Form 10-Q
Table of Contents

 

 

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, 2010

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

 

 

LOGO

NAVISTAR INTERNATIONAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware   36-3359573

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

4201 Winfield Road, P.O. Box 1488,

Warrenville, Illinois

  60555
(Address of principal executive offices)   (Zip Code)

Registrant’s telephone number, including area code (630) 753-5000

 

 

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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer  x    Accelerated filer  ¨    Non-accelerated filer  ¨    Smaller reporting company  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act.)    Yes  ¨    No  x.

As of May 31, 2010, the number of shares outstanding of the registrant’s common stock was 71,593,171, net of treasury shares.

 

 

 


Table of Contents

NAVISTAR INTERNATIONAL CORPORATION FORM 10-Q

INDEX

 

          Page
PART I

Item 1.

  

Condensed Consolidated Financial Statements (Unaudited)

   4
  

Consolidated Statements of Operations for the three and six months ended April 30, 2010 and 2009

   4
  

Consolidated Balance Sheets as of April 30, 2010 and October 31, 2009

   5
  

Condensed Consolidated Statements of Cash Flows for the six months ended April 30, 2010 and 2009

   6
  

Consolidated Statements of Stockholder’s Deficit for the six months ended April  30, 2010 and 2009

   7
  

Notes to Condensed Consolidated Financial Statements

   8

Item 2.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

   42

Item 3.

  

Quantitative and Qualitative Disclosures About Market Risk

   58

Item 4.

  

Controls and Procedures

   59
PART II

Item 1.

  

Legal Proceedings

   60

Item 1A.

  

Risk Factors

   61

Item 2.

  

Unregistered Sales of Equity Securities and Use of Proceeds

   61

Item 6.

  

Exhibits

   61
  

Signature

   62

Disclosure Regarding Forward-Looking Statements

Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak as of the date of this report and Navistar International Corporation assumes no obligation to update the information included in this report. Such forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy. These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. For a further description of these factors, see Item 1A, Risk Factors, included within our Annual Report on Form 10-K for the year ended October 31, 2009, which was filed on December 21, 2009. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.

 

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Table of Contents

Available Information

We are subject to the reporting and information requirements of the Exchange Act and as a result, are obligated to file periodic reports, proxy statements, and other information with the United States Securities and Exchange Commission (“SEC”). We make these filings available free of charge on our website (http://www.navistar.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we file electronically with the SEC. You can read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Room 1850, Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Information on our website does not constitute part of this Quarterly Report on Form 10-Q.

 

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Table of Contents

PART I

 

Item 1. Condensed Consolidated Financial Statements

Navistar International Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)

 

     Three Months Ended
April 30,
    Six Months Ended
April 30,
 
     2010     2009     2010     2009  
(in millions, except per share data)                         

Sales and revenues

        

Sales of manufactured products, net

   $   2,690      $   2,741      $   5,448      $   5,636   

Finance revenues

     53        67        104        142   
                                

Sales and revenues, net

     2,743        2,808        5,552        5,778   
                                

Costs and expenses

        

Costs of products sold

     2,189        2,295        4,451        4,618   

Restructuring charges

     3        (3     (14     55   

Selling, general and administrative expenses

     372        300        710        676   

Engineering and product development costs

     116        130        225        238   

Interest expense

     64        57        131        150   

Other (income) expense, net

     (47     22        (41     (176
                                

Total costs and expenses

     2,697        2,801        5,462        5,561   

Equity in (loss) income of non-consolidated affiliates

     (13     14        (19     31   
                                

Income before income tax benefit (expense)

     33        21        71        248   

Income tax benefit (expense)

     10        (9     2        (2
                                

Net income

     43        12        73        246   

Net income attributable to non-controlling interests

     (13     —          (26     —     
                                

Net income attributable to Navistar International Corporation

   $ 30      $ 12      $ 47      $ 246   
                                

Earnings per share attributable to Navistar International Corporation:

        

Basic

   $ 0.43      $ 0.16      $ 0.66      $ 3.45   

Diluted

     0.42        0.16        0.65        3.44   

Weighted average shares outstanding:

        

Basic

     71.4        70.8        71.3        71.2   

Diluted

     72.8        71.3        72.4        71.5   

See Notes to Condensed Consolidated Financial Statements

 

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Navistar International Corporation and Subsidiaries

Consolidated Balance Sheets

 

     April 30,
2010
    October 31,
2009
 
(in millions, except per share data)    (Unaudited)     (Revised)(A)  

ASSETS

    

Current assets

    

Cash and cash equivalents

   $ 508      $ 1,212   

Marketable securities

     175        —     

Trade and other receivables, net

     754        855   

Finance receivables, net

     1,420        1,706   

Inventories

     1,719        1,666   

Deferred taxes, net

     106        107   

Other current assets

     240        202   
                

Total current assets

     4,922        5,748   

Restricted cash and cash equivalents

     284        485   

Trade and other receivables, net

     38        26   

Finance receivables, net

     1,400        1,498   

Investments in non-consolidated affiliates

     97        62   

Property and equipment (net of accumulated depreciation and amortization of $1,850 and $1,765, at the respective dates)

     1,439        1,467   

Goodwill

     324        318   

Intangible assets (net of accumulated amortization of $112 and $101, at the respective dates)

     272        264   

Deferred taxes, net

     44        52   

Other noncurrent assets

     120        103   
                

Total assets

   $ 8,940      $ 10,023   
                

LIABILITIES, REDEEMABLE EQUITY SECURITIES AND STOCKHOLDERS’ DEFICIT

    

Liabilities

    

Current liabilities

    

Notes payable and current maturities of long-term debt

   $ 1,006      $ 1,136   

Accounts payable

     1,600        1,872   

Other current liabilities

     1,065        1,177   
                

Total current liabilities

     3,671        4,185   

Long-term debt

     3,539        4,156   

Postretirement benefits liabilities

     2,203        2,570   

Deferred taxes, net

     170        142   

Other noncurrent liabilities

     555        599   
                

Total liabilities

     10,138        11,652   

Redeemable equity securities

     11        13   

Stockholders’ deficit

    

Series D convertible junior preference stock

     4        4   

Common stock ($0.10 par value per share, 110.0 shares authorized, 71.2 and 75.4 shares issued at the respective dates)

     7        7   

Additional paid in capital

     2,195        2,181   

Accumulated deficit

     (2,025     (2,072

Accumulated other comprehensive loss

     (1,311     (1,674

Common stock held in treasury, at cost (4.1 and 4.7 shares, at the respective dates)

     (135     (149
                

Total stockholders’ deficit attributable to Navistar International Corporation

       (1,265     (1,703

Stockholders’ equity attributable to non-controlling interests

     56        61   
                

Total stockholders’ deficit

     (1,209     (1,642
                

Total liabilities, redeemable equity securities, and stockholders’ deficit

   $ 8,940      $   10,023   
                

 

(A) Revised; See Note 1, Summary of significant accounting policies.

See Notes to Condensed Consolidated Financial Statements

 

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Navistar International Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

     Six Months Ended
April  30,
 
         2010             2009      
(in millions)             

Cash flows from operating activities

    

Net income

   $ 73      $ 246   

Adjustments to reconcile net income to cash provided by operating activities:

    

Depreciation and amortization

     132        140   

Depreciation of equipment leased to others

     26        27   

Deferred taxes

     11        (2

Amortization of debt issuance costs and discount

     20        8   

Stock-based compensation

     16        11   

Provision for doubtful accounts

     34        28   

Impairment of goodwill and intangibles

     —          7   

Equity in loss of non-consolidated affiliates, net of dividends

     22        16   

Other non-cash operating activities

     34        44   

Changes in other assets and liabilities, exclusive of the effects of businesses acquired and disposed

     (102     (38
                

Net cash provided by operating activities

     266        487   
                

Cash flows from investing activities

    

Purchases of marketable securities

     (663     (354

Sales or maturities of marketable securities

     488        356   

Net change in restricted cash and cash equivalents

     201        (96

Capital expenditures

     (78     (77

Purchase of equipment leased to others

     (25     (18

Proceeds from sales of property and equipment

     6        4   

Investments in non-consolidated affiliates

     (59     (14

Proceeds from sales of affiliates

     3        3   

Acquisition of intangibles

     (11     —     

Business acquisitions, net of cash received

     (2     —     
                

Net cash used in investing activities

     (140     (196
                

Cash flows from financing activities

    

Proceeds from issuance of securitized debt

     245        321   

Principal payments on securitized debt

     (536     (658

Proceeds from issuance of non-securitized debt

     557        259   

Principal payments on non-securitized debt

     (728     (362

Net increase (decrease) in notes and debt outstanding under revolving credit facilities

     (281     71   

Principal payments under financing arrangements and capital lease obligations

     (43     (24

Debt issuance costs

     (22     (2

Proceeds from exercise of stock options

     14        —     

Dividends paid by subsidiaries to non-controlling interest

     (33     —     

Stock repurchases

     —          (29
                

Net cash used in financing activities

     (827     (424
                

Effect of exchange rate changes on cash and cash equivalents

     (3     (10
                

Decrease in cash and cash equivalents

     (704     (143

Cash and cash equivalents at beginning of period

     1,212        861   
                

Cash and cash equivalents at end of the period

   $ 508      $ 718   
                

See Notes to Condensed Consolidated Financial Statements

 

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Navistar International Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Deficit

(Unaudited)

 

    Series D
Convertible
Junior
Preference
Stock
  Common
Stock
  Additional
Paid in
Capital
    Compre-
hensive
Income
(Loss)
    Accumulated
Deficit
    Accumulated
Other
Compre-
hensive
Loss
    Common
Stock
Held in
Treasury,
at Cost
    Stock-
holders
Equity
attributable
to Non-
controlling
interests
    Total  
(in millions)                                                  

Balance as of October 31, 2009(A)

  $ 4   $ 7   $     2,181        $   (2,072   $   (1,674)      $     (149)      $ 61      $   (1,642

Net income

        $ 47        47            26        73   

Other comprehensive loss:

                 

Foreign currency translation adjustments

          8                8   

U.S. OPEB re-measurement

          309                309   

Other post-employment benefits

          46                46   
                       

Total other comprehensive income

          363          363          
                       

Total comprehensive income

        $ 410             
                       

Transfer from redeemable equity securities upon exercise or expiration of stock options

        3                  3   

Stock-based compensation

        12                  12   

Stock ownership programs

        (1           14          13   

Cash dividends paid to non-controlling interest

                  (33     (33

Investment from non-controlling interest

                  2        2   
                                                             

Balance as of April 30, 2010

  $ 4   $ 7   $ 2,195        $   (2,025   $ (1,311   $ (135   $ 56      $ (1,209
                                                             

Balance as of October 31, 2008

  $ 4   $ 7   $ 1,966        $ (2,392   $ (943   $ (137   $ 6      $ (1,489

Net income

        $ 246        246              246   

Other comprehensive loss:

                 

Foreign currency translation adjustments

          (19             (19

Other post-employment benefits

          31                31   

Pension re-measurement

          (321             (321
                       

Total other comprehensive loss

          (309       (309      
                       

Total comprehensive loss

        $ (63          
                       

Stock options recorded as redeemable equity securities

        (5               (5

Redeemable equity securities modification

        130                  130   

Transfer from redeemable equity securities upon exercise or expiration of stock options

        4                  4   

Stock-based compensation

        11                  11   

Stock ownership programs

        (2           2          —     

Stock repurchases

                (29       (29
                                                             

Balance as of April 30, 2009

  $     4   $     7   $ 2,104        $ (2,146   $ (1,252   $ (164   $ 6      $ (1,441
                                                             

 

(A) Revised; See Note 1, Summary of significant accounting policies.

See Notes to Condensed Consolidated Financial Statements

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of significant accounting policies

Organization and Description of the Business

Navistar International Corporation (“NIC”), incorporated under the laws of the state of Delaware in 1993, is a holding company whose principal operating subsidiaries are Navistar, Inc. and Navistar Financial Corporation (“NFC”). References herein to the “Company,” “we,” “our,” or “us” refer collectively to NIC, its subsidiaries, and certain variable interest entities (“VIEs”) of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Engine, Parts (collectively called “manufacturing operations”), and Financial Services. The Financial Services segment consists of NFC and our foreign finance operations (collectively called “financial services operations”).

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our manufacturing operations, majority-owned dealers (“Dealcors”), wholly-owned financial services subsidiaries, and VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts. Certain reclassifications were made to prior year’s amounts to conform to the 2010 presentation.

We prepared the accompanying unaudited consolidated financial statements in accordance with United States (“U.S.”) generally accepted accounting principles (“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X issued by the SEC. Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, 2009 and should be read in conjunction with the disclosures therein. In our opinion, these interim financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.

Variable Interest Entities

We are the primary beneficiary of several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We are the primary beneficiary because our variable interests absorb the majority of the VIE’s expected gains and losses. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of the consolidated entities. Assets of these entities are not available to satisfy claims against our general assets.

In January 2009, we reached a settlement agreement with Ford Motor Company (“Ford”) where we agreed to settle our respective lawsuits against each other (the “Ford Settlement”). As a part of the Ford Settlement, on June 1, 2009, our equity interest in our Blue Diamond Parts (“BDP”) and Blue Diamond Truck (“BDT”) joint ventures with Ford were increased to 75%. With the increase in our equity interest, we determined that we were the primary beneficiary of these two VIE’s and have consolidated them since June 1, 2009. As a result, our Consolidated Balance Sheets includes assets of $258 million and $297 million and liabilities of $77 million and

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

$122 million as of April 30, 2010 and October 31, 2009, respectively, from BDP and BDT, including $42 million and $52 million of cash and cash equivalents, at the respective dates, which are not readily available to satisfy our other obligations. Their creditors do not have recourse to our general credit.

Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include assets of $962 million and $1.5 billion and liabilities of $753 million and $1.2 billion as of April 30, 2010 and October 31, 2009, respectively, all of which are involved in securitizations that are treated as borrowings. In addition, our Consolidated Balance Sheets include assets of $971 million and $782 million and related liabilities of $815 million and $634 million as of April 30, 2010 and October 31, 2009, respectively, all of which are involved in structures in which we transferred assets to special purpose entities (“SPEs”) that are not VIEs, which in turn arranged securitizations that are treated as borrowings. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent they are entitled to pay principal and interest payments. Investors in securitizations of these VIEs and SPEs have no recourse to the general credit of NIC or any other consolidated entity.

Our Financial Services segment does not consolidate a qualifying special purpose entity (“QSPE”) that is outside the scope of the accounting standard on consolidation of VIEs, and a conduit since we are not its primary beneficiary. Our consolidated SPE’s obtain funds from the QSPE and conduit, which securitize the related assets. Portions of the assets of the QSPE and conduit are accounted for as sales when securitized and accordingly those portions are not carried on our Consolidated Balance Sheets. Our consolidated SPEs retain residual economic interests in the future cash flows of the securitized assets that are owned by the QSPE and conduit. We carry these retained interests as an asset, included in Finance receivables, net on our Consolidated Balance Sheets. Retained interests are subordinated to the priority claims of investors in each respective securitization; our maximum loss exposure to the activities of the QSPE and conduit is limited to our retained interests. See Note 5, Finance receivables, for further discussion.

We are also involved with other VIEs, which we do not consolidate because we are not the primary beneficiary. Our determination that we are not the primary beneficiary of these entities is based upon the characteristics of our variable interests, which do not absorb the majority of the VIE’s expected gains and losses. Our financial support and maximum loss exposure relating to these non-consolidated VIEs is not material to our financial condition, results of operations, or cash flows.

We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Net income includes our share of the net earnings (loss) of these entities. As of April 30, 2010, we use the equity method to account for investments in thirteen active, partially-owned affiliates, in which the Company or one of its subsidiaries is a shareholder, general or limited partner, or venturer, as applicable.

Recently Adopted Accounting Standards

As of April 30, 2010, we adopted new guidance regarding disclosures about fair value measurements. The guidance requires new disclosures related to transfers in and out of Level 1 and Level 2 fair value measurements. The guidance also provides clarification to existing disclosures. The disclosures required by this guidance are included in Note 8, Fair value measurements.

As of February 1, 2010, we adopted new guidance regarding revenue arrangements with multiple deliverables. This guidance requires companies to allocate revenue in arrangements involving multiple deliverables based on the estimated selling price of each deliverable, even though such deliverables are not sold separately either by the

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

company or by other vendors. The Company elected to early adopt this guidance at the beginning of our second quarter of fiscal 2010 on a prospective basis. As required by the guidance, as the period of adoption was not the beginning of our fiscal year, we applied the adoption retrospectively from November 1, 2009. There was no impact on our Consolidated Statement of Operations related to the adoption of this guidance.

As of November 1, 2009, we adopted new guidance on the accounting for convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement), which requires issuers of convertible debt securities within its scope to separate these securities into a debt component and an equity component, resulting in the debt component being recorded at estimated fair value without consideration given to the conversion feature. Issuance costs are also allocated between the debt and equity components. The guidance requires that convertible debt within its scope reflect a company’s nonconvertible debt borrowing rate when interest expense is recognized. The provisions of the guidance are retrospective upon adoption. The adoption of the guidance on November 1, 2009 impacted the accounting treatment of the Company’s $570 million, 3% convertible senior subordinated notes due 2014 (the “Convertible Notes”) by reclassifying a portion of the original principal amount of the Convertible Notes’ balance to additional paid in capital, resulting in a discount on the Convertible Notes that will be amortized through interest expense over the life of the notes. We estimated the fair value of the liability component at $456 million with a discount on the Convertible Notes of $114 million at the date of issuance. Of the $18 million of debt issuance costs, we allocated $14 million and $4 million to the liability component and equity component, respectively. Our Consolidated Balance Sheet as of October 31, 2009 was retroactively restated to reflect the increase to Additional paid in capital of $110 million, the reduction in Long-term debt for the debt discount of $114 million, and the reduction in Other noncurrent assets for the equity component of debt issuance costs of $4 million. The resulting debt discount is amortized as interest expense and therefore reduces net income and basic and diluted earnings per share. The effective interest rate on the Convertible Notes will be 8.42% with the amortization of debt discount and debt issuance costs. As a result of the short period the debt was outstanding, adoption of the guidance did not have a material impact on our Consolidated Statement of Operations for the year ended October 31, 2009.

As of November 1, 2009, we adopted new guidance on non-controlling interests that clarifies that non-controlling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity. As required, this guidance was adopted through retrospective application, and all prior period information has been revised accordingly.

As of November 1, 2009, we adopted new guidance on the determination of the useful life of intangible assets. This guidance amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. The guidance also requires expanded disclosure related to the determination of useful lives for intangible assets and should be applied to all intangible assets recognized as of, and subsequent to, the effective date. The adoption did not have a material impact on our consolidated financial statements.

As of November 1, 2009, we adopted new guidance on fair value measurements for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in our consolidated financial statements on a nonrecurring basis. The adoption did not have a material impact on our consolidated financial statements.

As of November 1, 2009, we adopted new guidance that substantially changes the accounting for and reporting of business combinations including (i) expanding the definition of a business and a business combination, (ii) requiring all assets and liabilities of the acquired business, including goodwill and contingent consideration to be recorded at fair value on the acquisition date, (iii) requiring acquisition-related transaction and restructuring costs to be expensed rather than accounted for as acquisition costs, and (iv) requiring reversals of valuation

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

allowances related to acquired deferred tax assets and changes to acquired income tax uncertainties to be recognized in earnings. The adoption did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards

Accounting pronouncements issued by various standard setting and governmental authorities that have not yet become effective with respect to our consolidated financial statements are described below, together with our assessment of the potential impact they may have on our consolidated financial statements:

In January 2010, the Financial Accounting Standards Board (“FASB”) issued new guidance regarding disclosures about fair value measurements. The guidance requires new disclosures related to activity in Level 3 fair value measurements. This guidance requires purchases, sales, issuances, and settlements to be presented separately in the rollforward of activity in Level 3 fair value measurements and is effective for fiscal years beginning after December 15, 2010, and for interim periods within those fiscal years. Our effective date is November 1, 2011. When effective, we will comply with the disclosure provisions of this guidance.

In June 2009, the FASB issued new guidance on accounting for transfers of financial assets. The guidance eliminates the concept of a QSPE, changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. This guidance is effective for fiscal years beginning after November 15, 2009. Our effective date is November 1, 2010. We are evaluating the potential impact on our consolidated financial statements.

In June 2009, the FASB issued new guidance regarding the consolidation of VIEs. The guidance also amends the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate an entity, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis will include, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Prior guidance required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. QSPEs, which were previously exempt from the application of this guidance, will be subject to the provisions of this guidance when it becomes effective. The guidance also requires enhanced disclosures about an enterprise’s involvement with a VIE. This guidance is effective for the first annual reporting period beginning after November 15, 2009 and for interim periods within that first annual reporting period. Our effective date is November 1, 2010. We are evaluating the potential impact on our consolidated financial statements.

In December 2008, the FASB issued new guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. Our effective date is October 31, 2010. When effective, we will comply with the disclosure provisions of this guidance.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits,

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

allowance for doubtful accounts, sales of receivables, income tax contingency accruals and valuation allowances, product warranty accruals, asbestos accruals, asset impairment, and litigation-related accruals. Actual results could differ from our estimates.

Reversal of tax reserve for change in estimate

Under the Brazilian tax system, the state government levies a tax on the incremental value added to goods or service (commonly known as “value added tax” or “VAT”). The VAT is computed based on the value added to the taxed item which is then included in the price of products sold and purchased. We periodically review our VAT credit balances for recovery based primarily on projected sales and purchases. In the past, we determined that a portion of our VAT credits were not recoverable and accordingly provided an allowance against the balance not expected to be recovered. In the second quarter of 2010, we reevaluated our VAT credit balance and reserve and concluded that based on actions taken to facilitate changes in sales mix between domestic and export and production locations, it was probable that previously reserved VAT credits will be utilized. As a result, we recognized a material adjustment for this change in estimate in Other (income) expense, net of $42 million, or $0.58 per diluted share for the three and six months ended April 30, 2010.

Concentration Risks

Our financial condition, results of operations, and cash flows are subject to concentration risks related to concentrations of union employees and two customers. As of April 30, 2010, approximately 6,040, or 58%, of our hourly workers and approximately 706, or 9%, of our salaried workers are represented by labor unions and are covered by collective bargaining agreements. Our collective bargaining agreement with the National Automobile, Aerospace and Agricultural Implement Workers of Canada, covering approximately 1,030 or 10% of our hourly workers as of April 30, 2010, expired on June 30, 2009. As a result, we have temporarily ceased production at our Chatham, Canada facility. Negotiations for a new collective bargaining agreement are ongoing. Our collective bargaining agreements with the United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) will expire on October 1, 2010. As of April 30, 2010, approximately 1,790 or 17% of our hourly workers were covered by these collective bargaining agreements. See Note 14, Segment reporting, for discussion of customer concentrations. Additionally, our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and global, political, and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).

Product Warranty Liability

Accrued product warranty and deferred warranty revenue activity is as follows:

 

     Six Months Ended
April 30,
 
       2010         2009    
(in millions)             

Accrued product warranty and deferred warranty revenue, at beginning of period

   $ 492      $   602   

Costs accrued and revenues deferred

     117        102   

Adjustments to pre-existing warranties(A)

     9        78   

Payments and revenues recognized

     (146     (180

Warranty adjustment related to legal settlement(B)

       —          (75
                

Accrued product warranty and deferred warranty revenue, at end of period

     472        527   

Less: Current portion

     228        256   
                

Noncurrent accrued product warranty and deferred warranty revenue

   $ 244     $ 271   
                

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

(A) Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historic and expected trends. We recognized material adjustments for changes in estimates of $61 million and $78 million, or $0.86 and $1.09 per diluted share, for the three and six months ended April 30, 2009, respectively.
(B) See Note 2, Ford settlement and related charges, for discussion regarding warranty adjustments related to the Ford Settlement.

The amount of deferred revenue related to extended warranty programs was $146 million and $139 million at April 30, 2010 and October 31, 2009, respectively. Revenue recognized under our extended warranty programs was $11 million and $23 million for the three and six months ended April 30, 2010, respectively and $10 million and $20 million for the three and six months ended April 30, 2009, respectively.

2. Ford settlement and related charges

In 2008, the Engine segment recognized $358 million of charges for impairments of property and equipment associated with its asset groups in the VEE Business Unit. The impairment charges were the result of a reduction in demand from Ford for diesel engines produced by the VEE Business Unit and the expectation that Ford’s demand for diesel engines would continue to be below previously anticipated levels. Also in 2008, the VEE Business Unit recorded $37 million of other charges related to the significant reduction in demand from Ford.

In the first quarter of 2009, we reached a settlement agreement with Ford where we agreed to settle our respective lawsuits against each other. The result of the Ford Settlement resolved all prior warranty claims, resolved the selling price for our engines going forward, and allowed Ford to pursue a separate strategy related to diesel engines in its products. Additionally, both companies agreed to end their current North America supply agreement for diesel engines as of December 31, 2009 (the agreement was otherwise set to expire July 2012). In the first quarter of 2009, we received a $200 million cash payment from Ford, which was recorded as a gain in Other (expense) income, net, and we reversed our previously recorded warranty liability of $75 million, which was recorded as a reduction of Costs of products sold. In the third quarter of 2009, we increased our interest in our BDP and BDT joint ventures with Ford to 75% and recognized a gain of $23 million in Other (expense) income, net in connection with the increased equity interests in BDP. The increased equity interest in BDT did not result in a gain or loss.

Also in the first quarter of 2009, with the changes in Ford’s strategy, we announced our intention to close our Indianapolis Engine Plant (“IEP”) and our Indianapolis Casting Corporation foundry (“ICC”) and the Engine segment recognized $58 million of restructuring charges. The restructuring charges consisted of $21 million in personnel costs for employee termination and related benefits, $16 million of charges for pension and other postretirement contractual termination benefits and a pension curtailment, and $21 million of other contractual costs. In the fourth quarter of 2009, the Engine segment recognized an additional $4 million of charges for benefits to terminated employees. Net of first quarter adjustments of $3 million reducing personnel costs for employee termination, the Engine segment recognized $59 million of restructuring charges for the year ended October 31, 2009. In the third quarter of 2009, we made the decision that at IEP we will continue certain quality control and manufacturing engineering activities and there will be no other business activities aside from these after July 31, 2009. We have delayed the closure of ICC to July 16, 2010 due to supply and other customer needs.

In the first quarter of 2010, we settled a portion of our other contractual costs and recognized a $16 million benefit. We expect the majority of the remaining restructuring and other costs, excluding pension and other postretirement related costs, will be paid in 2010.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

The following table summarizes the activity in the restructuring liability related to Ford, which excludes $16 million of charges for pension and other postretirement contractual termination benefits, and the pension curtailment for 2010:

 

     Balance at
October 31, 2009
   Additions    Payments    Adjustments    Balance at
April 30, 2010
(in millions)                         

Employee termination charges

   $ 20    $ —      $ (10)    $ (1)    $ 9

Other contractual costs

     21      —        (5)      (16)        —  
                                  

Restructuring liability

   $   41    $   —      $   (15)    $   (17)    $ 9
                                  

In addition to the restructuring charges, in the second through fourth quarters of 2009 the Engine segment recognized other related charges for inventory valuation and low volume adjustments of $105 million, of which $81 million and $24 million were recognized in Costs of products sold and Other (expense) income, net, respectively. Offsetting the charges were warranty recoveries of $29 million, of which $26 million and $3 million were recognized in Other (expense) income, net and Costs of products sold, respectively. Included in these charges and offsetting recoveries was the impact of our settlement with Continental Automotive Systems US, Inc. (“Continental”).

In the fourth quarter of 2009, we agreed to settle our commercial dispute related to Continental’s low volume damages claim and our counter claim related to quality issues for products primarily sold to Ford. Through this settlement, our ongoing business relationships were restructured and all existing claims between the Company and Continental were settled. The settlement agreement with Continental was a multiple element arrangement which, among other things, included an agreement for the Company to acquire all membership interests, certain assets, and assume certain liabilities of Continental Diesel Systems US, LLC (“CDS”), a wholly owned subsidiary of Continental. In addition to a cash payment of $18 million to Continental, we determined the fair value of consideration exchanged included $29 million of warranty recoveries offset by $27 million of low volume adjustments. Net of the reversal of existing balances, we recognized a net charge of $2 million related to the settlement.

3. Business combinations and consolidation of variable interest entities

Blue Diamond Parts

BDP was formed in August 2001 as a joint venture between Ford and Navistar (collectively, the “Members”), with Ford owning 51% and Navistar owning 49%. BDP manages the sourcing, merchandising, and distribution of various spare parts for vehicles the Members sell in North America. These spare parts are primarily for Navistar diesel engines in Ford trucks, commercial truck parts, and certain parts for F650/750 and Low-Cab Forward trucks produced for Ford by BDT. Substantially all of BDP’s transactions are between BDP and its Members.

On June 9, 2009, pursuant to the provisions of the Ford Settlement, we increased our equity interest in BDP from 49% to 75%, effective June 1, 2009. Our voting interest in BDP remains 50%. The receipt of additional equity interest from Ford was among the various components of the Ford Settlement, and no additional consideration was paid to Ford in connection with the increase in equity interest in BDP. We determined the fair value of the increased interest in BDP based on a discounted cash flow model utilizing BDP’s estimated future cash flows. The fair value of the increased interest, net of settlement of an executory contract, was $23 million and we recognized a gain of this amount in Other (expense) income, net in our Engine segment in the third quarter of 2009.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

With the increase in our equity interest, we determined that we are now the primary beneficiary of BDP and have consolidated the operating results of BDP since June 1, 2009. As a result of the BDP acquisition, we recognized an intangible asset for customer relationships of $45 million and have assigned a useful life of nine years. For additional information on the Ford Settlement, see Note 2, Ford settlement and related charges.

The unaudited pro forma financial information in the table below summarizes the combined results of operations of Navistar and BDP as though BDP had been combined as of the beginning of the period presented. The unaudited pro forma financial information is presented for information purposes only and is not indicative of the results of operations that would have been achieved if the acquisition had taken place at the beginning of the period, or that may result in the future.

 

     Three Months Ended
April 30, 2009
    Six Months Ended
April 30, 2009
 
(in millions, except per share data)             

Sales and revenue, net

   $   2,866      $   5,892   

Net income

     33        289   

Net income attributable to non-controlling interests

     (11     (22
                

Net income attributable to Navistar International Corporation

   $ 22      $ 267   
                

Earnings per share attributable to Navistar International Corporation:

    

Pro forma basic earnings per share

   $ 0.32      $ 3.75   

Pro forma diluted earnings per share

   $ 0.32      $ 3.73   

 

The table above includes BDP net service revenue of $52 million and $101 million, net expenses of $7 million and $10 million, income before tax expense of $45 million and $91 million, and net income of $47 million and $92 million for the three and six months ended April 30, 2009, respectively.

4. Allowance for doubtful accounts

The activity related to our allowance for doubtful accounts for trade and other receivables and finance receivables is summarized as follows:

 

     Three Months Ended
April  30,
    Six Months Ended
April  30,
 
       2010         2009         2010         2009    
(in millions)                         

Allowance for doubtful accounts, at beginning of period

   $   110      $   109      $   104      $   113   

Provision for doubtful accounts, net of recoveries

     20        26        34        28   

Charge-off of accounts

     (11     (13     (19     (19
                                

Allowance for doubtful accounts, at end of period

   $ 119      $ 122      $ 119      $ 122   
                                

5. Finance receivables

Finance receivables are receivables of our financial services operations, which generally can be repaid without penalty prior to contractual maturity. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts.

The primary business of our financial services operations is to provide wholesale, retail, and lease financing for new and used trucks sold by us and our dealers and, as a result, our finance receivables and leases are concentrated in the trucking industry. On a geographic basis, there is not a disproportionate concentration of credit risk in any area of the U.S. or other countries where we have financial service operations. We retain as collateral an ownership interest in the equipment associated with leases and, on our behalf and the behalf of the various trusts, we maintain a security interest in equipment associated with generally all finance receivables. All

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

of the assets of our financial services operations are restricted through security agreements to benefit the creditors of the respective finance subsidiary. Total on-balance sheet assets of our financial services operations net of intercompany balances are $3.4 billion and $3.9 billion, at April 30, 2010 and October 31, 2009, respectively. Included in total assets are on-balance sheet finance receivables of $2.8 billion and $3.2 billion at April 30, 2010 and October 31, 2009, respectively.

In March 2010, we entered into a three-year Operating Agreement (with one-year automatic extensions and subject to early termination provisions) with GE Capital Corporation and GE Capital Commercial, Inc. (collectively “GE”). Under the terms of the agreement, GE becomes our preferred source of retail customer financing for equipment offered by us and our dealers in the U.S. We will provide GE a loss sharing arrangement for certain credit losses. While under limited circumstances NFC retains the rights to originate retail customer financing, we expect retail finance receivables and retail finance revenues will decline over the next five years as our retail portfolio pays down.

Securitizations

Our financial services operations transfer wholesale notes, accounts receivable, retail notes, finance leases, and operating leases through SPEs, which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities. In addition to servicing receivables, our continued involvement in the SPEs includes an economic interest in the transferred receivables and managing exposure to interest rates using interest rate swaps, interest rate caps, and forward contracts. Certain sales of wholesale notes and accounts receivables are considered to be sales in accordance with guidance on accounting for transfers and servicing of financial assets and extinguishment of liabilities, and are accounted for off-balance sheet. For sales that do qualify for off-balance sheet treatment, an initial gain (loss) is recorded at the time of the sale while servicing fees and excess spread income are recorded as revenue when earned over the life of the finance receivables.

We received net proceeds of $6 million and $245 million from securitizations of finance receivables and investments in operating leases accounted for as secured borrowings for the three and six months ended April 30, 2010, and $309 million and $321 million for the three and six months ended April 30, 2009, respectively.

Off-Balance Sheet Securitizations

We use an SPE that has in place a revolving wholesale note trust, which is a QSPE, which provides for the funding of eligible wholesale notes through an investor certificate and variable funding notes (“VFN”). The QSPE owned $691 million of wholesale notes and $45 million of cash equivalents as of April 30, 2010 and $763 million of wholesale notes as of October 31, 2009. The QSPE held $100 million and $96 million of wholesale notes with our Dealcors as of April 30, 2010 and October 31, 2009, respectively.

Components of available wholesale note trust funding facilities were as follows:

 

     Maturity    As of
        April 30,
2010
   October 31,
2009
(in millions)               

Investor notes

      $ —      $ 212

Variable funding certificate

        —        650

Variable funding notes

   August 2010      500        —  

Investor notes

   October 2012      350      —  

Investor notes

   January 2012      250      —  
                

Total wholesale note funding

      $   1,100    $ 862
                

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

In November 2009, we completed the sale of $350 million of three-year investor notes within the wholesale note trust funding facility. This sale was eligible for funding under the U.S. Federal Reserve Term Asset-Backed Securities Loan Facility (“TALF”) program.

In February 2010, we completed the sale of $250 million of two-year investor notes within the wholesale note trust funding facility. This sale was also eligible for funding under TALF. Also in February 2010, we paid off previously issued investor notes of $212 million upon maturity.

In April 2010, the remaining balance in the variable funding certificate of $20 million was paid off and refinanced under the VFN. As of April 30, 2010, no funding was utilized under the VFN.

Unutilized funding related to the variable funding facilities was $500 million and $300 million at April 30, 2010 and October 31, 2009, respectively.

We use another SPE, Truck Retail Accounts Corporation (“TRAC”), that utilizes a $100 million conduit funding arrangement, which provides for the funding of eligible accounts receivables. The SPE owned $96 million of retail accounts and $20 million of cash equivalents as of April 30, 2010, and $89 million of retail accounts and $20 million of cash equivalents as of October 31, 2009. There was $77 million and $92 million of unutilized funding at April 30, 2010 and October 31, 2009, respectively.

For sold receivables, wholesale notes balances past due over 60 days were $1 million as of April 30, 2010 and October 31, 2009. Retail balances past due over 60 days for accounts receivable financing were less than $1 million and $2 million as of April 30, 2010 and October 31, 2009, respectively. No credit losses on sold receivables were recorded for the three and six months ended April 30, 2010 and 2009.

Retained Interests in Off-Balance Sheet Securitizations

Our financial services operations are under no obligation to repurchase any transferred receivables that become delinquent in payment or are otherwise in default. The terms of receivable transfers generally require our financial services operations to provide credit enhancements in the form of excess seller’s interests and/or cash reserves, which are owned by the trust and conduit. The maximum exposure under all credit enhancements was $223 million and $291 million as of April 30, 2010 and October 31, 2009, respectively, and consists entirely of retained interests.

Retained interests, which arise from the credit enhancements, represent the fair value of the excess of the cash flows from the assets held by the QSPE and conduit over the future payments of debt service to investors in the QSPE and conduit. The securitization agreements entitle us to these excess cash flows. Our retained interests are restricted assets that are subordinated to the interests of the investors in either the QSPE or the conduit. Our retained interests are recognized as an asset in Finance receivables, net.

The key economic assumptions and the sensitivity of the current fair values of residual cash flows comprising our retained interests to an immediate adverse change of 10 percent and 20 percent in each assumption are as follows:

 

     As of     Fair Value Change
at April 30, 2010
     April 30,
2010
    October 31,
2009
    Adverse
10%
   Adverse
20%
(dollars in millions)                      

Discount rate

   7.7 to 18.8 %    9.1 to 20.5   $ 2    $ 4

Estimated credit losses

   0.0 to 0.24 %    0.0 to 0.24       —          —  

Payment speed (percent of portfolio per month)

   4.4 to 77.1 %    4.9 to 70.8     1      1

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

The lower end of the discount rate assumption range and the upper end of the payment speed assumption range were used to value the retained interests in the retail account securitization. No percentage for estimated credit losses was assumed for retail account securitizations as no losses have been incurred to date. The upper end of the discount rate assumption range and the lower end of the payment speed assumption range were used to value the retained interests in the wholesale note securitization facility.

The effect of a variation of a particular assumption on the fair value of the retained interests is calculated based upon changing one assumption at a time. Oftentimes however, changes in one factor may result in changes in another, which in turn could magnify or counteract these reported sensitivities.

Finance Revenues

Finance revenues derived from receivables that are both on and off-balance sheet consist of the following:

 

     Three Months Ended
April 30,
    Six Months Ended
April 30,
 
       2010         2009         2010         2009    
(in millions)                         

Finance revenues from on-balance sheet receivables:

        

Retail notes and finance leases revenue

   $ 45      $ 62      $ 98      $ 126   

Operating leases revenue

     6        5        12        11   

Wholesale notes interest

     6        3        12        11   

Retail and wholesale accounts interest

     4        5        9        10   

Other income

     1        2        2        2   
                                

Total finance revenues from on-balance sheet receivables

     62        77        133        160   

Revenues from off-balance sheet securitization:

        

Fair value adjustments

     13        10        20        29   

Excess spread income

     10        9        21        11   

Servicing fees revenue

     2        2        4        4   

Losses on sale of finance receivables

     (11     (10     (27     (25

Investment revenue

     —          —          —          2   
                                

Securitization Income

     14        11        18        21   
                                

Gross finance revenues

     76        88        151        181   

Less: Intercompany revenues

     (23     (21     (47     (39
                                

Finance revenues

   $ 53      $ 67      $ 104      $ 142   
                                

Cash flows from off-balance sheet securitization transactions are as follows:

 

     Three Months Ended
April  30,
   Six Months Ended
April  30,
       2010        2009        2010        2009  
(in millions)                    

Proceeds from finance receivables

   $   954    $   898    $   2,027    $   1,940

Servicing fees

     5      2      7      4

Cash from net excess spread

     20      8      31      10

Investment income

     —        —        —        1
                           

Net cash from securitization transactions

   $ 979    $ 908    $ 2,065    $ 1,955
                           

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

6. Inventories

The components of inventories are as follows:

 

     As of
     April 30,
2010
   October  31,
2009
(in millions)          

Finished products

   $ 866    $ 840

Work in process

     265      214

Raw materials

     588      612
             

Total inventories

   $   1,719    $   1,666
             

7. Debt

The following table summarizes our debt obligations:

 

     April 30,
2010
    October 31,
2009
 
(in millions)          (Revised)(A)  

Manufacturing operations

    

8.25% Senior Notes, due 2021, net of unamortized discount of $36 and $37 at the respective dates

   $ 964      $ 963   

3.0% Senior Subordinated Convertible Notes, due 2014, net of unamortized discount of $104 and $114 at the respective dates

     466        456   

Debt of majority-owned dealerships

     148        148   

Financing arrangements and capital lease obligations

     241        271   

Other

     20        23   
                

Total manufacturing operations debt

     1,839        1,861   

Less: Current portion

     (201     (191
                

Net long-term manufacturing operations debt

   $ 1,638      $ 1,670   
                

Financial services operations

    

Asset-backed debt issued by consolidated SPEs, at variable rates, due serially through 2016

   $ 941      $ 1,227   

Bank revolvers, at fixed and variable rates, due dates from 2010 through 2015

     1,074        1,518   

Revolving retail warehouse facility, at variable rates, due 2010

     500        500   

Commercial paper, at variable rates, due serially through 2010

     60        52   

Borrowings secured by operating and finance leases, at various rates, due serially through 2016

     131        134   
                

Total financial services operations debt

     2,706        3,431   

Less: Current portion

     (805     (945
                

Net long-term financial services operations debt

   $     1,901      $     2,486   
                

 

(A) Revised; See Note 1, Summary of significant accounting policies.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

Financial Services Operations

In December 2009, NFC’s Revolving Credit Agreement dated March 2007, as amended, was refinanced with an $815 million, three year facility that matures in December 2012, with an interest rate of LIBOR plus 425 basis points. The new facility contains a term loan of $365 million and a revolving loan of $450 million with a Mexican sub-revolver of $100 million. Under the new agreement, NFC is subject to customary operational and financial covenants including an initial minimum collateral coverage ratio of 120%. Concurrent with the refinancing, NFC issued borrowings secured by asset-backed securities due serially through October 2016 and issued a term loan secured by retail notes and leases that matures in March 2013, with weighted average interest rates of 5.7% and 5.9%, respectively. These borrowings generated proceeds of $304 million in total.

8. Fair value measurements

On November 1, 2008, we adopted guidance on accounting for fair value measurements, for assets and liabilities measured at fair value on a recurring basis. On November 1, 2009, we adopted guidance on accounting for fair value measurements for our non-financial assets and liabilities. We did not have any significant non-financial assets or liabilities measured at fair value on a nonrecurring basis during the three and six month period ended April 30, 2010. The guidance:

 

   

defines fair value as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date, and establishes a framework for measuring fair value,

 

   

establishes a hierarchy of fair value measurements based upon the observability of inputs used to value assets and liabilities,

 

   

requires consideration of nonperformance risk, and

 

   

expands disclosures about the methods used to measure fair value.

The guidance establishes a three-level hierarchy of measurements based upon the reliability of observable and unobservable inputs used to arrive at fair value. Observable inputs are independent market data, while unobservable inputs reflect our assumptions about valuation. Depending on the inputs, we classify each fair value measurement as follows:

 

   

Level 1—based upon quoted prices for identical instruments in active markets,

 

   

Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations all of whose significant inputs are observable, and

 

   

Level 3—based upon one or more significant unobservable inputs.

The following section describes key inputs and assumptions in our valuation methodologies:

Cash Equivalents and Restricted Cash Equivalents. We classify highly liquid investments, with a maturity of 90 days or less at the date of purchase, including U.S. Treasury bills, federal agency securities, and commercial paper, as cash equivalents. We use quoted prices where available and use a matrix of observable market-based inputs when quoted prices are unavailable.

Marketable Securities. Our marketable securities portfolios are classified as available-for-sale and include investments in U.S. government and commercial paper with a maturity of greater than 90 days at the date of purchase. We use quoted prices from active markets to determine their fair values.

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

Wholesale Notes. Wholesale notes are classified as held-for-sale and are valued at the lower of amortized cost or fair value on an aggregate basis. Amortized cost approximates fair value as a result of the short-term nature and variable interest terms inherent to wholesale notes.

Derivative Assets and Liabilities. We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on readily available observable market inputs. In certain cases, market data is not available and we estimate inputs such as in situations where trading in a particular commodity is not active, or for instruments with notional amounts that fluctuate over time. Measurements based upon these unobservable assumptions are classified within Level 3. For more information regarding derivatives, see Note 11, Financial instruments and commodity contracts.

Retained Interests. We retain certain interests in receivables sold in off-balance sheet securitization transactions. We estimate the fair value of retained interests using internal valuation models that incorporate market inputs and our own assumptions about future cash flows. The fair value of retained interests is estimated based on the present value of monthly collections on the sold finance receivables in excess of amounts accruing to investors and other obligations arising in securitization transactions. In addition to the amount of debt and collateral held by the securitization vehicle, the three key inputs that affect the valuation of the retained interests include credit losses, payment speed, and the discount rate. We classify these assets within Level 3. For more information regarding retained interest, see Note 5, Finance receivables.

The following table presents the financial instruments measured at fair value on a recurring basis as of April 30, 2010:

 

     Level 1    Level 2    Level 3    Total
(in millions)                    

Assets

           

Marketable securities:

           

U.S. treasury bills

   $ 105    $   —      $ —      $ 105

Other U.S. and non-U.S. government bonds

     70      —        —        70

Derivative financial instruments:

           

Interest rate swaps

     —        —        15      15

Interest rate caps purchased

     —        2        —        2

Commodity contracts

     —        5      —        5

Foreign currency contracts

     —        1      —        1

Retained interests

     —        —        223      223
                           

Total assets

   $ 175    $ 8    $ 238    $   421
                           

Liabilities

           

Derivative financial instruments:

           

Interest rate swaps

   $ —      $ 14    $ 15    $ 29

Interest rate caps sold

     —        2      —        2
                           

Total liabilities

   $   —      $ 16    $ 15    $ 31
                           

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

The following table presents the financial instruments measured at fair value on a recurring basis as of October 31, 2009:

 

     Level 1    Level 2    Level 3    Total
(in millions)                    

Assets

           

Derivative financial instruments:

           

Interest rate swaps

   $ —      $ —      $ 32    $ 32

Interest rate caps purchased

       —        5      —        5

Commodity contracts

     —          —        1      1

Retained interests

     —          —        291      291
                           

Total assets

   $ —      $ 5    $   324    $   329
                           

Liabilities

           

Derivative financial instruments:

           

Interest rate swaps

   $ —      $ 30    $ 31    $ 61

Interest rate caps sold

     —        4      —        4

Commodity contracts

     —        —        1      1
                           

Total liabilities

   $ —      $ 34    $ 32    $ 66
                           

The table below presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:

     2010    2009  
     Interest
rate swap
assets and
liabilities
    Retained
interests
    Commodity
contracts
   Interest rate
swap assets and
liabilities
    Retained
interests
   Commodity
contracts
 
(in millions)                                   

Three Months Ended April 30

              

Balance at February 1

   $   —        $ 315      $   —      $ 2      $ 199    $ (3

Total gains (losses) (realized/unrealized) included in earnings(A)

     —          5        —        (2     —        (3

Purchases, issuances and settlements

     —          (97     —        1        40         2   
                                              

Balance at April 30

     —          223        —        1        239      (4
                                              

Change in unrealized gains (losses) on assets and liabilities still held

   $ —       $ 5      $ —      $   —       $   —      $ (1
                                              

Six Months Ended April 30

              

Balance at November 1

   $ 1      $   291      $ —      $ —       $ 230    $ 1   

Total gains (losses) (realized/unrealized) included in earnings(A)

     (1            —        1        5      (8

Purchases, issuances and settlements

     —          (68     —        —         4      3   
                                              

Balance at April 30

     —          223        —        1        239      (4
                                              

Change in unrealized gains (losses) on assets and liabilities still held

   $ —        $ —        $ —      $ —       $ 5    $ (3
                                              

 

(A) For interest rate swap assets and liabilities, gains (losses) are included in Interest Expense. For commodity contracts, gains (losses) are included in Cost of Products Sold. For retained interests, gains recognized are included in Finance revenues.

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

The following table presents the financial instruments measured at fair value on a nonrecurring basis:

 

     Level 2
     April 30,
2010
   October 31,
2009
(in millions)          

Finance receivables(A)

   $   20    $   38

 

(A) Certain impaired finance receivables are measured at fair value on a nonrecurring basis. An impairment charge is recorded for the amount by which the carrying value of the receivables exceeds the fair value of the underlying collateral, net of remarketing costs. As of April 30, 2010, impaired receivables with a carrying amount of $41 million had specific loss reserves of $21 million and a fair value of $20 million. As of October 31, 2009, impaired receivables with a carrying amount of $62 million had specific loss reserves of $24 million and a fair value of $38 million. Fair values of the underlying collateral are determined by reference to dealer vehicle value publications adjusted for certain market factors.

In addition to the methods and assumptions we use for the financial instruments recorded at fair value discussed above, we used the following methods and assumptions to estimate the fair value for our other financial instruments which are not marked to market on a recurring or nonrecurring basis. The carrying amounts of cash and cash equivalents, restricted cash and cash equivalents, and accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. The carrying amounts of customer receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below. The fair values of our finance receivables are estimated by discounting expected cash flows at estimated current market rates. We also use quoted market prices, when available, or the present value of estimated future cash flows to determine fair values of debt instruments.

The carrying values and estimated fair values of financial instruments as of April 30, 2010 and October 31, 2009 are summarized in the table below:

 

     April 30, 2010    October 31, 2009
     Carrying
Value
   Estimated
Fair Value
   Carrying
Value
   Estimated
Fair Value
(in millions)                    

Assets

           

Finance receivables

   $   2,249    $   2,077    $   2,355    $   2,177

Notes receivable

     35      35      16      16

Liabilities

           

Debt:

           

Manufacturing operations

           

Debt of majority-owned dealerships

     148      144      148      145

8.25% Senior Notes, due 2021

     964      1,097      963      984

3.0% Senior Subordinated Convertible Notes, due 2014(A)

     466      652      456      548

Financing arrangements

     222      211      261      244

Other

     20      21      23      25

Financial services operations

           

Asset-backed debt issued by consolidated SPEs, at variable rates, due serially through 2016

     941      952      1,227      1,185

Bank revolvers, at fixed and variable rates, due dates from 2010 through 2015

     1,074      1,087      1,518      1,470

Revolving retail warehouse facility, at variable rates, due 2010

     500      488      500      489

Commercial paper, at variable rates, due serially through 2010

     60      60      52      50

Borrowings secured by operating and finance leases, at various rates, due serially through 2016

     131      131      134      136

 

(A) The carrying value represents the bifurcated debt component only, while the fair value is based on quoted market prices for the convertible note which includes the equity feature.

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

9. Postretirement benefits

Defined Benefit Plans

We provide postretirement benefits to a substantial portion of our employees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, and surviving spouses and dependents. Generally, our pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the three and six months ended April 30, 2010, we contributed $36 million and $47 million, respectively, to our pension plans to meet regulatory minimum funding requirements. For the three and six months ended April 30, 2009, we contributed $9 million and $19 million, respectively, to our pension plans to meet regulatory minimum funding requirements. We currently anticipate additional contributions of approximately $103 million during the remainder of 2010.

Other post-employment benefit (“OPEB”) obligations, such as retiree medical, are generally funded in accordance with a 1993 restructured health and life legal settlement, which requires us to fund a portion of the plans’ annual service cost. For the three and six months ended April 30, 2010, we contributed $1 million and $2 million, respectively, to our OPEB plans to meet legal funding requirements. For the three and six months ended April 30, 2009, we contributed $1 million and $2 million, respectively, to our OPEB plans to meet legal funding requirements. We currently anticipate additional contributions of approximately $1 million during the remainder of 2010.

On March 18, 2010, the Company made an administrative change to the prescription drug program under the OPEB plan affecting plan participants who are Medicare eligible. Effective July 1, 2010, the Company will enroll Medicare eligible plan participants who do not opt out into a Medicare Part D Plan. The Company will supplement the coverage provided by the Medicare Part D Plan. As a result of this change, effective July 1, 2010 for substantially all of the Medicare eligible participants, the Company will no longer be eligible to receive the Medicare Part D subsidy that is available to sponsors of retiree healthcare plans that provide prescription drug benefits that are at least actuarially equivalent to Medicare Part D.

On March 23, 2010, the Patient Protection and Affordable Care Act (“PPACA”) was enacted and on March 30, 2010 the Health Care and Education Reconciliation Act of 2010 (“HCERA”) was enacted, which amends certain aspects of the PPACA. The impact the PPACA and the HCERA’s comprehensive health care reform legislation had on the Company’s OPEB obligation was evaluated and the elements expected to have a significant effect were incorporated into the obligation.

The plan change to move the Medicare eligible retirees to the Medicare Part D Plan resulted in a remeasurement of the Company’s OPEB obligation. The Company’s remeasurement date was March 31, 2010. The discount rate used to measure the Accumulated Postretirement Benefit Obligation (“APBO”) was 5.6% at March 31, 2010 compared to 5.4% at October 31, 2009. All other significant assumptions remained unchanged from the October 31, 2009 measurement date. The impact of the plan change, which is net of the subsidy elimination, decreased the APBO by $340 million and was accounted for as prior service credit as a component of Accumulated other comprehensive loss. As discussed in Note 12, Commitments and contingencies, the UAW has filed a motion contesting our ability to implement this administrative change. In addition, the Company filed a complaint arguing that it has not received the consideration it was promised in the 1993 restructured health and life legal settlement.

The impact of health care reform legislation on the APBO was a net increase of $86 million accounted for as an actuarial loss. Our remeasurement was based on our best estimate of the impacts of the health care reform legislation on our OPEB plan. As regulations regarding the implementation of the health care reform legislation

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

are promulgated and additional guidance becomes available, our estimates may change. Actuarial gains due to the remeasurement decreased the APBO by $55 million. The total remeasurement impact of $309 million was recognized as a credit to equity as a component of Accumulated other comprehensive loss. The effects of the remeasurement, which includes the impact of the plan change and health care reform, will decrease the net postretirement benefits expense by $22 million for the period April 1, 2010 through the fiscal year-end, of which $3 million has been recognized during the second quarter.

In addition, in the second quarter of 2010 the Company recognized a charge of $2 million which was primarily curtailment charges related to the retiree medical plan due to the planned terminations of certain salaried employees in conjunction with NFC’s U.S. financing alliance with GE .

As discussed in Note 2, Ford settlement and related charges, the Company incurred restructuring charges related to our VEE Business Unit in the first quarter of 2009. The charges included $16 million for a plan curtailment and related contractual termination benefits. In addition to the plan curtailment and related contractual termination benefits resulting from the Ford Settlement, the Company recognized an additional $2 million of contractual termination benefits in the first quarter of 2009 related to the terminations of certain salaried employees in December 2008.

Components of Net Postretirement Benefits Expense

Net postretirement benefits expense included in our Consolidated Statements of Operations is composed of the following:

 

    Three Months Ended April 30,     Six Months Ended April 30,  
    Pension
Benefits
    Health and
Life Insurance
Benefits
    Pension
Benefits
    Health and
Life Insurance
Benefits
 
    2010     2009     2010     2009     2010     2009     2010     2009  
(in millions)                                                

Service cost for benefits earned during the period

  $ 5      $ 4      $ 2      $ 1      $ 9      $ 8      $ 4      $ 3   

Interest on obligation

    50        57        21        29        101        117        43        58   

Amortization of net cumulative losses (gains)

    25        19        2        —          49        34        4        (1

Amortization of prior service benefit

      —            —          (4     (1     —            —          (5     (2

Settlements and curtailments

    —          —          2        —          —          6        2          —     

Contractual termination benefits

    —          —            —            —            —          9          —          3   

Premiums on pension insurance

    1        1        —          —          1        1        —          —     

Less: Expected return on assets

    (48     (46     (10     (10     (96     (94     (20     (20
                                                               

Net postretirement benefits expense

  $ 33      $ 35      $ 13      $ 19      $ 64      $ 81      $ 28      $ 41   
                                                               

Defined Contribution Plans and Other Contractual Arrangements

Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. Many participants covered by the plan receive annual Company contributions to their retirement account based on an age-weighted percentage of the participant’s eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $7 million and $16 million for the three and six months ended April 30, 2010, respectively, and $9 million and $15 million for the three and six months ended April 30, 2009, respectively.

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

In accordance with the 1993 restructured health care and life insurance plans, an independent Retiree Supplemental Benefit Trust (the “Trust”) was established. The Trust, and the benefits it provides to certain retirees, are not part of the Company’s consolidated financial statements. The assets of the Trust arise from three sources: (i) the Company’s 1993 contribution to the Trust of 25.5 million shares of our Class B common stock, which was subsequently sold by the Trust prior to 2000; (ii) contingent profit-sharing contributions made by the Company; and (iii) net investment gains on the Trust’s assets, if any.

The Company’s contingent profit sharing obligations will continue until certain funding targets defined by the 1993 Settlement Agreement are met (“Profit Sharing Cessation”). Upon Profit Sharing Cessation, the Company would assume responsibility for (i) establishing the investment policy for the Trust, (ii) approving or disapproving of certain additional supplemental benefits to the extent such benefits would result in higher expenditures than those contemplated upon the Profit Sharing Cessation, and (iii) making additional contributions to the Trust as necessary to make up for investment and /or actuarial losses. For the six months ended April 30, 2010, we have recorded no profit sharing accruals based on our estimate of 2010 results.

10. Income taxes

We compute on a quarterly basis an estimated annual effective tax rate considering ordinary income and related income tax expense. To the extent a company cannot reliably estimate annual projected taxes for a taxing jurisdiction, taxes on ordinary income for such a jurisdiction are reported in the period in which they are incurred. Accordingly our ordinary income in 2009 excluded our U.S. operations, whereas in 2010 such operations are included in our estimated worldwide annual effective tax rate. Canadian results in 2009 and 2010 are excluded from ordinary income due to projected ordinary losses for which no benefit can be recognized. Ordinary income refers to income (loss) before income tax expense excluding significant, unusual, or infrequently occurring items. The tax effect of an unusual or infrequently occurring item is recorded in the interim period in which it occurs. Our 2010 estimated annual effective tax rate includes a refund for alternative minimum taxes paid in prior years resulting from the “Worker, Homeownership, and Business Assistance Act of 2009.” Other items included in income tax expense in the periods in which they occur include the cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment in the realizability of deferred tax assets in future years.

We have evaluated the need to maintain a valuation allowance for deferred tax assets based on an assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. Due to the cyclical nature of our U.S and Canadian businesses, the historical inconsistency of profits during the full business cycle, and the uncertainty of the economic outlook, we continue to maintain a full valuation allowance against our U.S and Canadian deferred tax assets.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of April 30, 2010, the amount of the liability for gross unrecognized tax benefits was $108 million ($97 million net of offsetting indirect tax benefits). If the gross unrecognized tax benefits are recognized, $104 million ($93 million net of offsetting indirect tax benefits) would impact our effective tax rate. However, to the extent we continue to maintain a full valuation allowance against certain deferred tax assets, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carry forward which would be offset by a full valuation allowance.

 

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Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

We recognize interest and penalties related to uncertain tax positions as part of Income tax benefit (expense). A benefit for interest and penalties was recognized during the three and six months ended April 30, 2010 of $2 million. Cumulative interest and penalties included in the Consolidated Balance Sheet at April 30, 2010 was a $1 million receivable, including indirect tax benefits.

We have open tax years back to 2002 with significant tax jurisdictions in the U.S., Canada, Mexico, and Brazil. In connection with the examination of tax returns, contingencies may arise that generally result from differing interpretations of applicable tax laws and regulations as they relate to the amount, timing or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. We believe we have sufficient accruals for our contingent tax liabilities. Interim tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.

11. Financial instruments and commodity contracts

Derivative Financial Instruments

We use derivative financial instruments as part of our overall interest rate, foreign currency, and commodity risk management strategies to reduce our interest rate exposure, to potentially increase the return on invested funds, to reduce exchange rate risk for transactional exposures denominated in currencies other than the functional currency, and to minimize commodity price volatility. From time to time, we use foreign currency forward and option contracts to manage the risk of exchange rate movements that would reduce the value of our foreign currency cash flows. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the functional currency. From time to time, we also use commodity forward contracts to manage variability related to exposure to certain commodity price risk. We generally do not enter into derivative financial instruments for speculative or trading purposes and did not during the three and six months ended April 30, 2010 and 2009. None of our derivatives qualified for hedge accounting treatment during the three and six months ended April 30, 2010 or 2009.

Certain of our derivative contracts contain provisions that require us to provide collateral if certain thresholds are exceeded. No collateral was provided at April 30, 2010 or October 31, 2009. Collateral is not required to be provided by our counter-parties for derivative contracts. We manage exposure to counter-party credit risk by entering into derivative financial instruments with various major financial institutions that can be expected to fully perform under the terms of such agreements. We do not anticipate nonperformance by any of the counter-parties. Our exposure to credit risk in the event of nonperformance by the counter-parties is limited to derivative asset positions. At April 30, 2010 and October 31, 2009, our exposure to the credit risk of others was $23 million and $38 million, respectively.

Our financial services operations manage exposure to fluctuations in interest rates by limiting the amount of fixed rate assets funded with variable rate debt. This is accomplished by funding fixed rate receivables utilizing a combination of fixed rate and variable rate debt and derivative financial instruments to convert variable rate debt to fixed. These derivative financial instruments may include interest rate swaps, interest rate caps, and forward contracts. The fair value of these instruments is estimated based on quoted market prices and is subject to market risk, as the instruments may become less valuable due to changes in market conditions or interest rates. Notional amounts of derivative financial instruments do not represent exposure to credit risk.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

The fair values of all derivatives are recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. At April 30, 2010 and October 31, 2009, the fair values of our derivatives and their respective balance sheet locations are presented in the following table:

 

(in millions)   

Asset Derivatives

   

Liability Derivatives

 
  

Location in

Consolidated Balance Sheets

   Fair Value    

Location in

Consolidated Balance Sheets

   Fair Value  

As of April 30, 2010

          

Interest rate swaps:

          

Current portion

   Other current assets    $ 3      Other current liabilities    $ 8   

Noncurrent portion

   Other noncurrent assets      12      Other noncurrent liabilities      21   

Interest rate caps purchased

   Other current assets      2      Other noncurrent liabilities      —     

Interest rate caps sold

   Other noncurrent assets      —        Other current liabilities      2   

Foreign currency contracts

   Other current assets      1      Other current liabilities      —     

Commodity contracts

   Other current assets      5      Other current liabilities      —     
                      

Total fair value

        23           31   

Less: Current portion

        (11        (10
                      

Noncurrent portion

      $ 12         $ 21   
                      

 

(in millions)   

Asset Derivatives

   

Liability Derivatives

 
  

Location in

Consolidated Balance Sheets

   Fair Value    

Location in

Consolidated Balance Sheets

   Fair Value  

As of October 31, 2009

          

Interest rate swaps:

          

Current portion

   Other current assets    $ 5      Other current liabilities    $ 9   

Noncurrent portion

   Other noncurrent assets      27      Other noncurrent liabilities      52   

Interest rate caps purchased

   Other noncurrent assets      5      Other noncurrent liabilities      —     

Interest rate caps sold

   Other noncurrent assets      —        Other noncurrent liabilities      4   

Commodity contracts

   Other current assets      1      Other current liabilities      1   
                      

Total fair value

        38           66   

Less: Current portion

        (6        (10
                      

Noncurrent portion

      $ 32         $ 56   
                      

The location and amount of gain (loss) recognized in income on derivatives are as follows for the periods ended April 30:

 

    

Location in

Consolidated Statements of Operations

   Amount of Gain
(Loss) Recognized
 
            2010             2009      
(in millions)                  

Three Months Ended April 30

       

Interest rate swaps

   Interest expense    $ (1   $ (9

Interest rate caps purchased

   Interest expense      (1     1   

Interest rate caps sold

   Interest expense      2        (1

Foreign currency contracts

   Other income      —          —     

Commodity forward contracts

   Costs of products sold      5        (3
                   

Total gain (loss)

      $ 5      $   (12
                   

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

 

    

Location in

Consolidated Statements of Operations

   Amount of Gain
(Loss) Recognized
 
            2010             2009      
(in millions)                  

Six Months Ended April 30

       

Interest rate swaps

   Interest expense    $ (4   $ (34

Interest rate caps purchased

   Interest expense      (3     (1

Interest rate caps sold

   Interest expense      3        1   

Foreign currency contracts

   Other income      —          3   

Commodity forward contracts

   Costs of products sold      6        (8
                   

Total gain (loss)

      $ 2      $   (39
                   

12. Commitments and contingencies

Guarantees

We occasionally provide guarantees that could obligate us to make future payments if the primary entity fails to perform under its contractual obligations. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet the recognition and measurement provisions of the guidance on guarantor’s accounting and disclosure requirements for guarantees including indirect guarantees of the indebtedness of others. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under various guarantees. We do not believe that claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.

We have issued residual value guarantees in connection with various leases that extend through 2014. The amounts of the guarantees are estimated and recorded as liabilities as of April 30, 2010. Our guarantees are contingent upon the fair value of the leased assets at the end of the lease term.

We obtain certain stand-by letters of credit and surety bonds from third party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. The amount of available stand-by letters of credit and surety bonds were $50 million at April 30, 2010.

We extend credit commitments to certain truck fleet customers, which allow them to purchase parts and services from participating dealers. The participating dealers receive accelerated payments from us with the result that we carry the receivables and absorb the credit risk related to these customers. At April 30, 2010, we have $29 million of unused credit commitments outstanding under this program.

In addition, as of April 30, 2010, we have entered into various purchase commitments of $84 million and contracts that have cancellation fees of $28 million with various expiration dates through 2017.

In the ordinary course of business, we also provide routine indemnifications and other guarantees, the terms of which range in duration and often are not explicitly defined. We do not believe these will result in claims that would have a material impact on our financial condition, results of operations, or cash flows.

The terms of the Ford Settlement require us to indemnify Ford with respect to intellectual property infringement claims, if any, that are brought against Ford or others that use the 6.0 liter or 6.4 liter engines on behalf of Ford. The maximum amount of future payments that we could potentially be required to pay under the indemnification would depend upon whether any such claims are alleged in the future and thus cannot currently be determined.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

Environmental Liabilities

We have been named a potentially responsible party (“PRP”), in conjunction with other parties, in a number of cases arising under an environmental protection law, the Comprehensive Environmental Response, Compensation, and Liability Act, popularly known as the “Superfund” law. These cases involve sites that allegedly received wastes from current or former Company locations. Based on information available to us which, in most cases, consists of data related to quantities and characteristics of material generated at current or former Company locations, material allegedly shipped by us to these disposal sites, as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of our share, if any, of the probable costs and accruals are recorded in our consolidated financial statements. These accruals are generally recognized no later than completion of the remedial feasibility study and are not discounted to their present value. We review all accruals on a regular basis and believe that, based on these calculations, our share of the potential additional costs for the cleanup of each site will not have a material effect on our financial condition, results of operations, or cash flows.

Four sites formerly owned by us, (i) Solar Turbines in San Diego, California, (ii) the West Pullman Plant in Chicago, Illinois, (iii) the Canton Plant in Canton, Illinois, and (iv) Wisconsin Steel in Chicago, Illinois, were identified as having soil and groundwater contamination. Two sites in Sao Paulo, Brazil, one where we are currently operating and another where we previously had operations, were identified as having soil and groundwater contamination. While investigations and cleanup activities continue at all sites, we believe that we have adequate accruals to cover costs to complete the cleanup of these sites.

We have accrued $13 million for these and other environmental matters that may arise, which are included within Other current liabilities and Other noncurrent liabilities, as of April 30, 2010. The majority of these accrued liabilities are expected to be paid out in 2010 and 2011.

Along with other vehicle manufacturers, we have been subject to an increase in the number of asbestos-related claims in recent years. In general, these claims relate to illnesses alleged to have resulted from asbestos exposure from component parts found in older vehicles, although some cases relate to the alleged presence of asbestos in our facilities. In these claims, we are not the sole defendant, and the claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. We have strongly disputed these claims, and it has been our policy to defend against them vigorously. Historically, the actual damages paid out to claimants have not been material in any year to our financial condition, results of operations, or cash flows. It is possible that the number of these claims will continue to grow, and that the costs for resolving asbestos related claims could become significant in the future.

Legal Proceedings

Overview

We are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings that constitute ordinary, routine litigation incidental to our business. The majority of these claims and proceedings relate to commercial, product liability, and warranty matters. In our opinion, apart from the actions set forth below, the disposition of these proceedings and claims, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on our business or our financial condition, results of operations, and cash flows.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

Litigation Relating to Accounting Controls and Financial Restatement

In December 2007, a complaint was filed against us by Norfolk County Retirement System and Brockton Contributory Retirement System (collectively “Norfolk”), which was subsequently amended in May 2008. In March 2008, an additional complaint was filed by Richard Garza, which was subsequently amended in October 2009. Both of these matters are pending in the United States District Court, Northern District of Illinois.

The plaintiffs in the Norfolk case allege they are shareholders suing on behalf of themselves and a class of other shareholders who purchased shares of the Company’s common stock between February 14, 2003 and July 17, 2006. The amended complaint alleges that the defendants, which include the Company, one of its executive officers, two of its former executive officers, and the Company’s former independent accountants, Deloitte & Touche LLP (“Deloitte”), violated federal securities laws by making false and misleading statements about the Company’s financial condition during that period. In March 2008, the court appointed Norfolk County Retirement System and the Plumbers Local Union 519 Pension Trust as joint lead plaintiffs. On July 7, 2008, the Company filed a motion to dismiss the amended complaint based on the plaintiffs’ failure to plead any facts tending to show the defendants’ actual knowledge of the alleged false statements or that the plaintiffs suffered damages. Deloitte also filed a motion to dismiss on similar grounds. On July 28, 2009, the Court granted Deloitte’s motion to dismiss but denied the motion to dismiss as to all other defendants. The parties are currently engaged in discovery focused on class certification issues. The next status conference with the Court is scheduled for June 14, 2010. The lead plaintiffs in this matter seek compensatory damages and attorneys’ fees among other relief. The parties have agreed to discuss non-binding mediation.

The plaintiff in the Garza case brought a derivative claim on behalf of the Company against one of the Company’s executive officers, two of its former executive officers, and certain of its directors, alleging that all of the defendants violated their fiduciary obligations under Delaware law by willfully ignoring certain accounting and financial reporting problems at the Company, thereby knowingly disseminating false and misleading financial information about the Company and certain of the defendants were unjustly enriched in connection with their sale of Company stock during the December 2002 to January 2006 period. On November 30, 2009, the defendants filed a motion to dismiss the amended complaint based on plaintiffs’ failure to state a claim and based on plaintiffs’ failure to make a demand on the Board of Directors. That motion was fully briefed as of February 4, 2010, and is currently pending before the Court. The plaintiffs in this matter seek compensatory damages, disgorgement of the proceeds of defendants’ profits from the sale of Company stock, attorneys’ fees, and other equitable relief. The parties have agreed to discuss settlement.

We strongly dispute the allegations in these amended complaints and will vigorously defend ourselves.

SEC Investigation

In January 2005, we announced that we would restate our financial results for 2002 and 2003 and the first three quarters of 2004. Our restated Annual Report on Form 10-K was filed in February 2005. The SEC notified us on February 9, 2005 that it was conducting an informal inquiry into our restatement. On March 17, 2005, we were advised by the SEC that the status of the inquiry had been changed to a formal investigation. On April 7, 2006, we announced that we would restate our financial results for 2002 through 2004 and for the first three quarters of 2005. We were subsequently informed by the SEC that it was expanding the investigation to include this restatement. Our 2005 Annual Report on Form 10-K, which included the restated financial statements, was filed in December 2007. We have been providing information to and fully cooperating with the SEC on this investigation.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

To resolve this matter we, along with our chief executive officer, have made offers of settlement to the investigative staff of the SEC and the investigative staff has decided to recommend those offers of settlement to the SEC. As a result of the proposed settlement, in each case without admitting or denying wrongdoing, we would consent to the entry of an administrative settlement and would not pay a civil penalty and our chief executive officer would consent to the entry of an administrative settlement regarding our system of internal accounting controls and return to us a portion of his bonus for 2004. These proposed settlements are subject to mutual agreement on the specific language of the orders and to final approval by the SEC. We cannot assure that the proposed settlement will be approved by the SEC and, in the event the proposed settlement is not approved, what the ultimate resolution of this investigation will be.

Commercial Steam LLC and Andrew Harold vs. Ford Motor Co. and Navistar International Corporation.

In October 2009, Commercial Steam LLC and Andrew Harold (collectively, the “plaintiffs”) served the Company with an amended complaint naming the Company as a defendant in a case in the United States District Court for the Southern District of West Virginia. The plaintiffs in this case alleged they are suing on behalf of themselves and a putative class of other West Virginia residents who purchased a model year 2003 to 2006 Ford F-Series truck with a 6.0 liter Power Stroke engine. The amended complaint alleged problems with these vehicles and engines, including, but not limited to, the fuel system, fuel injectors, oil leaks, broken turbochargers, and other warranty claims. The plaintiffs in this matter sought compensatory damages, interest and attorneys’ fees among other relief. On November 10, 2009, we answered the amended complaint and strongly disputed the allegations contained in the amended complaint.

In April 2010, counsel for plaintiffs filed a notice with the Court stating that plaintiffs would not proceed with moving for class certification. As a result, plaintiffs no longer asserted claims on behalf of a putative class previously alleged to include thousands of potential members, but asserted only their individual claims. Plaintiffs’ counsel subsequently agreed to dismiss the pending individual claims against the Company without prejudice. On May 27, 2010, the parties filed a joint motion to dismiss the claims asserted against the Company. On May 28, 2010, the Court granted the parties’ joint motion seeking that relief, and dismissed the claims asserted against the Company.

Retiree Health Care Litigation

In April 2010, the UAW and others (“Plaintiffs”) filed a “Motion of Plaintiffs Art Shy, UAW, et al for an Injunction to Compel Compliance with the Settlement Agreement” (the “Shy Motion”). The Plaintiffs request “expedited” consideration of the Shy Motion, which is pending in U.S. District Court for the Southern District of Ohio (Case No. C-3-92-333) (the “Court”). The Shy Motion seeks to enjoin the Company from implementing an administrative change relating to prescription drug benefits under a healthcare plan for Medicare eligible retirees (the “Part D Change”). Specifically, Plaintiffs claim that the Part D Change violates the terms of a June 1993 settlement agreement previously approved by the Court (the “Settlement Agreement”). That Settlement Agreement resolved a class action originally filed in 1992 regarding the restructuring of the Company’s then applicable retiree health care and life insurance benefits.

The Part D Change will be effective July 1, 2010, and will make the Company’s prescription drug coverage for post-65 retirees (“Plan 2” or Medicare-eligible retirees) supplemental to the coverage provided by Medicare. After the change, Plan 2 retirees will pay the premiums for Medicare Part D drug coverage. For drugs that are covered by Medicare Part D, Plan 2 will supplement that coverage through a “buy down” of co-payments to the amounts in place prior to the Part D Change. The Shy Motion contends that the Part D Change violates the

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

Settlement Agreement, because the Settlement Agreement (i) only describes retiree participation in Medicare Parts A and B, not Part D, (ii) only specifies retiree premiums for Medicare Part B, not Part D, and (iii) does not allow the Company to “terminate” coverage for drugs previously covered by Plan 2 that fall outside the formulary of the Part D plan selected by the Company.

On May 20, 2010, the Company filed its Opposition to the Shy Motion (the “Opposition”). The Opposition argues that the Part D Change is within the Company’s authority as “Plan Administrator” to construe and interpret Plan 2, and that the language of Plan 2 makes it clear Plan 2 is supplemental to all available Medicare benefits (even Medicare benefits that did not exist in 1993 and therefore could not have been referenced in the Settlement Agreement). The Opposition further argues that Plan 2 requires retirees to pay the premiums for “available” Medicare benefits and restricts supplemental coverage to “expenses covered by Medicare, but not paid in full by the government program.”

Plaintiffs’ filed their reply brief in support of the Shy Motion on June 3, 2010 (the “Reply”). In the Reply, Plaintiffs reiterate the arguments in the Shy Motion. With respect to the Company’s arguments in its Opposition, Plaintiffs contend that (a) the Company’s authority as Plan Administrator does not include the authority to make the Part D Change, (b) the language about Plan 2 being “supplemental” or “secondary” to Medicare means “supplemental” or “secondary” only to Parts A and B of Medicare, and (c) even if the Company was correct that Plan 2 is supplemental to Medicare Part D, that does not imply that retirees must bear the costs of any Part D premiums.

On June 4, 2010, Navistar filed a separate Complaint in the Court relating to the Settlement Agreement (the “Complaint”). In the Complaint, the Company argues that it has not received the consideration that it was promised in the Settlement Agreement – specifically, that the Company’s APBO for health benefits would be “permanently reduced” to approximately $1 billion. The Company, therefore, seeks a declaration from the Court that it is not required to fund or provide retiree health benefits that would cause its APBO to exceed the approximate $1 billion amount provided in the Settlement Agreement.

This litigation is pending and no schedule or hearings have been set. The Company disputes the allegations in the Shy Motion and intends to vigorously defend itself.

13. Earnings per share attributable to Navistar International Corporation

The following table shows the information used in the calculation of our basic and diluted earnings per share attributable to Navistar International Corporation:

 

     Three Months Ended
April 30,
   Six Months Ended
April 30,
         2010            2009            2010            2009    
(in millions, except per share data)                    

Numerator:

           

Net income attributable to Navistar International Corporation

   $ 30    $ 12    $ 47    $ 246
                           

Denominator:

           

Weighted average shares outstanding

           

Basic

     71.4      70.8      71.3      71.2

Effect of dilutive securities

     1.4      0.5      1.1      0.3
                           

Diluted

     72.8      71.3      72.4      71.5
                           

Earnings per share attributable to Navistar International Corporation:

           

Basic

   $   0.43    $   0.16    $   0.66    $   3.45

Diluted

   $ 0.42    $ 0.16    $ 0.65    $ 3.44

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

The aggregate shares not included in the computation of diluted earnings per share as they would be anti-dilutive, were 22.8 million for the three and six months ended April 30, 2010, respectively, and 0.4 million for the three and six months ended April 30, 2009, respectively.

The 22.8 million shares not included in the computation for the three and six months ended April 30, 2010 include 11.4 million shares related to our Convertible Notes and 11.4 million shares related warrants to purchase common stock. The conversion rate on our Convertible Notes is 19.8910 shares of common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of $50.27 per share of common stock. In connection with the sale of the Convertible Notes, we entered into separate warrant transactions whereby we sold warrants to various counterparties to purchase from us an aggregate 11.4 million shares of our common stock, subject to adjustments, at an exercise price of $60.14 per share of common stock. The shares were not included as they are anti-dilutive as our average stock price was less than the conversion price on the Convertible Notes and the strike price on the warrants for the three and six months ended April 30, 2010.

We also purchased call options in connection with the sale of the Convertible Notes, covering 11.4 million shares at a strike price of $50.27 per share, which are intended to minimize share dilution associated with the Convertible Notes; however under accounting guidance, these call options cannot be utilized to offset the dilution of the Convertible Notes for determining diluted earnings per share as they are anti-dilutive.

14. Segment reporting

The following is a description of our four reporting segments:

 

   

Our Truck segment manufactures and distributes a full line of Class 4 through 8 trucks and buses under the International® and IC Bus, LLC (“IC bus”) brands, and Navistar Defense, LLC military vehicles. Our Truck segment also produces chassis for motor homes and commercial step-van vehicles under the Workhorse Custom Chassis, LLC (“WCC”) brand and recreational vehicles under the Monaco RV, LLC brands. In an effort to strengthen and maintain our dealer network, this segment occasionally acquires and operates dealer locations for the purpose of transitioning ownership or providing temporary operational assistance.

 

   

Our Engine segment designs and manufactures diesel engines for use primarily in our Class 6 and 7 medium trucks and buses and selected Class 8 heavy truck models, and for sale to original equipment manufacturers (“OEMs”) primarily in North America. In addition, our Engine segment produces diesel engines in Brazil primarily for distribution in South America under the MWM brand for sale to OEMs.

 

   

Our Parts segment provides customers with proprietary products needed to support the International truck, IC bus, WCC chassis, Navistar Defense military vehicles, and the MaxxForce® engine lines. Our Parts segment also provides a wide selection of other standard truck, trailer, and engine aftermarket parts.

 

   

Our Financial Services segment provides retail, wholesale, and lease financing of products sold by the Truck segment and its dealers within the U.S. and Mexico as well as financing for wholesale accounts and selected retail accounts receivable.

Corporate contains those items that are not included in our four segments.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

Segment Profit (Loss)

We define segment profit (loss) as net income attributable to Navistar International Corporation excluding income taxes. Our results for interim periods are not necessarily indicative of results for a full year. We allocate certain fees charged by our Financial Services segment to our manufacturing operations for unused funding facilities, surcharges on retail and wholesale account balances, and retail note and wholesale note balances for Dealcor dealers which were $23 million and $21 million for the six months ended April 30, 2010 and 2009, respectively. Selected financial information is as follows:

 

     Truck     Engine(A )     Parts     Financial
Services(B )
    Corporate
and
Eliminations
    Total  
(in millions)                                     

Three Months Ended April 30, 2010

            

External sales and revenues, net

   $ 1,847      $ 444      $ 399      $ 53      $ —        $ 2,743   

Intersegment sales and revenues

     —          233        48        23        (304     —     
                                                

Total sales and revenues, net

   $   1,847      $ 677      $ 447      $ 76      $ (304   $ 2,743   
                                                

Depreciation and amortization

   $ (40   $ (27   $ (2   $ (7   $ (3   $ (79

Interest expense

     —          —          —          29        35        64   

Equity in (loss) income of non-consolidated affiliates

     (11     (2     —          —          —          (13

Segment profit (loss)

     76        15        58        16        (145     20   

Capital expenditures( C)

     24        11        2        —          2        39   

Three Months Ended April 30, 2009

            

External sales and revenues, net

   $ 1,773      $ 434      $ 534      $ 67      $   —        $ 2,808   

Intersegment sales and revenues

     —          158        43        21        (222     —     
                                                

Total sales and revenues, net

   $ 1,773      $ 592      $ 577      $ 88      $ (222   $ 2,808   
                                                

Depreciation and amortization

   $ 45      $ 32      $ 1      $ 6      $ 4      $ 88   

Interest expense

     —          —          —          38        19        57   

Equity in (loss) income of non-consolidated affiliates

     (10     22        2        —          —          14   

Segment profit (loss)

     56        (84     115        18        (84     21   

Capital expenditures( C)

     19        14        3        1        2        39   

Six Months Ended April 30, 2010

            

External sales and revenues, net

   $ 3,563      $ 1,069      $ 816      $   104      $   —        $   5,552   

Intersegment sales and revenues

     1        429        98        47        (575     —     
                                                

Total sales and revenues, net

   $ 3,564      $   1,498      $   914      $ 151      $ (575   $ 5,552   
                                                

Depreciation and amortization

   $ (80   $ (53   $ (3   $ (15   $ (7   $ (158

Interest expense

     —          —          —          61        70        131   

Equity in (loss) income of non-consolidated affiliates

     (18     (2     1        —          —          (19

Segment profit (loss)

     111        69        137        28        (300     45   

Capital expenditures( C)

     34        34        4        1        5        78   

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

     Truck     Engine(A )    Parts    Financial
Services(B )
   Corporate
and
Eliminations
    Total
(in millions)                                

Six Months Ended April 30, 2009

               

External sales and revenues, net

   $ 3,834      $ 783    $ 1,019    $ 142    $ —        $ 5,778

Intersegment sales and revenues

     1        318      98      39      (456     —  
                                           

Total sales and revenues, net

   $ 3,835      $ 1,101    $   1,117    $ 181    $ (456   $ 5,778
                                           

Depreciation and amortization

   $ 85      $ 59    $ 3    $ 12    $ 8      $ 167

Interest expense

     —          —        —        102      48        150

Equity in (loss) income of non-consolidated affiliates

     (17     44      4      —        —          31

Segment profit (loss)

     170        105      219      17      (263     248

Capital expenditures( C)

     33        34      6      1      3        77

As of April 30, 2010

               

Segment assets

   $   2,710      $   1,572    $ 569    $   3,507    $ 582      $ 8,940

As of October 31, 2009

               

Segment assets

     2,660        1,517      664      4,136        1,046          10,023

 

(A) See Note 2, Ford settlement and related charges, and Note 12, Commitment and contingencies, for further discussion.
(B) Total sales and revenues in the Financial Services segment include interest revenues of $65 million and $135 million for the three and six months ended April 30, 2010, respectively, and $76 million and $158 million for the same period in 2009.
(C) Exclusive of purchase of equipment leased to others.

The following is information about our two customers from which we derived more than 10% of our consolidated Sales and revenues, net:

 

   

Sales of vehicles and service parts to the U.S. government were 12% and 11% of consolidated sales and revenues for the three and six months ended April 30, 2010, respectively, and 32% for the same periods in 2009, and were recorded in the Truck and Parts segments.

 

   

Sales to Ford were 12% of consolidated sales and revenues for the six months ended April 30, 2010, and were recorded in the Truck and Engine segments.

15. Condensed consolidating guarantor and non-guarantor financial information

The following tables set forth condensed consolidating balance sheets as of April 30, 2010 and October 31, 2009, and condensed consolidating statements of operations and condensed consolidating statements of cash flows for the three and six months ended April 30, 2010 and 2009. The information is presented as a result of Navistar, Inc.’s guarantee, exclusive of its subsidiaries, of NIC’s indebtedness under its 7.5% Senior Notes due 2011 and 8.25% Senior Notes due 2021. Navistar, Inc. is a direct wholly-owned subsidiary of NIC. None of NIC’s other subsidiaries guarantee any of these notes. The guarantee is full and unconditional. Separate financial statements and other disclosures concerning Navistar, Inc. have not been presented because management believes that such information is not material to investors. Within this disclosure only, “NIC” includes the consolidated financial results of the parent company only, with all of its wholly-owned subsidiaries accounted for under the equity method. Likewise, “Navistar, Inc.,” for purposes of this disclosure only, includes the consolidated financial results of its wholly-owned subsidiaries accounted for under the equity method and its operating units accounted for on a consolidated basis. “Non-Guarantor Subsidiaries” includes the combined financial results of all other non-guarantor subsidiaries. “Eliminations and Other” includes all eliminations and reclassifications to reconcile

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

to the consolidated financial statements. NIC files a consolidated U.S. federal income tax return that includes Navistar, Inc. and its U.S. subsidiaries. Navistar, Inc. has a tax allocation agreement (“Tax Agreement”) with NIC which requires Navistar, Inc. to compute its separate federal income tax liability and remit any resulting tax liability to NIC. Tax benefits that may arise from net operating losses of Navistar, Inc. are not refunded to Navistar, Inc. but may be used to offset future required tax payments under the Tax Agreement. The effect of the Tax Agreement is to allow NIC, the parent company, rather than Navistar, Inc., to utilize current U.S. taxable losses of Navistar, Inc. and all other direct or indirect subsidiaries of NIC.

 

     NIC     Navistar,
Inc.
    Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  
(in millions)                               

Condensed Consolidating Statement of Operations for the Three Months Ended April 30, 2010

          

Sales and revenues, net

   $   —        $   1,566      $   2,545      $   (1,368   $   2,743   
                                        

Costs of products sold

     (5     1,425        2,110        (1,341     2,189   

Restructuring charges

     —          —          3        —          3   

All other operating expenses (income)

     16        354        167        (32     505   
                                        

Total costs and expenses

     11        1,779        2,280        (1,373     2,697   

Equity in (loss) income of affiliates

     42        163        (5     (213     (13
                                        

Income (loss) before income tax

     31        (50     260        (208     33   

Income tax benefit (expense)

     (1     1       8        2        10   
                                        

Net income (loss)

     30        (49     268        (206     43   

Net income attributable to non-controlling interest

     —          —          (13     —          (13
                                        

Net income (loss) attributable to controlling interest

   $ 30      $ (49   $ 255      $ (206   $ 30   
                                        
     NIC     Navistar,
Inc.
    Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  
(in millions)                               

Condensed Consolidating Statement of Operations for the Six Months Ended April 30, 2010

          

Sales and revenues, net

   $   —        $   3,055      $   5,200      $   (2,703   $   5,552   
                                        

Costs of products sold

     (6     2,785        4,327        (2,655     4,451   

Restructuring charges

     —          (17     3        —          (14

All other operating expenses (income)

     33        688        365        (61     1,025   
                                        

Total costs and expenses

     27        3,456        4,695        (2,716     5,462   

Equity in (loss) income of affiliates

     76        314        (8     (401     (19
                                        

Income (loss) before income tax

     49        (87     497        (388     71   

Income tax benefit (expense)

     (2     3       (18     19        2   
                                        

Net income (loss)

     47        (84     479        (369     73   

Net income attributable to non-controlling interests

     —          —          (26     —          (26
                                        

Net income (loss) attributable to controlling interest

   $ 47      $ (84   $ 453      $ (369   $ 47   
                                        

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

    NIC     Navistar,
Inc.
    Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  
(in millions)                              

Condensed Consolidating Balance Sheet as of April 30, 2010

         

Assets

         

Cash and cash equivalents

  $ 211      $ 21      $ 276      $ —        $ 508   

Marketable securities

    40        —          135        —          175   

Restricted cash and cash equivalents

    20        8        256        —          284   

Finance and other receivables, net

    8        144        3,476        (16     3,612   

Inventories

    —          706        1,064        (51     1,719   

Goodwill

    —          —          324        —          324   

Property and equipment, net

    —          422        1,018        (1     1,439   

Investments in non-consolidated affiliates

    (3,320     4,681        67        (1,331     97   

Deferred taxes, net

    —          33        119        (2     150   

Other

    41        114        477        —          632   
                                       

Total assets

  $   (3,000)      $   6,129      $   7,212      $   (1,401   $ 8,940   
                                       

Liabilities, redeemable equity securities, and stockholders’ equity (deficit)

         

Debt

  $ 1,445      $ 236      $ 3,093      $ (229   $ 4,545   

Postretirement benefits liabilities

    —          2,082        222        —          2,304   

Amounts due to (from) affiliates

    (4,932     7,666        (2,823     89        —     

Other liabilities

    1,741        3        1,718        (173     3,289   
                                       

Total liabilities

    (1,746     9,987        2,210        (313       10,138   

Redeemable equity securities

    11        —          —          —          11   

Stockholders’ equity attributable to non-controlling interests

    —          —          54       2        56   

Stockholders’ equity (deficit) attributable to Navistar International Corporation

    (1,265       (3,858     4,948        (1,090     (1,265
                                       

Total liabilities, redeemable equity securities, and stockholders’ equity (deficit)

  $ (3,000   $ 6,129      $ 7,212      $   (1,401   $ 8,940   
                                       
    NIC     Navistar,
Inc.
    Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  
(in millions)                              

Condensed Consolidating Statement of Cash Flows for the Six Months Ended April 30, 2010

         

Net cash provided by (used in) operations

  $   (556   $   (482   $ 722      $ 582      $ 266   
                                       

Cash flow from investment activities

         

Net change in restricted cash and cash equivalents

    1       1        199        —          201   

Net sales of marketable securities

    (40     —            (135     —          (175

Capital expenditures

    —          (23     (80     —          (103

Other investing activities

    —          (52     (24     13        (63
                                       

Net cash provided by (used in) investment activities

    (39     (74     (40     13        (140
                                       

Cash flow from financing activities

         

Net borrowings (repayments) of debt

    —          541        (745       (582     (786

Other financing activities

    14        —          (42     (13     (41
                                       

Net cash provided by (used in) financing activities

    14        541        (787     (595     (827
                                       

Effect of exchange rate changes on cash and cash equivalents

    —          —          (3     —          (3
                                       

Cash and cash equivalents

         

Decrease during the period

    (581     (15     (108     —          (704

At beginning of the period

    792        36        384        —            1,212   
                                       

Cash and cash equivalents at end of the period

  $ 211      $ 21      $ 276      $ —        $ 508   
                                       

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

     NIC     Navistar,
Inc.
    Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  
(in millions)                               

Condensed Consolidating Statement of Operations for the Three Months Ended April 30, 2009

          

Sales and revenues, net

   $   —        $   1,404      $   2,637      $   (1,233   $   2,808   
                                        

Costs of products sold

     3        1,446        2,125        (1,279     2,295   

Restructuring charges

     —          (3     —          —          (3

All other operating expenses (income)

     (3     342        210        (40     509   
                                        

Total costs and expenses

     —          1,785        2,335        (1,319     2,801   

Equity in (loss) income of affiliates

     1        378        14        (379     14   
                                        

Income (loss) before income tax

     1        (3     316        (293     21   

Income tax benefit (expense)

     11        (1     (19     —          (9
                                        

Net income (loss)

     12        (4     297        (293     12   

Net income attributable to non-controlling interests

     —          —          —          —          —     
                                        

Net income (loss) attributable to Navistar International Corporation

   $ 12     $ (4   $ 297      $ (293   $ 12   
                                        
     NIC     Navistar,
Inc.
    Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  
(in millions)                               

Condensed Consolidating Statement of Operations for the Six Months Ended April 30, 2009

          

Sales and revenues, net

   $   —        $   3,326      $   5,505      $   (3,053   $   5,778   
                                        

Costs of products sold

     8        3,086        4,544        (3,020     4,618   

Restructuring charges

     —          55        —          —          55   

All other operating expenses (income)

     (7     519        441        (65     888   
                                        

Total costs and expenses

     1        3,660        4,985        (3,085     5,561   

Equity in (loss) income of affiliates

     229        549        29        (776     31   
                                        

Income (loss) before income tax

     228        215        549        (744     248   

Income tax benefit (expense)

     18        (1     (19     —          (2
                                        

Net income (loss)

     246        214        530        (744     246   

Net income attributable to non-controlling interest

     —          —          —          —          —     
                                        

Net income (loss) attributable to Navistar International Corporation

   $ 246      $ 214      $ 530      $ (744   $ 246   
                                        

 

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Table of Contents

Navistar International Corporation and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(Unaudited)

 

     NIC     Navistar,
Inc.
    Non-Guarantor
Subsidiaries
    Eliminations
and Other
    Consolidated  
(in millions)                               

Condensed Consolidating Balance Sheet as of October 31, 2009

          

Assets

          

Cash and cash equivalents

   $ 792      $ 36      $ 384      $ —        $ 1,212   

Restricted cash and cash equivalents

     21        10        454        —