehensive income is expected to be
immaterial.
Business Environment
Sales of Class 5 through 8 trucks have historically been cyclical, with
demand affected by such economic factors as industrial production, construction,
demand for consumer durable goods, interest rates, fuel prices, driver
availability and the earnings and cash flow of dealers and customers. Strong
levels of medium retail activity has led the company to increase its demand
estimates. The company currently projects 2000 United States and Canadian Class
8 heavy truck demand to be 245,000 units. Class 5, 6 and 7 medium truck demand,
excluding school buses, is forecast at 148,000 units and demand for school buses
is forecast at 35,000 units. However, an industry-wide slowdown in orders for
heavy trucks has resulted in a schedule change at the company's Chatham Assembly
Plant that resulted in the layoff of approximately 800 employees during the
first nine months of the year.
The decrease in the number of new truck orders is in line with the
company's expectations and has decreased the company's order backlog to 27,100
units at July 31, 2000 from 53,300 units at July 31, 1999. The company
continually evaluates order receipts and backlog throughout the year and
balances production with demand as appropriate.
During August 2000, the company announced it has begun the process of
implementing a restructuring plan designed to allow the company to meet its
financial objectives in the face of the long-anticipated sharp drop in demand
for new trucks and an extremely competitive marketplace. Part of this plan
involved the elimination of approximately 1,100 salaried and contract positions
representing approximately 15 percent of the company's white-collar workforce.
Charges related to the entire restructuring plan are still being determined and
will be recorded in the fourth quarter.
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PAGE 20
Navistar International Corporation and Consolidated Subsidiaries
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in the company's market risk
exposure since October 31, 1999, as reported in the 1999 Annual
Report on Form 10-K.
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, 1999,
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:
No reports on Form 8-K were filed
for the three months ended July 31, 2000.
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PAGE 21
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 14, 2000
