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 2017
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 April 30, 2017

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
___________________________________________________

  navistarlogo2015a05.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
 
o
  
Accelerated filer
 
þ
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 May 31, 2017, the number of shares outstanding of the registrant’s common stock was 98,148,404, 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 implementation of our new strategic alliance with Volkswagen Truck & Bus GmbH ("VW T&B");
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 strategy focused on growing the core business, seeking new sources of revenue, driving operational excellence, leveraging the VW T&B alliance, investing in our people, and improving our financial performance, as well as the results we expect to achieve from the implementation of our 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 charges and timing of cash payments related thereto, and operational flexibility, savings, and efficiencies from such restructurings;
our expectations relating to the potential 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 wholesale and retail finance receivables and revenues;
our expectations and estimates relating to our used truck inventory;
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.

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 fiscal year ended October 31, 2016 which was filed on December 20, 2016, 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.

3





Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (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 April 30,
 
Six Months Ended April 30,
(in millions, except per share data)
2017
 
2016
 
2017

2016
Sales and revenues
 
 
 
 
 
 
 
Sales of manufactured products, net
$
2,063

 
$
2,164

 
$
3,692

 
$
3,894

Finance revenues
33

 
33

 
67

 
68

Sales and revenues, net
2,096

 
2,197

 
3,759

 
3,962

Costs and expenses
 
 
 
 
 
 
 
Costs of products sold
1,776

 
1,845

 
3,146

 
3,311

Restructuring charges
2

 
3

 
9

 
6

Asset impairment charges
5

 
3

 
7

 
5

Selling, general and administrative expenses
221

 
202

 
421

 
407

Engineering and product development costs
65

 
61

 
128

 
119

Interest expense
89

 
81

 
171

 
162

Other expense (income), net
9

 
(25
)
 
1

 
(47
)
Total costs and expenses
2,167

 
2,170

 
3,883

 
3,963

Equity in income of non-consolidated affiliates
2

 
2

 
5

 
1

Income (loss) before income taxes
(69
)
 
29

 
(119
)
 

Income tax expense
(6
)
 
(16
)
 
(10
)
 
(11
)
Net income (loss)
(75
)
 
13

 
(129
)

(11
)
Less: Net income attributable to non-controlling interests
5

 
9

 
13

 
18

Net income (loss) attributable to Navistar International Corporation
$
(80
)
 
$
4

 
$
(142
)
 
$
(29
)
 
 
 
 
 
 
 

Income (loss) per share attributable to Navistar International Corporation:
 
 
 
 
 
 
 
Basic
$
(0.86
)
 
$
0.05

 
$
(1.62
)
 
$
(0.35
)
Diluted
(0.86
)
 
0.05

 
(1.62
)
 
(0.35
)
 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
93.3

 
81.7

 
87.5

 
81.7

Diluted
93.3

 
82.0

 
87.5

 
81.7


See Notes to Consolidated Financial Statements
5



Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited) 
(in millions)
Three Months Ended April 30,
 
Six Months Ended April 30,
2017

2016
 
2017
 
2016
Net income (loss)
$
(75
)
 
$
13

 
$
(129
)
 
$
(11
)
Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
4

 
50

 
(8
)
 
17

Defined benefit plans, net of tax
34

 
15

 
69

 
48

Total other comprehensive income
38

 
65

 
61

 
65

Comprehensive income (loss)
(37
)
 
78

 
(68
)
 
54

Less: Net income attributable to non-controlling interests
5

 
9

 
13

 
18

Total comprehensive income (loss) attributable to Navistar International Corporation
$
(42
)
 
$
69

 
$
(81
)
 
$
36


See Notes to Consolidated Financial Statements
6



Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
 
April 30,
2017
 
October 31,
2016
(in millions, except per share data)
 
 
 
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
771

 
$
804

Restricted cash and cash equivalents
112

 
64

Marketable securities
178

 
46

Trade and other receivables, net
300

 
276

Finance receivables, net
1,459

 
1,457

Inventories, net
946

 
944

Other current assets
181

 
168

Total current assets
3,947

 
3,759

Restricted cash
48

 
48

Trade and other receivables, net
17

 
16

Finance receivables, net
232

 
220

Investments in non-consolidated affiliates
55

 
53

Property and equipment (net of accumulated depreciation and amortization of $2,480 and $2,553, respectively)
1,324

 
1,241

Goodwill
38

 
38

Intangible assets (net of accumulated amortization of $130 and $124, respectively)
46

 
53

Deferred taxes, net
161

 
161

Other noncurrent assets
84

 
64

Total assets
$
5,952

 
$
5,653

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
744

 
$
907

Accounts payable
1,240

 
1,113

Other current liabilities
1,138

 
1,183

Total current liabilities
3,122

 
3,203

Long-term debt
4,321

 
3,997

Postretirement benefits liabilities
2,941

 
3,023

Other noncurrent liabilities
695

 
723

Total liabilities
11,079

 
10,946

Stockholders’ deficit
 
 
 
Series D convertible junior preference stock
2

 
2

Common stock (103.1 and 86.8 shares issued, respectively, and $0.10 par value per share and 220 shares authorized at both dates)
10

 
9

Additional paid-in capital
2,732

 
2,499

Accumulated deficit
(5,105
)
 
(4,963
)
Accumulated other comprehensive loss
(2,579
)
 
(2,640
)
Common stock held in treasury, at cost (4.9 and 5.2 shares, respectively)
(191
)
 
(205
)
Total stockholders’ deficit attributable to Navistar International Corporation
(5,131
)
 
(5,298
)
Stockholders’ equity attributable to non-controlling interests
4

 
5

Total stockholders’ deficit
(5,127
)
 
(5,293
)
Total liabilities and stockholders’ deficit
$
5,952

 
$
5,653


See Notes to Consolidated Financial Statements
7



Navistar International Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended April 30,
(in millions)
2017
 
2016
Cash flows from operating activities
 
 
 
Net loss
$
(129
)
 
$
(11
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Depreciation and amortization
75

 
74

Depreciation of equipment leased to others
37

 
37

Deferred taxes, including change in valuation allowance
(2
)
 
(3
)
Asset impairment charges
7

 
5

Loss on sales of investments and businesses, net

 
2

Amortization of debt issuance costs and discount
23

 
17

Stock-based compensation
12

 
7

Provision for doubtful accounts, net of recoveries
7

 
8

Equity in income of non-consolidated affiliates, net of dividends
1

 

Write-off of debt issuance cost and discount
4

 

Other non-cash operating activities
(9
)
 
(8
)
Changes in other assets and liabilities, exclusive of the effects of businesses disposed
(133
)
 
(232
)
Net cash used in operating activities
(107
)
 
(104
)
Cash flows from investing activities
 
 
 
Purchases of marketable securities
(589
)
 
(283
)
Sales of marketable securities
440

 
177

Maturities of marketable securities
17

 
37

Net change in restricted cash and cash equivalents
(48
)
 
(19
)
Capital expenditures
(66
)
 
(53
)
Purchases of equipment leased to others
(37
)
 
(78
)
Proceeds from sales of property and equipment
14

 
17

Investments in non-consolidated affiliates
(2
)
 

Proceeds from sales of affiliates

 
36

Net cash used in investing activities
(271
)
 
(166
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
5

 
75

Principal payments on securitized debt
(56
)
 
(19
)
Net change in secured revolving credit facilities
21

 
38

Proceeds from issuance of non-securitized debt
383

 
110

Principal payments on non-securitized debt
(278
)
 
(162
)
Net change in notes and debt outstanding under revolving credit facilities
42

 
(105
)
Principal payments under financing arrangements and capital lease obligations
(1
)
 
(1
)
Debt issuance costs
(18
)
 
(1
)
Proceeds from financed lease obligations
16

 
12

Issuance of common stock
256

 

Stock issuance costs
(11
)
 

Proceeds from exercise of stock options
3

 

Dividends paid by subsidiaries to non-controlling interest
(15
)
 
(19
)
Other financing activities
(3
)
 
1

Net cash provided by (used in) financing activities
344

 
(71
)
Effect of exchange rate changes on cash and cash equivalents
1

 
18

Decrease in cash and cash equivalents
(33
)
 
(323
)
Cash and cash equivalents at beginning of the period
804

 
912

Cash and cash equivalents at end of the period
$
771

 
$
589


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, 2016
$
2

 
$
9

 
$
2,499

 
$
(4,963
)
 
$
(2,640
)
 
$
(205
)
 
$
5

 
$
(5,293
)
Net income (loss)

 

 

 
(142
)
 

 

 
13

 
(129
)
Total other comprehensive income

 

 

 

 
61

 

 

 
61

Stock-based compensation

 

 
3

 

 

 

 

 
3

Stock ownership programs

 

 
(13
)
 

 

 
14

 

 
1

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(15
)
 
(15
)
Issuance of common stock

 
2

 
254

 

 

 

 

 
256

Stock issuance costs

 

 
(11
)
 

 

 

 

 
(11
)
Other

 
(1
)
 

 

 

 

 
1

 

Balance as of April 30, 2017
$
2

 
$
10

 
$
2,732

 
$
(5,105
)
 
$
(2,579
)
 
$
(191
)
 
$
4

 
$
(5,127
)
Balance as of October 31, 2015
$
2

 
$
9

 
$
2,499

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

 
$
(5,160
)
Net income (loss)

 

 

 
(29
)
 

 

 
18

 
(11
)
Total other comprehensive income

 

 

 

 
65

 

 

 
65

Stock-based compensation

 

 
2

 

 

 

 

 
2

Stock ownership programs

 

 
(4
)
 

 

 
4

 

 

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(19
)
 
(19
)
Acquisition of remaining ownership interest from non-controlling interest holder

 

 
1

 

 

 

 

 
1

Other

 

 

 

 

 

 
1

 
1

Balance as of April 30, 2016
$
2

 
$
9

 
$
2,498

 
$
(4,895
)
 
$
(2,536
)
 
$
(206
)
 
$
7

 
$
(5,121
)


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. ("NI") 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 11, Segment Reporting.
Our fiscal year ends on October 31. As such, all references to 2017 and 2016 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, 2016, 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, LLC ("BDP") joint venture with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of $43 million and $51 million and liabilities of $17 million and $16 million as of April 30, 2017 and October 31, 2016, respectively, including $12 million and $6 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.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of $943 million and $865 million as of April 30, 2017 and October 31, 2016, respectively, and liabilities of $703 million and $722 million as of April 30, 2017 and October 31, 2016, 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 $254 million and $249 million as of April 30, 2017 and October 31, 2016, respectively, and corresponding liabilities of $123 million and $136 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.

10




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

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.
Inventories
Inventories are valued at the lower of cost or market. Cost is principally determined using the first-in, first-out method. Our gross used truck inventory decreased to $342 million at April 30, 2017 from $410 million at October 31, 2016, offset by reserves of $216 million and $208 million, respectively.
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.
The following table presents our used truck reserve:
 
Six Months Ended April 30,
(in millions)
2017
 
2016
Balance at beginning of period
$
208

 
$
110

Additions charged to expense(A)
88

 
84

Deductions/Other adjustments(B)
(80
)
 
(26
)
Balance at end of period
$
216

 
$
168

_________________________
(A)
Additions charged to expense reflect the increase of the reserve for inventory on hand. During the second quarter of 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and lower domestic pricing to enable higher sales velocity. In the second quarter of 2017 and 2016, we recorded a charge of $60 million and $38 million, respectively, in Costs of Products Sold in our Consolidated Statements of Operations.
(B)
Deductions/Other adjustments reflect reductions of the reserve primarily related to the sale of units to certain export markets and our Mexican subsidiary currency translation adjustments.

11




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

Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity:
 
Six Months Ended April 30,
(in millions)
2017
 
2016
Balance at beginning of period
$
818

 
$
994

Costs accrued and revenues deferred(A)
87

 
94

Currency translation adjustment
(1
)
 
1

Adjustments to pre-existing warranties(B)
(10
)
 
51

Payments and revenues recognized(A)
(206
)
 
(233
)
Balance at end of period
688

 
907

Less: Current portion
352

 
429

Noncurrent accrued product warranty and deferred warranty revenue
$
336

 
$
478

_________________________
(A)
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 six months ended April 30, 2016, we have reclassified $25 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.
(B)
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 pre-existing charges primarily related to increases in both claim frequency and cost of repair across both the Medium Duty and Big Bore engine families. These charges increase the reserve for Navistar's standard warranty obligations as well as the loss positions related to our Big Bore extended service contract.
Extended Warranty Programs
The amount of deferred revenue related to extended warranty programs was $287 million and $325 million at April 30, 2017 and October 31, 2016, respectively. Revenue recognized under our extended warranty programs was $47 million and $81 million for the three and six months ended April 30, 2017, respectively, and $38 million and $76 million for the three and six months ended April 30, 2016, respectively.
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 April 30, 2017, approximately 6,300, or 95%, of our hourly workers and approximately 900, or 17%, 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, tax 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).

12




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

Recently Issued Accounting Standards
In January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, "Business Combinations" (Topic 805). This ASU provides a new framework for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This ASU creates an initial screening test (Step 1) that reduces the population of transactions that an entity needs to analyze to determine whether there is an input and substantive processes in the acquisition or disposal (Step 2). Fewer transactions are expected to involve acquiring or selling a business. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. Adoption will require a prospective transition. We do not expect the impact of this ASU to have a material effect on our consolidated financial statements.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows" (Topic 230). This ASU requires that a statement of cash flows explain the change during the period in the total of cash, and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. Adoption will require a retrospective transition. We do not expect the impact of this ASU to have a material effect on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes” (Topic 740). This ASU update requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. Adoption will require a modified retrospective transition. We are currently evaluating 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. Adoption will require a modified retrospective transition. Our effective date is November 1, 2020. We are currently evaluating 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 impact of this ASU on our consolidated financial statements.
In May 2014, the FASB issued 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 in the process of completing our initial assessment of the potential impact on our consolidated financial statements and have not concluded on our adoption methodology.

13




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

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 excludes pension and other postretirement contractual termination benefits:
(in millions)
Balance at October 31, 2016
 
Additions
 
Payments
 
Adjustments
 
Balance at April 30, 2017
Employee termination charges
$
5

 
$
8

 
$
(3
)
 
$
(1
)
 
$
9

Lease vacancy
1

 

 
(1
)
 

 

Other
1

 

 

 

 
1

Restructuring liability
$
7

 
$
8

 
$
(4
)
 
$
(1
)
 
$
10

(in millions)
Balance at
October 31, 2015
 
Additions
 
Payments
 
Adjustments
 
Balance at April 30, 2016
Employee termination charges
$
62

 
$
6

 
$
(49
)
 
$

 
$
19

Lease vacancy
5

 

 
(3
)
 

 
2

Other
1

 

 

 

 
1

Restructuring liability
$
68

 
$
6

 
$
(52
)
 
$

 
$
22

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. Unsuccessful efforts to appeal the ruling in the Ontario court system ended in December 2015. On April 25, 2016, we filed a qualified partial wind-up report for approval by the Financial Services Commission of Ontario ("FSCO"). On January 12, 2017, FSCO issued its approval of the partial wind-up report. On February 27, 2017, we finalized the resolution of statutory severance pay for former employees related to the closure of our Chatham, Ontario plant, resulting in a charge of $6 million in the first quarter of 2017. The charge is reported within Restructuring charges in our Consolidated Statements of Operations. Once the wind-up is complete, severance has been paid, and pension elections have been made by participants, there may be adjustments made to pension and post-retirement accruals which could be material. See Note 7, Postretirement benefits for further discussion.

14




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

Asset Impairments
In the six months ended April 30, 2017, we concluded that we had triggering events related to certain assets under operating leases. As a result, charges of $7 million were recorded in our Truck segment.
In the six months ended April 30, 2016, we concluded that we had a triggering event in connection with the potential sale of Pure Power Technologies, LLC ("PPT"), a components business focused on air and fuel systems, requiring the impairment of certain assets. As a result, charges of $3 million were recorded in our Truck segment. In February 2016, we completed the sale of PPT. In the six months ended April 30, 2016, we also concluded that we had a triggering event related to certain long-lived assets. As a result, charges of $2 million were recorded in our Truck segment.
These charges were recorded in Asset impairment charges in our Consolidated Statements of Operations.
See Note 9, Fair Value Measurements, for information on the valuation of impaired operating leases and other assets.
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 as of both April 30, 2017 and October 31, 2016. Included in total assets of our Financial Services operations are finance receivables of $1.7 billion as of both April 30, 2017 and October 31, 2016. 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)
April 30, 2017
 
October 31, 2016
Retail portfolio
$
545

 
$
499

Wholesale portfolio
1,169

 
1,199

Total finance receivables
1,714

 
1,698

Less: Allowance for doubtful accounts
23

 
21

Total finance receivables, net
1,691

 
1,677

Less: Current portion, net(A)
1,459

 
1,457

Noncurrent portion, net
$
232

 
$
220

_________________________
(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, 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 April 30, 2017 and October 31, 2016, 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 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 $854 million and $829 million as of April 30, 2017 and October 31, 2016, respectively. Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $126 million and $108 million as of April 30, 2017 and October 31, 2016, 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 April 30,
 
Six Months Ended April 30,
(in millions)
2017

2016
 
2017
 
2016
Retail notes and finance leases revenue
$
10

 
$
9

 
$
19

 
$
19

Wholesale notes interest
24

 
26

 
47

 
52

Operating lease revenue
16

 
16

 
33

 
32

Retail and wholesale accounts interest
6

 
7

 
11

 
14

Gross finance revenues
56

 
58

 
110

 
117

Less: Intercompany revenues
23

 
25

 
43

 
49

Finance revenues
$
33

 
$
33

 
$
67

 
$
68

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 April 30, 2017
 
Three Months Ended April 30, 2016
(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
$
19

 
$
2

 
$
28

 
$
49

 
$
19

 
$
4

 
$
23

 
$
46

Provision for doubtful accounts, net of recoveries
1

 

 

 
1

 
1

 

 
1

 
2

Charge-off of accounts
(1
)
 

 

 
(1
)
 
(1
)
 

 

 
(1
)
Other(A)
2

 

 

 
2

 
2

 

 
2

 
4

Allowance for doubtful accounts, at end of period
$
21

 
$
2

 
$
28

 
$
51

 
$
21

 
$
4

 
$
26

 
$
51

 
Six Months Ended April 30, 2017
 
Six Months Ended April 30, 2016
(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
$
19

 
$
2

 
$
28

 
$
49

 
$
22

 
$
4

 
$
22

 
$
48

Provision for doubtful accounts, net of recoveries
6

 

 
1

 
7

 
3

 

 
4

 
7

Charge-off of accounts
(4
)
 

 
(1
)
 
(5
)
 
(4
)
 

 
(1
)
 
(5
)
Other(A)

 

 

 

 

 

 
1

 
1

Allowance for doubtful accounts, at end of period
$
21

 
$
2

 
$
28

 
$
51

 
$
21

 
$
4

 
$
26

 
$
51

____________________

(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:
 
April 30, 2017
 
October 31, 2016
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Impaired finance receivables with specific loss reserves
$
23

 
$

 
$
23

 
$
15

 
$

 
$
15

Impaired finance receivables without specific loss reserves

 

 

 

 

 

Specific loss reserves on impaired finance receivables
10

 

 
10

 
8

 

 
8

Finance receivables on non-accrual status
23

 

 
23

 
15

 

 
15

The average balances of the impaired finance receivables in the retail portfolio were $17 million and $21 million during the six months ended April 30, 2017 and 2016, respectively. See Note 9, Fair Value Measurements, for information on the valuation of impaired finance receivables.
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:
 
April 30, 2017
 
October 31, 2016
(in millions)
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
 
Retail
Portfolio
 
Wholesale
Portfolio
 
Total
Current, and up to 30 days past due
$
505

 
$
1,166

 
$
1,671

 
$
449

 
$
1,198

 
$
1,647

30-90 days past due
24

 
1

 
25

 
37

 

 
37

Over 90 days past due
16

 
2

 
18

 
13

 
1

 
14

Total finance receivables
$
545

 
$
1,169

 
$
1,714

 
$
499

 
$
1,199

 
$
1,698

5. Inventories
The following table presents the components of Inventories in our Consolidated Balance Sheets:
(in millions)
April 30,
2017
 
October 31,
2016
Finished products
$
619

 
$
678

Work in process
57

 
46

Raw materials
270

 
220

Total inventories, net
$
946

 
$
944


17




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

6. Debt
The following tables present the components of Notes payable and current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheets:
(in millions)
April 30, 2017

October 31, 2016
Manufacturing operations
 
 
 
Senior Secured Term Loan Credit Facility, as amended, due 2020, net of unamortized discount of $12 and $14, respectively, and unamortized debt issuance costs of $13 and $7, respectively
$
1,002

 
$
1,009

8.25% Senior Notes, due 2022 net of unamortized discount of $14 and $15, respectively, and unamortized debt issuance costs of $15 and $12, respectively
1,421

 
1,173

4.50% Senior Subordinated Convertible Notes, due 2018, net of unamortized discount of $8 and $10, respectively, and unamortized debt issuance costs of $1 at both dates
192

 
189

4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $19 and $24, respectively, and unamortized debt issuance costs of $4 at both dates
388

 
383

Financing arrangements and capital lease obligations
38

 
42

Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040, net of unamortized debt issuance costs of $5 at both dates
220

 
220

Financed lease obligations
102

 
52

Other
20

 
28

Total Manufacturing operations debt
3,383

 
3,096

Less: Current portion
85

 
71

Net long-term Manufacturing operations debt
$
3,298

 
$
3,025

(in millions)
April 30, 2017
 
October 31, 2016
Financial Services operations
 
 
 
Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2022, net of unamortized debt issuance costs of $5 and $6, respectively
$
735

 
$
753

Bank credit facilities, at fixed and variable rates, due dates from 2017 through 2021, net of unamortized debt issuance costs of $2 and $3, respectively
766

 
861