10-Q 1 0001.txt 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, 2000 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 May 31, 2000, the number of shares outstanding of the registrant's common stock was 59,221,914. PAGE 2 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, 2000 and 1999...... 3 Statement of Financial Condition April 30, 2000, October 31, 1999 and April 30, 1999............ 4 Statement of Cash Flow Six Months Ended April 30, 2000 and 1999....................... 5 Notes to Financial Statements........................................... 6 Supplemental Financial Information...................................... 11 Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition.................... 13 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 PAGE 3 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 --------------------------- --------------------------- 2000 1999 2000 1999 ---------- ---------- ---------- ---------- Sales and revenues Sales of manufactured products............. $ 2,313 $ 2,215 $ 4,399 $ 4,052 Finance and insurance revenue.............. 64 59 133 121 Other income............................... 11 13 22 38 ---------- ---------- ---------- ---------- Total sales and revenues............... 2,388 2,287 4,554 4,211 ---------- ---------- ---------- ---------- Costs and expenses Cost of products and services sold......... 1,908 1,824 3,656 3,368 Postretirement benefits.................... 61 65 109 114 Engineering and research expense........... 76 66 147 124 Sales, general and administrative expense.. 126 123 250 249 Interest expense........................... 33 35 68 67 Other expense.............................. 26 20 53 36 ---------- ---------- ---------- ---------- Total costs and expenses............... 2,230 2,133 4,283 3,958 ---------- ---------- ---------- ---------- Income before income taxes......... 158 154 271 253 Income tax expense................. 60 58 103 96 ---------- ---------- ---------- ---------- Net income................................. $ 98 $ 96 $ 168 $ 157 ========== ========== ========== ========== Earnings per share Basic.................................. $ 1.61 $ 1.44 $ 2.72 $ 2.37 Diluted................................ $ 1.58 $ 1.42 $ 2.68 $ 2.33 Average shares outstanding (millions) Basic.................................. 61.0 66.2 61.8 66.3 Diluted................................ 61.9 67.5 62.7 67.3 ----------------------------------------------------------------------------------------------------------- See Notes to Financial Statements.
PAGE 4 STATEMENT OF FINANCIAL CONDITION (Unaudited) ------------------------------------------------------------------------------------------------ Millions of dollars ------------------------------------------------------------------------------------------------ Navistar International Corporation and Consolidated Subsidiaries -------------------------------------------------- April 30 October 31 April 30 2000 1999 1999 ----------- ---------- ----------- ASSETS Current assets Cash and cash equivalents............. $ 480 $ 243 $ 181 Marketable securities................. 96 138 130 Receivables, net...................... 1,626 1,550 1,621 Inventories........................... 726 625 646 Deferred tax asset, net............... 221 229 179 Other assets.......................... 82 57 58 ----------- ----------- ----------- Total current assets......................... 3,231 2,842 2,815 ----------- ----------- ----------- Marketable securities........................ 99 195 276 Finance and other receivables, net........... 651 1,268 1,052 Property and equipment, net.................. 1,567 1,475 1,185 Investments and other assets................. 156 207 183 Prepaid and intangible pension assets........ 313 274 243 Deferred tax asset, net..................... 629 667 655 ----------- ----------- ----------- Total assets .............................. $ 6,646 $ 6,928 $ 6,409 =========== =========== =========== LIABILITIES AND SHAREOWNERS' EQUITY Liabilities Current liabilities Notes payable and current maturities of long-term debt ................. $ 134 $ 192 $ 135 Accounts payable, principally trade... 1,250 1,399 1,294 Other liabilities..................... 770 911 861 ----------- ----------- ----------- Total current liabilities.................... 2,154 2,502 2,290 ----------- ----------- ----------- Debt: Manufacturing operations.............. 547 445 469 Financial services operations......... 1,541 1,630 1,575 Postretirement benefits liability............ 658 634 831 Other liabilities............................ 442 426 359 ----------- ----------- ----------- Total liabilities..................... 5,342 5,637 5,524 ----------- ----------- ----------- Commitments and contingencies Shareowners' equity Series D convertible junior preference stock. 4 4 4 Common stock (75.3 million shares issued).... 2,139 2,139 2,139 Retained earnings (deficit).................. (137) (297) (682) Accumulated other comprehensive loss......... (193) (197) (340) Common stock held in treasury, at cost (16.1 million, 12.1 million and 9.6 million shares held) ........ (509) (358) (236) ----------- ----------- ----------- Total shareowners' equity............. 1,304 1,291 885 ----------- ----------- ----------- Total liabilities and shareowners' equity.... $ 6,646 $ 6,928 $ 6,409 =========== =========== =========== ------------------------------------------------------------------------------------------------ See Notes to Financial Statements.
PAGE 5 STATEMENT OF CASH FLOW (Unaudited) ------------------------------------------------------------------------------------------ For the Six Months Ended April 30 (Millions of dollars) ------------------------------------------------------------------------------------------ Navistar International Corporation and Consolidated Subsidiaries ---------------------------------- 2000 1999 ----------- ----------- Cash flow from operations Net income............................................... $ 168 $ 157 Adjustments to reconcile net income to cash provided by (used in) operations: Depreciation and amortization..................... 106 97 Deferred income taxes............................. 61 87 Postretirement benefits funding (in excess of) less than expense............... (18) 25 Other, net........................................ (9) (29) Change in operating assets and liabilities: Receivables....................................... 133 (308) Inventories....................................... (102) (139) Prepaid and other current assets.................. 4 (25) Accounts payable.................................. (162) 10 Other liabilities................................. (128) (21) ----------- ----------- Cash provided by (used in) operations................ 53 (146) ----------- ----------- Cash flow from investment programs Purchases of retail notes and lease receivables.......... (607) (670) Collections/sales of retail notes and lease receivables.. 1,001 544 Purchases of marketable securities....................... (157) (142) Sales or maturities of marketable securities............. 299 409 Capital expenditures..................................... (153) (113) Property and equipment leased to others.................. (32) (39) Investment in affiliates................................. 14 (46) Capitalized interest and other........................... (17) (34) ----------- ----------- Cash provided by (used in) investment programs....... 348 (91) ----------- ----------- Cash flow from financing activities Issuance of debt......................................... 182 97 Principal payments on debt............................... (43) (106) Net (decrease) increase in notes and debt outstanding under bank revolving credit facility and commercial paper programs ...................................... (152) 60 Purchases of common stock................................ (151) (26) Other, net............................................... - 3 ----------- ----------- Cash (used in) provided by financing activities...... (164) 28 ----------- ----------- Cash and cash equivalents Increase (decrease) during the period................ 237 (209) At beginning of the year............................. 243 390 ----------- ----------- Cash and cash equivalents at end of the period........... $ 480 $ 181 =========== =========== --------------------------------------------------------------------------------------- See Notes to Financial Statements.
PAGE 6 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 International Truck and Engine Corporation (International), formerly Navistar International Transportation Corp. As used hereafter, "company" or "Navistar" refers to Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal industry segments: truck, engine (collectively called "manufacturing operations"), and financial services. 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 1999 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 1999 amounts have been reclassified to conform with the presentation used in the 2000 financial statements. Note B. Supplemental Cash Flow Information Consolidated interest payments during the first six months of 2000 and 1999 were $65 million and $71 million, respectively. Consolidated tax payments made during the first six months of 2000 and 1999 were $21 million and $10 million, respectively. 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 United States federal income taxes will be minimal. PAGE 7 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 2000 1999 1999 ----------------------------------------------------------------------------- Finished products............... $ 415 $ 285 $ 320 Work in process................. 44 95 114 Raw materials and supplies...... 267 245 212 ----------- ----------- ----------- Total inventories........ $ 726 $ 625 $ 646 =========== =========== =========== Note E. Financial Instruments In November 1999, Navistar Financial Corporation (NFC) sold $533 million of fixed rate retail notes, net of unearned finance income, through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary of NFC, on a variable rate basis to two multi-seller asset-backed commercial paper conduits sponsored by a major financial institution. The gain on the sale was not material. NFC entered into an interest rate swap agreement to hedge the future cash flows of the amounts due from the sale of receivables. In March 2000, NFC transferred all of the rights and obligations of the swap to the conduit. Under the terms of the agreement, NFC will make or receive payments based on the differential between the transferred swap notional amount and the securitization transaction net outstanding balance. In January 2000, NFC sold $300 million of variable funding certificates, through Navistar Financial Securities Corporation, a wholly owned subsidiary of NFC, to a conduit sponsored by a major financial institution. The variable funding certificates mature in 2001. In March 2000, NFC sold $475 million of retail notes, net of unearned finance income, through NFRRC to an owner trust which, in turn, sold notes to investors. The gain on the sale was not material. In the second quarter of 2000, NFC entered into a total of $250 million of forward treasury locks and $50 million of forward starting swaps in anticipation of a July 2000 sale of retail receivables. Any gain or loss will be included in the gain or loss on the sale of receivables recognized in July 2000. The unrealized gain on these forward contracts was not material. In the second quarter of 2000, the company entered into a $41 million treasury lock in anticipation of entering into a lease in June. Any gain or loss on the lock will be offset by an adjustment in the rate on the lease. The unrealized loss on this lock was not material. In April 2000, the company entered into a $95 million forward contract which expires in 2001 to purchase outstanding common shares. As of April 30, 2000, the company held German mark and Japanese yen forward contracts with respective notional amounts of $129 million and $9 million related to committed capital equipment purchases. The company held other derivative contracts with notional amounts of $14 million. The unrealized net loss on these forward contracts was $9 million. PAGE 8 Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note E. Financial Instruments (continued) At quarter end, $103 million of a Mexican finance subsidiary's receivables were pledged as collateral for bank borrowings. Note F. Earnings Per Share 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 2000 1999 2000 1999 ---------------------------------------------------- -------- -------- -------- -------- Net income ......................................... $ 98 $ 96 $ 168 $ 157 ======== ======== ======== ======== Average shares outstanding (millions) Basic......................................... 61.0 66.2 61.8 66.3 Dilutive effect of options outstanding and other dilutive securities............ .9 1.3 .9 1.0 -------- -------- -------- -------- Diluted....................................... 61.9 67.5 62.7 67.3 ======== ======== ======== ======== Earnings per share Basic......................................... $ 1.61 $ 1.44 $ 2.72 $ 2.37 Diluted....................................... $ 1.58 $ 1.42 $ 2.68 $ 2.33
Unexercised employee stock options to purchase 1.4 million and .1 million shares of Navistar common stock during the three months ended April 30, 2000 and 1999, respectively, and to purchase .8 million and .2 million shares of Navistar common stock during the six months ended April 30, 2000 and 1999, respectively, were excluded from the computation of diluted shares outstanding because the exercise prices were greater than the average market price of Navistar common stock. Note G. Comprehensive Income Navistar's total comprehensive income was as follows: Three Months Ended Six Months Ended April 30 April 30 ---------------------- ---------------------- Millions of dollars 2000 1999 2000 1999 ---------------------------------------------------- -------- -------- -------- -------- Net income ......................................... $ 98 $ 96 $ 168 $ 157 Other comprehensive income (loss)................... (1) - 4 (9) -------- -------- -------- -------- Total comprehensive income.................... $ 97 $ 96 $ 172 $ 148 ======== ======== ======== ========
PAGE 9 Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note H. Segment Data Reportable operating segment data is as follows: Financial Millions of dollars Truck Engine Services Total ------------------------------------------------------------------------------------------------- For the quarter ended April 30, 2000 ----------------------------------------------------------------- External revenues............. $ 1,831 $ 482 $ 67 $ 2,380 Intersegment revenues......... - 191 24 215 --------- --------- -------- -------- Total revenues........... $ 1,831 $ 673 $ 91 $ 2,595 ========= ========= ======== ======== Segment profit................ $ 88 $ 79 $ 20 $ 187 For the six months ended April 30, 2000 ----------------------------------------------------------------- External revenues............. $ 3,514 $ 885 $ 139 $ 4,538 Intersegment revenues......... - 360 45 405 --------- --------- -------- -------- Total revenues........... $ 3,514 $ 1,245 $ 184 $ 4,943 ========= ========= ======== ======== Segment profit................ $ 138 $ 137 $ 45 $ 320 As of April 30, 2000 ----------------------------------------------------------------- Segment assets................ $ 1,923 $ 869 $ 2,416 $ 5,208 For the quarter ended April 30, 1999 ----------------------------------------------------------------- External revenues............. $ 1,789 $ 426 $ 62 $ 2,277 Intersegment revenues......... - 198 19 217 --------- --------- -------- -------- Total revenues........... $ 1,789 $ 624 $ 81 $ 2,494 ========= ========= ======== ======== Segment profit................ $ 96 $ 70 $ 21 $ 187 For the six months ended April 30, 1999 ----------------------------------------------------------------- External revenues............. $ 3,266 $ 786 $ 133 $ 4,185 Intersegment revenues......... - 356 35 391 --------- --------- -------- -------- Total revenues........... $ 3,266 $ 1,142 $ 168 $ 4,576 ========= ========= ======== ======== Segment profit................ $ 142 $ 119 $ 50 $ 311 As of April 30, 1999 ----------------------------------------------------------------- Segment assets................ $ 1,539 $ 662 $ 2,778 $ 4,979
PAGE 10 Navistar International Corporation and Consolidated Subsidiaries Notes to Financial Statements (Unaudited) Note H. Segment Data (continued) Reconciliation to the consolidated financial statements for the three months and six months ended April 30 is as follows: Three Months Ended Six Months Ended April 30 April 30 --------------------------- -------------------------- Millions of dollars 2000 1999 2000 1999 --------------------------------------------------------------------------------------------------------------------- Segment sales and revenues..................... $ 2,595 $ 2,494 $ 4,943 $ 4,576 Other income................................... 8 10 16 26 Intercompany................................... (215) (217) (405) (391) -------- -------- -------- -------- Consolidated sales and revenues................ $ 2,388 $ 2,287 $ 4,554 $ 4,211 ======== ======== ======== ======== Segment profit................................. $ 187 $ 187 $ 320 $ 311 Corporate items................................ (32) (30) (52) (61) Manufacturing net interest income.............. 3 (3) 3 3 -------- -------- -------- -------- Consolidated pretax income..................... $ 158 $ 154 $ 271 $ 253 ======== ======== ======== ======== As of April 30 ---------------------------- 2000 1999 ---------------------------- Segment assets................................. $ 5,208 $ 4,979 Cash and marketable securities................. 436 406 Deferred taxes................................. 850 834 Corporate intangible pension assets............ 118 121 Other corporate and eliminations............... 34 69 -------- -------- Consolidated assets............................ $ 6,646 $ 6,409 ======== ========
PAGE 11 Navistar International Corporation and Consolidated Subsidiaries Supplemental Financial Information (Unaudited) The following supplemental financial information is provided based upon the continuing interest of certain shareholders and creditors. 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 2000 1999 2000 1999 ---------------------------------------------------- -------- -------- -------- -------- Sales of manufactured products...................... $ 2,313 $ 2,215 $ 4,399 $ 4,052 Other income........................................ 8 9 16 28 -------- -------- -------- -------- Total sales and revenues...................... 2,321 2,224 4,415 4,080 -------- -------- -------- -------- Cost of products sold............................... 1,897 1,819 3,636 3,353 Postretirement benefits............................. 61 65 109 114 Engineering and research expense.................... 76 66 147 124 Sales, general and administrative expense........... 111 107 220 222 Other expense....................................... 42 39 85 74 -------- -------- -------- -------- Total costs and expenses...................... 2,187 2,096 4,197 3,887 -------- -------- -------- -------- Income before income taxes Manufacturing operations...................... 134 128 218 193 Financial services operations................. 24 26 53 60 -------- -------- -------- -------- Income before income taxes............... 158 154 271 253 Income tax expense....................... 60 58 103 96 -------- -------- -------- -------- Net income ......................................... $ 98 $ 96 $ 168 $ 157 ======== ======== ======== ======== April 30 October 31 April 30 Condensed Statement of Financial Condition 2000 1999 1999 ---------------------------------------------------- ---------- ---------- ---------- Cash, cash equivalents and marketable securities...................... $ 489 $ 386 $ 432 Inventories......................................... 688 604 626 Property and equipment, net......................... 1,279 1,188 936 Equity in nonconsolidated subsidiaries.............. 377 377 344 Other assets........................................ 1,159 1,527 1,349 Deferred tax asset, net............................. 850 896 834 ---------- ---------- ---------- Total assets................................ $ 4,842 $ 4,978 $ 4,521 ========== ========== ========== Accounts payable, principally trade................. $ 1,221 $ 1,386 $ 1,255 Postretirement benefits liability................... 799 776 959 Other liabilities................................... 1,518 1,525 1,422 Shareowners' equity................................. 1,304 1,291 885 ---------- ---------- ---------- Total liabilities and shareowners' equity... $ 4,842 $ 4,978 $ 4,521 ========== ========== ==========
PAGE 12 Navistar International Corporation and Consolidated Subsidiaries Supplemental Financial Information (Unaudited) 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 2000 1999 ---------------------------------------------------- -------- -------- Cash flow from operations Net income ....................................... $ 168 $ 157 Adjustments to reconcile net income to cash (used in) provided by operations: Depreciation and amortization................ 78 75 Deferred income taxes........................ 61 87 Postretirements benefits funding (in excess of) less than expense......... (18) 25 Equity in earnings of investees, net of dividends received........................ (20) (16) Other, net................................... (17) (25) Change in operating assets and liabilities.......... (401) (147) -------- -------- Cash (used in) provided by operations............... (149) 156 -------- -------- Cash flow from investment programs Purchases of marketable securities.................. (130) (110) Sales or maturities of marketable securities........ 276 375 Capital expenditures................................ (153) (113) Receivable from financial services operations....... 452 (455) Investment in affiliates............................ 14 (46) Capitalized interest and other...................... (17) (19) -------- -------- Cash provided by (used in) investment programs...... 442 (368) -------- -------- Cash (used in) provided by financing activities..... (49) 5 -------- -------- Cash and cash equivalents Increase (decrease) during the period............... 244 (207) At beginning of the year............................ 167 351 -------- -------- Cash and cash equivalents at end of the period...... $ 411 $ 144 ======== ======== PAGE 13 Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION RESULTS OF OPERATIONS Certain statements under this caption that are not purely historical constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. These forward-looking statements are based on current management expectations as of the date made. The company assumes no obligation to update any forward-looking statements. 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 caption "Business Environment." Second Quarter Ended April 30, 2000 ------------------------------------ The company reported net income of $98 million, or $1.58 per diluted common share for the second quarter ended April 30, 2000, compared with net income of $96 million or $1.42 per diluted common share for the comparable quarter last year. Consolidated income before income taxes was $158 million compared with pretax income of $154 million in the second quarter of 1999. The truck segment's profit decreased 8% to $88 million due to softening in the used truck market and increases in material costs. The engine segment's profit increased 13% to $79 million as a result of increased shipments of mid-range diesel engines to other original equipment manufacturers (OEMs) and improved manufacturing performance measures. The combined engine and truck segments' profit contributed to higher pretax income in the manufacturing operations of $6 million compared to the same period last year. The financial services segment's profit for the second quarter of 2000 was $20 million, which was $1 million lower than the same period last year. The decrease in second quarter profit was primarily a result of lower margins on sales of retail note receivables. Sales and Revenues. Consolidated sales and revenues for the second quarter of 2000 totaled $2,388 million, 4% higher than the $2,287 million reported for the comparable quarter in 1999. The truck segment's revenue increased slightly to $1,831 million due to favorable changes in product mix. The engine segment's revenue increased 8% to $673 million resulting from increased shipments of mid-range diesel engines to OEMs. The combined truck and engine segments' revenue resulted in a $98 million increase in sales of manufactured products compared to the same period in 1999. The financial services segment's revenue increased 12% to $91 million primarily as a result of increased retail and wholesale account and lease financing activities. United States (U.S.) and Canadian industry retail sales of Class 5 through 8 trucks totaled 121,700 units in the second quarter of 2000, which is comparable to the 122,500 units sold during this period in 1999. Class 8 heavy truck sales of 70,100 units during the second quarter of 2000 were 2% lower than the 1999 level of 71,800 units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, increased 2% to 51,600 units. Industry sales of school buses, which accounted for 19% of the medium truck market, increased slightly to 10,000 units. PAGE 14 The company's retail deliveries in the combined U.S. and Canadian Class 5 through 8 truck market decreased 6%, contributing to a decrease in market share for the second quarter of 2000 to 26.9% from 28.6% for the same period last year. (Sources: Ward's Communications and the Canadian Vehicle Manufacturers Association.) Shipments of mid-range diesel engines by the company to OEMs during the second quarter of 2000 totaled 83,200 units, a 15% increase from the same period of 1999. This increase resulted from higher shipments to Ford Motor Company to meet consumer demand for the light trucks and vans which use this engine. The engine segment's revenues increased at a lower rate than units shipped due to changes in product mix compared to the same period last year. Costs and Expenses. Manufacturing gross margin was 18.0% of sales for the second quarter of 2000 compared with 17.9% for the same period in 1999. Engineering and research expense increased $10 million from the second quarter of 1999 primarily due to the company's continuing investment in its next generation vehicle (NGV) and next generation diesel (NGD) programs. Other expense includes finance charges, insurance claims and underwriting fees, and costs associated with the company's investment in dealer operations. Six Months Ended April 30, 2000 ------------------------------- The company reported net income of $168 million, or $2.68 per diluted common share for the first six months ended April 30, 2000, compared with net income of $157 million or $2.33 per diluted common share for the comparable period last year. Consolidated pretax income for the first six months of 2000 was $271 million compared with $253 million reported for the same period of 1999. The truck segment's profit decreased 3% to $138 million due to revenue increases which were more than offset by softening in the used truck market and increases in material costs. The engine segment's profit increased by 15% to $137 million. This increase was attributable to increased shipments of mid-range diesel engines to OEMs and improved manufacturing performance measures. The combined truck and engine segments' profit contributed to a $25 million increase in pretax income in the manufacturing operations, compared to the same period last year. The financial services segment's profit decreased $5 million primarily due to a first quarter 1999 legal settlement in favor of an insurance subsidiary of the company which is included in other income. Sales and Revenues. Consolidated sales and revenues during the first six months of 2000 totaled $4,554 million, an increase of 8% from 1999. The truck and engine segments' revenue was higher by 8% and 9%, respectively. These increases were attributable to increased shipments of trucks to customers and mid-range diesel engines to other OEMs. The combined truck and engine segments' revenue resulted in a $347 million increase in sales of manufactured products, compared to the same period last year. The financial services segment's revenue increased $16 million to $184 million primarily as a result of increased retail and wholesale account and lease financing activities. PAGE 15 Industry retail sales of Class 5 through 8 trucks during the first six months of 2000 totaled 234,500 units, an increase from the 227,600 units sold during this period in 1999. Class 8 heavy truck sales of 139,200 units during the first six months of 2000 were 4% higher than the 1999 level of 133,700 units. Industry sales of Class 5, 6 and 7 medium trucks, including school buses, increased 2% to 95,300 units. Industry sales of school buses, which accounted for 18% of the medium truck market, decreased 5% to 17,500 units. The company's retail deliveries in the combined U.S. and Canadian Class 5 through 8 truck market decreased by 2%, contributing to a decrease in market share for the first six months of 2000 to 26.7% from the 27.9% reported in 1999. (Sources: Ward's Communications and the Canadian Vehicle Manufacturers Association.) Shipments of mid-range diesel engines by the company to OEMs during the first six months of 2000 totaled 154,800 units, a 19% increase from the same period of 1999 due to higher shipments to Ford Motor Company. The engine segment's revenues increased at a lower rate than units shipped due to a shift in warranty administration liability between International and its customers. Costs and Expenses. Manufacturing gross margin for the first six months of 2000 was 17.3% compared with 17.2% in 1999. Engineering and research expense increased $23 million from the first half of 1999 to $147 million primarily due to the company's continuing investment in its NGV and NGD programs. Other expense includes finance charges, insurance claims and underwriting fees, and costs associated with the company's investment in dealer operations. Liquidity and Capital Resources Cash flow is generated from the manufacture and sale of trucks and mid-range diesel engines and their associated service parts as well as from product financing and insurance coverage provided to the company's dealers and retail customers by the financial services segment. The company's current debt ratings have made sales of finance receivables the most economic source of funding for NFC. Insurance operations are self-funded. The company had working capital of $1,077 million at April 30, 2000, compared to $340 million at October 31, 1999. Cash provided by operations during the first six months of 2000 totaled $53 million primarily from net income of $168 million, $61 million of noncash deferred taxes and $79 million of other noncash items, principally depreciation, partially offset by a net change in operating assets and liabilities of $255 million. The net use of cash resulting from the change in operating assets and liabilities included a $128 million decrease in other liabilities primarily due to the timing of the payments required by the company's profit sharing and incentive programs, a $162 million decrease in accounts payable related to the timing of NGD program payments, and an increase in inventories primarily related to the timing of customer shipments and an increase in used truck inventory. These were partially offset by a $133 million decrease in accounts receivable primarily due to a net decrease in wholesale note and account balances. PAGE 16 Investment programs provided $348 million in cash primarily reflecting a net decrease in retail notes and lease receivables of $394 million and a net decrease in marketable securities of $142 million. These were partially offset by a $32 million net increase in property and equipment leased to others and $153 million of capital expenditures primarily for the NGV and NGD programs. Cash used in financing activities of $164 million resulted from a net decrease of $152 million in notes and debt outstanding under the bank revolving credit facility and other commercial paper programs, and purchases of $151 million of common stock during the first half of 2000. These decreases were partially offset by a $139 million net increase in long-term debt including $6 million of borrowings under the Mexican credit facility. NFC has traditionally obtained funds to provide financing to the company's dealers and retail customers from sales of finance receivables, commercial paper, short and long-term bank borrowings, medium and long-term debt and equity capital. As of April 30, 2000, NFC's funding consisted of sold finance receivables of $3,124 million, bank and other borrowings of $1,038 million, subordinated debt of $100 million, capital lease obligations of $360 million and equity of $298 million. Through the asset-backed markets, NFC has been able to fund fixed rate retail note receivables at rates offered to companies with investment grade ratings. During the first half of 2000, NFC sold $1,008 million of retail notes, net of unearned finance income, through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary of NFC. In November 1999, NFC sold $533 million of fixed rate retail notes on a variable rate basis to two multi-seller asset-backed commercial paper conduits sponsored by a major financial institution. NFC entered into an interest rate swap agreement to hedge the future cash flows of the amounts due from the sale of receivables. In March 2000, NFC transferred all of the rights and obligations of the swap to the conduit. Under the terms of the agreement, NFC will make or receive payments based on the differential between the transferred swap notional amount and the securitization transaction net outstanding balance. As of April 30, 2000, the remaining shelf registration available to NFRRC for the public issuance of asset-backed securities was $1,783 million. In January 2000, NFC sold $300 million of variable funding certificates, through Navistar Financial Securities Corporation (NFSC), a wholly owned subsidiary of NFC, to a conduit sponsored by a major financial institution. The variable funding certificates mature in 2001. In March 2000, NFC sold $475 million of retail notes, net of unearned finance income, through NFRRC to an owner trust which, in turn, sold notes to investors. The gain on the sale was not material. In the second quarter of 2000, NFC entered into a total of $250 million of forward treasury locks and $50 million of forward starting swaps in anticipation of a July 2000 sale of retail receivables. Any gain or loss will be included in the gain or loss on the sale of receivables recognized in July 2000. The unrealized gain on these forward contracts was not material. In April 2000, the company entered into a $95 million forward contract which expires in 2001 to purchase outstanding common shares. PAGE 17 At April 30, 2000, available funding under NFC's bank revolving credit facility and the asset-backed commercial paper facility was $302 million. When combined with unrestricted cash and cash equivalents, $332 million was available to fund the general business purposes of NFC. Also, as of April 30, 2000, NFSC had a revolving wholesale note trust that provides for the funding of $900 million of eligible wholesale notes. As of April 30, 2000, the company held German mark and Japanese yen forward contracts with respective notional amounts of $129 million and $9 million related to committed capital equipment purchases. The company held other derivative contracts with notional amounts of $14 million. The unrealized net loss on these forward contracts was $9 million. Cash flow from the company's manufacturing operations, financial services operations and financing capacity is sufficient to cover planned investment in the business. The company had outstanding capital commitments of $418 million at April 30, 2000, primarily for the NGV and NGD programs. In February 2000, Standard and Poor's raised the company's and NFC's senior debt ratings from BB+ to BBB-, and raised the company's and NFC's subordinated debt ratings from BB- to BB+. It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow will provide 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 sources will permit the financial services operations to meet the financing requirements of the company's dealers and customers. Market Risk There have been no material changes in the company's market risk exposure since October 31, 1999, as reported in the 1999 Annual Report on Form 10-K. Year 2000 As described in the 1999 Annual Report on Form 10-K, the company had instituted a corporate-wide Year 2000 readiness project to identify all systems which would require modification or replacement, and to establish appropriate remediation and contingency plans to avoid an impact on the company's ability to continue to provide its products and services. Through the date of this report, the company has not experienced any significant Year 2000 problems but will continue to monitor its critical systems over the next several months. In the event that significant issues arise, the company's contingency plans remain in place. The company's total cost of the Year 2000 project, which is funded through operating cash flows, is estimated to be $32 million including $26 million of estimated expense and $6 million of capital expenditures. Approximately $25 million has been expensed and approximately $6 million has been capitalized through April 30, 2000. The remaining costs are estimated to be incurred through the remainder of fiscal year 2000. PAGE 18 Business Environment Sales of Class 5 through 8 trucks have historically been cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates, fuel prices, driver availability and the earnings and cash flow of dealers and customers. The decrease in the number of new truck orders is in line with the company's expectations and has decreased the company's order backlog to a more normal level of 31,100 units at April 30, 2000 from 55,400 units at April 30, 1999. The company continually evaluates order receipts and backlog throughout the year and balances production with demand as appropriate. An industry-wide slowdown in orders for heavy trucks has resulted in a schedule change at the company's Chatham Assembly Plant that resulted in the layoff of approximately 400 employees in March 2000. An additional layoff of approximately 400 employees is expected to be fully implemented in July 2000 and is not expected to have a material impact on the company's financial statements. PAGE 19 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, 1999, 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 February 22, 2000. The following four nominees were elected to the Board of Directors to serve three year terms expiring at the 2003 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" -------- ------------ ---------- Y. Marc Belton 44,574,308 10,961,564 Jerry E. Dempsey 44,580,393 10,955,479 Dr. Abbie J. Griffin 44,576,946 10,958,926 Robert C. Lannert 44,606,093 10,929,779 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 John R. Horne, Michael N. Hammes, William F. Patient, William F. Andrews, John D. Correnti, Allen J. Krowe, and Paul C. Korman. 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 (b) Reports on Form 8-K: No reports on Form 8-K were filed for the three months ended April 30, 2000. PAGE 20 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/ Mark T. Schwetschenau ----------------------------------- Mark T. Schwetschenau Vice President and Controller (Principal Accounting Officer) June 13, 2000