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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________________
Form 10-Q
___________________________________________________
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended July 31, 2020

OR
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____.        
   Commission file number 1-9618
___________________________________________________

   NAVISTAR_LOGOA04A01A01A02A18.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)
(331332-5000
______________________________________________________
Registrant’s telephone number, including area code
 Not applicable
______________________________________________________
(Former name, former address, and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $0.10
NAV
New York Stock Exchange
Cumulative convertible junior preference stock, Series D (par value $1.00)
NAV-D
New York Stock Exchange
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 every Interactive Data File required to be submitted 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 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, a smaller reporting company, or an emerging growth company. See definition of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
þ
Accelerated filer
 
o
Emerging growth company
 
o
Non-accelerated filer
 
o
Smaller reporting company
 
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes       No  þ
As of August 31, 2020, the number of shares outstanding of the registrant’s common stock was 99,508,416, 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—Other Information
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 Section 27A of the Securities Act of 1933, as amended ("Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended ("Exchange Act"), and the Private Securities Litigation Reform Act of 1995. Such forward-looking statements only speak as of the date of this report and Navistar International Corporation assumes no obligation to update the information included in this report.
Such forward-looking statements include, but are not limited to, statements concerning:
estimates we have made in preparing our financial statements;
the implementation of, and expected benefits from, our strategic alliance with TRATON SE and certain of its subsidiaries and affiliates ("TRATON Group");
our development and launch 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 short-term and long-term goals and activities to accomplish such strategies and goals;
our ability to implement our strategy and the results we expect to achieve from the implementation of our strategy;
our expectations related to new product launches;
anticipated results from acquisitions, dispositions, 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 debt refinancing activities;
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;
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, other intangible assets, and property, plant and equipment;
costs relating to litigation and similar matters;
estimates relating to pension plan contributions and unfunded pension and postretirement benefits;
our expectations relating to commodity price risk, including the impact of tariff increases or potential new tariffs;
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations; and
our expectations relating to the anticipated impact that the novel strain of coronavirus (“COVID-19”) pandemic has on our business, financial condition, results of operations and cash flows.

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 fiscal year ended October 31, 2019, which was filed on December 17, 2019, and our Quarterly Report on Form 10-Q for the period ended April 30, 2020, filed on June 4, 2020, 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 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.

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)
2020
 
2019
 
2020

2019
Sales and revenues
 
 
 
 
 
 
 
Sales of manufactured products, net
$
1,639

 
$
2,996

 
$
5,310

 
$
8,330

Finance revenues
36

 
46

 
128

 
141

Sales and revenues, net
1,675

 
3,042

 
5,438

 
8,471

Costs and expenses
 
 
 
 
 
 
 
Costs of products sold
1,388

 
2,501

 
4,541

 
6,973

Restructuring charges
4

 

 
5

 
1

Asset impairment charges
12

 
3

 
25

 
6

Selling, general and administrative expenses
141

 
167

 
493

 
726

Engineering and product development costs
73

 
81

 
237

 
242

Interest expense
71

 
76

 
199

 
243

Other expense, net
14

 
25

 
27

 
140

Total costs and expenses
1,703

 
2,853

 
5,527

 
8,331

Equity in income of non-consolidated affiliates
2

 
1

 

 
4

Income (loss) before income tax
(26
)
 
190

 
(89
)
 
144

Income tax expense
(8
)
 
(29
)
 
(10
)
 
(9
)
Net income (loss)
(34
)
 
161

 
(99
)

135

Less: Net income attributable to non-controlling interests
3

 
5

 
12

 
16

Net income (loss) attributable to Navistar International Corporation
$
(37
)
 
$
156

 
$
(111
)
 
$
119

 
 
 
 
 
 
 

Income (loss) per share attributable to Navistar International Corporation:
 
 
 
 
 
 
 
Basic
$
(0.37
)
 
$
1.57

 
$
(1.11
)
 
$
1.20

Diluted
(0.37
)
 
1.56

 
(1.11
)
 
1.20

 
 
 
 
 
 
 
 
Weighted average shares outstanding:
 
 
 
 
 
 
 
Basic
99.7

 
99.4

 
99.6

 
99.2

Diluted
99.7

 
99.7

 
99.6

 
99.5


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,
2020

2019
 
2020
 
2019
Net income (loss)
$
(34
)
 
$
161

 
$
(99
)
 
$
135

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustment
32

 
9

 
(79
)
 
5

Defined benefit plans, net of tax
31

 
23

 
80

 
161

Total other comprehensive income
63

 
32

 
1

 
166

Comprehensive income (loss)
29

 
193

 
(98
)
 
301

Less: Net income attributable to non-controlling interests
3

 
5

 
12

 
16

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

 
$
188

 
$
(110
)
 
$
285


See Notes to Consolidated Financial Statements
6



Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets
 
As of July 31, 2020
 
As of October 31, 2019
(in millions, except per share data)
 
 
 
ASSETS
(Unaudited)
 
 
Current assets
 
 
 
Cash and cash equivalents
$
1,648

 
$
1,370

Restricted cash and cash equivalents
232

 
133

Trade and other receivables, net
266

 
338

Finance receivables, net
1,403

 
1,923

Inventories, net
896

 
911

Other current assets
247

 
277

Total current assets
4,692

 
4,952

Restricted cash
54

 
54

Trade and other receivables, net
8

 
10

Finance receivables, net
250

 
274

Investments in non-consolidated affiliates
30

 
31

Property and equipment (net of accumulated depreciation and amortization of $2,328 and $2,488, respectively)
1,241

 
1,309

Operating lease right of use assets
119

 

Goodwill
38

 
38

Intangible assets (net of accumulated amortization of $139 and $142, respectively)
20

 
25

Deferred taxes, net
115

 
117

Other noncurrent assets
108

 
107

Total assets
$
6,675

 
$
6,917

LIABILITIES and STOCKHOLDERS’ DEFICIT
 
 
 
Liabilities
 
 
 
Current liabilities
 
 
 
Notes payable and current maturities of long-term debt
$
865

 
$
871

Accounts payable
1,154

 
1,341

Other current liabilities
1,096

 
1,363

Total current liabilities
3,115

 
3,575

Long-term debt
4,694

 
4,317

Postretirement benefits liabilities
2,013

 
2,103

Other noncurrent liabilities
681

 
645

Total liabilities
10,503

 
10,640

Stockholders’ deficit
 
 
 
Series D convertible junior preference stock
2

 
2

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

 
10

Additional paid-in capital
2,726

 
2,730

Accumulated deficit
(4,333
)
 
(4,409
)
Accumulated other comprehensive loss
(2,100
)
 
(1,912
)
Common stock held in treasury, at cost (3.6 and 3.9 shares, respectively)
(135
)
 
(147
)
Total stockholders’ deficit attributable to Navistar International Corporation
(3,830
)
 
(3,726
)
Stockholders’ equity attributable to non-controlling interests
2

 
3

Total stockholders’ deficit
(3,828
)
 
(3,723
)
Total liabilities and stockholders’ deficit
$
6,675

 
$
6,917


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)
2020
 
2019
Cash flows from operating activities
 
 
 
Net income (loss)
$
(99
)
 
$
135

Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Depreciation and amortization
103

 
99

Depreciation of equipment leased to others
43

 
45

Deferred taxes, including change in valuation allowance
(5
)
 
(41
)
Asset impairment charges
25

 
6

Gain on sales of investments and businesses, net

 
(56
)
Amortization of debt issuance costs and discount
11

 
15

Stock-based compensation
14

 
20

Provision for doubtful accounts
13

 
8

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

 
(3
)
Write-off of debt issuance costs and discount

 
6

Other non-cash operating activities
(9
)
 
(6
)
Changes in other assets and liabilities, exclusive of the effects of businesses disposed
36

 
(124
)
Net cash provided by operating activities
132

 
104

Cash flows from investing activities
 
 
 
Maturities of marketable securities

 
98

Capital expenditures
(115
)
 
(90
)
Purchases of equipment leased to others
(69
)
 
(130
)
Proceeds from sales of property and equipment
11

 
12

Proceeds from sales of investments and businesses
10

 
100

Other investing activities
(4
)
 
1

Net cash used in investing activities
(167
)
 
(9
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of securitized debt
316

 
331

Principal payments on securitized debt
(45
)
 
(300
)
Net change in secured revolving credit facilities
(241
)
 
120

Proceeds from issuance of non-securitized debt
622

 
144

Principal payments on non-securitized debt
(108
)
 
(988
)
Net change in notes and debt outstanding under revolving credit facilities
(90
)
 
469

Debt issuance costs
(17
)
 
(9
)
Proceeds from financed lease obligations

 
13

Proceeds from exercise of stock options
3

 
3

Dividends paid by subsidiaries to non-controlling interest
(13
)
 
(18
)
Other financing activities
(2
)
 
(2
)
Net cash provided by (used in) financing activities
425

 
(237
)
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(13
)
 
(7
)
Increase (decrease) in cash, cash equivalents and restricted cash
377

 
(149
)
Cash, cash equivalents and restricted cash at beginning of the period
1,557

 
1,445

Cash, cash equivalents and restricted cash at end of the period
$
1,934

 
$
1,296


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, 2019
$
2

 
$
10

 
$
2,730

 
$
(4,409
)
 
$
(1,912
)
 
$
(147
)
 
$
3

 
$
(3,723
)
Net income (loss)



 

 
(36
)
 

 

 
4

 
(32
)
Total other comprehensive income

 

 

 

 
17

 

 

 
17

Reclassification of stranded tax effects

 

 

 
189

 
(189
)
 

 

 

Stock-based compensation

 

 
2

 

 

 

 

 
2

Stock ownership programs

 

 
(2
)
 

 

 
4

 

 
2

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(5
)
 
(5
)
Balance as of January 31, 2020
$
2


$
10


$
2,730


$
(4,256
)

$
(2,084
)

$
(143
)

$
2


$
(3,739
)
Net income (loss)



 

 
(38
)
 

 

 
5

 
(33
)
Total other comprehensive loss

 

 

 

 
(79
)
 

 

 
(79
)
Stock-based compensation

 

 
1

 

 

 

 

 
1

Stock ownership programs

 

 
(6
)
 
(2
)
 

 
7

 

 
(1
)
Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(5
)
 
(5
)
Balance as of April 30, 2020
$
2

 
$
10

 
$
2,725

 
$
(4,296
)
 
$
(2,163
)
 
$
(136
)
 
$
2

 
$
(3,856
)
Net income (loss)



 

 
(37
)
 

 

 
3

 
(34
)
Total other comprehensive income

 

 

 

 
63

 

 

 
63

Stock-based compensation

 

 
1

 

 

 

 

 
1

Stock ownership programs

 

 

 

 

 
1

 

 
1

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(3
)
 
(3
)
Balance as of July 31, 2020
$
2

 
$
10

 
$
2,726

 
$
(4,333
)
 
$
(2,100
)
 
$
(135
)
 
$
2

 
$
(3,828
)

See Notes to Consolidated Financial Statements
9



Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders' Deficit - (Continued)
(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, 2018
$
2

 
$
10

 
$
2,731

 
$
(4,593
)
 
$
(1,920
)
 
$
(161
)
 
$
5

 
$
(3,926
)
Net income






11






6


17

Total other comprehensive income








129






129

ASC-606 modified retrospective adoption






(27
)







(27
)
Stock-based compensation




2










2

Stock ownership programs




(1
)





1





Cash dividends paid to non-controlling interest












(8
)

(8
)
Balance as of January 31, 2019
$
2

 
$
10

 
$
2,732

 
$
(4,609
)
 
$
(1,791
)
 
$
(160
)
 
$
3

 
$
(3,813
)
Net income (loss)
$

 
$

 
$

 
$
(48
)
 
$


$

 
$
5

 
$
(43
)
Total other comprehensive income

 

 

 

 
5

 

 

 
5

Stock-based compensation

 

 
5

 

 

 

 

 
5

Stock ownership programs

 

 
(9
)
 

 

 
8

 

 
(1
)
Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(5
)
 
(5
)
Balance as of April 30, 2019
$
2

 
$
10

 
$
2,728

 
$
(4,657
)
 
$
(1,786
)
 
$
(152
)
 
$
3

 
$
(3,852
)
Net income
$

 
$

 
$

 
$
156

 
$


$

 
$
5

 
$
161

Total other comprehensive income

 

 

 

 
32

 

 

 
32

Stock-based compensation

 

 
2

 

 

 

 

 
2

Stock ownership programs

 

 

 

 

 
2

 

 
2

Cash dividends paid to non-controlling interest

 

 

 

 

 

 
(5
)
 
(5
)
Balance as of July 31, 2019
$
2

 
$
10

 
$
2,730

 
$
(4,501
)
 
$
(1,754
)
 
$
(150
)
 
$
3

 
$
(3,660
)


See Notes to Consolidated Financial Statements
10



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 13, Segment Reporting.
Our fiscal year ends on October 31. As such, all references to 2020, 2019, and other years 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 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, 2019, 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 $23 million and $32 million as of July 31, 2020 and October 31, 2019, respectively, and liabilities of $5 million and $4 million, respectively. As of July 31, 2020 and October 31, 2019, assets include $5 million and $2 million of cash and cash equivalents, respectively, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have recourse to our general credit. In October 2019, Ford notified us of its intention to dissolve the BDP joint venture effective October 2021.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of $973 million and $927 million as of July 31, 2020 and October 31, 2019, respectively, and liabilities of $900 million and $838 million as of July 31, 2020 and October 31, 2019, 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 $293 million and $537 million as of July 31, 2020 and October 31, 2019, respectively, and corresponding liabilities of $216 million and $279 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.

11




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 (loss) of non-consolidated affiliates includes our share of the net income (loss) of these entities.
Related Party Transactions
We have a series of commercial relationships and agreements with TRATON SE and certain of its subsidiaries and affiliates ("TRATON Group") for royalties related to use of certain engine technology, contract manufacturing operations performed by us, the sale of engines, the sale and purchase of parts, and a procurement joint venture. We also have development agreements with TRATON Group involving certain engine and transmission projects. This development work is being expensed as incurred. During the quarter, we informed MAN, a subsidiary of the TRATON Group, of the cancellation of a certain engine program. The parties disagree about the effects of the cancellation under the terms of the applicable agreement and are having commercial discussions related to the consequences of the program cancellation. The ultimate resolution may result in additional expenses which could be material. We are unable to estimate the amount of these expenses at this time. Revenue recognized for the three months and nine months ended July 31, 2020 was approximately $29 million and $72 million, respectively, compared to $42 million and $113 million in the comparable prior year periods. Net expense incurred for the three months and nine months ended July 31, 2020 was $13 million and $37 million, respectively, compared to $11 million and $29 million in the respective prior year periods, included primarily in Engineering and product development costs on our Consolidated Statements of Operations. Our receivable from TRATON Group was $7 million and $13 million as of July 31, 2020 and October 31, 2019, respectively. Our payable to TRATON Group was $84 million and $55 million as of July 31, 2020 and October 31, 2019, respectively.
We have an exclusive long-term agreement to supply military and commercial parts and chassis to our former defense business, ND Holdings, LLC (“Navistar Defense”), in which we retain a 30% ownership interest. We also entered into an intellectual property agreement and a transition services agreement. For the three and nine months ended July 31, 2020, revenue recognized was approximately $12 million and $37 million, respectively, compared to $9 million and $43 million in the respective prior year periods. As of July 31, 2020 and October 31, 2019, our receivables from Navistar Defense were $27 million and $29 million, respectively.
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is principally determined using the first-in, first-out method. Our gross used truck inventory was $200 million at July 31, 2020 and at October 31, 2019, offset by reserves of $63 million and $37 million, respectively.
Property and Equipment
We report land, buildings, leasehold improvements, machinery and equipment (including tooling and pattern equipment), furniture, fixtures, and equipment, and equipment leased to others at cost, net of depreciation. We initially record assets under finance lease obligations at the present value of the aggregate future minimum lease payments. We depreciate our assets using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets.
We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the carrying value. It is reasonably possible that within the next twelve months, we could recognize additional impairment charges for certain trucks under operating leases where Navistar is the lessor, which could be material, if we experience continued declines in excess of our forecasted expected residual values, as a result of the COVID-19 pandemic, the demand for used trucks or a change in the mix of sales through various market channels. For more information regarding asset impairment charges see Note 3, Restructuring, Impairments and Divestitures.

12




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:
 
Nine Months Ended July 31,
(in millions)
2020
 
2019
Balance at beginning of period
$
510

 
$
529

Costs accrued and revenues deferred
113

 
182

Adjustments to pre-existing warranties(A)
26

 
7

Payments and revenues recognized
(195
)
 
(208
)
Other adjustments(B)

 
12

Balance at end of period
454

 
522

Less: Current portion
213

 
247

Noncurrent accrued product warranty and deferred warranty revenue
$
241

 
$
275

_________________________
(A)
Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior fiscal 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.
(B)
Other adjustments in 2019 include a $14 million increase in revenues deferred in connection with the adoption of the new revenue standard (as defined below regarding Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606), partially offset by a $2 million reduction in liability related to the sale of a majority interest in Navistar Defense.
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, tax contingency accruals and valuation allowances, product warranty accruals, 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, 2020, approximately 6,600, or 97%, of our hourly workers and approximately 700, or 13%, 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).
Due to disruptions in our supply chain resulting from the COVID-19 pandemic, our global manufacturing activities at certain of our production facilities have been impacted. Some of our suppliers are the sole source for a particular supply item (e.g., the majority of engines, parts and manufactured components) and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required by another supplier in order to provide the component or materials. We continue to monitor our supply chain, though production has resumed by us and our suppliers. Production volumes may be volatile in the near future due to supplier constraints, which may materially impact the results of our operations.
Recently Adopted Accounting Standards
In February 2018, the FASB issued Accounting Standard Update ("ASU") No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". This ASU provides guidance on a reclassification from accumulated other comprehensive income to retained earnings for the effect of the tax rate change resulting from the Tax Cuts and Jobs Act of 2017 (the "Tax Act"). The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. We adopted this ASU on November 1, 2019 which resulted in a decrease to Accumulated deficit and an increase of Accumulated other comprehensive loss on our Consolidated Balance Sheet in the amount of $189 million related to the reclassification of the stranded tax effects.

13




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



In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842), and subsequently issued various ASUs to clarify the implementation guidance in ASU 2016-02. 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 remained largely unchanged. We adopted this ASU by using the optional modified retrospective basis on November 1, 2019, with no effect on our Accumulated deficit.
We elected the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs, as well as the practical expedient related to land easements. We did not elect the use-of-hindsight. For lessor accounting, we elected to exclude taxes collected from customers, such as sales, use and value added, from the measurement of lease income and expense.
We evaluated our lease population to assess the effect of the guidance on our consolidated financial statements and recorded right of use assets for operating leases related to certain property and equipment of $111 million and lease liabilities of $114 million. The new lease standard also resulted in changes in the classification of certain sales that were previously recorded as borrowings, as we retained control of the related equipment, in Long-term debt in our Consolidated Balance Sheets. Under the new lease standard, on a prospective basis, these transactions are classified as operating lease liabilities recognized as Other current liabilities and Other noncurrent liabilities in our Consolidated Balance Sheets. In addition, the new lease standard requires lessors to classify cash receipts from leases within operating activities. As a result, cash receipts from operating leases which were accounted for as borrowings are presented as an operating cash inflow rather than the previous presentation as a financing cash inflow.
The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. For more information on leases, refer to Note 7, Leases.
Recently Issued Accounting Standards
In December 2019, the FASB issued Accounting Standard Update ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". This ASU simplifies the accounting for income taxes by removing certain exceptions previously included in the guidance. In addition, the ASU provides new guidance on accounting for specific taxes and minor codification improvements. This ASU is effective for us in the first quarter of fiscal year 2022, with early adoption permitted. 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: Measurement of Credit Losses on Financial Instruments” (Topic 326), and subsequently issued various ASUs to clarify the implementation guidance in ASU 2016-13. This 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. This ASU is effective for us in the first quarter of fiscal year 2021. The impact of this ASU on our consolidated financial statements will primarily result from our Financial Services operations and certain financial guarantees. We have developed models that establish a coefficient between commonly available economic indicators and historical loss rates and default probabilities from which we expect to estimate credit losses throughout the amortization period of our finance and trade receivables and certain other credit exposures. We are currently documenting and testing the policies and controls needed to govern those estimates. The impact will largely depend on economic conditions and forecasts existing at the time of adoption.
2. Revenue
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.

14




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



Disaggregation of Revenue
The following tables disaggregate our external revenue by product type:
(in millions)
Truck
 
Parts
 
Global Operations
 
Financial
Services
 
Corporate
and
Eliminations
 
Total
Three Months Ended July 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Truck products and services(A)
$
1,040

 
$

 
$

 
$

 
$
3

 
$
1,043

Truck contract manufacturing
71

 

 

 

 

 
71

Used trucks
42

 

 

 

 

 
42

Engines

 
48

 
35

 

 

 
83

Parts
1

 
365

 
11

 

 

 
377

Extended warranty contracts
23

 

 

 

 

 
23

Sales of manufactured products, net
1,177

 
413

 
46

 

 
3

 
1,639

Retail financing(C)

 

 

 
33

 
(3
)
 
30

Wholesale financing(C)

 

 

 
6

 

 
6

Finance revenues

 

 

 
39

 
(3
)
 
36

Sales and revenues, net
$
1,177

 
$
413

 
$
46

 
$
39

 
$

 
$
1,675

(in millions)
Truck
 
Parts
 
Global Operations
 
Financial
Services
 
Corporate
and
Eliminations
 
Total
Nine Months Ended July 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Truck products and services(A)
$
3,372

 
$

 
$

 
$

 
$
9

 
$
3,381

Truck contract manufacturing
227

 

 

 

 

 
227

Used trucks
125

 

 

 

 

 
125

Engines

 
147

 
118

 

 

 
265

Parts
2

 
1,200

 
36

 

 

 
1,238

Extended warranty contracts
74

 

 

 

 

 
74

Sales of manufactured products, net
3,800

 
1,347

 
154

 

 
9

 
5,310

Retail financing(C)

 

 

 
111

 
(7
)
 
104

Wholesale financing(C)

 

 

 
24

 

 
24

Finance revenues

 

 

 
135

 
(7
)
 
128

Sales and revenues, net
$
3,800

 
$
1,347

 
$
154

 
$
135

 
$
2

 
$
5,438


15




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



(in millions)
Truck
 
Parts
 
Global Operations
 
Financial
Services
 
Corporate
and
Eliminations
 
Total
Three Months Ended July 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Truck products and services(A)
$
2,115

 
$

 
$

 
$

 
$
3

 
$
2,118

Truck contract manufacturing
144

 

 

 

 

 
144

Used trucks
54

 

 

 

 

 
54

Engines

 
73

 
63

 

 

 
136

Parts
2

 
496

 
19

 

 

 
517

Extended warranty contracts
27

 

 

 

 

 
27

Sales of manufactured products, net
2,342

 
569

 
82

 

 
3

 
2,996

Retail financing(C)

 

 

 
35

 

 
35

Wholesale financing(C)

 

 

 
11

 

 
11

Finance revenues

 

 

 
46

 

 
46

Sales and revenues, net
$
2,342

 
$
569

 
$
82

 
$
46

 
$
3

 
$
3,042


(in millions)
Truck
 
Parts
 
Global Operations
 
Financial
Services
 
Corporate
and
Eliminations
 
Total
Nine Months Ended July 31, 2019
 
 
 
 
 
 
 
 
 
 
 
Truck products and services(A)(B)
$
5,891

 
$

 
$

 
$

 
$
9

 
$
5,900

Truck contract manufacturing
274

 

 

 

 

 
274

Used trucks
151

 

 

 

 

 
151

Engines

 
217

 
168

 

 

 
385

Parts
4

 
1,476

 
55

 

 

 
1,535

Extended warranty contracts
85

 

 

 

 

 
85

Sales of manufactured products, net
6,405

 
1,693

 
223

 

 
9

 
8,330

Retail financing(C)

 

 

 
106

 

 
106

Wholesale financing(C)

 

 

 
35

 

 
35

Finance revenues

 

 

 
141

 

 
141

Sales and revenues, net
$
6,405

 
$
1,693

 
$
223

 
$
141

 
$
9

 
$
8,471

_________________________
(A)
Includes other markets primarily consisting of Bus, Export Truck and Mexico.
(B)
Includes military sales of $62 million. In December 2018, we completed the sale of a 70% equity interest in Navistar Defense. See Note 3, Restructuring, Impairments and Divestitures for additional information.
(C)
Retail financing revenues in the Financial Services segment include interest revenue of $13 million and $44 million for the three and nine months ended July 31, 2020, respectively, and $15 million and $42 million for the three and nine months ended July 31, 2019, respectively. Wholesale financing revenues in the Financial Services segment include interest revenue of $6 million and $24 million for the three and nine months ended July 31, 2020, respectively, and $11 million and $35 million for the three and nine months ended July 31, 2019, respectively.
Trucks, Truck Contract Manufacturing, Used trucks, Engines and Parts
Revenue for our truck products and services, certain truck contract manufacturing, used trucks, certain engines and parts is recognized at a point in time when control is transferred to the customer. Our trucks, used trucks, engines, and parts have a standard warranty, the estimated cost of which is included in Costs of products sold.

16




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



Prior to our sale of a 70% equity interest in Navistar Defense, certain truck sales to the U.S. government of non-commercial products manufactured to government specification were recognized over time as the goods were manufactured. Certain truck and other contract manufacturing arrangements, unrelated to Navistar Defense, continue to be recognized over time. We recognize revenue over time when the finished assets have no alternative use and we have a right to payment for work performed in the event of a contract cancellation or when we create or enhance an asset that the customer controls as it is being created or enhanced. We recognize revenue using a cost-based input method because it best depicts our progress in satisfying the performance obligation. The selection of the method requires judgement and is based on the nature of the products or services to be provided.
Certain terms or modifications to U.S. and foreign government contracts may have been unpriced; that is, the work to be performed was defined, but the related contract price was to be negotiated at a later date. In situations where we could reliably estimate a profit margin in excess of costs incurred, revenue and gross margin were recorded for delivered contract items. Otherwise, revenue was recognized when the price had been agreed with the applicable government and costs were deferred when it was probable that the costs would be recovered.
An allowance for parts sales returns is recorded as a reduction to revenue based upon estimates using historical information about returns. This includes when we are a reseller of certain service parts that include a core component. A core component is the basic forging or casting, such as an engine block, that can be remanufactured by a certified remanufacturing supplier. When a dealer returns a core component within the specified eligibility period, we refund the core return deposit, which is applied to the customer's account balance.
Extended Warranty Contracts
We sell separately-priced extended warranty contracts that can be purchased for periods ranging from one to ten years. Warranty revenue related to extended warranty contracts is recognized over the life of the contract in proportion to the costs expected to be incurred in satisfying the obligation under the contract. Costs under extended warranty contracts are expensed as incurred. We recognize losses on defined pools of extended warranty contracts when the remaining expected costs for a given pool of contracts exceed the related deferred revenue.
Retail and Wholesale Financing
Financial Services operations recognize revenue from retail notes, finance leases, wholesale notes, retail accounts, and wholesale accounts as Finance revenues over the term of the receivables utilizing the effective interest method. Certain direct origination costs and fees are deferred and recognized as adjustments to yield and are reported as part of interest income over the life of the receivable. Loans are impaired when we conclude it is probable the customer will not be able to make full payment according to contractual terms after reviewing the customer's financial performance, payment ability, capital-raising potential, management style, economic situation, and other factors. The accrual of interest on such loans is suspended when the loan becomes 90 days or more past due. Finance revenues on these loans are recognized only to the extent cash payments are received. We resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured.
Operating lease revenues are recognized on a straight-line basis over the life of the lease. Recognition of revenue is suspended when management determines the collection of future revenue is not probable. Recognition of revenue is resumed if collection again becomes probable.
Performance Obligations
Generally, revenue from our sales is recognized at a point in time when control is transferred to the customer which generally occurs upon shipment from our plants and distribution centers or at the time of delivery to our customers. The standard payment term is less than 30 days, but we may extend payment terms on selected receivables. We have elected the practical expedient that allows the Company to not assess whether a contract has a significant financing component when the time between cash collection and transfer of control is less than one year.
We recognize price allowances, returns and the cost of incentive programs in the normal course of business based on programs offered to dealers or fleet customers. Estimates are made for sales incentives on certain vehicles in dealer stock inventory based on historical experience and announced special programs. The estimated sales incentives and returns are adjusted at the earlier of when the estimate of consideration we expect to receive changes or the consideration becomes fixed. For contracts where there is more than one performance obligation, discounts are allocated to all of the performance obligations in the contract based on their relative standalone selling prices.

17




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



Revenue on bill and hold arrangements is not recognized until after the customer is notified that the product (i) has been completed according to customer specifications, (ii) has passed our quality control inspections, (iii) is ready for physical transfer to the customer and (iv) the reason for the bill and hold arrangement is substantive.
We have elected to account for shipping and handling activities that occur subsequent to transfer of control as a fulfillment cost and not as a separate performance obligation. The costs are recognized as an expense in Costs of products sold when control of the related performance obligation has transferred to the customer. We do not disclose the transaction price related to order backlogs as they have an original expected duration of less than one year.
We exclude from revenue any sales taxes, value added taxes and other related taxes collected from customers.
The impact of changes to revenue related to performance obligations satisfied in prior periods was not material to our consolidated financial statements in the third quarter of 2020.
Contract Balances
Most of our contracts are for a period of less than one year. We have certain long-term contract manufacturing and extended warranty contracts that extend beyond one year. We record deferred revenue, primarily related to extended warranty contracts, when we receive consideration from a customer prior to transferring goods or services under the terms of a sales contract. This deferred revenue represents contract liabilities which are included in our Consolidated Balance Sheets as components of current and long-term liabilities. The amount of manufacturing contract liabilities is not material to our consolidated financial statements.
The amount of deferred revenue related to extended warranty contracts was $249 million and $279 million at July 31, 2020 and October 31, 2019, respectively. Revenue recognized under our extended warranty programs was $23 million and $74 million for the three and nine months ended July 31, 2020, respectively, and $27 million and $85 million for the three and nine months ended July 31, 2019, respectively. We expect to recognize revenue under our extended warranty programs of approximately $31 million in the remainder of 2020, $88 million in 2021, $68 million in 2022, $40 million in 2023, $18 million in 2024, and an aggregate amount of $4 million thereafter.
Contract Costs
We recognize incremental costs to obtain contracts as an asset if they are recoverable. We recognize the costs of obtaining a contract as an expense when the related contract period is less than one year. We have no contract costs capitalized as of July 31, 2020 or October 31, 2019.
3. Restructuring, Impairments and Divestitures
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.
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 evaluate 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.
Asset Impairments
In the second quarter of 2020, we identified a triggering event related to our operations in Brazil due to the impacts of the COVID-19 pandemic, which resulted in declines in actual and forecasted results. We performed an impairment test as of April 30, 2020 on the long-lived assets of the Brazilian asset group. As a result, we recorded charges of $12 million in our Global Operations segment.
In the three months and nine months ended July 31, 2020, we concluded that we had triggering events primarily related to certain trucks under operating leases, due to declines in expected residual values. As a result, we recorded charges of $12 million and $13 million, respectively, in our Truck segment.

18




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



In the three and nine months ended July 31, 2019, we concluded that we had triggering events related to certain assets under operating leases. As a result, we recorded charges of $3 million and $6 million, respectively, in our Truck segment.
These charges were recorded in Asset impairment charges in our Consolidated Statements of Operations.
See Note 11, Fair Value Measurements, for information on the valuation of impaired operating leases and other long-lived assets.
Navistar Defense Divestiture
In December 2018, we completed the sale of a 70% equity interest in Navistar Defense to an affiliate of Cerberus Capital Management, L.P. In connection with the closing of the transaction, we entered into an exclusive long-term agreement to supply military and commercial parts and chassis to Navistar Defense. We also entered into an intellectual property agreement and a transition services agreement concurrent with the sale.
The Navistar Defense purchase price, adjusted for certain calendar year 2018 chargeouts, was approximately $140 million, which was subject to additional adjustments for working capital, transfers of certain liabilities and commitments, and other items. In the nine months ended July 31, 2019, we recognized a gain on the sale in our Truck segment of $51 million in Other expense, net in our Consolidated Statements of Operations.
4. 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 were $2.3 billion and $2.8 billion as of July 31, 2020 and October 31, 2019, respectively.
Included in total assets of our Financial Services operations were finance receivables of $1.7 billion and $2.2 billion as of July 31, 2020 and October 31, 2019, 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.
In connection with the COVID-19 pandemic, we have received extension requests from certain customers in the retail note and finance lease portfolios. These requests were generally granted for short-term extensions (6 months or less), without interest or principal forgiveness. The related credit exposure was not material to the consolidated financial statements.
Our Finance receivables, net in our Consolidated Balance Sheets consist of the following:
(in millions)
As of July 31, 2020
 
As of October 31, 2019
Retail portfolio
$
550

 
$
854

Wholesale portfolio
1,128

 
1,366

Total finance receivables
1,678

 
2,220

Less: Allowance for doubtful accounts
25

 
23

Total finance receivables, net
1,653

 
2,197

Less: Current portion, net(A)
1,403

 
1,923

Noncurrent portion, net
$
250

 
$
274

_________________________
(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 July 31, 2020 or October 31, 2019, 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.

19




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



We transfer eligible finance receivables into 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 $808 million and $874 million as of July 31, 2020 and October 31, 2019, respectively.
Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $137 million and $358 million as of July 31, 2020 and October 31, 2019, 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.
Finance Revenues
The following table presents the components of our Finance revenues from our Financial Services segment:
 
Three Months Ended July 31,
 
Nine Months Ended July 31,
(in millions)
2020

2019
 
2020
 
2019
Retail notes and finance leases revenue
$
14

 
$
16

 
$
48

 
$
45

Wholesale notes interest
14

 
31

 
49

 
93

Operating lease revenue
20

 
19

 
64

 
62

Retail and wholesale accounts interest
1

 
8

 
9

 
26

Gross finance revenues
49

 
74

 
170

 
226

Less: Intercompany revenues
10

 
28

 
35

 
85

Finance revenues
$
39

 
$
46

 
$
135

 
$
141


5. 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 4, 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, 2020
 
Three Months Ended July 31, 2019
(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

 
$
2

 
$
20

 
$
43

 
$
22

 
$
3

 
$
29

 
$
54