NAV 10Q 07.31.2011
Table of Contents

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 ____________________________
Form 10-Q
____________________________
 
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2011

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
 
x
  
Accelerated filer
 
o
Non-accelerated filer
 
o
  
Smaller reporting company
 
o
(Do not check if a smaller reporting company)
  
 
 
 

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

As of August 31, 2011, the number of shares outstanding of the registrant’s common stock was 72,571,312, net of treasury shares.

Table of Contents

NAVISTAR INTERNATIONAL CORPORATION FORM 10-Q
INDEX
 
 
 
 
Page
PART I – Financial Information
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II – Other Information
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 


2

Table of Contents

Disclosure Regarding Forward-Looking Statements

Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), Section 21E of the Securities Exchange Act of 1934, as amended (“Exchange Act”), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak as of the date of this report and Navistar International Corporation assumes no obligation to update the information included in this report.

Such forward-looking statements include, but are not limited to, statements concerning:
estimates we have made in preparing our financial statements;
our development of new products and technologies;
the anticipated volume, demand and markets for our products;
the anticipated performance and benefits of our products and technologies, including our exhaust gas recirculation technologies;
our business strategies;
our expectations and estimates relating to restructuring charges and operational savings;
our expectations relating to our retail finance receivables and retail finance revenues;
our expectations relating to warranty costs;
estimates relating to pension plan contributions;
trends relating to commodity prices; and
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.

These statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to differences in our future financial results include those discussed in Item 1A, Risk Factors, included within our Annual Report on Form 10-K for the year ended October 31, 2010, which was filed on December 21, 2010, as well as those discussed in Item 1A, Risk Factors, and elsewhere in this report. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.

Available Information

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


3

Table of Contents

PART I- Financial Information

Item 1.
Financial Statements

Navistar International Corporation and Subsidiaries

Consolidated Statements of Operations
(Unaudited)
 
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
2011
 
2010
 
2011
 
2010
(in millions, except per share data)
 
 
 
(Revised)(A)
 
 
 
(Revised)(A)
Sales and revenues
 
 
 
 
 
 
 
 
Sales of manufactured products, net
 
$
3,490

 
$
3,162

 
$
9,481

 
$
8,610

Finance revenues
 
47

 
59

 
154

 
163

Sales and revenues, net
 
3,537

 
3,221

 
9,635

 
8,773

Costs and expenses
 

 

 

 

Costs of products sold
 
2,930

 
2,525

 
7,830

 
6,976

Restructuring charges (benefit)
 
56

 
(9
)
 
80

 
(23
)
Impairment of property and equipment and intangible assets
 
64

 

 
64

 

Selling, general and administrative expenses
 
334

 
380

 
1,006

 
1,075

Engineering and product development costs
 
141

 
113

 
407

 
338

Interest expense
 
62

 
58

 
187

 
189

Other income, net
 
(18
)
 
(7
)
 
(39
)
 
(48
)
Total costs and expenses
 
3,569

 
3,060

 
9,535

 
8,507

Equity in loss of non-consolidated affiliates
 
(22
)
 
(13
)
 
(55
)
 
(32
)
Income (loss) before income tax benefit (expense)
 
(54
)
 
148

 
45

 
234

Income tax benefit (expense)
 
1,463

 
(19
)
 
1,458

 
(17
)
Net income
 
1,409

 
129

 
1,503

 
217

Less: Net income attributable to non-controlling interests
 
9

 
12

 
35

 
38

Net income attributable to Navistar International Corporation
 
$
1,400

 
$
117

 
$
1,468

 
$
179

Earnings per share attributable to Navistar International Corporation:
 

 

 

 

Basic
 
$
19.10

 
$
1.61

 
$
20.13

 
$
2.49

Diluted
 
18.24

 
1.56

 
19.04

 
2.44

Weighted average shares outstanding:
 

 

 

 

Basic
 
73.3

 
72.0

 
73.0

 
71.6

Diluted
 
76.8

 
74.3

 
77.1

 
73.1

_________________
(A)
Certain amounts have been revised to reflect a retrospective change in accounting principle. See Note 1, Summary of significant accounting policies.

See Notes to Condensed Consolidated Financial Statements

4

Table of Contents

Navistar International Corporation and Subsidiaries

Consolidated Balance Sheets
 
 
July 31,
2011
 
October 31,
2010
(in millions, except per share data)
 
(Unaudited)
 
 
ASSETS
 
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
 
$
444

 
$
585

Marketable securities
 
620

 
586

Trade and other receivables, net
 
1,004

 
987

Finance receivables, net
 
1,996

 
1,770

Inventories
 
1,731

 
1,568

Deferred taxes, net
 
523

 
83

Other current assets
 
284

 
256

Total current assets
 
6,602

 
5,835

Restricted cash and cash equivalents
 
159

 
180

Trade and other receivables, net
 
132

 
44

Finance receivables, net
 
799

 
1,145

Investments in non-consolidated affiliates
 
111

 
103

Property and equipment (net of accumulated depreciation and amortization of $2,039 and $1,928, at the respective dates)
 
1,492

 
1,442

Goodwill
 
334

 
324

Intangible assets (net of accumulated amortization of $94 and $124, at the respective dates)
 
225

 
262

Deferred taxes, net
 
1,049

 
63

Other noncurrent assets
 
275

 
332

Total assets
 
$
11,178

 
$
9,730

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
 

 

Liabilities
 

 

Current liabilities
 

 

Notes payable and current maturities of long-term debt
 
$
754

 
$
632

Accounts payable
 
1,921

 
1,827

Other current liabilities
 
1,119

 
1,130

Total current liabilities
 
3,794

 
3,589

Long-term debt
 
3,801

 
4,238

Postretirement benefits liabilities
 
2,036

 
2,097

Deferred taxes, net
 
72

 
142

Other noncurrent liabilities
 
718

 
588

Total liabilities
 
10,421

 
10,654

Redeemable equity securities
 
5

 
8

Stockholders’ equity (deficit)
 

 

Series D convertible junior preference stock
 
3

 
4

Common stock ($0.10 par value per share, 220.0 and 110.0 shares authorized, at the respective dates, 75.4 shares issued at both dates)
 
7

 
7

Additional paid in capital
 
2,289

 
2,206

Accumulated deficit
 
(410
)
 
(1,878
)
Accumulated other comprehensive loss
 
(1,066
)
 
(1,196
)
Common stock held in treasury, at cost (2.5 and 3.6 shares, at the respective dates)
 
(112
)
 
(124
)
Total stockholders’ equity (deficit) attributable to Navistar International Corporation
 
711

 
(981
)
Stockholders’ equity attributable to non-controlling interests
 
41

 
49

Total stockholders’ equity (deficit)
 
752

 
(932
)
Total liabilities and stockholders’ equity (deficit)
 
$
11,178

 
$
9,730


See Notes to Condensed Consolidated Financial Statements

5

Table of Contents

Navistar International Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows
(Unaudited) 
 
 
Nine Months Ended July 31,
 
 
2011
 
2010
(in millions)
 
 
 
(Revised)(A)
Cash flows from operating activities
 
 
 
 
Net income
 
$
1,503

 
$
217

Adjustments to reconcile net income to cash provided by operating activities:
 
 
 
 
Depreciation and amortization
 
217

 
198

Depreciation of equipment leased to others
 
28

 
38

Deferred taxes
 
(1,472
)
 
9

Impairment of property and equipment and intangible assets
 
73

 

Amortization of debt issuance costs and discount
 
33

 
29

Stock-based compensation
 
33

 
20

Provision for doubtful accounts, net of recoveries
 
(5
)
 
33

Equity in loss of non-consolidated affiliates, net of dividends
 
57

 
35

Other non-cash operating activities
 
(9
)
 
51

Changes in other assets and liabilities, exclusive of the effects of businesses acquired and disposed
 
81

 
34

Net cash provided by operating activities
 
539

 
664

Cash flows from investing activities
 
 
 
 
Purchases of marketable securities
 
(1,109
)
 
(944
)
Sales or maturities of marketable securities
 
1,075

 
643

Net change in restricted cash and cash equivalents
 
21

 
341

Capital expenditures
 
(291
)
 
(162
)
Purchase of equipment leased to others
 
(35
)
 
(27
)
Proceeds from sales of property and equipment
 
27

 
11

Investments in non-consolidated affiliates
 
(48
)
 
(83
)
Proceeds from sales of affiliates
 
6

 
4

Acquisition of intangibles
 
(15
)
 
(12
)
Business acquisitions, net of cash received
 
(1
)
 
(2
)
Net cash used in investing activities
 
(370
)
 
(231
)
Cash flows from financing activities
 
 
 
 
Proceeds from issuance of securitized debt
 
348

 
1,170

Principal payments on securitized debt
 
(560
)
 
(1,178
)
Proceeds from issuance of non-securitized debt
 
158

 
609

Principal payments on non-securitized debt
 
(73
)
 
(802
)
Net decrease in notes and debt outstanding under revolving credit facilities
 
(85
)
 
(832
)
Principal payments under financing arrangements and capital lease obligations
 
(81
)
 
(56
)
Debt issuance costs
 
(6
)
 
(26
)
Purchase of treasury stock
 
(11
)
 

Proceeds from exercise of stock options
 
36

 
33

Dividends paid by subsidiaries to non-controlling interest
 
(43
)
 
(45
)
Net cash used in financing activities
 
(317
)
 
(1,127
)
Effect of exchange rate changes on cash and cash equivalents
 
7

 
(3
)
Decrease in cash and cash equivalents
 
(141
)
 
(697
)
Cash and cash equivalents at beginning of period
 
585

 
1,212

Cash and cash equivalents at end of the period
 
$
444

 
$
515

_____________ 
(A)
Certain amounts have been revised to reflect a retrospective change in accounting principle. See Note 1, Summary of significant accounting policies.
See Notes to Condensed Consolidated Financial Statements

6

Table of Contents

Navistar International Corporation and Subsidiaries

Consolidated Statements of Stockholders’ Equity (Deficit)
(Unaudited)
 
 
Series D
Convertible
Junior
Preference
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Comprehensive
Income
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Loss
 
Common
Stock
Held in
Treasury,
at cost
 
Stockholders'
Equity
Attributable
to Noncontrolling
Interests
 
Total
(in millions)
 
 
 
 
 
 
 
(Revised) (A)
 
(Revised) (A)

 
 
 
 
 
 
 
(Revised) (A)
Balance as of October 31, 2010
 
$
4

 
$
7

 
$
2,206

 
 
 
$
(1,878
)
 
$
(1,196
)
 
$
(124
)
 
$
49

 
$
(932
)
Net income
 
 
 
 
 
 
 
$
1,468

 
1,468

 
 
 
 
 
35

 
1,503

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
65

 
 
 
 
 
 
 
 
 
65

Other post employment benefits
 
 
 
 
 
 
 
65

 
 
 
 
 
 
 
 
 
65

Total other comprehensive income
 
 
 
 
 
 
 
130

 
 
 
130

 
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
 
 
$
1,598

 
 
 
 
 
 
 
 
 
 
Transfer from redeemable equity securities upon exercise or expiration of stock options
 
 
 
 
 
3

 
 
 
 
 
 
 
 
 
 
 
3

Stock-based compensation
 
 
 
 
 
24

 
 
 
 
 
 
 

 
 
 
24

Stock ownership programs
 
 
 
 
 
10

 
 
 
 
 
 
 
23

 
 
 
33

Stock repurchase program
 
 
 
 
 
 
 
 
 
 
 
 
 
(11
)
 
 
 
(11
)
Impact to additional paid-in capital for valuation allowance release
 
 
 
 
 
45

 
 
 
 
 
 
 
 
 
 
 
45

Cash dividends paid to non-controlling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(43
)
 
(43
)
Other
 
(1
)
 
 
 
1

 
 
 
 
 
 
 
 
 
 
 

Balance as of July 31, 2011
 
$
3

 
$
7

 
$
2,289

 
 
 
$
(410
)
 
$
(1,066
)
 
$
(112
)
 
$
41

 
$
752

Balance as of October 31, 2009
 
4

 
7

 
2,181

 
 
 
(2,072
)
 
(1,674
)
 
(149
)
 
61

 
(1,642
)
Net income
 
 
 
 
 
 
 
179

 
179

 
 
 
 
 
38

 
217

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments
 
 
 
 
 
 
 
(4
)
 
 
 
 
 
 
 
 
 
(4
)
U.S. OPEB re-measurement
 
 
 
 
 
 
 
309

 
 
 
 
 
 
 
 
 
309

Other post employment benefits
 
 
 
 
 
 
 
65

 
 
 
 
 
 
 
 
 
65

Total other comprehensive income
 
 
 
 
 
 
 
370

 
 
 
370

 
 
 
 
 
 
Total comprehensive income
 
 
 
 
 
 
 
$
549

 
 
 
 
 
 
 
 
 
 
Transfer from redeemable equity securities upon exercise or expiration of stock options
 
 
 
 
 
4

 
 
 
 
 
 
 
 
 
 
 
4

Stock-based compensation
 
 
 
 
 
15

 
 
 
 
 
 
 
 
 
 
 
15

Stock ownership programs
 
 
 
 
 
2

 
 
 
 
 
 
 
24

 
 
 
26

Cash dividends paid to non-controlling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(45
)
 
(45
)
Other
 
 
 
 
 
(1
)
 
 
 
 
 
 
 
 
 
2

 
1

Balance as of July 31, 2010
 
$
4

 
$
7

 
$
2,201

 
 
 
$
(1,893
)
 
$
(1,304
)
 
$
(125
)
 
$
56

 
$
(1,054
)
_______________ 
(A)
Certain amounts have been revised to reflect a retrospective change in accounting principle. See Note 1, Summary of significant accounting policies.

See Notes to Condensed Consolidated Financial Statements

7

Table of Contents

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

1. Summary of significant accounting policies

Organization and Description of the Business

Navistar International Corporation (“NIC”), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating subsidiaries are Navistar, Inc. and Navistar Financial Corporation (“NFC”). References herein to the “Company,” “we,” “our,” or “us” refer collectively to NIC, its subsidiaries, and certain variable interest entities (“VIEs”) of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Engine, Parts (collectively called “manufacturing operations”), and Financial Services, which consists of NFC and our foreign finance operations (collectively called “financial services operations”). These segments are discussed in Note 13, Segment reporting.

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our manufacturing operations and our financial services operations, including VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts. Certain reclassifications were made to prior year amounts to conform to the 2011 presentation.

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, 2010 and should be read in conjunction with the disclosures therein. In our opinion, these interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.

Revision of Previously Issued Financial Statements

Starting with the first quarter of 2011, the Company changed its method of accruing for certain incentive compensation, specifically relating to cash bonuses, for interim reporting purposes from a ratable method to a performance-based method. The Company believes that the performance-based method is preferable because it links the accrual of incentive compensation with the achievement of performance. We have revised our previously reported Consolidated Statements of Operations for the three months and nine months ended July 31, 2010 and our Condensed Consolidated Statement of Cash Flows and Consolidated Statement of Stockholders' Deficit for the nine months ended July 31, 2010, on a retrospective basis to reflect this change in principle based on information that would have been available as of our previous filing. This change will have no impact on our annual financial results.
















8

Table of Contents             
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)




The following table sets forth the effects of the revision on our Consolidated Statement of Operations for the three months ended July 31, 2010:
 
 
 
As  Previously
Reported
 
Revisions for
Change in
Accounting
Principle
 
As Revised
(in millions, except per share data)
 
 
 
 
 
 
Selling, general and administrative expenses
 
$
360

 
$
20

 
$
380

Net income
 
149

 
(20
)
 
129

Net income attributable to Navistar International Corporation
 
137

 
(20
)
 
117

Basic earnings per share attributable to Navistar International Corporation
 
1.89

 
(0.28
)
 
1.61

Diluted earnings per share attributable to Navistar International Corporation
 
1.83

 
(0.27
)
 
1.56


The following table sets forth the effects of the revision on our Consolidated Statement of Operations for the nine months ended July 31, 2010:
 
 
 
As  Previously
Reported
 
Revisions for
Change in
Accounting
Principle
 
As Revised
(in millions, except per share data)
 
 
 
 
 
 
Selling, general and administrative expenses
 
$
1,070

 
$
5

 
$
1,075

Net income
 
222

 
(5
)
 
217

Net income attributable to Navistar International Corporation
 
184

 
(5
)
 
179

Basic earnings per share attributable to Navistar International Corporation
 
2.56

 
(0.07
)
 
2.49

Diluted earnings per share attributable to Navistar International Corporation
 
2.51

 
(0.07
)
 
2.44


The following table sets forth the effects of the revision on our Condensed Consolidated Statement of Cash Flows for the nine months ended July 31, 2010:
 
 
 
As Previously
Reported
 
Revisions for
Change in
Accounting
Principle
 
As Revised
(in millions)
 
 
 
 
 
 
Net income
 
$
222

 
$
(5
)
 
$
217

Changes in other assets and liabilities, exclusive of the effects of businesses acquired and disposed
 
29

 
5

 
34


The following table sets forth the effects of the revision on our Consolidated Statement of Stockholders’ Deficit as of July 31, 2010:
 
 
 
As of July 31, 2010
(in millions)
 
 
Stockholders’ deficit, as previously reported
 
$
(1,049
)
Effect of revision adjustments on net income for the nine months ended July 31, 2010
 
(5
)
Stockholders’ deficit, as revised
 
$
(1,054
)


9

Table of Contents             
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



The following table sets forth the effects of the change on our Consolidated Statement of Operations for the three months ended July 31, 2011:
 
 
 
As Computed
Under the
Ratable
Method
 
As Reported
Under the
Performance-
Based Method
 
Effect of
Change
(in millions, except per share data)
 
 
 
 
 
 
Selling, general and administrative expenses
 
$
338

 
$
334

 
$
(4
)
Net income
 
1,405

 
1,409

 
4

Net income attributable to Navistar International Corporation
 
1,396

 
1,400

 
4

Basic earnings per share attributable to Navistar International Corporation
 
19.04

 
19.10

 
0.06

Diluted earnings per share attributable to Navistar International Corporation
 
18.18

 
18.24

 
0.06


The following table sets forth the effects of the change on our Consolidated Statement of Operations for the nine months ended July 31, 2011:
 
 
 
As Computed
Under the
Ratable
Method
 
As Reported
Under the
Performance-
Based Method
 
Effect of
Change
(in millions, except per share data)
 
 
 
 
 
 
Selling, general and administrative expenses
 
$
1,028

 
$
1,006

 
$
(22
)
Net income
 
1,481

 
1,503

 
22

Net income attributable to Navistar International Corporation
 
1,446

 
1,468

 
22

Basic earnings per share attributable to Navistar International Corporation
 
19.84

 
20.13

 
0.29

Diluted earnings per share attributable to Navistar International Corporation
 
18.75

 
19.04

 
0.29


The following table sets forth the effects of the change on our Consolidated Balance Sheet as of July 31, 2011:
 
 
 
As Computed
Under the
Ratable
Method
 
As Reported
Under the
Performance-
Based Method
 
Effect of
Change
(in millions)
 
 
 
 
 
 
Other current liabilities
 
$
1,141

 
$
1,119

 
$
(22
)
Accumulated deficit
 
(432
)
 
(410
)
 
22

 
The following table sets forth the effects of the change on our Condensed Consolidated Statement of Cash Flows for the nine months ended July 31, 2011:
 
 
 
As Computed
Under the
Ratable
Method
 
As Reported
Under the
Performance-
Based
Method
 
Effect of
Change
(in millions)
 
 
 
 
 
 
Net income
 
$
1,481

 
$
1,503

 
$
22

Changes in other assets and liabilities, exclusive of the effects of businesses acquired and disposed
 
103

 
81

 
(22
)

Variable Interest Entities

We are the primary beneficiary of several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our variable interests that we are the primary beneficiary as we have the power to direct the activities of the VIE that most significantly impact the VIE’s economic

10

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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



performance and have the obligation to absorb losses of the VIE that could potentially be significant to the VIE or the right to receive benefits from the VIE that could potentially be significant to the VIE. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of the consolidated entities. Assets of these entities are not available to satisfy claims against our general assets.

We are the primary beneficiary of our Blue Diamond Parts (“BDP”) and Blue Diamond Truck (“BDT”) joint ventures with Ford Motor Company (“Ford”). As a result, our Consolidated Balance Sheets include assets of $247 million and $312 million and liabilities of $128 million and $150 million as of July 31, 2011 and October 31, 2010, respectively, from BDP and BDT, including $25 million and $16 million of cash and cash equivalents, at the respective dates, which are not readily available to satisfy our other obligations. The creditors of BDP and BDT do not have recourse to our general credit.

Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include assets of $1.6 billion and $1.7 billion and liabilities of $1.4 billion and $1.6 billion as of July 31, 2011 and October 31, 2010, respectively, all of which are involved in securitizations that are treated as borrowings. In addition, our Consolidated Balance Sheets include assets of $411 million and $353 million and related liabilities of $209 million and $236 million as of July 31, 2011 and October 31, 2010, respectively, all of which are involved in structures in which we transferred assets in transactions that do not qualify for sale accounting treatment and are therefore treated as borrowings. Investors that hold securitization debt have a priority claim on the cash flows generated by the securitized assets of the respective trusts to the extent that those trusts are entitled to make principal and interest payments. Investors in securitizations of these entities have no recourse to the general credit of NIC or any other consolidated entity.

Prior to the adoption of new guidance on accounting for transfers of financial assets on November 1, 2010, our Financial Services segment did not consolidate the assets and liabilities of the conduit funding facility of Truck Retail Accounts Corporation (“TRAC”), our consolidated special purpose entity (“SPE”), as we were not the primary beneficiary of the conduit and transfers of finance receivables to the facility qualified for sale accounting treatment. TRAC retained residual economic interests in the future cash flows of the securitized assets that were owned by the conduit. We carried these retained interests as an asset, included in Finance receivables, net on our Consolidated Balance Sheets. Subsequent to the adoption of the new accounting guidance, previous transfers of finance receivables from our Financial Services segment to the TRAC conduit retained their sales accounting treatment while prospective transfers of finance receivables no longer receive sale accounting treatment.

We are also involved with other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.

We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Equity in loss of non-consolidated affiliates represents our share of the net loss of these entities.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, sales of receivables, income tax contingency accruals and valuation allowances, product warranty accruals, asbestos and other product liability accruals, asset impairment, and litigation-related accruals. Actual results could differ from our estimates.

Concentration Risks

Our financial condition, results of operations, and cash flows are subject to concentration risks related to concentrations of union employees and one customer. As of July 31, 2011, approximately 5,900, or 55%, of our hourly workers and approximately 500, or 6%, of our salaried workers are represented by labor unions and are covered by collective bargaining agreements. Our collective bargaining agreement with the National Automobile, Aerospace and Agricultural Implement Workers of Canada expired on June 30, 2009. On July 29, 2011 we committed to close the Chatham, Canada facility. For further information regarding anticipated employee related costs associated with such closing, see Note 2, Restructurings and

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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



impairments. For discussion of customer concentrations, see Note 13, Segment reporting. Additionally, our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and global, political, and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).

Product Warranty Liability

Accrued product warranty and deferred warranty revenue activity is as follows:
 
 
 
Nine Months Ended July 31,
 
 
2011
 
2010
(in millions)
 
 
 
 
Accrued product warranty and deferred warranty revenue, at beginning of period
 
$
506

 
$
492

Costs accrued and revenues deferred
 
281

 
175

Adjustments to pre-existing warranties(A)
 
66

 
34

Payments and revenues recognized
 
(288
)
 
(218
)
Accrued product warranty and deferred warranty revenue, at end of period
 
565

 
483

Less: Current portion
 
254

 
244

Noncurrent accrued product warranty and deferred warranty revenue
 
$
311

 
$
239

_______________
(A)
Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historic and expected trends and are also impacted by authorized field campaigns. In the second quarter of 2011, we recorded adjustments for changes in estimates of $27 million, or $0.34 per diluted share. In the third quarter of 2011, we recorded adjustments for changes in estimates of $30 million, or $0.39 per diluted share. In the third quarter of 2010, we recorded adjustments for changes in estimates of $25 million, or $0.34 per diluted share.

The amount of deferred revenue related to extended warranty programs was $220 million and $167 million at July 31, 2011 and October 31, 2010, respectively. Revenue recognized under our extended warranty programs was $13 million and $39 million for the three and nine months ended July 31, 2011 and $11 million and $34 million for the three and nine months ended July 31, 2010, respectively.

Recently Adopted Accounting Standards

As of January 31, 2011, we adopted new guidance regarding disclosures about the credit quality of financing receivables and the allowance for credit losses. The guidance requires disaggregated information about the credit quality of financing receivables and the allowance for credit losses based on portfolio segment and class, as well as disclosure of credit quality indicators, and past due information. We have complied with the disclosure requirements of the new guidance within Note 4, Allowance for doubtful accounts.

As of November 1, 2010, we adopted new guidance on accounting for transfers of financial assets. The guidance eliminates the concept of a qualifying special purpose entity (“QSPE”), changes the requirements for derecognizing financial assets, and requires additional disclosures in order to enhance information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and an entity’s continuing involvement in and exposure to the risks related to transferred financial assets. Upon adoption, transfers of finance receivables from our Financial Services segment to the TRAC funding conduit no longer receive sale accounting treatment. The adoption of this guidance did not have a material impact on our consolidated financial statements.

As of November 1, 2010, we adopted new guidance regarding the consolidation of VIEs. The guidance amends the determination of whether an enterprise is the primary beneficiary of a VIE, and is, therefore, required to consolidate the VIE, by requiring a qualitative analysis rather than a quantitative analysis. The qualitative analysis includes, among other things, consideration of who has the power to direct the activities of the entity that most significantly impact the entity’s economic performance and who has the obligation to absorb losses or the right to receive benefits of the VIE that could potentially be significant to the VIE. This guidance also requires continuous reassessments of whether an enterprise is the primary beneficiary of a VIE. Prior guidance required reconsideration of whether an enterprise was the primary beneficiary of a VIE only when specific events had occurred. QSPEs, which were previously exempt from the application of this guidance, are now subject to the provisions of this guidance. The guidance also requires enhanced disclosures about an enterprise’s involvement with a VIE.

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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



The adoption of this guidance did not have a material impact on our consolidated financial statements.

Recently Issued Accounting Standards

Accounting guidance that has not yet become effective with respect to our consolidated financial statements is described below, together with our assessment of the potential impact it may have on our consolidated financial statements:

In June 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2011. Our effective date is November 1, 2012. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.
 
In May 2011, the FASB issued new guidance to clarify the application of existing fair value measurement requirements and to change particular requirements for measuring fair value and for disclosing information about fair value measurements. This guidance is effective for interim and annual periods beginning on or after December 15, 2011. Our effective date is February 1, 2012. The adoption of this guidance is not expected to have a material impact on our consolidated financial statements.

In April 2011, the FASB issued new guidance which provides additional guidance to creditors for evaluating whether a modification or restructuring of a receivable is a troubled debt restructuring. The new guidance will require creditors to evaluate modifications and restructuring of receivables using a more principles-based approach, which may result in more modifications and restructurings being considered troubled debt restructurings. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. Our effective date is August 1, 2011. The adoption of this guidance will not have a material impact on our consolidated financial statements.

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

2. Restructurings and impairments

The Company recognized $56 million and $80 million of restructuring charges for the three and nine months ended July 31, 2011, respectively, primarily related to restructuring activities at our Fort Wayne facility and Springfield Assembly Plant, Chatham heavy truck plant, Workhorse chassis plant in Union City, Indiana, and Monaco recreational vehicle ("RV") headquarters and motor coach manufacturing plant in Coburg, Oregon within our Truck segment. The Company recognized $9 million and $23 million of restructuring benefits for the three and nine months ended July 31, 2010, respectively, primarily related to restructuring activities at our Indianapolis Engine Plant (“IEP”) and Indianapolis Casting Corporation (“ICC”) locations within our Engine segment. The restructuring charges recorded are based on restructuring plans that have been committed to by management and are, in part, based upon management’s best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities.

The Company is utilizing proceeds from our October 2010 tax-exempt bond financing to finance the relocation of the Company’s world headquarters site, the expansion of an existing warehouse facility, and the development of certain industrial facilities to facilitate the consolidation of certain operations. In the first quarter of 2011, the Company finalized the purchase of the property and buildings that we are developing into our new world headquarters site. We continue to develop plans for efficient transitions related to these activities and the optimization of our operations and management structure. Restructuring charges related to these activities include $4 million and $23 million for the three and nine months ended July 31, 2011, respectively. In addition, we incurred other related charges of $11 million and $18 million for the three and nine months ended July 31, 2011, respectively, included in Engineering and product development costs and Selling, general and administrative expenses. For the remainder of 2011, we expect to incur approximately $36 million of additional restructuring and related charges associated with these activities. We anticipate additional charges in future periods to range between $80 million and

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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



$110 million as these actions are expected to be completed in 2012.

Fort Wayne and Springfield restructuring activity

On October 30, 2010, our United Automobile, Aerospace and Agricultural Implement Workers of America (“UAW”) represented employees ratified a new four-year labor agreement that replaced the prior contract that expired October 1, 2010. The new contract allows the Company additional flexibility in manufacturing decisions and includes provisions for the wind-down of UAW positions at our Fort Wayne facility. As a result of the contract ratification and planned wind-down of UAW positions at our Fort Wayne facility, the Truck segment recognized $9 million of restructuring charges in the fourth quarter of 2010. The restructuring charges consisted of $5 million in personnel costs for employee termination and related benefits and $4 million of charges for pension and other postretirement contractual termination benefits.

In the first quarter of 2011, the Company committed to a plan to wind-down and transfer certain operations at our Fort Wayne facility. In addition, certain employees at our Springfield Assembly Plant accepted retirement and separation incentive agreements. As a result of the restructuring activities, the Truck segment recognized an additional $4 million and $27 million of restructuring charges for the three and nine months ended July 31, 2011, respectively. The restructuring charges consisted of $17 million in personnel costs for employee termination and related benefits, $6 million of charges for pension and other postretirement contractual termination benefits and $4 million of employee relocation costs.

We expect the restructuring charges, excluding pension and other postretirement costs, will be paid over the next two to three years.

Chatham restructuring activity and impairment of property and equipment

In the third quarter of 2011, the Company committed to close its Chatham, Ontario heavy truck plant, which has been idled since June 2009 due to an inability to reach a collective bargaining agreement with the Canadian Auto Workers. Under the Company's flexible manufacturing strategy, products previously built in Chatham were transitioned to other assembly plants in North America. The commitment to close the plant was driven by economic, industry and operational conditions that rendered the plant uncompetitive. As a result of the restructuring activities, the Truck segment recognized $47 million of restructuring charges for the three and nine months ended July 31, 2011. The restructuring charges consisted of $7 million in personnel costs for employee termination and related benefits, $33 million of charges for pension and other postretirement statutory and contractual termination benefits and related charges, and $7 million of other costs. Ultimate pension and postretirement costs are subject to employee negotiation and acceptance rates. We anticipate additional charges of $30 million and $70 million. We expect the restructuring charges, excluding pension and other postretirement costs, will be paid over the next year.

In the third quarter of 2011, the Truck segment recognized $8 million of charges for impairments of property and equipment at our Chatham facility. The closure of the facility permanently eliminated future cash flows and those carrying values were determined to not be fully recoverable. We utilized the cost approach and market approach to determine the fair value of certain assets within the asset group. The impairment charges reflect the impact of the restructuring activities and closure of the Chatham facility.

Custom Products restructuring activity and impairment of property and equipment and intangible assets

In the third quarter of 2011, the Company committed to a restructuring plan of its Workhorse Custom Chassis ("WCC") and Monaco RV recreational vehicles (collectively "Custom Products") operations, including the closure of our Union City, Indiana chassis facility and the wind-down and transfer of certain operations at our RV motor coach plant in Coburg, Oregon. Production from our Union City plant will be transitioned to a new chassis manufacturing plant in an existing facility in Elkhart, Indiana. The commitment to close the Union City plant was driven by the close proximity of the Elkhart facility in relation to the Company's other plants and suppliers, as well as the improved layout of the new facility. Our Monaco RV headquarters in Coburg will be closed and relocated to the Company's new corporate campus in Lisle, Illinois. In addition, the production of Class A motor coaches will be transitioned to an existing RV manufacturing facility in Wakarusa, Indiana. The Company plans to continue producing RV towables and maintain certain administrative functions in facilities in Oregon, as well as maintain a RV service center there. The commitment to relocate the Monaco RV headquarters, and consolidate all gas and diesel motorized RVs at the Wakarusa plant, was made to improve operating efficiencies and drive integration.

As a result of these restructuring activities, the Truck segment recognized $5 million of restructuring charges for the three and nine months ended July 31, 2011. The restructuring charges consisted of $1 million in personnel costs for employee termination and related benefits and $4 million of charges due to a curtailment of other postretirement employee benefit plan and

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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



postretirement contractual termination benefits. These actions are expected to be completed by the second quarter of 2012 and we anticipate additional charges of $10 million to $20 million in future periods. We expect the restructuring charges, excluding other postretirement costs, will be paid over the next two years.

In third quarter of 2011, the Truck segment recognized $51 million of charges for impairments of intangible assets, primarily customer relationships and trade names, associated with the Workhorse asset group. The asset group was reviewed for recoverability by comparing the carrying value to estimated future undiscounted cash flows and those carrying values were determined to not be fully recoverable. We utilized the income and market approach to determine the fair value of the asset group. The impairment charges for the asset group reflect market deterioration and reduction in demand below previously anticipated levels.

Ford related restructuring activity

In the first quarter of 2010, the Company recognized $17 million of restructuring benefits related to the 2009 restructuring activity at our IEP and ICC locations. The restructuring benefit primarily related to the settlement of a portion of our other contractual costs for $16 million within the restructuring liability.
 
Reconciliation of restructuring liability

The following table summarizes the 2011 activity in the restructuring liability related to Fort Wayne, Springfield, Chatham, and Custom Products, which excludes pension and other postretirement contractual termination benefits:
 
 
 
Balance at
October 31, 2010
 
Additions
 
Payments
 
Adjustments
 
Balance at
July 31, 2011

(in millions)
 
 
 
 
 
 
 
 
 
 
Employee termination charges
 
$
5

 
$
25

 
$
(4
)
 
$

 
$
26

Employee relocation costs
 

 
4

 
(4
)
 

 

Other
 

 
7

 

 

 
7

Restructuring liability
 
$
5

 
$
36

 
$
(8
)
 
$

 
$
33

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

 
 
Balance at
October 31, 2009
 
Additions
 
Payments
 
Adjustments
 
Balance at
July 31, 2010

(in millions)
 
 
 
 
 
 
 
 
 
 
Employee termination charges
 
$
20

 
$

 
$
(11
)
 
$
(8
)
 
$
1

Other contractual costs
 
21

 

 
(5
)
 
(16
)
 

Restructuring liability
 
$
41

 
$

 
$
(16
)
 
$
(24
)
 
$
1


3. Finance receivables

Finance receivables are receivables of our financial services operations, which generally can be repaid without penalty prior to contractual maturity. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts. Total on-balance sheet assets of our financial services operations net of intercompany balances are $3.2 billion and $3.3 billion, as of July 31, 2011 and October 31, 2010, respectively. Included in total assets are on-balance sheet finance receivables of $2.8 billion and $2.9 billion as of July 31, 2011 and October 31, 2010, respectively.

In March 2010, we entered into a three-year operating agreement (with one-year automatic extensions and subject to early termination provisions) with GE Capital Corporation and GE Capital Commercial, Inc. (collectively “GE”). Under the terms of the agreement, GE became our preferred source of retail customer financing for equipment offered by us and our dealers in the U.S. We provide GE a loss sharing arrangement for certain credit losses. The primary features of the loss sharing arrangement include us reimbursing GE for credit losses in excess of the first 10% of the original value of a financed contract. The Company’s exposure to loss is mitigated since receivables financed under the operating agreement are secured by the financed equipment. We do not carry the receivables financed under the operating agreement on our Consolidated Balance Sheets. There were $588 million and $144 million of outstanding finance receivables as of July 31, 2011 and October 31, 2010, respectively,

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Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



financed through the operating agreement and subject to the loss sharing arrangement. The related originations of these outstanding finance receivables were $655 million and $159 million as of July 31, 2011 and October 31, 2010, respectively.

Based on our historic experience of losses on similar finance receivables and GE’s first loss position, we do not believe our share of losses related to balances currently outstanding will be material. Historically our losses, representing the entire loss amount, on similar finance receivables, measured as a percentage of the average balance of the related finance receivable, ranged from 0.3% to 2.1%. While under limited circumstances NFC retains the rights to originate retail customer financing, we expect retail finance receivables and retail finance revenues will decline as our retail portfolio pays down.

Pursuant to the adoption of new accounting guidance relating to disclosures about the allowance for losses and credit quality of finance receivables, we determined that we have two portfolio segments of finance receivables based on the type of financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.

Our finance receivables by major classification are as follows:

 
 
July 31, 2011
 
October 31, 2010
(in millions)
 
 
 
 
Retail portfolio
 
$
1,617

 
$
1,917

Wholesale portfolio
 
1,217

 
1,006

Amounts due from sales of receivables
 

 
53

Total finance receivables
 
2,834

 
2,976

Less: Allowance for doubtful accounts
 
39

 
61

Total finance receivables, net
 
2,795

 
2,915

Less: Current portion, net(A)
 
1,996

 
1,770

Noncurrent portion, net
 
$
799

 
$
1,145

_______________ 
(A)
The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash flows because of prepayments, extensions, delinquencies, credit losses, and renewals.

Securitizations

Our financial services operations transfer wholesale notes, retail accounts receivable, retail notes, finance leases, and operating leases through SPEs, which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities. In addition to servicing receivables, our continued involvement in the SPEs includes an economic interest in the transferred receivables and, historically, managing exposure to interest rates using interest rate swaps, interest rate caps, and forward contracts. In 2010, certain sales of retail accounts receivables were considered to be sales in accordance with guidance on accounting for transfers and servicing of financial assets and extinguishment of liabilities, and were accounted for off-balance sheet. For sales that do qualify for off-balance sheet treatment, an initial gain (loss) is recorded at the time of the sale while servicing fees and excess spread income are recorded as revenue when earned over the life of the finance receivables.

Effective July 31, 2010, our Financial Services segment amended the wholesale trust agreement with the Navistar Financial Dealer Note Master Trust (“Master Trust”). The amendment disqualified the Master Trust as a QSPE and therefore required the Master Trust to be evaluated for consolidation as a VIE. As we are the primary beneficiary of the Master Trust, the Master Trust’s assets and liabilities are consolidated into the assets and liabilities of the Company. Components of available wholesale note trust funding facilities were as follows:


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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



 
 
Maturity
 
As of
July 31, 2011
 
October 31, 2010
(in millions)
 
 
 
 
 
 
Variable funding notes (“VFN”)
 
July 2012
 
$
500

 
$
500

Investor notes
 
October 2012
 
350

 
350

Investor notes
 
January 2012
 
250

 
250

Total wholesale note funding
 
 
 
$
1,100

 
$
1,100


Unutilized funding related to the variable funding facilities was $390 million and $500 million at July 31, 2011 and October 31, 2010, respectively.

TRAC, our consolidated SPE, utilizes a $100 million funding facility arrangement that provides for the funding of eligible retail accounts receivables. Subsequent to the adoption of new accounting guidance on accounting for transfers of financial assets, transfers of finance receivables from our Financial Services segment to the TRAC funding facility completed prior to November 1, 2010 retained their sale accounting treatment while transfers of finance receivables subsequent to November 1, 2010 no longer receive sale accounting treatment. There were no remaining outstanding retained interests as of July 31, 2011.

The funding facility has been refinanced with a maturity date of March 2012. The facility is secured by $124 million of retail accounts and $23 million of cash equivalents as of July 31, 2011 and $54 million of retail accounts and $21 million of cash equivalents as of October 31, 2010. There was $39 million and $78 million of unutilized funding at July 31, 2011 and October 31, 2010, respectively. As of July 31, 2011, all pledged receivables of the SPE are consolidated.

Retained Interests in Off-Balance Sheet Securitizations

Retained interests in off-balance sheet securitizations of $53 million at October 31, 2010, represented our over-collateralization of the TRAC conduit funding facility. As of July 31, 2011, all retail accounts sold into the conduit prior to November 1, 2010 were liquidated; therefore there were no retained interests in off-balance sheet securitizations.

When retained interests are recorded, we estimate the payment speeds for the receivables sold, the discount rate used to determine the fair value of our retained interests, and the anticipated net losses on the receivables in order to calculate the initial gain or loss on the sale of the receivables. Estimates are based on historical experience, anticipated future portfolio performance, market-based discount rates and other factors and are made separately for each securitization transaction. The fair value of our retained interests is based on these assumptions. We re-evaluate the fair value of our retained interests on a monthly basis and recognize changes in current income as required. Our retained interests are recognized as an asset in Finance receivables, net.

The key economic assumptions related to the valuation of our retained interests related to our retail account securitization are as follows:
 
 
 
October 31, 2010

Discount rate
 
7.3
%
Estimated credit losses
 

Payment speed (percent of portfolio per month)
 
88.5
%

The sensitivity of our retained interests to an immediate adverse change of 10% and 20% in each assumption is not material. The effect of a variation of a particular assumption on the fair value of the retained interests is calculated based upon changing one assumption at a time. Oftentimes however, changes in one factor may result in changes in another, which in turn could magnify or counteract these sensitivities.
 

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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



Finance Revenues

Finance revenues derived from receivables that are both on and off-balance sheet consist of the following:
 
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
2011
 
2010
 
2011
 
2010
(in millions)
 
 
 
 
 
 
 
 
Finance revenues from on-balance sheet receivables:
 
 
 
 
 
 
 
 
Retail notes and finance leases revenue
 
$
32

 
$
46

 
$
108

 
$
144

Operating lease revenue
 
8

 
8

 
23

 
25

Wholesale notes interest
 
25

 
9

 
76

 
18

Retail and wholesale accounts interest
 
8

 
5

 
20

 
14

Total finance revenues from on-balance sheet receivables
 
73

 
68

 
227

 
201

Revenues from off-balance sheet securitization:
 
 
 
 
 
 
 
 
Fair value adjustments
 

 
14

 
1

 
35

Excess spread income
 

 
10

 

 
30

Servicing fees revenue
 

 
2

 

 
6

Gain (loss) on sale of finance receivables
 

 
(12
)
 
1

 
(39
)
Securitization income
 

 
14

 
2

 
32

Gross finance revenues
 
73

 
82

 
229

 
233

Less: Intercompany revenues
 
26

 
23

 
75

 
70

Finance revenues
 
$
47

 
$
59

 
$
154

 
$
163


As a result of the adoption of new accounting guidance, substantially all of our securitization activity in 2011 results in the receivables being carried on our Consolidated Balance Sheet. Cash flows from off-balance sheet securitization transactions for the three and nine months ended July 31, 2010 are as follows:
 
 
 
Three Months Ended July 31, 2010
 
Nine Months Ended July 31, 2010
(in millions)
 
 
 
 
Proceeds from finance receivables
 
$
665

 
$
2,692

Servicing fees
 
2

 
6

Cash from net excess spread
 
10

 
31

Net cash from securitization transactions
 
$
677

 
$
2,729


4. Allowance for doubtful accounts

Pursuant to the adoption of new accounting guidance relating to disclosures about the allowance for losses and credit quality of finance receivables, we determined that we have two portfolio segments of finance receivables based on the type of financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory. As the initial measurement attributes and the monitoring and assessment of credit risk or the performance of the receivables are consistent within each of our receivable portfolios, the Company determined that each portfolio consisted of one class of receivable.


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Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



The activity related to our allowance for doubtful accounts for our retail portfolio, wholesale portfolio, and trade and other receivables is summarized as follows:
 

 
Three Months Ended July 31, 2011
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
(in millions)
 
 
 
 
 
 
 
Allowance for doubtful accounts, at beginning of period
$
40

 
$
2

 
$
34

 
$
76

Provision for doubtful accounts, net of recoveries
(1
)
 

 
(2
)
 
(3
)
Charge-off of accounts(A)
(2
)
 

 
(4
)
 
(6
)
Allowance for doubtful accounts, at end of period
$
37

 
$
2

 
$
28

 
$
67

 
 
Nine Months Ended July 31, 2011
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
(in millions)
 
 
 
 
 
 
 
Allowance for doubtful accounts, at beginning of period
$
58

 
$
2

 
$
36

 
$
96

Provision for doubtful accounts, net of recoveries
(1
)
 

 
(4
)
 
(5
)
Charge-off of accounts(A)
(20
)
 

 
(4
)
 
(24
)
Allowance for doubtful accounts, at end of period
$
37

 
$
2

 
$
28

 
$
67


 
Three Months Ended July 31, 2010
 
Nine Months Ended July 31, 2010
(in millions)
 
 
 
Allowance for doubtful accounts, at beginning of period
$
119

 
$
104

Provision for doubtful accounts, net of recoveries
(1
)
 
33

Charge-off of accounts(A)
(11
)
 
(30
)
Allowance for doubtful accounts, at end of period
$
107

 
$
107

_________________ 
(A)
We repossess sold and leased vehicles on defaulted finance receivables and leases, and place them into Inventories. Losses recognized at the time of repossession and charged against the allowance for doubtful accounts were $2 million and $17 million for the three and nine months ended July 31, 2011, respectively, and $4 million and $21 million for the three and nine months ended July 31, 2010, respectively.

The accrual of interest income is discontinued on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. In certain cases, we continue to collect payments on our impaired finance receivables.

Information regarding impaired finance receivables is as follows:
 
 
As of July 31, 2011
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
(in millions)
 
 
 
 
 
Impaired finance receivables with specific loss reserves
$
22

 
$

 
$
22

Impaired finance receivables without specific loss reserves

 

 

Specific loss reserves on impaired finance receivables
13

 

 
13

Finance receivables on non-accrual status
17

 

 
17

Average balance of impaired finance receivables for the nine months ended July 31, 2011
37

 

 
37




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Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



The Company uses the aging of our receivables as well as other inputs when assessing credit quality. The aging analysis for finance receivables is summarized as follows:

 
 
As of July 31, 2011
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
(in millions)
 
 
 
 
 
Current
$
1,521

 
$
1,212

 
$
2,733

30-90 days past due
83

 
3

 
86

Over 90 days past due
14

 
1

 
15

Total finance receivables
$
1,618

 
$
1,216

 
$
2,834



5. Inventories

 
 
As of
 
 
July 31,
2011
 
October 31,
2010
(in millions)
 
 
 
 
Finished products
 
$
896

 
$
893

Work in process
 
187

 
202

Raw materials
 
648

 
473

Total inventories
 
$
1,731

 
$
1,568


6. Investments in non-consolidated affiliates

Investments in non-consolidated affiliates is comprised of our interests in partially-owned affiliates of which our ownership percentages range from 10% to 50%. We do not control these affiliates, but have the ability to exercise significant influence over their operating and financial policies. Our investment in these affiliates is an integral part of our operations, and we account for them using the equity method of accounting.

Presented below is summarized financial information for NC2 Global, LLC (“NC2”), which is considered a significant non-consolidated affiliate. NC2 was established in September 2009 as a joint venture with Caterpillar Inc. to develop, manufacture, and distribute conventional and cab-over truck designs to serve the global commercial truck market. Balance sheet information for NC2 was insignificant to our Consolidated Balance Sheets as of July 31, 2011 and October 31, 2010.

 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
2011
 
2010
 
2011
 
2010
(in millions)
 
 
 
 
 
 
 
 
Net revenue
 
$
82

 
$
15

 
$
161

 
$
28

Net expenses
 
105

 
36

 
218

 
75

Loss before tax expense
 
(23
)
 
(21
)
 
(57
)
 
(47
)
Net loss
 
(24
)
 
(21
)
 
(58
)
 
(47
)
 


20

Table of Contents             
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



7. Debt
 
 
July 31,
2011
 
October 31,
2010
(in millions)
 
 
 
 
Manufacturing operations
 
 
 
 
8.25% Senior Notes, due 2021, net of unamortized discount of $33 million and $35 million, at the respective dates
 
$
967

 
$
965

3.0% Senior Subordinated Convertible Notes, due 2014, net of unamortized discount of $79 million and $94 million, at the respective dates
 
491

 
476

Debt of majority-owned dealerships
 
109

 
66

Financing arrangements and capital lease obligations
 
123

 
221

Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040
 
225

 
225

Other
 
41

 
33

Total manufacturing operations debt
 
1,956

 
1,986

Less: Current portion
 
102

 
145

Net long-term manufacturing operations debt
 
$
1,854

 
$
1,841

Financial services operations
 
 
 
 
Asset-backed debt issued by consolidated SPEs, at variable rates, due serially through 2018
 
$
1,553

 
$
1,731

Bank revolvers, at fixed and variable rates, due dates from 2012 through 2018
 
876

 
974

Commercial paper, at variable rates, due serially through 2012
 
91

 
67

Borrowings secured by operating and finance leases, at various rates, due serially through 2017
 
79

 
112

Total financial services operations debt
 
2,599

 
2,884

Less: Current portion
 
652

 
487

Net long-term financial services operations debt
 
$
1,947

 
$
2,397


Manufacturing Operations

In October 2009, we completed the sale of $570 million aggregate principal amount of our 3.0% Senior Subordinated Convertible Notes due 2014 (the “Convertible Notes”). Holders may convert the Convertible Notes into common stock of the Company at any time on or after April 15, 2014. Holders may also convert the Convertible Notes at their option prior to April 15, 2014, under the following circumstances: (i) during any fiscal quarter commencing after January 31, 2010, if the last reported sale price of the common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on the last trading day of the preceding fiscal quarter is greater than or equal to 130% of the applicable conversion price on each such trading day; (ii) during the five business day period after any five consecutive trading day period (the “Measurement Period”) in which the trading price per $1,000 principal amount of notes for each trading day of that Measurement Period was less than 98% of the product of the last reported sale price of the common stock and the applicable conversion rate on each such trading day; or (iii) upon the occurrence of specified corporate events, as more fully described in the Convertible Indenture. The conversion rate is initially 19.8910 shares of common stock per $1,000 principal amount of Convertible Notes (equivalent to an initial conversion price of approximately $50.27 per share of common stock). The conversion rate may be adjusted for anti-dilution provisions and the conversion price may be decreased by the Board of Directors to the extent permitted by law and listing requirements.

The Convertible Notes can be settled in common stock, cash, or a combination of common stock and cash. Upon conversion, the Company will satisfy its conversion obligations by delivering, at its election, shares of common stock (plus cash in lieu of fractional shares), cash, or any combination of cash and shares of common stock. If the Company elects to settle in cash or a combination of cash and shares, the amounts due upon conversion will be based on a daily conversion value calculated on a proportionate basis for each trading day in a 40 trading-day observation period. If a holder converts its Convertible Notes on or after April 15, 2014, and the Company elects physical settlement as described above, the holder will not receive the shares of common stock into which the Convertible Notes are convertible until after the expiration of the observation period described above, even though the number of shares the holder will receive upon settlement will not change. It is our policy to settle the principal and accrued interest on the Convertible Notes with cash. In certain cases, holders may require the Company to repurchase, for cash, all or part of the Convertible Notes at a price equal to 100% of the principal amount of the Convertible

21

Table of Contents             
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



Notes being repurchased plus any accrued and unpaid interest.

Based upon the closing price of our common stock for the prescribed measurement period during the three months ended April 30, 2011, the contingent conversion threshold on the Convertible Notes was exceeded. As a result, the Convertible Notes were convertible at the option of any holder that provided a valid conversion notice prior to July 31, 2011. Accordingly, since it is our policy to settle the principal and accrued interest on the Convertible Notes with cash, we reclassified (i) the portion of the Convertible Notes attributable to the conversion feature, which had not yet been accreted to its face value, from Additional paid in capital to Convertible debt and (ii) the carrying value of the Convertible Notes from Long-term debt to Notes payable and current maturities of long-term debt on our Consolidated Balance Sheet as of April 30, 2011. In cases where holders decide to convert prior to the maturity date, the Company will immediately write off the proportionate amount of remaining debt issue costs. We received conversion notices from holders of an immaterial amount of the Convertible Notes during the conversion period. Based upon the closing price of our common stock for the prescribed measurement period during the three months ended July 31, 2011, the contingent conversion thresholds on the Convertible Notes was not exceeded and the carrying value of the Convertible Notes and the portion of the Convertible Notes attributable to the conversion feature were reclassified to Long-term debt and Additional paid in capital, respectively, on our Consolidated Balance Sheet as of July 31, 2011. The determination of whether the Convertible Notes are convertible is performed on a quarterly basis. Consequently, the Convertible Notes may meet the contingent conversion thresholds and therefore may be reclassified to Notes payable and current maturities of long-term debt and Convertible debt in future periods.

Financial Services Operations

TRAC, our consolidated SPE, utilized a $100 million funding facility arrangement that provided for the funding of eligible retail accounts receivables. Subsequent to the adoption of new accounting guidance on accounting for transfers of financial assets, transfers of finance receivables from our Financial Services segment to the TRAC funding facility completed prior to November 1, 2010 retained their sale accounting treatment while transfers of finance receivables subsequent to November 1, 2010 no longer receive sale accounting treatment. Accordingly, borrowings secured by the transferred receivables are included in Notes payable and current maturities of long-term debt within our Consolidated Balance Sheet as of July 31, 2011. In January 2011, the maturity of the funding facility maturity was extended to March 2011, and in March 2011, the funding facility was refinanced with a maturity date of March 2012. As of July 31, 2011, all borrowings of the SPE are included in our consolidated financial statements.

8. Postretirement benefits

Defined Benefit Plans

For the three and nine months ended July 31, 2011, we contributed $28 million and $80 million, respectively, and for the three and nine months ended July 31, 2010, we contributed $37 million and $84 million, respectively, to our pension plans to meet regulatory minimum funding requirements. We currently anticipate additional contributions of approximately $53 million during the remainder of 2011.

Other post-employment benefit (“OPEB”) obligations, such as retiree medical, are generally funded in accordance with a 1993 restructured health and life legal settlement (the “1993 Settlement Agreement”), which requires us to fund a portion of the plans’ annual service cost. Contributions for the three and nine months ended July 31, 2011 and 2010, and anticipated contributions for the remainder of 2011, are not material.
 
In the first quarter of 2011, the Company incurred a charge of $5 million due to a plan curtailment and contractual termination benefits related to restructuring activities at the Fort Wayne facility, as discussed in Note 2, Restructurings and impairments. The plan curtailment also resulted in a plan remeasurement at December 31, 2010. The discount rate used to measure the pension benefit obligation at December 31, 2010 was 5.0% compared to the October 31, 2010 discount rate of 4.9%. All other significant assumptions remained unchanged from the October 31, 2010 measurement date. Actuarial gains for the two months ended December 31, 2010 of $44 million, primarily due to favorable asset returns, were recognized as a credit to equity as a component of Accumulated other comprehensive loss.

As discussed in Note 2, Restructurings and impairments, the Company committed to close its Chatham, Ontario plant. During the third quarter of 2011, the plant closure resulted in a pension curtailment gain of $8 million that was recognized as a component of Accumulated other comprehensive loss and contractual termination charges of $35 million. The closure also resulted in an OPEB charge of $13 million during the third quarter of 2011 representing a plan curtailment and related contractual termination benefits. The pension plan curtailment resulted in a plan remeasurement at July 31, 2011. The discount

22

Table of Contents             
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



rate used to measure the pension benefit obligation was 4.5% at July 31, 2011 compared to 5.0% at October 31, 2010. The OPEB plan curtailment resulted in a plan remeasurement at July 31, 2011. The discount rate used to measure the OPEB obligation at July 31, 2011 was 5.3% compared to the October 31, 2010 discount rate of 5.4%. All other significant assumptions remained unchanged from the October 31, 2010 measurement date. As a result of the plan remeasurements, actuarial losses of $9 million for pension and actuarial gains for OPEB of $1 million were recognized as a component of Accumulated other comprehensive loss at July 31, 2011. The effects of the remeasurements will decrease net periodic postretirement cost by approximately $3 million for the remainder of 2011.
The Company also incurred an OPEB charge of $4 million during the third quarter of 2011 due to an OPEB plan curtailment and contractual termination charges related to the closure of the Workhorse Union City plant.

During 2010, the Company made an administrative change to the prescription drug program under the OPEB plan affecting plan participants who are Medicare eligible. The Company enrolled Medicare eligible plan participants who did not opt out into a Medicare Part D Plan. The OPEB plan now supplements the coverage provided by the Medicare Part D Plan. As a result of this change, for substantially all of the Medicare eligible participants, the Company is no longer eligible to receive the Medicare Part D subsidy that is available to sponsors of retiree healthcare plans that provide prescription drug benefits that are at least actuarially equivalent to Medicare Part D. The UAW filed a motion contesting our ability to implement this administrative change and the Company filed a complaint arguing that it has not received the consideration it was promised in the 1993 Settlement Agreement. See Note 12, Commitments and contingencies, for further discussion.

Also during 2010, the Patient Protection and Affordable Care Act (“PPACA”) and the Health Care and Education Reconciliation Act of 2010 (“HCERA”), which amends certain aspects of the PPACA, were enacted. The impact of the PPACA and the HCERA was estimated and included in the measurement of the OPEB obligation. As regulations regarding implementation of the health care reform legislation are promulgated and additional guidance becomes available, our estimates may change.

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

The Company had previously committed to close its IEP and ICC locations resulting in a charge of $16 million during the first quarter of 2009 representing a plan curtailment and related contractual termination benefits. In July 2010, we reached an agreement with ICC employees represented by the UAW and are now continuing operations at ICC. As a result, in the third quarter of 2010, we reversed $4 million of charges for pension and OPEB contractual termination benefits associated with the previously planned action.


23

Table of Contents             
Navistar International Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements–(Continued)
(Unaudited)



Components of Net Postretirement Benefits Expense

Net postretirement benefits expense included in our Consolidated Statements of Operations is composed of the following:
 
 
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
 
 
 
Pension
Benefits
 
Health and
Life Insurance
Benefits
 
Pension Benefits
 
Health and
Life Insurance
Benefits
 
 
 
2011
 
2010
 
2011
 
2010
 
2011
 
2010
 
2011
 
2010
 
(in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost for benefits earned during the period
 
$
4

 
$
4

 
$
2

 
$
2

 
$
13

 
$
13

 
$
6

 
$
6

 
Interest on obligation
 
47

 
51

 
13

 
19

 
141

 
152

 
40

 
62

 
Amortization of net cumulative losses
 
25

 
24

 

 
2

 
75

 
73

 

 
6

 
Amortization of prior service benefit
 
1

 
1

 
(7
)
 
(7
)
 
1

 
1

 
(22
)
 
(12
)
 
Settlement and curtailments
 

 
1

 
11

 

 
2

 
1

 
11