Annual Reports

 
Quarterly Reports

  • 10-Q (Mar 8, 2018)
  • 10-Q (Sep 6, 2017)
  • 10-Q (Jun 7, 2017)
  • 10-Q (Mar 7, 2017)
  • 10-Q (Sep 8, 2016)
  • 10-Q (Jun 7, 2016)

 
8-K

 
Other

Navistar International 10-Q 2016
Document

 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
___________________________________________________
(Mark One)
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2016

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
___________________________________________________

 navistarlogo2015a04.jpg
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.)
 
 
2701 Navistar Drive, Lisle, Illinois
60532
(Address of principal executive offices)
(Zip Code)

Registrant’s telephone number, including area code (331) 332-5000
______________________________________________________
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  þ    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  þ    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
 
þ
  
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  þ
As of August 31, 2016, the number of shares outstanding of the registrant’s common stock was 81,616,811, net of treasury shares.
 
 
 
 
 



NAVISTAR INTERNATIONAL CORPORATION FORM 10-Q
TABLE OF CONTENTS
 
 
 
Page
PART I—Financial Information
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
Item 3.
 
Item 4.
 
 
 
 
 
PART II
 
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 3.
 
Item 4.
 
Item 5.
 
Item 6.
 
 
 
 
 
 
 

2






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 the federal securities laws. 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;
the anticipated consummation and implementation of our recently announced strategic alliance with Volkswagen Truck & Bus;
our development of new products and technologies;
anticipated sales, volume, demand, markets for our products, and financial performance;
anticipated performance and benefits of our products and technologies;
our business strategies relating to, and our ability to meet, federal and state regulatory heavy-duty diesel emissions standards applicable to certain of our engines, including the timing and costs of compliance and consequences of noncompliance with such standards, as well as our ability to meet other federal, state and foreign regulatory requirements;
our business strategies and long-term goals, and activities to accomplish such strategies and goals;
our ability to implement our new strategy focused on establishing a leading market position based on uptime advantage and a customer-centric culture, leading with connected vehicle offerings, providing customers with meaningful innovation and tailored solutions, and developing effective leaders at every level, as well as the results we expect to achieve from the implementation of our new strategy;
our expectations related to new product launches;
anticipated results from the realignment of our leadership and management structure;
anticipated benefits from acquisitions, strategic alliances, and joint ventures we complete;
our expectations and estimates relating to restructuring activities, including restructuring and integration charges and timing of cash payments related thereto, and operational flexibility, savings, and efficiencies from such restructurings;
our expectations relating to the possible effects of anticipated divestitures and closures of businesses;
our expectations relating to our cost-reduction actions and actions to reduce discretionary spending;
our expectations relating to our ability to service our long-term debt;
our expectations relating to our retail finance receivables and retail finance revenues;
our expectations and estimates relating to our used truck inventory;
our anticipated costs relating to the implementation of our emissions compliance strategy and other product modifications that may be required to meet other federal, state, and foreign regulatory requirements;
liabilities resulting from environmental, health and safety laws and regulations;
our anticipated capital expenditures;
our expectations relating to payments of taxes;
our expectations relating to warranty costs;
our expectations relating to interest expense;
our expectations relating to impairment of goodwill and other assets;
costs relating to litigation and similar matters;
estimates relating to pension plan contributions and unfunded pension and postretirement benefits;
trends relating to commodity prices; and
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.

3





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 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, 2015, which was filed on December 17, 2015, as well as those factors discussed 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 annual, quarterly, and current reports, proxy statements, and other information with the United States ("U.S.") 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 electronically file with, or furnish to, the SEC. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC’s Public Reference Room at 100 F Street, N.E., 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.

4





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,
(in millions, except per share data)
2016
 
2015
 
2016

2015
Sales and revenues
 
 
 
 
 
 
 
Sales of manufactured products, net
$
2,052

 
$
2,501

 
$
5,946

 
$
7,544

Finance revenues
34

 
37

 
102

 
108

Sales and revenues, net
2,086

 
2,538

 
6,048

 
7,652

Costs and expenses

 

 
 
 
 
Costs of products sold
1,757

 
2,172

 
5,068

 
6,577

Restructuring charges
5

 
13

 
11

 
22

Asset impairment charges
12

 
7

 
17

 
15

Selling, general and administrative expenses
197

 
220

 
604

 
704

Engineering and product development costs
62

 
71

 
181

 
226

Interest expense
84

 
75

 
246

 
227

Other income, net
(15
)
 
(6
)
 
(62
)
 
(37
)
Total costs and expenses
2,102

 
2,552

 
6,065

 
7,734

Equity in income of non-consolidated affiliates
2

 
3

 
3

 
6

Loss from continuing operations before income taxes
(14
)
 
(11
)
 
(14
)
 
(76
)
Income tax expense
(14
)
 
(12
)
 
(25
)
 
(37
)
Loss from continuing operations
(28
)
 
(23
)
 
(39
)
 
(113
)
Income from discontinued operations, net of tax

 
2

 

 
2

Net loss
(28
)
 
(21
)
 
(39
)

(111
)
Less: Net income attributable to non-controlling interests
6

 
7

 
24

 
23

Net loss attributable to Navistar International Corporation
$
(34
)
 
$
(28
)
 
$
(63
)
 
$
(134
)
 
 
 
 
 
 
 

Amounts attributable to Navistar International Corporation common shareholders:
 
 
 
 
 
 


Loss from continuing operations, net of tax
$
(34
)
 
$
(30
)
 
$
(63
)
 
$
(136
)
Income from discontinued operations, net of tax

 
2

 

 
2

Net loss
$
(34
)
 
$
(28
)
 
$
(63
)
 
$
(134
)
 
 
 
 
 
 
 
 
Earnings (loss) per share:
 
 
 
 
 
 
 
Basic:
 
 
 
 
 
 
 
Continuing operations
$
(0.42
)
 
$
(0.37
)
 
$
(0.77
)
 
$
(1.67
)
Discontinued operations

 
0.03

 

 
0.03

 
$
(0.42
)
 
$
(0.34
)
 
$
(0.77
)
 
$
(1.64
)
 
 
 
 
 


 
 
Diluted:
 
 
 
 


 
 
Continuing operations
$
(0.42
)
 
$
(0.37
)
 
$
(0.77
)
 
$
(1.67
)
Discontinued operations

 
0.03

 

 
0.03

 
$
(0.42
)
 
$
(0.34
)
 
$
(0.77
)
 
$
(1.64
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
81.7

 
81.6

 
81.7

 
81.5

Diluted
81.7

 
81.6

 
81.7

 
81.5


See Notes to Consolidated Financial Statements
5



Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) 
(Unaudited)
(in millions)
Three Months Ended July 31,
 
Nine Months Ended July 31,
2016

2015
 
2016
 
2015
Net loss
$
(28
)
 
$
(21
)
 
$
(39
)
 
$
(111
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
(10
)
 
(47
)
 
7

 
(133
)
Defined benefit plans (net of tax)
34

 
33

 
82

 
98

Total other comprehensive income (loss)
24

 
(14
)
 
89

 
(35
)
Comprehensive income (loss)
(4
)
 
(35
)
 
50

 
(146
)
Less: Net income attributable to non-controlling interests
6

 
7

 
24

 
23

Total comprehensive income (loss) attributable to Navistar International Corporation
$
(10
)
 
$
(42
)
 
$
26

 
$
(169
)

See Notes to Consolidated Financial Statements
6



Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
 
July 31,
2016
 
October 31,
2015
(in millions, except per share data)
 
 
 
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
547

 
$
912

Restricted cash and cash equivalents
115

 

Marketable securities
140

 
159

Trade and other receivables, net
301

 
429

Finance receivables, net
1,410

 
1,779

Inventories, net
1,084

 
1,135

Deferred taxes, net

 
36

Other current assets
175

 
172

Total current assets
3,772

 
4,622

Restricted cash
66

 
121

Trade and other receivables, net
16

 
13

Finance receivables, net
203

 
216

Investments in non-consolidated affiliates
60

 
66

Property and equipment (net of accumulated depreciation and amortization of $2,591 and $2,546, respectively)
1,257

 
1,345

Goodwill
38

 
38

Intangible assets (net of accumulated amortization of $133 and $120, respectively)
56

 
57

Deferred taxes, net
153

 
128

Other noncurrent assets
98

 
86

Total assets
$
5,719

 
$
6,692

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
1,389

 
$
1,110

Accounts payable
1,003

 
1,301

Other current liabilities
1,141

 
1,377

Total current liabilities
3,533

 
3,788

Long-term debt
3,676

 
4,188

Postretirement benefits liabilities
2,907

 
2,995

Deferred taxes, net

 
14

Other noncurrent liabilities
737

 
867

Total liabilities
10,853

 
11,852

Stockholders’ deficit
 
 
 
Series D convertible junior preference stock
2

 
2

Common stock, $0.10 par value per share (86.8 shares issued and 220 shares authorized at both dates)
9

 
9

Additional paid-in capital
2,499

 
2,499

Accumulated deficit
(4,929
)
 
(4,866
)
Accumulated other comprehensive loss
(2,512
)
 
(2,601
)
Common stock held in treasury, at cost (5.2 and 5.3 shares, respectively)
(206
)
 
(210
)
Total stockholders’ deficit attributable to Navistar International Corporation
(5,137
)
 
(5,167
)
Stockholders’ equity attributable to non-controlling interests
3

 
7

Total stockholders’ deficit
(5,134
)
 
(5,160
)
Total liabilities and stockholders’ deficit
$
5,719

 
$
6,692


See Notes to Consolidated Financial Statements
7



Navistar International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended July 31,
(in millions)
2016
 
2015
Cash flows from operating activities
 
 
 
Net loss
$
(39
)
 
$
(111
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
111

 
165

Depreciation of equipment leased to others
53

 
56

Deferred taxes, including change in valuation allowance

 
(9
)
Asset impairment charges
17

 
15

Loss on sales of investments and businesses, net
2

 

Amortization of debt issuance costs and discount
27

 
28

Stock-based compensation
9

 
8

Provision for doubtful accounts, net of recoveries
9

 
(6
)
Equity in income of non-consolidated affiliates, net of dividends
5

 
2

Other non-cash operating activities
(12
)
 
(28
)
Changes in other assets and liabilities, exclusive of the effects of businesses disposed
(196
)
 
(134
)
Net cash used in operating activities
(14
)
 
(14
)
Cash flows from investing activities
 
 
 
Purchases of marketable securities
(378
)
 
(515
)
Sales of marketable securities
358

 
764

Maturities of marketable securities
39

 
63

Net change in restricted cash and cash equivalents
(64
)
 
(192
)
Capital expenditures
(83
)
 
(72
)
Purchases of equipment leased to others
(94
)
 
(58
)
Proceeds from sales of property and equipment
20

 
12

Investments in non-consolidated affiliates
(1
)
 

Proceeds from sales of affiliates
36

 
7

Acquisition of intangibles

 
(4
)
Net cash provided by (used in) investing activities
(167
)
 
5

Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
72

 
490

Principal payments on securitized debt
(69
)
 
(247
)
Net change in secured revolving credit facilities
26

 
(9
)
Proceeds from issuance of non-securitized debt
163

 
166

Principal payments on non-securitized debt
(235
)
 
(234
)
Net change in notes and debt outstanding under revolving credit facilities
(151
)
 
(41
)
Principal payments under financing arrangements and capital lease obligations
(1
)
 
(2
)
Debt issuance costs
(12
)
 
(10
)
Proceeds from financed lease obligations
17

 
26

Proceeds from exercise of stock options

 
1

Dividends paid by subsidiaries to non-controlling interest
(28
)
 
(27
)
Other financing activities
1

 
(27
)
Net cash provided by (used in) financing activities
(217
)
 
86

Effect of exchange rate changes on cash and cash equivalents
33

 
(27
)
Increase (decrease) in cash and cash equivalents
(365
)
 
50

Cash and cash equivalents at beginning of the period
912

 
497

Cash and cash equivalents at end of the period
$
547

 
$
547


See Notes to Consolidated Financial Statements
8



Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Deficit
(Unaudited)
(in millions)
Series D
Convertible
Junior
Preference
Stock
 
Common
Stock
 
Additional
Paid-in
Capital
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income (Loss)
 
Common
Stock
Held in
Treasury,
at cost
 
Stockholders'
Equity
Attributable
to Non-controlling
Interests
 
Total
Balance as of October 31, 2015
$
2

 
$
9

 
$
2,499

 
$
(4,866
)
 
$
(2,601
)
 
$
(210
)
 
$
7

 
$
(5,160
)
Net income (loss)

 

 

 
(63
)
 

 

 
24

 
(39
)
Total other comprehensive income

 

 

 

 
89

 

 

 
89

Stock-based compensation

 

 
3

 

 

 

 

 
3

Stock ownership programs

 

 
(4
)
 

 

 
4

 

 

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(28
)
 
(28
)
Acquisition of remaining ownership interest from non-controlling interest holder

 

 
1

 

 

 

 

 
1

Balance as of July 31, 2016
$
2

 
$
9

 
$
2,499

 
$
(4,929
)
 
$
(2,512
)
 
$
(206
)
 
$
3

 
$
(5,134
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of October 31, 2014
$
3

 
$
9

 
$
2,500

 
$
(4,682
)
 
$
(2,263
)
 
$
(221
)
 
$
34

 
$
(4,620
)
Net income (loss)

 

 

 
(134
)
 

 

 
23

 
(111
)
Total other comprehensive loss

 

 

 

 
(35
)
 

 

 
(35
)
Transfer from redeemable equity securities upon exercise or expiration of stock options

 

 
1

 

 

 

 

 
1

Stock-based compensation

 

 
9

 

 

 

 

 
9

Stock ownership programs

 

 
(9
)
 

 

 
9

 

 

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(27
)
 
(27
)
Acquisition of remaining ownership interest from non-controlling interest holder

 

 
(4
)
 

 

 

 
(23
)
 
(27
)
Balance as of July 31, 2015
$
3

 
$
9

 
$
2,497

 
$
(4,816
)
 
$
(2,298
)
 
$
(212
)
 
$
7

 
$
(4,810
)

See Notes to Consolidated Financial Statements
9



Navistar International Corporation and Subsidiaries
Notes to 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 entities are Navistar, Inc. and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer collectively to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Parts, Global Operations (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 12, Segment Reporting.
Our fiscal year ends on October 31. As such, all references to 2016 and 2015 contained within this Quarterly Report on Form 10-Q relate to the fiscal year, unless otherwise indicated.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our Manufacturing operations, which include majority-owned dealers ("Dealcors"), 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.
We prepared the accompanying unaudited consolidated financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X issued by the U.S. 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, 2015, which 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.
Variable Interest Entities
We have an interest in several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our VIEs that we are the primary beneficiary because we have the power to direct the activities of the VIE that most significantly impact its economic performance and we have the obligation to absorb losses of, 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 these VIEs. Assets of these entities are not readily available to satisfy claims against our general assets.
We are the primary beneficiary of our Blue Diamond Parts ("BDP") joint venture with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of $40 million and $50 million and liabilities of $12 million and $7 million as of July 31, 2016 and October 31, 2015, respectively, including $3 million and $7 million of cash and cash equivalents, at the respective dates, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have recourse to our general credit.
On May 29, 2015, we acquired Ford's remaining 25% ownership in our Blue Diamond Truck ("BDT") joint venture for $27 million. The acquisition of Ford's remaining ownership of the BDT joint venture did not have a material impact on our consolidated net loss for the three or nine months ended July 31, 2015.

10




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


Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of $1.0 billion and $1.1 billion as of July 31, 2016 and October 31, 2015, respectively, and liabilities of $850 million and $844 million as of July 31, 2016 and October 31, 2015, respectively, all of which are involved in securitizations that are treated as asset-backed debt. In addition, our Consolidated Balance Sheets include secured assets of $178 million and $235 million as of July 31, 2016 and October 31, 2015, respectively, and corresponding liabilities of $118 million and $107 million, at the respective dates, which are related to other secured transactions that do not qualify for sale accounting treatment, and therefore, are treated as borrowings secured by operating and finance leases. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent that the related VIEs are required to make principal and interest payments. Investors in securitizations of these entities have no recourse to our general credit.
We also have an interest in 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 income of non-consolidated affiliates includes our share of the net income of these entities.
Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity:
 
Nine Months Ended July 31,
(in millions)
2016
 
2015
Balance at beginning of period
$
994

 
$
1,197

Costs accrued and revenues deferred(B)
141

 
208

Currency translation adjustment
2

 
(7
)
Adjustments to pre-existing warranties(A)
70

 
(38
)
Payments and revenues recognized(B)
(339
)
 
(344
)
Balance at end of period
868

 
1,016

Less: Current portion
423

 
466

Noncurrent accrued product warranty and deferred warranty revenue
$
445

 
$
550

_________________________
(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. Our warranty liability is generally affected by component failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.
In the second quarter of 2016, we recorded a charge for adjustments to pre-existing warranties of $46 million or $0.56 per diluted share. The charge primarily relates to increases in both claim frequency and cost of repair across both the Medium Duty and Big Bore engine families. The charge increases the reserve for our standard warranty obligations as well as the loss positions related to our Big Bore extended service contracts.
Adjustments to pre-existing warranties in the three and nine months ended July 31, 2015 include a benefit of $2 million related to our Workhorse Custom Chassis operations, which are reported in Discontinued Operations in our Consolidated Statements of Operations. In the first quarter of 2015, we recorded a benefit for adjustments to pre-existing warranties of $57 million or $0.70 per diluted share. The impact of income taxes on the 2016 and 2015 adjustments are not material due to our deferred tax valuation allowances on our U.S. deferred tax assets.
(B)
During the third quarter of 2016, we determined that the amortization of loss reserves for Big Bore extended service contracts, which were included within Costs accrued and revenues deferred, should be applied to Payments and revenues recognized. As a result, for the nine months ended July 31, 2015, we have reclassified $31 million of amortization of loss reserves in order to conform to our current presentation. The reclassification did not impact our Consolidated Statements of Operations or our Consolidated Balance Sheets.
Extended Warranty Programs
The amount of deferred revenue related to extended warranty programs was $345 million and $401 million at July 31, 2016 and October 31, 2015, respectively. Revenue recognized under our extended warranty programs was $37 million and $113 million, in the three and nine months ended July 31, 2016, respectively, and $40 million and $115 million for the three and nine months ended July 31, 2015, respectively.

11




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


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 for the periods presented. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, income tax contingency accruals and valuation allowances, product warranty accruals, used truck inventory valuations, asbestos and other product liability accruals, asset impairment charges, restructuring charges 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 our significant unionized workforce. As of July 31, 2016, approximately 5,400, or 82%, of our hourly workers and approximately 300, or 6%, of our salaried workers, are represented by labor unions and are covered by collective bargaining agreements. Our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).
Indefinite-Lived Intangible Assets
An intangible asset determined to have an indefinite useful life is not amortized until its useful life is determined to no longer be indefinite. Indefinite-lived intangible assets are evaluated each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Significant judgment is applied when evaluating if an intangible asset has a finite useful life. In addition, for indefinite-lived intangible assets, significant judgment is applied in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.
During the third quarter of 2015, the economic downturn in Brazil resulted in the continued decline in actual and forecasted results for the Brazilian engine reporting unit with an indefinite-lived intangible asset, a trademark, of $24 million. As a result, we performed an impairment analysis in the third quarter of 2015 utilizing the income approach, based on discounted cash flows, which are derived from internal forecasts and economic expectations. It was determined that the carrying value of the trademark exceeded its fair value. As a result, we determined that the trademark was impaired and recognized an impairment charge of $3 million. In the third quarter of 2016, we recognized an additional impairment charge of $1 million related to this trademark. The non-cash impairment charges were included in Asset impairment charges in our Consolidated Statements of Operations. The Brazilian engine reporting unit is included in the Global Operations segment.
Inventories
Inventories are valued at the lower of cost or market. Our gross used truck inventory increased to approximately $430 million at July 31, 2016 from $390 million at October 31, 2015, offset by reserves of $166 million and $110 million, respectively. During the nine months ended July 31, 2016, additional reserves of $56 million were recorded primarily in Costs of products sold.
In valuing our used truck inventory, we are required to make assumptions regarding the level of reserves required to value inventories at their net realizable value ("NRV"). Our judgments and estimates for used truck inventory are based on an analysis of current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. The NRV is subject to change based on numerous conditions, including age, specifications, mileage, timing of sales, market mix and current and forecasted pricing. While calculations are made after taking these factors into account, significant management judgment regarding expectations for future events is involved. Future events that could significantly influence our judgment and related estimates include general economic conditions in markets where our products are sold, actions of our competitors, and the ability to sell used trucks in a timely manner.
Recently Adopted Accounting Standards
In the nine months ended July 31, 2016, we have not adopted any new accounting guidance that has had a material impact on our consolidated financial statements.

12




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


Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, "Revenue from Contracts with Customers" (Topic 606), which supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition." This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which postponed the effective date of ASU No. 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted on the original effective date for fiscal years beginning after December 15, 2016. Our effective date for this ASU is November 1, 2018. We are currently evaluating the method of adoption and the impact of this ASU on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Our effective date for this ASU is November 1, 2019. Adoption will require a modified retrospective transition. We are currently evaluating the method of adoption and the impact of this ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The ASU sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, and certain off-balance sheet credit exposures. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Our effective date is November 1, 2020. We are currently evaluating the method of adoption and the impact of this ASU on our consolidated financial statements.
2. Restructurings and Impairments
Restructuring charges are recorded 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.
Restructuring Liability
The following tables summarize the activity in the restructuring liability, which includes amounts related to discontinued operations and excludes pension and other postretirement contractual termination benefits:
(in millions)
Balance at October 31, 2015
 
Additions
 
Payments
 
Adjustments
 
Balance at July 31, 2016
Employee termination charges
$
62

 
$
4

 
$
(58
)
 
$
2

 
$
10

Lease vacancy
5

 

 
(4
)
 

 
1

Other
1

 

 

 

 
1

Restructuring liability
$
68

 
$
4

 
$
(62
)
 
$
2

 
$
12

(in millions)
Balance at
October 31, 2014
 
Additions
 
Payments
 
Adjustments
 
Balance at July 31, 2015
Employee termination charges
$
8

 
$
17

 
$
(7
)
 
$
(2
)
 
$
16

Lease vacancy
11

 

 
(6
)
 

 
5

Other
1

 
2

 
(2
)
 

 
1

Restructuring liability
$
20

 
$
19

 
$
(15
)
 
$
(2
)
 
$
22


13




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


North American Manufacturing Restructuring Activities
We continue to focus on our core Truck and Parts businesses and evaluate our portfolio of assets to validate their strategic and financial fit. This allows us to close or divest non-strategic businesses, and identify opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure. For those areas that fall outside our strategic businesses, we are evaluating alternatives which could result in additional restructuring and other related charges in the future, including but not limited to: (i) impairments, (ii) costs for employee and contractor termination and other related benefits, and (iii) charges for pension and other postretirement contractual benefits and curtailments. These charges could be significant.
Chatham restructuring activities
In the third quarter of 2011, we committed to close our Chatham, Ontario heavy truck plant, which had been idled since June 2009. At that time, we recognized curtailment and contractual termination charges related to postretirement plans. Based on a ruling regarding pension benefits received from the Financial Services Tribunal in Ontario, Canada, in the third quarter of 2014, we recognized additional charges of $14 million related to the 2011 closure of the Chatham, Ontario plant. We appealed this ruling, but it was upheld in a July 3, 2015 decision issued by the Divisional Court of Ontario. On July 23, 2015, we filed a notice of motion for leave to appeal to the Court of Appeal for Ontario, which was perfected on August 25, 2015 through an additional filing. On December 21, 2015, the Ontario Court of Appeal denied the motion for leave to appeal. On April 25, 2016, we filed a qualified partial wind-up report for approval by the Financial Services Commission of Ontario. Potential charges in future periods could range from $0 million to $60 million, primarily related to pension, postretirement costs and termination benefits, which are subject to governmental approval, employee negotiation, acceptance rates and the resolution of disputes related thereto. In addition, we are continuing to evaluate the impact of the ruling on prior plan administration practices, and, as a result, we have recognized $5 million of charges in the third quarter of 2016. We do not expect material future charges.
Foundry Facilities
In December 2014, we announced the closure of our Indianapolis, Indiana foundry facility; on June 30, 2015, we closed this facility; and on August 19, 2016, we sold this facility. In addition, on April 30, 2015, we sold our Waukesha, Wisconsin foundry operations. As a result of these actions, the Truck segment recognized charges of $3 million and $28 million in the three and nine months ended July 31, 2015, respectively, for the acceleration of depreciation of certain assets related to foundry and engine facilities. These charges are reported within Costs of products sold in our Consolidated Statements of Operations.
Cost-Reductions and Other Strategic Initiatives
From time to time, we have announced, and we may continue to announce, actions to control spending across the Company with targeted reductions of certain costs. We are focused on continued reductions in discretionary spending, including reductions resulting from efficiencies, and prioritizing or eliminating certain programs or projects.
In the third quarter of 2015, we initiated new cost-reduction actions, including a reduction-in-force in the U.S. and Brazil. As a result of these actions, we recognized restructuring charges of $13 million in personnel costs for employee termination and related benefits, which will primarily be paid throughout 2016.
Asset Impairments
The following table reconciles our Asset impairment charges in our Consolidated Statements of Operations:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions)
2016
 
2015
 
2016
 
2015
Intangible asset impairment charge
$
1

 
$
3

 
$
1

 
$
3

Other asset impairment charges related to continuing operations
11

 
4

 
16

 
12

Total asset impairment charges
$
12

 
$
7

 
$
17

 
$
15

As a result of the economic downturn in Brazil causing declines in actual and forecasted results, we tested the indefinite-lived intangible asset of our Brazilian engine reporting unit for potential impairment. As a result, in the third quarters of 2016 and 2015, we determined that the trademark asset carrying value was impaired, resulting in charges of $1 million and $3 million, respectively. For more information, see Note 1, Summary of Significant Accounting Policies.
In the nine months ended July 31, 2016, we recorded $3 million of asset impairment charges in the Truck segment related to the sale of Pure Power Technologies, a components business focused on air and fuel systems, in February 2016.

14




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


In the third quarters of 2016 and 2015, we concluded we had triggering events related to certain long-lived assets in the Truck segment. As a result, certain long-lived assets were determined to be impaired, resulting in a charges of $11 million and $3 million, respectively. Additionally, in the first quarter of 2015, we concluded that we had a triggering event related to certain operating leases. As a result, the Truck segment recorded $7 million of asset impairment charges.
All of these charges are recognized in Asset impairment charges in our Consolidated Statements of Operations.
3. Finance Receivables
Finance receivables are receivables of our Financial Services operations. Finance receivables generally consist of wholesale notes and accounts, as well as retail notes, finance leases and accounts. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts. Total assets of our Financial Services operations net of intercompany balances are $2.1 billion and $2.5 billion as of July 31, 2016 and October 31, 2015, respectively. Included in total assets of our Financial Services operations are finance receivables of $1.6 billion and $2.0 billion as of July 31, 2016 and October 31, 2015, respectively. We have two portfolio segments of finance receivables that we distinguish based on the type of customer and nature of the 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, net in our Consolidated Balance Sheets consist of the following:
(in millions)
July 31, 2016
 
October 31, 2015
Retail portfolio
$
406

 
$
554

Wholesale portfolio
1,228

 
1,467

Total finance receivables
1,634

 
2,021

Less: Allowance for doubtful accounts
21

 
26

Total finance receivables, net
1,613

 
1,995

Less: Current portion, net(A)
1,410

 
1,779

Noncurrent portion, net
$
203

 
$
216

_________________________
(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 to special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities issued. In addition to servicing receivables, our continued involvement in the SPEs may include an economic interest in the transferred receivables and, in some cases, managing exposure to interest rate changes on the securities using interest rate swaps or interest rate caps. There were no transfers of finance receivables that qualified for sale accounting treatment as of July 31, 2016 and October 31, 2015, and as a result, the transferred finance receivables are included in our Consolidated Balance Sheets and the related interest earned is included in Finance revenues.
We transfer eligible finance receivables into retail note owner trusts or wholesale note owner trusts in order to issue asset-backed securities. These trusts are VIEs of which we are determined to be the primary beneficiary and, therefore, the assets and liabilities of the trusts are included in our Consolidated Balance Sheets. The outstanding balance of finance receivables transferred into these VIEs was $917 million and $1.0 billion as of July 31, 2016 and October 31, 2015, respectively. Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $54 million and $96 million as of July 31, 2016 and October 31, 2015, respectively. For more information on assets and liabilities of consolidated VIEs and other securitizations accounted for as secured borrowings by our Financial Services segment, see Note 1, Summary of Significant Accounting Policies.

15




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


Finance Revenues
The following table presents the components of our Finance revenues in our Consolidated Statements of Operations:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions)
2016

2015
 
2016
 
2015
Retail notes and finance leases revenue
$
9

 
$
12

 
$
28

 
$
37

Wholesale notes interest
29

 
27

 
81

 
75

Operating lease revenue
17

 
16

 
49

 
46

Retail and wholesale accounts interest
5

 
8

 
19

 
25

Gross finance revenues
60

 
63

 
177

 
183

Less: Intercompany revenues
(26
)
 
(26
)
 
(75
)
 
(75
)
Finance revenues
$
34

 
$
37

 
$
102

 
$
108

4. Allowance for Doubtful Accounts
Our two finance receivables portfolio segments, retail and wholesale, each consist of one class of receivable based on: (i) initial measurement attributes of the receivables, and (ii) the assessment and monitoring of risk and performance of the receivables. For more information, see Note 3, Finance Receivables.
The following tables present the activity related to our allowance for doubtful accounts for our retail portfolio segment, wholesale portfolio segment, and trade and other receivables:
 
Three Months Ended July 31, 2016
 
Three Months Ended July 31, 2015
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
21

 
$
4

 
$
26

 
$
51

 
$
25

 
$
3

 
$
30

 
$
58

Provision for doubtful accounts, net of recoveries
2

 
(1
)
 

 
1

 
2

 

 

 
2

Charge-off of accounts
(3
)
 

 
(1
)
 
(4
)
 

 

 
(1
)
 
(1
)
Other(A)
(2
)
 

 
2

 

 
(2
)
 

 
(3
)
 
(5
)
Allowance for doubtful accounts, at end of period
$
18

 
$
3

 
$
27

 
$
48

 
$
25

 
$
3

 
$
26

 
$
54

 
Nine Months Ended July 31, 2016
 
Nine Months Ended July 31, 2015
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Trade and
Other
Receivables
 
Total
Allowance for doubtful accounts, at beginning of period
$
22

 
$
4

 
$
22

 
$
48

 
$
24

 
$
3

 
$
38

 
$
65

Provision for doubtful accounts, net of recoveries
5

 
(1
)
 
4

 
8

 
7

 

 

 
7

Charge-off of accounts
(7
)
 

 
(2
)
 
(9
)
 
(1
)
 

 
(4
)
 
(5
)
Other(A)
(2
)
 

 
3

 
1

 
(5
)
 

 
(8
)
 
(13
)
Allowance for doubtful accounts, at end of period
$
18

 
$
3

 
$
27

 
$
48

 
$
25

 
$
3

 
$
26

 
$
54

_________________________
(A)
Amounts include impact from currency translation.
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.

16




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


The following table presents information regarding impaired finance receivables:
 
July 31, 2016
 
October 31, 2015
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Impaired finance receivables with specific loss reserves
$
18

 
$

 
$
18

 
$
21

 
$

 
$
21

Impaired finance receivables without specific loss reserves

 

 

 

 

 

Specific loss reserves on impaired finance receivables
9

 

 
9

 
9

 

 
9

Finance receivables on non-accrual status
18

 

 
18

 
21

 

 
21

The average balances of the impaired finance receivables in the retail portfolio were $18 million and $21 million during the nine months ended July 31, 2016 and 2015, respectively.
We use the aging of our receivables as well as other inputs when assessing credit quality. The following table presents the aging analysis for finance receivables:
 
July 31, 2016
 
October 31, 2015
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Current, and up to 30 days past due
$
356

 
$
1,226

 
$
1,582

 
$
486