form10q013105

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 January 31, 2005
 
OR
 
( )
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from
To
 
Commission file number 1-9618
 
 NAVISTAR INTERNATIONAL CORPORATION

 
(Exact name of registrant as specified in its charter)
 
 
 
Delaware
 
36-3359573
 


 
(State or other jurisdiction of
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 and (2) has been subject to such filing requirements for the past 90 days. Yes  X      No ___

 
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.) Yes X    No __

 
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___ No ___
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
As of March 31, 2005, the number of shares outstanding of the registrant's common stock was 70,024,485.




PAGE 2

NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
 
 
INDEX
 
         
Page
Reference

           
Part I. Financial Information:
 
3
           
 
Item 1. Condensed Consolidated Financial Statements
   
           
   
Statement of Income
   
     
Three Months Ended January 31, 2005 and 2004 (restated) 
 
3
           
   
Statement of Financial Condition
   
     
January 31, 2005, October 31, 2004 and January 31, 2004 (restated) 
 
4
           
   
Statement of Cash Flow
   
     
Three Months Ended January 31, 2005 and 2004 (restated) 
 
5
           
   
Notes to the Financial Statements 
 
6
         
   
Additional Financial Information 
 
24
           
 
Item 2. Management's Discussion and Analysis of Financial
   
   
Condition and Results of Operations 
 
26
           
 
Item 3. Quantitative and Qualitative Disclosures
   
   
About Market Risk 
 
36
           
 
Item 4. Controls and Procedures 
 
36
           
Part II. Other Information:
   
           
 
Item 1. Legal Proceedings 
 
37
           
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
 
38
           
 
Item 5. Other Information 
 
39
           
 
Item 6. Exhibits 
 
40
           
Signature 
 
40
           
           





PAGE 3

PART I - FINANCIAL INFORMATION
 
ITEM 1. Condensed Consolidated Financial Statements
 
   
STATEMENT OF INCOME (Unaudited)
 
Millions of dollars, except per share data
 

 
       
   
Navistar International Corporation
and Consolidated Subsidiaries
 
   
 
   
Three Months Ended
January 31
 
   
 
   
2005
 
2004
 
   
 
 
       
 * As Restated 
 
Sales and revenues
             
Sales of manufactured products
 
$
2,491
 
$
1,886
 
Finance revenue
   
62
   
56
 
Other income 
   
5
   
3
 
   
 
 
Total sales and revenues 
   
2,558
   
1,945
 
   
 
 
               
Costs and expenses
             
Cost of products and services sold
   
2,177
   
1,653
 
Restructuring and other non-recurring charges
   
-
   
4
 
Postretirement benefits expense
   
59
   
61
 
Engineering and research expense
   
77
   
64
 
Selling, general and administrative expense
   
176
   
149
 
Interest expense
   
33
   
32
 
Other expense 
   
9
   
7
 
   
 
 
Total costs and expenses 
   
2,531
   
1,970
 
   
 
 
               
Income (loss) before income taxes 
   
27
   
(25
)
Income tax expense (benefit) 
   
9
   
(11
)
   
 
 
               
Net income (loss) 
 
$
18
 
$
(14
)
   
 
 
               

               
Earnings (loss) per share
             
Basic 
 
$
0.25
 
$
(0.20
)
Diluted 
 
$
0.24
 
$
(0.20
)
               
Average shares outstanding (millions)
             
Basic 
   
70.1
   
69.2
 
Diluted 
   
76.3
   
69.2
 
               

See Notes to Financial Statements.
* See Note P to the Financial Statements.
             

 



PAGE 4

STATEMENT OF FINANCIAL CONDITION (Unaudited)
 
Millions of dollars
 

   
Navistar International Corporation
and Consolidated Subsidiaries
 
   
 
   
January 31
 
October 31
 
January 31
 
   
2005
 
2004
 
2004
 
   
 
 
 
ASSETS  
             
 * As Restated
 
                     
Current assets
                   
Cash and cash equivalents 
 
$
540
 
$
605
 
$
287
 
Marketable securities 
   
78
   
182
   
42
 
Receivables, net 
   
806
   
1,215
   
1,033
 
Inventories 
   
865
   
790
   
689
 
Deferred tax asset, net 
   
189
   
207
   
161
 
Other assets 
   
203
   
168
   
175
 
   
 
 
 
                     
Total current assets 
   
2,681
   
3,167
   
2,387
 
                     
Marketable securities 
   
320
   
73
   
255
 
Finance and other receivables, net 
   
1,363
   
1,222
   
989
 
Property and equipment, net 
   
1,403
   
1,444
   
1,414
 
Investments and other assets 
   
367
   
374
   
321
 
Prepaid and intangible pension assets 
   
71
   
73
   
69
 
Deferred tax asset, net 
   
1,288
   
1,239
   
1,325
 
   
 
 
 
                     
Total assets  
 
$
7,493
 
$
7,592
 
$
6,760
 
   
 
 
 
                     
LIABILITIES AND SHAREOWNERS' EQUITY
                   
                     
Liabilities
                   
Current liabilities
                   
Notes payable and current maturities of long-term debt 
 
$
1,434
 
$
823
 
$
415
 
Accounts payable, principally trade 
   
1,286
   
1,462
   
1,006
 
Other liabilities 
   
1,017
   
965
   
932
 
   
 
 
 
                     
Total current liabilities 
   
3,737
   
3,250
   
2,353
 
                     
Debt: Manufacturing operations 
   
1,246
   
1,258
   
898
 
Financial services operations 
   
169
   
787
   
1,388
 
Postretirement benefits liability 
   
1,399
   
1,382
   
1,435
 
Other liabilities 
   
394
   
384
   
376
 
   
 
 
 
                     
Total liabilities 
   
6,945
   
7,061
   
6,450
 
   
 
 
 
                     
Commitments and contingencies
                   
                     
Shareowners' equity
                   
Series D convertible junior preference stock 
   
4
   
4
   
4
 
Common stock and additional paid in capital
(75.3 million shares issued)  
   
2,085
   
2,096
   
2,123
 
Retained earnings (deficit) 
   
(585
)
 
(604
)
 
(848
)
Accumulated other comprehensive loss 
   
(784
)
 
(789
)
 
(775
)
Common stock held in treasury, at cost
                   
(5.3 million, 5.3 million and 5.7 million shares held) 
   
(172
)
 
(176
)
 
(194
)
   
 
 
 
                     
Total shareowners’ equity 
   
548
   
531
   
310
 
   
 
 
 
                     
Total liabilities and shareowners’ equity 
 
$
7,493
 
$
7,592
 
$
6,760
 
   
 
 
 
                     

 
See Notes to Financial Statements.
* See Note P to the Financial Statements.
                   
 
 



PAGE 5

STATEMENT OF CASH FLOW (Unaudited)
 
Millions of dollars
 

   
   
Navistar International Corporation
and Consolidated Subsidiaries
 
   
 
   
Three Months Ended
January 31
 
   
 
   
2005
 
2004
 
   
 
 
Cash flow from operations
       
 * As Restated
 
Net income (loss) 
 
$
18
 
$
(14
)
Adjustments to reconcile net income (loss) to cash used in operations:
             
Depreciation and amortization 
   
64
   
52
 
Deferred income taxes 
   
(9
)
 
(14
)
    Postretirement benefits funding less than expense 
   
8
   
1
 
Other, net
   
(10
)
 
(42
)
Change in operating assets and liabilities:
             
Receivables 
   
(120
)
 
(110
)
Inventories 
   
(81
)
 
(92
)
Prepaid and other current assets 
   
(34
)
 
(25
)
Accounts payable 
   
(199
)
 
(96
)
Other liabilities 
   
20
   
17
 
   
 
 
Cash used in operations 
   
(343
)
 
(323
)
   
 
 
               
Cash flow from investment programs
             
Purchases of retail notes and lease receivables 
   
(445
)
 
(346
)
Collections/sales of retail notes and lease receivables 
   
896
   
264
 
Purchases of marketable securities 
   
(213
)
 
(88
)
Sales or maturities of marketable securities 
   
70
   
386
 
Capital expenditures 
   
(16
)
 
(22
)
Property and equipment leased to others 
   
6
   
-
 
Other investment programs 
   
4
   
2
 
   
 
 
Cash provided by investment programs 
   
302
   
196
 
   
 
 
               
Cash flow from financing activities
             
Issuance of debt 
   
11
   
93
 
Principal payments on debt 
   
(48
)
 
(94
)
Net (increase) decrease in notes and debt outstanding under bank revolving credit  facility and commercial paper programs 
   
22
   
(78
)
Other financing activities 
   
(9
)
 
26
 
   
 
 
Cash used in financing activities 
   
(24
)
 
(53
)
   
 
 
               
Cash and cash equivalents
             
Decrease during the period 
   
(65
)
 
(180
)
At beginning of the period 
   
605
   
467
 
   
 
 
Cash and cash equivalents at end of the period 
 
$
540
 
$
287
 
   
 
 
               

 
See Notes to Financial Statements.
* See Note P to the Financial Statements.

 



PAGE 6
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note A. Summary of Accounting Policies

Navistar International Corporation (NIC) is a holding company whose principal operating subsidiary is International Truck and Engine Corporation (International). As used hereafter, “company” or “Navistar” refers to Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal industry segments: truck, engine (collectively called “manufacturing operations”), and financial services. The consolidated financial statements include the results of the company’s manufacturing operations, majority owned dealers and its wholly owned financial services subsidiaries. The effects of transactions between the manufacturing, dealer and financial services operations have been eliminated to arrive at the consolidated totals.

The accompanying unaudited financial statements have been prepared in accordance with accounting policies described in the 2004 Annual Report on Form 10-K and should be read in conjunction with the disclosures therein.

In the opinion of management, these interim financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flow for the periods presented. Interim results are not necessarily indicative of results for the full year. Certain 2004 amounts have been reclassified to conform with the presentation used in the 2005 financial statements.

Statement of Financial Accounting Standards (SFAS) No. 123 (SFAS No. 123), “Accounting for Stock-Based Compensation” and Statement of Financial Accounting Standards No. 148 (SFAS No. 148), “Accounting for Stock-Based Compensation - Transition and Disclosure,” encourage, but do not require, companies to record compensation cost for stock-based employee compensation plans at fair value. The company has chosen to continue to account for stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Accordingly, no compensation cost has been recognized for fixed stock options because the exercise prices of the stock options equal the market value of the company’s common stock at the date of grant. The following table illustrates the effect on the company’s net income (loss) and earnings (loss) per share if the company had applied the fair value recognition provision of SFAS No. 123 in accordance with the disclosure provisions of SFAS No. 148.


   
Three Months Ended
January 31
 
   
 
Millions of dollars 
 
2005
 
2004
 

 
 
 
               
Net income (loss), as reported
 
$
18
 
$
(14
)
Deduct: Total stock-based employee
compensation expense determined under
fair value based method for all awards, net
of related tax effects 
   
(4
)
 
(5
)
   
 
 
Pro forma net income (loss)
 
$
14
 
$
(19
)
   
 
 
               
Earnings (loss) per share:
             
Basic - as reported
 
$
0.25
 
$
(0.20
)
Basic - pro forma
 
$
0.20
 
$
(0.28
)
               
Diluted - as reported
 
$
0.24
 
$
(0.20
)
Diluted - pro forma
 
$
0.19
 
$
(0.28
)


Based on recent clarifications that affect the company's previous interpretation of the timing of expense recognition under SFAS No. 123 for certain "retirement eligible" recipients of stock option awards, the company has revised the first quarter 2004 pro-forma stock option expense amount of $3 million, as previously included in its first quarter 2004 Form 10-Q, to $5 million, as reflected above.  The related pro-forma basic and diluted per share amounts have similarly been adjusted to reflect this revision.



PAGE 7
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note B. New Accounting Pronouncements

In June 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (revised 2004), “Share-Based Payment”. This Statement generally requires the recognition of the cost of employee services received in exchange for an award of equity instruments. This cost is based on the grant date fair value of the equity award and will be recognized over the period during which the employee is required to provide service in exchange for the award.  The effective date for the company is the beginning of the first fiscal quarter of 2006.  The company is still evaluating its share-based payment programs and the related impact, if any, this Statement may have on its results of operations, financial condition or cash flows.

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs”, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. The Statement clarifies that abnormal inventory costs should be recognized in the period in which they occur. This Statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The company will adopt this Statement in fiscal 2006 and will determine the effect, if any, this Statement may have on its results of operations, financial condition and cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets”, to amend Accounting Principles Board Opinion No. 29 (APB No. 29). The Statement eliminates the exception from fair value measurement for nonmonetary exchanges of similar products in APB No. 29 and replaces it with an exception for exchanges that do not have commercial substance. This Statement will be applied prospectively for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The company does not expect this statement will have a material impact on its results of operations, financial condition and cash flows.

In December 2004, the FASB issued two FASB Staff Positions (FSP’s) that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 (the Act) that was signed into law on October 22, 2004. The Act could affect how companies report their deferred income tax balances. The first FSP is FSP FAS 109-1 (FSP 109-1); the second is FSP FAS 109-2 (FSP 109-2). In FSP 109-1, the FASB concludes that the tax relief (special tax deduction for domestic manufacturing) from the Act should be accounted for as a "special deduction" instead of a tax rate reduction. FSP 109-2 gives a company additional time to evaluate the effects of the Act on any plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, “Accounting for Income Taxes.” However, companies must provide certain disclosures if it chooses to utilize the additional time granted by the FASB. The company is evaluating the impact, if any, these FSP’s may have on its results of operations, financial condition or cash flows.


Note C. Supplemental Cash Flow Information

Consolidated interest payments during the first three months of 2005 and 2004 were $45 million and $37 million, respectively. Consolidated tax payments made during the first three months of 2005 and 2004 were $3 million and $1 million, respectively.




PAGE 8
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note D. Postretirement Benefits

Postretirement Benefits Expense

The company provides postretirement benefits to a substantial portion of its employees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees and surviving spouses and dependents. In addition, as part of the 1993 restructured health care and life insurance plans, profit sharing payments to the Retiree Supplemental Benefit Trust (Trust) are required.

The cost of postretirement benefits is segregated as a separate component on the Statement of Income and is as follows:
   
Three Months Ended
January 31
 
   
 
Millions of dollars 
 
2005
 
2004
 

 
 
 
               
Pension expense
 
$
17
 
$
20
 
Other benefits 
   
42
   
41
 
   
 
 
Net postretirement benefits expense 
 
$
59
 
$
61
 
   
 
 

Net periodic postretirement benefits expense included on the Statement of Income is composed of the following:

   
Pension Expense for
Three Months Ended
January 31
 
   
 
Millions of dollars 
 
2005
 
2004
 

 
 
 
               
Service costs for benefits earned during the period
 
$
6
 
$
7
 
Interest on obligation
   
55
   
58
 
Amortization of cumulative losses
   
15
   
13
 
Amortization of prior service cost
   
2
   
2
 
Other
   
6
   
6
 
Less expected return on assets 
   
(67
)
 
(66
)
   
 
 
Net pension expense 
 
$
17
 
$
20
 
   
 
 
               


   
Other Benefits for
Three Months Ended
January 31
 
   
 
Millions of dollars 
 
2005
 
2004
 

 
 
 
               
Service costs for benefits earned during the period
 
$
4
 
$
4
 
Interest on obligation
   
36
   
36
 
Amortization of cumulative losses
   
15
   
12
 
Other
   
-
   
3
 
Less expected return on assets 
   
(13
)
 
(14
)
   
 
 
Net other benefits expense
 
$
42
 
$
41
 
   
 
 

“Other” includes the expense related to yearly lump-sum payments to retirees required by negotiated labor contracts, expense related to defined contribution plans and other postretirement benefit costs.



PAGE 9
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note D. Postretirement Benefits (continued)

Employer Contributions

The company previously disclosed in its financial statements for the year ended October 31, 2004 that it expected to contribute approximately $20 million to its pension plans in 2005. Current expectations regarding 2005 pension plan contributions have not changed since that time. As of January 31, 2005, $6 million of contributions have been made to the company’s qualified pension plans.

The company also makes contributions to partially fund retiree health care benefits. As of January 31, 2005, $2 million of contributions have been made to the company’s retiree healthcare plans and the company anticipates contributing an additional $4 million in 2005 for a total contribution of $6 million.


Note E. Income Taxes

The tax expense (benefit) on the Statement of Income reflects the tax benefit of current Net Operating Losses (NOL), net of valuation reserves, while the cumulative benefit of NOL carryforwards is recognized as a deferred tax asset in the Statement of Financial Condition. Cash payment of income taxes may be required for certain state income, foreign income and withholding and federal alternative minimum taxes. Until the company has utilized its significant NOL carryforwards, the cash payment of United States (U.S.) federal and state income taxes will be minimal.

Note F. Inventories

Inventories are as follows:
   
January 31
 
October 31
 
January 31
 
Millions of dollars
 
 2005
 
 2004
 
 2004
 

 
 
 
 
                     
Finished products
 
$
544
 
$
505
 
$
417
 
Work in process
   
60
   
47
   
65
 
Raw materials and supplies
   
261
   
238
   
207
 
   
 
 
 
Total inventories 
 
$
865
 
$
790
 
$
689
 
   
 
 
 

Note G. Sales of Receivables

Navistar Financial Corporation’s (NFC) primary business is to provide wholesale, retail and lease financing for new and used trucks sold by International and International’s dealers and, as a result, NFC’s finance receivables and leases have a significant concentration in the trucking industry. NFC retains as collateral an ownership interest in the equipment associated with leases and a security interest in equipment associated with wholesale notes and retail notes.
 
During the first quarter of fiscal 2005, NFC sold $757 million of retail notes and leases for a pre-tax gain of $11 million compared to the first quarter of fiscal 2004, when NFC sold $195 million of retail receivables for a pre-tax gain of $4 million.


PAGE 10
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note H. Restructuring and Other Non-recurring Charges

Restructuring Charges

In 2000 and 2002, the company’s board of directors approved separate plans to restructure its manufacturing and corporate operations. The company incurred charges for severance and other benefits, curtailment losses, lease terminations, asset and inventory write-downs and other exit costs relating to these plans. The following are the major restructuring, integration and cost reduction initiatives originally included in the 2000 and 2002 Plans of Restructuring (Plans of Restructuring):

·  
Replacement of steel cab trucks with a new line of High Performance Vehicles (HPV) and a concurrent realignment of the company’s truck manufacturing facilities
·  
Launch of the next generation technology diesel engines (NGD)
·  
Consolidation of corporate operations
·  
Realignment of the bus and truck dealership network and termination of various dealerships’ contracts
·  
Closure of certain facilities and operations and exit of certain activities including the Chatham, Ontario heavy truck assembly facility, the Springfield, Ohio body plant and a manufacturing production line within one of the company’s plants
·  
Offer of early retirement and voluntary severance programs to certain union represented employees

The Plans of Restructuring originally called for a reduction in workforce of approximately 5,400 employees, primarily in North America, resulting in charges totaling $169 million. The decision, in 2003, to keep open the Chatham facility along with changes in staffing requirements at other manufacturing facilities lowered the total number of employee reductions to 4,200. The change in expected employee reductions along with an evaluation of the severance reserves related to the HPV and NGD product programs resulted in a net reversal to the previously recorded severance and other benefits reserves totaling $50 million.

A curtailment loss of $157 million was recorded in 2002 relating to the company’s postretirement plans. This loss was the result of an early retirement program for represented employees at the company’s Springfield and Indianapolis plants and the planned closure of the Chatham facility. Subsequently, the decision to keep open the Chatham facility, the offer of an early retirement and voluntary severance program to certain employees at the Chatham facility, and the completion of the sign-up period for the early retirement window program offered to certain eligible, long serviced UAW employees, resulted in a net reduction of $3 million to the previously recorded curtailment loss. The curtailment liability has been classified as a postretirement benefits liability on the Statement of Financial Condition.

Lease termination charges include estimated lease costs, net of probable sublease income, under long-term non-cancelable lease agreements. These charges primarily relate to the lease at the company’s previous corporate office in Chicago, Illinois, which expires in 2010.

Dealer termination costs include the termination of certain dealer contracts in connection with the realignment of the company’s bus distribution network. Other exit costs include contractually obligated exit and closure costs associated with facility closures and an accrual for the loss on sale of Harco National Insurance Company. As of January 31, 2005, $55 million of the total net charge of $66 million has been incurred, of which $2 million was incurred during the quarter.




PAGE 11
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note H. Restructuring and Other Non-recurring Charges (continued)

Other Non-Recurring Charges

In October 2002, Ford advised the company that its current business case for a V-6 diesel engine in the specified vehicles was not viable and discontinued its program for the use of these engines. Accordingly, the company recorded charges of $170 million for the write-off of deferred pre-production costs, the write-down of fixed assets that were abandoned, lease obligations under non-cancelable operating leases and accruals for amounts contractually owed to suppliers. In 2003, the company recorded an adjustment of $11 million for additional amounts contractually owed to suppliers related to the V-6 diesel engine program. In April 2003, the company reached a comprehensive agreement with Ford concerning the termination of its V-6 diesel engine program. The terms of the agreement included compensation to neutralize certain current and future V-6 diesel engine program related costs not accrued for as part of the 2002 non-recurring charge, resolution of ongoing pricing related to the company’s V-8 diesel engine program and a release by the parties of all of their obligations under the V-6 diesel engine contract. The company will continue as Ford’s exclusive supplier of V-8 diesel engines through 2012. The agreement with Ford does not have a material net impact on the Statement of Financial Condition or the Statement of Income for the periods covered in this report.

Summary

Through January 31, 2005, the company has recorded cumulative charges of $818 million relating to the Plans of Restructuring and other non-recurring charges.

The remaining components of the company’s Plans of Restructuring and other non-recurring charges are shown in the following table.

 
 
(Millions of dollars) 
 
Balance
October 31
2004
 
 
Amount Incurred
 
Balance
January 31
2005
 

 
 
 
 
Lease terminations 
   
21
   
(2
)
 
19
 
Dealer terminations and other charges 
   
12
   
(1
)
 
11
 
Other non-recurring charges 
   
64
   
(2
)
 
62
 
   
 
 
 
Total 
 
$
97
 
$
(5
)
$
92
 
   
 
 
 
                     

The remaining liability of $92 million is expected to be funded from existing cash balances and internally generated cash flows from operations. The total cash outlay for the remainder of 2005 is expected to be $13 million with the remaining obligation of $79 million, primarily related to non-recurring charges and long-term non-cancelable lease agreements, to be settled in 2006 and beyond.

The company is in the process of completing certain aspects of the Plans of Restructuring and will continue to evaluate the remaining restructuring reserves as the plans are executed. As a result, there may be additional adjustments to the reserves noted above. Since the company-wide restructuring plans are an aggregation of many individual components requiring judgments and estimates, actual costs have differed from estimated amounts.




PAGE 12
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note I. Financial Instruments

The company uses derivative financial instruments as part of its overall interest rate and foreign currency risk management strategy.

The 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 selling fixed rate receivables on a fixed rate basis and by utilizing derivative financial instruments. 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. NFC manages exposure to counter-party credit risk by entering into derivative financial instruments with major financial institutions that can be expected to fully perform under the terms of such agreements. NFC does not require collateral or other security to support derivative financial instruments with credit risk.

NFC’s counter-party credit exposure is limited to the positive fair value of contracts at the reporting date. As of January 31, 2005, NFC’s derivative financial instruments had a negative net fair value. Notional amounts of derivative financial instruments do not represent exposure to credit loss.

At January 31, 2005, the notional amounts and fair values of the company’s derivatives are presented in the following table. The fair values of all these derivatives are recorded in other assets or other liabilities on the Statement of Financial Condition.

(Millions of dollars)
 
Inception Date
 
 
Maturity Date
 
 
Derivative Type
 
 
Notional Amount
 
 
Fair Value





                 
November 2002 -
July 2004
 
March 2007 -
September 2008
 
Interest rate swaps*
 $ 
41
 
 -
                 
July 2001 -
January 2005
 
June 2005 -
June 2011
 
Interest rate swaps
 
299
 
6
                 
October 2000 -
December 2004
 
February 2005 -
November 2012
 
Interest rate caps
 
1,083
 
-
                 
January 2005
 
February 2005
 
Cross Currency Swaps
 
27
 
-
                 

*Accounted for as non-hedging instruments.










PAGE 13
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note J. Guarantees

The company and its subsidiaries occasionally provide guarantees that could obligate them to make future payments if the primary entity fails to perform under its contractual obligations. The company has not recorded a liability for these guarantees. The company has no recourse as guarantor in case of default.

International provides a full and unconditional guarantee on the $400 million 9 3/8% Senior Notes due 2006, the $250 million 7.5% Senior Notes due 2011 and the $190 million 2.5% Senior Convertible Notes due 2007. NIC also provides a guarantee on the $19 million 9.95% Senior Notes due 2011. As of January 31, 2005, the outstanding balance on the 9.95% Senior Notes was $13 million.

NIC and International are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary’s income before interest expense and income taxes at not less than 125% of its total interest expense. No income maintenance payments were required for the three months ended January 31, 2005.

NIC guarantees lines of credit made available to its Mexican finance subsidiaries by third parties and NFC. NFC guarantees the borrowings of the Mexican finance subsidiaries. The following table summarizes the borrowings as of January 31, 2005, in millions of dollars.

 
Entity
 
Amount of Guaranty
 
Outstanding Balance
 
Maturity dates extend to




             
NIC
 
$ 393
 
$ 99
 
2010
             
NFC
 
$ 88
 
$ 75
 
2010
             
NIC and NFC
 
$ 100
 
$ 37
 
2005

The company also guarantees many of the operating leases of its operating subsidiaries. The leases have various expiration dates that extend through June 2014. The remaining maximum obligation under these leases as of January 31, 2005, totaled approximately $521 million.

The company and International also guarantee real estate operating leases of International and of the subsidiaries of the company. The leases have various maturity dates extending through 2019. As of January 31, 2005, the total remaining obligation under these leases is approximately $44 million.

The company and NFC have issued residual value guarantees in connection with various operating leases. The amount of the guarantees is undeterminable because in some instances, neither the company nor NFC is responsible for the entire amount of the guaranteed lease residual. The company’s and NFC’s guarantees are contingent upon the fair value of the leased assets at the end of the lease term. The difference between this fair value and the guaranteed lease residual represents the amount of the company’s and NFC’s exposure.




PAGE 14
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note J. Guarantees (continued)

As of January 31, 2005, NFC had guaranteed derivative contracts for foreign currency forwards, interest rate swaps and cross currency swaps related to two of the company’s Mexican finance subsidiaries. NFC is liable up to the fair market value of these derivative contracts only in cases of default by the two Mexican finance subsidiaries. As of January 31, 2005, there was an outstanding notional balance of $58 million related to interest rate swaps and cross currency swaps, and the fair market value of the outstanding balance was immaterial.

At January 31, 2005, the company’s Canadian operating subsidiary was contingently liable for $409 million of retail customers’ contracts and $35 million of retail leases that are financed by a third party. The Canadian operating subsidiary is responsible for the residual values of these financing arrangements. These contract amounts approximate the resale market value of the collateral underlying the note liabilities.

In addition, the company entered into various guarantees for purchase commitments, insurance loss reserves, credit guarantees and buyback programs with various expiration dates that total approximately $93 million. In the ordinary course of business, the company also provides routine indemnifications and other guarantees whose terms range in duration and often are not explicitly defined. The company does not believe these will have a material impact on the results of operations or financial condition of the company.

Product Warranty

Provisions for estimated expenses related to product warranty are made at the time products are sold. These estimates are established using historical information about the nature, frequency and average cost of warranty claims. Management actively studies trends of warranty claims and takes action to improve vehicle quality and minimize warranty claims. Management believes that the warranty reserve is appropriate; however, actual claims incurred could differ from the original estimates, requiring adjustments to the reserve.

Changes in the product warranty accrual for the three months ended January 31, 2005, were as follows:

Millions of dollars
     

 
 
Balance, beginning of period
 
$
286
 
Change in liability for warranties issued during the period
   
52
 
Change in liability for preexisting warranties
   
5
 
Payments made 
   
(75
)
   
 
Balance, end of period
 
$
268
 
   
 


Note K. Legal Proceedings and Environmental Matters

The company and its subsidiaries 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 the business of the company and its subsidiaries. The majority of these claims and proceedings relate to commercial, product liability and warranty matters. In the opinion of the company’s management, the disposition of these proceedings and claims, including those discussed below, after taking into account established reserves and the availability and limits of the company’s insurance coverage, will not have a material adverse effect on the business or the financial condition of the company.





 

PAGE 15
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)
Note K. Legal Proceedings and Environmental Matters (continued)

The company has 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 the company 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 the company 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 the company's share, if any, of the probable costs and is provided for in the financial statements. These obligations are generally recognized no later than completion of the remedial feasibility study and are not discounted to their present value. The company reviews all accruals on a regular basis and believes that, based on these calculations, its share of the potential additional costs for the cleanup of each site will not have a material effect on the company's financial results.

Two sites formerly owned by the company, Wisconsin Steel in Chicago, Illinois and Solar Turbines in San Diego, California, were identified as having soil and groundwater contamination. While investigations and cleanup activities continue at both sites, the company anticipates that all necessary costs to complete the cleanup have been adequately reserved.

In December 2003, the United States Environmental Protection Agency (US EPA) issued a Notice of Violation to the company in conjunction with the operation of its engine casting facility in Indianapolis, Indiana. Specifically, the US EPA alleged that the company violated applicable environmental regulations by failing to obtain the necessary permit in connection with the construction of certain equipment and complying with the best available control technology for emissions from such equipment. The company is currently in discussions with the US EPA and believes that its discussions will result in capital improvements together with monetary sanctions which will not be material.

Various claims and controversies have arisen between the company and its former fuel system supplier, Caterpillar Inc. (Caterpillar), regarding the ownership and validity of certain patents covering fuel system technology used in the company's new version of diesel engines that were introduced in February 2002. In June 1999, in Federal Court in Peoria, Illinois, Caterpillar sued Sturman Industries, Inc. (Sturman), the company’s joint venture partner in developing fuel system technology, alleging that technology invented and patented by Sturman and licensed to the company, belongs to Caterpillar. After a trial, on July 18, 2002, the jury returned a verdict in favor of Caterpillar finding that this technology belongs to Caterpillar under a prior contract between Caterpillar and Sturman. Sturman appealed the adverse judgment, and the jury’s verdict was reversed by the appellate court on October 28, 2004 and remanded to the district court for retrial. The company is cooperating with Sturman in this effort. In May 2003, in Federal Court in Columbia, South Carolina, Caterpillar sued the company, its supplier of fuel injectors and joint venture, Siemens Diesel Systems Technology, L.L.C., and Sturman for patent infringement alleging that the Sturman fuel system technology patents and certain Caterpillar patents are infringed in the company’s new engines. The company believes that it has meritorious defenses to the claims of infringement of the Sturman patents as well as the Caterpillar patents and will vigorously defend such claims. In January 2002, Caterpillar sued the company in the Circuit Court in Peoria County, Illinois, alleging the company breached the purchase agreement pursuant to which Caterpillar supplied fuel systems for the company’s prior version of diesel engines. Caterpillar’s claims involve a 1990 agreement to reimburse Caterpillar for costs associated with the delayed launch of the company’s V-8 diesel engine program. Reimbursement of the delay costs was made by a surcharge of $8.08 on each injector purchased and the purchase of certain minimum quantities of spare parts. In 1999, the company concluded that, in accordance with the 1990 agreement, it had fully reimbursed Caterpillar for its delay costs and stopped paying the surcharge and purchasing the minimum quantities of spare parts. Caterpillar is asserting that the surcharge and the spare parts purchase requirements continue throughout the life of the contract and has sued the company to recover these amounts, plus interest. Caterpillar also asserts that the company failed to purchase all of its fuel injector requirements under the contract and, in collusion with Sturman, failed to pursue a future fuel systems supply relationship with Caterpillar. The company believes that it has meritorious defenses to Caterpillar’s claims.





PAGE 16
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note K. Legal Proceedings and Environmental Matters (continued)

Along with other vehicle manufacturers, the company and certain of its subsidiaries have been subject to an increase in the number of asbestos-related claims in recent years. Management believes that such claims will not have a material adverse affect on the company’s financial condition or results of operations. 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 presence of asbestos in company facilities. In these claims the company is not the sole defendant, and the claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. Management has strongly disputed these claims, and it has been the company’s policy to defend against them vigorously. Historically, the actual damages paid out to claimants have not been material to the company’s results of operations and financial condition. However, management believes the company and other vehicle manufacturers are being more aggressively targeted, largely as a result of bankruptcies of manufacturers of asbestos and products containing asbestos. 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.

On October 13, 2004, the company received a request from the staff of the Securities and Exchange Commission (SEC) to voluntarily produce certain documents and information related to the company’s accounting practices with respect to defined benefit pension plans and other postretirement benefits. The company is fully cooperating with this request. Based on the status of the inquiry, the company is not able to predict the final outcome.

On January 31, 2005, the company announced that it would restate its financial results for fiscal years 2002 and 2003 and the first three quarters of fiscal 2004. The SEC notified the company on February 9, 2005, that it was conducting an informal inquiry into the company’s restatement. On March 17, 2005, the company was advised by the SEC that the status of the inquiry had been changed to a formal investigation. The company is fully cooperating with the SEC on this investigation. Based on the status of the investigation, the company is not able to predict the final outcome.

Note L. Segment Data
Reportable operating segment data is as follows:
Millions of dollars
 
Truck
 
Engine
 
Financial
Services
 
Total
 

       
   
For the quarter ended January 31, 2005
 
 
                           
External revenues 
 
$
1,918
 
$
573
 
$
64
 
$
2,555
 
Intersegment revenues 
   
-
   
149
   
13
   
162
 
   
 
 
 
 
Total revenues 
 
$
1,918
 
$
722
 
$
77
 
$
2,717
 
   
 
 
 
 
                           
Segment profit (loss) 
 
$
55
 
$
(19
)
$
35
 
$
71
 
                           
 
 
As of January 31, 2005 
 
                           
Segment assets 
 
$
1,972
 
$
1,165
 
$
2,246
 
$
5,383
 
                           
 
 
For the quarter ended January 31, 2004 
 
                           
External revenues 
 
$
1,427
 
$
459
 
$
57
 
$
1,943
 
Intersegment revenues 
   
-
   
135
   
9
   
144
 
   
 
 
 
 
Total revenues 
 
$
1,427
 
$
594
 
$
66
 
$
2,087
 
   
 
 
 
 
                           
Segment profit  
 
$
9
 
$
5
 
$
23
 
$
37
 
                           
 
 
As of January 31, 2004 
 
                           
Segment assets 
 
$
1,594
 
$
1,065
 
$
2,210
 
$
4,869
 
                           





PAGE 17
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note L. Segment Data (continued)

Reconciliation to the consolidated financial statements as of and for the quarters ended January 31 is as follows:
 
Millions of dollars
 
 
2005
 
 
2004
 

 
 
 
               
Segment sales and revenues 
 
$
2,717
 
$
2,087
 
Other income 
   
3
   
2
 
Intercompany 
   
(162
)
 
(144
)
   
 
 
Consolidated sales and revenues 
 
$
2,558
 
$
1,945
 
   
 
 
               
Segment profit 
 
$
71
 
$
37
 
Restructuring adjustment 
   
-
   
(4
)
Corporate items 
   
(30
)
 
(44
)
Manufacturing net interest expense 
   
(14
)
 
(14
)
   
 
 
Consolidated pre-tax income (loss) from continuing operations 
 
$
27
 
$
(25
)
   
 
 
               
Segment assets 
 
$
5,383
 
$
4,869
 
Cash and marketable securities 
   
433
   
224
 
Deferred taxes 
   
1,477
   
1,486
 
Corporate intangible pension assets 
   
1
   
3
 
Other corporate and eliminations 
   
199
   
178
 
   
 
 
Consolidated assets 
 
$
7,493
 
$
6,760
 
   
 
 




Note M. Comprehensive Income

The components of comprehensive income (loss) are as follows:
   
For the Three Months Ended
January 31
 
   
 
Millions of dollars
 
2005
 
2004
 

 
 
 
               
Net income (loss) 
 
$
18
 
$
(14
)
Other comprehensive income
   
5
   
3
 
   
 
 
Total comprehensive income (loss) 
 
$
23
 
$
(11
)
   
 
 









PAGE 18
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note N. Earnings Per Share

Earnings (loss) per share was computed as follows: 
   
For the Three Months Ended
January 31
 
   
 
Millions of dollars, except share and per share data
 
2005
 
2004
 

 
 
 
               
Net income (loss) 
 
$
18
 
$
(14
)
               
Average shares outstanding (millions)
             
Basic 
   
70.1
   
69.2
 
Diluted 
   
76.3
   
69.2
 
               
Earnings (loss) per share
             
Basic 
 
$
0.25
 
$
(0.20
)
Diluted 
 
$
0.24
 
$
(0.20
)
               

The computation of diluted shares outstanding for the three months ended January 31, 2004, excludes incremental shares of 10.8 million, related to employee stock options, convertible debt and other dilutive securities. These shares are excluded due to their anti-dilutive effect as a result of the company’s losses for the first three months of 2004.



Note O. Condensed Consolidating Guarantor and Non-Guarantor Financial Information

The following tables set forth the condensed consolidating Statements of Financial Condition as of January 31, 2005 and 2004, and the Statements of Income and Cash Flow for the three months ended January 31, 2005 and 2004. The following information is included as a result of International’s guarantees, exclusive of its subsidiaries, of NIC’s indebtedness under its 9 3/8% Senior Notes due 2006, 2.5% Senior Convertible Notes due 2007 and 7.5% Senior Notes due 2011. International is a direct wholly owned subsidiary of NIC. None of NIC’s other subsidiaries guarantee any of these notes. Each of the guarantees is full and unconditional. Separate financial statements and other disclosures concerning International have not been presented because management believes that such information is not material to investors. NIC includes the consolidated financial results of the parent company only, with all of its wholly owned subsidiaries accounted for under the equity method. International, for purposes of this disclosure only, includes the consolidated financial results of its wholly owned subsidiaries accounted for under the equity method. “Non-Guarantor Companies and Eliminations” includes the consolidated financial results of all other non-guarantor subsidiaries including the elimination entries for all intercompany transactions. All applicable corporate expenses have been allocated appropriately among the guarantor and non-guarantor subsidiaries.

NIC files a consolidated U.S. federal income tax return that includes International and its U.S. subsidiaries. International has a tax allocation agreement (Tax Agreement) with NIC which requires International to compute its separate federal income tax expense based on its adjusted book income. Any resulting tax liability is paid to NIC. In addition, under the Tax Agreement, International is required to pay to NIC any tax payments received from its subsidiaries. The effect of the Tax Agreement is to allow the parent company, rather than International, to utilize U.S. operating income/losses and NIC operating loss carryforwards.



PAGE 19
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note O. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)

Millions of dollars
 
NIC
 
International
 
Non-Guarantor Companies and Eliminations
 
Consolidated
 

CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JANUARY 31, 2005
 
                           
Sales and revenues 
 
$
1
 
$
1,966
 
$
591
 
$
2,558
 
   
 
 
 
 
                           
Cost of products and services sold 
   
2
   
1,832
   
343
   
2,177
 
All other operating expenses 
   
(9
)
 
262
   
101
   
354
 
   
 
 
 
 
Total costs and expenses 
   
(7
)
 
2,094
   
444
   
2,531
 
   
 
 
 
 
                           
Equity in income (loss) of non-consolidated subsidiaries 
   
19
   
93
   
(112
)
 
-
 
   
 
 
 
 
                           
Income (loss) before income taxes 
   
27
   
(35
)
 
35
   
27
 
Income tax expense (benefit) 
   
9
   
12
   
(12
)
 
9
 
   
 
 
 
 
                           
Net income (loss) 
 
$
18
 
$
(47
)
$
47
 
$
18
 
   
 
 
 
 
                           
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JANUARY 31, 2005
                           
Assets
                         
Cash and marketable securities 
 
$
340
 
$
8
 
$
590
 
$
938
 
Receivables, net 
   
1
   
265
   
1,903
   
2,169
 
Inventories 
   
-
   
431
   
434
   
865
 
Property and equipment, net 
   
-
   
744
   
659
   
1,403
 
Investment in affiliates 
   
(2,665
)
 
1,130
   
1,535
   
-
 
Deferred tax asset and other assets 
   
1,439
   
216
   
463
   
2,118
 
   
 
 
 
 
Total assets 
 
$
(885
)
$
2,794
 
$
5,584
 
$
7,493
 
   
 
 
 
 
                           
Liabilities and shareowners’ equity
                         
Debt  
 
$
1,058
 
$
14
 
$
1,777
 
$
2,849
 
Postretirement benefits liability 
   
-
   
4,408
   
(2,838
)
 
1,570
 
Amounts due to (from) affiliates 
   
(2,629
)
 
85
   
2,544
   
-
 
Other liabilities 
   
138
   
1,513
   
875
   
2,526
 
   
 
 
 
 
Total liabilities 
   
(1,433
)
 
6,020
   
2,358
   
6,945
 
   
 
 
 
 
                           
Shareowners’ equity (deficit) 
   
548
   
(3,226
)
 
3,226
   
548
 
   
 
 
 
 
Total liabilities and shareowners’ equity 
 
$
(885
)
$
2,794
 
$
5,584
 
$
7,493
 
   
 
 
 
 
                           
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE THREE MONTHS ENDED JANUARY 31, 2005
Cash provided by (used in) operations 
 
$
(220
)
$
(66
)
$
(57
)
$
(343
)
   
 
 
 
 
                           
Cash flow from investment programs
                         
Purchases, net of collections, of finance receivables 
   
-
   
-
   
451
   
451
 
Net increase in marketable securities 
   
115
   
-
   
(258
)
 
(143
)
Capital expenditures 
   
-
   
(7
)
 
(9
)
 
(16
)
Other investing activities 
   
(3
)
 
30
   
(17
)
 
10
 
   
 
 
 
 
Cash provided by investment programs 
   
112
   
23
   
167
   
302
 
   
 
 
 
 
                           
Cash flow from financing activities
                         
Net repayments of debt
   
-
   
(1
)
 
(14
)
 
(15
)
Other financing activities
   
(16
)
 
28
   
(21
)
 
(9
)
   
 
 
 
 
Cash provided by (used in) financing activities 
   
(16
)
 
27
   
(35
)
 
(24
)
   
 
 
 
 
Cash and cash equivalents
                         
Increase (decrease) during the period 
   
(124
)
 
(16
)
 
75
   
(65
)
At beginning of the period 
   
406
   
22
   
177
   
605
 
   
 
 
 
 
Cash and cash equivalents at end of the period
 
$
282
 
$
6
 
$
252
 
$
540
 
   
 
 
 
 




PAGE 20
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note O. Condensed Consolidating Guarantor and Non-Guarantor Financial Information (continued)

Millions of dollars
 
NIC
 
International
 
Non-Guarantor Companies and Eliminations
 
Consolidated
 

CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JANUARY 31, 2004
 
                           
Sales and revenues 
 
$
-
 
$
1,478
 
$
467
 
$
1,945
 
   
 
 
 
 
                           
Cost of products and services sold 
   
11
   
1,377
   
265
   
1,653
 
Restructuring and other non-recurring charges 
   
-
   
-
   
4
   
4
 
All other operating expenses 
   
(4
)
 
257
   
60
   
313
 
   
 
 
 
 
Total costs and expenses 
   
7
   
1,634
   
329
   
1,970
 
   
 
 
 
 
                           
Equity in income (loss) of non-consolidated subsidiaries 
   
(18
)
 
82
   
(64
)
 
-
 
   
 
 
 
 
                           
Income (loss) before income taxes 
   
(25
)
 
(74
)
 
74
   
(25
)
Income tax expense (benefit) 
   
(11
)
 
2
   
(2
)
 
(11
)
   
 
 
 
 
                           
Net income (loss) 
 
$
(14
)
$
(76
)
$
76
 
$
(14
)
   
 
 
 
 
                           
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JANUARY 31, 2004
                           
Assets
                         
Cash and marketable securities 
 
$
85
 
$
24
 
$
475
 
$
584
 
Receivables, net 
   
1
   
170
   
1,851
   
2,022
 
Inventories 
   
-
   
350
   
339
   
689
 
Property and equipment, net 
   
-
   
755
   
659
   
1,414
 
Investment in affiliates 
   
(2,788
)
 
890
   
1,898
   
-
 
Deferred tax asset and other assets 
   
1,490
   
203
   
358
   
2,051
 
   
 
 
 
 
Total assets 
 
$
(1,212
)
$
2,392
 
$
5,580
 
$
6,760
 
   
 
 
 
 
                           
Liabilities and shareowners’ equity
                         
Debt  
 
$
840
 
$
16
 
$
1,845
 
$
2,701
 
Postretirement benefits liability 
   
-
   
3,122
   
(1,388
)
 
1,734
 
Amounts due to (from) affiliates 
   
(2,534
)
 
1,156
   
1,378
   
-
 
Other liabilities 
   
172
   
1,316
   
527
   
2,015
 
   
 
 
 
 
Total liabilities 
   
(1,522
)
 
5,610
   
2,362
   
6,450
 
   
 
 
 
 
                           
Shareowners’ equity (deficit) 
   
310
   
(3,218
)
 
3,218
   
310
 
   
 
 
 
 
Total liabilities and shareowners’ equity 
 
$
(1,212
)
$
2,392
 
$
5,580
 
$
6,760
 
   
 
 
 
 
                           
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE THREE MONTHS ENDED JANUARY 31, 2004
Cash provided by (used in) operations 
 
$
(174
)
$
(59
)
$
(90
)
$
(323
)
   
 
 
 
 
                           
Cash flow from investment programs
                         
Purchases, net of collections, of finance receivables 
   
-
   
-
   
(82
)
 
(82
)
Net increase in marketable securities 
   
22
   
-
   
276
   
298
 
Capital expenditures 
   
-
   
(12
)
 
(10
)
 
(22
)
Other investing activities 
   
(8
)
 
59
   
(49
)
 
2
 
   
 
 
 
 
Cash provided by investment programs 
   
14
   
47
   
135
   
196
 
   
 
 
 
 
                           
Cash flow from financing activities
                         
Net repayments of debt
   
-
   
(1
)
 
(78
)
 
(79
)
Other financing activities
   
37
   
16
   
(27
)
 
26
 
   
 
 
 
 
Cash provided by (used in) financing activities 
   
37
   
15
   
(105
)
 
(53
)
   
 
 
 
 
Cash and cash equivalents
                         
Increase (decrease) during the period 
   
(123
)
 
3
   
(60
)
 
(180
)
At beginning of the period 
   
218
   
21
   
228
   
467
 
   
 
 
 
 
Cash and cash equivalents at end of the period
 
$
85
 
$
24
 
$
168
 
$
287
 
   
 
 
 
 




PAGE 21
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note P: Restatement of Prior Period Financial Statements

In December 2004, NFC determined that it would restate its consolidated financial statements for the first three quarters of fiscal 2004 and the fiscal years ended October 31, 2003 and 2002 due to certain misapplications of GAAP. The primary area where it was determined that GAAP was incorrectly applied was in the accounting for retail note securitizations. As a result of NFC’s restatement, the company concluded that it was necessary to restate its financial statements for the same periods. In the course of preparing the restatement of its consolidated financial statements, the company determined that it was appropriate to make other adjustments as well. These adjustments were primarily related to trade payables at the company’s Mexican truck assembly facility, accruals relating to employee plans and the consolidation of majority owned truck dealerships.

The significant effects of the restatements on the consolidated financial statements for the period ended January 31, 2004, primarily due to the consolidation of majority owned truck dealerships and the accounting for retail note securitizations at NFC, is included below. The amounts shown below have minor differences to the unaudited Selected Quarterly Financial Data disclosed in Note 22 to the company’s Annual Report on Form 10-K. The changes represent timing within the quarters and do not change year-end amounts.

   
Navistar International Corporation
and Consolidated Subsidiaries
 
   
 
STATMENT OF INCOME
 
Three Months Ended
January 31, 2004
 
   
 
 
Millions of dollars
 
As Previously Reported [1]
 
 
As Restated
 

 
 
 
               
Sales and revenues
             
Sales of manufactured products
 
$
1,806
 
$
1,886
 
Finance revenue 
   
50
   
56
 
Other income 
   
3
   
3
 
   
 
 
Total sales and revenues 
   
1,859
   
1,945
 
   
 
 
               
Costs and expenses
             
Cost of products and services sold
   
1,603
   
1,653
 
Restructuring and other non-recurring charges
   
4
   
4
 
Postretirement benefits expense
   
61
   
61
 
Engineering and research expense
   
64
   
64
 
Selling, general and administrative expense
   
121
   
149
 
Interest expense 
   
31
   
32
 
Other expense 
   
7
   
7
 
   
 
 
Total costs and expenses 
   
1,891
   
1,970
 
   
 
 
               
Income (loss) before income taxes 
   
(32
)
 
(25
)
Income tax expense (benefit) 
   
(14
)
 
(11
)
   
 
 
               
Net income (loss)
 
$
(18
)
$
(14