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.
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.
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.
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.
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
|
|
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.
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.
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.
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.
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
|
|
|
Provision for doubtful accounts
|
4
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
Charge-offs
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
Recoveries
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Other(A)
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
—
|
|
|
2
|
|
|
1
|
|
|
Allowance for doubtful accounts at end of period
|
$
|
23
|
|
|
$
|
2
|
|
|
$
|
20
|
|
|
$
|
45
|
|
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
32
|
|
|
$
|
56
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 31, 2020
|
|
Nine 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
|
$
|
20
|
|
|
$
|
3
|
|
|
$
|
21
|
|
|
$
|
44
|
|
|
$
|
19
|
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
50
|
|
|
Provision for doubtful accounts
|
11
|
|
|
(1
|
)
|
|
3
|
|
|
13
|
|
|
5
|
|
|
—
|
|
|
3
|
|
|
8
|
|
|
Charge-offs
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(4
|
)
|
|
—
|
|
|
(1
|
)
|
|
(5
|
)
|
|
Recoveries
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Other(A)
|
(2
|
)
|
|
—
|
|
|
(4
|
)
|
|
(6
|
)
|
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
Allowance for doubtful accounts at end of period
|
$
|
23
|
|
|
$
|
2
|
|
|
$
|
20
|
|
|
$
|
45
|
|
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
32
|
|
|
$
|
56
|
|
____________________
(A) Amounts include the impact from currency translation.
The accrual of interest income is suspended on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. We may continue to collect payments on our impaired finance receivables. Certain loss reserves on impaired finance receivables are recorded by our Truck segment under trade and other receivables above.
The following table presents information regarding impaired finance receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2020
|
|
October 31, 2019
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Impaired finance receivables with specific loss reserves
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
39
|
|
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
Impaired finance receivables without specific loss reserves
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
Specific loss reserves on impaired finance receivables
|
16
|
|
|
—
|
|
|
16
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
Finance receivables on non-accrual status
|
39
|
|
|
—
|
|
|
39
|
|
|
24
|
|
|
—
|
|
|
24
|
|
The average balances of the impaired finance receivables in the retail portfolio were $29 million and $21 million during the nine months ended July 31, 2020 and 2019, respectively. See Note 11, Fair Value Measurements, for information on the valuation of impaired finance receivables.
In response to the COVID-19 pandemic, we have granted limited payment extensions to certain customers who were not past due before the pandemic. There was no forgiveness of principal or interest in connection with these extensions. As a result, we concluded that these extensions were not troubled debt restructurings ("TDR"). We have TDRs in the normal course of our Financial Services operations; however, such amounts are not material.
We use the aging of our receivables as well as other inputs when assessing credit quality. The following table presents the aging analysis for finance receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2020
|
|
October 31, 2019
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Current, and up to 30 days past due
|
$
|
485
|
|
|
$
|
1,127
|
|
|
$
|
1,612
|
|
|
$
|
753
|
|
|
$
|
1,365
|
|
|
$
|
2,118
|
|
|
30-90 days past due
|
42
|
|
|
1
|
|
|
43
|
|
|
76
|
|
|
1
|
|
|
77
|
|
|
Over 90 days past due
|
23
|
|
|
—
|
|
|
23
|
|
|
25
|
|
|
—
|
|
|
25
|
|
|
Total finance receivables
|
$
|
550
|
|
|
$
|
1,128
|
|
|
$
|
1,678
|
|
|
$
|
854
|
|
|
$
|
1,366
|
|
|
$
|
2,220
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
6. Inventories
The following table presents the components of Inventories, net in our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
July 31,
2020
|
|
October 31,
2019
|
|
Finished products
|
$
|
585
|
|
|
$
|
640
|
|
|
Work in process
|
71
|
|
|
21
|
|
|
Raw materials
|
240
|
|
|
250
|
|
|
Total inventories, net
|
$
|
896
|
|
|
$
|
911
|
|
7. Leases
We account for a lease when an asset has been identified and when the contract conveys the right to control the use of the identified asset in exchange for consideration for a period of time. We determine whether an arrangement is or contains a lease at inception.
Lessee
We lease certain land, buildings, and equipment under operating and finance leases for our distribution centers, manufacturing facilities and our corporate offices, expiring at various dates through 2030. Operating leases generally have 1 to 20 year terms, with options to extend the lease. Terms are generally negotiated at the time of renewal. Options to terminate are not common and may be included at the discretion of the lessor. Certain leases may include provisions for rent escalation based on actual costs incurred by the lessor. Variable lease payments, which are not material, are not included as right of use assets or lease liabilities in our Consolidated Balance Sheets, and are expensed as incurred. Generally, our lease agreements do not contain any residual value guarantees or restrictive covenants.
All real estate leases and equipment leases, with an initial term greater than 12 months, result in the recognition of a right of use asset and lease liability recognized on our Consolidated Balance Sheets. Certain equipment leases with a term less than 12 months do not result in the recognition of right of use assets or lease liabilities. We recognize lease expense for those leases, which are not material, on a straight-line basis over the lease term.
We sublease certain real estate to third parties. In the third quarter of 2020, sublease income earned was not material to our Consolidated Statements of Operations.
We generally combine fixed lease and non-lease components for those leases we have entered into or reassessed after the adoption of the new lease standard. These assets primarily include real estate, manufacturing equipment and vehicles. The implicit rate of the majority of our leases is not known; therefore we use our incremental borrowing rate in determining the present value of lease payments. For leases denominated in a foreign currency, the incremental borrowing rate is adjusted by replacing the U.S. credit-free spread with that of the specific country.
In the three and nine months ended July 31, 2020, we incurred operating lease costs recorded in Costs of products sold of $2 million and $6 million, respectively. In the three and nine months of 2020, we incurred operating lease costs recorded in SG&A expenses of $6 million and $18 million, respectively. These charges were recognized in our Consolidated Statements of Operations. Finance lease costs were not material to our Consolidated Statements of Operations.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The following table presents balance sheet information related to operating leases:
|
|
|
|
|
|
|
|
(in millions)
|
As of July 31, 2020
|
|
Operating lease right of use assets
|
$
|
119
|
|
|
Finance lease right of use assets(A)
|
2
|
|
|
Total right of use assets
|
$
|
121
|
|
|
Operating lease liabilities
|
|
|
|
Other current liabilities
|
$
|
30
|
|
|
Other noncurrent liabilities
|
92
|
|
|
Finance lease liabilities
|
|
|
|
Notes payable and current maturities of long-term debt
|
1
|
|
|
Long-term debt
|
1
|
|
|
Total lease liabilities
|
$
|
124
|
|
_________________________
|
|
|
|
(A)
|
Finance lease right of use assets are included in Property and Equipment, net on our Consolidated Balance Sheets.
|
The following table presents maturities of lease liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2020
|
|
(in millions)
|
Finance Leases
|
|
Operating Leases
|
|
Remainder of 2020
|
$
|
—
|
|
|
$
|
8
|
|
|
2021
|
1
|
|
|
35
|
|
|
2022
|
1
|
|
|
27
|
|
|
2023
|
—
|
|
|
21
|
|
|
2024
|
—
|
|
|
14
|
|
|
Thereafter
|
—
|
|
|
33
|
|
|
Total lease payments
|
2
|
|
|
138
|
|
|
Less: Present value discount
|
—
|
|
|
16
|
|
|
Total lease liabilities
|
$
|
2
|
|
|
$
|
122
|
|
The following table presents future minimum lease payments:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2019
|
|
(in millions)
|
Capital Lease Obligations
|
|
Operating Leases
|
|
2020
|
$
|
1
|
|
|
$
|
37
|
|
|
2021
|
1
|
|
|
28
|
|
|
2022
|
—
|
|
|
22
|
|
|
2023
|
—
|
|
|
18
|
|
|
2024
|
—
|
|
|
13
|
|
|
Thereafter
|
—
|
|
|
31
|
|
|
Total future minimum lease payments
|
$
|
2
|
|
|
$
|
149
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The following table presents cash flow information related to leases:
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Three Months Ended July 31, 2020
|
Nine Months Ended July 31, 2020
|
|
Cash paid for amounts included in the measurement of lease liabilities
|
|
|
|
|
Operating cash flows from operating leases
|
$
|
11
|
|
$
|
30
|
|
|
Right of use assets obtained in exchange for lease liabilities
|
|
|
|
|
Operating leases
|
$
|
7
|
|
$
|
35
|
|
The following table presents the weighted-average remaining lease term and discount rate:
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2020
|
|
|
Finance Leases
|
|
Operating Leases
|
|
Weighted-average remaining lease term
|
9.0 years
|
|
|
5.6 years
|
|
|
Weighted-average discount rate
|
5.9
|
%
|
|
4.4
|
%
|
Lessor
We primarily lease trucks, tractors, and trailers to retail customers and dealers in the U.S. and Mexico through our Financial Services segment. These leases are classified as either operating or finance leases, expire at various dates, and typically have terms which allow an extension or fair value options to purchase the asset at the end of the lease term. The terms of leases generally range from 2 to 7 years, though extension periods may be for a shorter time. Our Financial Services segment manages the relationship with Navistar Capital (a program of BMO Harris Bank N.A. and Bank of Montreal (together, “BMO”)). Navistar Capital is our third-party preferred source of retail and lease customer financing for equipment offered by us and our dealers in the U.S. For certain Navistar Capital financed contracts which contain an end of term option for us to purchase the leased equipment if the customer declines to do so, we recognize the equipment subject to an operating lease as an asset on our Consolidated Balance Sheets. For more information related to the BMO arrangement, see Note 12, Commitments and Contingencies. We have also leased certain real estate to third parties to manage excess capacity through our Corporate segment.
We depreciate trucks, tractors, and trailers leased to customers under operating lease agreements on a straight-line basis to the equipment's estimated residual value over the lease term. The residual values of the equipment leased under operating lease agreements represent estimates of the value of the assets at the end of the lease contracts and are initially recorded based on estimates of future market values. Realization of the residual values is dependent on our future ability to market the equipment. We work with our customers and dealers to manage the sale of lease returns and the recovery of residual exposure. We also review residual values periodically to determine that recorded amounts are appropriate and the equipment is not impaired. For more information on key inputs and valuation methodologies in evaluating impairment of assets under operating lease agreements, see Note 11, Fair Value Measurements. For more information regarding impaired finance receivables see Note 5, Allowance for Doubtful Accounts, and Note 3, Restructuring, Impairments and Divestitures for impaired assets under operating leases.
The following table presents revenue from finance and operating leases, included in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2020
|
|
Nine Months Ended July 31, 2020
|
|
(in millions)
|
Finance Leases(A)
|
|
Operating Leases
|
|
Finance Leases(A)
|
|
Operating Leases
|
|
Sales of manufactured products, net
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
16
|
|
|
Finance revenues
|
7
|
|
|
16
|
|
|
25
|
|
|
57
|
|
|
Other expense, net
|
—
|
|
|
1
|
|
|
—
|
|
|
4
|
|
|
Total lease revenue
|
$
|
7
|
|
|
$
|
21
|
|
|
$
|
25
|
|
|
$
|
77
|
|
_______________________
(A) Finance revenues consist primarily of interest income. Additional fees, such as late fees, are not material to our consolidated financial statements.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The following table presents the carrying amount of equipment leased to others, included in Property Plant and Equipment, net in our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
July 31, 2020
|
|
October 31, 2019
|
|
Equipment leased to others, at original cost
|
$
|
546
|
|
|
$
|
562
|
|
|
Less: Accumulated depreciation
|
127
|
|
|
125
|
|
|
Equipment leased to others, net
|
$
|
419
|
|
|
$
|
437
|
|
The following table presents payments due from operating leases:
|
|
|
|
|
|
|
|
(in millions)
|
July 31, 2020
|
|
Remainder of 2020
|
$
|
47
|
|
|
2021
|
84
|
|
|
2022
|
75
|
|
|
2023
|
61
|
|
|
2024
|
35
|
|
|
Thereafter
|
47
|
|
|
Total
|
$
|
349
|
|
The following table presents maturities of finance lease receivables reconciled to the net investment in finance leases:
|
|
|
|
|
|
|
|
(in millions)
|
July 31, 2020
|
|
Remainder of 2020
|
$
|
72
|
|
|
2021
|
70
|
|
|
2022
|
49
|
|
|
2023
|
28
|
|
|
2024
|
13
|
|
|
Thereafter
|
3
|
|
|
Total
|
235
|
|
|
Less: Unearned interest income
|
50
|
|
|
Net investment in finance leases
|
$
|
185
|
|
Operating and finance lease contracts generally may be repaid or refinanced prior to contractual maturity. Accordingly, this presentation should not be regarded as a forecast of future cash.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
8. 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)
|
July 31, 2020
|
|
October 31, 2019
|
|
Manufacturing operations
|
|
|
|
|
Senior Secured Term Loan Credit Agreement, due 2025, net of unamortized discount of $5 and $6, respectively, and unamortized debt issuance costs of $8 and $10, respectively
|
$
|
1,547
|
|
|
$
|
1,556
|
|
|
9.5% Senior Secured Notes, due 2025, net of unamortized debt issuance costs of $11
|
589
|
|
|
—
|
|
|
6.625% Senior Notes, due 2026, net of unamortized debt issuance costs of $13 and $15, respectively
|
1,087
|
|
|
1,085
|
|
|
Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040, net of unamortized debt issuance costs of $5 at both dates
|
220
|
|
|
220
|
|
|
Financed lease obligations
|
48
|
|
|
60
|
|
|
Other
|
41
|
|
|
11
|
|
|
Total Manufacturing operations debt
|
3,532
|
|
|
2,932
|
|
|
Less: Current portion
|
73
|
|
|
32
|
|
|
Net long-term Manufacturing operations debt
|
$
|
3,459
|
|
|
$
|
2,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
July 31, 2020
|
|
October 31, 2019
|
|
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 $4 at both dates
|
$
|
1,008
|
|
|
$
|
991
|
|
|
Bank credit facilities, at fixed and variable rates, due dates from 2020 through 2025, net of unamortized debt issuance costs of less than $1 and $1, respectively
|
914
|
|
|
1,059
|
|
|
Commercial paper, at variable rates, program matures in 2022
|
—
|
|
|
84
|
|
|
Borrowings secured by operating and finance leases, at various rates, due serially through 2024
|
105
|
|
|
122
|
|
|
Total Financial Services operations debt
|
2,027
|
|
|
2,256
|
|
|
Less: Current portion
|
792
|
|
|
839
|
|
|
Net long-term Financial Services operations debt
|
$
|
1,235
|
|
|
$
|
1,417
|
|
Manufacturing Operations
9.5% Senior Secured Notes, due 2025
On April 27, 2020, we issued $600 million of 9.5% senior secured notes, due 2025 ("9.5% Senior Secured Notes"). Interest is payable on May 1 and November 1 of each year beginning on November 1, 2020 until the maturity date of May 1, 2025. The proceeds from the 9.5% Senior Secured Notes are being used for general corporate purposes in addition to certain transaction fees and expenses incurred in connection with the new 9.5% Senior Secured Notes. Debt issuance costs of $12 million were recorded as a direct deduction from the carrying amount and will be amortized through Interest expense over the life. The 9.5% Senior Secured Notes are subject to specific redemption pricing, restrictive payments, and change of control provisions.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Recovery Zone Facility Revenue Refunding Bonds
On August 4, 2020, subsequent to our balance sheet date, we completed a certain tax-exempt bond financing in which the Illinois Finance Authority (the “IFA”) issued and sold $225 million aggregate principal amount of Recovery Zone Facility Revenue Refunding Bonds (Navistar International Corporation Project) Series 2020 due October 15, 2040 (the “2020 Bonds"). The proceeds from the issuance of the 2020 Bonds will be used, together with certain other funds of the Company, for the purposes of refunding (1) the $135 million aggregate principal amount of IFA Recovery Zone Facility Revenue Bonds (Navistar International Corporation Project), Series 2010 due October 15, 2040 (the “IFA 2010 Bonds”) and (2) $90 million aggregate principal amount of The County of Cook, Illinois Recovery Zone Facility Revenue Bonds (Navistar International Corporation Project), Series 2010 due October 15, 2040 (the “Cook County Bonds”; together with the IFA 2010 Bonds, the “2010 Bonds”) for which a notice of redemption was issued on August 24, 2020. Beginning on August 1, 2030, the 2020 Bonds are subject to optional redemption at the direction of the Company, in whole or in part. In addition, if the Company is acquired by TRATON SE or one of its affiliates, the Company may, at its option, redeem all, but not less than all, of the 2020 Bonds. In each case, the Company will pay a redemption price equal to 100% of the principal amount thereof, plus accrued interest, if any, to the redemption date. The interest rate on the 2020 Bonds is 4.75% and the interest rate on the 2010 Bonds is 6.75%. The 2020 Bonds are senior unsecured general obligations with a subsidiary guaranty from Navistar, Inc.
Other
Other Manufacturing Debt includes outstanding borrowings of $30 million as of July 31, 2020 and no borrowings as of October 31, 2019 under our $125 million Amended and Restated Asset-Based Credit Facility. This facility is secured by certain of NI's aftermarket parts inventory locations and is also used to issue letters of credit.
Financial Services Operations
Asset-backed Debt
In January 2020, the Truck Retail Accounts Corporation (“TRAC”) funding facility was renewed and extended to June 2021, with a capacity range of $100 million to $200 million.
In May 2020, the maturity date of our variable funding notes ("VFN") facility was extended to May 2021, and the maximum capacity remained $350 million.
In July 2020, Navistar Financial Securities Corporation ("NFSC") issued $300 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds are expected to be used, in part, to replace the $300 million of NFSC investor notes that mature in September 2020.
9. Postretirement Benefits
Defined Benefit Plans
We provide postretirement benefits to a substantial portion of our employees and retirees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, surviving spouses and dependents.
Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the nine months ended July 31, 2020 and 2019, we contributed $30 million and $140 million, respectively, to our pension plans to meet regulatory funding requirements. During the first quarter of 2019, we accelerated the payment of a substantial portion of our 2019 minimum required funding. We expect to contribute $5 million to our pension plans during the remainder of 2020 and defer $157 million of previously expected remaining 2020 contributions until the first quarter of 2021 under provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act").
We primarily fund other post-employment benefits ("OPEB") obligations, such as retiree medical, in accordance with the 1993 Settlement Agreement (the "1993 Settlement Agreement"), which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of our then applicable retiree health care and life insurance benefits. Contributions for the nine months ended July 31, 2020, as well as anticipated contributions for the remainder of 2020, are not material.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Components of Net Periodic Benefit Expense
Net periodic benefit expense included in our Consolidated Statements of Operations for the three and nine months ended July 31, 2020 and 2019 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Nine Months Ended July 31,
|
|
|
Pension Benefits
|
|
Health and Life
Insurance Benefits
|
|
Pension Benefits
|
|
Health and Life
Insurance Benefits
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Service cost for benefits earned during the period
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
6
|
|
|
$
|
5
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Interest on obligation
|
21
|
|
|
30
|
|
|
7
|
|
|
12
|
|
|
63
|
|
|
92
|
|
|
21
|
|
|
36
|
|
|
Amortization of cumulative loss
|
24
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
73
|
|
|
70
|
|
|
—
|
|
|
—
|
|
|
Settlements
|
7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
142
|
|
|
—
|
|
|
—
|
|
|
Premiums on pension insurance
|
3
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
7
|
|
|
—
|
|
|
—
|
|
|
Expected return on assets
|
(36
|
)
|
|
(35
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
(108
|
)
|
|
(108
|
)
|
|
(15
|
)
|
|
(16
|
)
|
|
Net periodic benefit expense
|
$
|
21
|
|
|
$
|
22
|
|
|
$
|
3
|
|
|
$
|
8
|
|
|
$
|
50
|
|
|
$
|
208
|
|
|
$
|
9
|
|
|
$
|
23
|
|
Components of net periodic benefit cost other than service cost are included in Other expense, net in our Consolidated Statements of Operations.
In the third quarter of 2020 and in the first quarter of 2019, we purchased group annuity contracts for certain retired pension plan participants resulting in plan remeasurements. The purchase of the group annuity contracts was funded directly by the assets of our pension plans. As a result, in the third quarter of 2020 and first quarter of 2019, net actuarial gains of $2 million and net actuarial losses of $11 million, respectively, were recognized as components of Accumulated other comprehensive loss and non-cash pension settlement accounting expenses of $7 million, and $142 million, respectively, were recognized in Other expense, net in our Consolidated Statements of Operations.
Defined Contribution Plans and Other Contractual Arrangements
Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. In light of recent developments relating to the COVID-19 pandemic, we have implemented cash conservation initiatives including a delay in certain 401(k) company matching contributions until 2021. The matching contribution delay was effective March 1, 2020. Prior to this, the matching contributions for non-represented employees were deposited monthly. Many participants covered by the plans receive annual Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $7 million and $26 million for the three and nine months ended July 31, 2020, respectively, and $8 million and $28 million for the three and nine months ended July 31, 2019, respectively.
In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees pursuant to a certain Retiree Supplemental Benefit Program ("Supplemental Benefit Program") under the 1993 Settlement Agreement, is not part of our consolidated financial statements.
Our contingent profit sharing obligations under a certain Supplemental Benefit Trust Profit Sharing Plan will continue until certain funding targets defined by the 1993 Settlement Agreement are met. We record profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits. For more information on pending arbitration regarding the Supplemental Benefit Trust Profit Sharing Plan, see Note 12, Commitments and Contingencies.
10. Income Taxes
For interim income tax reporting we estimate our annual effective tax rate and apply it to our year to date ordinary income (loss). Tax jurisdictions with a projected full year loss for which a tax benefit cannot be realized are excluded. Our annual effective tax rate is primarily impacted by jurisdictions that continue to be in a valuation allowance where tax benefits are not recognized. The tax effects of unusual or infrequently occurring items, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, are reported in the interim period in which they occur.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
For the three months and nine months ended July 31, 2020, we recognized an income tax expense of $8 million and $10 million, respectively, compared to an income tax expense of $29 million and $9 million for the respective prior year periods. The change in tax is primarily due to the decrease in earnings and earnings and/or losses for which no tax expense or benefit can be recognized due to valuation allowances. This is partially offset by a $38 million benefit associated with a group annuity contract purchase for certain retired pension plan participants, recorded in the first quarter of 2019. Other differences for the three and nine months ended July 31, 2020 include geographical mix and certain discrete items, primarily related to the change in value of the U.S. dollar resulting in an income tax expense of $7 million and an income tax benefit of $8 million for the three months and nine months ended July 31, 2020, respectively.
We have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more-likely-than-not that deferred tax benefits will be realized through the generation of future taxable income. We continue to maintain a valuation allowance on the majority of our U.S. deferred tax assets as well as certain foreign deferred tax assets that we believe, on a more-likely-than-not basis, will not be realized based on our analysis of the relevant facts and circumstances. For all remaining deferred tax assets, while we believe that it is more-likely-than-not that they will be realized, we believe that it is reasonably possible that additional deferred tax asset valuation allowances could be required in the next twelve months.
On March 27, 2020, the CARES Act was enacted in response to the COVID-19 pandemic. The CARES Act contains numerous income tax provisions, such as relaxing the limitations on the deductibility of interest and the carryback of net operating losses for specific periods. We have performed an analysis of these provisions and due to the unavailability of excess taxable income in the current or carry back periods, and the application of a valuation allowance to deferred tax assets, the Company's effective income tax rate and its tax provision are currently unaffected by the provisions of the CARES Act.
Additionally, the CARES Act provides for refundable employee retention credits and the deferral of the employer-paid portion of social security taxes. As of July 31, 2020, we elected to defer the employer-paid portion of social security taxes for the remainder of 2020, to be repaid equally in December 2021 and December 2022. The total employer-paid portion of social security taxes deferred as of July 31, 2020 is $9 million. We intend to claim the refundable employee retention tax credits provided under the CARES Act, which can be used to offset payroll tax liabilities. We estimate the potential benefits that the employee retention credits can provide to be approximately $3 million.
11. Fair Value Measurements
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:
|
|
|
|
•
|
Level 1—based upon quoted prices for identical instruments in active markets,
|
|
|
|
|
•
|
Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
|
|
|
|
|
•
|
Level 3—based upon one or more significant unobservable inputs.
|
The following section describes key inputs and assumptions in our valuation methodologies:
Cash Equivalents and Restricted Cash Equivalents—Cash equivalents are highly liquid investments, with an original maturity of 90 days or less, which may include U.S. government and federal agency securities, commercial paper, and other highly liquid investments. The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents approximate fair value because of the short-term maturity and highly liquid nature of these instruments.
Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and may include investments in U.S. government and federal agency securities, commercial paper and other investments with an original maturity greater than 90 days. We use quoted prices from active markets to determine fair value.
Derivative Assets and Liabilities—We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs.
Guarantees—We provide certain guarantees of payments and residual values, to which losses are generally capped, to specific counterparties. The fair value of these guarantees includes a contingent component and a non-contingent component that are based upon internally developed models using unobservable inputs. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 12, Commitments and Contingencies.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Impaired Finance Receivables and Impaired Assets Under Operating Leases—Fair values of the underlying collateral are determined by current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. For more information regarding impaired finance receivables, see Note 5, Allowance for Doubtful Accounts.
Impaired Property, Plant and Equipment—We generally measure the fair value by discounting future cash flows expected to be received from the operation of, or disposition of, the asset or asset group that has been determined to be impaired. When appropriate, we utilize alternative methods for the measurement of fair value such as market and cost approaches. For more information regarding the impairment of property, plant and equipment, see Note 3, Restructuring, Impairments and Divestitures.
The following table presents the financial instruments measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2020
|
|
As of October 31, 2019
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency contracts(A)
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Total assets
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forward contracts(B)
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
Foreign currency contracts(C)
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
Guarantees
|
—
|
|
|
—
|
|
|
29
|
|
|
29
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
27
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
6
|
|
|
$
|
29
|
|
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
27
|
|
|
$
|
30
|
|
_________________________
|
|
|
|
(A)
|
The asset value of foreign currency contracts is primarily included in Other current assets and an immaterial portion is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.
|
|
|
|
|
(B)
|
The liability values of commodity forward contracts are included in Other current liabilities in the accompanying Consolidated Balance Sheets.
|
|
|
|
|
(C)
|
The liability values of foreign currency contracts are primarily included in Other noncurrent liabilities and an immaterial portion is included in Other current liabilities in the accompanying Consolidated Balance Sheets.
|
The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Nine Months Ended July 31,
|
|
(in millions)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Guarantees, at beginning of period
|
$
|
(28
|
)
|
|
$
|
(22
|
)
|
|
$
|
(27
|
)
|
|
$
|
(24
|
)
|
|
Net issuances
|
(2
|
)
|
|
(4
|
)
|
|
(7
|
)
|
|
(3
|
)
|
|
Settlements
|
1
|
|
|
—
|
|
|
5
|
|
|
1
|
|
|
Guarantees, at end of period
|
$
|
(29
|
)
|
|
$
|
(26
|
)
|
|
$
|
(29
|
)
|
|
$
|
(26
|
)
|
There were no transfers of Level 3 financial instruments.
In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash and cash equivalents, and Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables, net generally consist of retail and wholesale accounts and notes.
The carrying amounts of Trade and other receivables, net and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest rate terms. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below.
The fair values of our retail notes are estimated by discounting expected cash flows at estimated current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.75% Tax Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax Exempt Bonds is classified as Level 2. Trading in our 6.625% Senior Notes and 9.5% Senior Secured Notes is limited to qualified institutional buyers; therefore the notes are classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.
The following tables present the carrying values and estimated fair values of financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2020
|
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Retail notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
209
|
|
|
$
|
209
|
|
|
$
|
207
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan Credit Agreement, due 2025
|
—
|
|
|
—
|
|
|
1,517
|
|
|
1,517
|
|
|
1,547
|
|
|
9.5% Senior Secured Notes, due 2025
|
—
|
|
|
685
|
|
|
—
|
|
|
685
|
|
|
589
|
|
|
6.625% Senior Notes, due 2026
|
—
|
|
|
1,125
|
|
|
—
|
|
|
1,125
|
|
|
1,087
|
|
|
Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040
|
—
|
|
|
226
|
|
|
—
|
|
|
226
|
|
|
220
|
|
|
Financed lease obligations
|
—
|
|
|
—
|
|
|
48
|
|
|
48
|
|
|
48
|
|
|
Other(A)
|
—
|
|
|
—
|
|
|
40
|
|
|
40
|
|
|
40
|
|
|
Financial Services operations
|
|
|
|
|
|
|
|
|
|
|
Asset-backed debt issued by consolidated SPEs, due serially through 2022
|
—
|
|
|
—
|
|
|
1,011
|
|
|
1,011
|
|
|
1,008
|
|
|
Bank credit facilities, due dates from 2020 through 2025
|
—
|
|
|
—
|
|
|
881
|
|
|
881
|
|
|
914
|
|
|
Borrowings secured by operating and finance leases, due serially through 2024
|
—
|
|
|
—
|
|
|
105
|
|
|
105
|
|
|
105
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2019
|
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Retail notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
205
|
|
|
$
|
205
|
|
|
$
|
208
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan Credit Agreement, due 2025
|
—
|
|
|
—
|
|
|
1,552
|
|
|
1,552
|
|
|
1,556
|
|
|
6.625% Senior Notes, due 2026
|
—
|
|
|
1,122
|
|
|
—
|
|
|
1,122
|
|
|
1,085
|
|
|
Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040
|
—
|
|
|
234
|
|
|
—
|
|
|
234
|
|
|
220
|
|
|
Financed lease obligations
|
—
|
|
|
—
|
|
|
60
|
|
|
60
|
|
|
60
|
|
|
Other(A)
|
—
|
|
|
—
|
|
|
9
|
|
|
9
|
|
|
9
|
|
|
Financial Services operations
|
|
|
|
|
|
|
|
|
|
|
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2022
|
—
|
|
|
—
|
|
|
995
|
|
|
995
|
|
|
991
|
|
|
Bank credit facilities, due dates from 2020 through 2025
|
—
|
|
|
—
|
|
|
1,038
|
|
|
1,038
|
|
|
1,059
|
|
|
Commercial paper, at variable rates, program matures in 2022
|
84
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
84
|
|
|
Borrowings secured by operating and finance leases, due serially through 2024
|
—
|
|
|
—
|
|
|
122
|
|
|
122
|
|
|
122
|
|
________________________
|
|
|
|
(A)
|
Excludes non-financial instrument debt of $1 million and $2 million as of July 31, 2020 and October 31, 2019, respectively.
|
12. Commitments and Contingencies
Guarantees
We occasionally provide guarantees that could obligate us to make future payments if the primary entity fails to perform under its contractual obligations. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet the recognition and measurement provisions of U.S. GAAP. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under various guarantees. We do not believe that claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.
Under the terms of the Navistar Capital Operating Agreement, BMO is our third-party preferred source of retail and lease customer financing for equipment offered by us and our dealers in the U.S. The Navistar Capital Operating Agreement, as amended, contains a loss sharing arrangement under which we generally reimburse BMO for excess credit losses as defined in the arrangement. Our exposure to loss is mitigated because contracts under the Navistar Capital Operating Agreement are secured by the financed equipment. There was $1.6 billion of outstanding loan principal and operating lease payments receivable at both July 31, 2020 and October 31, 2019 financed through the Navistar Capital Operating Agreement and subject to the loss sharing arrangements in the U.S. The related financed values of these outstanding contracts were $2.6 billion and $2.7 billion at July 31, 2020 and October 31, 2019, respectively. We have recognized a guarantee liability for our portion of estimated Navistar Capital credit losses. Generally, we do not carry the contracts under the Navistar Capital Operating Agreement on our Consolidated Balance Sheets. However, for certain Navistar Capital financed contracts which we have accounted for as borrowings, we have recognized equipment leased to others of $42 million and $51 million and financed lease obligations of $48 million and $60 million, in our Consolidated Balance Sheets as of July 31, 2020 and October 31, 2019, respectively. In response to the COVID-19 pandemic, BMO has restructured certain loans that are subject to the loss sharing arrangement. We have increased our estimated guarantee liability for potential COVID-19 related credit losses by an amount which was not material to our consolidated financial statements.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
We also have issued a limited number of residual value guarantees, for which losses are generally capped. If control has not transferred, we generally account for these arrangements as operating leases and revenue is recognized on a straight-line basis over the term of the lease. If control has transferred, revenue is recognized upon sale and the amounts of the guarantees are estimated and recorded. Our guarantees are contingent upon the fair value of the leased assets at the end of the lease term. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet recognition and measurement provisions. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under various guarantees that are not recognized in our Consolidated Balance Sheets. We do not believe claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.
We obtain certain stand-by letters of credit and surety bonds from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. As of July 31, 2020, the amount of stand-by letters of credit and surety bonds issued was $85 million.
In addition, as of July 31, 2020, we have $122 million of outstanding purchase commitments and contracts with $17 million of cancellation fees with expiration dates through 2028.
In the ordinary course of business, we also provide routine indemnifications and other guarantees, the terms of which range in duration and often are not explicitly defined. We do not believe these will result in claims that would have a material impact on our financial condition, results of operations, or cash flows.
Environmental Liabilities
We have been named a potentially responsible party ("PRP"), in conjunction with other parties, in a number of cases arising under an environmental protection law, the Comprehensive Environmental Response, Compensation, and Liability Act, popularly known as the "Superfund" law. These cases involve sites that allegedly received wastes from current or former Company locations. Based on information available to us which, in most cases, consists of data related to quantities and characteristics of material generated at current or former Company locations, material allegedly shipped by us to these disposal sites, as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of our share of the probable costs, if any, and accruals are recorded in our consolidated financial statements. These accruals are generally recognized no later than upon completion of the remedial feasibility study and are not discounted to their present value. We review all accruals on a regular basis and believe that, based on these calculations, our share of the potential additional costs for the cleanup of each site will not have a material effect on our financial condition, results of operations, or cash flows.
In addition, other sites formerly owned by us or where we are currently operating have been identified as having soil and groundwater contamination. While investigations and cleanup activities continue at these sites, we believe that we have appropriate accruals to cover costs to complete the cleanup of all sites.
We have accrued $18 million for these and other environmental matters, which are included within Other current liabilities and Other noncurrent liabilities, as of July 31, 2020. The majority of these accrued liabilities are expected to be paid subsequent to 2021.
Along with other vehicle manufacturers, we have been subject to a number of asbestos-related claims. In general, these claims relate to illnesses alleged to have resulted from asbestos exposure from component parts found in older vehicles, although some cases relate to the alleged presence of asbestos in our facilities. In these claims, we are generally not the sole defendant, and the claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. We have strongly disputed these claims, and it has been our policy to defend against them vigorously. Historically, the actual damages paid out to claimants have not been material in any year to our financial condition, results of operations, or cash flows. It is possible that the number of these asbestos-related claims, and the costs for resolving them, could become significant in the future.
Legal Proceedings
Overview
We are subject to various claims arising in the ordinary course of business and are party to various legal proceedings that constitute ordinary, routine litigation incidental to our business. The majority of these claims and proceedings relate to commercial, product liability, and warranty matters. In addition, from time to time we are subject to various claims and legal proceedings related to employee compensation, benefits, and benefits administration, including, but not limited to, compliance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Department of Labor requirements.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
In our opinion, apart from the actions set forth below, the disposition of these proceedings and claims, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on our business or our financial condition, results of operations, or cash flows.
Profit Sharing Disputes
Pursuant to the 1993 Settlement Agreement, the program administrator and named fiduciary of the Supplemental Benefit Program is the Supplemental Benefit Program Committee (the "Committee"), composed of individuals not appointed by NI or NIC. In August 2013, the Committee filed a motion for leave to (a) amend its February 2013 complaint (which sought injunctive relief for the Company to provide certain information to which the Committee was allegedly entitled under the Supplemental Benefit Trust Profit Sharing Plan (the "Profit Sharing Plan")) and (b) file a proposed amended complaint (the "Profit Sharing Complaint") in the U.S. District Court for the Southern District of Ohio (the "Court"). Leave to file the Profit Sharing Complaint was granted by the Court in October 2013. In its Profit Sharing Complaint, the Committee alleged that the Company breached the 1993 Settlement Agreement and violated ERISA by failing to properly calculate profit sharing contributions due under the Profit Sharing Plan and sought damages in excess of $50 million, injunctive relief and reimbursement of attorneys' fees and costs. Following the resolution of a procedural dispute by the U.S. Court of Appeals for the 6th Circuit, in May 2015 the Court ordered that the claims in the Profit Sharing Complaint be arbitrated pursuant to the dispute resolution procedures in the Profit Sharing Plan. The Company and the Committee selected an arbitrator and the arbitration discovery process commenced. On June 29, 2017, the arbitrator ruled, among other things, that the arbitration will include Profit Sharing Plan calculations for the years ending October 31, 2001 through October 31, 2014. On February 17, 2020, the Committee filed its written submission with the arbitrator and requested a damages award of $588 million comprised of $252 million in profit sharing contributions that the Committee asserts are due under the Profit Sharing Plan and $336 million of lost earnings that the Committee asserts the Supplemental Trust would have earned had those profit sharing contributions been made and invested. The Company’s written submission to the arbitrator was filed March 16, 2020 and the Committee’s reply was filed April 7, 2020. On June 5, 2020 the parties and the arbitrator agreed the only years at issue for the arbitration are the plan years ending October 31, 2006, 2008, 2009, 2010, and 2011.
By letter dated February 14, 2019, the Committee indicated the Profit Sharing Plan calculation for the plan year ending October 31, 2018 reflects numerous positions that have caused the Committee to dispute the Profit Sharing Plan calculations in the past, and on that basis the Committee disagrees with the 2018 calculation. The Committee also requested information about the 2018 calculation. On March 12, 2019, the Committee filed a motion to enforce the 1993 Settlement Agreement for the Company’s failure to respond to the Committee’s February 14, 2019 information requests. On May 15, 2019, the Company responded to the information requests. The motion to enforce is still pending with the Court, but on October 30, 2019, the Company and the Committee met with the Court regarding the motion to enforce, and agreed on a plan for the Company to respond to the Committee’s information and document requests related to the 2018 calculation (which also relates to the information requested for the Profit Sharing Plan calculations for the years ending October 31, 2001 through October 31, 2014). Furthermore, the Committee informed the Company, by letter dated January 19, 2020, that it disputes the Company's Profit Sharing Plan calculations for the years ending October 31, 2015 through October 31, 2019.
As noted under “Retiree Health Care Litigation” below, on August 14, 2018, the Company filed a motion to schedule a status hearing, in which the Company requested an in-person hearing to discuss the possibility of a global resolution of various disputes under the 1993 Settlement Agreement, including the pending Profit Sharing Complaint. As a result, in-person hearings, an in-chambers conference and several telephone conferences were held with the Court, and on April 17, 2020, the Company filed a motion to reform the 1993 Settlement Agreement. A hearing on the motion to reform the 1993 Settlement Agreement was held on June 1, 2020. Additional hearings and/or conferences may be scheduled in the future.
In addition, various local bargaining units of the UAW have filed separate grievances pursuant to the profit sharing plans under various collective bargaining agreements in effect between the Company and the UAW that may have similar legal and factual issues as the Profit Sharing Complaint.
Based on our assessment of the facts underlying the claims in the above actions, we are unable to provide meaningful quantification of how the final resolution of these claims may impact our future consolidated financial condition, results of operations, or cash flows.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Retiree Health Care Litigation
On October 21, 2016, a lawsuit was filed with the Court by two individual members of the Committee (the "Committee Members") who are retirees and participants in the Navistar, Inc. Health Benefit and Life Insurance Plan (the “Plan”) created pursuant to the 1993 Settlement Agreement. The Committee Members’ complaint (the “Committee Members’ Complaint”) was filed against NIC, NI, NFC and certain other former or current affiliates, all of which are parties or employers as defined in the 1993 Settlement Agreement. The Committee Members allege, among other things, that the Company violated the terms of the Plan, breached a fiduciary duty under ERISA, and engaged in ERISA-prohibited transactions by improperly using the Plan’s assets (a portion of certain Medicare Part D subsidies and a portion of certain Medicare Part D coverage-gap discounts (collectively, the “Subsidies”), in each case that were received by the Navistar, Inc. Retiree Health Benefit Trust created pursuant to the 1993 Settlement Agreement (the “Base Trust”)) for the Company’s benefit.
The Committee Members requested that the Court order the defendants to restore all losses to the Base Trust, including approximately $26 million, which the Committee Members allege is the Plan participants’ “fair share” of the Subsidies that were allegedly misappropriated by the defendants from January 2012 through April 2015. The Committee Members also requested that the Court enjoin the defendants from alleged future violations of the Plan and ERISA with respect to treatment of the Subsidies, order the defendants to remedy all alleged ERISA-prohibited transactions and pay the Committee Members’ attorneys’ fees and costs.
The Court bifurcated the case and in September 2018 the Court conducted a trial on the issue of whether the Committee Members’ Complaint is barred by the applicable statute of limitations. On November 20, 2018, the Committee Members filed a motion for sanctions, alleging various discovery and trial misconduct by the defendants, and requested that the Court enter judgment in favor of the Committee Members with respect to the statute of limitations issue and award attorneys’ fees to the Committee Members. On March 26, 2019, the Court granted the Committee Members’ motion for sanctions and subsequently extended the statute of limitations discovery period to October 7, 2019. Briefing on the statute of limitations issue was completed in January 2020. The Court also ordered the Company to pay certain of the Committee Members' legal and other costs to file the motion for sanctions and to conduct additional discovery related to the statute of limitations issue.
On August 14, 2018, under the original Shy et. al. v. Navistar International Corporation, Civil Action No. 3:92-CV-333 (S.D. Ohio 1992), the Company filed a motion to schedule a status hearing to request an in-person hearing to discuss the possibility of a global resolution of various disputes under the 1993 Settlement Agreement, including, but not limited to, resolving the pending Profit Sharing Complaint and Committee Members’ Complaint described above. As a result, on April 17, 2020 the Company filed a motion to reform the 1993 Settlement Agreement, and in-person hearings, an in-chambers conference and several telephone conferences were held with the Court. A hearing on the motion to reform the 1993 Settlement Agreement was held on June 1, 2020. Additional hearings and/or conferences may be scheduled in the future.
Based on our assessment of the facts underlying the claims in the above actions, we are unable to provide meaningful quantification of how the final resolution of these claims may impact our future consolidated financial condition, results of operations, or cash flows.
FATMA Notice
International Indústria Automotiva da América do Sul Ltda. ("IIAA"), formerly known as Maxion International Motores S/A ("Maxion"), now a wholly owned subsidiary of the Company, received a notice (the “FATMA Notice”) in July 2010 from the State of Santa Catarina Environmental Protection Agency ("FATMA") in Brazil. The FATMA Notice alleged that Maxion sent waste to a facility owned and operated by a company known as Natureza (the “Natureza Facility”) and that soil and groundwater contamination had occurred at the Natureza Facility.
The FATMA Notice asserted liability against Maxion and assessed an initial penalty in the amount of R$2 million (the equivalent of less than US$1 million as of July 31, 2020), which is not final or due until all administrative appeals are exhausted. Maxion was one of numerous companies that received similar notices. IIAA filed an administrative defense in August 2010 and has not yet received a decision following that filing.
In addition to the matter described above, there is a suit pending in the federal court of Brazil in which the federal district attorney has sued (a) FATMA, for claims related to FATMA’s actions in connection with licensing and inspection procedures related to the Natureza Facility, and (b) Selamix, as the current owner of the Natureza Facility. In this federal suit, Selamix was found liable for the contamination at the Natureza Facility due to it being the successor owner of the facility. However, the federal court’s decision does not prohibit Selamix from seeking to recover its damages from third parties that contributed to the contamination at the Natureza Facility.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
In January 2018, the district attorney of the State of Santa Catarina (the "SC District Attorney"), local and state authorities, Selamix, IIAA and the 14 other companies (together, the "Companies") that are alleged to have significantly contributed to the contamination met to discuss the matter. In March 2018, Selamix informed the SC District Attorney that it would voluntarily conduct a preliminary environmental study at the Natureza Facility in an attempt to determine and allocate the liability for the contamination pursuant to an agreement with the Companies after the study is completed. The SC District Attorney agreed to suspend further inquiry into the matter until Selamix’s study had been completed.
In June 2018, Selamix presented its Environmental Preliminary Assessment Report to the SC District Attorney and the Companies alleged to have contributed to the contamination. Selamix also presented commercial proposals from two additional companies specializing in environmental studies to perform the next steps of the technical work. The SC District Attorney then requested a third commercial proposal. One of the commercial proposals included an Environmental Preliminary Assessment Report ("Phase 1 Study") and indicated that a Phase 2 assessment should be performed. In July 2019, the SC District Attorney requested that each of the Companies (including IIAA) inform the SC District Attorney of whether they intended to contribute to the costs of the portion of the Phase 2 assessment related to geophysical investigations to identify buried drums at the Natureza Facility. The request did not include any information related to the potential range of the associated costs or indicate whether contributions for the cost of the other portions of the Phase 2 assessment would be sought from the Companies (including IIAA). IIAA responded to the request indicating that it would not contribute to the cost of the Phase 2 assessment related to geophysical investigations and requested a meeting with the SC District Attorney to discuss the next steps in the process.
In late February 2020, IIAA became aware that the SC District Attorney filed an action in the civil court of Santa Catarina against nine of the Companies (including IIAA), Selamix, and the Municipality of Schroeder (where the Natureza Facility is located) requesting that the defendants in the action bear all of the potential costs of the investigation needed to determine the parties responsible for the contamination and manage the remediation of the contamination at the Natureza Facility and that the defendants place funds in escrow to cover such costs. Prior to ruling on these issues, the court has indicated that it will schedule a hearing to allow the defendants to set forth their defenses. In May 2020, the Municipality of Schroeder presented its defenses to the court and alleged that (i) it was not liable for contamination after FATMA, as a state agency, became responsible for the environmental licensing of Natureza, (ii) Selamix should be held liable for the contamination, and (iii) the other defendants (including IIAA) should be held liable for the contamination because their irregular disposal of toxic material contributed to the environmental damage. IIAA will be required to present its response to the Municipality of Schroeder’s defenses, but a deadline has not yet been set. IIAA continues to dispute the allegations in the FATMA Notice and intends to continue to vigorously defend itself.
Sao Paulo Groundwater Notice
In March 2014, IIAA, along with other nearby companies, received from the Sao Paulo District Attorney (the "District Attorney") a notice and proposed Consent Agreement relating to alleged neighborhood-wide groundwater contamination at or around its Sao Paulo manufacturing facility. The proposed Consent Agreement sought certain groundwater investigations and other technical relief and proposed sanctions in the amount of R$3 million (the equivalent of less than US$1 million as of July 31, 2020). In November 2014, IIAA extended a settlement offer which was never accepted, rejected or countered by the District Attorney.
On August 31, 2016, the District Attorney filed civil actions against IIAA and other companies in the Central Forum of the capital of the State of Sao Paulo seeking soil and groundwater investigation and remediation, together with monetary payment in an unspecified amount. IIAA filed its defense to the civil action on January 26, 2017, alleging that IIAA had made all necessary investigations and had taken remedial measures to address the contamination and that Companhia Ambiental do Estado de Sao Paulo, the environmental agency of Sao Paulo State, had agreed to the remedial measures taken by IIAA.
A new district attorney (the “New District Attorney”) assumed responsibility for the case in February 2018. The New District Attorney indicated that it would like the companies involved to try to reach a settlement agreement as to the remediation efforts to be taken after having discussions and negotiations with the New District Attorney’s technical experts. On September 10, 2019, the judge granted the New District Attorney's request to require answers to inquiries related to the case from the Department of Water and Electric Energy ("DAEE") and Sao Paulo State Sewage Company ("SABESP"), but DAEE and SABESP did not provide any additional, relevant information. IIAA is currently waiting for the New District Attorney's opinion on the matter and then intends to evaluate possible next steps.
There are no current demands or offers outstanding.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
MaxxForce Engine EGR Warranty Litigation
On June 24, 2014, N&C Transportation Ltd. ("N&C") filed a putative class action lawsuit against NIC, NI, Navistar Canada Inc., and Harbour International Trucks in Canada in the Supreme Court of British Columbia (the "N&C Action"). Subsequently, seven additional, similar putative class action lawsuits have been filed in various courts in Canada, including Alberta, Manitoba, Ontario and Quebec (together with the N&C Action, the "Canadian Actions").
On November 16, 2016, the Supreme Court of British Columbia certified a Canada-wide class comprised of persons who purchased heavy-duty trucks equipped with Advanced EGR MaxxForce 11, MaxxForce 13, and MaxxForce 15 engines designed to meet 2010 EPA regulations. On August 1, 2018, the appellate court affirmed the November 2016 decision and certified three additional narrow issues on whether misrepresentations were made in Navistar's advertising materials. The next step will be an attendance before the case management judge regarding the details of the notice of certification to be given to the class. No date for this attendance has been set.
On July 7, 2014, Par 4 Transport, LLC filed a putative class action lawsuit against NI in the United States District Court for the Northern District of Illinois (the "Par 4 Action"). Subsequently, seventeen additional putative class action lawsuits were filed in various United States district courts, (together with the Par 4 Action, the "U.S. Actions"). Some of the U.S. Actions named both NIC and NI, and alleged matters substantially similar to the Canadian Actions. More specifically, one or more of the Canadian Actions and the U.S. Actions (collectively, the "EGR Class Actions") seek to certify a class of persons or entities in Canada or the United States who purchased and/or leased a ProStar or other Navistar vehicle equipped with a model year 2008-2013 MaxxForce Advanced EGR engine.
In substance, the EGR Class Actions allege that the MaxxForce Advanced EGR engines are defective and that the Company and NI failed to disclose and correct the alleged defect. The EGR Class Actions assert claims based on theories of contract, breach of warranty, consumer fraud, unfair competition, misrepresentation and negligence. The EGR Class Actions seek relief in the form of monetary damages, punitive damages, declaratory relief, interest, fees, and costs.
In December 2014, the United States Judicial Panel on Multidistrict Litigation (the "MDL Panel") issued an order consolidating before Judge Joan B. Gottschall of the United States District Court for the Northern District of Illinois all of the U.S. Actions, as well as certain non-class action MaxxForce Advanced EGR engine lawsuits that were pending on October 3, 2014 (the "MDL Action").
On May 11, 2015, lead counsel for the plaintiffs in the MDL Action filed a consolidated complaint, which was subsequently amended multiple times.
In May 2019, the parties completed negotiation of a settlement agreement (the "Settlement Agreement") to resolve the U.S. Actions. The plaintiffs submitted the Settlement Agreement to the court for preliminary approval on May 28, 2019. The Settlement Agreement class consists of entities and natural persons who owned or leased a 2011-2014 model year vehicle equipped with a MaxxForce 11 or 13 liter engine certified to meet EPA 2010 emissions standards without selective catalytic reduction technology, provided that the vehicle was purchased or leased in the U.S.
Among other things, the Settlement Agreement requires that (1) the parties establish a non-reversionary common fund consisting of cash (the “Cash Fund”) and rebates (the “Rebate Fund”) with a total value of $135 million (the “Settlement Fund”); (2) NIC and NI contribute $85 million to the Cash Fund, which will be used to pay all settlement fees and expenses, service awards, attorneys’ fees and costs, and cash payments to members of the settlement class; (3) NI commit to make available rebates with a face value in the aggregate of $50 million to the Rebate Fund; and (4) the settlement class release NIC and NI and their affiliates from all claims and potential claims arising from or related to the allegations in the U.S. Actions, except for claims for personal injury or damage to third-party property. The Settlement Agreement further provides that dollars or value remaining in either the Cash Fund or the Rebate Fund after claims are processed will be used to pay approved claims from the other fund if the other fund is oversubscribed (the “Waterfall”). The Settlement Agreement states that NIC and NI deny all claims in the U.S. Actions, deny wrongdoing, liability or damage of any kind, and deny that NIC and NI acted improperly or wrongfully in any way. On February 3, 2020, NIC and NI funded $85 million to the Cash Fund. Any Waterfall from the Rebate Fund to the Cash Fund is capped at $35 million. We are waiting for the final adjudication of the claims by the administrator. Is is possible that a Waterfall from the Rebate Fund to the Cash Fund could occur.
On June 12, 2019, the court preliminarily approved the settlement. Members of the class were provided notice of the Settlement Agreement and an opportunity to object or opt out. Any members of the class who opted out will not receive any benefit from the Settlement Agreement or be bound by it.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Four class members filed a consolidated objection to the Settlement Agreement on October 10, 2019. On January 3, 2020, the court entered an order rejecting the objection and finding the settlement to be "fair, reasonable, and adequate." The court also granted the motion of lead counsel for the class plaintiffs for approval of an award of attorneys' fees and costs. On January 21, 2020, the court entered an Order Granting Final Approval of Class Action Settlement, Award of Attorneys' Fees and Costs and Final Order and Judgment.
In February 2020, three class members intervened in the MDL Action and filed motions asking the court to exclude them from the settlement or to permit them to opt out after the opt out deadline. In April and June 2020, the court denied these motions. In May 2020, two of the intervening class members appealed the court’s April 2020 order. The Company’s opposition brief was filed on August 19, 2020.
There are also non-class action MaxxForce Advanced EGR engine lawsuits filed against the Company in various state courts. A number of non-class action lawsuits have been resolved in favor of the Company prior to trial or settled for immaterial amounts. Several cases have been resolved at trial with varying results. Several other state court non-class actions are pending at this time. One of the non-class action lawsuits ("Milan"), alleging violations of the Tennessee Consumer Protection Act and fraud and involving approximately 235 trucks, was tried in Tennessee state court in August 2017, and resulted in a jury verdict of approximately $31 million against the Company, including $20 million in punitive damages.
In the third quarter of 2017, we recorded $31 million of charges in SG&A expenses in our Consolidated Statements of Operations related to the Milan lawsuit.
On August 14, 2019, a three-judge panel of the Tennessee Court of Appeals issued a unanimous opinion reversing the $31 million judgment and $1 million of fees and costs previously awarded to the Milan plaintiffs following an appeal filed by the Company in January 2018 challenging the jury verdict. In addition, the Tennessee Court of Appeals affirmed the trial court’s judgment for Navistar on the Milan plaintiff's warranty claims. On October 11, 2019, the Milan plaintiffs filed an application for permission to appeal this ruling to the Tennessee Supreme Court. On January 16, 2020, the Tennessee Supreme Court granted permission to appeal. The Company filed its opposition brief on August 19, 2020.
Based on our assessment of the facts underlying the claims in the above actions, the Company has recorded a charge in the Company’s fiscal second quarter ended April 30, 2019 in the amount of $159 million as a reserve for its expected obligations under the Settlement Agreement as well as for current period liabilities and potential future settlements with respect to certain other MaxxForce Advanced EGR engine lawsuits that are not included in the Settlement Agreement. In addition, the Company has released a liability of $32 million, related to the judgment reversal in the Milan case in the third quarter ended July 31, 2019. These impacts were recorded in SG&A expenses in our Consolidated Statements of Operations. As noted above, with respect to the Settlement Agreement and the claims filed in connection with it, it is possible that a Waterfall from the Rebate Fund to the Cash Fund could result in an additional cash impact. Other than the aforementioned, we are unable to provide further meaningful quantification of how the final resolution of these matters may impact our future consolidated financial condition, results of operations or cash flows.
EPA Clean Air Act Litigation
In February 2012, NI received a Notice of Violation ("NOV") from the United States Environmental Protection Agency (the "EPA") pertaining to certain heavy-duty diesel engines which, according to the EPA, were not completely assembled by NI until calendar year 2010 and, therefore, were not covered by NI's model year 2009 certificates of conformity. The NOV concluded that NI's introduction into commerce of each of these engines violated the Federal Clean Air Act.
On July 14, 2015, the Department of Justice ("DOJ"), on behalf of the EPA, filed a lawsuit against NIC and NI in the U.S. District Court for the Northern District of Illinois. Similar to the NOV, the lawsuit alleges that NIC and NI introduced into commerce approximately 7,749 heavy-duty diesel engines that were not covered by model year 2009 certificates of conformity because those engines were not completely assembled until calendar year 2010, resulting in violations of the Federal Clean Air Act. On July 16, 2015, the DOJ filed an amended complaint clarifying the amount of civil penalties being sought. The lawsuit requests injunctive relief and the assessment of civil penalties of up to $37,500 for each violation. On September 14, 2015, NIC and NI each filed an Answer and Affirmative Defenses to the Amended Complaint. We dispute the allegations in the lawsuit.
On March 1, 2017, the court entered a Memorandum Opinion and Order (i) granting a motion by the DOJ for summary judgment on the issue of liability with respect to NI, (ii) denying a motion by the DOJ for summary judgment on the issue of liability with respect to NIC, and (iii) denying a motion by NIC for summary judgment against the EPA.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
On April 3, 2018, the parties jointly filed a stipulation of dismissal with prejudice for NIC only. The stipulation with prejudice has no effect on the claims made against NI. With the dismissal of NIC, the matter moved to the remedy phase with respect to NI. Fact discovery for the remedy phase is complete. On July 30, 2020, NI filed a motion for partial summary judgment as to certain aspects of the remedy sought by the DOJ. The parties will continue expert discovery and all additional summary judgment filings are anticipated to be completed by the end of September 2020.
Based on our assessment of the facts underlying the amended complaint above, we recorded an additional charge of $4 million in the first quarter of 2020 resulting in the recording of a total estimated liability of $6 million at July 31, 2020 in SG&A expenses in our Consolidated Statements of Operations. Total cash outlays in future periods could range from $6 million to $291 million related to the resolution of this matter. Other than the aforementioned, we are unable to provide further meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition, results of operations or cash flows.
Navistar Defense MRAP Litigation
In the third quarter of 2016, Navistar Defense, LLC ("NDLLC") received a subpoena from the United States Department of Defense Inspector General (the "DOD IG"). The subpoena requested documents relating to NDLLC's sale of its independent suspension systems ("ISS") for military vehicles to the government for the period from January 1, 2009 through December 31, 2010.
Beginning in June 2016, NDLLC made submissions of documents responsive to the subpoena and engaged in ongoing discussions with government representatives, including representatives from the DOD IG and the DOJ. Such discussions included assertions that NDLLC may have overcharged the United States for the ISS components. In August 2017, NDLLC received a letter from the DOJ claiming that NDLLC made false and misleading statements during the course of price negotiations and during the Defense Contract Audit Agency audit which resulted in NDLLC overcharging the United States for the ISS components by approximately $88 million and asking for treble damages and penalties for a total demand of approximately $264 million. NDLLC responded to the DOJ’s demand letter explaining its position that it has no liability in this matter, and outlining the bases for such position, and stating that NDLLC intends to vigorously defend its position.
On December 8, 2017, NDLLC received another subpoena from the DOD IG which requested documents relating to NDLLC's pricing of the Mine Resistant Ambush Protected (“MRAP”) vehicle and its sale of parts to the government for the period from January 1, 2006 through December 31, 2013. NDLLC responded to the subpoena.
On July 10, 2018, NDLLC received another subpoena from the DOD IG requesting additional custodian emails and documents related to the MRAP and ISS components. NDLLC responded to the subpoena. Additionally, in September and October 2018, the DOJ conducted interviews of certain current and former employees.
On December 3, 2019, the DOJ filed a complaint against NDLLC in the U.S. District Court for the District of Columbia partially intervening in what had been a sealed False Claims Act (“FCA”) case previously filed by a relator. The relator, a former NDLLC employee, filed his initial complaint in September 2013 in the U.S. District Court for the District of Columbia. The relator filed an amended complaint on November 1, 2019, alleging that NDLLC submitted false pricing support to the government in connection with three MRAP contract parts or part systems - the chassis, the engine, and 13 components of the 3,898 ISS kits (“Relator’s ISS Claim”). The relator alleges single damages of $1.1 billion for the chassis, $36 million for the engine, and $119 million for the Relator’s ISS Claim, totaling approximately $1.3 billion in single damages and $3.8 billion in treble damages. The DOJ’s complaint in partial intervention alleges that NDLLC submitted false pricing support in connection with 11 of the components of 3,803 ISS kits and seeks damages of an unspecified amount under the FCA and common law theories of mistake, unjust enrichment, and fraud. On January 10, 2020, NDLLC filed a motion to transfer venue to the Northern District of Illinois. On January 16, 2020, the U.S. District Court for the District of Columbia entered an order staying deadlines to respond to the complaints, pending resolution of the motion to transfer venue.
NDLLC intends to defend itself vigorously.
At this time, we are unable to predict the outcome of these matters, including whether a settlement will be reached, or provide meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition, results of operations or cash flows.
Customer Dispute
On August 20, 2020, a customer, Hirschbach Motor Lines, Inc., filed a complaint against Navistar International Corporation and Navistar, Inc. in the Northern District of Iowa, alleging various causes of action (including allegations relating to the parties' contractual relationship) and requesting monetary damages (including punitive damages and attorneys' fees). The court has issued a seal order for the complaint and its exhibits.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
At this time, we are unable to predict the outcome of this matter, including whether a settlement will be reached, or provide meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition, results of operations or cash flows.
13. Segment Reporting
The following is a description of our four reporting segments:
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Our Truck segment manufactures and distributes Class 4 through 8 trucks and buses under the International and IC Bus ("IC") brands, and produces engines under our proprietary brand name. This segment sells its products in the U.S., Canada, and Mexico markets, as well as through our export truck business.
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•
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Our Parts segment provides customers with proprietary products needed to support the International commercial truck, IC Bus, proprietary engine lines, and export parts business, as well as our other product lines. Our Parts segment also provides a wide selection of other standard truck, trailer, and engine aftermarket parts. Also included in the Parts segment are the operating results of BDP, which manages the sourcing, merchandising, and distribution of certain service parts we sell to Ford in North America.
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•
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Our Global Operations segment primarily consists of Brazil engine operations which produce diesel engines under contract manufacturing arrangements, as well as under the MWM brand, for sale to original equipment manufacturers (OEMs) in South America.
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Our Financial Services segment provides retail, wholesale, and lease financing of products sold by the Truck and Parts segments and their dealers within the U.S. and Mexico, as well as financing for wholesale accounts and selected retail accounts receivable. This segment also facilitates financing relationships in the U.S. and other countries to support our Manufacturing Operations.
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Corporate contains those items that are not included in our four segments.
Segment Profit (Loss)
We define segment profit (loss) as net income (loss) attributable to NIC, excluding income tax benefit (expense). Selected financial information from our Consolidated Statements of Operations and our Consolidated Balance Sheets is as follows:
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(in millions)
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Truck
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Parts
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Global Operations
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Financial
Services(A)
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Corporate
and
Eliminations
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Total
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Three Months Ended July 31, 2020
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External sales and revenues, net
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$
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1,177
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$
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413
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|
$
|
46
|
|
|
$
|
39
|
|
|
$
|
—
|
|
|
$
|
1,675
|
|
|
Intersegment sales and revenues
|
26
|
|
|
1
|
|
|
1
|
|
|
10
|
|
|
(38
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
1,203
|
|
|
$
|
414
|
|
|
$
|
47
|
|
|
$
|
49
|
|
|
$
|
(38
|
)
|
|
$
|
1,675
|
|
|
Net income (loss) attributable to NIC
|
$
|
(22
|
)
|
|
$
|
97
|
|
|
$
|
1
|
|
|
$
|
10
|
|
|
$
|
(123
|
)
|
|
$
|
(37
|
)
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
(8
|
)
|
|
Segment profit (loss)
|
$
|
(22
|
)
|
|
$
|
97
|
|
|
$
|
1
|
|
|
$
|
10
|
|
|
$
|
(115
|
)
|
|
$
|
(29
|
)
|
|
Depreciation and amortization
|
$
|
27
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
16
|
|
|
$
|
2
|
|
|
$
|
47
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
55
|
|
|
71
|
|
|
Equity in income of non-consolidated affiliates
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Capital expenditures(B)
|
18
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
5
|
|
|
25
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Three Months Ended July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
2,342
|
|
|
$
|
569
|
|
|
$
|
82
|
|
|
$
|
46
|
|
|
$
|
3
|
|
|
$
|
3,042
|
|
|
Intersegment sales and revenues
|
45
|
|
|
2
|
|
|
8
|
|
|
28
|
|
|
(83
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
2,387
|
|
|
$
|
571
|
|
|
$
|
90
|
|
|
$
|
74
|
|
|
$
|
(80
|
)
|
|
$
|
3,042
|
|
|
Net income (loss) attributable to NIC
|
$
|
167
|
|
|
$
|
149
|
|
|
$
|
1
|
|
|
$
|
30
|
|
|
$
|
(191
|
)
|
|
$
|
156
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29
|
)
|
|
(29
|
)
|
|
Segment profit (loss)
|
$
|
167
|
|
|
$
|
149
|
|
|
$
|
1
|
|
|
$
|
30
|
|
|
$
|
(162
|
)
|
|
$
|
185
|
|
|
Depreciation and amortization
|
$
|
26
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
16
|
|
|
$
|
1
|
|
|
$
|
47
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
49
|
|
|
76
|
|
|
Equity in income of non-consolidated affiliates
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Capital expenditures(B)
|
17
|
|
|
2
|
|
|
1
|
|
|
—
|
|
|
4
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Nine Months Ended July 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
3,800
|
|
|
$
|
1,347
|
|
|
$
|
154
|
|
|
$
|
135
|
|
|
$
|
2
|
|
|
$
|
5,438
|
|
|
Intersegment sales and revenues
|
34
|
|
|
3
|
|
|
12
|
|
|
35
|
|
|
(84
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
3,834
|
|
|
$
|
1,350
|
|
|
$
|
166
|
|
|
$
|
170
|
|
|
$
|
(82
|
)
|
|
$
|
5,438
|
|
|
Net income (loss) attributable to NIC
|
$
|
(131
|
)
|
|
$
|
319
|
|
|
$
|
(12
|
)
|
|
$
|
51
|
|
|
$
|
(338
|
)
|
|
$
|
(111
|
)
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
(10
|
)
|
|
Segment profit (loss)
|
$
|
(131
|
)
|
|
$
|
319
|
|
|
$
|
(12
|
)
|
|
$
|
51
|
|
|
$
|
(328
|
)
|
|
$
|
(101
|
)
|
|
Depreciation and amortization
|
$
|
83
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
48
|
|
|
$
|
5
|
|
|
$
|
146
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
55
|
|
|
144
|
|
|
199
|
|
|
Equity in income (loss) of non-consolidated affiliates
|
(1
|
)
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Capital expenditures(B)
|
93
|
|
|
6
|
|
|
3
|
|
|
—
|
|
|
13
|
|
|
115
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Nine Months Ended July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
6,405
|
|
|
$
|
1,693
|
|
|
$
|
223
|
|
|
$
|
141
|
|
|
$
|
9
|
|
|
$
|
8,471
|
|
|
Intersegment sales and revenues
|
75
|
|
|
5
|
|
|
27
|
|
|
85
|
|
|
(192
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
6,480
|
|
|
$
|
1,698
|
|
|
$
|
250
|
|
|
$
|
226
|
|
|
$
|
(183
|
)
|
|
$
|
8,471
|
|
|
Net income (loss) attributable to NIC
|
$
|
183
|
|
|
$
|
437
|
|
|
$
|
10
|
|
|
$
|
93
|
|
|
$
|
(604
|
)
|
|
$
|
119
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
(9
|
)
|
|
Segment profit (loss)
|
$
|
183
|
|
|
$
|
437
|
|
|
$
|
10
|
|
|
$
|
93
|
|
|
$
|
(595
|
)
|
|
$
|
128
|
|
|
Depreciation and amortization
|
$
|
78
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
48
|
|
|
$
|
7
|
|
|
$
|
144
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
83
|
|
|
160
|
|
|
243
|
|
|
Equity in income (loss) of non-consolidated affiliates
|
3
|
|
|
2
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Capital expenditures(B)
|
69
|
|
|
3
|
|
|
2
|
|
|
2
|
|
|
14
|
|
|
90
|
|
_______________________
|
|
|
|
(A)
|
Total sales and revenues in the Financial Services segment include interest revenues of $29 million and $103 million for the three and nine months ended July 31, 2020, respectively, and $53 million and $161 million for the three and nine months ended July 31, 2019, respectively.
|
|
|
|
|
(B)
|
Exclusive of purchases of equipment leased to others.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Segment assets, as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2020
|
$
|
1,721
|
|
|
$
|
641
|
|
|
$
|
202
|
|
|
$
|
2,285
|
|
|
$
|
1,826
|
|
|
$
|
6,675
|
|
|
October 31, 2019
|
1,705
|
|
|
688
|
|
|
296
|
|
|
2,774
|
|
|
1,454
|
|
|
6,917
|
|
14. Stockholders' Deficit
Accumulated Other Comprehensive Loss
The following table presents changes in Accumulated other comprehensive loss, net of tax, included in our Consolidated Statements of Stockholders' Deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of April 30, 2020
|
$
|
(432
|
)
|
|
$
|
(1,731
|
)
|
|
$
|
(2,163
|
)
|
|
Other comprehensive income before reclassifications
|
32
|
|
|
2
|
|
|
34
|
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
29
|
|
|
29
|
|
|
Net current-period other comprehensive income
|
32
|
|
|
31
|
|
|
63
|
|
|
Balance as of July 31, 2020
|
$
|
(400
|
)
|
|
$
|
(1,700
|
)
|
|
$
|
(2,100
|
)
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of October 31, 2019
|
$
|
(321
|
)
|
|
$
|
(1,591
|
)
|
|
$
|
(1,912
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
(79
|
)
|
|
2
|
|
|
(77
|
)
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
78
|
|
|
78
|
|
|
Net current-period other comprehensive income (loss)
|
(79
|
)
|
|
80
|
|
|
1
|
|
|
Reclassification of stranded tax effects(A)
|
—
|
|
|
(189
|
)
|
|
(189
|
)
|
|
Balance as of July 31, 2020
|
$
|
(400
|
)
|
|
$
|
(1,700
|
)
|
|
$
|
(2,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of April 30, 2019
|
$
|
(319
|
)
|
|
$
|
(1,467
|
)
|
|
$
|
(1,786
|
)
|
|
Other comprehensive income before reclassifications
|
9
|
|
|
—
|
|
|
9
|
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
23
|
|
|
23
|
|
|
Net current-period other comprehensive income
|
9
|
|
|
23
|
|
|
32
|
|
|
Balance as of July 31, 2019
|
$
|
(310
|
)
|
|
$
|
(1,444
|
)
|
|
$
|
(1,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of October 31, 2018
|
$
|
(315
|
)
|
|
$
|
(1,605
|
)
|
|
$
|
(1,920
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
5
|
|
|
(8
|
)
|
|
(3
|
)
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
169
|
|
|
169
|
|
|
Net current-period other comprehensive income
|
5
|
|
|
161
|
|
|
166
|
|
|
Balance as of July 31, 2019
|
$
|
(310
|
)
|
|
$
|
(1,444
|
)
|
|
$
|
(1,754
|
)
|
_________________________
|
|
|
|
(A)
|
During the first nine months of 2020, we reclassified $189 million of stranded tax effects out of Accumulated other comprehensive loss and into Accumulated deficit. The stranded tax effects remained a component of Accumulated other comprehensive loss as a result of the remeasurement of our deferred tax assets related to our U.S. pension and OPEB plans through the statement of operations, to the new U.S. federal tax rate of 21% through our Consolidated Statements of Operations. As a result, stranded tax effects within Accumulated other comprehensive loss which would not be realized at the established historical tax rates have now been adjusted through equity.
|
The following table presents the amounts reclassified from Accumulated other comprehensive loss and the affected line item in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Nine Months Ended July 31,
|
|
(in millions)
|
|
Location in Consolidated
Statements of Operations
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss
|
|
Other expense, net
|
|
$
|
24
|
|
|
$
|
23
|
|
|
$
|
73
|
|
|
$
|
70
|
|
|
Settlements
|
|
Other expense, net
|
|
7
|
|
|
—
|
|
|
7
|
|
|
142
|
|
|
|
|
Total before tax
|
|
31
|
|
|
23
|
|
|
80
|
|
|
212
|
|
|
|
|
Income tax expense
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
(43
|
)
|
|
Total reclassifications for the period, net of tax
|
|
$
|
29
|
|
|
$
|
23
|
|
|
$
|
78
|
|
|
$
|
169
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
15. Earnings (Loss) Per Share Attributable to Navistar International Corporation
The following table presents the information used in the calculation of our basic and diluted earnings (loss) per share all attributable to NIC in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Nine Months Ended July 31,
|
|
(in millions, except per share data)
|
2020
|
|
2019
|
|
2020
|
|
2019
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) attributable to Navistar International Corporation common stockholders
|
$
|
(37
|
)
|
|
$
|
156
|
|
|
$
|
(111
|
)
|
|
$
|
119
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
99.7
|
|
|
99.4
|
|
|
99.6
|
|
|
99.2
|
|
|
Effect of dilutive securities
|
—
|
|
|
0.3
|
|
|
—
|
|
|
0.3
|
|
|
Diluted
|
99.7
|
|
|
99.7
|
|
|
99.6
|
|
|
99.5
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (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
|
|
The computation of diluted earnings per share excludes outstanding options and other common stock equivalents in periods where inclusion of such potential common stock instruments would be anti-dilutive. For the three and nine months ended July 31, 2020, no dilutive securities were included in the computation of diluted earnings per share because they would have been anti-dilutive due to the net loss attributable to NIC.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)