-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, KPEVk2DRpNC8I0zm6Uij3jPLhYmk2dBdKs0M8R9/bHd9OrPj1ponG7LBbe5RAcGu iMr31/aRiu1xvEvYKY1a+Q== 0000808450-98-000007.txt : 19980615 0000808450-98-000007.hdr.sgml : 19980615 ACCESSION NUMBER: 0000808450-98-000007 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980430 FILED AS OF DATE: 19980612 SROS: CSX SROS: NASD SROS: NYSE SROS: PCX FILER: COMPANY DATA: COMPANY CONFORMED NAME: NAVISTAR INTERNATIONAL CORP /DE/NEW CENTRAL INDEX KEY: 0000808450 STANDARD INDUSTRIAL CLASSIFICATION: MOTOR VEHICLES & PASSENGER CAR BODIES [3711] IRS NUMBER: 363359573 STATE OF INCORPORATION: DE FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-09618 FILM NUMBER: 98647507 BUSINESS ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DR CITY: CHICAGO STATE: IL ZIP: 60611 BUSINESS PHONE: 3128362000 MAIL ADDRESS: STREET 1: 455 N CITYFRONT PLAZA DRIVE STREET 2: 455 N CITYFRONT PLAZA DRIVE CITY: CHICAGO STATE: IL ZIP: 60611 FORMER COMPANY: FORMER CONFORMED NAME: NAVISTAR HOLDING INC DATE OF NAME CHANGE: 19870528 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q ( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended April 30, 1998 OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 1-9618 NAVISTAR INTERNATIONAL CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) Delaware 36-3359573 ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 455 North Cityfront Plaza Drive, Chicago, Illinois 60611 -------------------------------------------------- ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (312) 836-2000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. Yes No --- --- APPLICABLE ONLY TO CORPORATE ISSUERS: As of June 10, 1998, the number of shares outstanding of the registrant's common stock was 67,066,977. - 1 - NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES -------------------------- INDEX --------- Page Reference --------- Part I. Financial Information: Item 1. Financial Statements: Statement of Income -- Three Months and Six Months Ended April 30, 1998 and 1997........................... 3 Statement of Financial Condition -- April 30, 1998, October 31, 1997 and April 30, 1997....... 4 Statement of Cash Flow -- Six Months Ended April 30, 1998 and 1997.................. 5 Notes to Financial Statements................................. 6 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition... 12 Item 6. Exhibits and Reports on Form 8-K .................. 19 Part II. Other Information: Item 1. Legal Proceedings.................................. 19 Item 4. Submission of Matters to a Vote of Security Holders 19 Item 6. Exhibits and Reports on Form 8-K................... 19 Signature ................................................... 20 - 2 - PART I - FINANCIAL INFORMATION ------------------------------ ITEM 1. Financial Statements
STATEMENT OF INCOME (Unaudited) --------------------------------------------------------------------------------------- Millions of dollars, except per share data --------------------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries ------------------------------------------- Three Months Ended Six Months Ended April 30 April 30 ------------------ ---------------- 1998 1997 1998 1997 ------ ------ ------ ------ Sales and revenues Sales of manufactured products ........... $1,981 $1,493 $3,653 $2,733 Finance and insurance revenue ............ 47 43 92 88 Other income ............................. 14 15 24 26 ------ ------ ------ ------ Total sales and revenues ............... 2,042 1,551 3,769 2,847 ------ ------ ------ ------ Costs and expenses Cost of products and services sold ....... 1,703 1,292 3,157 2,368 Postretirement benefits .................. 43 57 88 108 Engineering and research expense ......... 46 32 81 62 Marketing and administrative expense ..... 97 87 195 170 Interest expense ......................... 29 20 46 37 Financing charges on sold receivables .... 7 5 15 12 Insurance claims and underwriting expense. 9 9 18 17 ------ ------ ------ ------ Total costs and expenses ............... 1,934 1,502 3,600 2,774 ------ ------ ------ ------ Income before income taxes ........... 108 49 169 73 Income tax expense ................... 41 19 64 28 ------ ------ ------ ------ Net income ............................... 67 30 105 45 Less dividends on Series G Preferred stock 4 7 11 14 ------ ------ ------ ------ Net income applicable to common stock .... $ 63 $ 23 $ 94 $ 31 ====== ====== ====== ====== Earnings per share Basic ............................... $ .90 $ .31 $ 1.32 $ .41 Diluted ............................. $ .89 $ .31 $ 1.30 $ .41 Average shares outstanding (millions) Basic ............................... 69.2 73.6 70.6 73.6 Diluted ............................. 70.5 73.7 71.7 73.7 See Notes to Financial Statements.
- 3 -
STATEMENT OF FINANCIAL CONDITION (Unaudited) - ---------------------------------------------------------------------------------------- Millions of dollars - ---------------------------------------------------------------------------------------- Navistar International Corporation and Consolidated Subsidiaries -------------------------------------------- April 30 October 31 April 30 1998 1997 1997 ---------- ---------- ---------- ASSETS - ------------------------------------------ Cash and cash equivalents ................ $ 453 $ 609 $ 237 Marketable securities .................... 491 356 533 ------ ------ ------ 944 965 770 Receivables, net ......................... 2,044 1,755 1,618 Inventories .............................. 576 496 503 Property, net of accumulated depreciation and amortization of $892, $847 and $869 ................. 968 835 748 Investments and other assets ............. 334 319 303 Intangible pension assets ................ 212 212 267 Deferred tax asset, net ................. 871 934 995 ------ ------ ------ Total assets ............................. $5,949 $5,516 $5,204 ====== ====== ====== LIABILITIES AND SHAREOWNERS' EQUITY - ------------------------------------------ Liabilities Accounts payable, principally trade ...... $1,214 $1,100 $ 907 Debt: Manufacturing operations ........... 464 92 109 Financial services operations ...... 1,592 1,224 1,213 Postretirement benefits liability ........ 910 1,186 1,200 Other liabilities ........................ 977 894 816 ------ ------ ------ Total liabilities .................... 5,157 4,496 4,245 ------ ------ ------ Commitments and contingencies Shareowners' equity Series G convertible preferred stock (liquidation preference $240 million) .. $ - $ 240 $ 240 Series D convertible junior preference stock (liquidation preference $4 million) ............................ 4 4 4 Common stock (55.4, 52.2 and 51.0 million shares issued) ......................... 1,750 1,659 1,642 Class B Common stock (19.9, 23.1 and 24.3 million shares issued) ................ 388 471 491 Retained earnings (deficit) .............. (1,212) (1,301) (1,388) Common stock held in treasury, at cost ... (138) (53) (30) ------ ------ ------ Total shareowners' equity ............ 792 1,020 959 ------ ------ ------ Total liabilities and shareowners' equity. $5,949 $5,516 $5,204 ====== ====== ====== See Notes to Financial Statements.
- 4 - STATEMENT OF CASH FLOW (Unaudited) ------------------------------------------------------------------------------ For the Six Months Ended April 30 (Millions of dollars) ------------------------------------------------------------------------------ Navistar International Corporation and Consolidated Subsidiaries ------------------------- 1998 1997 ------ ------ Cash flow from operations Net income ............................... $ 105 $ 45 Adjustments to reconcile net income to cash used in operations: Depreciation and amortization .......... 79 60 Deferred income taxes .................. 64 26 Postretirement benefits funding in excess of expense ........................... (283) (145) Other, net ............................. (17) (18) Change in operating assets and liabilities: Receivables ............................ (192) (63) Inventories ............................ (81) (18) Prepaid and other current assets ....... (11) (4) Accounts payable ....................... 80 93 Other liabilities ...................... 91 19 ------ ------ Cash used in operations .................. (165) (5) ------ ------ Cash flow from investment programs Purchase of retail notes and lease receivables ............................ (576) (445) Collections/sales of retail notes and lease receivables ................. 520 518 Purchase of marketable securities ........ (355) (332) Sales or maturities of marketable securities ............................. 223 195 Capital expenditures ..................... (124) (58) Property and equipment leased to others .. (88) (16) Other investment programs, net ........... (2) 4 ------ ------ Cash used in investment programs ......... (402) (134) ------ ------ Cash flow from financing activities Issuance of debt ......................... 441 79 Principal payments on debt ............... (61) (18) Net increase (decrease) in notes and debt outstanding under bank revolving credit facility and asset-backed and other commercial paper programs .............. 312 (158) Mexican credit facility .................. 54 - Repurchase of common stock ............... (84) - Redemption of Series G Preferred Stock ... (240) - Dividends paid ........................... (11) (14) ------ ------ Cash provided by (used in) financing activities ................... 411 (111) ------ ------ Cash and cash equivalents Decrease during the period ............. (156) (250) At beginning of the year ............... 609 487 ------ ------ Cash and cash equivalents at end of the period ................... $ 453 $ 237 ====== ====== See Notes to Financial Statements. - 5 - Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note A. Summary of Accounting Policies Navistar International Corporation is a holding company whose principal operating subsidiary is Navistar International Transportation Corp. (Transportation). As used hereafter, "company" or "Navistar" refers to Navistar International Corporation and its consolidated subsidiaries. The consolidated financial statements include the results of the company's manufacturing operations and its wholly owned financial services subsidiaries. The effects of transactions between the manufacturing and financial services operations have been eliminated to arrive at the consolidated totals. The accompanying unaudited financial statements have been prepared in accordance with accounting policies described in the 1997 Annual Report on Form 10-K and should be read in conjunction with the disclosures therein. In the opinion of management, these interim financial statements reflect all adjustments, consisting of normal recurring accruals, necessary to present fairly the financial position, results of operations and cash flow for the periods presented. Interim results are not necessarily indicative of results for the full year. Certain 1997 amounts have been reclassified to conform with the presentation used in the 1998 financial statements. Note B. Supplemental Cash Flow Information Consolidated interest payments during the first six months of 1998 and 1997 were $42 million and $37 million, respectively. Consolidated tax payments made during the first six months of 1998 and 1997 were not material. Note C. Income Taxes The benefit of Net Operating Loss (NOL) carryforwards is recognized as a deferred tax asset in the Statement of Financial Condition, while the Statement of Income includes income taxes calculated at the statutory rate. The amount reported does not represent cash payment of income taxes except for certain state income, foreign withholding and federal alternative minimum taxes which are not material. In the Statement of Financial Condition, the deferred tax asset is reduced by the amount of deferred tax expense or increased by a deferred tax benefit recorded during the year. Until the company has utilized its significant NOL carryforwards, the cash payment of federal income taxes will be minimal. - 6 - Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note D. Inventories Inventories are as follows: April 30 October 31 April 30 Millions of dollars 1998 1997 1997 - ------------------------------------------------------------------------------ Finished products........... $ 261 $ 225 $ 268 Work in process............. 141 106 101 Raw materials and supplies.. 174 165 134 -------- -------- -------- Total inventories........... $ 576 $ 496 $ 503 ======== ======== ======== Note E. Financial Instruments The company purchases collateralized mortgage obligations (CMOs) that have predetermined fixed-principal payment patterns which are relatively certain. These instruments totaled $71 million at April 30, 1998. At April 30, the unrecognized gain on the CMOs was not material. Servicios Financieros Navistar, S.A. de C.V., a wholly-owned financial services subsidiary of the company, periodically enters into forward contracts in order to reduce exposure to exchange rate risk between the U.S. dollar and the Mexican peso. At April 30, 1998, these hedge agreements totaled $21 million with no expected net gain or loss. In June 1998, Navistar Financial Corporation (NFC) sold $501 million of retail notes, net of unearned finance income, recognizing a gain of $8 million on the sale. The proceeds of $482 million, net of underwriting fees and credit enhancements, were used by NFC for general working capital purposes. NFC entered into $400 million of forward treasury locks in anticipation of a June 1998 sale of retail receivables. These hedge agreements were closed in conjunction with the pricing of the sale and resulted in an immaterial gain. NFC also entered into a $100 million forward treasury lock in anticipation of a November 1998 sale of retail receivables. This hedge agreement will be closed in conjunction with the pricing of the sale and any resulting gain or loss will be included in the gain or loss on the sale of receivables recognized in November 1998. - 7 - Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note F. Earnings Per Share In the first quarter of 1998, the company adopted Statement of Financial Accounting Standards No. 128, "Earnings per Share," which replaces the presentation of primary earnings per share and fully diluted earnings per share with a presentation of basic earnings per share and diluted earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common shareowners by the weighted-average number of basic common shares outstanding for the period. Diluted earnings per share assumes the issuance of common stock for other potentially dilutive equivalent shares outstanding. All prior-period earnings per share data has been restated. The adoption of this new accounting standard did not have a material effect on the company's reported earnings per share amounts. Earnings per share was computed as follows:
Three Months Ended Six Months Ended April 30 April 30 --------------------- --------------------- Millions of dollars, except share and per share data 1998 1997 1998 1997 - ------------------------------------------- -------- -------- -------- -------- Net Income................................. $ 67 $ 30 $ 105 $ 45 Less dividends on Series G Preferred Stock. 4 7 11 14 -------- -------- -------- -------- Net income applicable to common stock (Basic and Diluted)...................... $ 63 $ 23 $ 94 $ 31 ======== ======== ======== ======== Average shares outstanding (millions)...... Basic.................................... 69.2 73.6 70.6 73.6 Dilutive effect of options outstanding and other dilutive securities....... 1.3 .1 1.1 .1 -------- -------- ---------- -------- Diluted.................................. 70.5 73.7 71.7 73.7 ======== ======== ========= ======== Earnings per share Basic.................................... .90 .31 1.32 .41 Diluted.................................. .89 .31 1.30 .41
Unexercised employee stock options to purchase .3 million and 3.1 million shares of Navistar common stock during the three months ended April 30, 1998 and 1997, respectively, and to purchase .5 million and 2.9 million shares of Navistar common stock during the six months ended April 30, 1998 and 1997, respectively, were not included in the computation of diluted shares outstanding because the exercise prices were greater than the average market price of Navistar common stock. Additionally, the diluted calculation excludes the effects of the conversion of the Series G preferred stock as such conversion would produce anti-dilutive results. See Note H for discussion of the February 1998 redemption of the Series G preferred stock and the company's repurchase of shares in conjunction with the June secondary offering. - 8 - Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note G. New Accounting Pronouncements In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement revises standards for disclosures about pension and other postretirement benefit plans and is effective for fiscal years beginning after December 15, 1997. This standard expands or modifies disclosure and, accordingly will have no impact on the company's reported financial position, results of operations and cash flows. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." This statement defines whether or not certain costs related to the development or acquisition of internal use software should be expensed or capitalized and is effective for fiscal years beginning after December 15, 1998. The company is currently assessing the impact of this statement on its results of operations and financial position. Note H. Debt and Equity Offerings On February 4, 1998 the company issued $100 million 7% Senior Notes due 2003 and $250 million 8% Senior Subordinated Notes due 2008. The proceeds of the Senior Notes were used to prepay an 8% Secured Note due 2002 and will be used to redeem the 9% Sinking Fund Debentures on June 15, 1998. (The company called the 9% Sinking Fund Debentures during May 1998). The proceeds of the Senior Subordinated Notes were used to redeem the company's $240 million, $6.00 Series G Convertible Cumulative Preferred Stock and to pay accumulated and unpaid dividends thereon. Excess proceeds from both debt issues will be used for general working capital purposes. On June 8, 1998, a secondary public offering of the common stock of the company was completed, in which the Navistar International Transportation Corp. Retiree Supplemental Benefit Trust sold approximately 19.9 million shares of common stock at an offering price of $26.50 per share. In conjunction with this offering, the company and certain of the company's pension plans purchased 2 million and 3 million, respectively, of the shares being offered. Navistar has also granted the underwriters an option to purchase up to an additional 1.3 million shares to cover over-allotments, if any. The company did not receive any proceeds from the sale of the shares in the offering but will pay expenses related to this offering estimated at $14 million, which will be expensed in the third quarter of 1998. - 9 - Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note I. Supplemental Financial Information Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars:
Three Months Ended Six Months Ended April 30 April 30 ---------------------- --------------------- Condensed Statement of Income 1998 1997 1998 1997 - ------------------------------------------ -------- -------- -------- -------- Sales of manufactured products............ $ 1,981 $ 1,493 $ 3,653 $ 2,733 Other income.............................. 12 14 22 24 -------- -------- -------- -------- Total sales and revenues.................. 1,993 1,507 3,675 2,757 -------- -------- -------- -------- Cost of products sold.................... 1,696 1,287 3,144 2,358 Postretirement benefits.................. 43 57 88 108 Engineering and research expense......... 46 32 81 62 Marketing and administrative expense..... 88 78 177 154 Other expenses........................... 31 20 58 41 -------- -------- -------- -------- Total costs and expenses................. 1,904 1,474 3,548 2,723 -------- -------- -------- -------- Income before income taxes Manufacturing operations............... 89 33 127 34 Financial services operations.......... 19 16 42 39 -------- -------- -------- -------- Income before income taxes........... 108 49 169 73 Income tax expense................... 41 19 64 28 -------- -------- -------- -------- Net income............................... $ 67 $ 30 $ 105 $ 45 ======== ======== ======== ========
April 30 October 31 April 30 Condensed Statement of Financial Condition 1998 1997 1997 - ------------------------------------------ -------- -------- -------- Cash, cash equivalents and marketable securities............... $ 750 $ 802 $ 610 Inventories............................... 562 483 473 Property and equipment, net............... 764 706 637 Equity in nonconsolidated subsidiaries.... 327 322 306 Other assets.............................. 874 864 780 Deferred tax asset, net................... 871 934 995 -------- -------- -------- Total assets......................... $ 4,148 $ 4,111 $ 3,801 ======== ======== ======== Accounts payable, principally trade....... $ 1,142 $ 1,060 $ 862 Postretirement benefits liabilities....... 902 1,178 1,192 Other liabilities......................... 1,312 853 788 Shareowners' equity....................... 792 1,020 959 -------- -------- -------- Total liabilities and shareowners' equity.......... $ 4,148 $ 4,111 $ 3,801 ======== ======== ========
- 10 - Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note I. Supplemental Financial Information (continued) Navistar International Corporation (with financial services operations on an equity basis) in millions of dollars: Six Months Ended April 30 ----------------------- Condensed Statement of Cash Flow 1998 1997 - ------------------------------------------------ -------- -------- Cash flow from operations Net income...................................... $ 105 $ 45 Adjustments to reconcile net income to cash provided by operations: Depreciation and amortization................. 64 49 Postretirement benefits funding in excess of expense........................ (283) (145) Deferred income taxes......................... 64 26 Other, net.................................... (9) - Change in operating assets and liabilities...... 104 101 -------- -------- Cash provided by operations..................... 45 76 -------- -------- Cash flow from investment programs Purchase of marketable securities............... (330) (280) Sales or maturities of marketable securities.... 196 134 Capital expenditures............................ (124) (58) Receivable from Navistar Financial Corporation.. (8) (98) Other investment programs, net ................. (2) 4 -------- -------- Cash used in investment programs................ (268) (298) -------- -------- Cash flow from financing activities............. 36 (21) -------- -------- Cash and cash equivalents Decrease during the period...................... (187) (243) At beginning of the year........................ 573 452 -------- -------- Cash and cash equivalents at end of the period.. $ 386 $ 209 ======== ======== - 11 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Certain statements under this caption constitute "forward-looking statements" under the Reform Act, which involve risks and uncertainties. Navistar International Corporation's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the heading "Business Environment." Second Quarter Ended April 30, 1998 ----------------------------------- The company reported net income of $67 million, or $0.89 per diluted common share for the second quarter ended April 30, 1998, compared with net income of $30 million, or $0.31 per diluted common share for the comparable quarter last year. The company's manufacturing operations reported income before income taxes of $89 million compared with pretax income of $33 million in the second quarter of 1997 reflecting an increase in the demand for trucks and engines. The financial services operations' pretax income for the second quarter of 1998 was $19 million compared with $16 million in the prior year reflecting increased finance receivable balances. Sales and Revenues. Second quarter 1998 industry retail sales of Class 5 through 8 trucks totaled 96,600 units, which is 10% higher than the 87,500 units sold during this period in 1997. Class 8 heavy truck sales of 56,500 units during the second quarter of 1998 were 15% higher than the 1997 level of 49,000 units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, increased 4% to 40,100 units. Industry sales of school buses, which accounted for 18% of the medium truck market, increased 2%. Sales and revenues for the second quarter of 1998 totaled $2,042 million, 32% higher than the $1,551 million reported for the comparable quarter in 1997. Sales of trucks, mid-range diesel engines and service parts for the second quarter of 1998 totaled $1,981 million compared with $1,493 million reported for the same period in 1997. The company maintained its position as sales leader in the combined United States and Canadian Class 5 through 8 truck market with a 29.6% market share for the second quarter of 1998, an increase from the 26.9% market share reported in 1997. (Sources: American Automobile Manufacturers Association, Canadian Vehicle Manufacturers Association, and R.L. Polk & Company.) Shipments of mid-range diesel engines by the company to other original equipment manufacturers during the second quarter of 1998 totaled 56,000 units, a 16% increase from the same period of 1997. Higher shipments to Ford Motor Company to meet consumer demand for the light trucks and vans which use this engine were the primary reason for the increase. - 12 - Service parts sales of $217 million in the second quarter of 1998 increased 7% from the prior year's level. Finance and insurance revenue of $47 million in the second quarter of 1998 increased 9% from 1997, primarily as a result of increased retail notes and lease financing receivables. Costs and expenses. Manufacturing gross margin was 14.4% of sales for the second quarter of 1998 compared with 13.8% for the same period in 1997. Consolidated marketing and administrative expense increased to $97 million in 1998 from $87 million in the second quarter of 1997 reflecting investment in the implementation of the company's truck strategy to reduce costs and complexity in its manufacturing processes and an increase in the provision for payment to employees as provided by the company's performance incentive programs. Postretirement benefits expense decreased to $43 million in 1998 from $57 million in the second quarter of 1997 mainly as a result of higher excepted return on plan assets. Engineering and research expense increased $14 million from the second quarter of 1997 to $46 million, reflecting the company's investment in its NGV program. The $9 million increase in interest expense is primarily due to the issuance of $350 million of Senior and Senior Subordinated Notes during February 1998. Six Months Ended April 30, 1998 ------------------------------- Pretax income for the first six months of 1998 was $169 million compared with $73 million reported for the same period of 1997. The company's manufacturing operations reported income before income taxes of $127 million during this period, compared with $34 million reported in 1997. The financial services operations' pretax income for the first six months of 1998 was $42 million, an increase from the $39 million reported in 1997. This change is primarily a result of an increase in finance receivable balances. Manufacturing operations' sales and revenues during this period totaled $3,675 million, an increase of 33% from 1997. During the first six months of 1998, sales of trucks increased 44% while sales of diesel engines to original equipment manufacturers increased 16%. Service parts sales were 3% higher than in the same period of 1997. Finance and insurance revenue was $92 million during the first two quarters of 1998 compared with $88 million in 1997. Industry retail sales of Class 5 through 8 trucks during the first six months of 1998 totaled 182,200 units, an increase from the 159,600 units sold during this period in 1997. The company remained the sales leader in the combined United States and Canadian Class 5 through 8 truck market for the first two quarters of the year with a 29.4% market share, an increase over the 26.7% market share reported for the same period last year. - 13 - Manufacturing gross margin for the first six months of 1998 was 13.9% compared with 13.7% in 1997. Consolidated marketing and administrative expense was $195 million during this period compared with $170 million during the first two quarters of 1997. The factors which influenced marketing and administrative expense, postretirement benefits expense, engineering and research expense, and interest expense during the second quarter of 1998 were also primarily responsible for the changes during the first half of the year. Liquidity and Capital Resources Cash flow is generated from the manufacture and sale of trucks, mid-range diesel engines and service parts as well as product financing and insurance coverage provided to the company's dealers and retail customers by the financial services operations. Historically, funds to finance the company's products are obtained from a combination of commercial paper, short- and long-term bank borrowings, medium- and long-term debt issues, sales of finance receivables and equity capital. NFC's current debt ratings have made sales of finance receivables the most economic source of funding. Insurance operations are funded through internal operations. Total cash, cash equivalents and marketable securities of the company amounted to $944 million at April 30, 1998, $965 million at October 31, 1997 and $770 million at April 30, 1997. Cash used in operations during the first six months of 1998 totaled $165 million primarily from excess postretirement benefits funding of $283 million and from a net change in operating assets and liabilities of $113 million offset by net income of $105 million, $64 million of noncash deferred taxes and $62 million of other noncash items, principally depreciation. In addition to regular postretirement benefit payments, the company contributed $200 million to the Retiree Health Care Base Plan Trust and $100 million to the hourly pension plan during the first six months of 1998. The net change in operating assets and liabilities included a $192 million increase in receivables primarily due to strong sales during the first six months of 1998. The $81 million increase in inventory, the $91 million increase in other liabilities and the $80 million increase in accounts payable were primarily due to timing of cash payments and higher production volume. Investment programs used $402 million in cash reflecting a net increase in marketable securities of $132 million and a net increase in retail notes and lease receivables of $56 million. Other investment activities used $88 million for property and equipment leased to others and $124 million to fund capital expenditures for construction of a truck assembly facility in Mexico, to increase mid-range diesel engine capacity, and for truck product improvements. - 14 - Financing activities provided a $380 million net increase in long-term debt primarily due to the issuance of $100 million 7% Senior Notes due 2003 and $250 million 8% Senior Subordinated Notes due 2008. Cash was also provided by an increase of $312 million in notes and debt outstanding under the bank revolving credit facility and other commercial paper program as well as $54 million of borrowings under the Mexican credit facility. These increases were offset by the $240 million redemption of the Series G Preferred Stock and payment of $11 million of related dividends. In addition, $83 million was used to repurchase 3.2 million shares of Class B common stock during the first quarter. On June 8, 1998, a secondary public offering of the common stock of the company was completed, in which the Navistar International Transportation Corp. Retiree Supplemental Benefit Trust sold approximately 19.9 million shares of common stock at an offering price of $26.50 per share. In conjunction with this offering, the company and certain of the company's pension plans purchased 2 million and 3 million, respectively, of the shares being offered. Navistar has also granted the underwriters an option to purchase up to an additional 1.3 million shares to cover over-allotments, if any. The company did not receive any proceeds from the sale of the shares in the offering but will pay expenses related to this offering estimated at $14 million, which will be expensed in the third quarter of 1998. During May 1998, the company called its 9% Sinking Fund Debentures due June 2004. These debentures will be redeemed on June 15, 1998 for approximately $47 million including accrued interest. Receivable sales were a significant source of funding in 1998 and 1997. During the first six months of 1998 and of 1997, NFC sold $500 million and $486 million, respectively, of retail notes through Navistar Financial Retail Receivables Corporation (NFRRC). NFRRC has filed registration statements with the Securities and Exchange Commission which provide for the issuance of up to $5,000 million of asset-backed securities. At April 30, 1998, the remaining shelf registration available to NFRRC was $973 million. At April 30, 1998, available funding under NFC's amended and restated credit facility and the asset-backed commercial paper facility was $242 million, of which $138 million was used to back short-term debt at April 30, 1998. The remaining $104 million, when combined with unrestricted cash and cash equivalents made $143 million available to fund the general business purposes of NFC at April 30, 1998. The company purchases collateralized mortgage obligations (CMOs) that have predetermined fixed-principal payment patterns which are relatively certain. These instruments totaled $71 million at April 30, 1998. At April 30, the unrecognized gain on the CMOs was not material. Servicios Financieros Navistar, S.A. de C.V., a wholly-owned financial services subsidiary, periodically enters into forward contracts in order to reduce exposure to exchange rate risk between the U.S. dollar and the Mexican peso. At April 30, 1998, these hedge agreements totaled $21 million with no expected net gain or loss. - 15 - In June 1998, the NFC sold $501 million of retail notes, net of unearned finance income, recognizing a gain of $8 million on the sale. The proceeds of $482 million, net of underwriting fees and credit enhancements, were used by NFC for general working capital purposes. NFC entered into $400 million of forward treasury locks in anticipation of a June 1998 sale of retail receivables. These hedge agreements were closed in conjunction with the pricing of the sale and resulted in an immaterial gain. NFC also entered into a $100 million forward treasury lock in anticipation of a November 1998 sale of retail receivables. This hedge agreement will be closed in conjunction with the pricing of the sale and any resulting gain or loss will be included in the gain or loss on the sale of receivables recognized in November 1998. The company had outstanding capital commitments of $124 million at April 30, 1998, primarily for increased manufacturing capacity at the Indianapolis engine plant, improvements to existing facilities and products and for completion of construction of a truck assembly facility in Mexico. Management continues to evaluate current and forecasted cash flow as a basis for financing operating requirements and capital expenditures. Management believes that collections on the outstanding receivables portfolios as well as funds available from various funding sources will permit the financial services operations to meet the financing requirements of the company's dealers and customers. Year 2000 The company has identified all significant applications that will require modification to ensure Year 2000 compliance. Internal and external resources are being used to make the required modifications and test Year 2000 compliance. The company plans to complete the modifications and testing process of all significant applications by July 1999, which is prior to any anticipated impact on its operating systems. The total cost of the Year 2000 project has not been and is not anticipated to be material to the company's financial position or results of operations and will be funded through operating cash flows. The costs of the project and the date on which the company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. - 16 - In addition, the company has communicated with others with whom it does significant business to determine their Year 2000 compliance readiness and the extent to which the company is vulnerable to any third party Year 2000 issues. However, there can be no guarantee that the systems or products of other companies, including the company's dealers, on which the company relies will be timely converted, or that a failure to convert by another company, or a conversion that is incompatible with the company's systems, would not have a material adverse affect on the company. Impact of Government Regulation For model year 1998, the U.S. EPA has issued conditional certification of conformance for electronically-controlled diesel engines while it investigates whether these engines fully comply with regulations concerning nitrogen oxide emissions. In particular, the U.S. EPA is focusing on whether certain electronics strategies used to attain fuel economy have an adverse impact on nitrogen oxide emissions. In connection with its investigation the U.S. EPA has made demand upon Navistar that it enter into a consent decree providing, among other things, for the payment of fines in excess of $100,000 for alleged violations of U.S. EPA emissions standards. Navistar believes the diesel engines manufactured by it are in compliance with all applicable U.S. EPA standards and is engaged in confidential discussions with the U.S. EPA in an effort to resolve this issue. It is premature at this time to predict the final results of these discussions. Income Taxes The deferred tax assets are net of valuation allowances since it is more likely than not that some portion of the deferred tax asset may not be realized in the future through the generation of taxable income. Extensive analysis has historically been performed on an annual basis to determine the amount of the deferred tax asset. Such analysis is based on the premise that the company is and will continue to be a going concern and that it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Management reviews all available evidence, both positive and negative, to assess the long-term earnings potential of the company using a number of alternatives to evaluate financial results in economic cycles at various industry volume conditions based upon the company's existing operating structure. As a result of the continued successful implementation of its manufacturing strategy, including the reinstatement of the NGV Program, the continued strength of industry volume conditions, changes in the company's operating structure and other positive operating indicators, management has initiated an extensive review of its projected future taxable income. Other positive operating indicators include an increase in the company's combined market share of Class 5 through 8 trucks and the opening of its Mexican assembly facility. This review which is expected to be completed by the end of the fiscal year may result in a reduction to the valuation allowance. - 17 - New Pronouncements In February 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." This statement revises standards for disclosures about pension and other postretirement benefit plans and is effective for fiscal years beginning after December 15, 1997. This standard expands or modifies disclosure and, accordingly will have no impact on the company's reported financial position, results of operations and cash flows. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". This statement defines which costs related to the development or acquisition of internal use software should be expensed or capitalized and is effective for fiscal years beginning after December 15, 1998. The company is currently assessing the impact of this statement on its results of operations and financial position. Business Environment Sales of Class 5 through 8 trucks are cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates and the earnings and cash flow of dealers and customers. Reflecting the stability of the general economy, demand for new trucks remained strong during the second quarter of 1998. An improvement in the number of new truck orders has increased the company's order backlog to 65,400 units at April 30, 1998 from 34,900 units at April 30, 1997. Retail deliveries in 1998 continue to be highly dependent on the rate at which new truck orders are received. The company will evaluate order receipts and backlog throughout the year and will balance production with demand as appropriate. A stronger than expected economy has led the company to increase its estimates of demand. The company currently projects 1998 United States and Canadian Class 8 heavy truck demand to be 230,000 units, a 17% increase from 1997. Class 5, 6 and 7 medium truck demand, excluding school buses, is forecast at 127,000 units, an 8% increase from 1997. Demand for school buses is expected to decline slightly in 1998 to 32,000 units. Mid-range diesel engine shipments by the company to original equipment manufacturers in 1998 are expected to be 215,500 units, 17% higher than in 1997. The company's service parts sales are projected to grow 9% to $875 million. At the currently forecasted 1998 demand of 389,000 units, the entire truck industry is operating at or near capacity while the company's manufacturing facilities are near capacity. Additionally, constraints have been placed on the company's ability to meet certain customers' demands because of component parts availability. During March 1998, the company announced that it has been selected to negotiate an extended term agreement to supply diesel engines for select Ford Motor Company under 8,500 lbs. GVW light duty trucks and sport utility vehicles. - 18 - Navistar International Corporation and Consolidated Subsidiaries PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings Incorporated herein by reference from Item 3 - "Legal Proceedings" in the company's definitive Form 10-K dated December 22, 1997, Commission File No. 1-9618. Item 4. Submission of Matters to a Vote of Security Holders The company's Annual Meeting of Shareowners was held on March 24, 1998. The following three nominees were elected to the Board of Directors to serve three year terms expiring at the 2001 Annual Meeting of Shareowners. There were no broker nonvotes nor abstentions for any of the nominees. The number of votes cast for, or withheld, for each nominee for director was as follows: Shares Voted Shares Nominees "FOR" "WITHHELD" ------------------ ------------ ---------- John R. Horne 44,394,815 612,787 Michael N. Hammes 44,373,473 634,130 William F. Patient 44,411,312 596,290 The names of the remaining directors who did not stand for election at the Annual Meeting and whose terms of office as directors continue after such meeting are William F. Andrews, John D. Correnti, Allen J. Krowe, Jerry E. Dempsey, Robert C. Lannert, John F. Fiedler, Walter J. Laskowski, William C. Craig and John T. Grigsby, Jr. Item 6. Exhibits and Reports on Form 8-K 10-Q Page --------- (a) Exhibits: 3. Articles of Incorporation and By-Laws. E-1 4. Instruments Defining The Rights of Security Holders, Including Indentures E-2 10. Material Contracts E-3 (b) Reports on Form 8-K: A current report on Form 8-K was filed on March 6, 1998 to state earnings per share for the five years ended October 31, 1997 under Statement of Financial Accounting Standards No. 128. - 19 - SIGNATURE --------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. NAVISTAR INTERNATIONAL CORPORATION - ---------------------------------- (Registrant) /s/ J. Steven Keate - ---------------------------------- J. Steven Keate Vice President and Controller (Principal Accounting Officer) June 12, 1998 - 20 - EX-3 2 EXHIBIT 3 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- ARTICLES OF INCORPORATION AND BY-LAWS The following documents of Navistar International Corporation are incorporated herein by reference: 3.1 Restated Certificate of Incorporation of Navistar International Corporation effective July 1, 1993, filed as Exhibit 3.2 to Form 10-K dated October 31, 1993, which was filed on January 27, 1994, Commission File No. 1-9618, and amended as of May 4, 1998. 3.2 The By-Laws of Navistar International Corporation effective April 14, 1995, filed as Exhibit 3.2 on Annual Report on Form 10-K dated October 31, 1995, which was filed on January 26, 1996, on Commission File No. 1-9618. E-1 EX-4 3 EXHIBIT 4 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- INSTRUMENTS DEFINING RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES The following instruments of Navistar International Corporation and its principal subsidiary Navistar International Transportation Corp. and its principal subsidiary Navistar Financial Corporation defining the rights of security holders are incorporated herein by reference. 4.1 Indenture, dated as of March 1, 1968, between Navistar International Transportation Corp. and Manufacturers Hanover Trust Company, as Trustee, and succeeded by FIDATA Trust Company of New York, as successor Trustee, for 6 1/4% Sinking Fund Debentures due 1998 for $50,000,000. Filed on Registration No. 2-28150. 4.2 Indenture, dated as of June 15, 1974, between Navistar International Transportation Corp. and Harris Trust and Savings Bank, as Trustee, and succeeded by Commerce Union Bank, now known as Sovran Bank/Central South, as successor Trustee, for 9% Sinking Fund Debentures due 2004 for $150,000,000. Filed on Registration No. 2-51111. 4.3 Indenture, dated as of November 15, 1993, between Navistar Financial Corporation and Bank of America, Illinois formerly known as Continental Bank, National Association, as Trustee, for 8 7/8% Senior Subordinated Notes due 1998 for $100,000,000. Filed on Registration No. 33-50541. 4.4 Indenture, dated as of May 30, 1997, by and between Navistar Financial Corporation and The Fuji Bank and Trust Company, as Trustee, for 9% Senior Subordinated Notes due 2002 for $100,000,000. Filed on Registration No. 333-30167. 4.5 $125,000,000, Credit Agreement dated as of November 26, 1997, as amended by Amendment No. 1 dated as of February 4, 1998, among Navistar International Corporation Mexico, S.A. de C.V., Navistar International Corporation, certain banks, certain Co-Arranger banks, Bank of Montreal, as Paying Agent, and Bancomer, S.A., Institucion de Banca Multiple, Grupo Financiero, as Peso Agent and Collateral Agent. The Registrant agrees to furnish to the Commission upon request a copy of such agreement which it has elected not to file under the provisions of Regulation 601(b) (4) (iii). 4.6 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, pursuant to which the 7% Senior Notes due 2003 have been issued. Filed on Registration No. 333-47063. 4.7 Indenture, dated as of February 4, 1998, by and between Navistar International Corporation and Harris Trust and Savings Bank, as Trustee, pursuant to which the 8% Senior Subordinated Notes due 2008 have been issued. Filed on Registration No. 333-47063. ====== Instruments defining the rights of holders of other unregistered long-term debt of Navistar and its subsidiaries have been omitted from this exhibit index because the amount of debt authorized under any such instrument does not exceed 10% of the total assets of the Registrant and its consolidated subsidiaries. The Registrant agrees to furnish a copy of any such instrument to the Commission upon request. E-2 EX-10 4 EXHIBIT 10 NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ---------------------------------- MATERIAL CONTRACTS The following documents of Navistar International Corporation are included herein. Form 10-Q Page -------------- 10.21 Navistar International Corporation E-4 1998 Interim Stock Plan E-3 EX-10.21 5 EXHIBIT 10.21 NAVISTAR INTERNATIONAL CORPORATION 1998 INTERIM STOCK PLAN SECTION I PURPOSE OF THE PLAN The purpose of this Navistar International Corporation 1998 Interim Stock Plan ("Plan") is to provide an additional plan for the issuance of stock options and restricted stock for shares of the common stock of Navistar International Corporation to employees of Navistar International Corporation and its subsidiaries ("Corporation") to attract and retain highly qualified personnel, to provide key employees who hold positions of major responsibility the opportunity to earn incentive awards commensurate with the quality of individual performance, the achievement of performance goals and ultimately the increase in shareowner value. This 1998 Plan is separate from and intended to supplement the Navistar 1994 Performance Incentive Plan ("1994 Plan"). SECTION II DEFINITIONS The terms used in this Plan are defined as specified in the 1994 Plan unless the context indicates to the contrary. SECTION III ELIGIBILITY Management will, from time to time, select and recommend to the Committee on Organization of the Board of Directors of Navistar International Corporation ("Committee") Employees who are to become Participants in the Plan. However, no executive officer of the Corporation shall participate in this Plan, except that options or restricted stock may be issued to a person not previously employed by the Corporation as an inducement essential to his entering into an employment contract as an executive officer of the Corporation. Employees will be selected from those who, in the opinion of management, have substantial responsibility in a managerial or professional capacity. Employees selected for participation in the Plan may also be participants in the 1994 Plan, and participation in this Plan will not be considered participation in a plan that would affect their participation in the 1994 Plan. E-4 SECTION IV STOCK OPTIONS The Committee may grant Nonqualified Stock Options to Participants in the amount and at the time that the Committee approves. No Incentive Stock Options shall be granted. Options shall be granted under the same terms and conditions as options granted under the 1994 Plan, but subject to the limitation on the number of shares contained in this Plan. SECTION V RESTRICTED SHARES The Committee may award restricted shares for the purposes and under the same terms and conditions as specified in Sections VI and VIII, and the other provisions of the 1994 Plan, but subject to the limitations on the number of shares contained in this Plan. SECTION VI ADMINISTRATION OF THE PLAN Full power and authority to construe, interpret and administer the Plan is vested in the Committee. Decisions of the Committee will be final, conclusive and binding upon all parties, including the Corporation, shareowners and employees. The foregoing will include, but will not be limited to, all determinations by the Committee as to (i) the approval of Employees for participation in the Plan, (ii) the amount of the Awards, (iii) the performance levels at which different percentages of the Awards would be earned and all subsequent adjustments to such levels and (iv) the determination of all Awards. Any person who accepts any Award hereunder agrees to accept as final, conclusive and binding all determinations of the Committee. The Committee will have the right, in the case of employees not employed in the United States, to vary from the provision of the Plan to the extent the Committee deems appropriate in order to preserve the incentive features of the Plan. SECTION VII MODIFICATION, AMENDMENT OR TERMINATION The Committee may modify without the consent of the Participant (i) the Plan, (ii) the terms of any option previously granted or (iii) the terms of Restricted Shares previously awarded at any time, provided that, no such modification will, without the approval of the Board of Directors of the Corporation, increase the number of shares of Common Stock available hereunder. The Committee may terminate the Plan at any time. E-5 SECTION VIII RESERVATION OF SHARES The total number of shares of stock reserved and available for delivery pursuant to this Plan is 500,000 shares of common stock of Navistar International Corporation. SECTION IX TERM OF THE PLAN The Plan shall be effective on the date of adoption by the Board of Directors and continue for a term of one year thereafter. Provided that, the Committee shall annually review the need for the continuation of the Plan and may amend or terminate the plan as provided herein. SECTION X GOVERNING LAW The Plan will be governed by and interpreted pursuant to the laws of the State of Delaware, the place of incorporation of the Corporation. E-6 EX-27 6
5 1,000,000 6-MOS OCT-31-1998 APR-30-1998 453 491 2078 34 576 0 1860 892 5949 0 2056 0 4 2138 (1350) 5949 3653 3769 3157 3600 88 4 46 169 64 105 0 0 0 105 1.32 1.30 The company has adopted an unclassified presentation in the Statement of Financial Condition. Amount represents Basic Earnings Per Share.
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