form10q-3q05

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
   
(X)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
 
SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended July 31, 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
 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 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 Rule12b-2 of the Act.) Yes X  No __
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Act.) Yes       No  X   . 
 
APPLICABLE ONLY TO ISSUERS INVOLVED
IN BANKRUPTCY PROCEEDINGS DURING
THE PRECEDING FIVE YEARS
 
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes ___No ___
 
APPLICABLE ONLY TO CORPORATE ISSUERS:
 
As of August 31, 2005, the number of shares outstanding of the registrant's common stock was 70,106,556.





PAGE 2


NAVISTAR INTERNATIONAL CORPORATION
AND CONSOLIDATED SUBSIDIARIES
 
 
INDEX
 
         
Page
Reference
           
Part I. Financial Information:
   
           
 
Item 1. Condensed Consolidated Financial Statements
   
           
   
Statement of Income
   
     
Three and Nine Months Ended July 31, 2005 and 2004 (restated) 
 
           
   
Statement of Financial Condition
   
     
July 31, 2005, October 31, 2004 and July 31, 2004 (restated) 
 
           
   
Statement of Cash Flow
   
     
Nine Months Ended July 31, 2005 and 2004 (restated) 
 
           
   
Notes to the Financial Statements 
 
         
   
Additional Financial Information 
 
           
 
Item 2. Management's Discussion and Analysis of Financial
   
   
Condition and Results of Operations 
 
           
 
Item 3. Quantitative and Qualitative Disclosures
   
   
About Market Risk 
 
           
 
Item 4. Controls and Procedures 
 
           
Part II. Other Information:
   
           
 
Item 1. Legal Proceedings 
 
           
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 
 
           
 
Item 6. Exhibits 
 
           
Signature 
 
           







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
July 31
 
Nine Months Ended
July 31
 
   
 
 
   
2005
 
2004
 
2005
 
2004
 
   
 
 
 
 
       
* As Restated
     
* As Restated
 
Sales and revenues
                         
Sales of manufactured products
 
$
2,923
 
$
2,294
 
$
8,318
 
$
6,456
 
Finance revenue
   
60
   
55
   
180
   
182
 
Other income 
   
11
   
-
   
24
   
9
 
   
 
 
 
 
Total sales and revenues 
   
2,994
   
2,349
   
8,522
   
6,647
 
   
 
 
 
 
                           
Costs and expenses
                         
Cost of products and services sold
   
2,474
   
1,953
   
7,149
   
5,582
 
Restructuring and other non-recurring charges
   
-
   
(5
)
 
-
   
(1
)
Postretirement benefits expense
   
59
   
43
   
178
   
162
 
Engineering and research expense
   
91
   
66
   
254
   
181
 
Selling, general and administrative expense
   
210
   
174
   
584
   
473
 
Interest expense
   
51
   
31
   
126
   
96
 
Other expense 
   
12
   
5
   
26
   
20
 
   
 
 
 
 
Total costs and expenses 
   
2,897
   
2,267
   
8,317
   
6,513
 
   
 
 
 
 
                           
Income before income taxes 
   
97
   
82
   
205
   
134
 
Income tax expense 
   
33
   
32
   
70
   
46
 
   
 
 
 
 
                           
Net income  
 
$
64
 
$
50
 
$
135
 
$
88
 
   
 
 
 
 
                           

                           
Earnings per share
                         
Basic 
 
$
0.91
 
$
0.72
 
$
1.93
 
$
1.27
 
Diluted 
 
$
0.83
 
$
0.66
 
$
1.78
 
$
1.19
 
                           
Average shares outstanding (millions)
                         
Basic
   
70.1
   
69.9
   
70.1
   
69.6
 
Diluted
   
79.9
   
80.0
   
80.1
   
80.2
 
 

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


 



PAGE 4

STATEMENT OF FINANCIAL CONDITION (Unaudited)
Millions of dollars
 

 
   
Navistar International Corporation
and Consolidated Subsidiaries
 
   
 
   
July 31
2005
 
October 31
2004
 
July 31
2004
 
   
 
 
 
ASSETS
         
* As Restated
 
Current assets
                   
Cash and cash equivalents 
 
$
593
 
$
605
 
$
478
 
Marketable securities 
   
719
   
182
   
6
 
Receivables, net 
   
962
   
1,215
   
850
 
Inventories 
   
1,064
   
790
   
856
 
Deferred tax asset, net 
   
169
   
207
   
152
 
Other assets 
   
224
   
168
   
183
 
   
 
 
 
                     
Total current assets 
   
3,731
   
3,167
   
2,525
 
                     
Marketable securities 
   
523
   
73
   
424
 
Finance and other receivables, net 
   
1,108
   
1,222
   
878
 
Property and equipment, net 
   
1,533
   
1,444
   
1,405
 
Investments and other assets 
   
516
   
374
   
327
 
Prepaid and intangible pension assets 
   
90
   
73
   
70
 
Deferred tax asset, net 
   
1,266
   
1,239
   
1,290
 
   
 
 
 
                     
Total assets 
 
$
8,767
 
$
7,592
 
$
6,919
 
   
 
 
 
                     
LIABILITIES AND SHAREOWNERS' EQUITY
                   
                     
Liabilities
                   
Current liabilities
                   
  Notes payable and current maturities of long-term debt 
 
$
1,170
 
$
823
 
$
271
 
  Accounts payable, principally trade 
   
1,383
   
1,462
   
1,161
 
  Other liabilities 
   
996
   
965
   
844
 
       
 
 
 
                          
Total current liabilities 
   
3,549
   
3,250
   
2,276
 
                     
Debt:  Manufacturing operations 
   
1,359
   
1,258
   
1,268
 
            Financial services operations
   
1,361
   
787
   
1,253
 
Postretirement benefits liability 
   
1,426
   
1,382
   
1,391
 
Other liabilities 
   
384
   
384
   
364
 
   
 
 
 
                     
Total liabilities 
   
8,079
   
7,061
   
6,552
 
   
 
 
 
                     
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) 
   
2,078
   
2,096
   
2,087
 
Retained earnings (deficit) 
   
(470
)
 
(604
)
 
(762
)
Accumulated other comprehensive loss 
   
(756
)
 
(789
)
 
(782
)
Common stock held in treasury, at cost
                   
(5.2 million, 5.3 million and 5.5 million shares held) 
   
(168
)
 
(176
)
 
(180
)
   
 
 
 
                     
Total shareowners’ equity 
   
688
   
531
   
367
 
   
 
 
 
                     
Total liabilities and shareowners’ equity 
 
$
8,767
 
$
7,592
 
$
6,919
 
   
 
 
 
 

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

 



PAGE 5

STATEMENT OF CASH FLOW (Unaudited)
Millions of dollars
 

 
   
Navistar International Corporation
and Consolidated Subsidiaries
 
   
 
   
Nine Months Ended
July 31
 
   
 
   
2005
 
2004
 
   
 
 
       
* As Restated
 
Cash flow from operating activities
         
Net income 
 
$
135
 
$
88
 
Adjustments to reconcile net income to cash provided by (used in) operating activities:
             
Depreciation and amortization 
   
168
   
149
 
Deferred income taxes 
   
20
   
18
 
Postretirement benefits funding less than (in excess of) expense 
   
45
   
(173
)
Gains on sales of receivables 
   
(14
)
 
(26
)
Other, net 
   
(20
)
 
(89
)
Change in operating assets and liabilities, net of effect of acquisitions:
             
Receivables 
   
79
   
(45
)
Inventories 
   
(246
)
 
(240
)
Prepaid and other current assets 
   
(34
)
 
(30
)
Accounts payable 
   
(50
)
 
51
 
Other liabilities 
   
3
   
61
 
   
 
 
Cash provided by (used in) operating activities 
   
86
   
(236
)
   
 
 
               
Cash flow from investment programs
             
Purchases of retail notes and lease receivables 
   
(1,240
)
 
(1,192
)
Collections/sales of retail notes and lease receivables 
   
1,537
   
1,360
 
Purchases of marketable securities 
   
(1,676
)
 
(235
)
Sales or maturities of marketable securities 
   
688
   
401
 
Capital expenditures 
   
(107
)
 
(103
)
Property and equipment leased to others 
   
21
   
4
 
Acquisitions and investment in affiliates 
   
(229
)
 
(1
)
Other investment programs 
   
(83
)
 
(16
)
   
 
 
Cash provided by (used in) investment programs 
   
(1,089
)
 
218
 
   
 
 
               
Cash flow from financing activities
             
Issuance of debt 
   
1,029
   
165
 
Principal payments on debt 
   
(111
)
 
(194
)
Net increase in notes and debt outstanding under bank revolving credit  facility and commercial paper programs 
   
80
   
56
 
Premium on call options, net 
   
-
   
(22
)
Other financing activities 
   
(7
)
 
24
 
   
 
 
Cash provided by financing activities 
   
991
   
29
 
   
 
 
               
Cash and cash equivalents
             
Increase (decrease) during the period 
   
(12
)
 
11
 
At beginning of the period 
   
605
   
467
 
   
 
 
Cash and cash equivalents at end of the period 
 
$
593
 
$
478
 
   
 
 
               
Supplemental cash flow information
             
Interest paid 
 
$
122
 
$
113
 
Income taxes paid, net of refunds 
 
$
18
 
$
16
 
 

See Notes to Financial Statements.
 * See Note Q 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 necessary to present fairly the financial position, results of operations and cash flow for the periods presented. In the current quarter, the company recorded charges of $14 million related to a foundry operation, including $11 million to correct the location’s inventory balances based upon physical counts conducted during the third quarter. This inventory adjustment was charged to the current period because the company was not able to determine the prior period to which the adjustment may have related. For the nine month period, the inventory charge described above combined with the correction of certain other accounting errors ($7 million) and other adjustments related to changes in estimates ($15 million) for this location totaled approximately $33 million. The errors primarily involved capitalized costs that should have been expensed in the prior periods in which they occurred.

Interim results are not necessarily indicative of results for the full year. Certain 2004 and 2005 amounts have been reclassified to conform with the presentation used in the 2005 financial statements in this report.

Statement of Financial Accounting Standards (SFAS) No. 123, “Accounting for Stock-Based Compensation” and 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 and earnings 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
July 31
 
Nine Months Ended
July 31
 
   
 
 
Millions of dollars, except per share data 
 
2005
 
2004
 
2005
 
2004
 

 
 
 
 
 
                   
Net income, as reported
 
$
64
 
$
50
 
$
135
 
$
88
 
Add: Interest expense on 2.5% senior convertible and 4.75% subordinated exchangeable debt for dilutive purposes (net of tax) 
   
2
   
3
   
7
   
7
 
   
 
 
 
 
Adjusted net income available to common shareholders plus assumed conversions
   
66
   
53
   
142
   
95
 
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards net of related tax effects 
   
(2
)
 
(3
)
 
(8
)
 
(10
)
   
 
 
 
 
Pro forma net income
 
$
64
 
$
50
 
$
134
 
$
85
 
   
 
 
 
 
                           
Earnings per share:
                         
Basic - as reported 
 
$
0.91
 
$
0.72
 
$
1.93
 
$
1.27
 
Basic - pro forma 
 
$
0.88
 
$
0.68
 
$
1.81
 
$
1.13
 
                           
Diluted - as reported 
 
$
0.83
 
$
0.66
 
$
1.78
 
$
1.19
 
Diluted - pro forma 
 
$
0.80
 
$
0.62
 
$
1.67
 
$
1.06
 




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

Note B. New Accounting Pronouncements

In December 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 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 but has not yet determined the effect, if any, this Statement may have on its results of operations, financial condition or cash flows.

In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets,” to amend Accounting Principles Board Opinion No. 29, “Accounting for Nonmonetary Transactions”(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 or cash flows.

In December 2004, the FASB issued two FASB Staff Positions (FSPs) 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. The company continues to evaluate the impact, if any, this FSP may have on its results of operations, financial condition or cash flows. 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, the company must provide certain disclosures if it chooses to utilize the additional time granted by the FASB. The company has completed its evaluation and does not intend to repatriate foreign earnings.

In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, “Accounting for Conditional Asset Retirement Obligations.” This Interpretation addresses diverse accounting practices that developed with respect to the timing of liability recognition for legal obligations associated with the retirement of a tangible long-lived asset when the timing and (or) method of settlement of the obligation are conditional on a future event. FIN No. 47 concludes that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability's fair value can be reasonably estimated. This Interpretation is effective no later than the end of fiscal years ending after December 15, 2005. The company does not have any such asset retirement obligations at this time. The company expects that this Interpretation will have no impact on the company’s results of operations, financial condition or cash flows.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections,” to replace Accounting Principles Board Opinion No. 20, “Accounting Changes” and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” This Statement provides guidance on the accounting for and reporting of accounting changes and error corrections. It also establishes the required methods by which entities should include accounting changes or error corrections in previously issued financial statements. This Statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this Statement was issued. The company intends to adopt this Statement for fiscal 2006.
 



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

Note C. Business Combinations

In April 2005, the company acquired MWM Motores Diesel Ltda (MWM), a Brazilian entity. MWM produces a broad line of medium and high-speed diesel engines in the 50 to 310 horsepower range for use in pick-ups, trucks, vans, light and semi-heavy trucks, as well as agricultural, marine and electric generator applications. The acquisition was effective April 1, 2005, therefore, the company’s Condensed Consolidated Financial Statements include the operating results of MWM as of that date. For the three months ended July 31, 2005, MWM contributed $7 million in profit. The Administrative Council for Economic Defense (CADE), the Brazilian antitrust regulatory authority, must review and approve the acquisition, and that review is still pending. Only minimal synergies can be achieved prior to CADE approval and CADE may require divestiture of assets or impose other conditions on the acquisition. This uncertainty inhibits the company from completing certain aspects of the purchase accounting associated with the acquisition of MWM. Once CADE finalizes its review, management will evaluate its engine operations within Brazil, decide how to best utilize its resources to meet the needs of its customers and complete the accounting associated with the acquisition.


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 healthcare expenses for employees, retirees and surviving spouses and dependents. In addition, as part of the 1993 restructured healthcare 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
July 31
 
Nine Months Ended
July 31
 
   
 
 
Millions of dollars 
 
2005
 
2004
 
2005
 
2004
 

 
 
 
 
 
                   
Pension expense
 
$
17
 
$
14
 
$
52
 
$
52
 
Other benefits expense 
   
42
   
32
   
126
   
108
 
Profit sharing provision to Trust
   
-
   
(3
)
 
-
   
2
 
   
 
 
 
 
Net postretirement benefits expense 
 
$
59
 
$
43
 
$
178
 
$
162
 
   
 
 
 
 



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

Note D. Postretirement Benefits (continued)

Net periodic postretirement benefits expense included on the Statement of Income is composed of the following:
   
Pension Expense
 
   
 
   
Three Months Ended
July 31
 
Nine Months Ended
July 31
 
   
 
 
Millions of dollars 
 
2005
 
2004
 
2005
 
2004
 

 
 
 
 
 
                   
Service costs for benefits earned during the period
 
$
6
 
$
3
 
$
18
 
$
17
 
Interest on obligation
   
55
   
58
   
166
   
174
 
Amortization of cumulative losses
   
15
   
12
   
44
   
37
 
Amortization of prior service cost
   
2
   
1
   
6
   
4
 
Other
   
6
   
7
   
19
   
20
 
Less expected return on assets 
   
(67
)
 
(67
)
 
(201
)
 
(200
)
   
 
 
 
 
Net pension expense 
 
$
17
 
$
14
 
$
52
 
$
52
 
   
 
 
 
 
                           
“Other” in the above table 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.
   
 
Other Benefits Expense
 
   
 
   
Three Months Ended
July 31
 
Nine Months Ended
July 31
 
   
 
 
Millions of dollars 
 
2005
 
2004
 
2005
 
2004
 

 
 
 
 
 
Service costs for benefits earned during the period
 
$
4
 
$
3
 
$
13
 
$
10
 
Interest on obligation
   
36
   
34
   
108
   
105
 
Amortization of cumulative losses
   
15
   
10
   
45
   
31
 
Other
   
-
   
(1
)
 
-
   
3
 
Less expected return on assets 
   
(13
)
 
(14
)
 
(40
)
 
(41
)
   
 
 
 
 
Net other benefits expense
 
$
42
 
$
32
 
$
126
 
$
108
 
   
 
 
 
 


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 July 31, 2005, $15 million of contributions have been made to the company’s qualified pension plans.

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

Note E. Income Taxes

The Statement of Income reflects tax expense which primarily reduces the cumulative benefit of NOL carryforwards currently recognized as a deferred tax asset, net of valuation allowances, 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.




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

Note F. Inventories

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

 
 
 
 
               
Finished products
 
$
675
 
$
505
 
$
539
 
Work in process
   
57
   
47
   
69
 
Raw materials and supplies
   
332
   
238
   
248
 
   
 
 
 
Total inventories 
 
$
1,064
 
$
790
 
$
856
 
   
 
 
 


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 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.

The following table summarizes NFC’s sale of retail notes and leases for the three months and nine months ended July 31, 2005 and 2004, in millions of dollars.

   
Three Months Ended
July 31
 
Nine Months Ended
July 31
 
   
 
 
   
 
2005
 
 
2004
 
 
2005
 
 
2004
 
   
 
 
 
 
                   
Sales of retail receivables  
 
$
385
 
$
325
 
$
1,559
 
$
1,120
 
Gain on sales of retail receivables  
   
3
   
3
   
14
   
26
 

Note H. Debt 

In March 2005, the company sold $400 million in Senior Notes due 2012 (original notes). The original notes were sold in a Rule 144A and Regulation S private unregistered offering and were priced to yield 6.25%. In June 2005, the company offered to exchange these original notes for a like amount of the company’s new 6.25%, Series B, Senior Notes due 2012 (exchange notes). The exchange notes were registered under the Securities Act. The terms of the exchange notes issued in the exchange offer are substantially identical to the original notes, except that the transfer restrictions and registration rights provisions relating to the original notes will not apply to the exchange notes. The exchange notes are guaranteed on a senior unsecured basis by the company’s principal operating subsidiary, International Truck and Engine Corporation. The exchange notes are the company’s senior unsecured obligation and rank in right of payment behind all of the company’s future secured debt and equally in right of payment to all of the company’s existing and future senior unsecured debt. The company exchanged in excess of 99.9% of the original notes for the exchange notes when the exchange offer expired on July 27, 2005.

In the third quarter of fiscal 2005, NFC refinanced its $820 million revolving credit facility which was going to become due in December 2005 with a new $1,200 million revolving credit facility that becomes due in December 2010. Likewise, one of NFC’s related affiliates, Truck Retail Installment Paper Corporation (TRIP), entered into a new revolving retail facility with a capacity of $500 million that will expire in June 2010, to replace the $500 million facility that will expire in August 2005.

In July 2005, the company repurchased $18 million of its 4.75% Subordinated Exchangeable Notes due 2009 and $7 million of its 9.375% Senior Notes due 2006. The effect of these repurchases on operating income was negligible. The repurchase of the 4.75% Subordinated Exchangeable Notes due 2009 reduced the number of shares included in the calculation of diluted earnings per share, beginning in July, by approximately 323,000 shares.
 



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

Note I. 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 July 31, 2005, $54 million of the total net charge of $66 million has been incurred.




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

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

Other Non-Recurring Charges

In October 2002, Ford Motor Company (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 include 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, under current agreements, 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 July 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
July 31
2005
 

 
 
 
 
Lease terminations 
 
$
21
 
$
(4
)
$
17
 
Dealer terminations and other charges 
   
12
   
-
   
12
 
Other non-recurring charges 
   
64
   
(7
)
 
57
 
   
 
 
 
Total 
 
$
97
 
$
(11
)
$
86
 
   
 
 
 

The remaining liability of $86 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 $4 million with the remaining obligation of $82 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 13
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note J. 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 July 31, 2005, NFC’s derivative financial instruments had a positive net fair value. Notional amounts of derivative financial instruments do not represent exposure to credit loss.

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

 
Inception Date
 
 
Maturity Date
 
 
Derivative Type
 
 
Notional Amount
 
 
Fair Value
 

 
 
 
 
 
                   
October 2003 -
April 2005
   
April 2008 -
September 2009
   
Interest rate swaps*
 
$
16
 
$
-
 
                           
July 2001 -
June 2004
   
April 2006 -
June 2011
   
Interest rate swaps
   
929
   
1
 
                           
October 2000 -
September 2001
   
October 2009 -
November 2012
   
Interest rate caps
   
2,065
   
-
 
                           

*Accounted for as non-hedging instruments.










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

Note K. 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 9.375% Senior Notes due 2006, the $250 million 7.5% Senior Notes due 2011, the $400 million 6.25% Senior Notes due 2012 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 July 31, 2005, the outstanding balance on the 9.95% Senior Notes and the 9.375% Senior Notes was $13 million and $393 million, respectively.

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 nine months ended July 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 July 31, 2005, in millions of dollars.
 
 
Entity
 
Amount of Guaranty
 
Outstanding Balance
 
Maturity dates extend to
 

 
 
 
 
               
NIC
 
$
393
 (1)
$
99
   
2010
 
                     
NFC
   
145
   
127
   
2010
 
                     
NIC and NFC
   
100
   
10
   
2010
 

(1) Included in this amount is $260 million of un-drawn guarantees.  Pursuant to an intercompany guarantee made by NIC in favor of NFC, NIC has agreed to guarantee, either directly to third party banks or indirectly through NFC, an un-drawn amount of $260 million.

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 July 31, 2005, totaled approximately $495 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 July 31, 2005, the total remaining obligation under these leases is approximately $43 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 15
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note K. Guarantees (continued)

As of July 31, 2005, NFC had guaranteed derivative contracts for 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 July 31, 2005, there was an outstanding notional balance of $59 million related to interest rate swaps and cross currency swaps, and the fair market value of the outstanding balance was immaterial.

At July 31, 2005, the company’s Canadian operating subsidiary was contingently liable for $513 million of retail customers’ contracts and $26 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 $87 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 nine months ended July 31, 2005, were as follows:

Millions of dollars
     

 
 
Balance, beginning of period
 
$
286
 
Change in liability for warranties issued during the period
   
171
 
Change in liability for pre-existing warranties
   
20
 
Payments made 
   
(199
)
   
 
Balance, end of period
 
$
278
 
   
 


Note L. 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 results of the company.

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



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

Note L. Legal Proceedings and Environmental Matters (continued)

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.

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 results. 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



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

Note L. Legal Proceedings and Environmental Matters (continued)

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 M. Segment Data

Reportable operating segment data is as follows:
 
Millions of dollars
 
 
Truck
 
 
Engine
 
Financial
Services
 
 
Total
 

       
   
For the quarter ended July 31, 2005
 
   
 
                           
External revenues 
 
$
2,211
 
$
712
 
$
65
 
$
2,988
 
Intersegment revenues 
   
-
   
181
   
16
   
197
 
   
 
 
 
 
Total revenues 
 
$
2,211
 
$
893
 
$
81
 
$
3,185
 
   
 
 
 
 
                           
Segment profit 
 
$
113
 
$
13
 
$
26
 
$
152
 
                           
 
 
For the nine months ended July 31, 2005 
   
                           
External revenues 
 
$
6,355
 
$
1,963
 
$
190
 
$
8,508
 
Intersegment revenues 
   
-
   
515
   
44
   
559
 
   
 
 
 
 
Total revenues 
 
$
6,355
 
$
2,478
 
$
234
 
$
9,067
 
   
 
 
 
 
                           
Segment profit 
 
$
262
 
$
9
 
$
88
 
$
359
 
                           
 
 
As of July 31, 2005 
   
                           
Segment assets 
 
$
2,173
 
$
1,564
 
$
2,827
 
$
6,564
 
                           
 
 
For the quarter ended July 31, 2004 
   
                           
External revenues 
 
$
1,789
 
$
504
 
$
56
 
$
2,349
 
Intersegment revenues 
   
-
   
159
   
10
   
169
 
   
 
 
 
 
Total revenues 
 
$
1,789
 
$
663
 
$
66
 
$
2,518
 
   
 
 
 
 
                           
Segment profit 
 
$
85
 
$
34
 
$
26
 
$
145
 
                           
 
 
For the nine months ended July 31, 2004 
   
                           
External revenues 
 
$
4,936
 
$
1,521
 
$
185
 
$
6,642
 
Intersegment revenues 
   
-
   
440
   
29
   
469
 
   
 
 
 
 
Total revenues 
 
$
4,936
 
$
1,961
 
$
214
 
$
7,111
 
   
 
 
 
 
                           
Segment profit  
 
$
164
 
$
71
 
$
86
 
$
321
 
                           
 
 
As of July 31, 2004 
   
                           
Segment assets 
 
$
1,781
 
$
1,091
 
$
2,153
 
$
5,025
 
                           




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

Note M. Segment Data (continued)

Reconciliation to the consolidated financial statements as of and for the three and nine months ended July 31 is as follows:

   
Three Months Ended
July 31
 
Nine Months Ended
July 31
 
   
 
 
 
Millions of dollars
 
 
2005
 
 
2004
 
 
2005
 
 
2004
 

 
 
 
 
 
                   
Segment sales and revenues 
 
$
3,185
 
$
2,518
 
$
9,067
 
$
7,111
 
Other income 
   
6
   
-
   
14
   
5
 
Intercompany 
   
(197
)
 
(169
)
 
(559
)
 
(469
)
   
 
 
 
 
Consolidated sales and revenues 
 
$
2,994
 
$
2,349
 
$
8,522
 
$
6,647
 
   
 
 
 
 
                           
Segment profit 
 
$
152
 
$
145
 
$
359
 
$
321
 
Restructuring adjustment 
   
-
   
5
   
-
   
1
 
Corporate items 
   
(38
)
 
(51
)
 
(109
)
 
(146
)
Manufacturing net interest expense 
   
(17
)
 
(17
)
 
(45
)
 
(42
)
   
 
 
 
 
Consolidated pre-tax income  
 
$
97
 
$
82
 
$
205
 
$
134
 
   
 
 
 
 
                           
Segment assets 
 
$
6,564
 
$
5,025
             
Cash and marketable securities 
   
634
   
281
 
Deferred taxes 
   
1,435
   
1,442
             
Corporate intangible pension assets 
   
1
   
3
 
Other corporate and eliminations 
   
133
   
168
             
   
 
             
Consolidated assets 
 
$
8,767
 
$
6,919
 
   
 
             



Note N. Comprehensive Income

The components of comprehensive income are as follows:

   
Three Months Ended
July 31
 
Nine Months Ended
July 31
 
   
 
 
Millions of dollars 
 
2005
 
2004
 
2005
 
2004
 

 
 
 
 
 
                   
Net income 
 
$
64
 
$
50
 
$
135
 
$
88
 
Other comprehensive income (loss)
   
13
   
(8
)
 
33
   
(4
)
   
 
 
 
 
Total comprehensive income 
 
$
77
 
$
42
 
$
168
 
$
84
 
   
 
 
 
 







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

Note O. Earnings Per Share

Earnings per share was computed as follows: 

   
Three Months Ended
July 31
 
Nine Months Ended
July 31
 
   
 
 
Millions of dollars,
except share and per share data 
 
2005
 
2004
 
2005
 
2004
 

 
 
 
 
 
                           
Net income 
 
$
64
 
$
50
 
$
135
 
$
88
 
Add: Interest expense on 2.5% senior convertible and 4.75% subordinated exchangeable debt for dilutive purposes (net of tax)
   
2
   
3
   
7
   
7
 
   
 
 
 
 
Net income available to common shareholders plus assumed conversions 
 
$
66
 
$
53
 
$
142
 
$
95
 
   
 
 
 
 
                           
Average shares outstanding (millions)
                         
Basic 
   
70.1
   
69.9
   
70.1
   
69.6
 
Convertible debt 
   
9.5
   
9.5
   
9.5
   
9.5
 
Stock options 
   
0.3
   
0.6
   
0.5
   
1.1
 
   
 
 
 
 
Diluted 
   
79.9
   
80.0
   
80.1
   
80.2
 
                           
Earnings per share
                         
Basic 
 
$
0.91
 
$
0.72
 
$
1.93
 
$
1.27
 
Diluted 
 
$
0.83
 
$
0.66
 
$
1.78
 
$
1.19
 
                           


Slight changes within the diluted shares outstanding are the result of an increase or decrease in the amount of exercisable employee stock options which are affected by fluctuations in the company’s stock price.


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

The following tables set forth the condensed consolidating Statements of Financial Condition as of July 31, 2005 and 2004, and the Statements of Income and Cash Flow for the nine months ended July 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 9.375% Senior Notes due 2006, 2.5% Senior Convertible Notes due 2007, 7.5% Senior Notes due 2011 and 6.25% Senior Notes due 2012. 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 20
Navistar International Corporation and Consolidated Subsidiaries
Notes to Financial Statements (Unaudited)

Note P. 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 NINE MONTHS ENDED JULY 31, 2005
 
                   
Sales and revenues 
 
$
8
 
$
6,402
 
$
2,112
 
$
8,522
 
   
 
 
 
 
                           
Cost of products and services sold 
   
5
   
5,964
   
1,180
   
7,149
 
All other operating expenses 
   
(25
)
 
842
   
351
   
1,168
 
   
 
 
 
 
Total costs and expenses 
   
(20
)
 
6,806
   
1,531
   
8,317
 
   
 
 
 
 
                           
Equity in income (loss) of non-consolidated subsidiaries 
   
177
   
464
   
(641
)
 
-
 
   
 
 
 
 
                           
Income (loss) before income taxes 
   
205
   
60
   
(60
)
 
205
 
Income tax expense (benefit) 
   
70
   
61
   
(61
)
 
70
 
   
 
 
 
 
                           
Net income (loss) 
 
$
135
 
$
(1
)
$
1
 
$
135
 
   
 
 
 
 
                           
CONDENSED CONSOLIDATING STATEMENT OF FINANCIAL CONDITION AS OF JULY 31, 2005
                           
Assets
                         
Cash and marketable securities 
 
$
552
 
$
9
 
$
1,274
 
$
1,835
 
Receivables, net 
   
1
   
239
   
1,830
   
2,070
 
Inventories 
   
-
   
486
   
578
   
1,064
 
Property and equipment, net 
   
-
   
719
   
814
   
1,533
 
Investment in affiliates 
   
(2,562
)
 
1,752
   
810
   
-
 
Deferred tax asset and other assets 
   
1,391
   
238
   
636
   
2,265
 
   
 
 
 
 
Total assets 
 
$
(618
)
$
3,443
 
$
5,942
 
$
8,767
 
   
 
 
 
 
                           
Liabilities and shareowners’ equity
                         
Debt  
 
$
1,459
 
$
13
 
$
2,418
 
$
3,890
 
Postretirement benefits liability 
   
-
   
1,369
   
238
   
1,607
 
Amounts due to (from) affiliates 
   
(2,866
)
 
3,692
   
(826
)
 
-
 
Other liabilities 
   
101
   
1,453
   
1,028
   
2,582
 
   
 
 
 
 
Total liabilities 
   
(1,306
)
 
6,527
   
2,858
   
8,079
 
   
 
 
 
 
                           
Shareowners’ equity (deficit) 
   
688
   
(3,084
)
 
3,084
   
688
 
   
 
 
 
 
Total liabilities and shareowners’ equity 
 
$
(618
)
$
3,443
 
$
5,942
 
$
8,767
 
   
 
 
 
 
                           
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOW FOR THE NINE MONTHS ENDED JULY 31, 2005
Cash provided by (used in) operating activities 
 
$
(426
)
$
162
 
$
350
 
$
86
 
   
 
 
 
 
                           
Cash flow from investment programs
                         
Purchases, net of collections, of finance receivables 
   
-
   
-
   
297
   </