Notes to Consolidated Financial Statements
(Unaudited)
1. Summary of Significant Accounting Policies
Organization and Description of the Business
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer collectively to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Parts, Global Operations (collectively called "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively called "Financial Services operations"). These segments are discussed in Note 12, Segment Reporting.
Our fiscal year ends on October 31. As such, all references to 2019, 2018, and other years contained within this Quarterly Report on Form 10-Q relate to the fiscal year, unless otherwise indicated.
Basis of Presentation and Consolidation
The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our Manufacturing operations and our Financial Services operations, including VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts.
We prepared the accompanying unaudited consolidated financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, 2018, which should be read in conjunction with the disclosures therein. In our opinion, these interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.
Variable Interest Entities
We have an interest in several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our VIEs that we are the primary beneficiary because we have the power to direct the activities of the VIE that most significantly impact its economic performance and we have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of these VIEs. Assets of these entities are not readily available to satisfy claims against our general assets.
We are the primary beneficiary of our Blue Diamond Parts, LLC ("BDP") joint venture with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of $28 million and $39 million as of July 31, 2019 and October 31, 2018, respectively, and liabilities of $3 million and $4 million, at each date. As of July 31, 2019 and October 31, 2018, assets include $3 million and $4 million of cash and cash equivalents, respectively, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have recourse to our general credit.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of $1.1 billion and $994 million as of July 31, 2019 and October 31, 2018, respectively, and liabilities of $956 million and $852 million as of July 31, 2019 and October 31, 2018, respectively, all of which are involved in securitizations that are treated as asset-backed debt. In addition, our Consolidated Balance Sheets include secured assets of $465 million and $370 million as of July 31, 2019 and October 31, 2018, respectively, and corresponding liabilities of $253 million and $205 million, at the respective dates, which are related to other secured transactions that do not qualify for sale accounting treatment, and, therefore, are treated as borrowings secured by operating and finance leases. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent that the related VIEs are required to make principal and interest payments. Investors in securitizations of these entities have no recourse to our general credit.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
We also have an interest in other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.
We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Equity in income of non-consolidated affiliates includes our share of the net income of these entities.
Related Party Transactions
We have a series of commercial relationships and agreements with TRATON SE and certain of its subsidiaries and affiliates ("TRATON Group") for royalties related to use of certain engine technology, contract manufacturing operations performed by us, the sale of engines, the sale and purchase of parts, and a procurement joint venture. We also have development agreements with TRATON Group involving certain engine and transmission projects. This development work is being expensed as incurred. For the three and nine months ended July 31, 2019, revenue recognized was approximately $42 million and $113 million, respectively, compared to $33 million and $114 million in the comparable prior year periods. For the three and nine months ended July 31, 2019, expenses incurred were $11 million and $29 million, respectively, compared to $2 million and $21 million in the comparable prior year periods, included primarily in Engineering and product development costs on our Consolidated Statements of Operations. Our receivable from TRATON Group was $16 million and $10 million as of July 31, 2019 and October 31, 2018, respectively. Our payable to TRATON Group was $48 million and $25 million as of July 31, 2019 and October 31, 2018, respectively.
We have an exclusive long-term agreement to supply military and commercial parts and chassis to our former defense business, ND Holdings, LLC (“Navistar Defense”). We also entered into an intellectual property agreement and a transition services agreement. For the three and nine months ended July 31, 2019, revenue recognized was approximately $9 million and $43 million, respectively. As of July 31, 2019, our receivables from Navistar Defense were $29 million.
Inventories
Inventories are valued at the lower of cost and net realizable value. Cost is principally determined using the first-in, first-out method. Our gross used truck inventory was $251 million at July 31, 2019 compared to $154 million at October 31, 2018, offset by reserves of $55 million and $31 million, respectively.
Property and Equipment
We report land, buildings, leasehold improvements, machinery and equipment (including tooling and pattern equipment), furniture, fixtures, and equipment, and equipment leased to others at cost, net of depreciation. We initially record assets under capital lease obligations at the lower of their fair value or the present value of the aggregate future minimum lease payments. We depreciate our assets using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets.
We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the carrying value.
Continued economic weakness in Brazil has resulted in a decline in forecasted results for the Brazilian asset group, which is included in the Global Operations segment. 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 could cause us to record impairment charges in future periods, which could be material.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity:
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|
|
|
|
|
|
|
|
|
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Nine Months Ended July 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
Balance at beginning of period
|
$
|
529
|
|
|
$
|
629
|
|
|
Costs accrued and revenues deferred
|
182
|
|
|
139
|
|
|
Adjustments to pre-existing warranties(A)
|
7
|
|
|
(4
|
)
|
|
Payments and revenues recognized
|
(208
|
)
|
|
(233
|
)
|
|
Other adjustments(B)
|
12
|
|
|
—
|
|
|
Balance at end of period
|
522
|
|
|
531
|
|
|
Less: Current portion
|
247
|
|
|
254
|
|
|
Noncurrent accrued product warranty and deferred warranty revenue
|
$
|
275
|
|
|
$
|
277
|
|
_________________________
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|
|
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(A)
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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.
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(B)
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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, ND Holdings, LLC ("Navistar Defense")..
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Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, tax contingency accruals and valuation allowances, product warranty accruals, asbestos and other product liability accruals, asset impairment charges, restructuring charges and litigation-related accruals. Actual results could differ from our estimates.
Concentration Risks
Our financial condition, results of operations, and cash flows are subject to concentration risks related to our significant unionized workforce. As of July 31, 2019, approximately 8,300, 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, changing national defense requirements, and political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).
Recently Adopted Accounting Standards
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. Based on our assessment, the cumulative effect adjustment upon adoption of the new revenue standard had a $27 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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 substantial risks of ownership. 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:
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|
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|
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|
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|
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(in millions)
|
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Balance at October 31, 2018
|
|
Change Due to New Standard
|
|
Balance at November 1, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Trade and other receivables, net
|
|
$
|
456
|
|
|
$
|
(8
|
)
|
|
$
|
448
|
|
|
Inventories, net
|
|
1,110
|
|
|
(91
|
)
|
|
1,019
|
|
|
Other current assets
|
|
189
|
|
|
101
|
|
|
290
|
|
|
Total current assets
|
|
5,136
|
|
|
2
|
|
|
5,138
|
|
|
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
|
|
|
$
|
(109
|
)
|
|
$
|
7,121
|
|
|
LIABILITIES and STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
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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
|
|
|
|
|
|
|
|
Total stockholders’ deficit attributable to Navistar International Corporation
|
|
(3,931
|
)
|
|
(27
|
)
|
|
(3,958
|
)
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
7,230
|
|
|
$
|
(109
|
)
|
|
$
|
7,121
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The following reconciles amounts as they would have been reported under the prior standard to current reporting:
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|
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|
|
|
|
|
|
Three months ended July 31, 2019(A)
|
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(in millions)
|
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Under Prior Standard
|
|
Effects of New Standard
|
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As Reported
|
|
Sales of manufactured products, net
|
|
$
|
2,998
|
|
|
$
|
(2
|
)
|
|
$
|
2,996
|
|
|
Costs of products sold
|
|
2,504
|
|
|
(3
|
)
|
|
2,501
|
|
|
Interest expense
|
|
77
|
|
|
(1
|
)
|
|
76
|
|
|
Income before income tax
|
|
188
|
|
|
2
|
|
|
190
|
|
|
Income tax expense
|
|
(29
|
)
|
|
—
|
|
|
(29
|
)
|
|
Net income
|
|
$
|
159
|
|
|
$
|
2
|
|
|
$
|
161
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended July 31, 2019(A)
|
|
(in millions)
|
|
Under Prior Standard
|
|
Effects of New Standard
|
|
As Reported
|
|
Sales of manufactured products, net
|
|
$
|
8,307
|
|
|
$
|
23
|
|
|
$
|
8,330
|
|
|
Costs of products sold
|
|
6,965
|
|
|
8
|
|
|
6,973
|
|
|
Interest expense
|
|
246
|
|
|
(3
|
)
|
|
243
|
|
|
Income before income tax
|
|
126
|
|
|
18
|
|
|
144
|
|
|
Income tax expense
|
|
(6
|
)
|
|
(3
|
)
|
|
(9
|
)
|
|
Net income
|
|
$
|
120
|
|
|
$
|
15
|
|
|
$
|
135
|
|
______________________
(A) Our Consolidated Statements of Operations for the nine months ended July 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 Restructuring, Impairments and Divestitures for additional information.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 31, 2019(A)
|
|
(in millions)
|
|
Under Prior Standard
|
|
Effects of New Standard
|
|
As Reported
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
Trade and other receivables, net
|
|
$
|
432
|
|
|
$
|
(3
|
)
|
|
$
|
429
|
|
|
Inventories, net
|
|
1,248
|
|
|
(53
|
)
|
|
1,195
|
|
|
Other current assets
|
|
210
|
|
|
63
|
|
|
273
|
|
|
Total current assets
|
|
5,319
|
|
|
7
|
|
|
5,326
|
|
|
Property and equipment, net
|
|
1,485
|
|
|
(195
|
)
|
|
1,290
|
|
|
Deferred taxes, net
|
|
126
|
|
|
(2
|
)
|
|
124
|
|
|
Other noncurrent assets
|
|
120
|
|
|
(8
|
)
|
|
112
|
|
|
Total assets
|
|
$
|
7,492
|
|
|
$
|
(198
|
)
|
|
$
|
7,294
|
|
|
LIABILITIES and STOCKHOLDERS’ DEFICIT
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
Notes payable and current maturities of long-term debt
|
|
$
|
689
|
|
|
$
|
(13
|
)
|
|
$
|
676
|
|
|
Other current liabilities
|
|
1,305
|
|
|
18
|
|
|
1,323
|
|
|
Total current liabilities
|
|
3,800
|
|
|
5
|
|
|
3,805
|
|
|
Long-term debt
|
|
4,577
|
|
|
(49
|
)
|
|
4,528
|
|
|
Other noncurrent liabilities
|
|
824
|
|
|
(132
|
)
|
|
692
|
|
|
Total liabilities
|
|
11,130
|
|
|
(176
|
)
|
|
10,954
|
|
|
Stockholders’ deficit
|
|
|
|
|
|
|
|
Total stockholders’ deficit attributable to Navistar International Corporation
|
|
(3,641
|
)
|
|
(22
|
)
|
|
(3,663
|
)
|
|
Total liabilities and stockholders’ deficit
|
|
$
|
7,492
|
|
|
$
|
(198
|
)
|
|
$
|
7,294
|
|
_________________________
|
|
|
|
(A)
|
Our Consolidated Balance Sheet as of July 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, Restructuring, Impairments and Divestitures for additional information.
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Recently Issued Accounting Standards
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. We are currently evaluating the impact of this ASU on our consolidated financial statements.
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. We are currently evaluating the impact of this ASU on our consolidated financial statements.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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), and subsequently issued various ASUs to clarify the implementation guidance in ASU 2016-02. This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors 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. This ASU is effective for us in the first quarter of fiscal 2020. We expect to adopt this ASU in the first quarter of fiscal 2020 on a modified retrospective basis by which the cumulative effect adjustment will be recognized in Accumulated deficit as of November 1, 2019. The new standard provides a number of optional practical expedients in transition. We expect to elect the ‘package of practical expedients’, which permits us not to reassess under the new standard our prior conclusions about lease identification, lease classification and initial direct costs. We also expect to elect the practical expedient related to land easements, but do not expect to elect the use-of-hindsight. We are currently evaluating our lease population to assess the effect of the guidance on our consolidated financial statements, but expect to record lease liabilities and right-of-use assets for operating leases related to certain property and equipment. We have selected our software and service providers and are focused on designing new processes and controls to assist with the implementation of the standard. We continue to evaluate the impact of this ASU on our consolidated financial statements.
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.
Disaggregation of Revenue
The following tables disaggregate our external revenue by product type for the three and nine months ended July 31, 2019 (in millions):
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|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Three Months Ended July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck products and services(A)
|
$
|
2,115
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
2,118
|
|
|
Truck contract manufacturing
|
144
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
144
|
|
|
Used trucks
|
54
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
54
|
|
|
Engines
|
—
|
|
|
73
|
|
|
63
|
|
|
—
|
|
|
—
|
|
|
136
|
|
|
Parts
|
2
|
|
|
496
|
|
|
19
|
|
|
—
|
|
|
—
|
|
|
517
|
|
|
Extended warranty contracts
|
27
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
Sales of manufactured products, net
|
2,342
|
|
|
569
|
|
|
82
|
|
|
—
|
|
|
3
|
|
|
2,996
|
|
|
Retail financing(C)
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
|
Wholesale financing(C)
|
—
|
|
|
—
|
|
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
Sales and revenues, net
|
$
|
2,342
|
|
|
$
|
569
|
|
|
$
|
82
|
|
|
$
|
46
|
|
|
$
|
3
|
|
|
$
|
3,042
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Nine Months Ended July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Truck products and services(A)(B)
|
$
|
5,891
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
5,900
|
|
|
Truck contract manufacturing
|
274
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
274
|
|
|
Used trucks
|
151
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
151
|
|
|
Engines
|
—
|
|
|
217
|
|
|
168
|
|
|
—
|
|
|
—
|
|
|
385
|
|
|
Parts
|
4
|
|
|
1,476
|
|
|
55
|
|
|
—
|
|
|
—
|
|
|
1,535
|
|
|
Extended warranty contracts
|
85
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
85
|
|
|
Sales of manufactured products, net
|
6,405
|
|
|
1,693
|
|
|
223
|
|
|
—
|
|
|
9
|
|
|
8,330
|
|
|
Retail financing(C)
|
—
|
|
|
—
|
|
|
—
|
|
|
106
|
|
|
—
|
|
|
106
|
|
|
Wholesale financing(C)
|
—
|
|
|
—
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
35
|
|
|
Sales and revenues, net
|
$
|
6,405
|
|
|
$
|
1,693
|
|
|
$
|
223
|
|
|
$
|
141
|
|
|
$
|
9
|
|
|
$
|
8,471
|
|
_________________________
|
|
|
|
(A)
|
Includes other markets primarily consisting of Bus, Export Truck and Mexico.
|
(B) Includes military sales of $62 million. In December 2018, we completed the sale of a 70% equity interest in Navistar Defense. See Note 3, Restructuring, Impairments and Divestitures for additional information.
|
|
|
|
(C)
|
Retail financing and Wholesale financing revenues in the Financial Services segment include interest revenue of $15 million and $11 million for the three months ended July 31, 2019, respectively, and $42 million and $35 million for the nine months ended July 31, 2019, respectively.
|
Trucks, Truck Contract Manufacturing, Used trucks, Engines and Parts
Revenue for our Truck products and services, certain truck contract manufacturing, Used trucks, certain Engines and Parts is recognized at a point in time when control is transferred to the customer. Our Trucks, Used trucks, Engines, and Parts have a standard warranty, the estimated cost of which is included in Costs of products sold. 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 the Company is a reseller of certain service parts that include a core component. A core component is the basic forging or casting, such as an engine block, that can be remanufactured by a certified remanufacturing supplier. When a dealer returns a core component within the specified eligibility period, we refund the core return deposit, which is applied to the customer's account balance.
Extended Warranty Contracts
We sell separately-priced extended warranty contracts that can be purchased for periods ranging from one to ten years. Warranty revenue related to extended warranty contracts is recognized over the life of the contract in proportion to the costs expected to be incurred in satisfying the obligation under the contract. Costs under extended warranty contracts are expensed as incurred. We recognize losses on defined pools of extended warranty contracts when the remaining expected costs for a given pool of contracts exceed the related deferred revenue.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Retail and Wholesale Financing
Financial Services operations recognize revenue from retail notes, finance leases, wholesale notes, retail accounts, and wholesale accounts as Finance revenues over the term of the receivables utilizing the effective interest method. Certain direct origination costs and fees are deferred and recognized as adjustments to yield and are reported as part of interest income over the life of the receivable. Loans are impaired when we conclude it is probable the customer will not be able to make full payment according to contractual terms after reviewing the customer's financial performance, payment ability, capital-raising potential, management style, economic situation, and other factors. The accrual of interest on such loans is suspended when the loan becomes 90 days or more past due. Finance revenues on these loans are recognized only to the extent cash payments are received. We resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured.
Operating lease revenues are recognized on a straight-line basis over the life of the lease. Recognition of revenue is suspended when management determines the collection of future revenue is not probable. Recognition of revenue is resumed if collection again becomes probable.
Performance Obligations
Generally, revenue from our sales is recognized at a point in time when control is transferred to the customer which generally occurs upon shipment from our plants and distribution centers or at the time of delivery to our customers. The standard payment term is less than 30 days, but we may extend payment terms on selected receivables. We have elected the practical expedient that allows the Company to not assess whether a contract has a significant financing component when the time between cash collection and transfer of control is less than one year.
We recognize price allowances, returns and the cost of incentive programs in the normal course of business based on programs offered to dealers or fleet customers. Estimates are made for sales incentives on certain vehicles in dealer stock inventory based on historical experience and announced special programs. The estimated sales incentives and returns are adjusted at the earlier of when the estimate of consideration we expect to receive changes or the consideration becomes fixed. For contracts where there is more than one performance obligation, discounts are allocated to all of the performance obligations in the contract based on their relative standalone selling prices.
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 the third quarter of 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 is not material to our consolidated financial statements.
The amount of deferred revenue related to extended warranty contracts was $273 million and $255 million at July 31, 2019 and October 31, 2018, respectively. Revenue recognized under our extended warranty programs was $27 million and $85 million for the three and nine months ended July 31, 2019, respectively, and $24 million and $80 million for the three and nine months ended July 31, 2018, respectively. We expect to recognize revenue under our extended warranty programs of approximately $23 million in the remainder of 2019, $82 million in 2020, $68 million in 2021, $47 million in 2022, $26 million in 2023 and $27 million thereafter.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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 July 31, 2019.
3. Restructuring, Impairments and Divestitures
Restructuring charges are recorded based on restructuring plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities.
Manufacturing Restructuring Activities
We continue to focus on our core Truck and Parts businesses and evaluate our portfolio of assets to validate their strategic and financial fit. This allows us to close or divest non-strategic businesses and identify opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure.
For those areas that fall outside our strategic businesses, we evaluate alternatives which could result in additional restructuring and other related charges in the future, including but not limited to: (i) impairments, (ii) costs for employee and contractor termination and other related benefits, and (iii) charges for pension and other postretirement contractual benefits and curtailments. These charges could be significant.
Global operations employee separation actions
In the fourth quarter of 2017, we initiated cost-reduction actions impacting our workforce in Brazil. As a result of these actions, we recognized restructuring charges of $6 million in personnel costs for employee separation and related benefits. In the first nine months of 2018, we recognized a benefit of $1 million upon the completion of these separation actions. This benefit was recorded in our Global operations segment within Restructuring charges in our Consolidated Statements of Operations.
Melrose Park Facility restructuring activities
In the third quarter of 2017, we committed to a plan to cease engine production at our plant in Melrose Park, Illinois (“Melrose Park Facility”) in the third quarter of fiscal year 2018. As a result, in the third quarter of 2017, we recognized charges of $41 million in our Truck segment. The charges include $23 million related to pension and other post-employment benefits ("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 in Costs of products sold in our Consolidated Statements of Operations. In the first nine months of 2018, we recognized a benefit of $2 million related to the finalized cessation of the 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 on May 17, 2018.
Asset Impairments
In the three and nine months ended July 31, 2019 and 2018, we concluded that we had triggering events related to certain assets under operating lease. As a result, we recorded charges in our Truck segment of $3 million and $6 million, respectively, compared to $1 million and $2 million, in the respective prior year periods.
In the nine months ended July 31, 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. We also concluded that we had triggering events related to other certain long-lived assets, and recorded additional charges of $6 million in our Truck segment and a charge of $1 million in our Financial Services segment.
These charges were recorded in Asset impairment charges in our Consolidated Statements of Operations.
See Note 10, 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. 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The Navistar Defense purchase price, adjusted for certain calendar year 2018 chargeouts, was approximately $140 million, which is 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 the first quarter of 2019, we recognized a gain on the sale in our Truck segment of $54 million in Other expense, net in our Consolidated Statements of Operations. During the third quarter of 2019, we recognized a charge of $3 million in our Truck segment related to adjustments to the purchase price within 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 $3.0 billion and $2.6 billion as of July 31, 2019 and October 31, 2018, respectively.
Included in total assets of our Financial Services operations were finance receivables of $2.5 billion and $2.2 billion as of July 31, 2019 and October 31, 2018, respectively. We have two portfolio segments of finance receivables that we distinguish based on the type of customer and nature of the financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.
Our Finance receivables, net in our Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
As of July 31, 2019
|
|
As of October 31, 2018
|
|
Retail portfolio
|
$
|
851
|
|
|
$
|
720
|
|
|
Wholesale portfolio
|
1,635
|
|
|
1,460
|
|
|
Total finance receivables
|
2,486
|
|
|
2,180
|
|
|
Less: Allowance for doubtful accounts
|
24
|
|
|
22
|
|
|
Total finance receivables, net
|
2,462
|
|
|
2,158
|
|
|
Less: Current portion, net(A)
|
2,187
|
|
|
1,898
|
|
|
Noncurrent portion, net
|
$
|
275
|
|
|
$
|
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.
|
Securitizations
Our Financial Services operations transfer wholesale notes, retail accounts receivable, finance leases, and operating leases to special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities issued. In addition to servicing receivables, our continued involvement in the SPEs may include an economic interest in the transferred receivables and, in some cases, managing exposure to interest rate changes on the securities using interest rate swaps or interest rate caps. There were no transfers of finance receivables that qualified for sale accounting treatment as of July 31, 2019 or October 31, 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 transfer eligible finance receivables into owner trusts in order to issue asset-backed securities. These trusts are VIEs of which we are determined to be the primary beneficiary, and, therefore, the assets and liabilities of the trusts are included in our Consolidated Balance Sheets. The outstanding balance of finance receivables transferred into these VIEs was $1.1 billion and $956 million as of July 31, 2019 and October 31, 2018, respectively.
Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $321 million and $235 million as of July 31, 2019 and October 31, 2018, respectively. For more information on assets and liabilities of consolidated VIEs and other securitizations accounted for as secured borrowings by our Financial Services segment, see Note 1, Summary of Significant Accounting Policies.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Finance Revenues
The following table presents the components of our Finance revenues in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Nine Months Ended July 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Retail notes and finance leases revenue
|
$
|
16
|
|
|
$
|
12
|
|
|
$
|
45
|
|
|
$
|
36
|
|
|
Wholesale notes interest
|
31
|
|
|
26
|
|
|
93
|
|
|
75
|
|
|
Operating lease revenue
|
19
|
|
|
19
|
|
|
62
|
|
|
54
|
|
|
Retail and wholesale accounts interest
|
8
|
|
|
8
|
|
|
26
|
|
|
22
|
|
|
Gross finance revenues
|
74
|
|
|
65
|
|
|
226
|
|
|
187
|
|
|
Less: Intercompany revenues
|
28
|
|
|
25
|
|
|
85
|
|
|
69
|
|
|
Finance revenues
|
$
|
46
|
|
|
$
|
40
|
|
|
$
|
141
|
|
|
$
|
118
|
|
5. Allowance for Doubtful Accounts
Our two finance receivables portfolio segments, retail and wholesale, each consist of one class of receivable based on: (i) initial measurement attributes of the receivables, and (ii) the assessment and monitoring of risk and performance of the receivables. For more information, see Note 4, Finance Receivables.
The following tables present the activity related to our allowance for doubtful accounts for our retail portfolio segment, wholesale portfolio segment, and trade and other receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31, 2019
|
|
Three Months Ended July 31, 2018
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Trade and
Other
Receivables
|
|
Total
|
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Trade and
Other
Receivables
|
|
Total
|
|
Allowance for doubtful accounts, at beginning of period
|
$
|
22
|
|
|
$
|
3
|
|
|
$
|
29
|
|
|
$
|
54
|
|
|
$
|
19
|
|
|
$
|
3
|
|
|
$
|
27
|
|
|
$
|
49
|
|
|
Provision for doubtful accounts
|
1
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
1
|
|
|
3
|
|
|
Charge-off of accounts
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
Recoveries
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Other(A)
|
(1
|
)
|
|
—
|
|
|
2
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
(2
|
)
|
|
Allowance for doubtful accounts, at end of period
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
32
|
|
|
$
|
56
|
|
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
26
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended July 31, 2019
|
|
Nine Months Ended July 31, 2018
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Trade and
Other
Receivables
|
|
Total
|
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Trade and
Other
Receivables
|
|
Total
|
|
Allowance for doubtful accounts, at beginning of period
|
$
|
19
|
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
50
|
|
|
$
|
17
|
|
|
$
|
3
|
|
|
$
|
28
|
|
|
$
|
48
|
|
|
Provision for doubtful accounts
|
5
|
|
|
—
|
|
|
3
|
|
|
8
|
|
|
5
|
|
|
—
|
|
|
1
|
|
|
6
|
|
|
Charge-off of accounts
|
(4
|
)
|
|
—
|
|
|
(1
|
)
|
|
(5
|
)
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
Recoveries
|
1
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
Other(A)
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
Allowance for doubtful accounts, at end of period
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
32
|
|
|
$
|
56
|
|
|
$
|
21
|
|
|
$
|
3
|
|
|
$
|
26
|
|
|
$
|
50
|
|
____________________
(A) Amounts include impact from currency translation.
The accrual of interest income is suspended on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. In certain cases, we continue to collect payments on our impaired finance receivables.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The following table presents information regarding impaired finance receivables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
October 31, 2018
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Impaired finance receivables with specific loss reserves
|
$
|
22
|
|
|
$
|
—
|
|
|
$
|
22
|
|
|
$
|
20
|
|
|
$
|
—
|
|
|
$
|
20
|
|
|
Impaired finance receivables without specific loss reserves
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Specific loss reserves on impaired finance receivables
|
11
|
|
|
—
|
|
|
11
|
|
|
9
|
|
|
—
|
|
|
9
|
|
|
Finance receivables on non-accrual status
|
22
|
|
|
—
|
|
|
22
|
|
|
20
|
|
|
—
|
|
|
20
|
|
The average balances of the impaired finance receivables in the retail portfolio were $21 million and $19 million during the nine months ended July 31, 2019 and 2018, respectively. See Note 10, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
|
October 31, 2018
|
|
(in millions)
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Retail
Portfolio
|
|
Wholesale
Portfolio
|
|
Total
|
|
Current, and up to 30 days past due
|
$
|
771
|
|
|
$
|
1,634
|
|
|
$
|
2,405
|
|
|
$
|
655
|
|
|
$
|
1,459
|
|
|
$
|
2,114
|
|
|
30-90 days past due
|
59
|
|
|
1
|
|
|
60
|
|
|
51
|
|
|
1
|
|
|
52
|
|
|
Over 90 days past due
|
21
|
|
|
—
|
|
|
21
|
|
|
14
|
|
|
—
|
|
|
14
|
|
|
Total finance receivables
|
$
|
851
|
|
|
$
|
1,635
|
|
|
$
|
2,486
|
|
|
$
|
720
|
|
|
$
|
1,460
|
|
|
$
|
2,180
|
|
6. Inventories
The following table presents the components of Inventories in our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
July 31,
2019
|
|
October 31,
2018
|
|
Finished products
|
$
|
779
|
|
|
$
|
671
|
|
|
Work in process
|
104
|
|
|
118
|
|
|
Raw materials
|
312
|
|
|
321
|
|
|
Total inventories, net
|
$
|
1,195
|
|
|
$
|
1,110
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
7. Debt
The following tables present the components of Notes payable and current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
July 31, 2019
|
|
October 31, 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
|
$
|
1,560
|
|
|
$
|
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
|
54
|
|
|
122
|
|
|
Other
|
10
|
|
|
26
|
|
|
Total Manufacturing operations debt
|
2,929
|
|
|
3,426
|
|
|
Less: Current portion
|
30
|
|
|
461
|
|
|
Net long-term Manufacturing operations debt
|
$
|
2,899
|
|
|
$
|
2,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
July 31, 2019
|
|
October 31, 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 $5 and $4, respectively
|
$
|
1,102
|
|
|
$
|
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 2019 through 2025, net of unamortized debt issuance costs of zero and $2, respectively
|
1,000
|
|
|
519
|
|
|
Commercial paper, at variable rates, program matures in 2022
|
71
|
|
|
75
|
|
|
Borrowings secured by operating and finance leases, at various rates, due serially through 2024
|
102
|
|
|
105
|
|
|
Total Financial Services operations debt
|
2,275
|
|
|
2,041
|
|
|
Less: Current portion
|
646
|
|
|
485
|
|
|
Net long-term Financial Services operations debt
|
$
|
1,629
|
|
|
$
|
1,556
|
|
Manufacturing Operations
4.75% Senior Subordinated Convertible Notes
The 4.75% Senior Subordinated Convertible Notes were fully repaid upon maturity in April 2019, and none were converted into our common stock.
Financial Services Operations
Asset-backed Debt
In November 2018, the maturity of our wholesale variable funding notes ("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 transaction. In June, the capacity decreased from $550 million to $350 million, upon the issuance of $300 million of two-year investor notes by Navistar Financial Securities Corporation 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 2019.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
In December 2018, the maturity of our Truck Retail Accounts Corporation ("TRAC") funding facility was extended from January 2019 to January 2020. In April 2019, the maximum capacity of the TRAC funding facility was increased from $100 million to $150 million.
NFC Term Loan and Bank Credit Facility
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 senior secured NFC Term Loan balance of $398 million. The early repayment of the senior secured NFC Term Loan resulted in the write off of unamortized debt issuance costs and discount of $6 million which was recorded in Other expense (income), net in our Consolidated Statements of Operations.
8. Postretirement Benefits
Defined Benefit Plans
We provide postretirement benefits to a substantial portion of our employees and retirees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, surviving spouses and dependents.
Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the three and nine months ended July 31, 2019, we contributed $9 million and $140 million, respectively, and for the three and nine months ended July 31, 2018, we contributed $25 million and $78 million, respectively, to our pension plans to meet regulatory funding requirements. During the first quarter of 2019, we accelerated the payment of a substantial portion of our 2019 minimum required funding. We do not expect any additional contributions to our pension plans during the remainder of 2019.
We primarily fund OPEB obligations, such as retiree medical, in accordance with the 1993 Settlement Agreement (the "1993 Settlement Agreement"), which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of our then applicable retiree health care and life insurance benefits. Contributions for the three and nine months ended July 31, 2019 and 2018, as well as anticipated contributions for the remainder of 2019, are not material.
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 three and nine months ended July 31, 2019 and 2018 are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Nine Months Ended July 31,
|
|
|
Pension Benefits
|
|
Health and Life
Insurance Benefits
|
|
Pension Benefits
|
|
Health and Life
Insurance Benefits
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Service cost for benefits earned during the period
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
Interest on obligation
|
30
|
|
|
27
|
|
|
12
|
|
|
10
|
|
|
92
|
|
|
81
|
|
|
36
|
|
|
32
|
|
|
Amortization of cumulative loss
|
23
|
|
|
26
|
|
|
—
|
|
|
3
|
|
|
70
|
|
|
79
|
|
|
—
|
|
|
7
|
|
|
Settlements
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
142
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
Premiums on pension insurance
|
3
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
7
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
Expected return on assets
|
(35
|
)
|
|
(40
|
)
|
|
(5
|
)
|
|
(5
|
)
|
|
(108
|
)
|
|
(121
|
)
|
|
(16
|
)
|
|
(17
|
)
|
|
Net periodic benefit expense
|
$
|
22
|
|
|
$
|
15
|
|
|
$
|
8
|
|
|
$
|
9
|
|
|
$
|
208
|
|
|
$
|
56
|
|
|
$
|
23
|
|
|
$
|
25
|
|
In the nine months ended July 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 $22 million and $73 million for the three and nine months ended July 31, 2018, respectively.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
In the nine months ended July 31, 2019 and 2018, we purchased group annuity contracts for certain retired pension plan participants resulting in plan remeasurements. The purchase of the group annuity contracts was funded directly by the assets of our pension plans. As a result, in the nine months ended July 31, 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 income, net in our Consolidated Statements of Operations.
Defined Contribution Plans and Other Contractual Arrangements
Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. Effective January 1, 2019, we deposit the matching contribution monthly. Many participants covered by the plans receive annual Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $8 million and $28 million in the three and nine months ended July 31, 2019, respectively, and $7 million and $25 million in the three and nine months ended July 31, 2018, respectively.
In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees pursuant to a certain Retiree Supplemental Benefit Program 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. We record profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits. For more information on pending arbitration regarding the Supplemental Benefit Trust Profit Sharing Plan, see Note 11, Commitments and Contingencies.
9. Income Taxes
We compute, on a quarterly basis, an estimated annual effective tax rate considering ordinary income and related income tax expense. Tax jurisdictions with a projected or year to date loss for which a tax benefit cannot be realized are excluded. Ordinary income refers to income (loss) before income tax expense excluding significant unusual or infrequently occurring items. The tax effect of a significant unusual or infrequently occurring item is recorded in the interim period in which the item occurs. We included an income tax benefit of $38 million in the first quarter of 2019 for the tax effect of a group annuity contract purchase for certain retired pension plan participants as a significant unusual or infrequently occurring item. Other items included in income tax expense in the periods in which they occur include the tax effects of cumulative changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment regarding the ability to realize deferred tax assets in future years.
On December 22, 2017, the Tax Act was signed into U.S. law. On December 22, 2017, Staff Accounting Bulletin No. 118 ("SAB 118") was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Act. The Company’s financial statement effects were reported on a provisional basis for the year ended October 31, 2018. The remeasurement period for SAB 118 ended on December 22, 2018. The Tax Act reduced the statutory corporate income tax rate from 35% to 21%, effective January 1, 2018. This rate reduction required us to remeasure our deferred taxes as of the date the Tax Act was enacted. Our U.S. deferred tax assets, net of deferred tax liabilities, were remeasured and reduced by $983 million, entirely offset by a valuation allowance reduction. As a result, the remeasurement of our deferred tax assets, net of deferred tax liabilities, including the valuation allowance, did not impact our income tax expense or net income. The Tax Act also included a mandatory deemed repatriation of earnings of the Company’s foreign subsidiaries and resulted in a one-time transition tax for the year ended October 31, 2018. We included $147 million of foreign earnings in taxable income due to this deemed repatriation. The deferred tax impact had a valuation allowance offset, resulting in no impact on our income tax expense or net income.
The income tax accounting for the effect of the rate change on deferred taxes and the mandatory deemed repatriation is complete.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
The Tax Act also included many other provisions, 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 and a deduction for foreign derived intangible income. We have included the impact of these provisions in our interim period tax calculations, which first apply to our taxable year beginning November 1, 2018. 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 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. The Company’s analyses performed to date are sufficient to calculate a reasonable estimate of the impacts of the Tax Act.
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. There were no significant changes in judgement related to our valuation allowance positions during the quarter ended July 31, 2019. For certain 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 in certain jurisdictions.
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. The tax benefits recognized in the consolidated 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. As of July 31, 2019, the amount of liability for uncertain tax positions was $21 million. The liability as of July 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.
We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. Total interest and penalties for the three and nine months ended July 31, 2019 related to our uncertain tax positions resulted in an income tax expense of less than $1 million, for both periods.
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. 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.
10. Fair Value Measurements
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:
|
|
|
|
•
|
Level 1—based upon quoted prices for identical instruments in active markets,
|
|
|
|
|
•
|
Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
|
|
|
|
|
•
|
Level 3—based upon one or more significant unobservable inputs.
|
The following section describes key inputs and assumptions in our valuation methodologies:
Cash Equivalents and Restricted Cash Equivalents—Cash equivalents are highly liquid investments, with an original maturity of 90 days or less, which may include U.S. government and federal agency securities, commercial paper, and other highly liquid investments. The carrying amounts of cash and cash equivalents and restricted cash and cash equivalents approximate fair value because of the short-term maturity and highly liquid nature of these instruments.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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 11, 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.
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 and Impairments.
The following table presents the financial instruments measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of July 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
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
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
|
$
|
3
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
101
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
105
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative financial instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity forward contracts(C)
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Foreign currency contracts(C)
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Guarantees
|
—
|
|
|
—
|
|
|
26
|
|
|
26
|
|
|
—
|
|
|
—
|
|
|
24
|
|
|
24
|
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
26
|
|
|
$
|
29
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Nine Months Ended July 31,
|
|
(in millions)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Guarantees, at beginning of period
|
$
|
(22
|
)
|
|
$
|
(27
|
)
|
|
$
|
(24
|
)
|
|
$
|
(21
|
)
|
|
Net (issuances) terminations
|
(4
|
)
|
|
7
|
|
|
(3
|
)
|
|
(1
|
)
|
|
Settlements
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
|
Guarantees, at end of period
|
$
|
(26
|
)
|
|
$
|
(20
|
)
|
|
$
|
(26
|
)
|
|
$
|
(20
|
)
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
There were no transfers of Level 3 financial instruments.
In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash and cash equivalents, and Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables 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 estimated 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 July 31, 2019
|
|
|
Estimated Fair Value
|
|
Carrying Value
|
|
(in millions)
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
Retail notes
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
198
|
|
|
$
|
198
|
|
|
$
|
204
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
Debt:
|
|
|
|
|
|
|
|
|
|
|
Manufacturing operations
|
|
|
|
|
|
|
|
|
|
|
Senior Secured Term Loan Credit Agreement, due 2025
|
—
|
|
|
—
|
|
|
1,578
|
|
|
1,578
|
|
|
1,560
|
|
|
6.625% Senior Notes, due 2026
|
—
|
|
|
1,130
|
|
|
—
|
|
|
1,130
|
|
|
1,085
|
|
|
Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040
|
—
|
|
|
235
|
|
|
—
|
|
|
235
|
|
|
220
|
|
|
Financed lease obligations
|
—
|
|
|
—
|
|
|
54
|
|
|
54
|
|
|
54
|
|
|
Other(A)
|
—
|
|
|
—
|
|
|
9
|
|
|
9
|
|
|
9
|
|
|
Financial Services operations
|
|
|
|
|
|
|
|
|
|
|
Asset-backed debt issued by consolidated SPEs, due serially through 2023
|
—
|
|
|
—
|
|
|
1,106
|
|
|
1,106
|
|
|
1,102
|
|
|
Bank credit facilities, due dates from 2019 through 2025
|
—
|
|
|
—
|
|
|
975
|
|
|
975
|
|
|
1,000
|
|
|
Commercial paper, program matures in 2022
|
71
|
|
|
—
|
|
|
—
|
|
|
71
|
|
|
71
|
|
|
Borrowings secured by operating and finance leases, due serially through 2024
|
—
|
|
|
—
|
|
|
101
|
|
|
101
|
|
|
102
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, at various rates, 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, at variable rates, 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 $1 million as of July 31, 2019.
|
|
|
|
|
(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.
|
11. Commitments and Contingencies
Guarantees
We occasionally provide guarantees that could obligate us to make future payments if the primary entity fails to perform under its contractual obligations. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet the recognition and measurement provisions of U.S. GAAP. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under various guarantees. We do not believe that claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.
Under the terms of the Navistar Capital Operating Agreement, 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 July 31, 2019 and October 31, 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 $2.6 billion and $2.5 billion at July 31, 2019 and October 31, 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 $46 million and $104 million and financed lease obligations of $54 million and $122 million, in our Consolidated Balance Sheets as of July 31, 2019 and October 31, 2018, respectively.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
We also have issued a limited number of residual value guarantees, for which losses are generally capped. If control has not transferred, we account for these arrangements as operating leases and revenue is recognized on a straight-line basis over the term of the lease. If control has transferred, revenue is recognized upon sale and the amounts of the guarantees are estimated and recorded. Our guarantees are contingent upon the fair value of the leased assets at the end of the lease term. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet recognition and measurement provisions. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under various guarantees that are not recognized in our Consolidated Balance Sheets. We do not believe claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.
We obtain certain stand-by letters of credit and surety bonds from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. As of July 31, 2019, the amount of stand-by letters of credit and surety bonds issued was $129 million.
In addition, as of July 31, 2019, we have $125 million of outstanding purchase commitments and contracts with $29 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 July 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)
(Unaudited)
In our opinion, apart from the actions set forth below, the disposition of these proceedings and claims, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on our business or our financial condition, results of operations, or cash flows.
Profit Sharing Disputes
Pursuant to the 1993 Settlement Agreement, the program administrator and named fiduciary of the Supplemental Benefit Program is the Supplemental Benefit Program Committee (the "Committee"), composed of individuals not appointed by NI or NIC. In August 2013, the Committee filed a motion for leave to amend its February 2013 complaint (which sought injunctive relief for the Company to provide certain information to which it 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.
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, and the motion is pending with the Court.
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. 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 U.S. District Court for the Southern District of Ohio 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.
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”).
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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 set a hearing for October 7, 2019 to complete the record on the statute of limitations defense. 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. Additional hearings may be scheduled in the future.
Based on our assessment of the facts underlying the claims in the above actions, we are unable to provide meaningful quantification of how the final resolution of these claims may impact our future consolidated financial condition, results of operations, or cash flows.
FATMA Notice
International Indústria Automotiva da América do Sul Ltda. ("IIAA"), formerly known as Maxion International Motores S/A ("Maxion"), now a wholly owned subsidiary of the Company, received a notice (the “FATMA Notice”) in July 2010 from the State of Santa Catarina Environmental Protection Agency ("FATMA") in Brazil. The FATMA Notice alleged that Maxion sent waste to a facility owned and operated by a company known as Natureza (the “Natureza Facility”) and that soil and groundwater contamination had occurred at the Natureza Facility.
The FATMA Notice asserted liability against Maxion and assessed an initial penalty in the amount of R$2 million (approximately US$1 million as of July 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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.
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 (approximately US$1 million as of July 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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. In the event that the New District Attorney does not request a further suspension, the proceedings will continue and the parties will begin discovery and evidence production.
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.
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 and wrote to the court seeking a case management conference. 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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.
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 August 16, 2018, Judge Gottschall entered a minute order setting a status hearing for September 26, 2018 in light of the ongoing settlement efforts of the parties. During the September 26, 2018 status hearing, the parties advised the court that additional settlement discussions were scheduled. Accordingly, on September 27, 2018 Judge Gottschall entered a minute order extending class plaintiffs' deadline to file a motion for class certification and supporting expert reports until November 16, 2018. Since September 2018, Judge Gottschall has extended the deadlines for class certification briefing several times to allow for settlement discussions. On May 28, 2019, NIC and NI entered into a Stipulation and Agreement of Settlement (the “Settlement Agreement”) with certain named plaintiffs to settle the class actions consolidated in the U.S. Actions. 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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. The court scheduled a fairness hearing for November 13, 2019 at which the court will determine whether the Settlement Agreement should be finally approved and whether the proposed Final Order and Judgment should be entered. Depending on opt out numbers and certain oversubscription numbers, NIC and NI or 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. A hearing is scheduled for September 24, 2019 in order to set a discovery plan for all Direct Action Plaintiffs.
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 40 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 Milan’s motion for pre-judgment interest and granted Milan $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 Milan. In addition, the Tennessee Court of Appeals affirmed the trial court’s judgment for Navistar on Milan’s warranty claims. Milan will have an opportunity to file an application for permission to appeal this ruling to the Tennessee Supreme Court. If Milan appeals this ruling, the Company will have 15 days to respond. The Tennessee Supreme Court will then 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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. As a result of the partial federal government shutdown, and subsequent motions by the parties, the deadline for fact discovery was August 3, 2019, expert report and expert deposition deadlines are through January 31, 2020 and a deadline for dispositive motions is scheduled for February 28, 2020.
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$17 million as of July 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$34 million as of July 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 (2) 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
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$28 million as of July 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 with the arbitral proceeding and to specify whether there were any additional productions of evidence or considerations by August 23, 2018.
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$2 million as of July 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 (approximately US$1 million as of July 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$28 million as of July 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 July 31, 2019) for a portion of IIAA’s costs incurred in the arbitration. The parties will have 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$35 million as of July 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 actions, 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.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
Other
U.S. Department of Defense Matter
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 DOJ to discuss the matter.
Since then, NDLLC has been 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 has responded to the DOJ’s demand letter explaining its position that it has no liability in this matter and outlining the bases for such position, and 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 is responding to the subpoena and has 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 currently are engaged in mediation, which began in February 2019.
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.
12. Segment Reporting
The following is a description of our four reporting segments:
|
|
|
|
•
|
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. In an effort to strengthen and maintain our dealer network, this segment occasionally acquires and operates dealer locations for the purpose of transitioning ownership.
|
|
|
|
•
|
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. In addition, our Global Operations segment includes the operating results of our former joint venture in China with Anhui Jianghuai Automobile Co., Ltd ("JAC").
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
•
|
Our Financial Services segment provides retail, wholesale, and lease financing of products sold by the Truck and Parts segments and their dealers within the U.S. and Mexico, as well as financing for wholesale accounts and selected retail accounts receivable. This segment also facilitates financing relationships in the U.S. and other countries to support our Manufacturing Operations.
|
Corporate contains those items that are not included in our four segments.
Segment Profit (Loss)
We define segment profit (loss) as net income (loss) attributable to NIC, excluding income tax benefit (expense). Selected financial information from our Consolidated Statements of Operations and our Consolidated Balance Sheets is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Three Months Ended July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
2,342
|
|
|
$
|
569
|
|
|
$
|
82
|
|
|
$
|
46
|
|
|
$
|
3
|
|
|
$
|
3,042
|
|
|
Intersegment sales and revenues
|
45
|
|
|
2
|
|
|
8
|
|
|
28
|
|
|
(83
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
2,387
|
|
|
$
|
571
|
|
|
$
|
90
|
|
|
$
|
74
|
|
|
$
|
(80
|
)
|
|
$
|
3,042
|
|
|
Net income (loss) attributable to NIC
|
$
|
167
|
|
|
$
|
149
|
|
|
$
|
1
|
|
|
$
|
30
|
|
|
$
|
(191
|
)
|
|
$
|
156
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(29
|
)
|
|
(29
|
)
|
|
Segment profit (loss)
|
$
|
167
|
|
|
$
|
149
|
|
|
$
|
1
|
|
|
$
|
30
|
|
|
$
|
(162
|
)
|
|
$
|
185
|
|
|
Depreciation and amortization
|
$
|
26
|
|
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
16
|
|
|
$
|
1
|
|
|
$
|
47
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
49
|
|
|
76
|
|
|
Equity in income of non-consolidated affiliates
|
—
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
Capital expenditures(B)
|
17
|
|
|
2
|
|
|
1
|
|
|
—
|
|
|
4
|
|
|
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Three Months Ended July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
1,894
|
|
|
$
|
603
|
|
|
$
|
68
|
|
|
$
|
40
|
|
|
$
|
1
|
|
|
$
|
2,606
|
|
|
Intersegment sales and revenues
|
22
|
|
|
2
|
|
|
21
|
|
|
25
|
|
|
(70
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
1,916
|
|
|
$
|
605
|
|
|
$
|
89
|
|
|
$
|
65
|
|
|
$
|
(69
|
)
|
|
$
|
2,606
|
|
|
Net income (loss) attributable to NIC
|
$
|
165
|
|
|
$
|
144
|
|
|
$
|
4
|
|
|
$
|
23
|
|
|
$
|
(166
|
)
|
|
$
|
170
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
|
(3
|
)
|
|
Segment profit (loss)
|
$
|
165
|
|
|
$
|
144
|
|
|
$
|
4
|
|
|
$
|
23
|
|
|
$
|
(163
|
)
|
|
$
|
173
|
|
|
Depreciation and amortization
|
$
|
31
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
14
|
|
|
$
|
1
|
|
|
$
|
51
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
22
|
|
|
60
|
|
|
82
|
|
|
Equity in income (loss) of non-consolidated affiliates
|
1
|
|
|
1
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Capital expenditures(B)
|
19
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
5
|
|
|
26
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Nine Months Ended July 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
6,405
|
|
|
$
|
1,693
|
|
|
$
|
223
|
|
|
$
|
141
|
|
|
$
|
9
|
|
|
$
|
8,471
|
|
|
Intersegment sales and revenues
|
75
|
|
|
5
|
|
|
27
|
|
|
85
|
|
|
(192
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
6,480
|
|
|
$
|
1,698
|
|
|
$
|
250
|
|
|
$
|
226
|
|
|
$
|
(183
|
)
|
|
$
|
8,471
|
|
|
Net income (loss) attributable to NIC
|
$
|
183
|
|
|
$
|
437
|
|
|
$
|
10
|
|
|
$
|
93
|
|
|
$
|
(604
|
)
|
|
$
|
119
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(9
|
)
|
|
(9
|
)
|
|
Segment profit (loss)
|
$
|
183
|
|
|
$
|
437
|
|
|
$
|
10
|
|
|
$
|
93
|
|
|
$
|
(595
|
)
|
|
$
|
128
|
|
|
Depreciation and amortization
|
$
|
78
|
|
|
$
|
4
|
|
|
$
|
7
|
|
|
$
|
48
|
|
|
$
|
7
|
|
|
$
|
144
|
|
|
Interest expense
|
—
|
|
|
—
|
|
|
—
|
|
|
83
|
|
|
160
|
|
|
243
|
|
|
Equity in income (loss) of non-consolidated affiliates
|
3
|
|
|
2
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
4
|
|
|
Capital expenditures(B)
|
69
|
|
|
3
|
|
|
2
|
|
|
2
|
|
|
14
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services(A)
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Nine Months Ended July 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales and revenues, net
|
$
|
4,810
|
|
|
$
|
1,768
|
|
|
$
|
229
|
|
|
$
|
118
|
|
|
$
|
8
|
|
|
$
|
6,933
|
|
|
Intersegment sales and revenues
|
61
|
|
|
6
|
|
|
38
|
|
|
69
|
|
|
(174
|
)
|
|
—
|
|
|
Total sales and revenues, net
|
$
|
4,871
|
|
|
$
|
1,774
|
|
|
$
|
267
|
|
|
$
|
187
|
|
|
$
|
(166
|
)
|
|
$
|
6,933
|
|
|
Net income (loss) attributable to NIC
|
$
|
200
|
|
|
$
|
413
|
|
|
$
|
(2
|
)
|
|
$
|
62
|
|
|
$
|
(521
|
)
|
|
$
|
152
|
|
|
Income tax expense
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(25
|
)
|
|
(25
|
)
|
|
Segment profit (loss)
|
$
|
200
|
|
|
$
|
413
|
|
|
$
|
(2
|
)
|
|
$
|
62
|
|
|
$
|
(496
|
)
|
|
$
|
177
|
|
|
Depreciation and amortization
|
$
|
100
|
|
|
$
|
5
|
|
|
$
|
8
|
|
|
$
|
41
|
|
|
$
|
6
|
|
|
$
|
160
|
|
|
Interest expense
|
—
|
|
—
|
|
—
|
|
|
—
|
|
|
64
|
|
|
176
|
|
|
240
|
|
|
Equity in income (loss) of non-consolidated affiliates
|
2
|
|
|
2
|
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Capital expenditures(B)
|
74
|
|
|
1
|
|
|
2
|
|
|
1
|
|
|
1
|
|
|
79
|
|
_________________________
|
|
|
|
(A)
|
Total sales and revenues in the Financial Services segment include interest revenues of $53 million and $161 million for the three and nine months ended July 31, 2019, respectively, and $46 million and $131 million for the three and nine months ended July 31, 2018, respectively.
|
|
|
|
|
(B)
|
Exclusive of purchases of equipment leased to others.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Truck
|
|
Parts
|
|
Global Operations
|
|
Financial
Services
|
|
Corporate
and
Eliminations
|
|
Total
|
|
Segment assets, as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2019
|
$
|
1,942
|
|
|
$
|
686
|
|
|
$
|
322
|
|
|
$
|
3,010
|
|
|
$
|
1,334
|
|
|
$
|
7,294
|
|
|
October 31, 2018
|
2,085
|
|
|
636
|
|
|
331
|
|
|
2,648
|
|
|
1,530
|
|
|
7,230
|
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
13. Stockholders' Deficit
Accumulated Other Comprehensive Loss
The following table presents changes in Accumulated other comprehensive loss, net of tax, included in our Consolidated Statements of Stockholders' Deficit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of April 30, 2019
|
$
|
(319
|
)
|
|
$
|
(1,467
|
)
|
|
$
|
(1,786
|
)
|
|
Other comprehensive income before reclassifications
|
9
|
|
|
—
|
|
|
9
|
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
23
|
|
|
23
|
|
|
Net current-period other comprehensive income
|
9
|
|
|
23
|
|
|
32
|
|
|
Balance as of July 31, 2019
|
$
|
(310
|
)
|
|
$
|
(1,444
|
)
|
|
$
|
(1,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of October 31, 2018
|
$
|
(315
|
)
|
|
$
|
(1,605
|
)
|
|
$
|
(1,920
|
)
|
|
Other comprehensive income (loss) before reclassifications
|
5
|
|
|
(8
|
)
|
|
(3
|
)
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
169
|
|
|
169
|
|
|
Net current-period other comprehensive income
|
5
|
|
|
161
|
|
|
166
|
|
|
Balance as of July 31, 2019
|
$
|
(310
|
)
|
|
$
|
(1,444
|
)
|
|
$
|
(1,754
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of April 30, 2018
|
$
|
(289
|
)
|
|
$
|
(1,865
|
)
|
|
$
|
(2,154
|
)
|
|
Other comprehensive loss before reclassifications
|
(13
|
)
|
|
—
|
|
|
(13
|
)
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
29
|
|
|
29
|
|
|
Net current-period other comprehensive income (loss)
|
(13
|
)
|
|
29
|
|
|
16
|
|
|
Balance as of July 31, 2018
|
$
|
(302
|
)
|
|
$
|
(1,836
|
)
|
|
$
|
(2,138
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
Foreign Currency Translation Adjustments
|
|
Defined Benefit Plans
|
|
Total
|
|
Balance as of October 31, 2017
|
$
|
(283
|
)
|
|
$
|
(1,928
|
)
|
|
$
|
(2,211
|
)
|
|
Other comprehensive loss before reclassifications
|
(19
|
)
|
|
(2
|
)
|
|
(21
|
)
|
|
Amounts reclassified out of accumulated other comprehensive loss
|
—
|
|
|
94
|
|
|
94
|
|
|
Net current-period other comprehensive income (loss)
|
(19
|
)
|
|
92
|
|
|
73
|
|
|
Balance as of July 31, 2018
|
$
|
(302
|
)
|
|
$
|
(1,836
|
)
|
|
$
|
(2,138
|
)
|
The following table presents the amounts reclassified from Accumulated other comprehensive loss and the affected line item in our Consolidated Statements of Operations:
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Nine Months Ended July 31,
|
|
(in millions)
|
|
Location in Consolidated
Statements of Operations
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Defined benefit plans
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of actuarial loss
|
|
Other expense, net
|
|
$
|
23
|
|
|
$
|
29
|
|
|
$
|
70
|
|
|
$
|
86
|
|
|
Settlements
|
|
Other expense, net
|
|
—
|
|
|
—
|
|
|
142
|
|
|
9
|
|
|
|
|
Total before tax
|
|
23
|
|
|
29
|
|
|
212
|
|
|
95
|
|
|
|
|
Income tax expense
|
|
—
|
|
|
—
|
|
|
(43
|
)
|
|
(1
|
)
|
|
Total reclassifications for the period, net of tax
|
|
$
|
23
|
|
|
$
|
29
|
|
|
$
|
169
|
|
|
$
|
94
|
|
14. 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 all attributable to NIC in our Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended July 31,
|
|
Nine Months Ended July 31,
|
|
(in millions, except per share data)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income attributable to Navistar International Corporation common stockholders
|
$
|
156
|
|
|
$
|
170
|
|
|
$
|
119
|
|
|
$
|
152
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
|
99.4
|
|
|
99.0
|
|
|
99.2
|
|
|
98.8
|
|
|
Effect of dilutive securities
|
0.3
|
|
|
0.7
|
|
|
0.3
|
|
|
0.8
|
|
|
Diluted
|
99.7
|
|
|
99.7
|
|
|
99.5
|
|
|
99.6
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share attributable to Navistar International Corporation:
|
|
|
|
|
|
|
|
|
Basic
|
$
|
1.57
|
|
|
$
|
1.72
|
|
|
$
|
1.20
|
|
|
$
|
1.54
|
|
|
Diluted
|
1.56
|
|
|
1.71
|
|
|
1.20
|
|
|
1.53
|
|
The conversion rate on our 4.5% Senior Subordinated Convertible Notes due 2018 (the "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. The 2018 Convertible Notes were fully repaid upon maturity in October 2018, and none were converted into shares of our common stock.
The conversion rate on our 4.75% Senior Subordinated Convertible Notes due 2019 (the “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. The 2019 Convertible Notes were fully repaid upon maturity in April 2019, and none were converted into shares of our common stock.
The computation of diluted earnings per share excludes outstanding options and other common stock equivalents in periods where inclusion of such potential common stock instruments would be anti-dilutive.
For the three and nine months ended July 31, 2018, certain securities have been excluded from the computation of earnings per share, as our average stock price during the period was less than their respective exercise prices. The aggregate shares not included were 13.2 million and 13.3 million, respectively, which was primarily comprised of 3.4 million shares related to the 2018 Convertible Notes and 7.6 million shares related to the 2019 Convertible Notes.