Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The ranges of estimated useful lives are as follows:
|
|
|
|
|
|
|
Years
|
|
Buildings
|
20 - 50
|
|
Leasehold improvements
|
3 - 20
|
|
Machinery and equipment
|
3 - 12
|
|
Furniture, fixtures, and equipment
|
3 - 15
|
|
Equipment leased to others
|
1 - 10
|
Long-lived assets are evaluated periodically to determine if an adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets.
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 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 review residual values periodically to determine that recorded amounts are appropriate and the equipment is not impaired.
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life or productive capacity of an asset and we capitalize interest on major construction and development projects while in progress.
Gains or losses on disposition of property and equipment are recognized in Other expense, net.
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.
During 2019, we identified a triggering event related to continued economic weakness in Brazil and the initiation of strategic cost reduction actions in the Brazilian asset group, which is included in the Global Operations segment. As a result, we estimated the recoverable amount of the asset group and determined that the sum of the undiscounted future cash flows exceeds the carrying value and the asset group was not impaired. It is reasonably possible that within the next twelve months, we could recognize impairment charges if we experience adverse changes in our business including further declines in profitability due to changes in volume, market pricing, cost, or the business environment. Significant adverse changes to our business environment and future cash flows, or our inability to realize cost savings from our restructuring activities, could cause us to record impairment charges in future periods, which could be material.
Included in equipment leased to others are trucks that we produced or acquired to lease to customers as well as equipment that is financed by Bank of Montreal ("BMO") that does not qualify for revenue recognition, as we retained control in the leased property, which are accounted for as operating leases and borrowings, respectively. In the Consolidated Statement of Cash Flows, the related expenditures are reflected as the Purchases of equipment leased to others in the investing section.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to the net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or more frequently, if circumstances change or an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Qualitative factors may be assessed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the qualitative assessment indicates that the carrying amount is more likely than not higher than the fair value, goodwill is tested for impairment based on a two-step test. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The income approach is based on discounted cash flows which are derived from internal forecasts and economic expectations for each respective reporting unit.
An intangible asset determined to have an indefinite useful life is not amortized until its useful life is determined to no longer be indefinite. Indefinite-lived intangible assets are evaluated each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Significant judgment is applied when evaluating if an intangible asset has a finite useful life. In addition, for indefinite-lived intangible assets, significant judgment is applied in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.
Intangible assets subject to amortization are also evaluated for impairment or when indicators of impairment are determined to exist. We test for impairment of intangible assets, subject to amortization, 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. If the sum of the undiscounted future cash flows is less than the carrying value, the fair value of the asset group is determined. The amount of impairment is calculated by subtracting the fair value of the asset group from the carrying value of the asset group. Intangible assets, subject to amortization, could become impaired in the future or require additional charges as a result of declines in profitability due to changes in volume, market pricing, cost, manner in which an asset is used, physical condition of an asset, laws and regulations, or the business environment. We amortize the cost of intangible assets over their respective estimated useful lives, generally on a straight-line basis.
The ranges for the amortization periods are generally as follows:
|
|
|
|
|
|
|
Years
|
|
Customer base and relationships
|
3 - 15
|
|
Trademarks
|
20
|
|
Other
|
3 - 18
|
Investments in Non-consolidated Affiliates
Equity method investments are recorded at original cost and adjusted periodically to recognize (i) our proportionate share of the investees' net income or losses after the date of investment, (ii) additional contributions made and dividends or distributions received, and (iii) impairment losses resulting from adjustments to fair value.
We assess the potential impairment of our equity method investments and determine fair value based on valuation methodologies, as appropriate, including the present value of estimated future cash flows, estimates of sales proceeds, and market multiples. If an investment is determined to be impaired and the decline in value is other than temporary, we record an appropriate write-down.
Debt Issuance Costs
We amortize debt issuance costs, discounts and premiums over the remaining life of the related debt using the effective interest method. The related income or expense is included in Interest expense. We record debt issuance costs, discounts and premiums associated with term debt as a direct deduction from, or addition to, the face amount of the debt. We record debt issuance costs associated with line-of-credit debt as other assets.
Pensions and Postretirement Benefits
We use actuarial methods and assumptions to account for our pension plans and other postretirement benefit plans. Pension and other postretirement benefits expense includes the actuarially computed cost of benefits earned during the current service period, the interest cost on accrued obligations, the expected return on plan assets, the straight-line amortization of net actuarial gains and losses and plan amendments, and adjustments due to settlements and curtailments.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Engineering and Product Development Costs
Engineering and product development costs arise from ongoing costs associated with improving existing products and manufacturing processes and for the introduction of new truck and engine components and products, and are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and are included in SG&A expenses. These costs totaled $31 million, $31 million, and $26 million for the years ended October 31, 2019, 2018, and 2017, respectively.
Contingency Accruals
We accrue for loss contingencies associated with outstanding litigation for which we have determined it is probable that a loss has occurred and the amount of loss can be reasonably estimated. Our asbestos, product liability, environmental, and workers compensation accruals also include estimated future legal fees associated with the loss contingencies, as we believe we can reasonably estimate those costs. In all other instances, legal fees are expensed as incurred. These expenses may be recorded in Costs of products sold, SG&A expenses, or Other expense, net. These estimates are based on our expectations of the scope, length to complete, and complexity of the claims. In the future, additional adjustments may be recorded as the scope, length, or complexity of outstanding litigation changes.
Warranty
We generally offer one to five-year warranty coverage for our truck, bus, and engine products, as well as our service parts. Terms and conditions vary by product, customer, and country. We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers.
Our warranty estimates are established using historical information about the nature, frequency, timing, and average cost of warranty claims. Warranty claims are influenced by numerous factors, including new product introductions, technological developments, the competitive environment, the design and manufacturing process, and the complexity and related costs of component parts. We estimate our warranty accrual for our engines and trucks based on engine types and model years. Our warranty accruals take into account the projected ultimate cost-per-unit ("CPU") utilizing historical claims information. The CPU represents the total cash projected to be spent for warranty claims for a particular model year during the warranty period, divided by the number of units sold. The projection of the ultimate CPU is affected by component failure rates, repair costs, and the timing of failures in the product life cycle. Warranty claims inherently have a high amount of variability in timing and severity and can be influenced by external factors. Our warranty estimation process takes into consideration numerous variables that contribute to the precision of the estimate, but also add to the complexity of the model. Including numerous variables also reduces the sensitivity of the model to any one variable. We perform periodic reviews of warranty spend data to allow for timely consideration of the effects on warranty accruals.
Initial warranty estimates for new model year products are based on the previous model year product's warranty experience until the new product progresses sufficiently through its life cycle and related claims data becomes mature. Historically, warranty claims experience for launch-year products has been higher compared to the prior model-year engines; however, over time we have been able to refine both the design and manufacturing process to reduce both the volume and the severity of warranty claims. New product launches require a greater use of judgment in developing estimates until historical experience becomes available.
We record adjustments to pre-existing warranties for changes in our estimate of warranty costs for products sold in prior fiscal years. Such adjustments typically occur when claims experience deviates from historic and expected trends. Future events and circumstances could materially change these estimates and require additional adjustments to our liability.
When we identify cost effective opportunities to address issues in products sold or corrective actions for safety issues, we initiate product recalls or field campaigns. As a result of the uncertainty surrounding the nature and frequency of product recalls and field campaigns, the liability for such actions are generally recorded when we commit to a product recall or field campaign. Each subsequent quarter after a recall or campaign is initiated the recorded liability balance is analyzed, reviewed, and adjusted if necessary to reflect any changes in the anticipated average cost of repair or number of repairs to be completed prospectively. Included in 2019 warranty expense were $27 million of charges related to new campaign issuances as well as changes in estimates of previously issued campaigns, as compared to $10 million and $21 million in 2018 and 2017, respectively. The charges were primarily recognized as adjustments to pre-existing warranties. As we continue to identify opportunities to improve the design and manufacturing of our engines we may incur additional charges for product recalls and field campaigns to address identified issues.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Optional extended warranty contracts can be purchased for periods ranging from one to ten years. Warranty revenues related to extended warranty contracts are amortized to income, over the life of the contract, (a) in 2019 in proportion to the costs expected to be incurred in satisfying the obligation under the contract and (b) in 2018 and 2017 using the straight-line method. Costs under extended warranty contracts are expensed as incurred. We recognize losses on defined pools of extended warranty contracts when the expected costs for a given pool of contracts exceed related unearned revenue.
When collection is reasonably assured, we also estimate the amount of warranty claim recoveries to be received from our suppliers and record them in Other current assets and Other noncurrent assets. Recoveries related to specific product recalls, in which a supplier confirms its liability under the recall, are recorded in Trade and other receivables, net. Warranty costs and recoveries are included in Costs of products sold.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Balance at beginning of period
|
$
|
529
|
|
|
$
|
629
|
|
|
$
|
818
|
|
|
Costs accrued and revenues deferred
|
249
|
|
|
211
|
|
|
199
|
|
|
Currency translation adjustment
|
—
|
|
|
1
|
|
|
(1
|
)
|
|
Adjustments to pre-existing warranties(A)
|
3
|
|
|
(9
|
)
|
|
(1
|
)
|
|
Payments and revenues recognized
|
(283
|
)
|
|
(303
|
)
|
|
(386
|
)
|
|
Other adjustments(B)
|
12
|
|
|
—
|
|
|
—
|
|
|
Balance at end of period
|
510
|
|
|
529
|
|
|
629
|
|
|
Less: Current portion
|
233
|
|
|
255
|
|
|
307
|
|
|
Noncurrent accrued product warranty and deferred warranty revenue
|
$
|
277
|
|
|
$
|
274
|
|
|
$
|
322
|
|
________________________
|
|
|
|
(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 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 our defense business, Navistar Defense.
In 2019, we recognized a net benefit of $14 million related to extended warranty contracts on our proprietary Big-Bore engines, which includes a benefit of $13 million related to pre-existing warranties. In 2018, we recognized a net benefit of $29 million related to extended warranty contracts on our proprietary Big-Bore engines, which includes a benefit of $33 million related to pre-existing warranties. In 2017, we recognized a net charge of $8 million related to extended warranty contracts on our proprietary Big-Bore engines, which includes a charge of $3 million related to pre-existing warranties.
Stock-based Compensation
We have various plans that provide for the granting of stock-based compensation to certain employees, directors, and consultants, which is further described in Note 18, Stock-Based Compensation Plans. Shares are issued upon option exercise from Common stock held in treasury.
For transactions in which we obtain employee services in exchange for an award of equity instruments, we measure the cost of the services based on the grant date fair value of the award. We recognize the cost over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). Costs related to plans with graded vesting are generally recognized using a straight-line method.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Foreign Currency Translation
We translate the financial statements of foreign subsidiaries whose local currency is their functional currency to U.S. dollars using period-end exchange rates for assets and liabilities and weighted average exchange rates for each period for revenues and expenses. Differences arising from exchange rate changes are included in the Foreign currency translation adjustment component of AOCL.
For foreign subsidiaries whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet accounts and the related income statement accounts at historical exchange rates. Gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred. We recognized net foreign currency transaction losses of $4 million, $2 million, and $16 million in 2019, 2018, and 2017, respectively, which were recorded in Other expense, net.
Income Taxes
We file a consolidated U.S. federal income tax return for NIC and its eligible domestic subsidiaries. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carryforwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
We recognize the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
We apply the intraperiod tax allocation rules to allocate income taxes among continuing operations, discontinued operations, other comprehensive income (loss), and additional paid-in capital when we meet the criteria as prescribed in the rules.
Earnings Per Share
The calculation of basic earnings per share is based on the weighted average number of our shares of common stock outstanding during the applicable period. The calculation for diluted earnings per share recognizes the effect of all potential dilutive shares of common stock that were outstanding during the respective periods, unless their impact would be anti-dilutive.
Diluted earnings per share recognizes the dilution that would occur if securities or other contracts to issue common stock were exercised or converted into shares using the treasury stock method.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles ("GAAP") requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, income tax contingency accruals and valuation allowances, product warranty accruals, used truck inventory valuations, asbestos and other product liability accruals, asset impairment charges, restructuring charges and litigation-related accruals. Actual results could differ from our estimates.
Concentration Risks
Our financial condition, results of operations, and cash flows are subject to concentration risks related to our significant unionized workforce. As of October 31, 2019, approximately 7,400, or 98%, 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. In January 2019, certain of our United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") represented employees executed a new six-year master collective bargaining agreement with a ratification date of December 17, 2018 that replaced the prior agreement which expired in October 2018. Our future operations may be affected by changes in governmental procurement policies, budget considerations, and political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Recently Adopted Accounting Standards
In March 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118". This ASU updates the income tax accounting in GAAP to reflect the SEC's interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (H.R.1) (the "Tax Act") was signed into law. We adopted this ASU on November 1, 2018. See Note 12, Income taxes for additional information.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". This ASU requires that an employer disaggregate the service cost component from the other components of net periodic benefit cost. In addition, only the service cost component will be eligible for capitalization. The amendments in this update are required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the Consolidated Statement of Operations and prospectively, on and after the adoption date, for the capitalization of the service cost component of net periodic benefit cost in assets. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. We adopted this ASU on November 1, 2018, using a retrospective approach, which resulted in a reclassification of certain net periodic benefit costs from Selling, general and administrative ("SG&A") expenses to Other expense, net in our Consolidated Statements of Operations of in the amounts of $94 million and $127 million for the years ended October 31, 2018 and 2017, respectively. See Note 11, Postretirement benefits for additional information.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash" (Topic 230). This ASU requires that a statement of cash flows explain the change during the period in the total of cash, and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. We adopted this ASU on November 1, 2018 using a retrospective transition approach.
The following table provides changes to our Consolidated Statements of Cash Flows for the years ended October 31, 2018 and 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Under Prior Standard
|
|
Effects of New Standard
|
|
As Reported
|
|
Year ended October 31, 2018
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Net change in restricted cash and cash equivalents
|
|
$
|
9
|
|
|
$
|
(9
|
)
|
|
$
|
—
|
|
|
Net cash used in investing activities
|
|
(57
|
)
|
|
(9
|
)
|
|
(66
|
)
|
|
Increase in cash, cash equivalents and restricted cash
|
|
614
|
|
|
(9
|
)
|
|
605
|
|
|
Cash, cash equivalents and restricted cash at beginning of the period
|
|
706
|
|
|
134
|
|
|
840
|
|
|
Cash, cash equivalents and restricted cash at end of the period
|
|
1,320
|
|
|
125
|
|
|
1,445
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Under Prior Standard
|
|
Effects of New Standard
|
|
As Reported
|
|
Year ended October 31, 2017
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Net change in restricted cash and cash equivalents
|
|
$
|
(22
|
)
|
|
$
|
22
|
|
|
$
|
—
|
|
|
Net cash used in investing activities
|
|
(542
|
)
|
|
22
|
|
|
(520
|
)
|
|
Decrease in cash, cash equivalents and restricted cash
|
|
(98
|
)
|
|
22
|
|
|
(76
|
)
|
|
Cash, cash equivalents and restricted cash at beginning of the period
|
|
804
|
|
|
112
|
|
|
916
|
|
|
Cash, cash equivalents and restricted cash at end of the period
|
|
706
|
|
|
134
|
|
|
840
|
|
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (“ASC 606”), which supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition." This ASU is based on the principle that revenue is
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which postponed the effective date of ASU No. 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted on the original effective date for fiscal years beginning after December 15, 2016. We analyzed the impact of the ASU on our portfolio of customer contracts which resulted in changes in the timing and the amount of revenue recognized and gross versus net accounting for certain revenue streams in comparison with previous guidance.
On November 1, 2018, we adopted the new accounting standard ASC 606, "Revenue from Contracts with Customers" and all the related amendments (“new revenue standard”) using the modified retrospective method to all contracts. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Based on our assessment, the cumulative effect adjustment upon adoption of the new revenue standard had a $37 million impact on our Accumulated deficit. The primary impacts include an increase in Accumulated deficit due to an increase in the refund liability owed to our customers for future returns of core components. Previously our refund liability was recorded net of our future trade-in value to our suppliers. Under the new revenue standard, we record a liability for the amounts owed to our customers and a deposit asset for the amount we are currently eligible to receive from our suppliers. An additional increase relates to a change in the recognition pattern of revenue for extended warranty contracts. Revenue from these contracts was recognized on a straight-line basis over the life of the contract. Under the new revenue standard, revenue for extended warranty contracts is recorded in proportion to the costs expected to be incurred in satisfying the obligations based on historical cost patterns over the life of similar contracts.
The increase in Accumulated deficit is partially offset by certain contracts where revenue recognition occurred as units were delivered and accepted. Under the new revenue standard, when the contract transfers control of a good to a customer as services or production occurs, revenue is recognized over time. An additional decrease in Accumulated deficit relates to certain sales that were recorded as leases or borrowings as we retained control in the leased property. Under the new revenue standard, revenue is recognized upon transfer of control for these transactions, less the value of any guarantees provided to the customer. The adoption of the new revenue standard resulted in changes in the classification of Sales and revenues, net and Costs of products sold in our Consolidated Statements of Operations. The new revenue standard also resulted in changes in the classification of certain assets and liabilities in our Consolidated Balance Sheets.
We have revised our relevant policy and procedures and provided expanded revenue recognition disclosures based on the new qualitative and quantitative disclosure requirements of the standard in Note 2, Revenue.
The cumulative effects of the adjustments made to our November 1, 2018 Consolidated Balance Sheet for the adoption of the new revenue standard were as follows:
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
Balance at October 31, 2018
|
|
Change Due to New Standard
|
|
Balance at November 1, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Trade and other receivables, net(A)
|
|
$
|
456
|
|
|
$
|
(18
|
)
|
|
$
|
438
|
|
|
Inventories, net
|
|
1,110
|
|
|
(91
|
)
|
|
1,019
|
|
|
Other current assets
|
|
189
|
|
|
101
|
|
|
290
|
|
|
Total current assets
|
|
5,136
|
|
|
(8
|
)
|
|
5,128
|
|
|
Property and equipment, net
|
|
1,370
|
|
|
(109
|
)
|
|
1,261
|
|
|
Deferred taxes, net
|
|
121
|
|
|
1
|
|
|
122
|
|
|
Other noncurrent assets
|
|
113
|
|
|
(3
|
)
|
|
110
|
|
|
Total assets
|
|
$
|
7,230
|
|
|
$
|
(119
|
)
|
|
$
|
7,111
|
|
|
LIABILITIES and STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt
|
|
$
|
946
|
|
|
$
|
(15
|
)
|
|
$
|
931
|
|
|
Other current liabilities
|
|
1,255
|
|
|
13
|
|
|
1,268
|
|
|
Total current liabilities
|
|
3,807
|
|
|
(2
|
)
|
|
3,805
|
|
|
Long-term debt
|
|
4,521
|
|
|
(58
|
)
|
|
4,463
|
|
|
Other noncurrent liabilities
|
|
731
|
|
|
(22
|
)
|
|
709
|
|
|
Total liabilities
|
|
11,156
|
|
|
(82
|
)
|
|
11,074
|
|
|
Stockholders’ deficit(A)
|
|
|
|
|
|
|
|
Total stockholders’ deficit attributable to Navistar International Corporation
|
|
(3,931
|
)
|
|
(37
|
)
|
|
(3,968
|
)
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
7,230
|
|
|
$
|
(119
|
)
|
|
$
|
7,111
|
|
______________________
(A) During the fourth quarter of 2019, we identified additional transition adjustments of $10 million related to the impact of certain core component transactions. As a result, Trade and other receivables, net was reduced by $10 million and Accumulated deficit was increased by a corresponding amount in our November 1, 2018 Consolidated Balance Sheet. The correction increased our cumulative effect adjustment upon adoption of the new revenue standard from $27 million to $37 million.
The following reconciles amounts as they would have been reported under the prior standard to current reporting:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, 2019(A)
|
|
(in millions)
|
|
Under Prior Standard
|
|
Effects of New Standard
|
|
As Reported
|
|
Sales of manufactured products, net
|
|
$
|
11,102
|
|
|
$
|
(41
|
)
|
|
$
|
11,061
|
|
|
Costs of products sold
|
|
9,301
|
|
|
(56
|
)
|
|
9,245
|
|
|
Interest expense
|
|
315
|
|
|
(3
|
)
|
|
312
|
|
|
Income before income tax
|
|
244
|
|
|
18
|
|
|
262
|
|
|
Income tax expense
|
|
(19
|
)
|
|
—
|
|
|
(19
|
)
|
|
Net income
|
|
$
|
225
|
|
|
$
|
18
|
|
|
$
|
243
|
|
______________________
(A) Our Consolidated Statements of Operations for the year ended October 31, 2019 includes two months of the operating activity of Navistar Defense prior to the sale of a majority interest in our former defense business. See Note 3 Restructurings, Impairments and Divestitures for additional information.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2019(A)
|
|
(in millions)
|
|
Under Prior Standard
|
|
Effects of New Standard
|
|
As Reported
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Trade and other receivables, net
|
|
$
|
362
|
|
|
$
|
(24
|
)
|
|
$
|
338
|
|
|
Inventories, net
|
|
968
|
|
|
(57
|
)
|
|
911
|
|
|
Other current assets
|
|
208
|
|
|
69
|
|
|
277
|
|
|
Total current assets
|
|
4,964
|
|
|
(12
|
)
|
|
4,952
|
|
|
Property and equipment, net
|
|
1,513
|
|
|
(204
|
)
|
|
1,309
|
|
|
Deferred taxes, net
|
|
116
|
|
|
1
|
|
|
117
|
|
|
Other noncurrent assets
|
|
116
|
|
|
(9
|
)
|
|
107
|
|
|
Total assets
|
|
$
|
7,141
|
|
|
$
|
(224
|
)
|
|
$
|
6,917
|
|
|
LIABILITIES and STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt
|
|
$
|
883
|
|
|
$
|
(12
|
)
|
|
$
|
871
|
|
|
Other current liabilities
|
|
1,349
|
|
|
14
|
|
|
1,363
|
|
|
Total current liabilities
|
|
3,573
|
|
|
2
|
|
|
3,575
|
|
|
Long-term debt
|
|
4,363
|
|
|
(46
|
)
|
|
4,317
|
|
|
Other noncurrent liabilities
|
|
796
|
|
|
(151
|
)
|
|
645
|
|
|
Total liabilities
|
|
10,835
|
|
|
(195
|
)
|
|
10,640
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
Total stockholders’ deficit attributable to Navistar International Corporation
|
|
(3,697
|
)
|
|
(29
|
)
|
|
(3,726
|
)
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
7,141
|
|
|
$
|
(224
|
)
|
|
$
|
6,917
|
|
_________________________
|
|
|
|
(A)
|
Our Consolidated Balance Sheet as of October 31, 2019 does not include the impact of Navistar Defense due to the sale of a majority interest in our former defense business. See Note 3, Restructurings, Impairments and Divestitures for additional information.
|
Recently Issued Accounting Standards
In February 2018, the FASB issued 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 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. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2020. The adoption of this guidance will result 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 on November 1, 2019.
In August 2018, the FASB issued Accounting Standard Update ("ASU") No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement". This ASU provides guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) and determining when the arrangement includes a software license. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2021, and we expect to early adopt this ASU in the first quarter of 2020. We do not expect our adoption of this ASU to have a material effect on our consolidated financial statements.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
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 2021. The impact of this ASU on our consolidated financial statements will primarily result from our Financial Services operations and certain financial guarantees, and will largely depend on economic conditions and forecasts existing at the time of adoption.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842), including subsequently issued ASUs to clarify the implementation guidance in ASU 2016-02 (“new lease standard”). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted.
On November 1, 2019, we adopted the new lease standard using the optional modified retrospective basis. We elected the “package of practical expedients”, which permits us not to reassess under the new lease standard our prior conclusions about lease identification, lease classification and initial direct costs. We also elected the practical expedient related to land easements, but did not elect the use-of-hindsight. For lessor accounting, we elected to exclude taxes collected from customers, such as sales and use and value added, from the measurement of lease income and expense.
Based on our preliminary assessment, the cumulative effect adjustment upon adoption of the new lease standard will have an immaterial impact on our Accumulated deficit. We evaluated our lease population to assess the effect of the guidance on our consolidated financial statements and will record lease liabilities and right-of-use assets for operating leases related to certain property and equipment. We are in the process of finalizing the assessment of the impact upon adoption and we currently estimate the right-of-use assets and lease liabilities as of November 1, 2019 will range from $125 million to $160 million. The new lease standard will also result in changes in the classification of certain sales that were 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, these transactions will be classified as operating lease liabilities recognized as 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, we will present cash receipts from operating leases which were accounted for as borrowings as an operating cash inflow rather than the current presentation as a financing cash inflow. The impact related to operating leases accounted for as borrowings on our consolidated financial statements is prospective and will largely depend on our operations at the time of adoption.
We will revise our relevant policy and procedures and provide expanded lease disclosures based on the new qualitative and quantitative disclosure requirements of the new lease standard in our Quarterly Report on Form 10-Q for the first quarter of 2020.
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)
Disaggregation of Revenue
The following tables disaggregate our external revenue by product type for the year ended October 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Year Ended October 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck products and services(A)(B)
|
$
|
7,727
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12
|
|
|
$
|
7,739
|
|
|
Truck contract manufacturing
|
399
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
399
|
|
|
Used trucks
|
257
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
257
|
|
|
Engines
|
—
|
|
|
309
|
|
|
232
|
|
|
—
|
|
|
—
|
|
|
541
|
|
|
Parts
|
5
|
|
|
1,930
|
|
|
77
|
|
|
—
|
|
|
—
|
|
|
2,012
|
|
|
Extended warranty contracts
|
113
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
113
|
|
|
Sales of manufactured products, net
|
8,501
|
|
|
2,239
|
|
|
309
|
|
|
—
|
|
|
12
|
|
|
11,061
|
|
|
Retail financing(C)
|
—
|
|
|
—
|
|
|
—
|
|
|
145
|
|
|
(3
|
)
|
|
142
|
|
|
Wholesale financing(C)
|
—
|
|
|
—
|
|
|
—
|
|
|
48
|
|
|
—
|
|
|
48
|
|
|
Finance revenues
|
—
|
|
|
—
|
|
|
—
|
|
|
193
|
|
|
(3
|
)
|
|
190
|
|
|
Sales and revenues, net
|
$
|
8,501
|
|
|
$
|
2,239
|
|
|
$
|
309
|
|
|
$
|
193
|
|
|
$
|
9
|
|
|
$
|
11,251
|
|
_________________________
|
|
|
|
(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, Restructurings, Impairments and Divestitures for additional information.
|
|
|
|
(C)
|
Retail financing and Wholesale financing revenues in the Financial Services segment include interest revenue of $56 million and $48 million, respectively, for the year ended October 31, 2019.
|
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. Operating lease and borrowing revenues are recognized on a straight-line basis over the life of the lease.
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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
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, or when a loan becomes 90 days or more past due. The accrual of interest is suspended on impaired loans. 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 us 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 generally allocated to all of the performance obligations in the contract based on their relative standalone selling prices.
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. As a practical expedient, 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 2019.
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 as of October 31, 2019 is not material to our consolidated financial statements.
The amount of deferred revenue related to extended warranty programs was $279 million, $255 million, and $271 million at October 31, 2019, 2018, and 2017, respectively. Revenue recognized under our extended warranty programs was $113 million, $104 million, and $144 million for the years ended October 31, 2019, 2018, and 2017, respectively. We expect to recognize
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
revenue under our extended warranty programs of approximately $87 million in 2020, $78 million in 2021, $59 million in 2022, $33 million in 2023, $13 million in 2024 and $9 million thereafter.
Contract Costs
We recognize incremental costs to obtain contracts as an asset if they are recoverable. As a practical expedient, 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 October 31, 2019.
3. Restructurings, 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 are evaluating alternatives which could result in additional restructuring and other related charges in the future, including but not limited to: (i) impairments, (ii) costs for employee and contractor termination and other related benefits, and (iii) charges for pension and other postretirement contractual benefits and curtailments. These charges could be significant.
Global Operations restructuring activities
During 2017, we initiated cost-reduction actions impacting our workforce in Brazil. As a result, we recognized restructuring charges of $6 million in personnel costs for employee separation and related benefits. During 2018, we recognized a benefit of $1 million upon the completion of these separation actions. These impacts were recorded in our Global Operations segment within Restructuring charges in our Consolidated Statements of Operations.
During 2019, we ceased production at our MWM Motores engine facility in Jesus Maria, Argentina and initiated structural cost reductions in Brazil. As a result, we recognized charges of $3 million of inventory reserves and other related charges in Costs of products sold and $11 million in Restructuring charges in our Consolidated Statements of Operations in our Global Operations segment.
Chatham restructuring activities
During 2011, we committed to close our Chatham, Ontario heavy truck plant, which had been idled since June 2009. At that time, we recognized curtailment and contractual termination charges related to postretirement plans. Based on a ruling regarding pension benefits received from the Financial Services Tribunal in Ontario, Canada, in the third quarter of 2014, we recognized additional charges of $14 million related to the 2011 closure of the Chatham, Ontario plant. Unsuccessful efforts to appeal the ruling in the Ontario court system ended in December 2015. In April 2016, we filed a qualified partial wind-up report for approval by the Financial Services Commission of Ontario ("FSCO"). In January 2017, FSCO issued its approval of the partial wind-up report. In February 2017, we finalized the resolution of statutory severance pay for former employees related to the closure of our Chatham, Ontario plant, resulting in a charge of $6 million in the first quarter of 2017. During the third quarter of 2017, we finalized the Chatham closure agreement. This resulted in the release of $66 million in other post-employment benefit ("OPEB") liabilities. In addition, a pension settlement accounting charge of $23 million was recorded as a result of lump-sum payments made to certain pension plan participants. These charges and benefits were recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations.
Melrose Park Facility restructuring activities
During 2017, we committed to a plan to cease engine production at our plant in Melrose Park, Illinois (“Melrose Park Facility”) in 2018. As a result, we recognized charges of $41 million in our Truck segment. The charges included $23 million related to pension and OPEB liabilities and $8 million for severance pay recorded in Restructuring charges in our Consolidated Statements of Operations. We also recorded $10 million of inventory reserves and other related charges to Costs of products sold in our Consolidated Statements of Operations. During 2018, we recognized a benefit of $2 million related to the finalized cessation of production agreement. This benefit was recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. Production at the Melrose Park Facility ceased in May 2018.
Asset Impairments
During 2019, 2018 and 2017, we concluded that we had triggering events related to certain assets under operating leases. As a result, we recorded charges of $6 million, $5 million, and $8 million, respectively, in our Truck segment.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
During 2019 and 2018, we concluded that we had triggering events related to certain long-lived assets. As a result, we recorded a charge of $1 million in our Truck segment. In 2018, we recorded charges of $6 million and $1 million in our Truck segment and Financial Services segment, respectively.
During 2018, we concluded that we had triggering events related to the sale of our railcar business in Cherokee, Alabama requiring the impairment of certain long-lived assets. As a result, we recorded a charge of $2 million in our Truck segment. In February 2018, we completed the sale of the business.
During 2017, we concluded that we had a triggering event in connection with the sale of our fabrication business in Conway, Arkansas requiring the impairment of certain assets. As a result, we recorded charges of $5 million in our Truck segment.
These charges were recorded in Asset impairment charges in our Consolidated Statements of Operations.
See Note 13, Fair Value Measurements, for information on the valuation of impaired operating leases and other 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. The retained interest is accounted for as an equity method investment. 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. The transaction also includes potential additional consideration of up to $17 million, not included in the gain on the sale, based on cash proceeds from certain contracts which exceed defined thresholds.
During 2019, we recognized a gain on the sale, net of adjustments to the purchase price, 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 $2.8 billion and $2.6 billion as of October 31, 2019 and 2018, respectively. Included in total assets of our Financial Services operations are finance receivables of $2.2 billion as of both October 31, 2019 and 2018. We have two portfolio segments of finance receivables that we distinguish based on the type of customer and nature of the financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.
Our Finance receivables, net in our Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Retail portfolio
|
$
|
854
|
|
|
$
|
720
|
|
|
Wholesale portfolio
|
1,366
|
|
|
1,460
|
|
|
Total finance receivables
|
2,220
|
|
|
2,180
|
|
|
Less: Allowance for doubtful accounts
|
23
|
|
|
22
|
|
|
Total finance receivables, net
|
2,197
|
|
|
2,158
|
|
|
Less: Current portion, net(A)
|
1,923
|
|
|
1,898
|
|
|
Noncurrent portion, net
|
$
|
274
|
|
|
$
|
260
|
|
_________________________
|
|
|
|
(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.
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
As of October 31, 2019, contractual maturities of our finance receivables are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Retail Portfolio
|
|
Wholesale Portfolio
|
|
Total
|
|
Due in:
|
|
|
|
|
|
|
2020
|
$
|
592
|
|
|
$
|
1,366
|
|
|
$
|
1,958
|
|
|
2021
|
145
|
|
|
—
|
|
|
145
|
|
|
2022
|
104
|
|
|
—
|
|
|
104
|
|
|
2023
|
49
|
|
|
—
|
|
|
49
|
|
|
2024
|
15
|
|
|
—
|
|
|
15
|
|
|
Thereafter
|
4
|
|
|
—
|
|
|
4
|
|
|
Gross finance receivables
|
909
|
|
|
1,366
|
|
|
2,275
|
|
|
Less: Unearned finance income
|
55
|
|
|
—
|
|
|
55
|
|
|
Total finance receivables
|
$
|
854
|
|
|
$
|
1,366
|
|
|
$
|
2,220
|
|
Securitizations
Generally 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. Certain operating leases are transferred to a third party without the use of an SPE. In addition to servicing receivables, our continued involvement in these transactions 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 October 31, 2019 and 2018, and as a result, the transferred finance receivables are included in our Consolidated Balance Sheets and the related interest earned is included in Finance revenues.
We generally transfer eligible finance receivables into 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 $874 million and $956 million as of October 31, 2019 and 2018, respectively.
Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $358 million and $235 million as of October 31, 2019 and 2018, respectively. For more information on assets and liabilities of consolidated VIEs and other securitizations accounted for as secured borrowings by our Financial Services operations, see Note 1, Summary of Significant Accounting Policies.
Finance Revenues
The following table presents the portion of Finance revenues from our Financial Services operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Retail notes and finance leases revenue
|
$
|
60
|
|
|
$
|
50
|
|
|
$
|
41
|
|
|
Wholesale notes interest
|
118
|
|
|
105
|
|
|
102
|
|
|
Operating lease revenue
|
86
|
|
|
72
|
|
|
68
|
|
|
Retail and wholesale accounts interest
|
33
|
|
|
30
|
|
|
24
|
|
|
Gross finance revenues
|
297
|
|
|
257
|
|
|
235
|
|
|
Less: Intercompany revenues
|
104
|
|
|
97
|
|
|
93
|
|
|
Finance revenues
|
$
|
193
|
|
|
$
|
160
|
|
|
$
|
142
|
|
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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 31, 2019
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Trade and
Other
Receivables
|
|
Total
|
|
Allowance for doubtful accounts, at beginning of period
|
$
|
19
|
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
50
|
|
|
Provision for doubtful accounts
|
5
|
|
|
—
|
|
|
(1
|
)
|
|
4
|
|
|
Charge-off of accounts
|
(6
|
)
|
|
—
|
|
|
(6
|
)
|
|
(12
|
)
|
|
Recoveries
|
2
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
Other(A)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Allowance for doubtful accounts, at end of period
|
$
|
20
|
|
|
$
|
3
|
|
|
$
|
21
|
|
|
$
|
44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 31, 2018
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Trade and
Other
Receivables
|
|
Total
|
|
Allowance for doubtful accounts, at beginning of period
|
$
|
17
|
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
48
|
|
|
Provision for doubtful accounts
|
7
|
|
|
—
|
|
|
3
|
|
|
10
|
|
|
Charge-off of accounts
|
(7
|
)
|
|
—
|
|
|
(1
|
)
|
|
(8
|
)
|
|
Recoveries
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
Other(A)
|
(1
|
)
|
|
—
|
|
|
(2
|
)
|
|
(3
|
)
|
|
Allowance for doubtful accounts, at end of period
|
$
|
19
|
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended October 31, 2017
|
|
(in millions)
|
Retail Portfolio
|
|
Wholesale Portfolio
|
|
Trade and Other Receivables
|
|
Total
|
|
Allowance for doubtful accounts, at beginning of period
|
$
|
19
|
|
|
$
|
2
|
|
|
$
|
28
|
|
|
$
|
49
|
|
|
Provision for doubtful accounts
|
4
|
|
|
1
|
|
|
2
|
|
|
7
|
|
|
Charge-off of accounts
|
(7
|
)
|
|
—
|
|
|
(1
|
)
|
|
(8
|
)
|
|
Recoveries
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Other(A)
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Allowance for doubtful accounts, at end of period
|
$
|
17
|
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
48
|
|
____________________
|
|
|
|
(A)
|
Amounts include impact from currency translation.
|
The accrual of interest income is discontinued on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. In certain cases, we continue to collect payments on our impaired finance receivables.
The following table presents information regarding impaired finance receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2019
|
|
October 31, 2018
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Impaired finance receivables with specific loss reserves
|
$
|
23
|
|
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
Impaired finance receivables without specific loss reserves
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Specific loss reserves on impaired finance receivables
|
11
|
|
|
—
|
|
|
11
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
Finance receivables on non-accrual status
|
24
|
|
|
—
|
|
|
24
|
|
|
20
|
|
|
—
|
|
|
20
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The average balances of the impaired finance receivables in the retail portfolio were $21 million and $19 million for the years ended October 31, 2019 and 2018, respectively. See Note 13, Fair Value Measurements, for information on the valuation of impaired finance receivables.
We use the aging of our receivables as well as other inputs when assessing credit quality. The following table presents the aging analysis for finance receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2019
|
|
October 31, 2018
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Current, and less than 30 days past due
|
$
|
753
|
|
|
$
|
1,365
|
|
|
$
|
2,118
|
|
|
$
|
655
|
|
|
$
|
1,459
|
|
|
$
|
2,114
|
|
|
30-90 days past due
|
76
|
|
|
1
|
|
|
77
|
|
|
51
|
|
|
1
|
|
|
52
|
|
|
Over 90 days past due
|
25
|
|
|
—
|
|
|
25
|
|
|
14
|
|
|
—
|
|
|
14
|
|
|
Total finance receivables
|
$
|
854
|
|
|
$
|
1,366
|
|
|
$
|
2,220
|
|
|
$
|
720
|
|
|
$
|
1,460
|
|
|
$
|
2,180
|
|
6. Inventories
The following table presents the components of Inventories in our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Finished products
|
$
|
640
|
|
|
$
|
671
|
|
|
Work in process
|
21
|
|
|
118
|
|
|
Raw materials
|
250
|
|
|
321
|
|
|
Total inventories, net
|
$
|
911
|
|
|
$
|
1,110
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
7. Property and Equipment, Net
The following table presents the components of Property and equipment, net in our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Land
|
$
|
97
|
|
|
$
|
92
|
|
|
Buildings
|
572
|
|
|
554
|
|
|
Leasehold improvements
|
13
|
|
|
24
|
|
|
Machinery and equipment
|
2,031
|
|
|
2,028
|
|
|
Furniture, fixtures, and equipment
|
471
|
|
|
461
|
|
|
Equipment leased to others
|
562
|
|
|
665
|
|
|
Construction in progress
|
51
|
|
|
44
|
|
|
Total property and equipment, at cost
|
3,797
|
|
|
3,868
|
|
|
Less: Accumulated depreciation and amortization
|
2,488
|
|
|
2,498
|
|
|
Property and equipment, net
|
$
|
1,309
|
|
|
$
|
1,370
|
|
Certain of our property and equipment serve as collateral for borrowings. See Note 10, Debt, for description of borrowings.
Equipment leased to others and assets under financing arrangements and capital lease obligations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Equipment leased to others
|
$
|
562
|
|
|
$
|
665
|
|
|
Less: Accumulated depreciation
|
126
|
|
|
177
|
|
|
Equipment leased to others, net
|
$
|
436
|
|
|
$
|
488
|
|
|
|
|
|
|
|
Buildings, machinery, and equipment under financing arrangements and capital lease obligations
|
$
|
20
|
|
|
$
|
25
|
|
|
Less: Accumulated depreciation and amortization
|
18
|
|
|
21
|
|
|
Assets under financing arrangements and capital lease obligations, net
|
$
|
2
|
|
|
$
|
4
|
|
For the years ended October 31, 2019, 2018, and 2017, depreciation expense, amortization expense related to assets under financing arrangements and capital lease obligations, and interest capitalized on construction projects are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Depreciation expense
|
$
|
129
|
|
|
$
|
133
|
|
|
$
|
138
|
|
|
Depreciation of equipment leased to others
|
61
|
|
|
71
|
|
|
73
|
|
|
Amortization expense
|
—
|
|
|
2
|
|
|
3
|
|
|
Interest capitalized
|
1
|
|
|
2
|
|
|
2
|
|
Certain depreciation expense on buildings used for administrative purposes is recorded in SG&A expenses.
Capital Expenditures
At October 31, 2019, 2018, and 2017, commitments for capital expenditures were $37 million, $36 million, and $27 million, respectively. At October 31, 2019, 2018, and 2017, liabilities related to capital expenditures that are included in accounts payable were $46 million, $50 million, and $48 million, respectively.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Leases
We lease certain land, buildings, and equipment under non-cancelable operating leases and capital leases expiring at various dates through 2030. Operating leases generally have 1 to 20 year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Various leases include provisions for rent escalation to recognize increased operating costs or require us to pay certain maintenance and utility costs. Our rent expense for the years ended October 31, 2019, 2018, and 2017 was $23 million, $40 million, and $49 million, respectively. Rental income from subleases for the years ended October 31, 2019, 2018, and 2017 was $3 million, $5 million, and $11 million, respectively.
Future minimum lease payments at October 31, 2019, for those leases having an initial or remaining non-cancelable lease term in excess of one year and certain leases that are treated as finance lease obligations, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Capital
Lease Obligations
|
|
Operating
Leases
|
|
Total
|
|
2020
|
$
|
1
|
|
|
$
|
37
|
|
|
$
|
38
|
|
|
2021
|
1
|
|
|
28
|
|
|
29
|
|
|
2022
|
—
|
|
|
22
|
|
|
22
|
|
|
2023
|
—
|
|
|
18
|
|
|
18
|
|
|
2024
|
—
|
|
|
13
|
|
|
13
|
|
|
Thereafter
|
—
|
|
|
31
|
|
|
31
|
|
|
|
2
|
|
|
$
|
149
|
|
|
$
|
151
|
|
|
Less: Interest portion
|
—
|
|
|
|
|
|
|
|
|
Total
|
$
|
2
|
|
|
|
|
|
Asset Retirement Obligations
We have a number of asset retirement obligations in connection with certain owned and leased locations, leasehold improvements, and sale and leaseback arrangements. Certain of our production facilities contain asbestos that would have to be removed if such facilities were to be demolished or undergo a major renovation. The fair value of the conditional asset retirement obligations as of the balance sheet date has been determined to be immaterial. Asset retirement obligations relating to the cost of removing improvements to leased facilities or returning leased equipment at the end of the associated agreements are not material.
8. Goodwill and Other Intangible Assets, Net
For our reporting units with goodwill or intangible assets not subject to amortization, we perform impairment tests on an annual basis on August 1, or more frequently if circumstances change or an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount. All of our goodwill is included in our Parts segment. As part of our goodwill impairment analysis for this reporting unit in the current year, we performed a qualitative assessment. Our intangible assets that are not subject to amortization includes a trademark in our Brazilian engine reporting unit within our Global Operations segment of $17 million and $18 million as of October 31, 2019 and 2018, respectively.
Information regarding our intangible assets that are subject to amortization is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2019
|
|
(in millions)
|
Customer
Base and
Relationships
|
|
Trademarks, Patents and Other
|
|
Total
|
|
Gross carrying value
|
$
|
66
|
|
|
$
|
84
|
|
|
$
|
150
|
|
|
Accumulated amortization
|
(66
|
)
|
|
(76
|
)
|
|
(142
|
)
|
|
Net of amortization
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
8
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2018
|
|
(in millions)
|
Customer
Base and
Relationships
|
|
Trademarks, Patents and Other
|
|
Total
|
|
Gross carrying value
|
$
|
68
|
|
|
$
|
84
|
|
|
$
|
152
|
|
|
Accumulated amortization
|
(66
|
)
|
|
(74
|
)
|
|
(140
|
)
|
|
Net of amortization
|
$
|
2
|
|
|
$
|
10
|
|
|
$
|
12
|
|
We recorded amortization expense for our finite-lived intangible assets of $3 million, $7 million, and $12 million for the years ended October 31, 2019, 2018, and 2017, respectively. Future estimated amortization expense for our finite-lived intangible assets for the remaining years is as follows:
|
|
|
|
|
|
|
|
(in millions)
|
Estimated
Amortization
|
|
2020
|
$
|
2
|
|
|
2021
|
1
|
|
|
2022
|
1
|
|
|
2023
|
1
|
|
|
2024
|
1
|
|
|
Thereafter
|
2
|
|
9. Investments in Non-consolidated Affiliates
Investments in non-consolidated affiliates is comprised of our interests in partially-owned affiliates of which our ownership percentages range from 30% to 50%. We do not control these affiliates, but have the ability to exercise significant influence over their operating and financial policies. We account for them using the equity method of accounting. We made no new and incremental investments in these non-consolidated affiliates for 2019 and 2018.
The following table summarizes 100% of the combined assets, liabilities, and equity of our equity method affiliates as of October 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(in millions)
|
2019
|
|
2018
|
|
Assets:
|
|
|
Current assets
|
$
|
186
|
|
|
$
|
336
|
|
|
Noncurrent assets
|
128
|
|
|
168
|
|
|
Total assets
|
$
|
314
|
|
|
$
|
504
|
|
|
Liabilities and equity:
|
|
|
|
|
Current liabilities
|
$
|
96
|
|
|
$
|
307
|
|
|
Noncurrent liabilities
|
93
|
|
|
38
|
|
|
Total liabilities
|
189
|
|
|
345
|
|
|
Partners' capital and stockholders' equity:
|
|
|
|
|
NIC
|
32
|
|
|
53
|
|
|
Third parties
|
93
|
|
|
106
|
|
|
Total partners' capital and stockholders' equity
|
125
|
|
|
159
|
|
|
Total liabilities and equity
|
$
|
314
|
|
|
$
|
504
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes 100% of the combined results of operations of our equity method affiliates for the years ended October 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Unaudited)
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Net sales
|
$
|
391
|
|
|
$
|
505
|
|
|
$
|
497
|
|
|
Costs, expenses, and income tax expense
|
385
|
|
|
507
|
|
|
488
|
|
|
Net income (loss)
|
$
|
6
|
|
|
$
|
(2
|
)
|
|
$
|
9
|
|
We recorded sales to certain of these affiliates totaling $61 million, $4 million, and $5 million in 2019, 2018, and 2017, respectively. We also purchased $123 million, $166 million, and $156 million of products and services from certain of these affiliates in 2019, 2018, and 2017, respectively.
Amounts due to and due from our affiliates arising from the sale and purchase of products and services as of October 31 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
2019
|
|
2018
|
|
Receivables due from affiliates
|
$
|
32
|
|
|
$
|
1
|
|
|
Payables due to affiliates
|
13
|
|
|
22
|
|
10. 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Manufacturing operations
|
|
|
|
|
Senior Secured Term Loan Credit Agreement, due 2025, net of unamortized discount of $6 and $7, respectively, and unamortized debt issuance costs of $10 and $11, respectively
|
$
|
1,556
|
|
|
$
|
1,570
|
|
|
6.625% Senior Notes, due 2026, net of unamortized debt issuance costs of $15 and $17, respectively
|
1,085
|
|
|
1,083
|
|
|
4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $5 and unamortized debt issuance costs of $1
|
—
|
|
|
405
|
|
|
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
|
60
|
|
|
122
|
|
|
Other
|
11
|
|
|
26
|
|
|
Total Manufacturing operations debt
|
2,932
|
|
|
3,426
|
|
|
Less: Current portion
|
32
|
|
|
461
|
|
|
Net long-term Manufacturing operations debt
|
$
|
2,900
|
|
|
$
|
2,965
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Financial Services operations
|
|
|
|
|
Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2023, net of unamortized debt issuance costs of $4 at both dates
|
$
|
991
|
|
|
$
|
948
|
|
|
Senior secured NFC Term Loan, due 2025, net of unamortized discount of $2 and unamortized debt issuance costs of $4
|
—
|
|
|
394
|
|
|
Bank credit facilities, at fixed and variable rates, due dates from 2020 through 2025, net of unamortized debt issuance costs of $1 and $2, respectively
|
1,059
|
|
|
519
|
|
|
Commercial paper, at variable rates, program matures in 2022
|
84
|
|
|
75
|
|
|
Borrowings secured by operating and finance leases, at various rates, due serially through 2024
|
122
|
|
|
105
|
|
|
Total Financial Services operations debt
|
2,256
|
|
|
2,041
|
|
|
Less: Current portion
|
839
|
|
|
485
|
|
|
Net long-term Financial Services operations debt
|
$
|
1,417
|
|
|
$
|
1,556
|
|
Manufacturing Operations
Senior Secured Term Loan Credit Agreement
On November 6, 2017, we signed a definitive credit agreement relating to a seven-year senior secured term loan credit facility in an aggregate principal amount of $1.6 billion (“Term Loan Credit Agreement”), guaranteed by Navistar International Corporation and twelve of its subsidiaries. Under the terms of the Term Loan Credit Agreement, the interest rate on the outstanding loan is based, at our option, on an adjusted Eurodollar Rate, plus a margin of 3.50%, or a Base Rate, plus a margin of 2.50%. The Term Loan Credit Agreement requires quarterly amortization payments of $4 million with the balance due at maturity on November 6, 2024. A portion of the proceeds from the Term Loan Credit Agreement was used to repay all outstanding loans under our previously existing Senior Secured Term Loan Credit Facility ("Term Loan"), to redeem a portion of the previously outstanding 8.25% senior notes ("8.25% Senior Notes") and to pay accrued and unpaid interest thereon, and pay certain transaction fees and expenses incurred in connection with the new Term Loan Credit Agreement. The remainder of the proceeds of the Term Loan Credit Agreement will be used for ongoing working capital purposes and general corporate purposes.
Upon the repayment of the Term Loan in the first quarter of 2018, we recorded approximately $16 million of charges related to the extinguishment of unamortized debt issuance costs associated with the Term Loan, included in Other expense, net on our Consolidated Statements of Operations.
6.625% Senior Notes
On November 6, 2017, we issued $1.1 billion in aggregate principal amount of 6.625% senior notes, due 2026 ("6.625% Senior Notes"). Interest is payable on the 6.625% Senior Notes on May 1 and November 1 of each year beginning on May 1, 2018 until the maturity date of November 1, 2025. The proceeds from the 6.625% Senior Notes offering were used to redeem a portion of our previously existing 8.25% Senior Notes, to pay accrued and unpaid interest thereon, and pay the associated prepayment premiums, certain transaction fees and expenses incurred in connection with the new 6.625% Senior Notes.
Upon the redemption of the 8.25% Senior Notes balance of $1.45 billion in the first quarter of 2018, we recorded approximately $30 million of charges related to the extinguishment of unamortized debt issuance costs and tender premiums associated with the 8.25% Senior Notes, included in Other expense, net on our Consolidated Statements of Operations.
4.75% Senior Subordinated Convertible Notes
During the second quarter of 2014, we completed the private sale of $411 million of convertible notes ("2019 Convertible Notes"), including a portion of the underwriter's over-allotment option. We received proceeds of $402 million, net of $9 million of issuance costs. The 2019 Convertible Notes were senior subordinated unsecured obligations of the Company. The 2019 Convertible Notes were fully repaid upon maturity in April 2019, and none were converted into our common stock.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Loan Agreement related to the Tax Exempt Bonds
In October 2010, we benefited from the issuance of certain tax-exempt bond financings, of which: (i) the Illinois Finance Authority issued and sold $135 million aggregate principal amount of Recovery Zone Facility Revenue Bonds due October 15, 2040, and (ii) The County of Cook, Illinois issued and sold $90 million aggregate principal amount of Recovery Zone Facility Revenue Bonds also due October 15, 2040 (collectively the "Tax Exempt Bonds"). The Tax Exempt Bonds were issued pursuant to separate, but substantially identical, indentures of trust dated as of October 1, 2010. The proceeds of the Tax Exempt Bonds were loaned by each issuer to the Company pursuant to separate, but substantially identical, loan agreements dated as of October 1, 2010. The proceeds from the issuance of the Tax Exempt Bonds were restricted for capital expenditures related to financing the relocation of our headquarters, the expansion of an existing warehouse facility, and the development of certain industrial and testing facilities, together with related improvements and equipment. The payment of principal and interest on the Tax Exempt Bonds is guaranteed under separate, but substantially identical, bond guarantees issued by NI. The Tax Exempt Bonds are special, limited obligations of each issuer, payable out of the revenues and income derived under the related loan agreements and related guarantees. The Tax Exempt Bonds bear interest at the fixed rate of 6.50% per annum, payable each April 15 and October 15, commencing April 15, 2011. Beginning on October 15, 2020, the Tax Exempt Bonds are subject to optional redemption at the direction of the Company, in whole or in part, at the redemption price equal to 100% of the principal amount thereof, plus accrued interest, if any, to the redemption date. In November 2010, we finalized the purchase of the property and buildings that we developed into our new world headquarters site. As of October 31, 2019, none of the $225 million remains to be reimbursed under the Tax Exempt Bonds.
On November 6, 2017, we entered into the First Amendment to Loan Agreement with The County of Cook, Illinois and the First Amendment to Loan Agreement with the Illinois Finance Authority (“Tax Exempt Bond Amendments”) to adjust various covenants included in the loan agreements relating to the Tax Exempt Bonds, including to permit the Company to incur secured debt up to $1.7 billion, in exchange for a coupon increase from 6.50% to 6.75% and the grant of a junior priority lien on certain collateral securing the Company’s Term Loan Credit Agreement.
Financed Lease Obligations
We have accounted for as borrowings certain third-party equipment financings by BMO (as defined in Note 14), our preferred source of retail customer financing for equipment offered by us and our dealers in the U.S. The initial transactions do not qualify for revenue recognition as we retain control in the leased property. As a result, the proceeds from the transfer are recorded as an obligation and amortized to revenue over the term of the financing. The remaining obligation will be amortized through 2024, with interest rates ranging from 3.77% to 5.91%.
Amended and Restated Asset-Based Credit Facility
In August 2017, we amended and extended our asset-based credit facility ("Amended and Restated Asset-Based Credit Facility") which was previously due in May 2018. The 2017 amendment extended the maturity date to August 2022 and reduced the revolving facility from $175 million to $125 million. The borrowing base of the facility is secured by a first priority security interest in certain of NI's aftermarket parts inventory locations and contains customary covenants, representations and warranties. Our borrowing capacity under the amended facility is subject to a $13 million liquidity block and is impacted by outstanding standby letters of credit issued under this facility and the amount of eligible inventory. Borrowings under the Amended and Restated Asset-Based Credit Facility accrue interest at a rate equal to a base rate or an adjusted LIBOR rate plus a spread. The spread is 175 basis points for Base Rate borrowings and 275 basis points for LIBOR borrowings. As of October 31, 2019, we had no borrowings but did have availability to borrow under the Amended and Restated Asset-Based Credit Facility.
Financial Services Operations
Asset-backed Debt
In May 2017, the maturity date of the variable funding notes ("VFN") facility was extended to May 2018, and the maximum capacity was reduced from $450 million to $425 million. In December 2017, the maturity date of our VFN facility was extended from May 2018 to December 2018, and the maximum capacity was reduced from $425 million to $350 million. In November 2018, the maturity of the VFN facility was extended from December 2018 to May 2020. In April 2019, the VFN facility capacity was temporarily increased from $350 million to $550 million until the earlier of June 28, 2019, or the completion of a qualifying wholesale asset-backed term facility. In June 2019, the capacity decreased from $550 million to $350 million, upon the sale of $300 million of two-year investor notes by Navistar Financial Securities Corporation ("NFSC"). Proceeds were used, in part, to replace the $250 million of investor notes that matured in June 2019. The VFN facility and investor notes are secured by assets of the wholesale note owner trust.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
In June 2017, NFSC issued $250 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $250 million of investor notes that matured in June 2017.
In September 2018, NFSC issued $300 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $300 million of investor notes that matured in September 2018.
Our Mexican financial services affiliate, Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad Regulada ("NFM"), issues secured notes, denominated in Mexican pesos, which are secured by retail finance receivables. The aggregate balance of these notes was $13 million and $31 million, net of issuance costs, at October 31, 2019, and 2018, respectively. These notes mature at various dates through March 2023.
In January 2018, Truck Retail Accounts Corporation ("TRAC"), a special purpose, wholly-owned subsidiary of NFC, extended its one-year $100 million revolving facility from April 2018 to January 2019, and in December 2018, the maturity was further extended to January 2020. In April 2019, the maximum capacity of the TRAC funding facility was increased from $100 million to $150 million, and further increased to $200 million in October 2019. Borrowings under this facility are secured by eligible retail accounts receivable.
The majority of the above asset-backed debt is issued by consolidated SPEs and is payable out of collections on the finance receivables sold to the SPEs. This debt is the legal obligation of the SPEs and not NFC or NFM. Assets used as collateral include finance receivables, restricted cash and other assets. The carrying amount of the assets used as collateral for asset-backed debt were $1.3 billion and $1.4 billion at October 31, 2019 and 2018, respectively. See Note 4, Finance Receivables, for more information on finance receivables used to secure asset-backed debt.
NFC Term Loan and Bank Credit Facilities
On June 1, 2018, in accordance with the terms of the May 2016 amended and extended NFC bank credit facility, the term loan portion was paid in full and the revolving portion capacity was reduced from $275 million to $269 million. On June 12, 2018, certain leverage covenants and baskets under the NFC bank credit facility were amended to allow for completion of the senior secured NFC term loan ("NFC Term Loan") in July 2018. In May 2019, NFC increased the capacity of its revolving bank credit facility from $269 million to $748 million and extended the maturity from September 2021 to May 2024. The additional capacity was used to fully repay the NFC Term Loan balance of $398 million. The early repayment of the NFC Term Loan resulted in the write off of unamortized debt issuance costs and discount of $6 million. The borrowings on the revolving portion of the facility totaled $623 million and $21 million as of October 31, 2019 and 2018, respectively.
We borrow funds under various bank credit lines denominated in U.S. dollars and Mexican pesos to be used for investment in our Mexican financial services operations. As of October 31, 2019, borrowings outstanding under these arrangements were $437 million, of which 11% was denominated in U.S. dollars and 89% in Mexican pesos. As of October 31, 2018, borrowings outstanding under these arrangements were $498 million, of which 28% was denominated in U.S. dollars and 72% in Mexican pesos. The interest rates on the dollar-denominated debt are at a negotiated fixed rate or at a variable rate based on LIBOR, and the interest rates on peso-denominated debt are based on the Interbank Interest Equilibrium Rate.
Commercial Paper
Effective February 2017, our Mexican financial services operation entered into a five-year commercial paper program for up to P1.8 billion (the equivalent of approximately $94 million at October 31, 2019). In October 2018, the commercial paper program was increased to P3.0 billion (the equivalent of approximately $157 million at October 31, 2019).
Borrowings Secured by Operating and Finance Leases
International Truck Leasing Corporation ("ITLC"), a special purpose, wholly-owned subsidiary of NFC, provides NFC with another source to obtain borrowings secured by leases. The balances are classified under Financial Services operations debt as borrowings secured by leases. ITLC's assets are available to satisfy its creditors' claims prior to such assets becoming available for ITLC's use or to NFC or affiliated companies. For the years ended October 31, 2019 and 2018, ITLC issued new borrowings of $31 million and $38 million, respectively. The balance of these secured borrowings issued by ITLC totaled $91 million and $105 million as of October 31, 2019 and 2018, respectively. The carrying amount of assets used as collateral was $109 million and $125 million as of October 31, 2019 and 2018, respectively. ITLC does not have any unsecured debt.
In 2019, NFC issued new borrowings secured by leases of $31 million. The balance of these secured borrowings issued by NFC totaled $31 million and zero as of October 31, 2019 and 2018, respectively. The carrying amount of assets used as collateral was $30 million and zero as of October 31, 2019 and 2018, respectively.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Future Maturities
The aggregate contractual annual maturities for debt as of October 31, 2019, are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Manufacturing
Operations (A)
|
|
Financial
Services
Operations
|
|
Total
|
|
(in millions)
|
|
|
|
|
|
|
2020
|
$
|
32
|
|
|
$
|
839
|
|
|
$
|
871
|
|
|
2021
|
48
|
|
|
665
|
|
|
713
|
|
|
2022
|
27
|
|
|
67
|
|
|
94
|
|
|
2023
|
26
|
|
|
53
|
|
|
79
|
|
|
2024
|
18
|
|
|
635
|
|
|
653
|
|
|
Thereafter
|
2,817
|
|
|
2
|
|
|
2,819
|
|
|
Total debt
|
2,968
|
|
|
2,261
|
|
|
5,229
|
|
|
Less: Unamortized discount and unamortized debt issuance costs
|
36
|
|
|
5
|
|
|
41
|
|
|
Net debt
|
$
|
2,932
|
|
|
$
|
2,256
|
|
|
$
|
5,188
|
|
Debt and Lease Covenants
We have certain public and private debt agreements, including the Term Loan Credit Agreement, the 6.625% Senior Notes, the loan agreements for the Tax Exempt Bonds, and the Amended and Restated Asset-Based Credit Facility, which limit our ability to incur additional indebtedness, pay dividends, buy back our stock, and take other actions. As of October 31, 2019, we were in compliance with these covenants.
We are also required under certain agreements with public and private lenders of NFC to ensure that NFC and its subsidiaries maintain their income before interest expense and income taxes at not less than 125% of their total interest expense. Under these agreements, if NFC's consolidated income, including capital contributions made by NIC or NI, before interest expense and income taxes is less than 125% of its interest expense, NIC or NI must make payments to NFC to achieve the required ratio. During the years ended October 31, 2019, 2018, and 2017, no such payments were made.
Covenants of the NFC bank credit facility restrict or limit certain payments such as dividends paid to NI. NFC was able to pay a dividend of $20 million to NI in October 2019 within the limits of these covenants. In the years ended October 31, 2018 and 2017, NFC paid no dividends.
Our Mexican financial services operations also have debt covenants, which require the maintenance of certain financial ratios. As of October 31, 2019, we were in compliance with those covenants.
11. 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Obligations and Funded Status
A summary of the changes in benefit obligations and plan assets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Health and Life
Insurance Benefits
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Change in benefit obligations
|
|
|
|
|
|
|
|
|
Benefit obligations at beginning of year
|
$
|
3,344
|
|
|
$
|
3,799
|
|
|
$
|
1,245
|
|
|
$
|
1,435
|
|
|
Service cost
|
7
|
|
|
7
|
|
|
3
|
|
|
4
|
|
|
Interest on obligations
|
121
|
|
|
108
|
|
|
49
|
|
|
43
|
|
|
Actuarial loss (gain)
|
405
|
|
|
(251
|
)
|
|
(138
|
)
|
|
(159
|
)
|
|
Plan amendment
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Settlements
|
(263
|
)
|
|
(25
|
)
|
|
—
|
|
|
—
|
|
|
Currency translation
|
(5
|
)
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
Plan participants' contributions
|
—
|
|
|
—
|
|
|
35
|
|
|
40
|
|
|
Subsidy receipts
|
—
|
|
|
—
|
|
|
37
|
|
|
42
|
|
|
Benefits paid
|
(266
|
)
|
|
(286
|
)
|
|
(144
|
)
|
|
(160
|
)
|
|
Benefit obligations at end of year
|
$
|
3,347
|
|
|
$
|
3,344
|
|
|
$
|
1,087
|
|
|
$
|
1,245
|
|
|
Change in plan assets
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
2,162
|
|
|
$
|
2,363
|
|
|
$
|
297
|
|
|
$
|
333
|
|
|
Actual return on plan assets
|
232
|
|
|
(30
|
)
|
|
20
|
|
|
4
|
|
|
Settlements
|
(263
|
)
|
|
(25
|
)
|
|
—
|
|
|
—
|
|
|
Currency translation
|
(5
|
)
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
|
Employer contributions(A)
|
136
|
|
|
132
|
|
|
1
|
|
|
1
|
|
|
Benefits paid
|
(249
|
)
|
|
(270
|
)
|
|
(35
|
)
|
|
(41
|
)
|
|
Fair value of plan assets at end of year
|
$
|
2,013
|
|
|
$
|
2,162
|
|
|
$
|
283
|
|
|
$
|
297
|
|
|
Funded status at year end
|
$
|
(1,334
|
)
|
|
$
|
(1,182
|
)
|
|
$
|
(804
|
)
|
|
$
|
(948
|
)
|
_________________________
|
|
|
|
(A)
|
Employer contributions as of October 31, 2019 consisted of $140 million, net of a $4 million return of plan assets to the Company.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Health and Life
Insurance Benefits
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Amounts recognized in our Consolidated Balance Sheets consist of:
|
|
|
|
|
|
|
|
|
|
Noncurrent asset
|
$
|
3
|
|
|
$
|
18
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Current liability
|
(18
|
)
|
|
(17
|
)
|
|
(20
|
)
|
|
(34
|
)
|
|
Noncurrent liability
|
(1,319
|
)
|
|
(1,183
|
)
|
|
(784
|
)
|
|
(914
|
)
|
|
Net liability recognized
|
$
|
(1,334
|
)
|
|
$
|
(1,182
|
)
|
|
$
|
(804
|
)
|
|
$
|
(948
|
)
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in our accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
$
|
2,086
|
|
|
$
|
2,007
|
|
|
$
|
(33
|
)
|
|
$
|
104
|
|
|
Net prior service cost
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net amount recognized
|
$
|
2,090
|
|
|
$
|
2,007
|
|
|
$
|
(33
|
)
|
|
$
|
104
|
|
The accumulated benefit obligation for pension benefits, a measure that excludes the effect of prospective salary and wage increases, was $3.3 billion for both October 31, 2019 and 2018.
The cumulative postretirement benefit adjustment included in the Consolidated Statement of Stockholders' Deficit at October 31, 2019 and 2018 is net of $464 million and $503 million, respectively, of deferred taxes related to our postretirement benefit plans.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Information for pension plans with accumulated benefit obligations in excess of plan assets were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Projected benefit obligations
|
$
|
3,325
|
|
|
$
|
3,065
|
|
|
Accumulated benefit obligations
|
3,307
|
|
|
3,051
|
|
|
Fair value of plan assets
|
1,991
|
|
|
1,865
|
|
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. As of October 31, 2019, we have met all regulatory funding requirements. In 2019, we contributed $140 million to our pension plans to meet regulatory funding requirements. We expect to contribute approximately $190 million to our pension plans during 2020.
We primarily fund OPEB obligations, such as retiree medical, in accordance with 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. In 2019, we contributed $1 million to our OPEB plans to meet legal funding requirements. We expect to contribute $1 million to our OPEB plans during 2020.
We have certain unfunded pension plans, under which we make payments directly to employees. Benefit payments of $17 million and $16 million for October 31, 2019 and 2018, respectively, are included within the amount of Benefits paid in the Change in benefit obligation section above, but are not included in the Change in plan assets section, because the payments are made directly by us and not by separate trusts that are used in the funding of our other pension plans.
We also have certain OPEB benefits that are paid from Company assets (instead of trust assets). Payments from Company assets, net of participant contributions and subsidy receipts, result in differences between benefits paid as presented under Change in benefit obligation and Change in plan assets of $37 million for both 2019 and 2018.
Components of Net Periodic Benefit Expense and Other Amounts Recognized in Other Comprehensive Loss
The components of our postretirement benefits expense included in our Consolidated Statements of Operations consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Pension expense
|
$
|
232
|
|
|
$
|
72
|
|
|
$
|
121
|
|
|
Health and life insurance expense
|
31
|
|
|
33
|
|
|
(3
|
)
|
|
Total postretirement benefits expense
|
$
|
263
|
|
|
$
|
105
|
|
|
$
|
118
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Components of Net Periodic Benefit Expense
Net periodic benefit expense included in our Consolidated Statements of Operations, and other amounts recognized in our Consolidated Statements of Stockholders' Deficit, for the years ended October 31 is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
|
Pension Benefits
|
|
Health and Life
Insurance Benefits
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
Service cost for benefits earned during the period
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
7
|
|
|
$
|
3
|
|
|
$
|
4
|
|
|
$
|
5
|
|
|
Interest on obligation
|
121
|
|
|
108
|
|
|
107
|
|
|
49
|
|
|
43
|
|
|
47
|
|
|
Amortization of cumulative loss (gain)
|
94
|
|
|
106
|
|
|
116
|
|
|
(1
|
)
|
|
9
|
|
|
22
|
|
|
Settlements
|
143
|
|
|
9
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Contractual termination benefits
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Curtailments and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(58
|
)
|
|
Premiums on pension insurance
|
10
|
|
|
3
|
|
|
15
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Expected return on assets
|
(143
|
)
|
|
(161
|
)
|
|
(157
|
)
|
|
(20
|
)
|
|
(23
|
)
|
|
(23
|
)
|
|
Net periodic benefit expense
|
$
|
232
|
|
|
$
|
72
|
|
|
$
|
121
|
|
|
$
|
31
|
|
|
$
|
33
|
|
|
$
|
(3
|
)
|
|
Other Changes in plan assets and benefit obligations recognized in other comprehensive loss (income)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial net loss (gain)
|
$
|
316
|
|
|
$
|
(61
|
)
|
|
$
|
(116
|
)
|
|
$
|
(138
|
)
|
|
$
|
(139
|
)
|
|
$
|
(197
|
)
|
|
Prior service cost
|
4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Amortization of cumulative (loss) gain
|
(94
|
)
|
|
(106
|
)
|
|
(116
|
)
|
|
1
|
|
|
(9
|
)
|
|
(22
|
)
|
|
Settlements
|
(143
|
)
|
|
(9
|
)
|
|
(23
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Curtailments
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total recognized in other comprehensive income
|
$
|
83
|
|
|
$
|
(176
|
)
|
|
$
|
(257
|
)
|
|
$
|
(137
|
)
|
|
$
|
(148
|
)
|
|
$
|
(219
|
)
|
|
Total net postretirement benefits (income) expense and other comprehensive loss (income)
|
$
|
315
|
|
|
$
|
(104
|
)
|
|
$
|
(136
|
)
|
|
$
|
(106
|
)
|
|
$
|
(115
|
)
|
|
$
|
(222
|
)
|
For the year ended October 31, 2019, we adopted ASU No. 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This ASU requires that an employer disaggregate the service cost component from the other components of net periodic benefit cost. As a result, we have reclassified certain net periodic benefit costs from SG&A expenses to Other expense, net in our Consolidated Statements of Operations. The guidance, which required retrospective application, resulted in a reclassification of $94 million and $127 million for the years ended October 31, 2018 and 2017, respectively.
For the years ended October 31, 2019 and 2018, we purchased group annuity contracts for certain retired pension plan participants resulting in plan remeasurements. As a result, in 2019 and 2018, net actuarial losses of $11 million and $2 million, respectively, were recognized as components of Accumulated other comprehensive loss and non-cash pension settlement accounting expenses of $142 million and $9 million, respectively, were recognized in Other expense, net in our Consolidated Statements of Operations.
In April 2016, we filed a qualified partial wind-up report for approval by FSCO related to the 2011 closure of our Chatham, Ontario plant. FSCO provided formal approval in January 2017. As a result of an ongoing administration review ordered in conjunction with the partial wind-up, we recognized $1 million of contractual termination charges in the first quarter of 2017. During the third quarter of 2017, we finalized the Chatham closure agreement. This resulted in the release of $66 million in OPEB liabilities. In addition, a pension settlement accounting charge of $23 million was recorded as a result of lump-sum payments made to certain pension plan participants. These charges and benefits were recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 3, Restructurings, Impairments and Divestitures for further discussion. As a result of the pension and OPEB plan remeasurements in connection with the finalization of the Chatham closure agreement, net actuarial gains of $21 million were recognized as a component of Accumulated other comprehensive loss in the third quarter of 2017.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
In the third quarter of 2017, we committed to a plan to cease engine production at our Melrose Park Facility in the third quarter of fiscal year 2018. As a result, in the third quarter of 2017, we recognized $9 million of pension and $4 million of OPEB contractual termination benefits charges and $10 million of OPEB curtailment charges. These charges were recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 3, Restructurings, Impairments and Divestitures for further discussion. A pension curtailment gain of $2 million and net actuarial gains of $91 million resulting from pension and OPEB remeasurements in connection with our Melrose Park Facility announcement were recognized as a component of Accumulated other comprehensive loss in the third quarter of 2017.
In 2019 and 2017, in accordance with the intraperiod tax allocation rules, we recorded a net benefit of $5 million and $28 million, respectively, related to domestic continuing operations in Income tax expense in our Consolidated Statements of Operations, and an offsetting reduction in Other comprehensive income due to the remeasurement of certain pension and OPEB plans.
The estimated amounts for the defined benefit pension plans and the other postretirement benefit plans that will be amortized from AOCL into net periodic benefit expense over the next fiscal year are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Pension Benefits
|
|
Health and Life Insurance Benefits
|
|
Amortization of prior service cost (benefit)
|
$
|
1
|
|
|
$
|
—
|
|
|
Amortization of cumulative losses/(gains)
|
97
|
|
|
(1
|
)
|
Cumulative unrecognized actuarial gains and losses for postretirement benefit plans, where substantially all of the plan participants are inactive, are amortized over the average remaining life expectancy of the inactive plan participants. Otherwise, cumulative gains and losses are amortized over the average remaining service period of active employees.
Plan amendments unrelated to negotiated labor contracts are amortized over the average remaining service period of active employees or the remaining life expectancy of the inactive participants based upon the nature of the amendment and the participants impacted. Plan amendments arising from negotiated labor contracts are amortized over the length of the contract.
Assumptions
The weighted average rate assumptions used in determining benefit obligations for the years ended October 31, 2019 and 2018 are:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Health and Life Insurance Benefits
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Discount rate used to determine present value of benefit obligation at end of year
|
3.1
|
%
|
|
4.4
|
%
|
|
3.1
|
%
|
|
4.4
|
%
|
|
Expected rate of increase in future compensation levels
|
3.5
|
%
|
|
3.5
|
%
|
|
—
|
|
|
—
|
|
The weighted average rate assumptions used in determining net postretirement benefits expense for 2019, 2018, and 2017 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Health and Life Insurance Benefits
|
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
|
Discount rate used to determine service cost
|
4.6
|
%
|
|
3.9
|
%
|
|
3.9
|
%
|
|
4.6
|
%
|
|
3.9
|
%
|
|
4.0
|
%
|
|
Discount rate used to determine interest cost
|
4.0
|
%
|
|
3.0
|
%
|
|
2.8
|
%
|
|
4.1
|
%
|
|
3.1
|
%
|
|
2.9
|
%
|
|
Expected long-term rate of return on plan assets
|
7.4
|
%
|
|
7.2
|
%
|
|
7.2
|
%
|
|
7.5
|
%
|
|
7.5
|
%
|
|
7.5
|
%
|
|
Expected rate of increase in future compensation levels
|
3.5
|
%
|
|
3.5
|
%
|
|
3.5
|
%
|
|
—
|
|
|
—
|
|
|
—
|
|
The actuarial assumptions used to compute the net postretirement benefits expense (income) are based upon information available as of the beginning of the year, specifically market interest rates, past experience, and our best estimate of future economic conditions. Changes in these assumptions may impact the measurement of future benefit costs and obligations. In computing future costs and obligations, we must make assumptions about such things as employee mortality and turnover, expected salary and wage increases, discount rates, expected returns on plan assets, and expected future cost increases. Three of these items have a significant impact on the level of expense recognized: (i) discount rates, (ii) expected rates of return on plan assets, and (iii) healthcare cost trend rates.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
We determine the discount rate for our pension and OPEB obligations by matching anticipated future benefit payments for the plans to a high-quality corporate bond yield curve to establish a weighted average discount rate for each plan.
We determine our assumption as to expected return on plan assets by evaluating historical performance, investment community forecasts, and current market conditions. We consider the current asset mix as well as our targeted asset mix when establishing the expected return on plan assets.
Health care cost trend rates have been established through a review of actual recent cost trends and projected future trends. Our retiree medical and drug cost trend assumptions are our best estimate of expected inflationary increases to healthcare costs. Due to the number of former employees and their beneficiaries included in our retiree population (approximately 30,000), the trend assumptions are based upon both our specific trends and nationally expected trends.
The weighted average rate of increase in the per capita cost of postretirement health care benefits provided through U.S. plans representing 90% of our other postretirement benefit obligation, is projected to be 10.1% in 2020 and was estimated as 14.4% for 2019. Our projections assume that the rate will decrease to 5% by the year 2024 and remain at that level each year thereafter.
The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
One-Percentage
Point Increase
|
|
One-Percentage
Point Decrease
|
|
Effect on total of service and interest cost components
|
$
|
8
|
|
|
$
|
(7
|
)
|
|
Effect on postretirement benefit obligation
|
141
|
|
|
(117
|
)
|
Plan Assets
The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 13, Fair Value Measurements, for a discussion of the fair value hierarchy.
The following describes the methods and significant assumptions used to estimate fair value of the investments:
|
|
|
|
•
|
Cash and short-term investments—Valued at cost plus earnings from investments for the period, which approximates fair market value due to the short-term duration. Cash equivalents are valued at net asset value as provided by the administrator of the fund.
|
|
|
|
|
•
|
U.S. Government and agency securities—Valued at the closing price reported on the active market on which the security is traded or valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor's and SIX Telekurs.
|
|
|
|
|
•
|
Corporate debt securities—Valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor's and SIX Telekurs.
|
|
|
|
|
•
|
Common and preferred stock—Valued at the closing price reported on the active market on which the security is traded.
|
|
|
|
|
•
|
Collective trusts, Partnerships/joint venture interests, Real estate and Hedge funds—Valued at the net asset value provided by the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding.
|
|
|
|
|
•
|
Insurance Linked Securities—Valued at the net asset value provided by the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities, then divided by the number of units outstanding.
|
|
|
|
|
•
|
Derivatives—Valued monthly for the trustee using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor’s and SIX Telekurs. Valued monthly by the trustee using various providers of derivatives pricing, most notably Numerix, Markit and Super Derivatives.
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Pension Assets
The fair value of the pension plan assets by category is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2019
|
|
As of October 31, 2018
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
$
|
68
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
68
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
77
|
|
|
Collective Trusts and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Equity
|
281
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
281
|
|
|
293
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
293
|
|
|
Canadian Equity
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
International Equity
|
283
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
283
|
|
|
270
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
270
|
|
|
Global Equity
|
219
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
219
|
|
|
205
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
205
|
|
|
Fixed Income - Long Duration Credit
|
—
|
|
|
296
|
|
|
—
|
|
|
—
|
|
|
296
|
|
|
—
|
|
|
283
|
|
|
—
|
|
|
—
|
|
|
283
|
|
|
Fixed Income - Long Duration Government
|
—
|
|
|
173
|
|
|
—
|
|
|
—
|
|
|
173
|
|
|
—
|
|
|
156
|
|
|
—
|
|
|
—
|
|
|
156
|
|
|
Fixed Income - Intermediate Duration Government
|
—
|
|
|
79
|
|
|
—
|
|
|
—
|
|
|
79
|
|
|
—
|
|
|
48
|
|
|
—
|
|
|
—
|
|
|
48
|
|
|
Fixed Income - High Yield
|
—
|
|
|
154
|
|
|
—
|
|
|
—
|
|
|
154
|
|
|
—
|
|
|
157
|
|
|
—
|
|
|
—
|
|
|
157
|
|
|
Fixed Income - Canadian Bond
|
—
|
|
|
20
|
|
|
—
|
|
|
—
|
|
|
20
|
|
|
—
|
|
|
194
|
|
|
—
|
|
|
—
|
|
|
194
|
|
|
Global Real Estate
|
—
|
|
|
138
|
|
|
—
|
|
|
—
|
|
|
138
|
|
|
—
|
|
|
135
|
|
|
—
|
|
|
—
|
|
|
135
|
|
|
Global Infrastructure
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
9
|
|
|
Insurance linked Securities
|
—
|
|
|
—
|
|
|
—
|
|
|
34
|
|
|
34
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
45
|
|
|
Hedge Fund of Funds
|
—
|
|
|
—
|
|
|
—
|
|
|
187
|
|
|
187
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
202
|
|
|
202
|
|
|
Private Equity
|
—
|
|
|
—
|
|
|
—
|
|
|
23
|
|
|
23
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
32
|
|
|
32
|
|
|
Private Credit
|
—
|
|
|
—
|
|
|
—
|
|
|
47
|
|
|
47
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
22
|
|
|
Real Estate
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Total(A)
|
$
|
851
|
|
|
$
|
860
|
|
|
$
|
—
|
|
|
$
|
300
|
|
|
$
|
2,011
|
|
|
$
|
861
|
|
|
$
|
973
|
|
|
$
|
—
|
|
|
$
|
310
|
|
|
$
|
2,144
|
|
___________________
|
|
|
|
(A)
|
In addition, the table above includes the fair value of Canadian pension assets translated at the exchange rates as of October 31, 2019 and 2018, respectively, while the change in the plan asset table includes the fair value of Canadian pension assets translated at historical foreign currency rates.
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Other Postretirement Benefits
The fair value of other postretirement benefit plan assets by category is summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2019
|
|
As of October 31, 2018
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
NAV
|
|
Total
|
|
Asset Category
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
11
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
11
|
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Credit Bonds
|
—
|
|
|
58
|
|
|
—
|
|
|
—
|
|
|
58
|
|
|
—
|
|
|
61
|
|
|
—
|
|
|
—
|
|
|
61
|
|
|
Corporate and Government Bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Government Bonds
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Collective Trusts and Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Equity
|
58
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
58
|
|
|
59
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59
|
|
|
International Equity
|
57
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
57
|
|
|
59
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
59
|
|
|
Fixed Income - Multi-Asset Credit
|
9
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
28
|
|
|
9
|
|
|
17
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
Real Estate (REITs)
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26
|
|
|
26
|
|
|
Mutual Fund
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Insurance Linked Securities
|
—
|
|
|
—
|
|
|
—
|
|
|
6
|
|
|
6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
Hedge Fund of Funds
|
—
|
|
|
—
|
|
|
—
|
|
|
37
|
|
|
37
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39
|
|
|
39
|
|
|
Private Equity
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8
|
|
|
8
|
|
|
Total
|
$
|
132
|
|
|
$
|
77
|
|
|
$
|
—
|
|
|
$
|
74
|
|
|
$
|
283
|
|
|
$
|
138
|
|
|
$
|
78
|
|
|
$
|
—
|
|
|
$
|
81
|
|
|
$
|
297
|
|
The investment strategy of the postretirement pension plans (the "Plans") is based on many factors including broad economic factors, historical and prospective information regarding capital market performance, investment strategies available to an asset pool of this size, the current regulatory environment, the Plans’ liabilities and the expected interaction between assets and liabilities. The primary objective of the strategy is to manage assets in such a way that will allow the eventual satisfaction of obligations to the Plans’ participants and beneficiaries. To meet the primary objective the portfolios will be structured to provide liquidity to meet the Plans’ benefit payment obligations and administration expenses, offer a reasonable probability of achieving growth in assets that will assist in closing the Plans’ funding gap and enable the Plans to satisfy their liabilities.
Given the relationship between risk and return a moderately aggressive risk profile was implemented. Primary emphasis is to strike a balance between portfolio stability and portfolio appreciation.
In line with the Plans' return objectives and risk parameters, target asset allocations are approximately 70% return-seeking assets and 30% liability-hedging assets. The return-seeking assets include long only equities (both active and passive, domestic and international, across the capitalization range) to capture long-term growth opportunities, hedge fund of funds to diversify the equity beta, return seeking credit (including high yield debt, emerging market debt and bank loans) to provide a meaningful level of absolute return and diversify equity beta, global real estate to diversify the equity beta and private equity. The liability-hedging assets are invested in high-quality, investment grade bonds with durations that approximate the durations of the liabilities. The objective of the liability hedging assets is to dampen the Plans’ surplus volatility.
All assets are managed by external investment managers. Each investment manager is expected to prudently manage the assets in a manner consistent with the investment objectives, guidelines, and constraints outlined in their Investment Management Agreements and the Investment Policy Statement. Managers are not permitted to invest outside of the asset class mandate (i.e., equity, fixed income, alternatives) or strategy for which they are appointed.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Expected Future Benefit Payments
The expected future benefit payments for the years ending October 31, 2020 through 2024 and the five years ending October 31, 2029 are estimated as follows:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Pension Benefit Payments
|
|
Other Postretirement Benefit Payments(A)
|
|
2020
|
$
|
258
|
|
|
$
|
66
|
|
|
2021
|
253
|
|
|
69
|
|
|
2022
|
246
|
|
|
73
|
|
|
2023
|
240
|
|
|
76
|
|
|
2024
|
233
|
|
|
77
|
|
|
2025 through 2029
|
1,057
|
|
|
356
|
|
________________________
|
|
|
|
(A)
|
Payments are net of expected participant contributions and expected federal subsidy receipts.
|
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. 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 $35 million in 2019, $33 million in 2018 and $29 million in 2017.
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 under the 1993 Settlement Agreement ("Supplemental Benefit Program"), is not part of our consolidated financial statements.
Our contingent profit sharing obligations under a certain Supplemental Benefit Trust Profit Sharing Plan ("Supplemental Benefit Trust Profit Sharing Plan") will continue until certain funding targets defined by the 1993 Settlement Agreement are met. In 2019 and 2018, we recorded $21 million and $30 million, respectively, in 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 14, Commitments and Contingencies.
12. Income Taxes
On December 22, 2017, the Tax Act was signed into U.S. law. The Tax Act reduces the statutory corporate income tax rate from 35% to 21%, effective January 1, 2018, required companies to pay a one-time transition tax on earnings of certain foreign subsidiaries that were previously tax-deferred and created new taxes on certain foreign-sourced earnings.
The Tax Act also added many new provisions, which first applied to our taxable year beginning November 1, 2018, including changes to limits on the deductions for executive compensation and interest expense, a tax on global intangible low‐taxed income (“GILTI”), the base erosion anti‐abuse tax (“BEAT”) and a deduction for foreign derived intangible income (“FDII”). Companies can either account for taxes on GILTI as incurred or recognize deferred taxes when basis differences exist that are expected to affect the amount of the GILTI inclusion upon reversal. The Company is electing to account for taxes on GILTI as incurred.
We have completed our accounting for the income tax effects of the Tax Act. There were no significant changes from our previous estimates or “provisional” amounts as permitted by the SEC’s Staff Accounting Bulletin No. 118 (“SAB”) issued on December 22, 2017. We will continue to evaluate the Tax Act’s impact, which may change as a result of additional Treasury guidance, federal or state legislative actions, or changes in accounting standards or related interpretations.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table presents the domestic and foreign components of Income (loss) from continuing operations before income taxes in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Domestic
|
$
|
220
|
|
|
$
|
246
|
|
|
$
|
(74
|
)
|
|
Foreign
|
42
|
|
|
174
|
|
|
138
|
|
|
Income from continuing operations before income taxes
|
$
|
262
|
|
|
$
|
420
|
|
|
$
|
64
|
|
The following table presents the components of Income tax expense in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Current:
|
|
|
|
|
|
|
Federal
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
(4
|
)
|
|
State and local
|
3
|
|
|
1
|
|
|
(10
|
)
|
|
Foreign
|
46
|
|
|
47
|
|
|
30
|
|
|
Total current expense
|
$
|
51
|
|
|
$
|
48
|
|
|
$
|
16
|
|
|
Deferred:
|
|
|
|
|
|
|
Federal
|
$
|
(1
|
)
|
|
$
|
(2
|
)
|
|
$
|
(19
|
)
|
|
State and local
|
(5
|
)
|
|
1
|
|
|
(4
|
)
|
|
Foreign
|
(26
|
)
|
|
5
|
|
|
17
|
|
|
Total deferred (benefit) expense
|
$
|
(32
|
)
|
|
$
|
4
|
|
|
$
|
(6
|
)
|
|
Total income tax expense
|
$
|
19
|
|
|
$
|
52
|
|
|
$
|
10
|
|
The following table presents a reconciliation of statutory federal income tax expense (benefit) recorded in Income tax expense in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Federal income tax expense(A)
|
$
|
55
|
|
|
$
|
98
|
|
|
$
|
22
|
|
|
State income taxes, net of federal benefit
|
2
|
|
|
3
|
|
|
3
|
|
|
Credits and incentives
|
16
|
|
|
50
|
|
|
(8
|
)
|
|
Adjustments to valuation allowances
|
(94
|
)
|
|
(1,120
|
)
|
|
57
|
|
|
Foreign operations
|
1
|
|
|
2
|
|
|
(4
|
)
|
|
Adjustments to uncertain tax positions
|
2
|
|
|
1
|
|
|
(15
|
)
|
|
Intraperiod tax allocation offset to equity components
|
(5
|
)
|
|
—
|
|
|
(28
|
)
|
|
Non-controlling interest adjustment
|
(5
|
)
|
|
(6
|
)
|
|
(9
|
)
|
|
Foreign Inclusions
|
34
|
|
|
—
|
|
|
—
|
|
|
Tax Act Mandatory Repatriation
|
—
|
|
|
34
|
|
|
—
|
|
|
Tax Act US Deferred Remeasurement
|
—
|
|
|
983
|
|
|
—
|
|
|
Other
|
13
|
|
|
7
|
|
|
(8
|
)
|
|
Recorded income tax expense
|
$
|
19
|
|
|
$
|
52
|
|
|
$
|
10
|
|
_________________________
(A) Federal income tax expense was taxed at a rate of 21% for the year ended 2019, and 23% for the year ended 2018 and 35% for the year ended 2017.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The tax effect of pretax income or loss from continuing operations generally should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. An exception to that incremental approach is applied when there is a loss from continuing operations and income in another category of earnings (for example, discontinued operations, other comprehensive income, additional paid in capital, etc.). In that situation, a tax provision is first allocated to the other categories of earnings. A related tax benefit is then recorded in continuing operations. This exception to the general rule applies even when a valuation allowance is in place at the beginning and end of the year. While intraperiod tax allocations do not change the overall tax provision, it may result in a gross-up of the individual components, thereby changing the amount of tax provision included in each category of income. During 2019 and 2017, we recorded $5 million and $28 million, respectively, for intraperiod allocation benefits in domestic continuing operations associated with certain postretirement plan remeasurement gains.
Not including the effect of the federal income tax rate change, we recognized an income tax benefit of $94 million and $137 million, and income tax expense of $57 million, for the change in the valuation allowance for the years ended October 31, 2019, 2018 and 2017, respectively.
At October 31, 2019, undistributed earnings of foreign subsidiaries were $357 million. Income taxes have not been provided on foreign undistributed earnings, whether previously taxed or not, because they are either considered to be permanently invested in foreign subsidiaries or are expected to be repatriated without significant incremental U.S. federal, state or foreign withholding taxes. It is impracticable to determine the exact amount of unrecognized deferred tax liabilities.
The following table presents the components of the deferred tax asset (liability):
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Deferred tax assets attributable to:
|
|
|
|
|
Employee benefits liabilities
|
$
|
578
|
|
|
$
|
615
|
|
|
Net operating loss ("NOL") carryforwards
|
782
|
|
|
979
|
|
|
Product liability and warranty accruals
|
165
|
|
|
172
|
|
|
Research and development
|
144
|
|
|
114
|
|
|
Tax credit carryforwards
|
196
|
|
|
212
|
|
|
Other
|
279
|
|
|
238
|
|
|
Gross deferred tax assets
|
2,144
|
|
|
2,330
|
|
|
Less: Valuation allowances
|
2,011
|
|
|
2,182
|
|
|
Net deferred tax assets
|
$
|
133
|
|
|
$
|
148
|
|
|
Deferred tax liabilities attributable to:
|
|
|
|
|
Other
|
$
|
(18
|
)
|
|
$
|
(27
|
)
|
|
Total deferred tax liabilities
|
$
|
(18
|
)
|
|
$
|
(27
|
)
|
At October 31, 2019, deferred tax assets attributable to NOL carryforwards include $465 million attributable to U.S. federal NOL carryforwards, $166 million attributable to state NOL carryforwards, and $151 million attributable to foreign NOL carryforwards. If not used to reduce future taxable income, U.S. federal NOLs are scheduled to expire beginning in 2032. State NOLs can be carried forward for initial periods of 5 to 20 years, and are scheduled to expire in 2020 to 2039. Approximately one fourth of our foreign net operating losses will expire beginning in 2027, and another approximate one fourth of our foreign net operating losses will expire beginning in 2033, while the majority of the remaining balance has no expiration date. The majority of our tax credits can be carried forward for initial periods of 20 years and are scheduled to expire between 2020 and 2039.
A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
For the year ended October 31, 2019, 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. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance.
We earned domestic income from continuing operations for the year ended October 31, 2019 and 2018 and incurred a domestic loss from continuing operations for the year ended October 31, 2017. The positive evidence of domestic income from the years ended October 31, 2019 and 2018 does not outweigh the negative evidence of cumulative losses from prior years. The qualitative and quantitative analysis of current and expected domestic earnings, industry volumes, tax planning strategies, and general business risks resulted in a more likely than not conclusion of not being able to realize a significant portion of our deferred tax assets as of October 31, 2019.
We continue to maintain a valuation allowances 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 current forecasted results. 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.
The total deferred tax asset valuation allowances were $2.0 billion and $2.2 billion at October 31, 2019 and 2018, respectively. In the event we released all of our valuation allowances, almost all would impact income taxes as a benefit in our Consolidated Statements of Operations.
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. As of October 31, 2019, the amount of liability for uncertain tax positions was $21 million. The liability at October 31, 2019 has a recorded offsetting tax benefit associated with various issues that total $9 million. If the unrecognized tax benefits are recognized, all would impact our effective tax rate, except for positions for which we maintain a full valuation allowance against certain deferred tax assets. In this case, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carryforward, which would be offset by a full valuation allowance.
Changes in the liability for uncertain tax positions are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Liability for uncertain tax positions at November 1
|
$
|
27
|
|
|
$
|
34
|
|
|
Additions as a result of positions taken in prior periods
|
3
|
|
|
2
|
|
|
Decrease as a result of positions taken in prior periods
|
(2
|
)
|
|
(7
|
)
|
|
Settlements
|
(7
|
)
|
|
(2
|
)
|
|
Liability for uncertain tax positions at October 31
|
$
|
21
|
|
|
$
|
27
|
|
We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. Total interest and penalties related to our uncertain tax positions resulted in income tax expense of less than $1 million and income tax benefits of $1 million and $6 million for the years ended October 31, 2019, 2018, and 2017, respectively. The total interest and penalties accrued were $4 million and $3 million for the years ended October 31, 2019 and 2018, respectively.
We have open tax years back to 2001 with various significant taxing jurisdictions including the U.S., Canada, Mexico, and Brazil. In connection with the examination of tax returns, contingencies may arise that generally result from differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. In connection with certain Brazil indirect federal taxes (PIS and COFINS), contingencies that would result in tax recoveries may be resolved in future periods, which could be material.
We believe we have sufficient accruals for our contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
13. 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 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 14, Commitments and Contingencies.
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, and for more information regarding impaired assets under operating leases, see Note 3, Restructurings, Impairments and Divestitures.
Impaired Property, Plant and Equipment—We 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. For more information regarding the impairment of property, plant and equipment, see Note 3, Restructurings, Impairments and Divestitures.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table presents the financial instruments measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2019
|
|
As of October 31, 2018
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government and federal agency securities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
101
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forward contracts(A)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
Foreign currency contracts(A)
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Interest rate caps(B)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
Total assets
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
101
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
105
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forward contracts(C)
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency contracts(C)
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Guarantees
|
—
|
|
|
—
|
|
|
27
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
24
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
27
|
|
|
$
|
30
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24
|
|
|
$
|
24
|
|
_________________________
|
|
|
|
(A)
|
The asset value of commodity forward contracts and foreign currency contracts is included in Other current assets in the accompanying Consolidated Balance Sheets.
|
|
|
|
|
(B)
|
The asset value of interest rate caps is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.
|
|
|
|
|
(C)
|
The liability value of commodity forward contracts and foreign currency contracts 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:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
October 31, 2019
|
|
October 31, 2018
|
|
Guarantees, at beginning of period
|
(24
|
)
|
|
(21
|
)
|
|
Issuances
|
(6
|
)
|
|
(7
|
)
|
|
Settlements
|
3
|
|
|
4
|
|
|
Guarantees, at end of period
|
$
|
(27
|
)
|
|
$
|
(24
|
)
|
There were no transfers of level 3 financial instruments.
The following table presents the financial instruments measured at fair value on a nonrecurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
October 31, 2019
|
|
October 31, 2018
|
|
Level 2 financial instruments
|
|
|
|
|
Impaired finance receivables (A)
|
$
|
23
|
|
|
$
|
20
|
|
|
Specific loss reserve
|
(11
|
)
|
|
(9
|
)
|
|
Fair value
|
$
|
12
|
|
|
$
|
11
|
|
_________________________
|
|
|
|
(A)
|
Certain impaired finance receivables are measured at fair value on a nonrecurring basis. An impairment charge is recorded for the amount by which the carrying value of the receivables exceeds the fair value of the underlying collateral, net of remarketing costs. Fair values of the underlying collateral are determined by reference to dealer vehicle value publications adjusted for certain market factors.
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
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 Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables generally consist of retail and wholesale accounts and notes. The carrying amounts of Trade and other receivables 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 current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.
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 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 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, due serially through 2023
|
—
|
|
|
—
|
|
|
995
|
|
|
995
|
|
|
991
|
|
|
Bank credit facilities, due dates from 2019 through 2025
|
—
|
|
|
—
|
|
|
1,038
|
|
|
1,038
|
|
|
1,059
|
|
|
Commercial paper, program matures in 2022
|
84
|
|
|
—
|
|
|
—
|
|
|
84
|
|
|
84
|
|
|
Borrowings secured by operating and finance leases, due serially through 2024
|
—
|
|
|
—
|
|
|
122
|
|
|
122
|
|
|
122
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2018
|
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Retail notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
180
|
|
|
$
|
180
|
|
|
$
|
183
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan Credit Agreement, due 2025
|
—
|
|
|
—
|
|
|
1,597
|
|
|
1,597
|
|
|
1,570
|
|
|
6.625% Senior Notes, due 2026
|
—
|
|
|
1,122
|
|
|
—
|
|
|
1,122
|
|
|
1,083
|
|
|
4.75% Senior Subordinated Convertible Notes, due 2019(B)
|
412
|
|
|
—
|
|
|
—
|
|
|
412
|
|
|
405
|
|
|
Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040
|
—
|
|
|
235
|
|
|
—
|
|
|
235
|
|
|
220
|
|
|
Financed lease obligations
|
—
|
|
|
—
|
|
|
122
|
|
|
122
|
|
|
122
|
|
|
Other
|
—
|
|
|
—
|
|
|
25
|
|
|
25
|
|
|
26
|
|
|
Financial Services operations
|
|
|
|
|
|
|
|
|
|
|
Asset-backed debt issued by consolidated SPEs, due serially through 2023
|
—
|
|
|
—
|
|
|
949
|
|
|
949
|
|
|
948
|
|
|
Senior secured NFC Term Loan, due 2025
|
—
|
|
|
—
|
|
|
400
|
|
|
400
|
|
|
394
|
|
|
Bank credit facilities, due dates from 2019 through 2025
|
—
|
|
|
—
|
|
|
511
|
|
|
511
|
|
|
519
|
|
|
Commercial paper, program matures in 2022
|
75
|
|
|
—
|
|
|
—
|
|
|
75
|
|
|
75
|
|
|
Borrowings secured by operating and finance leases, due serially through 2024
|
—
|
|
|
—
|
|
|
104
|
|
|
104
|
|
|
105
|
|
_________________________
|
|
|
|
(A)
|
Excludes capital lease obligation debt of $2 million.
|
|
|
|
|
(B)
|
The carrying value represents the consolidated financial statement amount of the debt which excludes the allocation of the conversion feature to equity, while the estimated fair value is derived from quoted prices in active markets which include the equity feature.
|
14. 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 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, Navistar Capital (a program of BMO Harris Bank N.A. and Bank of Montreal (together "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. We refer to this alliance as "Navistar Capital." 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 were $1.6 billion and $1.5 billion of outstanding loan principal and operating lease payments receivable at October 31, 2019 and 2018, respectively, 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 $2.7 billion and $2.5 billion at October 31, 2019 and 2018, 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 $51 million and $104 million and financed lease obligations of $60 million and $122 million, in our Consolidated Balance Sheets as of October 31, 2019 and 2018, respectively.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
We also have issued a limited number of residual value guarantees, for which losses are generally capped. If control has not transferred, we 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 October 31, 2019, the amount of stand-by letters of credit and surety bonds issued was $97 million.
In addition, as of October 31, 2019, we have $125 million of outstanding purchase commitments and contracts with $28 million of cancellation fees with expiration dates through 2025.
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 $20 million for these and other environmental matters, which are included within Other current liabilities and Other noncurrent liabilities, as of October 31, 2019. The majority of these accrued liabilities are expected to be paid subsequent to 2020.
Along with other vehicle manufacturers, we have been subject to an increased number of asbestos-related claims in recent years. 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 claims will continue to grow, and that the costs for resolving asbestos related claims 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)
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 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) and 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 the Company breached the 1993 Settlement Agreement and violated ERISA by failing to properly calculate profit sharing contributions due under the Supplemental Benefit Trust Profit Sharing Plan. The Committee seeks 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 Supplemental Benefit Trust Profit Sharing Plan. In November 2015, the Company and the Committee selected an arbitrator. The arbitration discovery process commenced and on August 1, 2016, the parties submitted briefs on issues related to the scope of the arbitration. On June 29, 2017, the arbitrator ruled, among other things, that the arbitration will include Supplemental Benefit Trust Profit Sharing Plan calculations for the years ending October 31, 2001 through October 31, 2014. On September 21, 2018, the arbitrator set a schedule to rule on all issues and determine final calculations by April 15, 2020. On April 29, 2019, the arbitrator ordered a new schedule for arbitration, and the arbitrator's final determination is expected by April 30, 2020. On September 13, 2019, the Committee filed an omnibus discovery motion with the arbitrator, alleging various discovery violations by the Company. On October 30, 2019, the Company and the Committee met with the Court regarding the motion to enforce discussed below, and the parties agreed on a plan for the Company to respond to the Committee’s information and document requests in the arbitration. On November 5, 2019, the Committee withdrew the motion without prejudice. The parties are in the process of proposing a new date to the arbitrator for the completion of the arbitration.
By letter dated February 14, 2019, the Committee indicated the Company’s Supplemental Benefit Trust Profit Sharing Plan calculation for the Plan year ending October 31, 2018 reflects numerous positions that have caused the Committee to dispute the Supplemental Benefit Trust Profit Sharing Plan calculations in the past, and on that basis the Committee disagrees with the 2018 calculation. In the February 14, 2019 letter, the Committee also requested information about the 2018 calculation. On March 12, 2019, the Committee filed in the Court 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 about the 2018 calculation.
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 were held on November 2, 2018 and February 22, 2019, and an in-chambers conference with the Court was held on November 22, 2019. Telephone conferences with the Court are scheduled for January 6, 2020 and February 7, 2020, and a hearing is set for June 1, 2020. Additional hearings 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.
Retiree Health Care Litigation
On October 21, 2016, two lawsuits were filed in the Court relating to postretirement healthcare and life insurance obligations under the 1993 Settlement Agreement. The first lawsuit (the “Committee’s Complaint”) was filed by the Committee.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The Committee’s Complaint was filed against NIC, NI, NFC and a former affiliate, all of which are parties to the 1993 Settlement Agreement. Since January 1, 2012, the Navistar, Inc. Retiree Health Benefit Trust, created pursuant to the 1993 Settlement Agreement (the “Base Trust”), has received certain Medicare Part D subsidies from the federal Centers for Medicare and Medicaid Services that were made available for prescription drug benefits provided to Medicare-eligible seniors pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and has also received certain Medicare Part D coverage-gap discounts from prescription drug manufacturers that were made available to eligible seniors pursuant to the Patient Protection and Affordable Care Act (collectively, the “Subsidies”).
The Committee alleges, among other things, that the defendants breached the 1993 Settlement Agreement since January 1, 2012 by causing the Base Trust to allocate the Subsidies in a manner that improperly decreased the defendants’ contributions to the Base Trust and increased retiree contributions. The Committee seeks damages, attorneys’ fees and costs for all alleged violations of the 1993 Settlement Agreement, including approximately $26 million which the Committee alleges is the eligible retirees’ “fair share” of the Subsidies that were allegedly misappropriated by the defendants from January, 2012 through April, 2015.
The second lawsuit was filed 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 the Subsidies) for the Company’s benefit.
The Committee Members request 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 request 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 defendants filed motions to dismiss each respective complaint on January 10, 2017. On May 10, 2017, the Court dismissed the Committee's Complaint with prejudice, stating that the Committee lacked standing to bring its claims. With respect to the Committee Members’ Complaint, the Court declined to dismiss the complaint, but ordered the parties to conduct discovery regarding whether the Committee Members’ Complaint is barred by the applicable statute of limitations and to file a motion for summary judgment thereafter on that issue of timeliness. The defendants filed their motion for summary judgment on September 21, 2017, the Committee Members’ filed their opposition on November 2, 2017, and the defendants filed their reply on November 22, 2017. On June 26, 2018, the Court conditionally overruled the defendants’ motion for summary judgment. 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 requesting 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 December 11, 2018, the defendants filed their opposition to the Committee Members’ motion for sanctions. On March 26, 2019, the Court granted the Committee Members’ motion for sanctions and ordered that discovery related to the statute of limitations be re-opened through May 28, 2019, and the Court subsequently extended the statute of limitations discovery period to October 7, 2019. The Court held a hearing on October 7, 2019 and October 8, 2019 to complete the record on the statute of limitations defense. Briefing on the statute of limitations issue is scheduled for completion 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, in-person hearings were held on November 2, 2018 and February 22, 2019 and an in-chambers conference with the Court was held on November 22, 2019. Telephone conferences with the Court are scheduled for January 6, 2020 and February 7, 2020, and a hearing is set for June 1, 2020. Additional hearings may be scheduled in the future.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
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 approximately less than US$1 million at October 31, 2019), which is not due and final 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.
In connection with the FATMA Notice, IIAA presented a motion to the district attorney of the State of Santa Catarina (the “SC District Attorney”) to set forth its defenses and correct inaccuracies in the FATMA Notice in August 2017. In September 2017, the SC District Attorney informed IIAA that it intended to present a Consent Agreement to all of the companies that sent waste to Natureza to determine the allocation of the liability for generating the waste which led to the contamination of the Natureza Facility. IIAA then filed a motion requesting that the SC District Attorney consider certain facts and circumstances prior to presenting the Consent Agreement.
In January 2018, 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. Selamix then presented three proposals for conducting a preliminary environmental assessment in the area to determine the allocation of liability among the Companies. 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. The Companies (other than Selamix) have expressed an interest in having an independent environmental study conducted. The SC District Attorney has indicated that it may consider requiring an independent environmental study after Selamix’s environmental study is 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 and the report indicated that the entire property should be subject to further studies to confirm the type and extent of the contamination due to signs of buried residues in several areas. 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 which was to be presented and paid for by Selamix. One of the commercial proposals included an Environmental Preliminary Assessment Report ("Phase 1 Study") and indicated that a Phase 2 assessment should be performed to include: (i) geophysical investigations to identify buried drums; (ii) investigations to verify and delimitate the volume and size of the contamination; and (iii) sample collection and analysis of soil and water. In July 2019, the SC District Attorney requested that each of the Companies (including IIAA) inform the SC District Attorney of whether they intend 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.
IIAA continues to dispute the allegations in the FATMA Notice and intends to continue to vigorously defend itself. Currently, no demands or offers are outstanding.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
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 approximately less than US$1 million at October 31, 2019). In November 2014, IIAA extended a settlement offer. The parties remained in discussions and IIAA’s settlement offer 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 has made all necessary investigations and has taken remedial measures to address the contamination and that Companhia Ambiental do Estado de Sao Paulo ("CETESB"), the environmental agency of Sao Paulo State, has agreed to the remedial measures taken by IIAA. On June 20, 2017, IIAA presented a petition requesting a 90-day suspension of the lawsuit. IIAA has since held and is currently engaged in discussions with the District Attorney regarding settlement of this matter. The District Attorney agreed to an initial suspension on June 30, 2017 and a subsequent suspension for an additional 90 days which ended on July 9, 2018.
A new district attorney (the “New District Attorney”) assumed responsibility for the case in February 2018. The New District Attorney 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. IIAA attempted to schedule a meeting with the New District Attorney’s technical experts. IIAA met with the New District Attorney on July 25, 2018. The New District Attorney has indicated that he will request information related to the status of the current remediation from CETESB. After receiving that information, the New District Attorney indicated that he will schedule a meeting with IIAA to discuss the proposed terms of a potential settlement agreement and granted a third suspension on August 14, 2018 which ended on November 14, 2018. Although the suspension was technically terminated, the New District Attorney continued to evaluate the possibility of settlement. The New District Attorney requested a suspension, which was granted by the court and technically ended on August 26, 2019. On September 6, 2019, the New District Attorney requested that (a) the case be continued due to the absence of a formal settlement agreement proposal, and (b) the judge required the Department of Water and Electric Energy (“DAEE”) and São Paulo State Sewage Company (“SABESP”) to answer inquiries related to the case. Subsequently, the New District Attorney suggested the case be suspended for another 180 days to allow for the further elaboration of the New District Attorney’s technical expert’s opinion. On September 10, 2019, the judge granted the New District Attorney's request to require answers from DAEE and SABESP on October 23, 2019. DAEE and SABESP responded to the requests and the parties are currently reviewing the information provided.
There are no current demands or offers outstanding.
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 Canada (together with the N&C Action, the "Canadian Actions").
From June 13-17, 2016, the court conducted a certification hearing in the N&C Action. On November 16, 2016, the court 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. The court in the N&C Action denied certification to persons who operated but did not buy the trucks in question. On November 2, 2017, NIC, NI, Navistar Canada Inc. and Harbour International Trucks filed a notice of appeal. On December 8, 2017, the plaintiff filed a notice of cross-appeal. Both the appeal and cross-appeal were heard by the British Columbia Court of Appeal on February 9, 2018. On August 1, 2018, the appellate court denied our appeal and granted, in part, N&C's cross-appeal and as such certified three narrow issues on whether misrepresentations were made in Navistar's advertising materials. On September 28, 2018, Navistar sought leave to appeal the certification decision to the Supreme Court of Canada, but leave was denied on March 28, 2019. 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
On June 5, 2017, a hearing was held in the Quebec putative class action lawsuit captioned 4037308 Canada Inc. v. Navistar Canada Inc., NI, and NIC. At that hearing, the court ruled on certain motions regarding evidence related to certification but deferred a ruling on plaintiff’s proposed amendment to narrow the proposed class to Quebec-only purchasers and lessees of model year 2010-13 vehicles containing MaxxForce 11, 13, and 15 liter engines. On November 23, 2017, we filed a motion to stay the Quebec case until the British Columbia Court of Appeal rules on the certification order in the N&C Action. The stay motion was granted on December 7, 2017. The decision of the British Columbia Court of Appeal was provided to the Quebec court. On September 6, 2018, the stay was extended until the Supreme Court of Canada decides the application for leave to appeal in the N&C Action. The stay has since been removed, but no hearing date or certification schedule has been set.
In the Manitoba putative class action lawsuit captioned Vern Brown v. Navistar International Corporation and Navistar Canada, Inc., the court held a case management conference on June 29, 2018, after the plaintiff failed to file a complete certification record by the previously court-ordered due date. The plaintiff advised that it expected to file its remaining certification affidavits by August 31, 2018, and the court suspended certification scheduling in the interim. The plaintiff filed an additional affidavit on July 5, 2018. On September 5, 2018, the court adjourned the certification application indefinitely to allow the plaintiff to obtain an expert report. On July 30, 2019, the plaintiff served an expert report. On October 7, 2019, the plaintiff served an amended motion for certification and requested a hearing to set a schedule leading to a certification hearing. On October 9, 2019, the court determined that the plaintiff did not properly file his certified materials and adjourned the plaintiffs’ scheduling request. It has not been rescheduled. There are no certification or other hearings scheduled in any of the other Canadian Actions at this time.
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, including the Northern District of Illinois, the Eastern District of Wisconsin, the Southern District of Florida, the Middle District of Pennsylvania, the Southern District of Texas, the Western District of Kentucky, the District of Minnesota, the Northern District of Alabama, and the District of New Jersey (together with the Par 4 Action, the "U.S. Actions"). Some of the U.S. Actions name both NIC and NI, and allege 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.
On October 3, 2014, NIC and NI filed a motion before the United States Judicial Panel on Multidistrict Litigation (the "MDL Panel") seeking to transfer and consolidate before Judge Joan B. Gottschall of the United States District Court for the Northern District of Illinois all of the then-pending U.S. Actions, as well as certain non-class action MaxxForce Advanced EGR engine lawsuits pending in various federal district courts.
On December 17, 2014, Navistar's motion to consolidate the U.S. Actions and certain other non-class action lawsuits was granted. The MDL Panel issued an order consolidating all of the U.S. Actions that were pending on the date of Navistar’s motion before Judge Gottschall in the United States District Court for the Northern District of Illinois (the "MDL Action").
The MDL Panel also consolidated into the MDL Action certain non-class action MaxxForce Advanced EGR engine lawsuits pending in the various federal district courts. Non-class federal lawsuits presenting pre-trial issues similar to the MDL Action continue to be transferred to the MDL Action. Approximately 28 such actions are currently pending.
On March 5, 2015, Judge Gottschall entered an order in the MDL Action appointing interim lead counsel and interim liaison counsel for the plaintiffs. On May 11, 2015, lead counsel for the plaintiffs filed a First Master Consolidated Class Action Complaint ("Consolidated Complaint"). The parties to the MDL Action exchanged initial disclosures on May 29, 2015. The Company answered the Consolidated Complaint on July 13, 2015. On September 22, 2016, lead counsel for the plaintiffs filed a First Amended Consolidated Class Action Complaint (the “Amended Consolidated Complaint”). The Amended Consolidated Complaint added 25 additional named plaintiffs. NI and NIC answered the Amended Consolidated Complaint on October 20, 2016.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
On October 13, 2017, lead counsel for the plaintiffs filed a Motion for Leave to File a Second Amended Consolidated Class Action Complaint, as well as a Motion for Voluntary Dismissal of Claims without Prejudice relating to 15 previously named plaintiffs. On January 4, 2018, Judge Gottschall granted both motions. On January 9, 2018, the plaintiffs filed a Second Amended Consolidated Class Action Complaint. The Second Amended Consolidated Class Action Complaint removed 15 named plaintiffs and substituted in 8 new named plaintiffs. Three class action cases were dismissed without prejudice because there were no longer any remaining plaintiffs in those cases. On May 30, 2019, the court granted plaintiffs leave to file a Third Amended Consolidated Class Action Complaint. The Third Amended Consolidated Class Action Complaint removed 2 named plaintiffs. NI and NIC answered the Third Amended Consolidated Class Action Complaint on June 16, 2019.
On May 28, 2019, plaintiffs submitted the Settlement Agreement to the court for preliminary approval. 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 vehicle was purchased or leased in the U.S.
Pursuant to the Settlement Agreement, among other things, (1) the parties will 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 will 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 will commit to make available rebates with a face value in the aggregate of $50 million to the Rebate Fund; and (4) the settlement class will 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”). Any Waterfall from the Rebate Fund to the Cash Fund is capped at $35 million. Finally, 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.
The Settlement Agreement is subject to final approval by the court, including possible appeals. On June 12, 2019, the court preliminarily approved the settlement. Members of the class have been provided notice of the Settlement Agreement and an opportunity to object or opt out. Any members of the class who opt out will not receive any benefit from the Settlement Agreement or be bound by it.
Four class members filed a consolidated objection to the Settlement Agreement on October 10, 2019. NIC and NI, and also lead counsel for the class, filed responses to the objection on October 23, 2019. The objectors filed a reply on November 6, 2019. In response to a court order dated November 8, 2019, lead counsel and the objectors filed supplemental information on November 11, 2019 and November 12, 2019. The court held a fairness hearing on November 13, 2019, to consider whether the Settlement Agreement should be finally approved and whether the proposed Final Order and Judgment should be entered. At the hearing, the court heard argument on behalf of the four objectors and from one additional class member who had not formally filed an objection. The court entered an order on November 13, 2019, requiring additional information from the parties on November 20 and 27, 2019. Depending on certain oversubscription numbers, lead counsel for the class may have the option to withdraw from the Settlement Agreement.
On November 11, 2017, seven plaintiffs (the “Direct Action Plaintiffs”) in the MDL Action moved for a separate trial and discovery schedule independent of the class action schedule. On January 2, 2018, Judge Gottschall granted in part and denied in part the Direct Action Plaintiffs’ motion, allowing two of the Direct Action Plaintiffs to begin limited discovery on plaintiff-specific issues. The parties are currently engaged in discovery. One of the Direct Action Plaintiffs filed a motion for leave to file a First Amended Complaint on September 25, 2018 and that motion was granted by the court in a minute order dated December 13, 2018. The First Amended Complaint was filed on December 18, 2018 and our response was filed on January 8, 2019. On September 24, 2019, NIC, NI, and certain Direct Action Plaintiffs filed a Joint Response Regarding a Proposed Discovery Plan. The court, in turn, referred the matter to a magistrate for discovery supervision. On November 20, 2019, the magistrate set a fact discovery close of October 30, 2020, and set a status hearing for January 14, 2020.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
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. Approximately 35 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. On August 10, 2017, the Milan jury returned a verdict of approximately $31 million against the Company, including $20 million in punitive damages. On October 2, 2017, the Company filed various motions in the trial court challenging the verdict, including a Motion for Judgment Notwithstanding the Verdict or, in the Alternative, a New Trial and Motion to Disapprove of the Award of Punitive Damages.
The hearing on these motions was held on December 1, 2017 and the court denied the Company's motions, denied the Milan plaintiffs’ motion for pre-judgment interest and granted the Milan plaintiffs’ $1 million in fees and costs. On January 11, 2018, the Company filed a Notice of Appeal in the Tennessee Court of Appeals challenging the verdict. Briefing on the appeal was completed on March 18, 2019, and the Tennessee Court of Appeals heard oral arguments on June 19, 2019. In the third quarter of 2017, we recorded $31 million of charges in SG&A expenses in our Consolidated Statements of Operations.
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 for the Milan plaintiffs. In addition, the Tennessee Court of Appeals affirmed the trial court’s judgment for Navistar on the Milan plaintiffs' warranty claims. On October 11, 2019, the Milan plaintiffs filed an application for permission to appeal this ruling to the Tennessee Supreme Court. On October 28, 2019, NI filed its answer to the application for permission to appeal. The Tennessee Supreme Court will decide whether or not to exercise its discretion to hear the appeal.
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. 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.
Fact discovery for the liability phase commenced on December 9, 2015. Pursuant to the court's minute order entered on July 12, 2017, the fact discovery was completed as of November 9, 2017.
On May 13, 2016, the DOJ, on behalf of the EPA, filed a motion for summary judgment on liability. On June 30, 2016, NIC and NI opposed the EPA's motion for summary judgment, and NIC cross-moved for summary judgment against the EPA. On March 1, 2017, the court entered a Memorandum Opinion and Order (i) granting the DOJ’s motion for summary judgment on the issue of liability with respect to NI, (ii) denying the DOJ’s motion for summary judgment on the issue of liability with respect to NIC, and (iii) denying NIC’s motion for summary judgment.
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. The court entered a scheduling order on May 3, 2018, setting a fact discovery deadline of May 22, 2019, expert report and deposition deadlines through November 7, 2019, and a deadline for submission of dispositive motions of December 9, 2019. Fact discovery for the remedy phase is complete. On October 8, 2019, the court set expert report and expert deposition deadlines through March 17, 2020. A status hearing is scheduled for January 29, 2020.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Based on our assessment of the facts underlying the amended complaint above, potential charges to the Consolidated Statements of Operations and cash outlays in future periods could range from $2 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.
Brazil Truck Dealer Disputes
In January 2014, IIAA initiated an arbitration proceeding under the International Chamber of Commerce rules seeking payment for goods sold and unpaid, in the amount of R$64 million (approximately US$16 million as of October 31, 2019), including penalties and interest, from a group of affiliated truck dealers in Brazil. The truck dealers are affiliated with each other, but not with us, and are collectively referred to as Navitrucks. In the proceeding, IIAA also seeks a declaration of fault against Navitrucks related to the termination of the truck dealer agreements between IIAA and Navitrucks. Navitrucks responded in part by submitting counterclaims against IIAA seeking the amount of R$128 million (approximately US$32 million as of October 31, 2019) for damages related to alleged unfulfilled promises and injury to Navitrucks’ reputation. In October 2014, Navitrucks amended their counterclaims by increasing the amount of damages. During a preliminary hearing before the arbitral tribunal on March 24, 2015, the parties agreed to submit all of the pending claims between the parties to the exclusive jurisdiction of the arbitral tribunal. Pursuant to the timetable issued in the arbitration proceeding, IIAA presented its complaint in July 2015, Navitrucks filed its answer and counterclaims on August 24, 2015, and IIAA filed its rebuttal and answer to Navitrucks’ counterclaims on October 22, 2015. On December 7, 2015, Navitrucks filed its rebuttal to IIAA’s answer to counterclaims. On June 13-15, 2016, the arbitral tribunal held hearings on the parties presenting witnesses and evidence.
On July 18, 2016, IIAA and Navitrucks presented additional documents and information related to the hearing held on June 13-15, 2016. On September 30, 2016, the parties presented their final allegations. On April 20, 2017, the arbitral tribunal issued a partial award (the "Initial Award") granting a portion of the relief sought by each of the parties. Specifically, the arbitral tribunal's Initial Award held that: (a) Navitrucks failed to pay certain amounts to IIAA for the purchase of vehicles under its agreements with IIAA, thereby breaching its contractual obligations; and (b) IIAA breached its contractual obligations under its agreements with Navitrucks due to its failure to fulfill its promises to invest in products, infrastructure, and a dealership network. Furthermore, the arbitral tribunal held that, due to the mutual breach of the agreements between IIAA and Navitrucks, the agreements should be deemed terminated.
On June 3, 2017, IIAA and Navitrucks filed an application to clarify certain interpretations of the Initial Award and to correct clerical errors in the Initial Award. IIAA also requested an award to (a) set the indisputable amount of the Initial Award, and (b) order Navitrucks to promptly pay such amount. On June 8, 2017, the arbitral tribunal invited IIAA and Navitrucks to present their respective comments on each other’s applications on or before June 27, 2017. On June 3, 2017 and June 27, 2017, IIAA and Navitrucks, respectively, filed their comments. On September 29, 2017, the arbitral tribunal issued a decision on the applications filed by both parties in which it rejected all of the requests made in the applications of both parties. On October 31, 2017, the arbitral tribunal issued a decision relating to the timeline for the production of technical evidence to be used in the calculation phase in which the actual monetary amount of the damages owed by each party to the other will be definitively determined.
As determined by the arbitral tribunal, IIAA (a) designated its expert assistant and disclosed the questions to be answered by the arbitral expert (official expert designated by the arbitral tribunal); (b) presented a summary of the amount that Navitrucks owes to IIAA in accordance with the previous calculation and related award issued on April 20, 2017; and (c) presented its replies to the Navitrucks' petitions.
On May 11, 2018, the arbitral tribunal issued a decision allowing the calculation to be made by the parties’ experts and scheduled the calculation phase hearing for August 16, 2018. On July 6, 2018, each party’s experts presented their reports indicating the calculation of the total amount due from each party to the other party. On August 6, 2018, the parties jointly filed a petition informing the arbitral tribunal that they reached an agreement as to the total amount due from each party to the other party. Pursuant to the agreement, Navitrucks agreed that it owes IIAA the total amount of R$107 million (approximately US$27 million as of October 31, 2019) after deducting the agreed amount of Navitrucks' claim against IIAA.
In addition, the parties requested: (a) the cancellation of the hearing scheduled for August 16, 2018; (b) a 15 day period for the parties to present their respective costs incurred in connection with the arbitral proceeding; and (c) the closure of the calculation phase with the final ruling of merits.
On August 13, 2018, the arbitral tribunal issued a decision canceling the hearing scheduled for August 16, 2018 and directed the parties to prove their respective incurred costs in connection with the arbitral proceeding and to specify whether there were any additional productions of evidence or considerations by August 23, 2018.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
On August 23, 2018, IIAA filed a petition indicating that its costs incurred in connection with the arbitral proceeding were R$6 million (approximately US$1 million as of October 31, 2019). On the same date, Navitrucks filed a petition indicating that its costs incurred in connection with the arbitral proceeding were R$3 million (less than approximately US$1 million as of October 31, 2019). On September 18, 2018, the arbitral tribunal issued a decision (i) declaring the end of the evidence phase, (ii) ordering the parties to present their closing arguments on or before October 31, 2018, and (iii) stating that the final decision on the merits will be issued on or before December 20, 2018. On October 31, 2018, the parties submitted their closing arguments.
On or about March 1, 2019, IIAA and Navitrucks received the award of the arbitral tribunal. The award orders the Navitrucks entities to pay IIAA a total of R$107 million (approximately US$27 million as of October 31, 2019), subject to inflation adjustment and default interest. In addition, the arbitral tribunal ordered the Navitrucks entities to reimburse IIAA in the amount of R$3 million (approximately US$1 million as of October 31, 2019) for a portion of IIAA’s costs incurred in the arbitration. The parties had 30 days from the date of receipt of the award to apply for the correction of errors and/or clarifications related to the award. On March 29, 2019, IIAA filed an application for clarifications related to certain clerical errors in the award. On April 22, 2019, the arbitral tribunal issued a decision ordering Navitrucks to submit any comments regarding the application for clarifications filed by IIAA on or before April 25, 2019 and indicated that the arbitral tribunal will issue a final award with respect to IIAA’s application for clarifications by May 25, 2019.
On June 3, 2019, the arbitral tribunal issued the final award with an addendum to address the clarifications related to certain clerical errors in the award. The final award amount was noted as R$131 million (approximately US$33 million as of October 31, 2019) and Navitrucks was required to pay IIAA on or before July 15, 2019. Navitrucks did not make the required payment to IIAA on or before July 15, 2019 and IIAA is now permitted to commence an enforcement proceeding in the Brazilian civil court.
We have not recorded a receivable related to this matter in our consolidated financial statements.
In addition, two truck fleet owners in Brazil have a separate adversarial proceeding pending against IIAA that may have similar legal and factual issues as the Navitrucks claim. This claim is not material either individually or in the aggregate.
California Air Resources Board Notice of Violation
On March 28, 2019, Navistar received a notice of violation ("NOV") from the California Air Resources Board ("CARB"). In the NOV, CARB alleges that Navistar failed to disclose a running change to 1,385 engines including certain model year 2013 to 2015 N13 engines and 2014 to 2015 N9/10 engines. CARB alleges that the running change in question made modifications to the emissions control system such that the engines no longer conformed to the configuration as certified. In August 2019, the Company and CARB reached a tentative resolution of this matter for $2 million, subject to agreement on formal terms.
Based on our assessment of the facts underlying the claims in the above action, the Company has recorded a charge in the third quarter ended July 31, 2019 in the amount of $2 million as a reserve for its expected obligations in Engineering and product development costs in our Consolidated Statements of Operations. 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.
Other
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. On June 3, 2016, NDLLC met with government representatives, including representatives from the DOD IG and the Department of Justice ("DOJ") to discuss the matter.
Since then, NDLLC engaged in ongoing discussions with the DOD IG and the DOJ. NDLLC made submissions of documents responsive to the subpoena in June and August 2016 and completed its subpoena response. On May 1, 2017, NDLLC met with government representatives, including representatives from the DOD IG and the DOJ, to further discuss the matter, including assertions that NDLLC may have overcharged the United States for the ISS components. NDLLC agreed to provide additional information relating to the pricing of the ISS components. The parties met again on June 13, 2017. 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
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
matter and outlining the bases for such position, and that NDLLC intends to vigorously defend its position. NDLLC and the DOJ communicated between October 5, 2017 and December 8, 2017 to discuss their respective positions on both liability and damages.
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 and made four productions of responsive documents.
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 and made four productions of responsive documents. Additionally, in September and October 2018 the DOJ conducted interviews of certain current and former employees and will likely conduct additional interviews in the future.
The parties began mediation in February 2019 but were unable to resolve the matter.
On December 3, 2019, the DOJ filed a complaint 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 of the parts associated with 3,898 ISS components (“Relator’s ISS Claim”). The relator alleges single damages of $1.125 billion for the chassis, $36.4 million for the engine, and $118.7 million for the Relator’s ISS Claim, totaling approximately $1.28 billion in single damages and $3.84 billion in treble damages. The DOJ’s complaint-in partial intervention alleges that NDLLC submitted false pricing support in connection with 11 of the parts associated with 3,803 ISS components used on the MRAP and seeks damages of an unspecified amount under the FCA and common law theories of mistake, unjust enrichment, and fraud.
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.
Deepwater Horizon Settlement Program
On June 3, 2018, we concluded the settlement of a business economic loss claim relating to our Alabama engine manufacturing facility. We received a gross amount of $85 million with a net present value of $70 million, net of our fees and costs, from the Deepwater Horizon Settlement Program. The cash proceeds are being received in installments through 2020. The net present value of the settlement was recorded in our 2018 financial results in Other expense, net in our Consolidated Statements of Operations, and Other current and Other non-current assets in our Consolidated Balance Sheets.
15. Segment Reporting
The following is a description of our four reporting segments:
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|
|
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•
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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.
|
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
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 other countries to support our Manufacturing Operations.
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Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Corporate contains those items that are not included in our four segments.
Segment Profit (Loss)
We define segment profit (loss) as net income (loss) from continuing operations 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:
|
|
|
|
•
|
The costs of profit sharing and annual incentive compensation for the Manufacturing operations are included in corporate expenses.
|
|
|
|
|
•
|
Interest expense and interest income for the Manufacturing operations are reported in corporate expenses.
|
|
|
|
|
•
|
The Financial Services segment finances certain sales to our dealers in North America, which include an interest-free period that varies in length that is subsidized by our Truck and Parts segments. Additionally, the Financial Services segment reports intersegment revenues from secured and unsecured loans to the Manufacturing operations. Certain retail sales financed by the Financial Services segment, primarily NFC, require the Manufacturing operations, primarily the Truck segment, to share a portion of any credit losses.
|
|
|
|
|
•
|
We allocate "access fees" to the Parts segment from the Truck segment for certain engineering and product development costs, depreciation expense, and SG&A expenses incurred by the Truck segment based on the relative percentage of certain sales, as adjusted for cyclicality.
|
|
|
|
|
•
|
Other than the items discussed above, the selected financial information presented below is presented in accordance with our policies described in Note 1, Summary of Significant Accounting Policies.
|
The following tables present selected financial information for our reporting segments:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Year Ended October 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
8,501
|
|
|
$
|
2,239
|
|
|
$
|
309
|
|
|
$
|
193
|
|
|
$
|
9
|
|
|
$
|
11,251
|
|
|
Intersegment sales and revenues
|
84
|
|
|
6
|
|
|
34
|
|
|
104
|
|
|
(228
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
8,585
|
|
|
$
|
2,245
|
|
|
$
|
343
|
|
|
$
|
297
|
|
|
$
|
(219
|
)
|
|
$
|
11,251
|
|
|
Income (loss) from continuing operations attributable to NIC, net of tax
|
$
|
269
|
|
|
$
|
598
|
|
|
$
|
—
|
|
|
$
|
123
|
|
|
$
|
(769
|
)
|
|
$
|
221
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(19
|
)
|
|
(19
|
)
|
|
Segment profit (loss)
|
$
|
269
|
|
|
$
|
598
|
|
|
$
|
—
|
|
|
$
|
123
|
|
|
$
|
(750
|
)
|
|
$
|
240
|
|
|
Depreciation and amortization
|
$
|
104
|
|
|
$
|
5
|
|
|
$
|
11
|
|
|
$
|
64
|
|
|
$
|
9
|
|
|
$
|
193
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
105
|
|
|
207
|
|
|
312
|
|
|
Equity in income (loss) of non-consolidated affiliates
|
2
|
|
|
3
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Capital expenditures(B)
|
101
|
|
|
7
|
|
|
2
|
|
|
2
|
|
|
22
|
|
|
134
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Year Ended October 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
7,386
|
|
|
$
|
2,399
|
|
|
$
|
305
|
|
|
$
|
160
|
|
|
$
|
—
|
|
|
$
|
10,250
|
|
|
Intersegment sales and revenues
|
104
|
|
|
8
|
|
|
55
|
|
|
97
|
|
|
(264
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
7,490
|
|
|
$
|
2,407
|
|
|
$
|
360
|
|
|
$
|
257
|
|
|
$
|
(264
|
)
|
|
$
|
10,250
|
|
|
Income (loss) from continuing operations attributable to NIC, net of tax
|
$
|
397
|
|
|
$
|
569
|
|
|
$
|
2
|
|
|
$
|
88
|
|
|
$
|
(716
|
)
|
|
$
|
340
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(52
|
)
|
|
(52
|
)
|
|
Segment profit (loss)
|
$
|
397
|
|
|
$
|
569
|
|
|
$
|
2
|
|
|
$
|
88
|
|
|
$
|
(664
|
)
|
|
$
|
392
|
|
|
Depreciation and amortization
|
$
|
130
|
|
|
$
|
6
|
|
|
$
|
10
|
|
|
$
|
55
|
|
|
$
|
10
|
|
|
$
|
211
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
92
|
|
|
235
|
|
|
327
|
|
|
Equity in income (loss) of non-consolidated affiliates
|
2
|
|
|
3
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Capital expenditures(B)
|
99
|
|
|
2
|
|
|
3
|
|
|
1
|
|
|
8
|
|
|
113
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Year Ended October 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
5,770
|
|
|
$
|
2,369
|
|
|
$
|
279
|
|
|
$
|
142
|
|
|
$
|
10
|
|
|
$
|
8,570
|
|
|
Intersegment sales and revenues
|
39
|
|
|
23
|
|
|
30
|
|
|
93
|
|
|
(185
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
5,809
|
|
|
$
|
2,392
|
|
|
$
|
309
|
|
|
$
|
235
|
|
|
$
|
(175
|
)
|
|
$
|
8,570
|
|
|
Income (loss) from continuing operations attributable to NIC, net of tax
|
$
|
(6
|
)
|
|
$
|
616
|
|
|
$
|
(7
|
)
|
|
$
|
77
|
|
|
$
|
(651
|
)
|
|
$
|
29
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
(10
|
)
|
|
Segment profit (loss)
|
$
|
(6
|
)
|
|
$
|
616
|
|
|
$
|
(7
|
)
|
|
$
|
77
|
|
|
$
|
(641
|
)
|
|
$
|
39
|
|
|
Depreciation and amortization
|
$
|
137
|
|
|
$
|
11
|
|
|
$
|
13
|
|
|
$
|
51
|
|
|
$
|
11
|
|
|
$
|
223
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
86
|
|
|
265
|
|
|
351
|
|
|
Equity in income (loss) of non-consolidated affiliates
|
4
|
|
|
3
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
6
|
|
|
Capital expenditures(B)
|
82
|
|
|
2
|
|
|
5
|
|
|
1
|
|
|
12
|
|
|
102
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Segment assets, as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2019
|
$
|
1,705
|
|
|
$
|
688
|
|
|
$
|
296
|
|
|
$
|
2,774
|
|
|
$
|
1,454
|
|
|
$
|
6,917
|
|
|
October 31, 2018
|
2,085
|
|
|
636
|
|
|
331
|
|
|
2,648
|
|
|
1,530
|
|
|
7,230
|
|
_________________________
|
|
|
|
(A)
|
Total sales and revenues in the Financial Services segment include interest revenues of $208 million, $182 million, and $165 million for the years ended October 31, 2019, 2018, and 2017, respectively.
|
|
|
|
|
(B)
|
Exclusive of purchases of equipment leased to others and liabilities related to capital expenditures.
|
No single customer accounted for more than 10% of consolidated sales and revenues for the years ended October 31, 2019, 2018 and 2017.
Sales and revenues to external customers classified by significant products and services were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Sales and revenues:
|
|
|
|
|
|
|
Trucks
|
$
|
8,496
|
|
|
$
|
7,323
|
|
|
$
|
5,706
|
|
|
Parts
|
2,021
|
|
|
2,215
|
|
|
2,177
|
|
|
Engine
|
541
|
|
|
552
|
|
|
545
|
|
|
Financial Services
|
193
|
|
|
160
|
|
|
142
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Information concerning principal geographic areas is presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Sales and revenues:
|
|
|
|
|
|
|
United States
|
$
|
9,097
|
|
|
$
|
7,223
|
|
|
$
|
6,375
|
|
|
Canada
|
918
|
|
|
868
|
|
|
708
|
|
|
Mexico
|
688
|
|
|
933
|
|
|
708
|
|
|
Brazil
|
268
|
|
|
263
|
|
|
237
|
|
|
Other
|
280
|
|
|
963
|
|
|
542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Long-lived assets:(A)
|
|
|
|
|
United States
|
$
|
1,017
|
|
|
$
|
1,099
|
|
|
Canada
|
7
|
|
|
9
|
|
|
Mexico
|
283
|
|
|
249
|
|
|
Brazil
|
62
|
|
|
73
|
|
|
Other
|
3
|
|
|
8
|
|
__________________________
(A) Long-lived assets consist of Property and equipment, net, Goodwill, and Intangible assets, net.
16. Stockholders' Deficit
Preferred and Preference Stocks
NIC has authorized 30 million shares of preferred stock, none of which have been issued, with a par value of $1.00 per share. NIC has authorized 10 million shares of preference stock with a par value of $1.00 per share. Currently, Series B Nonconvertible Junior Preference Stock ("Series B") and Series D Convertible Junior Preference Stock ("Series D") are outstanding.
The UAW holds the Series B and is currently entitled to elect one member of our Board of Directors. As of October 31, 2019 and 2018, there was one share of Series B Preference stock with a par value of $1.00 per share authorized and outstanding.
At both October 31, 2019 and 2018, there were 70,182 shares of Series D issued and outstanding. These shares were issued with a par value of $1.00 per share, an optional redemption price, and a liquidation preference of $25 per share plus accrued dividends. The Series D stock may be converted into NIC common stock at the holder's option (subject to adjustment in certain circumstances); upon conversion each share of Series D stock is converted to 0.3125 shares of common stock. The Series D stock ranks senior to common stock as to dividends and liquidation and receives dividends at a rate of 120% of the cash dividends on common stock as declared on an as-converted basis.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Common Stock
Changes in shares of common stock and treasury stock were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Common Stock
|
|
Treasury Stock
|
|
Shares Outstanding
|
|
Balance as of October 31, 2016
|
86.8
|
|
|
5.2
|
|
|
81.6
|
|
|
Shares issued
|
16.3
|
|
|
(0.7
|
)
|
|
17.0
|
|
|
Shares acquired
|
—
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
Balance as of October 31, 2017
|
103.1
|
|
|
4.6
|
|
|
98.5
|
|
|
Shares issued
|
—
|
|
|
(0.5
|
)
|
|
0.5
|
|
|
Shares acquired
|
—
|
|
|
0.1
|
|
|
(0.1
|
)
|
|
Balance as of October 31, 2018
|
103.1
|
|
|
4.2
|
|
|
98.9
|
|
|
Shares issued
|
—
|
|
|
(0.5
|
)
|
|
0.5
|
|
|
Shares acquired
|
—
|
|
|
0.2
|
|
|
(0.2
|
)
|
|
Balance as of October 31, 2019
|
103.1
|
|
|
3.9
|
|
|
99.2
|
|
On February 28, 2017, we consummated our previously announced strategic alliance with TRATON Group, which included an equity investment in the Company by TRATON Group pursuant to a Stock Purchase Agreement, License and Supply Framework Agreement and Procurement JV Framework Agreement. Pursuant to the TRATON Group Stock Purchase Agreement, on February 28, 2017 we issued and TRATON Group purchased 16.2 million of our shares of common stock for an aggregate purchase price of $256 million at $15.76 per share (an estimated 19.9% stake (16.6% on a fully-diluted basis) in the Company).
Additional Paid in Capital
In accounting for the issuance of the former 4.5% Senior Subordinated Convertible Notes due 2018 ("2018 Convertible Notes"), a debt component and an equity component were separated resulting in the debt component being recorded at its estimated fair value without consideration given to the conversion feature. We estimated the fair value of the liability component at $177 million. The resulting equity component of $22 million, net of $1 million of discount, was recorded in Additional paid in capital. Issuance costs were also allocated between the debt and equity components resulting in an immaterial amount being recorded as a reduction in Additional paid in capital. The 2018 Convertible Notes were fully repaid upon maturity in October 2018, and none were converted into our common stock.
In accounting for the issuance of the former 2019 Convertible Notes, the debt component and equity component were separated, resulting in the debt component being recorded at its estimated fair value without consideration given to the conversion feature. We estimated the fair value of the liability component at $367 million. The resulting equity component of $44 million was recorded in Additional paid in capital. Issuance costs were also allocated between debt and equity components with $1 million being recorded as a reduction in Additional paid in capital. The 2019 Convertible Notes were fully repaid upon maturity in April 2019, and none were converted into our common stock.
Accumulated Other Comprehensive Loss
The following table presents changes in Accumulated other comprehensive loss, net of tax, included in our Consolidated Statements of Shareholders' Deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Unrealized Gain on Marketable Securities
|
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of October 31, 2018
|
$
|
—
|
|
|
$
|
(315
|
)
|
|
$
|
(1,605
|
)
|
|
$
|
(1,920
|
)
|
|
Other comprehensive loss before reclassifications
|
—
|
|
|
(6
|
)
|
|
(178
|
)
|
|
(184
|
)
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
192
|
|
|
192
|
|
|
Net current-period other comprehensive income (loss)
|
—
|
|
|
(6
|
)
|
|
14
|
|
|
8
|
|
|
Balance as of October 31, 2019
|
$
|
—
|
|
|
$
|
(321
|
)
|
|
$
|
(1,591
|
)
|
|
$
|
(1,912
|
)
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Unrealized Gain on Marketable Securities
|
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of October 31, 2017
|
$
|
—
|
|
|
$
|
(283
|
)
|
|
$
|
(1,928
|
)
|
|
$
|
(2,211
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
—
|
|
|
(32
|
)
|
|
201
|
|
|
169
|
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
122
|
|
|
122
|
|
|
Net current-period other comprehensive income (loss)
|
—
|
|
|
(32
|
)
|
|
323
|
|
|
291
|
|
|
Balance as of October 31, 2018
|
$
|
—
|
|
|
$
|
(315
|
)
|
|
$
|
(1,605
|
)
|
|
$
|
(1,920
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Unrealized Gain on Marketable Securities
|
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of October 31, 2016
|
$
|
1
|
|
|
$
|
(280
|
)
|
|
$
|
(2,361
|
)
|
|
$
|
(2,640
|
)
|
|
Other comprehensive income (loss) before reclassifications(A)
|
(1
|
)
|
|
(3
|
)
|
|
279
|
|
|
275
|
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
—
|
|
|
154
|
|
|
154
|
|
|
Net current-period other comprehensive income (loss)
|
(1
|
)
|
|
(3
|
)
|
|
433
|
|
|
429
|
|
|
Balance as of October 31, 2017
|
$
|
—
|
|
|
$
|
(283
|
)
|
|
$
|
(1,928
|
)
|
|
$
|
(2,211
|
)
|
|
|
|
|
(A)
|
Other comprehensive income before reclassifications for Defined Benefit Plans includes a $28 million intraperiod tax allocation and $8 million of deferred tax assets.
|
The following table presents the amounts reclassified from Accumulated other comprehensive loss and the affected line item in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
|
|
Location in Consolidated
Statements of Operations
|
|
2019
|
|
2018
|
|
2017
|
|
Defined benefit plans
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss
|
|
Other expense, net
|
|
$
|
93
|
|
|
$
|
114
|
|
|
$
|
138
|
|
|
Settlements
|
|
Other expense, net
|
|
143
|
|
|
9
|
|
|
—
|
|
|
Settlements
|
|
Restructuring
|
|
—
|
|
|
—
|
|
|
23
|
|
|
|
|
Total before tax
|
|
236
|
|
|
123
|
|
|
161
|
|
|
|
|
Income tax expense
|
|
(44
|
)
|
|
(1
|
)
|
|
(7
|
)
|
|
Total reclassifications for the period, net of tax
|
|
$
|
192
|
|
|
$
|
122
|
|
|
$
|
154
|
|
Dividend Restrictions
Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for the year in which the dividend is declared or the preceding year, and no dividend may be paid on common stock at any time during which the capital of outstanding preferred stock or preference stock exceeds our net assets.
Certain debt instruments, including our 6.625% Senior Notes indenture, our Loan Agreement with regard to the Tax Exempt Bonds and our Amended Term Loan Credit Agreement, contain terms that include various negative covenants and restrictions, including, among others, certain limitations on dividends. We have not paid dividends on our common stock since 1980.
17. Earnings Per Share Attributable to Navistar International Corporation
The following table presents the information used in the calculation of our basic and diluted earnings per share for continuing operations, discontinued operations, and net income, all attributable to NIC in our Consolidated Statements of Operations:
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions, except per share data)
|
|
2019
|
|
2018
|
|
2017
|
|
Numerator:
|
|
|
|
|
|
|
|
Amounts attributable to Navistar International Corporation common stockholders:
|
|
|
|
|
|
|
|
Income from continuing operations, net of tax
|
|
$
|
221
|
|
|
$
|
340
|
|
|
$
|
29
|
|
|
Income from discontinued operations, net of tax
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Net income
|
|
$
|
221
|
|
|
$
|
340
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
Basic
|
|
99.3
|
|
|
98.9
|
|
|
93.0
|
|
|
Effect of dilutive securities
|
|
0.2
|
|
|
0.7
|
|
|
0.5
|
|
|
Diluted
|
|
99.5
|
|
|
99.6
|
|
|
93.5
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Navistar International Corporation:
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.23
|
|
|
$
|
3.44
|
|
|
$
|
0.31
|
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
0.01
|
|
|
Net income
|
|
$
|
2.23
|
|
|
$
|
3.44
|
|
|
$
|
0.32
|
|
|
Diluted:
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
2.22
|
|
|
$
|
3.41
|
|
|
$
|
0.31
|
|
|
Discontinued operations
|
|
—
|
|
|
—
|
|
|
0.01
|
|
|
Net income
|
|
$
|
2.22
|
|
|
$
|
3.41
|
|
|
$
|
0.32
|
|
The conversion rate on our former 2018 Convertible Notes was 17.1233 shares of common stock per $1,000 principal amount of 2018 Convertible Notes, equivalent to an initial conversion price of approximately $58.40 per share of common stock. The 2018 Convertible Notes had an anti-dilutive effect when calculating diluted earnings per share when our average stock price was less than $58.40 for all periods presented. The 2018 Convertible Notes were fully repaid upon maturity in October 2018, and none were converted into our common stock.
The conversion rate on our former 2019 Convertible Notes was 18.4946 shares of common stock per $1,000 principal amount of 2019 Convertible Notes, equivalent to an initial conversion price of approximately $54.07 per share of common stock. The 2019 Convertible Notes had an anti-dilutive effect when calculating diluted earnings per share when our average stock price was less than $54.07 for all periods presented. The 2019 Convertible Notes were fully repaid upon maturity in April 2019 and none were converted into our common stock.
In February 2017, we consummated our previously announced strategic alliance with TRATON Group, which included an equity investment in the Company by TRATON Group pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), a License and Supply Framework Agreement and a Procurement JV Framework Agreement.
Pursuant to the Stock Purchase Agreement, on February 28, 2017 we issued and TRATON Group purchased 16.2 million shares of our common stock for an aggregate purchase price of $256 million at $15.76 per share (a 19.9% stake at the time of purchase (16.6% on a fully-diluted basis)) in the Company, excluding stock issuance costs.
The computation of diluted earnings per share also excludes outstanding options and other common stock equivalents in periods where inclusion of such potential common stock instruments would be anti-dilutive.
For the years ended October 31, 2018 and 2017, certain securities have been excluded from the computation of earnings per share, as our average stock price was less than their respective exercise prices. The aggregate shares not included were 9.8 million and 13.9 million, respectively, which were primarily comprised of 7.6 million shares related to the 2019 Convertible Notes for the years ended October 31, 2018 and October 31, 2017, as well as 3.4 million shares related to the 2018 Convertible Notes for the year ended October 31, 2017.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
18. Stock-based Compensation Plans
2013 Performance Incentive Plan
The 2013 Performance Incentive Plan ("2013 PIP") was approved by the Board of Directors on December 11, 2012 and subsequently approved by the stockholders on February 19, 2013. The plan was first amended on February 11, 2015 and then subsequently amended on December 9, 2019. The 2013 PIP provides for the grant of annual cash incentive awards to all employees (including the Company’s executive officers), and stock options, restricted stock or stock unit awards, stock appreciation rights and other stock-based awards to all employees (including the Company’s executive officers), any consultants of the Company and its subsidiaries, and all non-employee directors serving on the Company’s Board of Directors. The awards granted under the 2013 PIP are established by our Board of Directors or a committee thereof at the time of issuance.
The 2013 PIP replaced on a prospective basis, our 2004 Performance Incentive Plan, and will expire in February 2023. A total of 3,665,500 shares of common stock were reserved for awards under the 2013 Plan. The number of shares authorized and available for issuance under the 2013 PIP will be increased by shares of stock subject to an option or award under the 2013 PIP, the Company’s 2004 Performance Incentive Plan, or the Ownership Program as further described below, (collectively, the "Existing Plans"), that are canceled, expired, forfeited, settled in cash, or otherwise terminated after February 19, 2013 without a delivery of shares to the participant of such plan, including shares used to satisfy the exercise price of a stock option or a tax withholding obligation arising in connection with an award. As of October 31, 2019, 3,106,390 shares remain available for issuance under the 2013 PIP. Shares issued under the Plan may be newly issued shares or reissued Treasury shares.
Other Plans and Grants
The following plans were approved by our Board of Directors but were not approved and were not required to be approved by our stockholders: the Executive Stock Ownership Program, as amended from time to time (the "Ownership Program"), and the Non-Employee Directors Deferred Fee Plan (the "Deferred Fee Plan").
|
|
|
|
•
|
Ownership Program—In June 1997, our Board of Directors approved the terms of the Ownership Program. In general, under the Ownership Program in existence through November 2013, all officers and senior managers were required to acquire, by direct purchase or through salary or annual bonus reduction, an ownership interest in the Company by acquiring a designated amount of our common stock based on organizational level. Participants were required to hold such stock for the entire period in which they are employed by the Company. The Ownership Program was amended and restated effective November 1, 2013 on a going forward basis. The new guidelines (i) increased stock ownership guideline multiples to six times salary for the President and CEO and up to three times salary for other senior executives; (ii) modified retention requirements for Company granted equity until ownership requirements are met; (iii) added a holding period for shares acquired through transactions with Company granted equity after the executives satisfy the stock ownership requirement; (iv) eliminated the granting of premium shares as an inducement to executives fulfilling stock ownership guidelines on an accelerated basis; and (v) eliminated the required time frame to fulfill stock ownership guidelines. Under the prior Ownership Program, participants were entitled to defer their cash bonus into deferred share units ("DSUs"), which vested immediately. There were 2,365 DSUs outstanding as of October 31, 2019. Premium share units ("PSUs") were also eligible to be awarded to participants who complete their ownership requirement on an accelerated basis. PSUs vested annually, pro rata over three years. There were 29,090 PSUs outstanding as of October 31, 2019 under the prior Ownership Program. Each vested DSU and PSU will be settled by delivery of one share of common stock within 10 days after a participant's termination of employment or at such later date as required by IRC Section Rule 409A. PSUs and DSUs awarded between February 19, 2013 and October 31, 2013 were issued under the 2013 PIP.
|
|
|
|
|
•
|
Deferred Fee Plan—Under the Deferred Fee Plan, non-employee directors may elect to defer payment of all or a portion of their retainer fees and meeting fees in cash (with interest) or in stock units. Deferrals in the deferred stock account are valued as if each deferral was vested in NIC common stock as of the deferral date. As of October 31, 2019, 20,669 deferred shares were outstanding under the Deferred Fee Plan. Beginning on September 30, 2013, shares deferred by non-employee directors have been issued out of the 2013 PIP. The Deferred Fee Plan was amended and restated effective February 11, 2015 and then subsequently amended on December 9, 2019.
|
Stock Options
Stock options represent the right to purchase a specified number of shares of common stock at a specified exercise price. Generally, stock options are awarded with an exercise price equal to the fair market value of the common stock at grant date. The stock options granted prior to December 2009 generally have a ten-year contractual life. Stock options granted in December 2009 through November 2016 were granted with a seven-year contractual life. Since December 2016, stock options
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
have been granted with a ten-year contractual life. Stock options are valued using the Black-Scholes option pricing model and vest ratably over a three-year period.
The following table summarizes stock options activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
Options outstanding, at beginning of year
|
1,780
|
|
|
$
|
33.70
|
|
|
2,408
|
|
|
$
|
38.81
|
|
|
2,835
|
|
|
$
|
38.89
|
|
|
Granted
|
284
|
|
|
33.83
|
|
|
236
|
|
|
40.44
|
|
|
301
|
|
|
27.88
|
|
|
Exercised
|
(94
|
)
|
|
23.98
|
|
|
(236
|
)
|
|
32.78
|
|
|
(325
|
)
|
|
30.25
|
|
|
Forfeited/expired
|
(233
|
)
|
|
36.86
|
|
|
(628
|
)
|
|
56.64
|
|
|
(403
|
)
|
|
38.13
|
|
|
Options outstanding, at end of year
|
1,737
|
|
|
33.82
|
|
|
1,780
|
|
|
33.70
|
|
|
2,408
|
|
|
38.81
|
|
|
Options exercisable, at end of year
|
1,242
|
|
|
33.50
|
|
|
1,396
|
|
|
33.55
|
|
|
2,073
|
|
|
40.72
|
|
The following table summarizes information about stock options outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise Price
|
|
Aggregate Intrinsic Value
|
|
Range of Exercise Prices:
|
(in thousands)
|
|
(in years)
|
|
|
|
(in millions)
|
|
$ 10.60 - $ 31.19
|
750
|
|
|
3.3
|
|
|
$
|
28.64
|
|
|
$
|
2.0
|
|
|
$ 31.20 - $ 39.32
|
713
|
|
|
3.8
|
|
|
36.30
|
|
|
—
|
|
|
$ 39.33 - $ 43.86
|
274
|
|
|
6.3
|
|
|
41.56
|
|
|
—
|
|
|
Options Outstanding
|
1,737
|
|
|
|
|
|
|
|
The following table summarizes information about stock options exercisable:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted Average Remaining Contractual Life
|
|
Weighted Average Exercise Price
|
|
Aggregate Intrinsic Value
|
|
Range of Exercise Prices:
|
(in thousands)
|
|
(in years)
|
|
|
|
(in millions)
|
|
$ 10.60 - $ 31.19
|
627
|
|
|
2.4
|
|
|
$
|
28.83
|
|
|
$
|
1.5
|
|
|
$ 31.20 - $ 39.32
|
470
|
|
|
0.9
|
|
|
36.96
|
|
|
—
|
|
|
$ 39.33 - $ 43.86
|
145
|
|
|
4.4
|
|
|
42.41
|
|
|
—
|
|
|
Options Exercisable
|
1,242
|
|
|
|
|
|
|
|
The weighted average grant date fair value of options granted during the years ended October 31, 2019, 2018, and 2017 was $16.15, $18.90, and $13.61, respectively. The total intrinsic value of stock options exercised during the years ended October 31, 2019, 2018, and 2017 was $2 million, $3 million, and $3 million, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model.
The following table summarizes the annual weighted average assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
Risk-free interest rate
|
2.5
|
%
|
|
2.5
|
%
|
|
1.9
|
%
|
|
Expected volatility
|
48.8
|
%
|
|
49.1
|
%
|
|
55.2
|
%
|
|
Expected life (in years)
|
5.6
|
|
|
5.3
|
|
|
5.0
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The use of the Black-Scholes option-pricing model requires us to make certain estimates and assumptions. The risk-free interest rate utilized is the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumption on the grant date, rounded to the nearest half year. A dividend yield assumption of 0% is used for all grants based on our history of not paying a dividend to any class of stock and future expectations. Expected volatility is based on a blend of our historical stock prices and implied volatilities from traded options in our stock. The weighted average expected life in years for all grants as a group is then calculated for each year.
Restricted Stock
Restricted stock represents common stock issued subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Restricted stock is valued based on the fair value of the common stock at grant date and except for the restricted stock issued to non-employee directors, vests either ratably over a three-year period or cliff-vest at the end of a three-year period. Restricted stock issued to non-employee directors represents their first quarterly retainer fees and immediately vests at grant date.
The following table summarizes restricted stock activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
Nonvested, at beginning of year
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
Granted
|
5
|
|
|
32.30
|
|
|
4
|
|
|
34.97
|
|
|
5
|
|
|
24.62
|
|
|
Vested
|
(5
|
)
|
|
32.30
|
|
|
(4
|
)
|
|
34.97
|
|
|
(5
|
)
|
|
24.62
|
|
|
Nonvested, at end of year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
The aggregate grant date fair value of restricted stock vested for the years ended October 31, 2019, 2018 and 2017 was $0.1 million.
Restricted Stock Units
Restricted stock units ("RSUs") represent the right to receive shares of common stock ("share-settled RSUs") or the cash ("cash-settled RSUs") value of one share of common stock in the future, with the right to future delivery of the shares or cash subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Share and cash-settled RSUs are valued based on the fair value of the common stock at grant date and vest either ratably over a three-year period or cliff-vest at the end of a three-year period. Cash-settled RSUs are classified as liabilities and are remeasured at each reporting date until settlement.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following tables summarize RSUs activity for the years ended October 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-Settled RSUs
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
Nonvested, at beginning of year
|
502
|
|
|
$
|
25.01
|
|
|
619
|
|
|
$
|
15.04
|
|
|
613
|
|
|
$
|
8.74
|
|
|
Granted
|
178
|
|
|
34.93
|
|
|
168
|
|
|
40.05
|
|
|
210
|
|
|
27.28
|
|
|
Vested
|
(194
|
)
|
|
11.84
|
|
|
(214
|
)
|
|
9.59
|
|
|
(204
|
)
|
|
8.74
|
|
|
Forfeited
|
(10
|
)
|
|
38.24
|
|
|
(71
|
)
|
|
20.24
|
|
|
—
|
|
|
—
|
|
|
Nonvested, at end of year
|
476
|
|
|
33.82
|
|
|
502
|
|
|
25.01
|
|
|
619
|
|
|
15.04
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-Settled RSUs
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
Nonvested, at beginning of year
|
428
|
|
|
$
|
28.58
|
|
|
587
|
|
|
$
|
18.02
|
|
|
817
|
|
|
$
|
13.95
|
|
|
Granted
|
226
|
|
|
34.97
|
|
|
187
|
|
|
40.12
|
|
|
258
|
|
|
27.48
|
|
|
Vested
|
(230
|
)
|
|
22.89
|
|
|
(319
|
)
|
|
16.42
|
|
|
(456
|
)
|
|
15.92
|
|
|
Forfeited
|
(39
|
)
|
|
34.99
|
|
|
(27
|
)
|
|
22.76
|
|
|
(32
|
)
|
|
20.17
|
|
|
Nonvested, at end of year
|
385
|
|
|
35.07
|
|
|
428
|
|
|
28.58
|
|
|
587
|
|
|
18.02
|
|
The aggregate grant date fair value of RSUs vested during the years ended October 31, 2019, 2018, and 2017 was $8 million, $7 million, and $9 million, respectively.
Performance-based Stock Options
Performance-based stock options represent the right to receive shares of common stock in the future, with the right to future delivery of the shares subject to forfeiture or other restrictions that will lapse upon satisfaction of a combination of the following conditions: service, market and performance conditions. Performance-based stock options have a seven-year contractual life. Performance-based stock options subject to service and performance conditions are valued using the Black-Scholes option pricing model and cliff-vest at the end of a three-year period if performance measures are met. Performance-based stock options subject to service and market conditions are valued using a Monte Carlo simulation and cliff-vest at the end of a three-year period if performance measures are met.
The following table summarizes the performance-based stock options subject to service and performance conditions activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
Options outstanding, at beginning of year
|
152
|
|
|
$
|
27.59
|
|
|
599
|
|
|
$
|
27.59
|
|
|
973
|
|
|
$
|
30.47
|
|
|
Exercised
|
(29
|
)
|
|
27.23
|
|
|
(13
|
)
|
|
27.67
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(434
|
)
|
|
27.59
|
|
|
(374
|
)
|
|
35.09
|
|
|
Options outstanding, at end of year
|
123
|
|
|
27.67
|
|
|
152
|
|
|
27.59
|
|
|
599
|
|
|
27.59
|
|
|
Options exercisable, at end of year
|
123
|
|
|
$
|
27.67
|
|
|
152
|
|
|
$
|
27.59
|
|
|
—
|
|
|
$
|
—
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes the performance-based stock options subject to service and market conditions activity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
Shares
|
|
Weighted Average Exercise Price
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
Options outstanding, at beginning of year
|
387
|
|
|
$
|
27.24
|
|
|
431
|
|
|
$
|
27.24
|
|
|
567
|
|
|
$
|
27.24
|
|
|
Exercised
|
(186
|
)
|
|
27.24
|
|
|
(44
|
)
|
|
27.24
|
|
|
(130
|
)
|
|
27.24
|
|
|
Forfeited
|
(1
|
)
|
|
27.24
|
|
|
—
|
|
|
—
|
|
|
(6
|
)
|
|
27.24
|
|
|
Options outstanding, at end of year
|
200
|
|
|
27.24
|
|
|
387
|
|
|
27.24
|
|
|
431
|
|
|
27.24
|
|
|
Options exercisable, at end of year
|
200
|
|
|
27.24
|
|
|
387
|
|
|
27.24
|
|
|
431
|
|
|
27.24
|
|
The total intrinsic value of performance-based stock options exercised was $1 million during each of the years ended October 31, 2018 and October 31, 2017. There was minimal intrinsic value for performance-based options exercised during the year ended October 31, 2019.
Performance-based Stock Units
Performance-based stock units ("PUs") represent the right to receive one share of common stock ("share-settled PUs") or cash equal to the value of one share of common stock ("cash-settled PUs") in the future, with the right to future delivery of the shares or cash subject to forfeiture or other restrictions that will lapse upon satisfaction of a combination of the following conditions: service, market, and performance conditions. Share and cash-settled PUs subject to service and performance conditions are valued based on the fair value of the common stock at grant date and vest either at the end of the performance period or cliff-vest at the end of a three-year period if performance measures are met. Cash-settled PUs subject to service and market conditions are valued using a Monte Carlo simulation and cliff-vest at the end of a three-year period if performance measures are met. Cash-settled PUs are classified as liabilities and are remeasured at each reporting date until settlement. There were no nonvested share-settled PUs subject to service and performance conditions outstanding for the years ended October 31, 2019, 2018, and 2017.
The following tables summarize cash-settled PUs activity for the years ended October 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash-Settled PUs subject to Service and Performance Conditions
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
Nonvested, at beginning of year
|
—
|
|
|
$
|
—
|
|
|
220
|
|
|
$
|
27.59
|
|
|
$
|
379
|
|
|
$
|
30.63
|
|
|
Granted
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Vested
|
—
|
|
|
—
|
|
|
(121
|
)
|
|
27.59
|
|
|
—
|
|
|
—
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
(99
|
)
|
|
27.59
|
|
|
(159
|
)
|
|
34.86
|
|
|
Nonvested, at end of year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
220
|
|
|
27.59
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Settled PUs subject to Service and Market Conditions
|
|
|
2019
|
|
2018
|
|
2017
|
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
Shares
|
|
Weighted Average Grant Date Fair Value
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
(in thousands)
|
|
|
|
Nonvested, at beginning of year
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
70
|
|
|
$
|
50.52
|
|
|
Forfeited
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(70
|
)
|
|
50.52
|
|
|
Nonvested, at end of year
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total Share-Based Compensation Expense
Total share-based compensation expense for the years ended October 31, 2019, 2018, and 2017 was $17 million, $17 million and $25 million, respectively. We record share-based compensation expense on a straight-line basis over the required service period which is equal to the vesting period, beginning on the grant date. Share-based compensation expense is included in Selling, general and administrative expenses in the Consolidated Statements of Operations. As of October 31, 2019, there was $12 million of total unrecognized compensation expense related to non-vested share-based awards which is expected to be recognized over a weighted average period of approximately one year.
We received cash of $4 million, $8 million, and $12 million during the years ended October 31, 2019, 2018 and 2017, respectively, related to stock options exercised. We used cash of $8 million, $13 million, and $13 million during the years ended October 31, 2019, 2018, and 2017, respectively, to settle cash-settled RSUs. We did not realize any tax benefit from stock options exercised for fiscal years 2019, 2018 and 2017.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
19. Supplemental Cash Flow Information
The following table provides additional information about our Consolidated Statements of Cash Flows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended October 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2017
|
|
Equity in income of affiliated companies, net of dividends
|
|
|
|
|
|
|
Equity in income of non-consolidated affiliates
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
(6
|
)
|
|
Dividends from non-consolidated affiliates
|
2
|
|
|
5
|
|
|
7
|
|
|
Equity in income of non-consolidated affiliates, net of dividends
|
$
|
(2
|
)
|
|
$
|
5
|
|
|
$
|
1
|
|
|
Other non-cash operating activities
|
|
|
|
|
|
|
Gain on sale of property and equipment
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
(9
|
)
|
|
Loss on sale and impairment of repossessed collateral
|
3
|
|
|
1
|
|
|
7
|
|
|
Income from non-cash leases
|
(11
|
)
|
|
(24
|
)
|
|
(26
|
)
|
|
Other non-cash operating activities
|
$
|
(9
|
)
|
|
$
|
(23
|
)
|
|
$
|
(28
|
)
|
|
Changes in other assets and liabilities
|
|
|
|
|
|
|
Other current assets
|
$
|
(38
|
)
|
|
$
|
(7
|
)
|
|
$
|
(19
|
)
|
|
Other noncurrent assets
|
(12
|
)
|
|
(19
|
)
|
|
(38
|
)
|
|
Other current liabilities
|
115
|
|
|
116
|
|
|
(35
|
)
|
|
Postretirement benefits liabilities, net
|
54
|
|
|
(131
|
)
|
|
(65
|
)
|
|
Other noncurrent liabilities
|
(21
|
)
|
|
58
|
|
|
(62
|
)
|
|
Other, net
|
3
|
|
|
9
|
|
|
(7
|
)
|
|
Changes in other assets and liabilities
|
$
|
101
|
|
|
$
|
26
|
|
|
$
|
(226
|
)
|
|
Cash paid during the year
|
|
|
|
|
|
|
Interest, net of amounts capitalized
|
$
|
287
|
|
|
$
|
306
|
|
|
$
|
294
|
|
|
Income taxes, net of refunds
|
47
|
|
|
18
|
|
|
19
|
|
|
Non-cash investing and financing activities
|
|
|
|
|
|
|
Transfers to inventories from property and equipment for leases to others
|
(15
|
)
|
|
(9
|
)
|
|
(7
|
)
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
20. Selected Quarterly Financial Data (Unaudited)
The following tables provide our quarterly condensed consolidated statements of operations and financial data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
January 31,
|
|
Second Quarter Ended
April 30,
|
|
(in millions, except for per share data and stock prices)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Sales and revenues, net
|
$
|
2,433
|
|
|
$
|
1,905
|
|
|
$
|
2,996
|
|
|
$
|
2,422
|
|
|
Manufacturing gross margin(A)
|
407
|
|
|
335
|
|
|
455
|
|
|
395
|
|
|
Net income (loss) attributable to Navistar International Corporation
|
$
|
11
|
|
|
$
|
(73
|
)
|
|
$
|
(48
|
)
|
|
$
|
55
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share attributable to Navistar International Corporation:
|
|
|
|
|
|
|
|
|
Basic(B)
|
$
|
0.11
|
|
|
$
|
(0.74
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
0.56
|
|
|
Diluted(B)
|
$
|
0.11
|
|
|
$
|
(0.74
|
)
|
|
$
|
(0.48
|
)
|
|
$
|
0.55
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third Quarter Ended
July 31,
|
|
Fourth Quarter Ended
October 31,
|
|
(in millions, except for per share data and stock prices)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Sales and revenues, net
|
$
|
3,042
|
|
|
$
|
2,606
|
|
|
$
|
2,780
|
|
|
$
|
3,317
|
|
|
Manufacturing gross margin(A)
|
495
|
|
|
470
|
|
|
459
|
|
|
573
|
|
|
Net income attributable to Navistar International Corporation
|
$
|
156
|
|
|
$
|
170
|
|
|
$
|
102
|
|
|
$
|
188
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Navistar International Corporation:
|
|
|
|
|
|
|
|
|
Basic(B)
|
$
|
1.57
|
|
|
$
|
1.72
|
|
|
$
|
1.03
|
|
|
$
|
1.90
|
|
|
Diluted(B)
|
$
|
1.56
|
|
|
$
|
1.71
|
|
|
$
|
1.02
|
|
|
$
|
1.89
|
|
_______________________
(A) Manufacturing gross margin is calculated by subtracting Costs of products sold from Sales of manufactured products, net.
|
|
|
|
(B)
|
Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share may not equal the full year earnings per share.
|