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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
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þ☑ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended October 31, 20182020
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o☐ | 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)
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| Delaware | 36-3359573 |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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| 2701 Navistar Drive | 60532 |
| Lisle | Illinois | 60532 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (331) (331) 332-5000
Securities registered pursuant to Section 12(b) of the Act: |
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Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common stock (par value $0.10) | NAV | New York Stock Exchange |
| Cumulative convertible junior preference stock, Series D (par value $1.00) | NAV-PD | New York Stock Exchange |
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yeso☑ No þ☐
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o☐Noþ☑
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 (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yesþ☑ No o☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yesþ☑ No o☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company or an emerging growth company. See definitionthe definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one) |
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| Large accelerated filer | | þ | | Accelerated filer | | o☐ |
| Non-accelerated filer | | o☐ | | Smaller reporting company | | o☐ |
| | | Emerging growth company | | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.☑
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o☐ No þ
As of April 30, 2018,2020, the aggregate market value of common stock held by non-affiliates of the registrant was approximately $1,272$1,120 million.
As of November 30, 2018,2020, the number of shares outstanding of the registrant’s common stock was98,900,635,99,596,669, net of treasury shares.
Documents incorporated by reference: Portions of the Company's proxy statement for the 20192021 annual meeting of stockholders scheduled to be held on February 12, 2019March 2, 2021 are incorporated by reference in Part III.
NAVISTAR INTERNATIONAL CORPORATION FORM 10-K
TABLE OF CONTENTS
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| PART I |
| Item 1. | | | |
| Item 1A. | | | |
| Item 1B. | | | |
| Item 2. | | | |
| Item 3. | | | |
| Item 4. | | | |
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| PART II |
| Item 5. | | | |
| Item 6. | | | |
| Item 7. | | | |
| Item 7A. | | | |
| Item 8. | | | |
Item 8. | | | |
Item 9. | | | |
| Item 9A. | | | |
| Item 9B. | | | |
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| PART III |
| Item 10. | | | |
| Item 11. | | | |
| Item 12. | | | |
| Item 13. | | | |
| Item 14. | | | |
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| PART IV |
| Item 15. | | | |
| Item 16. | | | |
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| EXHIBIT INDEX: |
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Disclosure Regarding Forward-Looking Statements
Information provided and statements contained in this report that are not purely historical are forward-looking statements within the meaning of the federal securities laws. Such forward-looking statements only speak as of the date of this report and Navistar International Corporation assumes no obligation to update the information included in this report.
Such forward-looking statements include, but are not limited to, statements concerning:
estimates we have made in preparing our financial statements;
our expectations and estimates relating to the impact of the federal Tax Cuts and Jobs Act (the “Tax Act”) on our business and financial condition;
the implementation of, and expected benefits from, our strategic alliance with TRATON AG (formerly Volkswagen Truck & Bus AG)SE and certain of its subsidiaries and affiliates ("TRATON Group");, and the likelihood and consequences of the previously announced acquisition of the Company by TRATON SE or one of its affiliates;
our development and launch of new products and technologies;
anticipated sales, volume, demand, markets for our products, and financial performance;
anticipated performance and benefits of our products and technologies;
our business strategies relating to, and our ability to meet, federal and state regulatory heavy-duty diesel emissions standards applicable to certain of our engines, including the timing and costs of compliance and consequences of noncompliance with such standards, as well as our ability to meet other federal, state and foreign regulatory requirements;
our business strategies and short-term and long-term goals, and activities to accomplish such strategies and goals;
our ability to implement our strategy focused on growing the core business (i.e., the truck and parts markets for the United States and Canada, where we participate primarily in the Class 6 through 8 vehicle market segments (the “Core” business and “Core” markets)), driving operational excellence, pursuing innovative technology solutions, leveraging the TRATON Group strategic alliance, continuing our commitment to a customer-centric approach, enhancing cross functional teamwork and our winning culture, and improving our financial performance, as well as the results we expect to achieve from the implementation of our strategy;
our expectations related to new product launches;
anticipated results from the realignment of our leadership and management structure;
anticipated results from acquisitions, dispositions, strategic alliances, and joint ventures we complete;
our expectations and estimates relating to restructuring activities, including restructuring charges and timing of cash payments related thereto, and operational flexibility, savings, and efficiencies from such restructurings;
our expectations relating to debt refinancing activities;
our expectations relating to the potential effects of anticipated divestitures and closures of businesses;
our expectations relating to our cost-reduction actions and actions to reduce discretionary spending;
our expectations relating to our ability to service our long-term debt;
our expectations relating to our wholesale and retail finance receivables and revenues;
liabilities resulting from environmental, health and safety laws and regulations;
our anticipated capital expenditures;
our expectations relating to payments of taxes;
our expectations relating to warranty costs;
our expectations relating to interest expense;
our expectations relating to impairment of goodwill, other intangible assets and other assets;property, plant and equipment;
our expectations relating to the resolution of, and costs relating to litigation, arbitration and similar matters;
estimates relating to pension plan contributions and unfunded pension and postretirement benefits;
our expectations relating to commodity price risk, including the impact of tariff increases or potential new tariffs; and
anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.operations; and
our expectations relating to the anticipated impact that the novel strain of the coronavirus ("COVID-19") pandemic has on our business, financial condition, results of operations and cash flows.
These statements often include words such as "believe," "expect," "anticipate," "intend," "plan," "estimate," or similar expressions. These statements are not guarantees of performance or results and they involve risks, uncertainties, and assumptions. Although we believe that these forward-looking statements are based on reasonable assumptions, there are many factors that could affect our results of operations and could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause or contribute to differences in our future financial results include those discussed in Item 1A, Risk Factors, set forth in Part I, as well as those factors discussed elsewhere in this report. All future written and oral forward-looking statements by us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained herein or referred to above. Except for our ongoing obligations to disclose material information as required by the federal securities laws, we do not have any obligations or intention to release publicly any revisions to any forward-looking statements to reflect events or circumstances in the future or to reflect the occurrence of unanticipated events.
Available Information
We are subject to the reporting and information requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act") and as a result, are obligated to file annual, quarterly, and current reports, proxy statements, and other information with the United States ("U.S.") Securities and Exchange Commission ("SEC"). We make these filings available free of charge on our website (http://www.navistar.com) as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. Information on our website does not constitute part of this Annual Report on Form 10-K. In addition, the SEC maintains a website (http://www.sec.gov) that contains our annual, quarterly, and current reports, proxy and information statements, and other information we electronically file with, or furnish to, the SEC.
PART I
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). On November 7, 2020, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with TRATON SE, a Societas Europaea ("TRATON SE"), with the Company continuing as a wholly owned indirect subsidiary of TRATON SE, following completion of the merger (the "Merger"). Additional information regarding the Merger and Merger Agreement can be found in Note 22, Subsequent Events, to the accompanying consolidated financial statements. The full text of the Merger Agreement is attached as Exhibit 2.3 to this Annual Report on Form 10-K. References herein to the "Company," "we," "our," or "us" refer to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We report our annual results for our fiscal year, which ends October 31. As such, all references to 2018, 2017,2020, 2019, and 20162018 contained within this Annual Report on Form 10-K relate to the applicable fiscal year unless otherwise indicated.
Overview
We are an international manufacturer of International® brand commercial and military trucks, proprietary diesel engines, and IC Bus® ("IC") brand school and commercial buses, as well as a provider of service parts for trucks and diesel engines. We also provide retail, wholesale, and lease financing services for our trucks and parts.
Our Products and Services
Our principal products and services include:
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| • | Trucks—We manufacture and distribute Class 4 through 8 trucks and buses in the common carrier, private carrier, government, leasing, construction, energy/petroleum, military vehicle, and student and commercial transportation markets under the International® and IC brands. We design and manufacture proprietary diesel engines for our International branded trucks and military vehicles and IC branded buses. |
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| • | Parts—We support our International® brand commercial and military trucks, IC brand buses, and our proprietary engines, as well as our other product lines, by distributing proprietary products together with a wide selection of other standard truck, trailer, and engine service parts. |
Financial Services—We provide and manage retail, wholesale, and lease financing of products sold by the Truck and Parts segments, as well as their dealers, within the U.S., Canada and Mexico.
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| • | Financial Services—We provide and manage retail, wholesale, and lease financing of products sold by the Truck and Parts segments, as well as their dealers, within the U.S., Canada and Mexico. |
Our Strategy
Our Business
Our Core business is the truck and parts markets for the United StatesU.S. and Canada, where we participate primarily in the Class 6 through 8 vehicle market segments.markets. With more than a million of our trucks on the road in the United StatesU.S. and Canada, nearly one in fourfive Class 6 through 8 vehicles is an International® truck. Nearly half of all school buses on the road today are our IC brand. We have one of the largest commercial vehicle parts distribution networks in the United StatesU.S. and a captive finance company. Further, we have the industry's largest service network of approximately 1,000 dealer and Love’s Travel Stop service partner locations in North America. Outside of our Core markets, International® is one of the leading truck brands in Mexico and much of Latin America. We areAmerica, and in 2019, we began building products for the largest independent diesel engine company in Brazil, withClass 4/5 Market, including our International® CVTM product. Our wholly-owned subsidiary International-IndustriaInternational Industria Automotiva da America do Sul Ltda. (“IIAA”), formerly MWM International-IndustriaInternational Industria de Motores da America Do Sul Ltda.Ltda, is one of the largest diesel engine manufacturers in South America and whose products serve the commercial vehicle, agricultural, industrial, power generation and marine segments. We also export trucks, buses, and engines to niche markets around the world.
We continue to take actions that we believe will improve our performance and evaluate additional opportunities to enhance value for our customers. The following is a summary of our 20182020 accomplishments and our expectations going forward.
Our 2018 Accomplishments
We continue to show positive progress on our top priorities as we move from a turn-around phase to a growth phase. In 2018, we ended with a significant volume increase and we were the only brand to increase Class 8 market share.
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I. | Sales: In 2018, we increased our Class 8 market share in a strong industry environment by nearly 2%, and our Core chargeout volumes ended at 73,900. Overall Class 6-8 retail market share was higher than the prior year. Our all-makes Fleetrite® brand experienced double-digit growth year over year for our overall Parts segment (U.S., Canada, Mexico and export).
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Product Launches: We focused on our Core markets and invested in product development to increase customer value, improve our customers’ business and enhance customer experience.
Truck: In January 2018, we announced the International® HV™ Series Mid-Range Diesel which includes a bridge formula truck for the concrete industry. In March 2018, we announced the International® MV™ Series Mid-Range Diesel model, our new medium-duty truck.
Our 2020 Accomplishments
Bus: In February 2018, we announced the newly updated IC Bus® RE Series Type D school bus featuring remote diagnostics connectivity solutions. In July 2018, IC Bus® became the first school bus original equipment manufacturer (OEM) to make electronic stability control and collision mitigation standard on all IC Bus models with air brakes.
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II. | Strategic Alliance: Our strategic alliance with TRATON Group continues to progress. Within the strategic alliance, the parties formed a joint venture to make recommendations for sourcing, evaluating and negotiating joint procurement opportunities.
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The procurement joint venture2020 has continued to give us access to global scale to achieve significant cost reductions. To date, our procurement joint venture has delivered over 90% of the target the parent companies had setbeen an unprecedented year for the first 24 months. Itworld, our customers and our Company. The COVID-19 pandemic has identifiedresulted in a pipelinemultitude of additional projectsbusiness challenges that Navistar has effectively navigated as an “essential business.” Through the dedication of our employees, communities, dealer network, customers and drivers who use our products, Navistar aided in ensuring the reliable and continued movement of essential goods throughout North America. Navistar 4.0, our enterprise-wide strategy with our customers at its core, is supported by strategic initiatives that guide decision-making and investments. This strategy has guided us in the most challenging of circumstances and reinforces our confidence that we are on the right track to deliver the cumulative savings projected over the first five years.grow our business.
The rest of the strategic alliance is
In 2020, we made several notable advancements on plan to deliver technology and other synergies:our Navistar 4.0 strategy:
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| 1. | Pursuing medium-duty vehicle electric powertrain.People: Our focus on creating a high-performance organization and culture proved to be one of Navistar 4.0’s strongest pillars this past year in dealing with the COVID-19 pandemic. Our efforts resulted in our organization being able to rapidly adapt to continually changing circumstances in our business, our communities and our employees' own lives. The most notable achievements and changes we were able to implement were: |
We immediately adapted our agile and collaborative visual management-based teaming practices to online tools and practices that were quickly scaled across the organization. Once stay at home orders started, we were able to quickly train and ramp up our organization to operate remotely with minimal disruption to most operations.
Significant senior leadership changes were made that strengthen Navistar’s focus on those critical areas that will help us achieve our objectives and guide us into the future:
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| ▪ | Persio V. Lisboa became President and Chief Executive Officer. He is a strong leader with a proven record of driving results. Troy Clarke became Executive Chairman and Chairman of the Board, dedicated to ensuring a smooth leadership transition and to continue to manage discussions with Navistar's strategic partner, TRATON. |
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2.▪ | Collaborating on fullyWe integrated next generation diesel big bore powertrains.sales, marketing and aftersales under one leader to further improve the complete commercial process for customers and dealers. |
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3.▪ | Collaborating on connected vehicle hardwareTo further drive operating efficiencies, Navistar global operations, including Brazil, Mexico and service solutions.the Global Export business, have been combined under the same leadership with our current integrated operations of procurement, product development, manufacturing and supply chain. |
Navistar and our employees are also proud of being leaders in our communities in this year of the COVID-19 pandemic, and social unrest. As a company that thrives with diversity, inclusion and social engagement, Navistar leaders, dealers and employees stepped up and demonstrated our values. Some notable examples of this are:
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| ▪ | International dealers served nearly 10,000 meals to truckers all over the US and Canada. |
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III.▪ | QualityInternational Truck, Triumph Business Capital and Uptime: Triumph Pay donated more than 6,500 face masks and 6,000 bottles of hand sanitizer to drivers who came in for service at select International Truck dealerships.
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| ▪ | Our focusSouth American engine subsidiary MWM Motores provided two mobile generators to power a soccer arena in Sao Paulo that had been converted into a temporary hospital with 200 beds. |
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| ▪ | We established the “International Cares” and “IC Bus Cares” programs to provide innovative financing solutions for our customers and to offer free access to services like our fleet management tools International 360 and IC Bus 360. |
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| ▪ | We established a platform for our employees to share concerns, thoughts and ideas on improving qualitydealing with a multitude of topics going on in our world through a series of online sessions entitled “Shifting Gears.” These sessions connected employees of all backgrounds and uptime can best be seen inexperiences across Navistar helping them deal with ongoing events. |
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| ▪ | Navistar also moved quickly at the reductiononset of dealer dwell time through improvements in diagnostic and repair procedures.the COVID-19 pandemic to ensure a safe environment for our employees by aggressively implementing safety protocols at all our facilities. |
Warranty expense as a percentage
Our people are our greatest asset, and Navistar will continue to work to keep our employees safe, healthy and productive to become the employer of manufacturing revenue has decreased to 1.7%, from 2.4%choice in the prior year.industry.
Our new product command center (“Command Center”) focuses on dwell time improvement for our new products. In 2018, the percent of repairs completed in 24 hours on our new 13L A26 engine improved by 10 percentage points.
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IV.2. | OnCommand Connection (“OCC”): OCC isPerformance: Continued to create sustainable long-term performance advantage within our unique open architecture, all-brands remote diagnostics system focusingproducts and services by investing in those areas with the greatest impact on improving vehicle uptime forrevenue growth and performance. During 2020, we balanced the need to preserve financial flexibility with the ability to meet our customers.long-term financial goals under Navistar 4.0. Our notable achievements in 2020 include:
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OCC supports
Took deliberate and concerted actions to preserve liquidity and performance during the Command Center using proactive diagnostics and predictive tools.
We have over 600,000 vehicles actively reporting in OCC of which over 75% report via telematics.
We continue to add telematics partners to our portfolio.
In 2018, we launched OCC Telematics which includes access to the OCC Portal as a standard feature on our RH™, LT™ and Lonestar products.COVID-19 pandemic. Those actions included:
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V.▪ | Enhanced liquidity through completion of a $600 million senior secured notes offering. |
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| ▪ | Maintained production as an “essential business” by working closely with our supply chain. |
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| ▪ | Maintained service at parts distribution centers ("PDCs"), used truck centers and dealers, in part by leveraging e-commerce and data analytics. |
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| ▪ | Implemented IT solutions to maintain critical operations and projects to increase flexibility to work from home. |
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| ▪ | Reduced cash outflows by retiming non-critical capital improvement and IT projects, and targeted deferrals and other permanent cost reduction actions. |
Moved forward with key capital infrastructure projects, including:
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| ▪ | Broke ground on the new San Antonio, TX plant, a $250M investment that will incorporate the latest manufacturing principles - digital factory, connected machinery, robust lean manufacturing processes and cloud analytics - to enable predictive quality and maintenance, and allow data-driven decisions to be made real time on the shop floor. |
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| ▪ | Broke ground on a $125M Huntsville, AL plant expansion that will support the production of next-generation big-bore powertrains developed with the TRATON Group. |
Signed a new 20-year agreement with the city of Tulsa, OK for our bus plant that will keep the IC Bus school bus manufacturing facility at the Tulsa International Airport.
Successfully extended our relationship with Cummins Inc. ("Cummins") to supply Cummins engines through the next two greenhouse gas emissions cycles for medium duty ("MD") and heavy duty ("HD") big-bore engines.
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| • | Cost Management: Focus on lowering material costs inPiloted new dealer sales processes, capturing new customers and launching new training modules, as well as continued to expand our procurementportfolio of Fleetrite® products and engineering organizations has resulted in improved margins.the number of our dedicated retail service parts locations.
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| • | Launched the International® HX® Series, the next generation of severe service trucks in late 2020, with increased component commonality that further aligns our full product line with our Project Compass initiative. |
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| 3. | #1 Choice: Significant progress has been made in identifying and focusing on key markets where we believe we have a differentiated value proposition, defining how we will operate in each of these markets, and how to prove to our customers that we are their #1 choice. Our strategy to communicate our clear value proposition has now expanded to include electric vehicles and self-driving technology, laying the foundation for the transportation infrastructure of the future. Notable achievements in 2020 include: |
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| • | Further solidified our on-going relationship with one of the nation’s largest fleet carriers by delivering our 5,000th LT series truck in 3 ½ years. |
Announcement of our first order for 18 Electric CE school buses for the province of British Columbia in Canada. We expect to begin delivery of the units in 2021.
Formed a partnership with TuSimple, Inc. ("TuSimple"), a global self-driving technology company to co-develop SAE Level 4 self-driving trucks.
Formed partnerships with 7 leading telematics service providers ("TSP") that we believe covers at least 70% of the TSP market.
Through our NEXT e-Mobility solutions business unit, we signed a master services agreement with In-Charge Energy to provide charging infrastructure and consulting services to Navistar and our electric vehicle customers.
Became a member of CharIN E.V. which is a global association that focuses on electric vehicle adoption, to further establish Navistar as a participant in the electric future of the commercial truck industry.
Launched the industry’s first holistic suite of products designed to minimize Total Cost of Ownership ("TCO") - Intelligent Fleet Care in OnCommand Connection.
We believe that these actions, coupled with our strategic alliance, and the proposed business combination, with TRATON SE and our winning culture anchored by our high performing cross-functional teams, will continue to drive our success.
Our Expectations Going Forward
We are accelerating our Navistar 4.0 focus to achieve sustainable success and build confidence among all stakeholders. To drive the pace of our progress forward, we established seven critical strategic initiatives that evolved out of our People, Performance and #1 Choice strategic pillars to guide decision-making and investments. We will continue our intense focus on costs to fund our growth initiatives and increase profitability while preserving a foundation for future success. Going forward, we believe we are well-positioned and haveour expectations include:
Growth Initiatives
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| • | Commercial Transformationis collaborating with our International dealer network to sustainably grow truck sales. |
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| • | Uptime/ Total Cost of Ownership ("TCO") / Connectedis supporting our customers on the road better than our competitors, through technology and responsiveness. |
Profitability Initiatives
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| • | Project Compass is reducing unnecessary complexity while meeting customer needs. |
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| • | Emerging Technologiesis deploying lifecycle innovative solutions leveraging internal competencies and strategic partnerships to address new profit opportunities. This initiative is focused on electric, fuel cell, and autonomous solutions. |
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| • | Manufacturing 4.0 is combining our manufacturing and procurement expertise, along with innovative technologies, to improve quality and minimize conversion cost. |
Foundational Initiatives
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| • | People 4.0is creating a culture of trust, empowerment and accountability to build the best teams. |
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| • | Innovation is embedding into our identity the fun, curiosity and energy of problem-solving and breakthrough thinking. |
Navistar 4.0 is built upon the right strategic vision in place to build upon our 2018 accomplishments. We intend to be the number one choice and the mostright strategy. We define success as an unparalleled customer focused, innovativeexperience, mutually beneficial relationships with employees, dealers, partners, customers and value-creating trucksuppliers, and bus solution provider in the Americas. To do that, we will prioritize and focus on closing the gaps before setting the new standard. The strategic vision includes areas of focus centered around:
Customer-Centric
Operational Excellence
Core Business
Business Transformation
Strategic Alliance with TRATON Group and
Cross-Functional Teamwork and a Winning Culture
By focusing on customer and market segmentation, we believe we will be able to better alignimproved financial returns for our efforts with customer-specific applications and product requirements. We plan to continue to drive improvement of key performance metrics and we are committed to enhance customer value. We are operating with great care to execute flawless launches. We will further investigate electrification and build our eCommerce business to support our ease of doing business initiative. Together with our strategic alliance partner, TRATON Group, we expect to have a fully integrated proprietary powertrain as early as 2020, expect to launch the next generation connectivity module allowing feature sharing, and expect to launch an electric medium-duty truck and electric school bus. We intend to further develop our team-based organization, enhance collaborative work environments, and utilize visual management tools. We expect our financial performance to continue to improve due to savings from expected cost reduction actions and revenue growth.investors.
Our Operating Segments
We operate in four industry segments: Truck, Parts, Global Operations (collectively referred to as "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively referred to as "Financial Services operations"). Corporate contains those items that do not fit into our four segments. Selected financial data for each segment can be found in Note 14, 16, Segment Reporting, to the accompanying consolidated financial statements.
Truck Segment
Our Truck segment manufactures and distributes Class 4 through 8 trucks buses, and military vehicles under the International and IC brands,buses along with production of proprietary engines, primarily in the North America markets that include the U.S., Canada, and Mexico. Our Truck segment also includes our truck export business under the International and IC brands as well as products that support the military truck product lines.brands. The proprietary engines produced in North America are primarily used in our trucks and buses. Our strategygoal is to deliver the highest quality commercial trucks buses, and military vehicles. We continue to expand our markets, which includes the exportation of our truck and bus products.buses. The Truck segment is our largest operating segment based on total external sales and revenues.
We compete primarily in our Core (collectively referred to as school buses, Class 6 and 7 medium trucks, Class 8 heavy trucks and Class 8 severe service trucks) markets. The Truck segment's manufacturing operations in the U.S. and Mexico consist principally of assembling components manufactured by our suppliers, as well as designing, engineering, and producing certain sheet metal components, including truck cabs, and proprietary engines.
The Truck segment's manufacturing operations also include the production of diesel engines, which are primarily used in our trucks. The operations at our engine manufacturing facility consist principally of the assembly of components manufactured by our suppliers, as well as machining operations relating to steel and grey-iron components. We market a portion ofand distribute our commercial products through our dealers and directly to large fleets both domestically and the remainderinternationally. Additionally, through our extensive independent dealer network of 1,052 outlets in Norththe U.S. and Canada, which includes 342 of Love’s Travel Stops locations, 89 outlets in Mexico, and our export truck operations, primarily in Latin America, which offerswe provide a comprehensive range of services and other support functions to our end users. Our commercial trucks are distributed in virtually all key markets through our distribution and service network retail outlets, which is comprised of 727 outlets in the U.S. and Canada and 89 outlets in Mexico, as of October 31, 2018, and our export truck operations, primarily in Latin America.functions. In addition, our network of used truck centers and International certified used truck dealers in the U.S. and Canada provides trade-in support to our dealers and national accounts group, and markets all makes and models of reconditioned used trucks to owner-operators and fleet buyers.
The Truck business competes on many dimensions, including customer service, price, ease-of-doing-business, uptime, and parts availability. The markets in which the Truck segment competes are subject to considerable volatility and fluctuation in response to cycles in the overall business environment. These markets are particularly sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Government regulation has also impacted, and will continue to impact, trucking operations as well as the efficiency and specifications of trucking equipment.
The Class 4 through 8 truck and bus markets in North America are highly competitive. Major U.S.-controlled domestic competitors include PACCAR Inc. ("PACCAR"), which sells vehicles under the Kenworth and Peterbilt nameplates in North America, and Ford Motor Company ("Ford"). Competing foreign-controlled domestic manufacturers include Freightliner and Western Star (both subsidiaries of Daimler-Benz AG ("Mercedes Benz")), Volvo and Mack (both subsidiaries of Volvo Global Trucks), and Hino (a subsidiary of Toyota Motor Corporation ("Toyota")). Major U.S. military vehicle competitors include BAE Systems, General Dynamics Land Systems, and Oshkosh Corporation. In addition, smaller, foreign-controlled market participants such as Isuzu Motors America, Inc. ("Isuzu"), UD Trucks North America (a subsidiary of AB Volvo ("UD Trucks")), and Mitsubishi Motors North America, Inc. ("Mitsubishi") are competing in the U.S. and Canadian truck markets with primarily imported products. In Mexico, the major domestic competitors are Kenmex (a subsidiary of PACCAR) and Freightliner. In our primary truck export market of Latin America, we compete with many truck manufacturers, including PACCAR, Freightliner, and Mack.
Refer to Note 16, Segment Reporting, to the accompanying consolidated financial statements, for Truck sales to external customers.
Parts Segment
Our Parts segment provides customers with proprietary products needed to support the International commercial truck, IC Bus, proprietary engine lines, and export parts business, as well as our other product lines by providing customers with proprietary products together with a wide selection of other standard truck, trailer, and engine service parts. We distribute service parts through the dealer network that supports our trucks and engines. The Parts segment is our second largest operating segment based on total external sales and revenues.
revenues and generates a significant portion of our net income.
Our extensive dealer channel provides us with an advantage in serving our customers by having our parts available when and where our customers require service. Goods are delivered to our customers either through one of our eleventwelve parts distribution centers operated out of North America, or through direct shipment from our suppliers. We have a dedicated parts sales team within North America, as well as national account teams focused on large fleet customers. We also serve our global markets through our dedicated export business which supports customers globally in Latin America, the Middle East, northern Africa, South Africa, Europe, Australia, Asia and Russia. In conjunction with the Truck sales and technical service group, we provide an integrated support team that works to find solutions to support our customers.
TheTo be competitive, the Parts business competesSegment must focus on many dimensions including customer service, price, ease-of-doing-business, and parts availability. We sell a substantial amount of all-make parts for light-, medium- and heavy-duty trucks ("All-Make parts"), which are common across OEM truck manufacturers. We sell remanufactured parts through our ReNEWed product line and private label products through our Fleetrite brand name. The dealers and fleets have multiple outlets to purchase All-Make parts including other OEMs (including but not limited to Freightliner, PACCAR, Mack and Volvo), independent distributors, and traditional retail outlets, including Fleetpride, TruckPro, and National Auto Parts Association ("Napa"). In addition, our Uptime Parts business sells directly to customers. We sell a wide-range of proprietary parts and we are subject to varying degrees of competition for many of our proprietary parts from alternative parts-providers and independent remanufacturers.
Also included in the Parts segment is our Blue Diamond Parts, LLC ("BDP") joint venture with Ford, which manages the sourcing, merchandising and distribution of certain service parts for North America Ford diesel vehicles. Major competitors for our BDP joint venture include Alliant Power, Jasper Engine Transmissions, and Delphi Automotive. In October 2019, Ford notified the Company of its intention to dissolve the BDP joint venture effective October 2021.
Refer to Note 16, Segment Reporting, to the accompanying consolidated financial statements, for Parts sales to external customers.
Global Operations Segment
Our Global Operations segment includes businesses that derive revenue from outside our Truck and Parts segments and primarily consists of the operations of our wholly-owned subsidiary, IIAA. IIAA is a leader in the South American mid-range diesel engine market, manufacturing and distributing mid-range diesel engines and providing customers with additional engine offerings in the agriculture, marine, genset, and light truck markets. Additionally, we also sell our engines to global OEMs for various on-and-off-road applications. We offer contract manufacturing services under IIAA's MWM brand to OEMs for the assembly of their engines, particularly in South America. IIAA has a very significant dealer network and Parts Distribution Center,parts distribution center, responsible for internal and export sales of spare parts. As part of the Global Operations segment, IIAA has engine manufacturing operations in Brazil and Argentina.Brazil. The Global Operations segment is our third largest operating segment based on total external sales and revenues.
Our commercial products are marketed through our independent dealer network, which offers a comprehensive range of services and other support functions to our end users.
IIAA also has a commercial agreement with an Indian company, Mahindra Heavy Engines Ltd. ("Mahindra"), under which MWM engines (4.8L and 7.2L) are manufactured at a plant located in the Chakan Industrial Area -in the city of Pune/Pune, India. The engines produced at that plant are exclusively sold by MWM outside of the Indian market, providing a cost competitive export platform in support of the Asian markets.
In Brazil, IIAA's engines compete with Cummins, Mercedes Benz, and Fiat Powertrain ("FPT") in the light and medium truck markets; Mercedes Benz, Cummins, Scania, MAN, Volvo, and FPT in the heavy truck market; Mercedes Benz in the bus market; New Holland (a subsidiary of CNH Industrial N.V.), Sisu Diesel (a subsidiary of AGCO Corporation), and Deere & Company in the agricultural market; and Scania and Cummins in the stationary market.
Financial Services Segment
Our Financial Services segment provides and manages wholesale, retail, wholesale, and lease financing of products sold by the Truck and Parts segments and their dealers. We also finance wholesale and retail accounts receivable. Substantially all revenues earned by the Financial Services segment are derived from supporting the sales of our vehicles and products. The Financial Services segment continues to meet the primary goal of providing and managing financing to our customers in U.S., CanadaCanadian and MexicoMexican markets by providing or arranging cost-effective funding sources, while working to mitigate credit losses and impaired vehicle asset values. NFC provides wholesale financing for 100% of new truckTruck inventory sold to our dealers and distributors in the U.S. through the customary free interest period offered by NI. At October 31, 20182020 and 2017,2019, NFC retained floor plan financing for approximately 74%71% and 77%72% of the dealers, respectively, after the expiration of any free interest period. The Financial Services segment also facilitates financing relationships in other countries to support our Manufacturing Operations.
The Financial Services segment manages the relationship with Navistar Capital (a program of BMO Harris Bank N.A. and Bank of Montreal (together, "BMO")). Navistar Capital is our third-party preferred source of retail and lease customer financing for equipment offered by us and our dealers in the U.S. In addition, Navistar Capital Canada (also a BMO program) provides financing to support the sale of our products in Canada.
Government Contracts
As a U.S. government contractor, we are subject to specific regulations and requirements as mandated by our contracts. These regulations include Federal Acquisition Regulations, Defense Federal Acquisition Regulations, and the Code of Federal Regulations. We are also subject to routine audits and investigations by U.S. government agencies such as the Defense Contract Management Agency and Defense Contract Audit Agency. These agencies review and assess compliance with contractual requirements, cost structure, cost accounting, and applicable laws, regulations, and standards.
A portion of our existing U.S. government contracts extend over multiple years and are conditioned upon the continuing availability of congressional appropriations. In addition, our U.S. government contracts generally permit the contracting government agency to terminate the contract, in whole or in part, either for the convenience of the government or for default based on our failure to perform under the contract.
Engineering and Product Development
Our engineering and product development programs are focused on the development of new product introductions,products, enhancements of current products, quality improvements and continuous material cost-reductionscost reductions across our truckproduct lines, complying with future regulatory requirements, and businvestigating future technologies for our product lines. We have shifted our investment focus from engine to truck by developing driver-centric designs with world class uptime and fuel economy that incorporates industry leading connected technologies utilizing Navistar’s OnCommand Connection ("OCC") open architecture telematics solution. In 2018,2019, we completed the launch of the International® HV™ Series for the Severe Service segment and the International® MV™ Series for the Medium Duty segment. These product introductions are the continuation of the vehicle line overhaul which is the most significant product investment the Company has made in the last ten years. Additionally, we reintroduced the IC Bus’s RE type D school bus along with an 8.0L gasoline engine in the CE Bus™. Along with Propane CE Bus, we now have the most comprehensive powertrain offerings in the industry today. During the first six months of 2019, we expect to complete the launch of the Horizon suite of vehicles for the Global markets. Wemarkets and also expect to launch a brand-new Class 4/5 vehiclelaunched the International CV Series in conjunction with General Motors byCompany ("GM") for the end ofClass 4/5 market.
In 2020, Navistar’s product development programs were focused on developing advances in aerodynamics, powertrain and software systems that are increasing fuel efficiency in the calendar year.International LT and RH Series on-highway vehicles. In addition, we will be developing further enhancements for our products in our Advanced Driver Assistance Systems (“ADAS”) offerings, more fuel-efficient features, and engines to comply with the 2021 greenhouse gas (“GHG”) emissions requirements. Navistar is investingwill continue to invest in ADAS, connected technologies and electric vehicles, working with strategic suppliers and partners. We introduced our first electric school bus at the recent National Association for Pupil Transportation Annual Conference. We believe that the alliance with TRATON Group will further expand our capabilities in these areas.
We participate in very competitive markets with more stringent regulatory requirements and fasterrapid technology adoptions, and we continue to believe that our strong commitment to engineering and product development is required to drive long-term growth. Our engineering and product development costs were $321 million in 2020, compared to $319 million in 2019 and $297 million in 2018, compared to $251 million in 2017 and $247 million in 2016.2018. We expect that greenhouse gas (“GHG”)GHG phase 2 regulations announced in 2016 will drive significant investments in product development by us and our competitors.
Backlog
We define order backlogs ("backlogs") as orders yet to be built as of the end of the period. Our backlogs do not represent guarantees of purchases by customers or dealers and are subject to cancellation.
The following table provides our worldwide backlog of unfilled truck orders as of October 31, 2018 and 2017:
|
| | | | | | |
| | Units | | Value |
| As of October 31: | | | (in billions) |
| 2018 | 51,000 |
| | $ | 3.9 |
|
| 2017 | 16,000 |
| | 1.4 |
|
Production of our October 31, 2018 backlog is expected to be substantially completed during 2019. The backlog of unfilled orders is one of many indicators of market demand; factors such as changes in production rates, internal and supplier available capacity, new product introductions, and competitive pricing actions may affect point-in-time comparisons.believe these investments will likely continue through 2027.
Employees and Human Capital
As our business requirements change,Part of Navistar’s values focus on developing and maintaining a world class workforce through personal accountability, teamwork, customer service and innovation. While fluctuations may occur within our workforce from year to year. Weyear, we carefully managedmanage our attrition, approving the replacement of key positions that we believe are critical to sustaining the improved business performanceperformance. We also analyze departure data so we can continually improve upon the employee experience. Our employee turnover for US, salaried non-represented employees in 2018. For more information, see Note 2, Restructurings2020 was 11.9%.Our talent management and Impairments, tosuccession plan process at Navistar includes the accompanying consolidated financial statements.
In 2018, we sold our Cherokee, Alabama facility.identification of key positions based on current and future business strategies, the identification of potential successors, and a plan for talent development. In addition production at the Melrose Park, Illinois facility ceased on May 17, 2018. In 2017,to compliance-related training which is completed by all employees annually, we sold our Conway, Arkansas location,offer a components businessvariety of leadership training modules. Safety is also a key priority for Navistar. Employees participate in numerous training sessions focused on supplying partsthis topic and metrics are reviewed regularly. Targets for a reduction in recordable Incident Frequency Rates (“IFR”) and Lost Time Case Rates (“LTCR”) are set annually. For 2020, we collectively met our targets. We achieved an overall IFR of 0.92, meaning that for every 100 employees, 0.92 employees incurred an injury that resulted in recordable medical treatment. The LTCR was 0.26, meaning that for every 100 employees, 0.26 individuals experienced an incident that resulted in days away from work.
Navistar aligns its base and variable pay with the external market, to ensure external competitiveness while maintaining internal value or equity within the organization. Our short-term and long-term incentive plans are designed to provide a variable pay opportunity to reward the attainment of key financial and operational goals and shareholder value creation. The mix among base compensation, short-term incentives and long-term incentives is designed to align with the competitive market. Navistar provides a variety of benefits including but not limited to "Doctor On Demand™" (telemedicine), tuition reimbursement for continuing education, adoption assistance, vacation buy program, and parental leave.
Our Diversity and Inclusion vision at Navistar is to empower an inclusive, engaged and unique culture that drives a sense of belonging, and respects and celebrates our Tulsa, Oklahoma bus plant. In 2016, we sold Pure Power Technologies, LLC, a components business focused on air and fuel systems, and our engine and foundry facilities in Indianapolis, Indiana. For more information, see Note 2, Restructurings and Impairments, to the accompanying consolidated financial statements.
differences.
The following tablestable summarize the number of employees worldwide as of the dates indicated and an additional subset of active union employees represented by the United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW"), and other unions, for the periods as indicated:
| | | | As of October 31, | As of October 31, |
| | 2018 | | 2017 | | 2016 | 2020 | | 2019 | | 2018 |
| Employees worldwide: | | | | | | | | | | |
| Total active employees | 13,100 |
| | 11,400 |
| | 11,300 |
| 11,000 |
| | 12,300 |
| | 13,100 |
|
Total inactive employees(A) | 900 |
| | 900 |
| | 1,100 |
| 1,100 |
| | 1,000 |
| | 900 |
|
| Total employees worldwide | 14,000 |
| | 12,300 |
| | 12,400 |
| 12,100 |
| | 13,300 |
| | 14,000 |
|
| Total active union employees: | | | | | | | | | | |
| Total UAW | 3,300 |
| | 2,900 |
| | 3,100 |
| 2,600 |
| | 3,000 |
| | 3,300 |
|
| Total other unions | 5,100 |
| | 3,800 |
| | 2,300 |
| 3,900 |
| | 4,500 |
| | 5,100 |
|
__________________
| |
(A) | Employees are considered inactive in certain situations including disability leave, leave of absence, layoffs, and work stoppages. Included within inactive employees are approximately 300 employees as of October 31, 2016, represented by the National Automobile, Aerospace and Agricultural Implement Workers of Canada ("CAW") at our Chatham, Ontario heavy truck plant, which was closed in 2011 due to an inability to reach a collective bargaining agreement with the CAW. For more information, see Note 2, Restructurings and Impairments, to the accompanying consolidated financial statements.
|
See Item 1A, Risk Factors, for further discussion related to the risk associated with labor and work stoppages.
Patents and Trademarks
We seek and obtain patents on our inventions and own a significant patent portfolio. Additionally, many of the components we purchase for our products are protected by patents that are owned or controlled by the component manufacturer. We license third-party patents for the manufacture of our products and also grant licenses of our patents. The monetary royalties paid or received under these licenses are not material.
Our primary trademarks are an important part of our worldwide sales and marketing efforts and provide clear identification of our products and services in the marketplace. To support these efforts, we maintain, or have pending, registrations of our primary trademarks in those countries in which we do business or expect to do business. We grant licenses under our trademarks for consumer-oriented goods, such as toy trucks and apparel, outside the product lines that we manufacture. The monetary royalties received under these licenses are not material.
Supply
We purchase raw materials, parts, and manufactured components from numerous third-party suppliers. To avoid duplicate tooling expenses and to maximize volume benefits, single-source suppliers fill a majority of our requirements for parts and manufactured components. Some parts and manufactured components are generic to the industry while others are of a proprietary design requiring unique tooling, which require additional effort to relocate. However, we believe our exposure to a disruption in production as a result of an interruption of raw materials and supplies is no greater than the industry as a whole.
Our costs for trucks and parts sold consist primarily of material costs which are influenced by commodities prices such as steel, precious metals, resins, and petroleum products. We continue to look for opportunities to mitigate the effects of market-based commodity cost increases through a combination of design changes, material substitution, alternate supplier resourcing, global sourcing efforts, and hedging activities. The objective of this strategy is to ensure cost stability and competitiveness in an often volatileoften-volatile global marketplace. Generally, the impact of commodity cost fluctuations in the global market will be reflected in our financial results on a delayed basis, depending on many factors including the terms of supplier contracts, special pricing arrangements, and any commodity hedging strategies employed.
Impact of Government Regulation
Truck and engine manufacturers continue to face significant governmental regulation of their products, especially in the areas of environmental and safety matters, includingmatters. For a discussion of the impact of Environmental Regulations on our business, refer to Impact of Environmental Regulation in Item7, Management's Discussion and Analysis of Financial Condition and Results of Operations.
The tariffs imposed upon key raw materials and our products increases the amount of capital expenditures for such materials and products and the overall costs of doing business. Moreover, tariffs present uncertainty about future barriers to global trade which may require significant adjustments to our supply chain management to control the costs of operation. Such changes may result in higher costs for our products to our customers which may affect our competitive position.
Government regulation of truck and engine manufacturers' products included on-highway emissions standards which require reducing allowable particulate matter and oxides of nitrogen ("NOx"). Meeting these emissions standards resulted in a significant increase in the cost of our products.
In 2010, the initial phase-in of onboard diagnostic ("OBD") requirements commenced for the initial family of truck engines and those products were certified. The phase-in for the remaining engine families occurred in 2013. Canadian heavy-duty engine emissions regulations essentially mirror those of the U.S. Environmental Protection Agency (the "EPA"). In Mexico, we offer EPA 2004 and Euro IV engines that comply with current standards in that country. Mexico is loweringlowered NOx emission standards in 2019 and will be lowering NOx emission standards in 2021 to Euro V and VI levels, respectively. Navistar Heavy Duty Diesel ("HDD") engines meet the EURO V and VI with current controls technology.
Truck manufacturers are also subject to various noise standards imposed by federal, state, and local regulations. As the engine is one of a truck's primary sources of noise, we invest a great deal of effort to develop strategies to reduce engine noise. We are also subject to the National Traffic and Motor Vehicle Safety Act ("Safety Act") and Federal Motor Vehicle Safety Standards ("Safety Standards") promulgated by the National Highway Traffic Safety Administration ("NHTSA").
Government regulation related to climate change is under consideration at the U.S. federal and state levels. Because our products use fossil fuels, they may be impacted indirectly due to regulation, such as a cap and trade program, affecting the cost of fuels. The EPA and the NHTSA issued final rules for GHG emissions and fuel economy in 2011, which were fully implemented in model year 2017. We are complying with theseEPA and NHTSA GHG emissions rules through use of existing technologies and implementation of emerging technologies as they become available. The EPA and NHTSA adopted a final rule in October 2016 with a second phase of federal GHG emission and fuel economy regulations. This rule contains significantly more stringent emissions levels for engines and vehicles whichand, while these costs are difficult to estimate, they will require substantial investments of capital. The GHG emission standards in the rule will take effect for vehicles and engines manufactured in modelcalendar year 2021 and be implemented in three stages culminating in model year 2027. We continue to assess the impact of the rule on us and our stakeholders as we develop our product planning for that period.
Canada adopted itsCanada's version of fuel economy and GHG emission regulations in February 2013. These regulations are substantially aligned with U.S. fuel economy and GHG emission regulations. Canada has finalized heavy duty phase 2 GHG rulemaking, which is substantially similar to EPA regulations with more stringent requirements for heavy haul tractors.
In December 2014, California adopted
California's GHG emission rules for heavy duty vehicles are equivalent to EPA phase 1 rules andrules. California is in the process of adopting its phase 2 equivalent rules. In 2014 Californiarules and also adoptedhas an optional lower emission standard for oxides of nitrogen ("NOx") in California.NOx. California has stated its intention to lower NOx standards for California-certified engines and has requested that the EPA lower its standards.standards for engines manufactured in 2024 and 2027. In June 2016, several regional air quality management districts in California and other states, as well as the environmental agencies for several states, petitioned the EPA to adopt lower NOx emission standards for on-road heavy duty trucks and engines. In addition to lower NOx, EPA and the California Air Resources Board ("CARB") may consider other actions, including extending emission warranty periods. On November 14, 2018, the EPA announced the “Cleaner Trucks Initiative” which will begin the regulatory process for a reduced NOx emissions regulation while also streamlining compliance and certification requirements. In addition to lower NOx, the EPA and California may consider other actions, including extending warranty periods, mandating sales of zero emission trucks, and requiring certification of zero emission heavy duty vehicles. We willcontinue to monitor and intend to participate in this rulemaking. We expect that heavy duty vehicle and engine fuel economy and GHG emissions rules will be under consideration in other global jurisdictions in the future. These standards will require significant investments of capital, will significantly increase costs of development for engines and vehicles, and will require us to incur administrative costs arising from implementation of the standards.
The EPA also issued a finalEPA's rule in October 2015 that loweredfor the National Ambient Air Quality Standard for ozone toof 70 parts per billion. This rulebillion could lead to future lower emission standards for substances that contribute to ozone, including NOx from vehicles, at the federal and state levels. We may require additional capital expenditures to comply with such lower emission standards.
Our facilities may be subject to regulation related to environmental matters, including climate change, and climate change itself may also have some impact on our operations. However, these impacts are currently uncertain and we cannot predict the nature and scope of those impacts.impacts or the capital expenditures that we will incur as a result of such impacts and regulations.
Information About Our Executive Officers of the Registrant
The following selected information for each of our current executive officers (as defined by regulations of the SEC) was prepared as of November 30, 2018.2020.
|
| | | | |
| Name | | Age | | Position with the Company |
| | | | | |
| Persio V. Lisboa | | 55 | | President and Chief Executive Officer |
| Troy A. Clarke | | 6365 | | Executive Chairman President and Chief Executive OfficerChairman of the Board |
| Walter G. Borst | | 5658 | | Executive Vice President and Chief Financial Officer |
Persio V. Lisboa | | 53 | | Executive Vice President and Chief Operating Officer |
| William V. McMenamin | | 5961 | | President, Financial Services and Treasurer |
| Samara A. Strycker | | 4648 | | Senior Vice President and Corporate Controller |
| Curt A. Kramer | | 5052 | | Senior Vice President and General Counsel |
| Richard E. Bond | | 6567 | | Associate General Counsel and Corporate Secretary |
Troy A. Clarke
Persio V. Lisboa has served as our President and Chief Executive Officer since June 2020. Prior to holding this position, Mr. Lisboa served as Executive Vice President and Chief Operating Officer of NIC since March 2017, as President, Operations of NI from November 2014 to March 2017, as Senior Vice President, Chief Procurement Officer of NI from December 2012 to November 2014, as Vice President, Purchasing and Logistics and Chief Procurement Officer of NI from October 2011 to November 2012 and as Vice President, Purchasing and Logistics of NI from August 2008 to October 2011. Prior to these positions, Mr. Lisboa held various management positions within the Company’s North American and South American operations.
Troy A. Clarke has served as our Executive Chairman and Chairman of the Board since June 2020. Prior to holding this position, Mr. Clarke served as President and Chief Executive Officer and as a member of our Board of Directors since April 2013 and has served as Chairman of our Board of Directors since February 2017. Mr. Clarke served as our President and Chief Operating Officer from August 2012 to April 2013. Prior to holding these positions, Mr. Clarke served at NI as President of the Truck and Engine Group from June 2012 to August 2012, as President of Asia-Pacific Operations of NI from 2011 to 2012, and as Senior Vice President of Strategic Initiatives of NI from 2010 to 2011. Prior to joining NI, Mr. Clarke held various positions at General Motors Company (“GM”),GM, including President of GM North America from 2006 to 2009 and President of GM Asia Pacific from 2003 to 2006. On June 1, 2009, GM filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Walter G. Borst has served as our Executive Vice President and Chief Financial Officer since June 2013. Prior to joining NI, in 2013, Mr. Borst served as Chairman, President and CEO of GM Asset Management and Vice President of GM since 2010. Prior to that, Mr. Borst served as Vice President and Treasurer of GM from 2009 to 2010 and as Treasurer of GM from 2003 to 2009. On June 1, 2009, GM filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Persio V. Lisboa has served as Executive Vice President and Chief Operating Officer of NIC since March 2017. Prior to holding this position, Mr. Lisboa served as the President, Operations of NI from November 2014 to March 2017, as Senior Vice President, Chief Procurement Officer of NI from December 2012 to November 2014, as Vice President, Purchasing and Logistics and Chief Procurement Officer of NI from October 2011 to November 2012 and Vice President, Purchasing and Logistics of NI from August 2008 to October 2011. Prior to these positions, Mr. Lisboa held various management positions within the Company’s North American and South American operations.
William V. McMenamin has served as our President, Financial Services and Treasurer since August 2015. He has also served as President of NFC since January 2013. Mr. McMenamin served as Vice President, Chief Financial Officer and Treasurer of NFC from October 2008 to January 2013. Prior to these positions, he served as Vice President of Strategy of NFC from May 2007 to October 2008, Vice President of Credit of NFC from April 2005 to May 2007, and Director of Corporate Finance of NI from 2001 to 2005. Prior to joining Navistar, Mr. McMenamin held various positions in finance and accounting with a human resources services company, a national bank and a national accounting firm.
Samara A. Strycker has served as Senior Vice President and Corporate Controller of NIC since August 2014. Prior to joining NIC, Ms. Strycker served as Regional Controller, Americas, of General Electric Healthcare ("GE Healthcare") from July 2010 to July 2014 and prior to that position she served as Assistant Controller of GE Healthcare from September 2008 to July 2010. Prior to joining GE Healthcare, Ms. Strycker was employed at PricewaterhouseCoopers LLP from 1993 to 2008. Ms. Strycker is a Certified Public Accountant.
Curt A. Kramer has served as our Senior Vice President and General Counsel since April 2017. Prior to holding this position, Mr. Kramer served as Associate General Counsel and Corporate Secretary of NIC and NI since December 2007. Prior to holding these positions, Mr. Kramer served as General Attorney of NI from April 2007 to December 2007, Senior Counsel of NI from 2004 to 2007, Senior Attorney of NI from 2003 to 2004, and Attorney of NI from 2002 to 2003. Prior to joining NI, Mr. Kramer was in private practice.
Richard E. Bondhas served as our Associate General Counsel and Corporate Secretary since June 2017. Mr. Bond joined NI in 2009 as Assistant General Attorney and became General Attorney and Assistant Corporate Secretary in June 2015. Prior to joining NI, he served Monaco Coach Corporation as Senior Vice President, Secretary and Chief Administrative Officer from 1999 to 2009, Vice President, Secretary and Chief Administrative Officer from 1998 to 1999 and as Vice President, General Counsel and Secretary from 1997 to 1998. On March 5, 2009, Monaco filed for voluntary reorganization under Chapter 11 of the U.S. Bankruptcy Code. Prior to 1997, Mr. Bond was the senior legal officer of another recreational vehicle manufacturer, after beginning his career in private practice.
Item 1A.Risk Factors
Our financial condition, results of operations, and cash flows are subject to various risks, many of which are not exclusively within our control, which may cause actual performance to differ materially from historical or projected future performance. We have in place an Enterprise Risk Management ("ERM") process that involves systematic risk identification and mitigation covering the categories of Strategic, Financial, Operational, and Compliance risk. The goal of ERM is not to eliminate all risk, but rather to identify and assess risks; assign, mitigate and monitor risks; and report the status of our risks to the Management Risk Committee and the Board of Directors and its committees. The risks described below could materially and adversely affect our business, financial condition, results of operations, or cash flows.
COVID-19 Pandemic
Our business, financial condition, results of operations and cash flows have been and will in the future continue to be adversely affected by the COVID-19 pandemic.
We face various risks related to public health issues, including epidemics, pandemics, and other outbreaks, including the deadly global outbreak of the COVID-19 pandemic. The ongoing outbreak and resurgence of COVID-19 resulted in actions taken by international, federal, state and local public health and government authorities to contain and combat the spread of COVID-19, including travel bans, quarantines, “stay-at-home” orders, restrictions on business activities and similar requirements for individuals to restrict daily activities. These measures resulted in work stoppages at certain suppliers that are part of our supply chain, have impaired, and may continue to impair, our ability to deliver products to our customers on a timely basis. Due to supplier disruptions, we temporarily suspended operations at some facilities, including our truck and bus assembly plants in the U.S. and Mexico, as well as our engine assembly plants in the U.S. and Brazil, for various periods of time throughout the end of the second quarter. While we are considered an essential business by many state and other governments and plan to continue manufacturing operations to the extent possible, all of our scheduled production dates are subject to change based on market conditions. In the near term, it is extremely difficult or impossible to predict whether we will be forced to suspend operations again at certain plants and the duration of any such suspensions or if additional facilities will experience similar closures.
The extent of the impact of the COVID-19 pandemic on our financial condition and results of operations will depend on future developments, including the duration and scope of the COVID-19 pandemic globally, the impact on our customers and suppliers, how quickly normal economic conditions, operations and demand for our products can resume and whether any of our key markets will experience recessionary conditions resulting from the COVID-19 pandemic. We cannot predict with any certainty if or when any further disruptions will occur due to the rapidly changing environment as the COVID-19 pandemic continues to evolve. We believe that our future financial results will be impacted, but at this time, the magnitude of such impacts is uncertain. The temporary closure of certain plants, as well as other business disruptions resulting from the COVID-19 pandemic, including potential layoffs, furloughs of employees or deferral of employee compensation, may impact our ability to deliver our products to our customers on schedule. On April 13, 2020, we announced a series of cost reduction initiatives that conserved approximately $300 million in cash over the balance of our fiscal year ending October 31, 2020. Any additional cost savings initiatives or other cash actions we undertake in response to the COVID-19 pandemic, may not achieve their intended results, and may result in other adverse consequences to our business, and such impacts may be material. We currently expect that the COVID-19 pandemic will continue to negatively impact our cash flow and liquidity profile. Whether we will continue to have sufficient liquidity to meet our operating requirements, capital expenditures, investments and financial obligations on both a short-term and long-term basis is subject to a number of risks and uncertainties, including that we do not experience an extended shutdown of the majority of our manufacturing plants as a result of the COVID-19 pandemic or otherwise. For example, if we cannot service all of our obligations under our existing debt, we will have to take actions, such as reducing or delaying capital investments, selling assets, restructuring or refinancing our debt or seeking additional debt or equity capital. We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all. Our ability to restructure or refinance our debt will depend on our financial condition at such time and the condition of the capital markets, which have and may continue to be adversely affected by the COVID-19 pandemic. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business and operations as a result of any economic recession or depression that has occurred or that may occur in the future.
Additionally, the COVID-19 outbreak has significantly increased economic and demand uncertainty. The extent of a global recession caused by the COVID-19 pandemic could have an adverse impact on our financial condition and results of operations. In past recessions, demand for trucks and buses has been negatively impacted which has resulted in lower chargeouts, adverse pricing, lower parts sales and lower used truck residual values. Current economic forecasts for significant increases in unemployment in the U.S. and other regions due to the adoption of social distancing and other policies to slow the spread of COVID-19 is likely to have a negative impact on demand for our products, and these impacts could exist for an extended period of time. To the extent the COVID-19 pandemic adversely affects our business, operations, financial condition and operating results, it may also have the effect of heightening many of the other risks and uncertainties described in this “Risk factors” section and could materially adversely affect our business, financial condition, results of operations and/or stock price.
Merger Agreement with TRATON SE'S and Other Strategic Alliances
There are risks and uncertainties related to TRATON SE's pending acquisition of the Company. Failure to complete the merger could have a material adverse effect on the Company.
On January 30, 2020, we received an unsolicited proposal from TRATON SE, a Societas Europaea ("TRATON SE" or "Parent"), a subsidiary of Volkswagen AG, regarding a potential transaction to acquire all the outstanding shares of Navistar that TRATON SE did not already own (the “Remaining Shares”) for $35.00 per share in cash. On September 10, 2020, we received a revised proposal from TRATON SE to acquire the Remaining Shares for $43.00 per share in cash. On October 16, 2020, our Board of Directors confirmed that it would be prepared to move forward with a transaction in which TRATON SE would acquire the Remaining Shares for $44.50 per share in cash. On November 7, 2020, we entered into an Agreement and Plan of Merger (the "Merger Agreement") with TRATON SE and Dusk Inc., a Delaware corporation and wholly owned indirect subsidiary of TRATON SE (“Merger Subsidiary”), pursuant to which Merger Subsidiary will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving company in the Merger as a wholly owned indirect subsidiary of Parent (the “Surviving Corporation”). The failure to satisfy all of the required conditions under the Merger Agreement could delay the completion of the Merger for a significant period of time or prevent it from occurring at all. There can be no assurance that the conditions to the completion of the Merger will be satisfied or waived, that the Merger will be completed, or, if consummated, that the expected benefits of the Merger will be realized.
We have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other costs in connection with the Merger, and many of these fees and costs will be payable by us regardless of whether the Merger is consummated. Delays in the completion of the Merger, including any delays caused by the COVID-19 pandemic, could, among other things, result in additional transaction costs, loss of revenue or other negative effects associated with delay and uncertainty about completion of the Merger, and could materially and adversely impact the ongoing business, financial condition, results of operations and stock price of the Company prior to the Merger and the Surviving Corporation following completion of the Merger. For instance, if the Merger is not completed, the Merger Agreement provides for certain other customary termination rights for the Company and TRATON SE, including a termination fee in the amount of $125,000,000 (the “Termination Fee”) that will be payable by the Company to TRATON SE in connection with the termination of the Merger Agreement under certain specified circumstances. Moreover, in the event that the stockholders of the Company do not approve the Merger at the Company’s stockholder meeting, the Company must also reimburse TRATON SE and its affiliates for 100% of their documented out-of-pocket fees and expenses in an amount up to $25,000,000 actually incurred in connection with the Merger Agreement. If the Company is required to pay the Termination Fee and to reimburse TRATON SE for its expenses, the Termination Fee will be reduced by the amount paid as reimbursement for out-of-pocket fees and expenses of TRATON SE, such that the Company will not be required to pay an amount in excess of $125,000,000.
Additional information regarding the Merger and Merger Agreement can be found in Note 22, Subsequent Events, to the accompanying consolidated financial statements. The full text of the Merger Agreement is attached as Exhibit 2.3 to this Annual Report on Form 10-K.
We may not realize sufficient acceptanceachieve all of our products in the marketplace in order to achieve our goal of regaining market share.
Key elements of our operating strategy are to focus on our Core markets and regain market share following the transitionexpected benefits from our Advanced Exhaust Gas Recirculation ("EGR") only engine technologystrategic alliances and other corporate transactions, including the Merger with TRATON SE.
We cannot provide any assurances that our strategic alliances and other corporate transactions, including the Merger with TRATON SE, will generate all of the expected benefits, including the cost savings and strategic advantages that are anticipated from the strategic alliance with TRATON Group. In addition, we cannot assure you that disputes will not arise with our strategic alliance and other corporate transaction partners and that such disputes will not lead to a SCR engine technology and to pursue innovative technologies. Our success in regaining market share depends in part on our ability to achieve market acceptance of our existing and new products and to adapt to the swiftly emerging technologies which meet our customers' evolving needs. The extent to which, and the rate at which, we achieve market acceptance and penetration of our current and future products is a function of many variables including, but not limited to: price, safety, efficacy, reliability, conversion costs, competitive pressures, regulatory approvals, marketing and sales efforts, residual values, and general economic conditions affecting purchasing patterns. Any failure to gain and retain market share couldlitigation or otherwise have an adverse effect on the strategic alliances or our business, liquidity,relationships with such partners. Failure to successfully manage and integrate these strategic alliances could adversely impact our financial condition, results of operations and financial condition.cash flows. We continue to evaluate opportunities to further restructure our business in an effort to optimize our cost structure, which could include, among other actions, additional rationalization of our strategic alliances.
Growth and Profitability
We operate in the highly competitive North American truck market and theparts markets, in which we compete are subject to considerable cyclicality.cyclicality, and to remain competitive, we must maintain profitability throughout the entire cycle.
The North American truck marketand parts markets in which we operate isare highly competitive.competitive and cyclical. As a result, we and other manufacturers face competitive pricing and margin pressures that could adversely affect our ability to increase or maintain vehicle prices. Many of our competitors have greater financial resources, which may place us at a competitive disadvantage in responding to substantial industry changes, such as changes in governmental regulations that require major additional capital expenditures. In addition, certain of our competitors may have a lower overall cost structure.
In order to remain competitive, we must remain profitable throughout the entire cycle. Our ability to be profitable depends in part on the varying conditions in the truck, bus, mid-range diesel engine, and service parts markets, which are subject to cycles in the overall business environment and are particularly sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Truck and engine demand is also dependent on general economic conditions, interest rate levels and fuel costs, among other external factors.
In addition, we expect that due to the COVID-19 pandemic, the demand for school buses may be impacted in the near-term as a result of actual or potential school closures. As schools reopen, it is uncertain whether school districts will have sufficient funding to purchase school buses due to funds having been diverted or depleted due to COVID-19 requirements or necessities. Furthermore, we expect that due to fewer school buses being operated, the demand for our bus parts will be adversely impacted.
We expect that the COVID-19 pandemic will continue to adversely impact demand for our products and sales, and our financial results, including our profitability. At this time, the full magnitude of those impacts is uncertain.
Liquidity, Indebtedness and Debt Ratings
Our business has significant liquidity requirements, and while recent operating results and financing activities have improved our liquidity position, the Company’s overall credit profile and the cyclicality of the industry could have an adverse impact on our liquidity position.
Our business has significant liquidity requirements, and while our operating results over the last several years have improved our liquidity position, the Company’s overall credit profile and the cyclicality of the industry could have an adverse impact on our liquidity position. We believe that in the absence of significant extraordinary cash demands, our: (i) level of cash, cash equivalents, and marketable securities, (ii) current and forecasted cash flow from our Manufacturing operations and Financial Services operations, (iii) availability under various funding facilities, (iv) current and forecasted availability from various funding alliances, and (v) access to capital in the capital markets will provide sufficient funds to meet operating requirements, capital expenditures, investments, and financial obligations on both a short-term and long-term basis. Significant assumptions underlie our beliefs with respect to our liquidity position, including, among other things, assumptions relating to North American truck volumes, for 2019, the continuing availability of trade credit from certain key suppliers, the ability to gain and retain market share and grow revenue and margins, the absence of material adverse developments in our competitive market position, access to the capital markets orand our capital requirements includingand the upcoming maturityimpact of our April 2019 convertible notes.the COVID-19 pandemic. As a result, we cannot assure you that we will continue to have sufficient liquidity to meet our operating needs.needs over the longer term. In the event that we do not have sufficient liquidity, we may be required to seek additional capital, sell assets, reduce or cut back our operating activities or otherwise alter our business strategy.
We currently expect that the COVID-19 pandemic will continue to negatively impact our cash flow and liquidity profile. Our belief that we will continue to have sufficient liquidity to meet our operating requirements, capital expenditures, investments and financial obligations on both a short-term and long-term basis is subject to a number of risks and uncertainties, including that we do not experience an extended shutdown of the majority of our manufacturing plants as a result of the COVID-19 pandemic or otherwise. Should it become necessary, we may need to take actions, such as reducing or delaying capital investments, selling assets, restructuring or refinancing our debt or seeking additional debt or equity capital, in order to service our existing debt or other obligations. We cannot assure you that any of these remedies could, if necessary, be effected on commercially reasonable terms, or at all. Our ability to restructure or refinance our debt will depend on our financial condition at such time and the condition of the capital markets, which have and may continue to be adversely affected by the COVID-19 pandemic. Even after the COVID-19 pandemic has subsided, we may continue to experience adverse impacts to our business as a result of any economic recession or depression that has occurred or may occur in the future.
Our substantial indebtedness could adversely affect our financial condition, cash flow, and operating flexibility.
Our significant amount of outstanding indebtedness and the covenants contained in our debt agreements could have important consequences for our operations. The terms of certain of our agreements limit our ability to obtain additional debt financing to fund future working capital, acquisitions, capital expenditures, engineering and product development costs, and other general corporate requirements; however, due to the recent refinancing transactions and debt agreement amendments, we have additional incremental debt financing capacity as compared to the restrictions contained in our previous debt agreements. Other consequences for our operations could include:
increasing our vulnerability to general adverse economic and industry conditions;
limiting our ability to use operating cash flow in other areas of our business because we must dedicate a portion of these funds to make significant interest payments on our indebtedness;
limiting our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate;
limiting our ability to take advantage of business opportunities as a result of various restrictive covenants in our debt agreements; and
placing us at a competitive disadvantage compared to our competitors that have less debt, lower interest rates and/or less restrictive debt covenants.
Our ability to make required payments of principal and interest on our debt will depend on our future performance and the other cash requirements of our business. Our performance, to a certain extent, is subject to general economic, political, financial, competitive, and other factors that are beyond our control. We cannot provide any assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under certain of our debt agreements in an amount sufficient to enable us to service our indebtedness.
Our debt agreements contain certain restrictive covenants and customary events of default. These restrictive covenants limit our ability to take certain actions, such as, among other things: make restricted payments; incur additional debt and issue preferred or disqualified stock; create liens; create or permit to exist restrictions on our ability or the ability of our restricted subsidiaries to make certain payments or distributions; engage in sale-leaseback transactions; engage in mergers or consolidations or transfer all or substantially all of our assets; designate restricted and unrestricted subsidiaries; make certain dispositions and transfers of assets; limit the ability of our restricted subsidiaries to make distributions; enter into transactions with affiliates; and guarantee indebtedness. One or more of these restrictive covenants may limit our ability to execute our preferred business strategy, take advantage of business opportunities, or react to changing industry conditions. However, the refinancing transactions that closed in November 2017 (as discussed below) increase our flexibility in certain of the areas described above.
Upon an event of default, if not waived by our lenders, our lenders may declare all amounts outstanding as due and payable, which may cause cross-defaults under our other debt obligations. If our current lenders accelerate the maturity of our indebtedness, we may not have sufficient capital available at that time to pay the amounts due to our lenders on a timely basis, and there is no guarantee that we would be able to repay, refinance, or restructure the payments on such debt. Further, under an event of default, under our senior secured term loan credit facility in an aggregate principal amount of $1.6 billion, which was refinanced in November 2017 (the "Term Loan Credit Agreement"), the $225 million Recovery Zone Facility Revenue Bonds (“Tax Exempt Bonds”) which obtained a junior lien in November 2017 on certain of the assets that underlie the Term Loan Credit Agreement and our amended and restated asset-based credit agreement in an aggregate principal amount of $125 million (the "Amended and Restated Asset-Based Credit Facility") and the $600 million 9.5% Senior Secured Notes due 2025 (the "Senior Secured Notes"), the lenders for the Term Loan Credit Agreement and the Amended and Restated Asset-Based Credit Facility or the collateral agent for the Senior Secured Notes would have the right to foreclose on certain of our assets, which could have a material adverse effect on our Company.us.
Upon the occurrence of a "change of control" as specified in each of the Company's principal debt agreements, of our Manufacturing operations, we are required to offer to repurchase or repay such indebtedness. Under these agreements, a "change of control" is generally defined to include, among other things: (a) the acquisition by a person or group of at least 35 percent of our common stock, or, in the case of our 4.75% senior subordinated convertible notes due April 2019 (the "2019 Convertible Notes"), 50 percent of our common stock, (b) a merger or consolidation in which holders of our common stock own less than a majority of the equity in the resulting entity, or (c) replacement of a majority of the members of our Board of Directors by persons who were not nominated by our current directors. Under our Amended and Restated Asset-Based Credit Facility and our Term Loan Credit Agreement, a change in control would result in an immediate event of default, which would allow our lenders to accelerate the debt owed to them. Under the indentures or loan agreements for our debt securities, we may be required to offer to purchase the outstanding notes under such indentures at a premium upon a change in control. In any such event, we may not have sufficient funds available to repay amounts outstanding under these agreements, which may also cause cross-defaults under our other debt obligations. Further, under our Amended and Restated Asset-Based Credit Facility and our Term Loan Credit Agreement, the lenders could have the right to foreclose on certain of our assets, which could have a material adverse effect on our financial position and results of operations. However, each of the Company's principal debt agreements and the indentures or loan agreements for our debt securities are currently structured so that an acquisition by TRATON SE does not constitute a "change of control" so long as certain conditions are met.
Our indebtedness under our Term Loan Credit Agreement, Amended and Restated Asset-Based Credit Facility, NFC bank credit facility, Term Asset Backed Securitization, Variable Funding Notes ("VFN") and Truck Retail Accounts Corporation ("TRAC") credit facilities bears interest at variable interest rates that use the London Inter-Bank Offered Rate ("LIBOR") as a benchmark rate. On July 27, 2017, the United Kingdom's Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit LIBOR quotations after 2021 (the "FCA Announcement"). The FCA Announcement indicates that the continuation of LIBOR on the current basis cannot and will not be assured after 2023, excluding 1-week and 2-month tenors which will no longer be available after December 31, 2021, and LIBOR may cease to exist or otherwise be unsuitable for use as a benchmark. Recent proposals for LIBOR reforms may result in the establishment of new methods of calculating LIBOR or the establishment of one or more alternative benchmark rates. As a result, this change may adversely impact the interest rate paid on some of our loans, credit facilities, other financial instruments and interest rate swaps, our interest expense may increase and our available cash flow and/or financial condition may be adversely affected.
Past and potential downgrades in our debt ratings may adversely affect our liquidity, competitive position and access to capital markets.
The major debt-rating agencies routinely evaluate and rate our debt according to a number of factors, among which are our perceived financial strength and our ability to recapturegain market share. In MayApril 2020, Fitch downgraded our corporate rating by one level and July 2018, Moody’s,certain of the ratings of our other debt securities by one to two levels. Additionally, S&P and Fitch reaffirmed our corporate rating and the ratings of all but one of our securities as the NFC senior secured bank credit facility was upgraded by one level to B+ by Fitch. Additionally, each rating agency alsoMoody’s changed their rating outlook in February 2020 from Stable to Positive during that same period.after the initial TRATON SE non-binding proposal to purchase the Company in January 2020. In response to the COVID-19 pandemic, all three rating agencies revised their outlook to Negative in April 2020. In October 2020, following the subsequent increase in the TRATON SE offer, S&P revised our outlook to CreditWatch Positive and Moody’s revised our outlook to Stable. The rating agencies have noted concerns with respect to our high levels of debt but expect continued improvement in our credit metrics and cash flow generation. However, any material deterioration in our market share, recovery, warranty expense, earnings or cash flow generation could lead to a downgrade by the rating agencies in our credit ratings. Any downgrade in our credit ratings and any resulting negative publicity could adversely affect our continued access to trade credit on customary terms as well as our ability to access capital in the future under acceptable terms and conditions.
Our ability to execute our strategy is dependent upon our ability to attract, trainFinancial Condition, Results of Operations and retain qualified personnel.
Our continued success depends, in large part, on our ability to identify, attract, develop, motivate and retain qualified employees in key functions and geographic areas. We have significant operations in foreign countries, including Canada, Mexico and Brazil, and, to effectively manage our global operations, we will need to engage our workforce around the world throughout their entire employee lifecycle.
In prior years we experienced the loss of certain personnel in connection with our reductions-in-force and voluntary separation programs. In the wake of those losses, we achieved a leaner and targeted workforce while reducing and controlling costs. However, the need to focus on engaging our workforce throughout the employee life cycle and creating sustained high performance remains a critical focus for our organization. Failure to do so could impair our ability to execute our business strategy and could have an adverse effect on our business prospects.
Our parts business may be negatively impacted by our engine strategy.
As a result of our decision to use third party engines in some of our products and declining units in operation due to lower market share in recent years, we expect to experience a decline over time in our engine-related parts business revenue. In addition, our agreement to supply diesel engines to Ford in North America ended in December 2009. A primary business purpose of BDP is to supply aftermarket parts supporting the diesel engines supplied to Ford. We have experienced declines in BDP’s engine-related parts sales and profitability, and we expect to see further declines as the diesel engines transition out of service in the future.
There is inherent uncertainty in warranty estimates that may affect our operating results and cash flow.
Warranty estimates are established using historical information about the nature, frequency, timing, and average cost of warranty claims. However, warranty claims inherently have a high amount of variability in timing and severity and can be influenced by many external factors. We accrue warranty related costs under standard warranty terms for the trucks and engines that we manufacture. We also accrue warranty related costs for certain claims made outside the contractual obligation period as accommodations to our customers. In addition, with respect to our optional extended warranty contracts, we recognize losses on defined pools of extended warranty contracts when the expected costs for a given pool of contracts exceeds the related unearned revenues.
We have substantially reduced the number of our engine offerings which has reduced our new product warranty accruals and potentially reduces the warranty exposure associated with engine specific service contracts over time.
In 2016 and 2017, we refreshed our truck model line-up and introduced a new big bore 13L engine under the A26 brand. Historically, warranty claims in product launch years have been higher compared to prior model years. We continue to refine the design and manufacturing processes to reduce the volume and severity of warranty claims. We may incur additional charges for recalls and field campaigns to address issues as we identify opportunities to improve the design, efficiency, and manufacturing of our products. These charges could have an adverse effect on our financial condition, results of operations and cash flows.
We may discover defects or other issues in vehicles potentially resulting in delays in new model launches, recall campaigns, or increased warranty costs.
Meeting or exceeding many government-mandated safety standards is costly and often technologically challenging. Government safety standards require manufacturers to remedy defects related to motor vehicle safety through safety recall campaigns, and a manufacturer is obligated to recall vehicles if it determines that they do not comply with a safety standard. In addition, we may decide to take action with respect to a product issue not related to safety. Should we or government safety regulators determine that a safety standard noncompliance, safety-related defect or other product issue exists with respect to certain types of our vehicles, there could be a delay in the launch of a new model or a significant increase in warranty claims or a recall for existing models, the costs of which could be substantial.
Additionally, if we experience failure in some of our emissions components and the emission component defect rates of our engines exceed a certain level set by CARB and the EPA, those engines may be subject to corrective actions by these agencies, which may include extending the warranties of those engines. This could increase exposure beyond the stated warranty period to the relevant regulatory useful life of the engine, and these actions could have an adverse effect on our financial condition, results of operations and cash flows.
We could incur restructuring and impairment charges as we continue to evaluate our portfolio of assets and identify opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure.
We continue to evaluate our portfolio of assets in order to validate their strategic and financial fit. To allow us to increase our focus on our North American Core business, we are evaluating product lines, businesses, and engineering programs that fall outside of our Core business. We are assessing the strategic fit to our Core business, to identify areas that are under-performing and/or non-strategic. For under-performing and non-strategic areas, we are evaluating whether to fix, divest, or close those areas. In addition, we are evaluating opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure. These actions could result in restructuring and related charges, including but not limited to asset impairments, employee termination costs, charges for pension and other postretirement contractual benefits, potential additional pension funding obligations, and pension curtailments, any of which could be significant, and could adversely affect our financial condition and results of operations.
We have substantial amounts of long-lived assets, including goodwill and intangible assets, which are subject to periodic impairment analysis and review. Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition, and general economic conditions, requires significant judgment. Declines in profitability due to changes in volume, market pricing, cost, or the business environment could result in charges that could have an adverse effect on our financial condition and results of operations.
Our Manufacturing operations are dependent upon third-party suppliers, including, in certain cases, single-source suppliers, making us vulnerable to supply shortages.
We obtain raw materials, parts and manufactured components from third-party suppliers. Any delay in receiving supplies could impair our ability to deliver products to our customers and, accordingly, could have an adverse effect on our business, financial condition, results of operations, and cash flows. The volatility in the financial markets and uncertainty in the automotive sector could result in exposure related to the financial viability of certain of our suppliers. Suppliers may also exit certain business lines, causing us to find other suppliers for materials or components and potentially delaying our ability to deliver products to customers, or our suppliers may change the terms on which they are willing to provide products to us, any of which could adversely affect our financial condition and results of operations. In addition, many of our suppliers have unionized workforces that could be subject to work stoppages as a result of labor relations issues. Some of our suppliers are the sole source for a particular supply item (e.g., the majority of engines, parts and manufactured components) and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required by another supplier in order to provide the component or materials. In addition to the risks described above regarding interruption of supplies, which are exacerbated in the case of single-source suppliers, the exclusive supplier of a component potentially could exert significant bargaining power over price, quality, warranty claims or other terms relating to a component.
We are exposed to, and may be adversely affected by, interruptions to our computer and information technology systems and sophisticated cyber-attacks.
We rely on our information technology systems and networks in connection with many of our business activities. Some of these networks and systems are managed by third-party service providers and are not under our direct control. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to our business, customers, dealers, suppliers, employees and other sensitive matters. As with most companies, we have experienced cyber-attacks, attempts to breach our systems and other similar incidents, none of which have been material. Any future cyber incidents could, however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise personally identifiable information regarding customers or employees; and jeopardize the security of our facilities. A cyber incident could be caused by malicious outsiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware and other cyber-attacks are increasing in both frequency and sophistication and could create financial liability, subject us to legal or regulatory sanctions or damage our reputation with customers, dealers, suppliers and other stakeholders. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology event could have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flows.Cash Flow
We have significant underfunded postretirement obligations.
On a U.S. generally accepted accounting principles ("GAAP") basis, the underfunded portion of our projected benefit obligation was $1.2$1.4 billion and $1.4$1.3 billion for pension benefits at October 31, 20182020 and 2017,2019, respectively, and $0.9 billion$347 million and $1.1 billion$804 million for postretirement healthcare benefits at October 31, 20182020 and 2017,2019, respectively. In calculating these amounts, we have assumed certain mortality rates, interest rates and growth rates of retiree medical costs. The fair value of invested assets held in our postretirement benefit plans are measured at October 31 each year and are used to compute funded status. Future mortality assumption changes and growth rates of retiree medical costs actually experienced by the postretirement benefit plans, as well as reductions in interest rates, government or pharmaceutical company reimbursements, gainshare amounts from insurance companies and the investment performance of the assets, could have an adverse impact on our underfunded postretirement obligations, financial condition, results of operations and cash flows.
The continued restructuring and rationalization of our business could also accelerate our pension funding obligations under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"). The volatility in the financial markets affects the valuation of our pension assets and liabilities, resulting in potentially higher pension costs and higher levels of under-funding in future periods. TheEven though our funding requirements over the next two years would have been higher without the pension funding relief legislation, Preservation of Access to Care for Medicare Beneficiaries and Pension Relief Act of 2010, the Moving Ahead for Progress in the 21st Century Act ("MAP-21 Act"), the Highway and Transportation Funding Act of 2014 ("HATFA") and the Bi-Partisan Budget Act of 2015, as well as possible future legislative or governmental agency relief the requirements set forth in ERISA and the Internal Revenue Code of 1986, as amended (the "IRC"), as applicable to our U.S. pension plans (including timing requirements) mandated by the Pension Protection Act of 2006 (the "PPA") to fully fund our U.S. pension plans, net of any current or possible future legislative or governmental agency relief, could also have an adverse impact on our business, financial condition, results of operations and cash flows even thoughflows.
Our parts business may be negatively impacted by our engine strategy.
As a result of our decision to use third party engines in some of our products and a decline in operation of certain units due to lower market share in recent years, we are experiencing a decline in our engine-related parts business revenue. BDP supplies aftermarket parts to support the diesel engines supplied to Ford prior to December 2009. We have experienced declines in BDP’s engine-related parts sales and profitability, and we expect to see further declines as diesel engines transition out of service and due to the future termination of the BDP joint venture in October 2021.
We could incur further restructuring and impairment charges as we continue to evaluate our portfolio of assets and identify opportunities to restructure our business and rationalize our Manufacturing operations to optimize our cost structure.
We continue to evaluate our portfolio of assets in order to validate their strategic and financial fit. To focus on our North American Core business, we have evaluated product lines, businesses, and engineering programs that fall outside of our Core business. We assessed the strategic fit to our North American Core business and identified areas that were under-performing and/or non-strategic. For those under-performing and non-strategic areas remaining, we continually evaluate whether to fix, divest, or close those areas. In addition, we are evaluating opportunities to restructure our business and rationalize our Manufacturing operations to optimize our cost structure. These actions could result in restructuring and related charges including, but not limited to, asset impairments, accelerated depreciation, employee termination costs, charges for pension and other postretirement contractual benefits, potential additional pension funding relief legislation, Preservationobligations, and pension curtailments, any of Accesswhich could be significant, and could adversely affect our financial condition and results of operations.
We have substantial amounts of long-lived assets, including goodwill, property, plant and equipment, and intangible assets, which are subject to Careperiodic impairment analysis and review. Identifying and assessing whether impairment indicators exist, or if events or changes in circumstances have occurred, including market conditions, operating results, competition, and general economic conditions, requires significant judgment.
Declines in profitability due to changes in volume, market pricing, cost, or the business environment could result in charges that could have an adverse effect on our financial condition and results of operations.
Disruptions to our business as a result of the COVID-19 pandemic may lead to the evaluation and material impairment of our long-lived assets, intangible assets and goodwill. During 2020, we identified triggering events in both our Truck and Global Operations segments related to the impacts of the COVID-19 pandemic. As a result, we tested the long-lived assets and determined the carrying value was impaired and recognized charges of $16 million and $12 million in our Truck and Global Operations segments, respectively.
Pricing allowances and sales incentives offered to customers can be influenced by many external factors which may affect our operating results and cash flow.
Pricing allowances and sales arrangements with customers are often complex and non-standard, and may include other sales incentives, such as rebates, residual value support and financing incentives. Such pricing allowances and sales arrangements may have terms which could have an adverse effect on our financial condition, results of operations and cash flows.
Warranty, Safety Standards and Emissions
Warranty claims and related costs often have high variability and can be influenced by many external factors which may affect our operating results and cash flow.
Warranty estimates are established using historical information about the nature, frequency, timing, and average cost of warranty claims. However, warranty claims inherently have high variability in timing and severity and can be influenced by many external factors. As a result, actual warranty related costs may vary from the accruals for Medicare Beneficiarieswarranty related costs. We accrue warranty related costs for the trucks and Pension Relief Actengines that we manufacture under standard warranty terms and for certain claims made outside the contractual obligation period as accommodations to our customers. In addition, with respect to our optional extended warranty contracts, we recognize losses on defined pools of 2010,extended warranty contracts when the Moving Aheadexpected costs for Progressa given pool of contracts exceeds the related unearned revenues. Over time, we have substantially reduced our engine offerings, thereby reducing our new product warranty accruals and potentially reducing the warranty exposure associated with engine specific service contracts. Although we continue to identify opportunities to refine and improve the design, efficiency and manufacturing of our products to reduce the volume and severity of warranty claims, we may incur additional charges for recalls or field campaigns to address issues which arise during this process. These charges could have an adverse effect on our financial condition, results of operations and cash flows.
We may discover defects or other issues in vehicles potentially resulting in delays in new model launches, recall campaigns, or increased warranty costs.
Meeting or exceeding many government-mandated safety standards is costly and often technologically challenging. Government safety standards require manufacturers to remedy defects related to motor vehicle safety through safety recall campaigns. A manufacturer is obligated to recall vehicles if it determines that they do not comply with a safety standard or contain a safety-related defect. In addition, we may decide to take action with respect to a product issue not related to safety. Should we or government safety regulators determine that a safety standard noncompliance, safety-related defect or other product issue exists with respect to certain types of our vehicles, there could be a delay in the 21st Century Act ("MAP-21 Act")launch of a new model or a significant increase in warranty claims or a recall for existing models, the costs of which could be substantial. Our partnerships with other companies in engine or vehicle development can increase this risk due to the added complexity inherent in such an effort. Additionally, if we experience failure in some of our emissions components and the Highwayemission component defect rates of our engines exceed a certain level set by the California Air Resources Board ("CARB") or the EPA, those engines may be subject to corrective actions by such agencies, which may include extending the warranties of those engines. This could increase exposure beyond the stated warranty period to the relevant regulatory useful life of the engine which could have an adverse effect on our financial condition, results of operations and Transportation Funding Actcash flows. In addition, our role as secondary engine manufacturer or as emissions certification holder for engines primarily manufactured by other companies could impair our identification of 2014 ("HATFA")defects and increase the Bi-Partisan Budget Actchance of 2015, will reduce our funding requirements over the next four years.warranty costs or recalls.
Implementation of our emissions strategy, federal regulations and fuel economy rules may increase costs.
Recent and future changes to on-highway emissions or performance standards (including fuel efficiency, noise, and safety), as well as compliance with additional environmental requirements, are expected to continue to add to the cost of our products and increase the engineering and product development programs of our business. Implementation of our emissions strategy is ongoing and we may experience increased costs or compliance or timing risks as we continue implementation of OBDOn Board Diagnostics ("OBD") systems requirements as they phase in and manage GHG emission credit balances. The EPA, the U.S. Department of Transportation and the government of Canada have issued final rules on GHG emissions and fuel economy for medium and heavy duty vehicles and engines. The emission standards establish required minimum fuel economy and GHG emissions levels for both engines and vehicles primarily through the increased use of existing technology. The rules, which apply to our engines and vehicles, initially required EPA certification for vehicles and engines to GHG emissions standards in calendar year 2014 and were fully implemented in model year 2017. EPA and NHTSA adopted a second phase of GHG emissions reductions that will apply in three emission standards beginning in model year 2021 and culminating in model year 2027. These rules reduce emission levels for engines and vehicles. In addition,
California has also adopted GHGEPA emissions standards, for heavy duty vehicles and engines, stated its intention tois in the process of adopting Omnibus Low NOx regulations which would establish lower NOx standards for California certified engines and requested EPA to lowerengine NOx emission standards as well. In additionin both 2024 and 2027 and is taking further steps to lower NOx, EPA and California may consider other actions, including extendingextend warranty periods mandating salesand adopt stricter initial and compliance testing requirements. California is also in the process of establishing the Advanced Clean Trucks rule, a mandate requiring medium and heavy-duty vehicle manufacturers to sell an increasing minimum percentage of zero emission trucks, and requiring certification of zero emission heavy duty vehicles. vehicles from 2024 through 2035.
In November 2018, the EPA announced its intent to update the heavy-duty commercial vehicle NOx standards; however, such updates have not yet been published.
In addition, we are responsible for emission certification for certain partner companies which can introduce complexity into the certification process.
These standards will require significant investments of capital, will significantly increase costs of development for engines and vehicles, and will require us to incur administrative costs arising from implementation of the standards. These regulatory proposals under consideration or those that are proposed in the future may set standards that are difficult to achieve or adversely affect our results of operations due to increased research, development, and warranty costs.
Supply Chain
Our Manufacturing operations are dependent upon third-party suppliers, including, in certain cases, single-source suppliers, making us vulnerable to supply shortages.
Third-party suppliers provide us with raw materials, parts and manufactured components (“Third Party Supplies”). Any delay in receiving Third Party Supplies could impair our ability to deliver products to our customers and, accordingly, could have an adverse effect on our business, financial condition, results of operations, and cash flows. The volatility in the financial markets and uncertainty in the automotive sector could result in exposure related to the financial viability of certain of our suppliers. Suppliers may also exit certain business lines, causing us to find other suppliers for materials or components. Finding new suppliers could potentially delay our ability to timely deliver products to customers and such new suppliers may also change the terms on which they are willing to provide products to us, any of which could adversely affect our financial condition and results of operations. In addition, many of our suppliers have unionized workforces that could be subject to work stoppages as a result of labor relations issues. The outbreak of COVID-19 resulted in work stoppages at certain suppliers that are part of our supply chain. The ongoing impact of the COVID-19 pandemic could result in additional work stoppages at our suppliers in the future. Due to the resulting supplier disruptions, we temporarily suspended all production at our truck and bus assembly plants in the U.S. and Mexico and our engine assembly plants in the U.S and Brazil for various periods of time throughout the end of the second quarter. All manufacturing operations at our plants are subject to change based on market conditions, component supplier disruptions, government regulations, and the continued spread and impact of the COVID-19 pandemic. If work stoppages were to be implemented again, there could be resulting supply shortages that could impact our ability to deliver our products to our customers on schedule and, accordingly, could have an adverse effect on our business, financial condition, results of operations, and cash flows. Some of our suppliers are the sole source for a particular supply item (e.g., the majority of engines, parts and manufactured components) and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required by another supplier in order to provide the component or materials. Even as production resumes by us and our suppliers, production volumes may be volatile and we may need to modify our production environment to ensure the health and safety of our workers and customers. If we are unsuccessful in managing a re-start of our production, our results of operations may be materially affected. In addition to the risks described above regarding interruption of Third Party Supplies, which are exacerbated in the case of single-source suppliers, the exclusive supplier of a component potentially could exert significant bargaining power over price, quality, warranty claims or other terms relating to a component.
Human Capital
Our ability to execute our strategy is dependent upon our focus on talent management.
Our continued success depends, in large part, on our ability to identify, attract, develop, motivate and retain qualified employees in key functions and geographic areas, including the U.S., Canada, Mexico and Brazil. To effectively manage our domestic and global operations, we will continue engaging our workforce throughout the entire employee lifecycle to create sustained high performance for our organization. Failure to focus on all aspects of talent management could impair our ability to execute our business strategy and could have an adverse effect on our business prospects.
The COVID-19 pandemic has heightened the risk that a portion of our workforce will suffer illness or otherwise be unable to work. The COVID-19 pandemic may also result in potential layoffs, furloughs or salary reductions of employees, which could have an adverse effect on our ability to attract, train and retain qualified personnel in the future.
Our business may be adversely impacted by work stoppages and other labor relations matters.
We are subject to risk of work stoppages and other labor relations matters because a significant portion of our workforce is unionized. As of October 31, 2018,2020, approximately 8,2006,500 of our hourly workers and approximately 700 of our salaried workers were represented by labor unions and were covered by collective bargaining agreements. Many of these agreements include provisions that limit our ability to realize cost savings from restructuring initiatives such as plant closings and reductions in workforce. Our currentIn January 2019, certain of our UAW represented employees executed a new six-year master collective bargaining agreement with a ratification date of December 17, 2018 that replaced the United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW")prior agreement which expired in October 2018 and we are currently in negotiations with the UAW to enter into a new collective bargaining agreement.2018.
Any strikes, threats of strikes, arbitration or other resistance in connection with the negotiation of new labor agreements, or increases in costs under a newly negotiated labor agreement, could adversely affect our business as well as impair our ability to implement further measures to reduce structural costs and improve production efficiencies. A lengthy strike that involves a significant portion of our manufacturing facilities could have an adverse effect on our financial condition, results of operations, and cash flows.
We
Environmental, Health and Safety
Our operations are involved in pending litigation,subject to environmental, health and an adverse resolution of such litigation maysafety laws and regulations that could adversely affect our business, financial condition,condition.
Our operations are subject to environmental, health and resultssafety laws and regulations, including those governing discharges to air and water; the management and disposal of hazardous substances; the cleanup of contaminated sites; and health and safety matters. We could incur material costs, including cleanup costs, civil and criminal fines, penalties and third-party claims for cost recovery, property damage or personal injury as a result of violations of or liabilities under such laws and regulations. Contamination has been identified at and in the vicinity of some of our current and former properties and at properties which received wastes from current or former Company locations for which we have established financial reserves. The ultimate cost of remediating contaminated sites is difficult to accurately predict and could exceed our current estimates. In addition, as environmental, health, and safety laws and regulations have tended to become stricter, we could incur additional costs complying with requirements that are promulgated in the future. These include climate change regulation, which could increase the cost of operations through increased energy costs.
Stockholder Influence and cash flows.
Litigation can be expensive, lengthy, and disruptive to normal business operations. The results of complex legal proceedings are often uncertain and difficult to predict. An unfavorable outcome of a particular matter described in our periodic filings or any future legal proceedings could have an adverse effect on our business, financial condition, and results of operations or cash flows.
We are currently involved in a number of pending litigation matters. For additional information regarding certain lawsuits in which we are involved, see Note 13, Commitments and Contingencies, to our consolidated financial statements.Governance
A small number of our stockholders have significant representation on and influence over our Board of Directors.
In October 2012, we entered into settlement agreements with two of our significant stockholders, Carl C. Icahn and several entities controlled by him (collectively, the "Icahn Group") and Mark H. Rachesky, MD, and several entities controlled by him (collectively, the "MHR Group") pursuant to which the Icahn Group and the MHR Group each had one representative appointed to our Board of Directors, and together the Icahn Group and the MHR Group mutually agreed upon a third representative appointed to our Board of Directors. In July 2013, we entered into amended settlement agreements with the Icahn Group and the MHR Group pursuant to which the Icahn Group and the MHR groupGroup each had two representatives nominated for election as directors at our 2014 annual meeting, and each has continued to have two representatives nominated for election each year. On September 5, 2016, we entered into a Stockholder Agreement with TRATON Group which, among other things, provides for the appointment of two individuals designated by TRATON Group to our Board of Directors, subject to our approval, and on February 28, 2017, we appointed the two individuals designated by TRATON Group to our Board of Directors. As of October 31, 2018,2020, based on filings made with the SEC and other information made available to us as of that date, we believe that: (i) the Icahn Group held approximately 16.7 million shares, or 16.9%16.8% of our outstanding common stock, (ii) the MHR Group held approximately 16.3 million shares, or 16.5%16.4% of our outstanding common stock, (iii) TRATON Group held approximately 16.6 million shares, or 16.8%16.7% of our outstanding common stock, and (iv) the Icahn Group, the MHR Group, TRATON Group, and two other stockholders, collectively hold approximately 70%66% of our outstanding common stock.
As a result of the foregoing, these stockholders are able to exercise significant influence over the election of our Board of Directors as well as matters requiring stockholder approval. Further, this concentration of ownership may adversely affect the market price of our common stock.
Provisions in our charter, by-laws, and by-laws,the Merger Agreement and Delaware law could delay and discourage takeover attempts that stockholders may consider favorable.
Certain provisions of our certificate of incorporation and by-laws, and applicable provisions of Delaware corporate law, may make it more difficult for a third party to acquire control of us or change our Board of Directors and management, or may prevent such an acquisition or change. These provisions include:
the ability of our Board of Directors to issue so-called "flexible" preferred stock;
a provision for any vacancies on our Board of Directors to be filled only by the remaining directors;
the inability of stockholders to act by written consent or call special meetings;
advance notice procedures for stockholder proposals to be brought before an annual meeting of our stockholders; and
Section 203 of the Delaware General Corporation Law, which generally restricts us from engaging in certain business combinations with a person who acquires 15% or more of our common stock for a period of three years from the date such person acquired such common stock, unless stockholder or Board approval is obtained prior to the acquisition
The foregoing provisions may adversely affect the marketability of our common stock by discouraging potential investors from acquiring our stock. In addition, these provisions could delay or frustrate the removal of incumbent directors and could make more difficult a merger, tender offer or proxy contest involving us, or impede an attempt to acquire a significant or controlling interest in us, even if such events might be beneficial to us and our stockholders.
We must comply with numerous federal security laws, procurement regulations,
In addition, the Merger Agreement contains "no-shop" provisions placing certain restrictions and procedures, as well asrequirements on the rules and regulationsability of foreign jurisdictions, and our failureBoard of Directors to comply could adversely affect our business.
We must observe laws and regulations relatingconsider other offers to acquire the formation, administration and performance of federal government contracts that affect how we do business with our clients and impose added costs on our business. For example,Company until the Federal Acquisition Regulations, Defense Federal Acquisition Regulation Supplement, foreign government procurement regulations and the industrial security regulationsclosing of the Department of Defense and related laws include provisions that:
allow our government clients to terminateMerger or not renew our contracts if we come under foreign ownership, control or influence;
allow our government clients to terminate existing contracts for the conveniencean earlier termination of the government;Merger Agreement.
require us to prevent unauthorized access to classified information;NOLs and
require us to comply with laws and regulations intended to promote various social or economic goals.
We are subject to industrial security regulations of the U.S. Departments of State, Commerce and Defense and other federal agencies that are designed to safeguard against foreigners' access to classified or restricted information. Similarly, our international operations are subject to the rules and regulations of foreign jurisdictions. If we were to come under foreign ownership, control or influence, we could lose our facility security clearances, which could result in our federal government clients terminating or deciding not to renew our contracts and could impair our ability to obtain new contracts.
A failure to comply with applicable laws, regulations, policies or procedures, including federal regulations regarding the procurement of goods and services and protection of classified information, could result in contract termination, loss of security clearances, suspension or debarment from contracting with the federal government, civil fines and damages and criminal prosecution and penalties, any of which could adversely affect our business.
Our products are subject to export limitations and we may be prevented from shipping our products to certain nations or buyers.
We are subject to federal licensing requirements with respect to the sale and support in foreign countries of certain of our products and the exporting of components for our products in foreign countries. In addition, we are obligated to comply with a variety of federal, state and local laws and regulations as well as procurement policies, both domestically and abroad, governing certain aspects of our international sales and support, including regulations promulgated by, among others, the U.S. Departments of Commerce, Defense, State and Justice.
Such licenses may be denied for reasons of U.S. national security or foreign policy. In the case of certain large orders for exports of defense equipment, the Department of State must notify Congress at least 15 to 30 days, depending on the size and location of the sale, prior to authorizing certain sales of defense equipment and services to foreign governments. During that time, Congress may take action to block the proposed sale. We can give no assurances that we will continue to be successful in obtaining the necessary licenses or authorizations or that Congress will not prevent or delay certain sales. Any significant impairment of our ability to sell products outside of the U.S. could negatively impact our financial condition, results of operations and cash flows.
For products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, we are subject to U.S. laws, sanctions, embargoes, and regulations governing international trade and exports, including, but not limited to, International Traffic in Arms Regulations, Export Administration Regulations, the Foreign Sales program and the Office of Foreign Assets Control, U.S. Department of the Treasury. A determination by the U.S. government that we have failed to comply with one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of significant fines, denial of export privileges, loss of revenues from certain customers, and debarment from participation in U.S. government contracts.
We are subject to the Foreign Corrupt Practices Act (the "FCPA") and other laws which prohibit improper payments to foreign governments and their officials by U.S. and other business entities. We operate in countries known to experience corruption. Our operations in such countries create the risk of an unauthorized payment by one of our employees or agents that could be in violation of various laws including the FCPA.
Additionally, the failure to obtain applicable governmental licenses, clearances, or approvals could adversely affect our ability to continue to service the government contracts we maintain. Exports of some of our products to certain international destinations may require shipment authorization from U.S. export control authorities, including the U.S. Departments of Commerce and State, and authorizations may be conditioned on end-use restrictions.
Our international business is also highly sensitive to changes in foreign national priorities and government budgets. Sales of military products are affected by defense budgets (both in the U.S. and abroad) and U.S. foreign policy.
Our operations are subject to environmental, health and safety laws and regulations that could result in liabilities to us.
Our operations are subject to environmental, health and safety laws and regulations, including those governing discharges to air and water; the management and disposal of hazardous substances; the cleanup of contaminated sites; and health and safety matters. We could incur material costs, including cleanup costs, civil and criminal fines, penalties and third-party claims for cost recovery, property damage or personal injury as a result of violations of or liabilities under such laws and regulations. Contamination has been identified at and in the vicinity of some of our current and former properties and at properties which received wastes from current or former Company locations for which we have established financial reserves. The ultimate cost of remediating contaminated sites is difficult to accurately predict and could exceed our current estimates. In addition, as environmental, health, and safety laws and regulations have tended to become stricter, we could incur additional costs complying with requirements that are promulgated in the future. These include climate change regulation, which could increase the cost of operations through increased energy costs.
We may not achieve all of the expected benefits from our cost saving initiatives.
We have implemented a number of cost saving initiatives, including the consolidation of our North American truck and engine engineering operations, continued reductions in discretionary spending, and employee headcount reductions. In addition, we continue to evaluate additional options to improve the efficiency and performance of our operations. This includes evaluating our portfolio of assets, which could include closing or divesting non-core/non-strategic businesses, and identifying opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure. We have made certain assumptions in estimating the anticipated impact of our cost saving initiatives, which include the estimated savings from the elimination of certain open positions. These assumptions may turn out to be incorrect due to a variety of factors. In addition, our ability to realize the expected benefits from these initiatives is subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. Some of our cost saving measures may not have the impact on our profitability that we currently project or we may not be able to sustain the savings. If we are unsuccessful in implementing these initiatives or if we do not achieve our expected results, our results of operations and cash flows could be adversely affected.
We may not achieve all of the expected benefits from our acquisitions, joint ventures, or strategic alliances.
We cannot provide any assurances that our acquisitions, joint ventures, or strategic alliances will generate all of the expected benefits, including the cost savings and strategic advantages that are anticipated from the strategic alliance with TRATON Group. In addition, we cannot assure you that disputes will not arise with our joint venture partners and that such disputes will not lead to litigation or otherwise have an adverse effect on the joint ventures or our relationships with our joint venture partners. Failure to successfully manage and integrate these acquisitions, joint ventures, and strategic alliances could adversely impact our financial condition, results of operations and cash flows. We continue to evaluate opportunities to further restructure our business in an effort to optimize our cost structure, which could include, among other actions, additional rationalization of certain of our acquisitions, joint ventures, or strategic alliances.
We are exposed to political, economic, and other risks that arise from operating a multinational business.
We have significant operations in foreign countries, primarily in Canada, Mexico and Brazil. Accordingly, our business is subject to the political, economic, and other risks that are inherent in operating a multinational company. These risks include, among others:
trade protection measures and import or export licensing requirements;
the imposition of foreign withholding taxes on the remittance of foreign earnings to the U.S.;
difficulty in staffing and managing international operations and the application of foreign labor regulations;
multiple and potentially conflicting laws, regulations, and policies that are subject to change;
currency exchange rate risk; and
changes in general economic and political conditions in countries where we operate, particularly in emerging markets. Future Tax Payments
Our ability to use net operating loss ("NOL") carryovers to reduce future tax payments could be negatively impacted if there is a change in our ownership or a failure to generate sufficient taxable income.
As of October 31, 2018,2020, we had $2.7$2.3 billion of NOL carryforwards with which to offset our future taxable income for U.S. federal income tax reporting purposes. Presently, there is no annual limitation on our ability to use U.S. federal NOLs to reduce future income taxes. However, we may be subject to substantial annual limitations provided by the IRC if an "ownership change," as defined in Section 382 of the IRC, occurs with respect to our capital stock. Generally, an ownership change occurs if certain persons or groups increase their aggregate ownership by more than 50 percentage points of our total capital stock in a three-year period. If an ownership change occurs, our ability to use domestic NOLs to reduce taxable income is generally limited to an annual amount based on (i) the fair market value of our stock immediately prior to the ownership change multiplied by the long-term tax-exempt interest rate plus (ii) under certain circumstances, realized built-in gains on certain assets held prior to the ownership change for the first five years after the ownership change. Although NOLs that exceed the Section 382 limitation in any year continue to be allowed as carryforwards for the remainder of the 20-year or indefinite carryforward period and can be used to offset taxable income for years within the carryover period subject to the limitation in each year, the use of the remaining NOLs for the loss year will be prohibited if the carryover period for any loss year expires. If we should fail to generate a sufficient level of taxable income prior to the expiration of the NOL carryforward periods, then we will lose the ability to apply the NOLs as offsets to future taxable income. Similar limitations also apply to certain U.S. federal tax credits. As
General Risk Factors
We may not realize sufficient acceptance of October 31, 2018, we had $197 millionour products in the marketplace in order to achieve our goal of U.S. federal tax credits that would be subjectrevenue and market share growth.
Key elements of our operating strategy are to a limitation upon a change in ownership with carryforward periods of upfocus on our Core markets and grow revenue and market share. The extent to 20 years.
U.S. federal income tax reform could adversely affect us.
On December 22, 2017, the Tax Cuts and Jobs Act of 2017 (the “Tax Act") was signed into U.S. law, significantly reforming the IRC. The Tax Act, among other things, includes a reduction to the statutory corporate income tax rate from 35% to 21%, effective January 1, 2018; a mandatory inclusion in taxable income for the deemed repatriation of earnings of the Company’s foreign subsidiaries; changes to limits on the deductions for executive compensation and interest expense; a tax on global intangible low‐taxed income; a base erosion anti‐abuse tax; and a deduction for foreign derived intangible income. The changes attributable to the Tax Act are complex and subject to additional guidance to be issued by the U.S. Treasurywhich, and the Internal Revenue Service. In addition, the reactionrate at which, we achieve market acceptance and penetration of our current and future products is a function of many variables including, but not limited to: price, safety, efficacy, reliability, conversion costs, competitive pressures, regulatory approvals, marketing and sales efforts, operating costs, residual values, and general economic conditions affecting purchasing patterns. Any failure to the federal tax changes by the individual states is evolving. While we continue to examine the impact the Tax Act may have on our business, the overall impact of the Tax Act is uncertain,gain and our business and financial conditionretain market share could be adversely affected. The estimated impact of the Tax Act is based on our management’s current knowledge and assumptions and recognized impacts could be materially different from current estimates based on our actual results and our further analysis of the new law.
New tariffs and evolving trade policy between the United States and other countries, including China, may have an adverse effect on our business, liquidity, results of operations and financial condition.
We are involved in pending litigation, and arbitration, an adverse resolution of such matters may adversely affect our business, financial condition, and results of operations and cash flows.
Litigation and arbitration can be expensive, lengthy, and disruptive to normal business operations. The results of complex legal proceedings are often uncertain and difficult to predict. An unfavorable outcome of a particular matter described in our periodic filings or any future legal proceedings could have an adverse effect on our business, financial condition, and results of operations or cash flows.
We are currently involved in pending litigation and arbitration matters. For additional information regarding certain lawsuits in which we are involved, see Note 15, Commitments and Contingencies, to our consolidated financial statements.
We are exposed to political, economic, and other risks that arise from operating a multinational business.
We have significant operations in foreign countries, primarily in Canada, Mexico and Brazil. Accordingly, our business is subject to the political, economic, and other risks that are inherent in operating a global supply chain of material costs for trucksmultinational company. These risks include, among others:
trade and parts sold. Recent steps taken by the United States government to applytechnology protection measures, export limitations and consider applying import and export licensing requirements;
tariffs imposed on certain products andkey raw materials including steel, could potentially disrupt our existing supply chains and impose additional costs on our business, including costs with respect to raw materials upon which our business depends. The increased costsdepends;
difficulty in staffing and managing international operations and the application of foreign labor regulations;
multiple and potentially conflicting laws, regulations, and policies that are subject to change or which may negatively impact our marginsconflict with U.S. laws, regulations and policies;
currency exchange rate risk;
changes in general economic and political conditions in countries where we operate, particularly in emerging markets; and
the occurrence and spread of contagious diseases or illnesses, such as COVID-19.
In addition, we may not be ableare subject to pass on the additional costsForeign Corrupt Practices Act (the “FCPA”) and other laws which prohibit improper payments to foreign governments and their officials by increasingU.S. and other business entities. Certain of the pricescountries in which we operate present heightened corruption risks, which therefore increases the risks of our products. As a result,exposure under the FCPA and other applicable anti-bribery and corruption laws and regulations.
We must comply with numerous federal security laws, procurement regulations, and procedures, as well as the rules and regulations of foreign jurisdictions, and our failure to comply could adversely affect our business.
We must observe laws and regulations relating to the formation, administration and performance of federal government contracts that affect how we continuedo business with our clients and impose added costs on our business. For example, the Federal Acquisition Regulations, foreign government procurement regulations and related laws include provisions that:
allow our government clients to monitor these tariffs andterminate or not renew our contracts if we come under foreign ownership, control or influence;
allow our government clients to terminate existing contracts for the evolving trade policyconvenience of the United Statesgovernment;
require us to prevent unauthorized access to classified information; and
require us to comply with laws and regulations intended to promote various social or economic goals.
We are actively looking for opportunitiessubject to mitigate their effects through a combinationindustrial security regulations of design changes, material substitution,the U.S. Departments of State and alternate supplier resourcing. While we believeCommerce and other federal agencies that are designed to safeguard against foreigners' access to classified or restricted information. Similarly, our exposureinternational operations are subject to the potential increased costsrules and regulations of these tariffs is no greater thanforeign jurisdictions.
A failure to comply with applicable laws, regulations, policies or procedures, including federal regulations regarding the industry as a whole,procurement of goods and services and protection of classified information, could result in contract termination, loss of security clearances, suspension or debarment from contracting with the federal government, civil fines and damages and criminal prosecution and penalties, any of which could adversely affect our business, financial condition and results of operationsoperations.
We are exposed to, and may be adversely affected ifby, interruptions to our effortscomputer and information technology systems and sophisticated cyber-attacks.
We rely on our information technology systems and networks in connection with many of our business activities. Some of these networks and systems are managed by third-party service providers and are not under our direct control. Our operations routinely involve receiving, storing, processing and transmitting sensitive information pertaining to mitigate their effectsour business, customers, dealers, suppliers, employees and other sensitive matters. As with most companies, we have experienced cyber-attacks, attempts to breach our systems and other similar incidents, none of which have been material. Any future cyber incidents could, however, materially disrupt operational systems; result in loss of trade secrets or other proprietary or competitively sensitive information; compromise personally identifiable information regarding customers or employees; delay our ability to deliver products to customers; and jeopardize the security of our facilities. A cyber incident could be caused by malicious outsiders or insiders using sophisticated methods to circumvent firewalls, encryption and other security defenses. Because techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are unsuccessful.not recognized until they are launched against a target, we may be unable to anticipate these techniques or to implement adequate preventative measures. Information technology security threats, including security breaches, computer malware and other cyber-attacks, are increasing in both frequency and sophistication and could create financial liability, subject us to legal or regulatory sanctions or damage our reputation with customers, dealers, suppliers and other stakeholders. With some of our employees working from home during the COVID-19 pandemic, there may be increased opportunities for unauthorized access and cyber-attacks. Security breaches could also result in a violation of U.S. and international privacy and other laws and subject the Company to various litigations and proceedings. We continuously seek to maintain a robust program of information security and controls, but the impact of a material information technology event could have a material adverse effect on our competitive position, reputation, results of operations, financial condition and cash flows.
| |
| Item 1B. | Unresolved Staff Comments |
None.
Our Truck segment operates fivefour manufacturing and assembly facilities, which contain in the aggregate approximately five million square-feet of floor space. Of these fivefour facilities, fourthree are located in the U.S. and one is located in Mexico. Three facilities are owned and two facilities areone facility is subject to leases. Foura lease. Three plants manufacture and assemble trucks, buses, and chassis. One plant is used to build diesel engines.
Our Parts segment leases sixnine distribution centers in the U.S., two in Canada, one in Mexico, and one in South Africa.
Our Global Operations segment owns and operates a manufacturing plantsplant in both Brazil, and Argentina, which containcontains a total of 1 million square-feet of floor space for use by our South American engine subsidiaries. Not included above is the facility in Argentina whose operations ceased on October 1, 2019.
Our Financial Services segment, the majority of whose activities are conducted at our headquarters in Lisle, Illinois, also leases office space in Mexico.
Our principal product development and engineering facilities are currently located in Lisle, Illinois; Melrose Park, Illinois; Madison Heights, Michigan; New Carlisle, Indiana; and Monterrey, Mexico. Additionally, we own or lease other significant properties in the U.S., Canada and Mexico including vehicle and parts distribution centers, sales offices, and our headquarters in Lisle, Illinois. Not included above is the Waukesha, Wisconsin foundry, which was leased to a third party in April 2015,until October 2020, the rail car manufacturing plant that was exited in February 2018 and the Melrose Park Engine Plant whose operations ceased in May 2018.
We believe that all of our facilities have been adequately maintained, are in good operating condition, and are suitable for our current needs. These facilities, together with planned capital expenditures, are expected to meet our needs in the foreseeable future. Our Lisle, Illinois and Brookfield, Wisconsin, properties are subject to mortgagesliens in favor of the lenders under our Term Loan Credit Agreement.
The information required to be set forth under this heading is incorporated by reference from Note 13, 15, Commitments and Contingencies, to the Consolidated Financial Statementsconsolidated financial statements included in Part II, Item 8.
| |
| Item 4. | Mine Safety Disclosures |
Not applicable.
PART II
| |
| Item 5. | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common stock is listed on the New York Stock Exchange ("NYSE"), under the stock symbol "NAV."
Number of Holders
As of November 30, 2018,2020, there were approximately 6,4646,010 holders of record of our common stock.
Dividend Policy
Holders of our common stock are entitled to receive dividends when and as declared by the Board of Directors out of funds legally available therefore, provided that, so long as any shares of our preference stock are outstanding, no dividends (other than dividends payable in common stock) or other distributions (including purchases) may be made with respect to the common stock unless full cumulative dividends, if any, on our shares of preference stock have been paid. Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for the year in which the dividend is declared or the preceding year, and no dividend may be paid on common stock at any time during which the capital of outstanding preference stock exceeds our net assets. Certain debt instruments contain terms that include negative covenants and restrictions, including, among others, certain limitations on dividends. We have not paid dividends on our common stock since 1980. We do not intend to pay dividends on our common stock for the foreseeable future.
Recent Sales of Unregistered Securities
There were no sales of unregistered securities by us or any of our affiliates during the three months ended October 31, 2018.2020.
Purchases of Equity Securities
There were no purchases of equity securities by us or any of our affiliates during the three months ended October 31, 2018.
2020.
Stock Performance
The following graph compares the five-year cumulative total returns of Navistar International Corporation common stock, the S&P 500 Index, and the S&P Construction, Farm Machinery and Heavy Truck Index.
The comparison graph assumes $100 was invested on October 31, 20132015 in our common stock and in each of the indices shown and assumes reinvestment of all dividends. Data is complete through October 31, 2018.2020. Shareholder returns over the indicated period are based on historical data and should not be considered indicative of future shareholder returns.
| | | | As of October 31, | As of October 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Navistar International Corporation | $ | 100 |
| | $ | 98 |
| | $ | 34 |
| | $ | 62 |
| | $ | 117 |
| | $ | 93 |
| $ | 100 |
| | $ | 181 |
| | $ | 344 |
| | $ | 272 |
| | $ | 254 |
| | $ | 350 |
|
| S&P 500 Index - Total Returns | 100 |
| | 117 |
| | 123 |
| | 129 |
| | 159 |
| | 171 |
| 100 |
| | 105 |
| | 129 |
| | 139 |
| | 159 |
| | 174 |
|
| S&P Construction, Farm Machinery, and Heavy Truck Index | 100 |
| | 118 |
| | 87 |
| | 104 |
| | 160 |
| | 139 |
| 100 |
| | 119 |
| | 184 |
| | 160 |
| | 195 |
| | 228 |
|
The above graph uses peer group only performance (excludes us from the peer group). Peer group indices use beginning of periods' market capitalization weighting. Prepared by Zacks Investment Research, Inc. Used with permission. All rights reserved. Copyright 1980-2018.1980-2019. Index Data: Copyright Standard and Poor’s, Inc. Used with permission. All rights reserved.
| |
| Item 6. | Selected Financial Data |
Refer to Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, and the notes to the accompanying consolidated financial statements for additional information regarding the financial data presented below, including matters that might cause this data not to be indicative of our future financial condition or results of operations.
Five-Year Summary of Selected Financial and Statistical Data | | | | As of and for the Years Ended October 31, | As of and for the Years Ended October 31, |
| (in millions, except per share data) | 2018 | | 2017 | | 2016 | | 2015 | 2014 | 2020 | | 2019 | | 2018 | | 2017 | | 2016 |
| RESULTS OF OPERATIONS DATA | | | | | | | | | | | | | | | | |
| Sales and revenues, net | $ | 10,250 |
| | $ | 8,570 |
| | $ | 8,111 |
| | $ | 10,140 |
| $ | 10,806 |
| $ | 7,503 |
| | $ | 11,251 |
| | $ | 10,250 |
| | $ | 8,570 |
| | $ | 8,111 |
|
| Income (loss) from continuing operations before taxes | 420 |
| | 64 |
| | (32 | ) | | (103 | ) | (556 | ) | (388 | ) | | 262 |
| | 420 |
| | 64 |
| | (32 | ) |
| Income tax expense | (52 | ) | | (10 | ) | | (33 | ) | | (51 | ) | (26 | ) | |
| Income tax benefit (expense) | | 59 |
| | (19 | ) | | (52 | ) | | (10 | ) | | (33 | ) |
| Income (loss) from continuing operations | 368 |
| | 54 |
| | (65 | ) | | (154 | ) | (582 | ) | (329 | ) | | 243 |
| | 368 |
| | 54 |
| | (65 | ) |
| Income from discontinued operations, net of tax | — |
| | 1 |
| | — |
| | 3 |
| 3 |
| — |
| | — |
| | — |
| | 1 |
| | — |
|
| Net income (loss) | 368 |
| | 55 |
| | (65 | ) | | (151 | ) | (579 | ) | (329 | ) | | 243 |
| | 368 |
| | 55 |
| | (65 | ) |
| Less: Net income attributable to non-controlling interests | 28 |
| | 25 |
| | 32 |
| | 33 |
| 40 |
| 18 |
| | 22 |
| | 28 |
| | 25 |
| | 32 |
|
| Net income (loss) attributable to Navistar International Corporation | $ | 340 |
| | $ | 30 |
| | $ | (97 | ) | | $ | (184 | ) | $ | (619 | ) | $ | (347 | ) | | $ | 221 |
| | $ | 340 |
| | $ | 30 |
| | $ | (97 | ) |
| Amounts attributable to Navistar International Corporation common shareholders: | | | | | | | | | | | | | | | | |
| Income (loss) from continuing operations net of tax | $ | 340 |
| | $ | 29 |
| | $ | (97 | ) | | $ | (187 | ) | $ | (622 | ) | |
| Income (loss) from continuing operations, net of tax | | $ | (347 | ) | | $ | 221 |
| | $ | 340 |
| | $ | 29 |
| | $ | (97 | ) |
| Income from discontinued operations, net of tax | — |
| | 1 |
| | — |
| | 3 |
| 3 |
| — |
| | — |
| | — |
| | 1 |
| | — |
|
| Net income (loss) | $ | 340 |
| | $ | 30 |
| | $ | (97 | ) | | $ | (184 | ) | $ | (619 | ) | $ | (347 | ) | | $ | 221 |
| | $ | 340 |
| | $ | 30 |
| | $ | (97 | ) |
| Basic earnings (loss) per share | | | | | | | | | | | | | | | | |
| Continuing operations | $ | 3.44 |
| | $ | 0.31 |
| | $ | (1.19 | ) | | $ | (2.29 | ) | $ | (7.64 | ) | $ | (3.48 | ) | | $ | 2.23 |
| | $ | 3.44 |
| | $ | 0.31 |
| | $ | (1.19 | ) |
| Discontinued operations | — |
| | 0.01 |
| | — |
| | 0.04 |
| 0.04 |
| — |
| | — |
| | — |
| | 0.01 |
| | — |
|
| Net income (loss) | $ | 3.44 |
| | $ | 0.32 |
| | $ | (1.19 | ) | | $ | (2.25 | ) | $ | (7.60 | ) | $ | (3.48 | ) | | $ | 2.23 |
| | $ | 3.44 |
| | $ | 0.32 |
| | $ | (1.19 | ) |
| Diluted earnings (loss) per share | | | | | | | | | | | | | | | | |
| Continuing operations | $ | 3.41 |
| | $ | 0.31 |
| | $ | (1.19 | ) | | $ | (2.29 | ) | $ | (7.64 | ) | $ | (3.48 | ) | | $ | 2.22 |
| | $ | 3.41 |
| | $ | 0.31 |
| | $ | (1.19 | ) |
| Discontinued operations | — |
| | 0.01 |
| | — |
| | 0.04 |
| 0.04 |
| — |
| | — |
| | — |
| | 0.01 |
| | — |
|
| Net income (loss) | $ | 3.41 |
| | $ | 0.32 |
| | $ | (1.19 | ) | | $ | (2.25 | ) | $ | (7.60 | ) | $ | (3.48 | ) | | $ | 2.22 |
| | $ | 3.41 |
| | $ | 0.32 |
| | $ | (1.19 | ) |
| Weighted average number of shares outstanding: | | | | | | | | | | | | | | | | |
| Basic | 98.9 |
| | 93.0 |
| | 81.7 |
| | 81.6 |
| 81.4 |
| 99.7 |
| | 99.3 |
| | 98.9 |
| | 93.0 |
| | 81.7 |
|
| Diluted | 99.6 |
| | 93.5 |
| | 81.7 |
| | 81.6 |
| 81.4 |
| 99.7 |
| | 99.5 |
| | 99.6 |
| | 93.5 |
| | 81.7 |
|
| BALANCE SHEET DATA | | | | | | | | | | | | | | | | |
| Total assets | $ | 7,230 |
| | $ | 6,135 |
| | $ | 5,653 |
| | $ | 6,649 |
| $ | 7,392 |
| $ | 6,637 |
| | $ | 6,917 |
| | $ | 7,230 |
| | $ | 6,135 |
| | $ | 5,653 |
|
Long-term debt:(A) | | | | | | | | | | | | | | | | |
| Manufacturing operations | $ | 2,965 |
| | $ | 3,121 |
| | $ | 3,025 |
| | $ | 3,059 |
| $ | 2,814 |
| $ | 3,451 |
| | $ | 2,900 |
| | $ | 2,965 |
| | $ | 3,121 |
| | $ | 3,025 |
|
| Financial services operations | 1,556 |
| | 768 |
| | 972 |
| | 1,088 |
| 1,065 |
| 1,239 |
| | 1,417 |
| | 1,556 |
| | 768 |
| | 972 |
|
| Total long-term debt | $ | 4,521 |
| | $ | 3,889 |
| | $ | 3,997 |
| | $ | 4,147 |
| $ | 3,879 |
| $ | 4,690 |
| | $ | 4,317 |
| | $ | 4,521 |
| | $ | 3,889 |
| | $ | 3,997 |
|
| Redeemable equity securities | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| $ | 2 |
| |
___________________________
(A) Exclusive of current portion of long-term debt.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
| |
Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is designed to provide information that is supplemental to, and should be read together with, our consolidated financial statements and the accompanying notes. Information in MD&A is intended to assist the reader in obtaining an understanding of (i) our consolidated financial statements, (ii) the changes in certain key items within those financial statements from year-to-year, (iii) the primary factors that contributed to those changes, (iv) any changes in known trends or uncertainties that we are aware of and that may have a material effect on our future performance, and (v) how certain accounting principles affect our consolidated financial statements. In addition, MD&A provides information about our business segments and how the results of those segments impact our results of operations and financial condition as a whole.
Executive Overview
We are an international manufacturer of International® brand commercial and military trucks, proprietary brand diesel engines, and IC Bus® ("IC") brand school and commercial buses, as well as a provider of service parts for trucks and diesel engines. Our Core business is conducted in the North American truck and parts markets, where we principally participate in the U.S. and Canada school bus and Class 6 through 8 medium and heavy truck markets. We also provide retail, wholesale, and lease financing services for our trucks and parts.
Executive Summary
During 2018,2020, we remained focused on Navistar 4.0, which is our enterprise-wide strategy with our customers at its core, supported by strategic initiatives that guide decision-making and investments. We define success as an unparalleled customer experience, mutually beneficial relationships with employees, dealers, partners, customers and suppliers, and improved financial returns.
In January 2020, we received an unsolicited proposal from our alliance partner TRATON SE regarding a potential transaction to acquire the Company. On September 10, 2020, we announced a revised proposal from TRATON SE to acquire all the outstanding shares of the Company that it did not already own (the "Remaining Shares") for $43 per share in cash. On October 16, 2020 our Board of Directors confirmed that it would be prepared to move forward with a transaction in which TRATON SE would acquire the Remaining Shares for $44.50 per share in cash. On November 7, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TRATON SE and Dusk Inc., a Delaware corporation and wholly owned indirect subsidiary of TRATON SE (“Merger Subsidiary”), pursuant to which Merger Subsidiary will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving company in the Merger as a wholly owned indirect subsidiary of TRATON SE.
We continue to monitor and address risks related to the COVID-19 pandemic. In March 2020, the World Health Organization ("WHO") characterized COVID-19 as a global pandemic and extraordinary actions have been taken by international, federal, state, and local public health and governmental authorities to contain and combat the outbreak and spread of COVID-19 in regions throughout the world. Navistar continues to operate as an essential business critical to supporting the world's increasingly stressed supply chain. Our cross-functional response team has been moderately successful in ensuring our business continuity and has constructed preparedness plans to address the constantly evolving situation.
Due to disruptions in the supply chain resulting from the COVID-19 pandemic, our global manufacturing activities at certain of our production facilities were impacted. Our assembly plants in the U.S., Mexico, and Brazil temporarily ceased production for various periods during the second quarter of 2020. In the third and fourth quarters of 2020, production disruptions decreased as compared to the second quarter. We expect to continue manufacturing operations at all plants subject to market conditions, component supplier disruptions, government regulations and the continued spread and impact of COVID-19.
Our parts organization is diligently tracking its parts supply base to takeminimize potential disruptions as a result of the COVID-19 pandemic. Currently all parts distribution centers ("PDCs") are open and operational. We have prevention measures in place and transition plans for our packagers, carriers and PDCs if a situation causes us to implement our contingency plans. Our PDCs and dealers have sufficient parts inventory to help the industry keep operating as effectively as possible during this time of uncertainty.
Our facilities are following strict safety measures to protect our employees, visitors and business operations, including increased frequency in cleaning and disinfecting, as well as hygiene and social distancing practices, among other actions, thatin alignment with guidance from the U.S. Centers for Disease Control ("CDC") and WHO regarding threat assessment protocols. Additionally, many of our non-production employees continue to work remotely in order to reduce the spread of COVID-19. These working conditions allow for the continuation of key business-critical operations, including financial reporting and internal controls facilitated by the appropriate digital tools.
In April, we believe will improveimplemented a series of temporary cash conservation measures to preserve financial flexibility. These actions include the postponement of certain discretionary spending and capital expenditures, taking advantage of the broad based employer relief provided under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), a delay in certain 401(k) company matching contributions until 2021, and deferrals of a portion of the base salaries of certain current employees and executives. Taken together, these measures conserved approximately $300 million in cash during our performance.Going forward, our strategic vision includes areasfiscal year ending October 31, 2020. We terminated the deferral of focus around being customer-centric, driving operational excellence, focusinga portion of base salaries as of September 1, 2020 and repaid these amounts in November 2020.
Even though the economy has begun to recover, the severity and duration of the related global economic crisis is not fully known, and the COVID-19 pandemic is expected to continue to have negative impacts on our Core business, pursuing business transformation, leveraging our alliance with TRATON Group, and promoting cross-functional teamwork with a winning culture. We believe our strategy will enable us to build upon our accomplishments and become the number one choice and the most customer focused, innovative and value driven truck and bus solution provider in the Americas.operating results.
In November 2017,April 2020, we issued $1.1 billion in aggregate principal amount$600 million of 6.625%9.5% senior secured notes, due 2026 (“6.625%2025 (the "9.5% Senior Notes”Secured Notes"). Interest is payable on May 1 and signed a definitive Term Loan Credit Agreement relating to a seven-year senior secured term loan credit facility in an aggregate principal amountNovember 1 of $1.6 billion.each year beginning on November 1, 2020 until the maturity date of May 1, 2025. The proceeds from the offering of our 6.625%9.5% Senior Secured Notes wereare being used for general corporate purposes in addition to purchase a portion of our previously existing 8.25% Senior Notes and to pay accrued and unpaid interest thereon, and pay the associated prepayment premiums, certain transaction fees and expenses incurred in connection with the 6.625% Senior Notes. A portion of the proceeds from our Term Loan Credit Agreement were used to repay all outstanding loans under our previously existing9.5% Senior Secured Term Loan Credit Facility (the “Term Loan"),Notes. The 9.5% Senior Secured Notes are subject to pay accruedspecific redemption pricing, restrictive payments, and unpaid interest thereon, and pay certain transaction fees and expenses incurred in connection with the new Term Loan Credit Agreement, and to repurchase the remaining outstanding 8.25% Senior Notes and associated accrued but unpaid interest thereon. The remainderchange of the proceeds of the Term Loan Credit Agreement will be used for ongoing working capital purposes and general corporate purposes.control provisions.
In November 2017, we entered intoJune 2020, our Board of Directors announced the First Amendmentappointment of Persio V. Lisboa as President and Chief Executive Officer. Prior to Loan Agreement with The Countythe appointment, he served in several positions of Cook, Illinois and the First Amendment to Loan Agreement with the Illinois Finance Authority (“Tax Exempt Bond Amendments”) to adjust various restrictive covenants includedincreasing responsibility in the loan agreements relatingUnited States and South America, including Executive Vice President and Chief Operating Officer since March 2017, and, prior to the Tax Exempt Bonds, includingthat, as President of Operations from November 2014, and Senior Vice President, Chief Procurement Officer from December 2012 to permit the Company to incur secured debt of up to $1.7 billion, in exchange for a coupon increase from 6.50% to 6.75% and the grant of a junior priority lien on certain collateral securing the Company's previously existing Term Loan and the new Term Loan Credit Agreement.November 2014.
In July 2018, NFC entered into a new agreement whereby NFC borrowed an aggregate principal amount of $400 million under a new seven-year senior secured term loan facility (the "NFC Term Loan"). The proceeds of the NFC Term Loan were used to pay certain fees and expenses in connection with the NFC Term Loan and to make an intercompany loan of $150 million to our Manufacturing operations. The remainder of the proceeds of the NFC Term Loan will be used for other general NFC purposes.
In October 2018, we repaid in full our 4.5% Senior Subordinated Convertible Notes issued in October 2013. The repayment of the outstanding principal of $200 million at maturity was funded with cash on hand.
In November 2018, we entered into a definitive agreement with Cerberus Capital Management, L.P. and its affiliates (“Cerberus”) to sell a 70% equity interest in our defense business, Navistar Defense, LLC (“Navistar Defense”), for a total value of approximately $140 million, adjusted for certain current year chargeouts. The total value is subject to additional adjustments related to working capital, the transfer of certain liabilities and commitments, and other items. The agreement also includes an exclusive long term supply agreement for commercial parts and chassis. The transaction is subject to customary closing conditions, including regulatory clearances. We expect the transaction to close in the first quarter of 2019.
We remain committed to product investment to increase customer value and to focus on our Core markets. In January 2018,2020, we announced the launch of the International® HV™ Series Mid-Range Diesel which includes a bridge formula truckstrategic partnership with TuSimple, a global self-driving technology company, to co-develop SAE Level 4 self-driving trucks targeted for the concrete industry. In February 2018, we announced the launch of the newly updated IC Bus® RE Series Type D school bus featuring remote diagnostics connectivity solutions. In March 2018, we announced the launch of the International® MV™ Series Mid-Range Diesel model, our new medium-duty truck. In November 2018, we announced the launch of the International® CV™ Series, our new class 4/5 truck. With our strategic partner, TRATON Group, we believe we will haveproduction by 2024. The program between TuSimple and Navistar is intended to ensure a fully integrated proprietaryengineering solution that will be ready for mass-production using Navistar's vehicle manufacturing capabilities. As a result, customers will be able to purchase the fully autonomous trucks through Navistar's traditional sales channels in the United States, Canada and Mexico.
In August 2020, we announced another step forward in our partnership with Cummins by extending our long-term agreement through the next two GHG emissions cycles, to supply medium-duty and heavy-duty big-bore engines for International Trucks and IC Buses in the United States and Canada. This partnership optimizes flexibility in our investment in advanced powertrain startingtechnologies. We further announced in 2020.November 2020 an agreement to collaborate with Cummins on a heavy-duty class 8 truck powered by hydrogen fuel cells. The collaborative agreement is part of an initiative to develop functionality, adoption and scalability of hydrogen cells as a power source for class 8 vehicles.
In December 2020, pursuant to an on-going dispute with the Supplemental Benefit Program Committee (the “Committee”) and the related Supplemental Benefit Trust Profit Sharing Plan (the “Profit Sharing Plan”), we received a notice of a semi-final award from the arbitrator. While the award is not final, we accrued a charge of $289 million in the fourth quarter to address the expected obligations under the award. We expectare continuing to launch an electric medium-duty truckdispute the award. See Note 15, Commitments and electric school bus in 2020. We also expectContingencies, to launch a next generation connectivity module allowing feature sharing.the accompanying consolidated financial statements.
20182020 Financial Summary
Continuing Operations Results
Continuing Operations Results — Consolidated net sales and revenues were $10.3$7.5 billion in 2018, an increase2020, a decrease of 20%33% compared to 2017.2019. The increase primarilydecrease reflects higherlower volumes infrom our Core markets.Truck segment.
In 2018,2020, we earned income from continuing operationsincurred a loss before income taxestax of $420$388 million compared to $64income before income tax of $262 million in 2017.2019. Our gross margin increaseddecreased by $400$724 million primarily due to the impact of higher volumes and a decrease in used truck losses. Also, during 2018, we recorded a gain of $70 million representing the net present value of our recovery from the Deepwater Horizon Settlement Program in Other Income, net and $46 million of charges related to the extinguishment of unamortized debt issuance costs and tender premium payments associated with the repurchase of our 8.25% Senior Notes and refinancing of our previous Term Loan.lower volumes.
In 2018,2020, we recognized an income tax expense from continuing operationsbenefit of $52$59 million compared to income tax expense of $10$19 million in the prior year. Income tax expense in both periods was impacted by earnings, geographical mix and certain discrete items. The change in income tax expense was also impactedprimarily driven by a $28 millionan intraperiod allocation benefit in domestic continuing operations of $75 million in 2020, and a $38 million benefit associated with a group annuity contract purchase for certain retired pension plan participants recorded in the first quarter of 2019, partially offset by a decrease in foreign taxes due to the decrease in earnings of $30 million, and certain post retirement plan remeasurements and a release of various state uncertain tax position liabilities of $14 million, both recorded in 2017.discrete items.
In 2018,2020, after income taxes, income from continuing operationswe incurred a net loss attributable to NIC was $340of $347 million or $3.41$3.48 per diluted share, compared to net income of $29$221 million or $0.31$2.22 per diluted share in 2017.2019.
In 2018,2020, consolidated net income from continuing operations attributable to Navistar International Corporation ("NIC"),NIC, before manufacturing interest, taxes, depreciation and amortization expenses (“EBITDA”) was $838$(8) million, compared to EBITDA of $527$640 million in 2017.2019. Excluding certain net adjustments of $12$428 million and $55$242 million in 20182020 and 2017,2019, respectively, Adjusted EBITDA was $826$420 million in 20182020 compared to $582$882 million in 2017.2019. In 2020, adjusted consolidated net income attributable to NIC, excluding certain net impacts ("Adjusted Net Income"), was $10 million compared to $423 million in 2019. EBITDA, Adjusted EBITDA, and Adjusted EBITDANet Income are not determined in accordance with U.S. GAAP, nor are they presented as alternatives to U.S. GAAP measures. For more information regarding this non-GAAP financial information, see Consolidated EBITDA and Adjusted EBITDANon-GAAP Financial Performance Measures.
We ended the year 20182020 with $1,421 million$1.8 billion of consolidated cash and cash equivalents, and marketable securities, compared to $1,076 million$1.4 billion as of October 31, 2017.2019. The increase in consolidated cash and cash equivalents and marketable securities was primarily attributable to net income, increases in accounts payable and other current and noncurrent liabilities, proceeds from the sales of property and equipment, financed lease obligations and the issuance of long-term and securitized debt partially offset by increasesdecreases in accounts and finance receivables inventoryof $526 million, a decrease in inventories of $136 million and proceeds from the issuance of $600 million in principal amount of the 9.5% Senior Secured Notes and securitized debt of $37 million, and an increase in other current liabilities of $49 million partially offset by an increase in other noncurrent assets of $22 million, a decrease in accounts payable of $77 million, capital expenditures of $148 million, purchases of equipment leased to others of $97 million, and payments on securitizednet repayments of revolving debt of $329 million and other long-term debt and dividends paid with respect to non-controlling interests.of $94 million.
Business Outlook and Key Trends
We continually look for ways to improve the efficiency and performance of our operations, and our focus is on improving our Core businesses. Certain trends have affected our results of operations for 20182020 as compared to 2017 and 2016.2019. These trends, as well as the key trends that we expect will impact our future results of operations, are as follows:
| |
| • | Engine Strategy and Emissions Standards Compliance—We are focused on new product introductions, enhancements of current products, quality improvements and continuous material cost-reductions across our truck and bus product lines. We have shifted our investment focus to develop more driver-centric designs. We are also expanding our powertrain offerings with a mix of proprietary engines and Cummins engines. We have incurred significant research and development and tooling costs to design and produce our product lines to meet the EPA and CARB on-highway HDD emissions standards, including OBD requirements. GHG phase 2 regulations will further increase significant investments in product development by us and our competitors. CARB also continues to advocate for stricter emission standards, OBD requirements and in-use oversight. These emissions standards have and will continue to result in significant increases in the costs of our products. |
| |
| • | TRATON Group Alliance—We and TRATON Group have a similar vision for the role of technology, including the importance of driver-focused open architecture solutions. We expect the alliance will be a source of powertrain options and other high-value technologies, including advanced driver assistance systems, connected vehicle solutions and autonomous technologies, electric vehicles, and cab and chassis subsystems. We expect to have a fully integrated proprietary powertrain and launch an electric medium-duty truck and electric school bus based on TRATON Group's technology. In addition, our Procurement JV Framework Agreement with TRATON Group will deliver further material cost savings in the years to come. |
| |
| • | Core Truck Market—The Core market in which we compete is cyclical in nature and strongly influenced by macroeconomic factors such as industrial production, consumer sentiment, demand for durable goods, construction spending, business investment, and state and local government spending. During the past year, truck customers in the U.S. and Canada have been significantly impacted by the COVID-19 pandemic as well as fundamental shifts in the economy. Following on the heels of a record market in 2019, 2020 has seen some segments of the core truck market prosper while others have stagnated. Select Private Fleets and For Hire carriers focused on both durable and non-durable goods have continued to perform at a high level while others engaged in select manufacturing areas or service-focused businesses, such as restaurant supply and hospitality have been adversely impacted. The general economy has been rebounding and may not fully recover until at least mid to late 2021. The heavy truck market has seen freight demand and rates remain healthy and is dealing with an increased level of driver retirement and shortages to some extent compounded by the COVID-19 pandemic. The medium truck market declined in 2020 due to a significant decrease in leasing and rental activity and is also expected to begin to rebound in 2021. Solid consumer spending and residential construction have buoyed the medium truck demand. The vocational truck market has been impacted by delayed or canceled government spending but benefited from the increased construction market as well. The school bus market is expected to be impacted by the COVID-19 pandemic as both government and private expenditures have been deferred because of the number of idle buses in many areas of the country. |
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| • | Used Truck Inventory—Our gross used truck inventory decreased to approximately $135 million at October 31, 2020 from $200 million at October 31, 2019, offset by reserves of $37 million at both periods. During 2020, additions to our used truck inventories were lower than 2019 primarily due to the year over year decline in new truck sales. In response to the changes in the business environment presented by the COVID-19 pandemic, higher reliance was placed on online auctions and wholesale channels to drive used truck sales. In 2020, there was also a focus to sell through the older model year inventories through inventory reduction strategies and "No Haggle" pricing. |
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| • | Parts—The Parts business remains a significant source of revenue and profit. We are focusing on retail customer segmentation and improving dealer-lead generation. Our private label brands help provide All-Make parts to customers, attract incremental price sensitive customers, and offset the decline in late-in-lifecycle products. We are leveraging technology such as eCommerce to attract and retain new customers, to expand our existing customers’ portfolio of products, and to improve our customers' ease of doing business with us. We have embraced improving uptime via parts availability, dedicated same-day deliveries and expanded hours at our PDCs. |
Engine Strategy and Emissions Standards Compliance—We are focused on new product introductions, enhancements of current products, quality improvements and continuous material cost-reductions across our truck and bus product lines. We have shifted our investment focus from engines to trucks including developing driver-centric designs. We are also expanding our powertrain offerings with a mix of proprietary engines and Cummins engines. We have incurred significant research and development and tooling costs to design and produce our product lines to meet the EPA and CARB on-highway HDD emissions standards, including OBD requirements. GHG phase 2 regulations will further drive up significant investments in product development by us and our competitors. CARB also continues to advocate for stricter emission standards, OBD requirements and in-use oversight. These emissions standards have and will continue to result in significant increases in the costs of our products.
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| • | Warranty Costs—Warranty expense continues to reflect our current product portfolio and our commitment to quality and customer uptime. Warranty expense as a percentage of manufacturing revenue increased to 2.3% from 1.4% a year ago. We recognized net charges for adjustments to pre-existing warranties of $40 million and $3 million in 2020 and 2019, respectively. Pre-existing warranties during the period were driven by proactive campaign actions for certain components on units built in prior years and un-favorable warranty experience on trucks and engines sold prior to fiscal year 2020. For more information, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements. |
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| • | Income Taxes—At October 31, 2020, we had $2.3 billion of U.S. federal net operating loss carryforwards and $167 million of federal tax credit carryforwards. We expect our cash payments of U.S. taxes will be minimal for as long as we are able to offset our U.S. taxable income by these U.S. net operating losses and tax credits, the majority of which have carryforward periods of up to 20 years and some have indefinite carryforward periods. We also have state and foreign net operating losses that are available to reduce cash payments of state and foreign taxes in future periods. |
TRATON Group Alliance—We and TRATON Group have a similar vision for the role of technology, including the importance of driver-focused open architecture solutions. We expect the alliance will be a source of powertrain options and other high-value technologies, including advanced driver assistance systems, connected vehicle solutions including platooning and autonomous technologies, electric vehicles, and cab and chassis subsystems. We expect to have a fully integrated proprietary powertrain starting in 2020, launch the next generation connectivity module allowing feature sharing, and launch an electric medium-duty truck and electric school bus as early as 2020.
Core Truck Market—The Core truck market in which we compete are cyclical in nature and are strongly influenced by macroeconomic factors such as industrial production, demand for durable goods, construction spending, business investment, oil prices, and consumer confidence and spending. Class 8 industry volume in 2018 increased 34% over 2017, and we anticipate positive momentum will continue in 2019 as general economic and industry-specific indicators are trending well into the next year. In addition, improved new truck fuel economy along with solid freight demand and rates show the trucking industry remains healthy. However, supplier capacity constraint and driver shortage may continue to negatively impact Class 8 truck demand. The medium truck and school bus markets are expected to maintain strong demand in 2019. We anticipate that our Core market retail industry deliveries will range between 395,000 units to 425,000 units for 2019.
Used Truck Inventory—Our gross used truck inventory decreased to approximately $154 million at October 31, 2018 from $206 million at October 31, 2017, offset by reserves of $31 million and $110 million, respectively. During 2018, additions to our used truck reserves were $50 million, compared to $111 million and $187 million in 2017 and 2016, respectively. The decline was primarily due to the implementation of a shift in market mix in 2017 for our used trucks to include an increase in volume to certain export markets that have a lower price point as compared to sales through our domestic channels, and to lower domestic pricing to enable higher sales velocity. We have decreased our gross used truck inventory balances and inventory reserves as a result of the shift in market mix and change in pricing strategy. We continue to seek alternative channels to sell our used trucks.
Parts—The Parts business remains a significant source of revenue and profit. We are focusing on retail customer segmentation and improving dealer-lead generation. Our private label brands help provide All-Make parts to customers, attract incremental price sensitive customers, and offset the decline in late-in-lifecycle products. We are leveraging technology such as eCommerce to attract and retain new customers, to expand our existing customers’ portfolio of products, and to improve the ease of doing business. We have embraced improving uptime via parts availability, dedicated same-day deliveries and expanded hours at our parts distribution centers.
Navistar Defense Sales—Our Navistar Defense sales were $534 million in 2018, compared to $302 million in 2017 and $252 million in 2016. The 2018 Navistar Defense sales primarily consisted of refurbishment and upgrades of MaxxPro vehicles to “like new” condition for foreign militaries, deliveries of military commercial off the shelf variants ("MILCOTS") and new MaxxPro vehicles to foreign militaries, spare parts, and technical support service.
We believe now is the right time to enter into a strategic transaction to reduce our capital investment in Navistar Defense. Partnering with Cerberus reduces our exposure to certain unpredictability inherent in military sales, and allows us to participate in the potential upside of the defense business through an ongoing equity stake and our exclusive long-term supply agreement for MILCOTS chassis and commercial parts.
Warranty Costs—Warranty expense continues to reflect our current product portfolio and our commitment to quality and customer uptime. Warranty expense as a percentage of manufacturing revenue declined to 1.7% from 2.4% a year ago. We recognized a benefit for adjustments to pre-existing warranties of $9 million in 2018 and $1 million in 2017 compared to charges for adjustments to pre-existing warranties of $77 million in 2016. This benefit was due to a decrease in claim frequency across both the Medium Duty and Big Bore engine families in our Truck segment. For more information, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Income Taxes—At October 31, 2018, we had $2.7 billion of U.S. federal net operating loss carryforwards and $197 million of federal tax credit carryforwards. We expect our cash payments of U.S. taxes will be minimal for as long as we are able to offset our U.S. taxable income by these U.S. net operating losses and tax credits, which have carryforward periods of up to 20 years. We also have state and foreign net operating losses that are available to reduce cash payments of state and foreign taxes in future periods.
We maintain valuation allowances on our U.S. and certain foreign deferred tax assets because it is more likely than not that those deferred tax assets will not be realized. It is reasonably possible within the next twelve months that additional valuation allowances may be required on certain foreign deferred tax assets. For more information, see Note 11, 13, Income Taxes, to the accompanying consolidated financial statements.
Core Business Evaluation—We are focused on improving our Truck and Parts businesses in our Core markets. We are working to fix, divest or close under-performing and non-strategic areas and expect to realize incremental benefits from these actions in the near future. In addition, we are restructuring our business and rationalizing our Manufacturing operations in an effort to optimize our cost structure. This effort is ongoing and may lead to additional divestitures of businesses or discontinuing programs that are outside of our Core operations or are not performing to our expectations.
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| • | Business Evaluation—We are focused on improving our Truck and Parts businesses in our Core markets. We are working to fix, divest or close under-performing and non-strategic areas and expect to realize incremental benefits from these actions. While we are making investments in our manufacturing footprint to expand our capabilities, we continue to rationalize our manufacturing operations to optimize our cost structure. This effort is ongoing and may lead to additional divestitures of businesses or discontinuing programs that are outside of our Core operations or are not performing to our expectations. |
As a result of these evaluations, we ceased engine production at our Melrose Park FacilityMWM Motores engine facility in 2018.Jesus Maria, Argentina in October 2019. In December 2018, we sold a majority interest in our former defense business, Navistar Defense, and our former joint venture in China with Anhui Jianghuai Automobile Co., Ltd ("JAC").
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| • | North and Latin American Economy—The COVID-19 pandemic has created unprecedented volatility in the global economy. Through the third quarter of calendar year 2020, the U.S. economy has recouped two-thirds of its output loss experienced in the first half of calendar year 2020. With the assumption of continued loose monetary policy, an additional fiscal stimulus plan, as well as potential wide-spread availability of a COVID-19 vaccine in the first half of 2021, U.S. economic growth is expected to continue recovering supported by consumer spending and industrial improvement in the next year. However, with employment still approximately 10 million individuals below pre-COVID-19 levels, the recovery path critically depends on the improvement of the health situation in our markets. The Canadian economy is expected to grow moderately, with a similar assumption about the health situation as in the U.S. The recovery in Latin America, including Mexico, Brazil, Chile, Colombia, and Peru, is projected to continue after the significant contraction caused by the COVID-19 pandemic, but the recovery trajectory remains challenged by country-specific factors and global headwinds. |
During 2020, we identified a triggering event related to our operations in Brazil due to the impacts of the COVID-19 pandemic, which resulted in declines in actual and forecasted results. We completedperformed an impairment test as of April 30, 2020 on the salelong-lived assets of the Brazilian asset group and as a result, we recorded $12 million of impairment charges in our Global Operations segment. We also concluded that we had triggering events related to certain trucks under operating leases, due to declines in expected residual values, and certain other long-lived assets. As a result, we recorded charges of $10 million and $6 million, respectively, in our Truck segment. We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the carrying value. It is reasonably possible that within the next twelve months, we could recognize additional impairment charges for certain trucks under operating leases where Navistar is a lessor, which could be material, if we experience continued declines in excess of our railcar business in Cherokee, Alabama in February 2018. In May 2017, we completedforecasted expected residual values, as a result of the sale ofCOVID-19 pandemic, the demand for used trucks or a business line included in our Parts segment. During August 2017, we also sold our fabrication business in Conway, Arkansas.
North and Latin American Economy—The outlook for the economies in both the U.S. and Canada remain cautiously optimistic with moderate growth expectations. A tight labor market, strong consumer confidence, and solid manufacturing activities continue to support the U.S. economy to remain above a long-run trend pace. However, rising inflation, tightening monetary policy, and slowing emerging market activities present risks to the economic expansion. Growth in Latin America is projected to accelerate moderately, largely reflecting the growth in commodity exporters, including Brazil, Chile, Colombia, and Peru. However, the growth trend continues to be challenged by country-specific factors. The new United States, Mexico, and Canada trade agreement will reinforce the stability of Mexico’s economy with a modest expansion in 2019.
Impact of Government Regulation—As a manufacturer of trucks and engines, we continue to face significant governmental regulation of our products, especiallychange in the areasmix of environmentalsales through various market channels. Significant adverse changes to our business environment and safety matters. We are also subjectfuture cash flows, or our inability to various noise standards imposed by federal, state, and local regulations. Our facilities mayrealize cost savings from our restructuring activities, could cause us to record impairment charges in future periods, which could be subject to regulation related to climate change, and climate change itself may also have some impact on our operations. However, these impacts are currently uncertain and we cannot predict the nature and scope of those impacts. For more information, see Impact of Government Regulation in Part I, Item I, Business.material.
Results of Continuing Operations
The following information summarizes our Consolidated Statements of Operations and illustrates the key financial indicators used to assess our consolidated financial results.
Refer to Item 7 - MD&A in Part II of our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 for additional information regarding Results of Operations for the year ended October 31, 20182019 as compared to the year ended October 31, 2017.2018 and Segment Results of Operations for 2019 as compared to 2018.
|
| | | | | | | | | | | | | | |
| (in millions, except per share data and % change) | 2018 |
| 2017 | | Change | | % Change |
| Sales and revenues, net | $ | 10,250 |
| | $ | 8,570 |
| | $ | 1,680 |
| | 20 | % |
| Costs of products sold | 8,317 |
| | 7,037 |
| | 1,280 |
| | 18 | % |
| Restructuring charges | (1 | ) | | 3 |
| | (4 | ) | | (133 | )% |
| Asset impairment charges | 14 |
| | 13 |
| | 1 |
| | 8 | % |
| Selling, general and administrative expenses | 922 |
| | 878 |
| | 44 |
| | 5 | % |
| Engineering and product development costs | 297 |
| | 251 |
| | 46 |
| | 18 | % |
| Interest expense | 327 |
| | 351 |
| | (24 | ) | | (7 | )% |
| Other income, net | (46 | ) | | (21 | ) | | (25 | ) | | 119 | % |
| Total costs and expenses | 9,830 |
| | 8,512 |
| | 1,318 |
| | 15 | % |
| Equity in income of non-consolidated affiliates | — |
| | 6 |
| | (6 | ) | | (100 | )% |
| Income from continuing operations before income taxes | 420 |
| | 64 |
| | 356 |
| | 556 | % |
| Income tax expense | (52 | ) | | (10 | ) | | (42 | ) | | 420 | % |
| Income from continuing operations | 368 |
| | 54 |
| | 314 |
| | 581 | % |
| Less: Net income attributable to non-controlling interests | 28 |
| | 25 |
| | 3 |
| | 12 | % |
Income from continuing operations(A) | 340 |
| | 29 |
| | 311 |
| | N.M. |
|
| Income from discontinued operations, net of tax | — |
| | 1 |
| | (1 | ) | | (100 | )% |
Net income (A) | $ | 340 |
| | $ | 30 |
| | $ | 310 |
| | N.M. |
|
| | | | | | | | |
Diluted earnings per share:(A) | | | | | | | |
| Continuing operations | $ | 3.41 |
| | $ | 0.31 |
| | $ | 3.10 |
| | N.M. |
|
| Discontinued operations | — |
| | 0.01 |
| | (0.01 | ) | | (100 | )% |
| | $ | 3.41 |
| | $ | 0.32 |
| | $ | 3.09 |
| | 966 | % |
| Diluted weighted average shares outstanding | 99.6 |
| | 93.5 |
| | 6.1 |
| | 7 | % |
Results of Operations for the year ended October 31, 2020 as compared to the year ended October 31, 2019. |
| | | | | | | | | | | | | | |
| (in millions, except per share data and % change) | 2020 |
| 2019 | | Change | | % Change |
| Sales and revenues, net | $ | 7,503 |
| | $ | 11,251 |
| | $ | (3,748 | ) | | (33 | )% |
| Costs of products sold | 6,221 |
| | 9,245 |
| | (3,024 | ) | | (33 | )% |
| Restructuring charges | 2 |
| | 12 |
| | (10 | ) | | (83 | )% |
| Asset impairment charges | 28 |
| | 7 |
| | 21 |
| | 300 | % |
| Selling, general and administrative expenses | 1,021 |
| | 934 |
| | 87 |
| | 9 | % |
| Engineering and product development costs | 321 |
| | 319 |
| | 2 |
| | 1 | % |
| Interest expense | 268 |
| | 312 |
| | (44 | ) | | (14 | )% |
| Other expense, net | 32 |
| | 164 |
| | (132 | ) | | (80 | )% |
| Total costs and expenses | 7,893 |
| | 10,993 |
| | (3,100 | ) | | (28 | )% |
| Equity in income of non-consolidated affiliates | 2 |
| | 4 |
| | (2 | ) | | (50 | )% |
| Income (loss) before income taxes | (388 | ) | | 262 |
| | (650 | ) | | (248 | )% |
| Income tax (expense) benefit | 59 |
| | (19 | ) | | 78 |
| | 411 | % |
| Net income (loss) | (329 | ) | | 243 |
| | (572 | ) | | (235 | )% |
| Less: Net income attributable to non-controlling interests | 18 |
| | 22 |
| | (4 | ) | | (18 | )% |
| Net income (loss) attributable to Navistar International Corporation | $ | (347 | ) | | $ | 221 |
| | $ | (568 | ) | | (257 | )% |
| | | | | | | | |
Diluted income (loss) per share(A)
| $ | (3.48 | ) | | $ | 2.22 |
| | $ | (5.70 | ) | | (257 | )% |
| Diluted weighted average shares outstanding | 99.7 |
| | 99.5 |
| | 0.2 |
| | — | % |
| |
| (A) | Amounts attributable to NIC. |
Sales and revenues, net
Our sales and revenues, net, are principally generated via sales of products and services. Sales and revenues, net in our Consolidated Statements of Operations, by reporting segment were as follows:
| | | (in millions, except % change) | 2018 | | 2017 | | Change | | % Change | 2020 | | 2019 | | Change | | % Change |
| Truck | $ | 7,490 |
| | $ | 5,809 |
| | $ | 1,681 |
| | 29 | % | $ | 5,312 |
| | $ | 8,585 |
| | $ | (3,273 | ) | | (38 | )% |
| Parts | 2,407 |
| | 2,392 |
| | 15 |
| | 1 | % | 1,846 |
| | 2,245 |
| | (399 | ) | | (18 | )% |
| Global Operations | 360 |
| | 309 |
| | 51 |
| | 17 | % | 253 |
| | 343 |
| | (90 | ) | | (26 | )% |
| Financial Services | 257 |
| | 235 |
| | 22 |
| | 9 | % | 217 |
| | 297 |
| | (80 | ) | | (27 | )% |
| Corporate and Eliminations | (264 | ) | | (175 | ) | | (89 | ) | | 51 | % | (125 | ) | | (219 | ) | | 94 |
| | 43 | % |
| Total | $ | 10,250 |
| | $ | 8,570 |
| | $ | 1,680 |
| | 20 | % | $ | 7,503 |
| | $ | 11,251 |
| | $ | (3,748 | ) | | (33 | )% |
In 2018,2020, our Truck segment net sales increaseddecreased by $1,681$3,273 million or 29%,38%. The decrease was primarily due to highera decrease in volumes in our Core markets an increaseand Mexico of $3,058 million and a decline in defense sales, higher used truck sales and a shiftof $69 million, due, in model mix, partially offsetpart, to the COVID-19 pandemic. Sales in 2020 were also lower than 2019 by a decline in Mexico truck volumes and lower sales$62 million due to the exitsale of our railcar businessa majority interest in Cherokee, Alabama.Navistar Defense in 2019. Chargeouts from our Core markets were up 29%decreased by 42%, compared to 2019, which is reflective of an improvement in our Class 8 truckindustry volumes and market share.
The decrease represents a 59% decrease in Class 8 heavy trucks, a 47% decrease in medium trucks, a 15% decrease in school buses, and a 14% decrease in Class 8 severe service trucks.
In 2018,2020, our Parts segment net sales increaseddecreased by $15$399 million or 1%,18%. The decrease was primarily due to pricing, higher Mexicodecreased North America volumes in the U.S., Canada, and export volumes and parts sales relatedfrom our Blue Diamond Parts, LLC ("BDP") joint venture with Ford Motor Company ("Ford") due, in part, to the Fleetrite™ brand, partially offset by lower U.S. and Canada volumes and BDP sales.COVID-19 pandemic impact.
In 2018,2020, our Global Operations segment net sales increaseddecreased by $51$90 million or 17%,26%. The decrease was primarily driven by higher engine$81 million of lower volumes in our South America engine operations duetriggered by temporary production stoppages related to the improving Brazilian economy,COVID-19 pandemic, along with $69 million from the impact of unfavorable foreign currency exchange rates. These decreases were partially offset by $64 million from the depreciationimpact of the Brazilian real against the U.S. dollar as the average conversion rate weakened by 10% compared with the prior year.favorable product mix in 2020.
In 2018,2020, our Financial Services segment net revenues increaseddecreased by $22$80 million or 9%27%. The increase is primarily driven by higher revenues$54 million of this decrease was due to lower average yields from operating leases and higherlower interest rates, while $28 million was due to lower average portfolio balances in the U.S. and Mexico.finance receivables from lower volumes.
Costs of products sold
In 2018, Costs2020, costs of products sold increaseddecreased by $1,280$3,024 million or 33% compared to the prior year. The decrease was primarily driven by the impact of higherlower overall volumes attributable, in our Core markets.part, to the COVID-19 pandemic.
In 2018,2020, we recorded charges to our used truck reserve of $50 million compared to $111 million in 2017. During 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and to lower domestic pricing to enable higher sales velocity. We have decreased our gross used truck inventory balances and inventory reserves as a result of the shift in market mix and change in pricing strategy.
In 2018, we recognized a benefit for adjustments to pre-existing warranties of $9$40 million compared to $1$3 million in 2017. We have a benefit2019. Pre-existing warranty expense during the period was primarily duedriven by supplier quality issues on engines sold in prior years.
Asset Impairment Charges
In 2020, asset impairment charges increased by $21 million or 300% compared to the decreaseprior year. The increase is attributable to the recognition of $12 million of asset impairment charges in claim frequency across bothour Global Operations segment triggered by the Medium Dutyimpact of the COVID-19 pandemic and Big Bore engine familiesa $10 million increase in asset impairment charges in our Truck segment. The impact decreased the reserve for our standard warranty obligations as well as the loss positionssegment primarily related to our Big Bore extended service contracts.
certain trucks under operating leases due to declines in expected residual values. For more information on our estimated warranty obligations and our used truck reserves,asset impairments, see Note 1, Summary of Significant Accounting Policies,3, Restructuring, Impairments and Divestitures, to the accompanying consolidated financial statements.
Restructuring Charges
We recognized a restructuring benefit of $1 million in 2018, compared to a charge of $3 million in 2017. During 2017, we recorded postretirement net benefits of $36 million related to the execution of the closure agreement and wind-up charges for our Chatham, Ontario plant, partially offset by postretirement and severance charges of $31 million related to our plan to cease production at our Melrose Park Facility, among other items. For more information, see Note 2, Restructuring and Impairments, to the accompanying consolidated financial statements.
Selling, general and administrative expenses
In 2018, our2020, SG&A expenses increased by $44$87 million or 9% compared to 2017the prior year. The increase is primarily dueattributable to the Shy profit-sharing accrual of $289 million and a $58 million charge, including $8 million of legal and other fees, related to a proposed legal settlement with the Department of Justice, related to Navistar Defense. These are partially offset by a MaxxForce Advanced EGR engine class action settlement and related litigation charges of $129 million recorded in 2019 in our Truck segment, a decrease in employee compensation expenses of $91 million and a $34 million reduction in other SG&A expenses related to growth initiatives, and profit sharing accruals related to supplemental benefits for certain retirees, partially offset by the impact of charges related to the MaxxForce engine EGR product litigation recorded during 2017.within our Truck segment. For more information on our legal proceedings, see Note 13,15, Commitments and Contingencies, to the accompanying consolidated financial statements.
Engineering and product development costs
In 2018, our Engineering and product development costs increased by $46 million compared to 2017 primarily due to our development agreements with TRATON Group involving the expense of certain engine and transmission development costs and higher research and product development costs to meet future emission standard regulatory requirements.
Interest expense
In 2018, our Interest2020, interest expense decreased by $24$44 million or 14% compared to the prior year, primarily driven by lower effective interest rates related to our issuance of the 6.625% Senior Notes and the Term Loan Credit Agreement in November 2017, which refinanced our 8.25% Senior Notes and Term Loan, partially offset by the impact of higher average borrowing levels for finance receivables funding.rates.
Other income,expense, net
We recognized Other income of $46In 2020, other expenses decreased by $132 million in 2018,or 80% compared to $21 million in the prior year. The increasedecrease was primarily driven by a settlement ofgroup annuity contract purchase for certain retired pension plan participants which resulted in a business economic loss claim related to our Alabama engine manufacturing facility, for which we recorded a gain of $70 million representing the net present value from the Deepwater Horizon Settlement Program. This increase was partially offset by $46 million of charges related to the extinguishment of unamortized debt issuance costs and tender premium payments associated with the repurchase of our 8.25% Senior Notes and refinancing of our previous Term Loan with the Term Loan Credit Agreement. For more information on the business economic loss settlement, see Note 13, Commitments and Contingencies, to the accompanying consolidated financial statements.
Income tax expense
In 2018, we recognized income tax expense from continuing operations of $52 million, compared to $10 millionplan remeasurement in the prior year. The increaseAs a result, we recorded pension settlement accounting charges of $142 million in 2019. There were also $58 million of lower interest costs on the pension and OPEB plans compared to 2019. These impacts were partially offset by a gain of $51 million related to the sale of a majority interest in Navistar Defense and a gain on sale of $5 million related to our joint venture in China with JAC, both recorded in 2019.
Income tax (expense) benefit
In 2020, income tax expense isdecreased by $78 million or 411% compared to the prior year. The change in tax expense was primarily driven by a $28 millionan intraperiod allocation benefit in domestic continuing operations of $75 million and a $38 million benefit associated with a group annuity contract purchase for certain retired pension plan participants, recorded in the first quarter of 2019, partially offset by a decrease in foreign taxes due to the decrease in earnings of $30 million, and certain post retirement plan remeasurement gains and a release of various state uncertain tax position liabilities of $14 million, both recorded in 2017.discrete items.
Net income attributable to non-controlling interests
Net income attributable to non-controlling interests is the result of our consolidation of subsidiaries that we do not wholly own. Substantially all of our net income attributable to non-controlling interests in 2018, 2017,2020 and 20162019 relates to Ford's non-controlling interest in BDP.
Segment Results of Continuing Operations for 20182020 as Compared to 20172019
We operate in four reporting segments: Truck, Parts, Global Operations, and Financial Services.
We define segment profit (loss) as net income (loss) from continuing operations attributable to NIC excluding income tax benefit (expense). The following sections analyze operating results as they relate to our four segments and do not include intersegment eliminations. For additional information concerning our segments, see Note 14, 16, Segment Reporting, to the accompanying consolidated financial statements.
| | | (in millions, except % change) | 2018 | | 2017 | | Change | | % Change | 2020 | | 2019 | | Change | | % Change |
| Truck segment sales, net | $ | 7,490 |
| | $ | 5,809 |
| | $ | 1,681 |
| | 29 | % | $ | 5,312 |
| | $ | 8,585 |
| | $ | (3,273 | ) | | (38 | )% |
| Truck segment profit (loss) | 397 |
| | (6 | ) | | 403 |
| | N.M. |
| (141 | ) | | 269 |
| | (410 | ) | | (152 | )% |
_________________________Segment sales
In 2018,2020, our Truck segment net sales increaseddecreased by $1,681$3,273 million or 29%,38%. The decrease is primarily due to highera decrease in volumes in our Core markets an increaseand Mexico of $3,058 million and a decline in defense sales, higher used truck sales and a shiftof $69 million, due, in model mix, partially offsetpart, to the COVID-19 pandemic. Sales in 2020 were also lower than 2019 by a decline in Mexico truck volumes and lower sales$62 million due to the exitsale of our railcar businessa majority interest in Cherokee, Alabama. ChargeoutsNavistar Defense in 2019.
In 2020 chargeouts from our Core markets were up 29%,decreased by 42% compared to 2019, which is reflective of an improvement in our Class 8 truckindustry volumes and market share. The improvementdecrease represents a 65% increase59% decrease in Class 8 heavy trucks, a 16% increase in Class 8 severe service trucks, a 16% increase47% decrease in Class 6 and 7 medium trucks, a 15% decrease in buses, and an 8% increasea 14% decrease in buses.Class 8 severe service trucks.
Segment results
In 2018,2020, our Truck segment results improvedprofit declined by $403$410 million The improvement is primarily drivenor 152%. Profits were lower by $421 million due to the impact of higherdecrease in volumes in our Core markets higherand Mexico, due, in part, to the COVID-19 pandemic. In addition, the decrease in profit in 2020 reflects the $58 million charge, including $8 million of legal and other income, an increasefees, related to a proposed legal settlement related to Navistar Defense with the Department of Justice, $51 million of non-recurring gain from the sale of a 70% equity interest in our defense sales margins, a declineNavistar Defense in 2019, and $36 million of higher used truck losses in 2020, which werepartially offset by a non-recurring EGR settlement charge in 2019 of $129 million and a $26 million benefit related to a request for an equitable adjustment claimdecrease in finance fees from our defense business.Financial Services segment of $63 million.
In 2018,2020, we recorded charges in our Truck segment for our used truck reserve of $50 million compared to charges of $111 million in the prior year period. During the second quarter of 2017, we implemented a shift in market mix for our used trucks to include an increase in volume to certain export markets, which had a lower price point as compared to sales through our domestic channels, and to lower domestic pricing to enable higher sales velocity of our used trucks.
In 2018, we recorded a benefit of $9$40 million in our Truck segment for adjustments to pre-existing warranties compared to charges of $8$3 million in the prior year. We have a benefitPre-existing warranties during the year were primarily driven by supplier quality issues on engines sold in the current year primarily due to the decrease in claim frequency across both the Medium Duty and Big Bore engine families. The impact decreased the reserve for our standard warranty obligations as well as the loss positions related to our Big Bore extended service contracts.prior years.
In 2018, we also recorded a $70 million gain related to the settlement of a business economic loss claim which was recognized in Other income, net in our Consolidated Statements of Operations.
| | | (in millions, except % change) | 2018 | | 2017 | | Change | | % Change | 2020 | | 2019 | | Change | | % Change |
| Parts segment sales, net | $ | 2,407 |
| | $ | 2,392 |
| | $ | 15 |
| | 1 | % | $ | 1,846 |
| | $ | 2,245 |
| | $ | (399 | ) | | (18 | )% |
| Parts segment profit | 569 |
| | 616 |
| | (47 | ) | | (8 | )% | 448 |
| | 598 |
| | (150 | ) | | (25 | )% |
Segment sales
In 2018,2020, our Parts segment net sales increaseddecreased by $15$399 million or 1%,18%. The decrease is primarily due to pricing, higher Mexicolower volumes in the U.S., Canada, and export volumes and parts sales relatedBDP due, in part, to the Fleetrite™ brand, partially offset by lower U.S. and Canada volumes and BDP sales.COVID-19 pandemic.
Segment profit
In 2018,2020, our Parts segment profit decreased by $47$150 million or 8%, primarily25%. $170 million of the decrease was due to the impact of lower North America volumes in the U.S. margins,, Canada, and higher freight-relatedBDP, due, in part, to the COVID-19 pandemic, partially offset by $9 million of lower SG&A expenses and intercompany$9 million of lower access fees. Access fees are allocated to theour Parts segment from theour Truck segment, primarily for the development of new products, and consist of certain engineering and product development costs, depreciation expense, and SG&A costs.expenses.
Global Operations Segment
| | | (in millions, except % change) | 2018 |
| 2017 | | Change | | % Change | 2020 |
| 2019 | | Change | | % Change |
| Global Operations segment sales, net | $ | 360 |
| | $ | 309 |
| | $ | 51 |
| | 17 | % | $ | 253 |
| | $ | 343 |
| | $ | (90 | ) | | (26 | )% |
| Global Operations segment profit (loss) | 2 |
| | (7 | ) | | 9 |
| | 129 | % | — |
| | — |
| | — |
| | N.M. |
|
Segment sales
In 2018, our Global Operations segment net sales increased by $51 million, or 17%, primarily driven by higher engine volumes in our South America engine operations due to the improving Brazilian economy, partially offset by the depreciation of the Brazilian real against the U.S. dollar as the average conversion rate weakened by 10% compared with the prior year.
Segment results
In 2018, our Global Operations segment results increased by $9 million, or 129%. The improvement was driven by the impact of higher engine volumes and cost-reduction actions initiated in 2017. In 2017, our Global Operations segment results included a $9 million benefit recognized as an adjustment to pre-existing warranties and other income related to the sale of machinery and equipment.
Financial Services Segment
|
| | | | | | | | | | | | | | |
| (in millions, except % change) | 2018 | | 2017 | | Change | | % Change |
| Financial Services segment revenues, net | $ | 257 |
| | $ | 235 |
| | $ | 22 |
| | 9 | % |
| Financial Services segment profit | 88 |
| | 77 |
| | 11 |
| | 14 | % |
Segment revenues
In 2018, our Financial Services segment net revenues increased by $22 million, or 9%. The increase is primarily driven by higher revenues from operating leases and higher average portfolio balances in the U.S. and Mexico.
Segment profit
In 2018, our Financial Services segment profit increased by $11 million, or 14%. The increase is primarily driven by higher revenues and is partially offset by higher interest expense, an increase in the provision for loan losses in Mexico, and higher depreciation expense on operating leases.
Results of Operations for the year ended October 31, 2017 as compared to the year ended October 31, 2016 |
| | | | | | | | | | | | | | |
| (in millions, except per share data and % change) | 2017 | | 2016 | | Change | | % Change |
| Sales and revenues, net | $ | 8,570 |
| | $ | 8,111 |
| | $ | 459 |
| | 6 | % |
| Costs of products sold | 7,037 |
| | 6,812 |
| | 225 |
| | 3 | % |
| Restructuring charges | 3 |
| | 10 |
| | (7 | ) | | (70 | )% |
| Asset impairment charges | 13 |
| | 27 |
| | (14 | ) | | (52 | )% |
| Selling, general and administrative expenses | 878 |
| | 802 |
| | 76 |
| | 9 | % |
| Engineering and product development costs | 251 |
| | 247 |
| | 4 |
| | 2 | % |
| Interest expense | 351 |
| | 327 |
| | 24 |
| | 7 | % |
| Other income, net | (21 | ) | | (76 | ) | | 55 |
| | (72 | )% |
| Total costs and expenses | 8,512 |
| | 8,149 |
| | 363 |
| | 4 | % |
| Equity in income of non-consolidated affiliates | 6 |
| | 6 |
| | — |
| | — | % |
| Income (loss) from continuing operations before income taxes | 64 |
| | (32 | ) | | 96 |
| | (300 | )% |
| Income tax expense | (10 | ) | | (33 | ) | | 23 |
| | (70 | )% |
| Income (loss) from continuing operations | 54 |
| | (65 | ) | | 119 |
| | (183 | )% |
| Less: Net income attributable to non-controlling interests | 25 |
| | 32 |
| | (7 | ) | | (22 | )% |
Income (loss) from continuing operations(A) | 29 |
| | (97 | ) | | 126 |
| | (130 | )% |
| Income from discontinued operations, net of tax | 1 |
| | — |
| | 1 |
| | N.M. |
|
Net income (loss)(A) | $ | 30 |
| | $ | (97 | ) | | $ | 127 |
| | (131 | )% |
| | | | | | | | |
Diluted earnings (loss) per share:(A) | | | | | | | |
| Continuing operations | $ | 0.31 |
| | $ | (1.19 | ) | | $ | 1.50 |
| | (126 | )% |
| Discontinued operations | 0.01 |
| | — |
| | 0.01 |
| | N.M. |
|
| | $ | 0.32 |
| | $ | (1.19 | ) | | $ | 1.51 |
| | (127 | )% |
| Diluted weighted average shares outstanding | 93.5 |
| | 81.7 |
| | 11.8 |
| | 14 | % |
| |
(A) | Amounts attributable to Navistar International Corporation. |
Sales and revenues, net
Our sales and revenues, net, are principally generated via sales of products and services. Sales and revenues, net, by reporting segment were as follows:
|
| | | | | | | | | | | | | | |
| (in millions, except % change) | 2017 | | 2016 | | Change | | % Change |
| Truck | $ | 5,809 |
| | $ | 5,403 |
| | $ | 406 |
| | 8 | % |
| Parts | 2,392 |
| | 2,427 |
| | (35 | ) | | (1 | )% |
| Global Operations | 309 |
| | 341 |
| | (32 | ) | | (9 | )% |
| Financial Services | 235 |
| | 235 |
| | — |
| | — | % |
| Corporate and Eliminations | (175 | ) | | (295 | ) | | 120 |
| | (41 | )% |
| Total | $ | 8,570 |
| | $ | 8,111 |
| | $ | 459 |
| | 6 | % |
In 2017, our Truck segment net sales increased $406 million, or 8%, primarily due to higher volumes in our Core markets, an increase in Mexico truck volumes, an increase in sales of GM-branded units manufactured for GM, and higher used truck sales. Chargeouts from our Core markets were up 8%, which is reflective of an improvement in our Class 8 volumes and market share.
In 2017, our Parts segment net sales decreased $35 million, or 1%, primarily due to lower BDP sales and lower North America volumes, partially offset by higher U.S. and Canada parts sales related to the Fleetrite™ brand and remanufactured parts sales.
In 2017, our Global Operations segment net sales decreased $32 million, or 9%, primarily driven by lower engine and component volumes in our South America engine operations, which declined 31% due to the impact of continued weakness in the Brazilian economy as well as the cessation of sales to an OEM customer in 2016. The decrease in volume was partially offset by the appreciation of the Brazilian real against the U.S. dollar as the average conversion rate strengthened by 11% compared with the prior year period.
In 2017, our Financial Services segment net revenues were comparable to the prior year primarily driven by higher interest
rates and higher revenues from operating leases in Mexico, offset by lower average finance receivable balances and
unfavorable movements in foreign currency exchange rates impacting our Mexican portfolio.
Costs of products sold
In 2017, Costs of products sold increased by $225 million, reflecting the impact of higher volumes in our Core markets, Mexico truck volumes, and market pressures, partially offset by a decrease in used truck losses, improved material costs, and lower adjustments to pre-existing warranties.
In 2017, we recorded charges to our used truck reserve of $111 million compared to $187 million in 2016. During the second quarter of 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and lower domestic pricing to enable higher sales velocity. We decreased our gross used truck inventory balances and inventory reserves as a result of the shift in market mix and change in pricing strategy.
In 2017, we recognized a benefit for adjustments to pre-existing warranties of $1 million compared to a charge of $78 million in 2016. The decline in charges is primarily due to the reduction in claim frequency across both the medium duty and big bore engine families in our Truck segment. The impact decreased the reserve for our standard warranty obligations.
For more information on our estimated warranty obligations and our used truck reserves, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.
Restructuring Charges
We recognized restructuring charges of $3 million in 2017 compared to $10 million in 2016. The decrease is primarily due to postretirement net benefits of $36 million related to the execution of the closure agreement and wind-up charges for our Chatham, Ontario plant, partially offset by postretirement and severance charges of $31 million related to our plan to cease production at our Melrose Park Facility, and certain cost reduction actions impacting our Global Operations segment. For more information, see Note 2, Restructuring and Impairments, to the accompanying consolidated financial statements.
Selling, general and administrative expenses
In 2017, our SG&A expenses increased by $76 million compared to 2016 primarily due to an increase in employee compensation expense and charges related to EGR product litigation. For more information on our legal proceedings, see Note 10, Commitments and Contingencies, to the accompanying consolidated financial statements.
Interest expense
In 2017, our interest expense increased by $24 million compared to 2016 primarily driven by the January 2017 issuance of additional Senior Notes, increased amortization of debt issuance costs, and an increase in average borrowing rates, partially offset by the impact of the lower interest rate related to the February 2017 refinancing of our Term Loan and lower average borrowing levels for finance receivables funding.
Other income, net
We recognized Other income of $21 million in 2017, compared to $76 million in the prior year. The decrease in Other income in 2017 is primarily due to a one-time $15 million fee received from a third party in the first quarter of 2016, deferred income for an IP license of $19 million in the second quarter of 2016, $13 million of IP license income in the third quarter of 2016, and unfavorable movements in foreign currency exchange rates, partially offset by the sale of a business line and machinery and equipment in 2017.
Income tax expense
In 2017, we recognized income tax expense from continuing operations of $10 million, compared to $33 million in the prior year. The decline in income tax expense is primarily driven by a $28 million intraperiod allocation benefit in domestic continuing operations due to certain post retirement plan remeasurement gains and a release of various state uncertain tax position liabilities of $14 million, partially offset by an increase in foreign taxes in Canada and Mexico and the non-recurring benefit of $13 million from the release of the valuation allowance on U.S. AMT credits due to the U.S. enactment of the Protecting Americans from Tax Hikes Act of 2015 recorded in the first quarter of 2016.
Net income attributable to non-controlling interests
Net income attributable to non-controlling interests is the result of our consolidation of subsidiaries that we do not wholly own. Substantially all of our net income attributable to non-controlling interests in 2017 and 2016 relates to Ford's non-controlling interest in BDP.
Segment Results of Continuing Operations for 2017 as Compared to 2016
Truck Segment
|
| | | | | | | | | | | | | | |
| (in millions, except % change) | 2017 | | 2016 | | Change | | % Change |
| Truck segment sales, net | $ | 5,809 |
| | $ | 5,403 |
| | $ | 406 |
| | 8 | % |
| Truck segment loss | (6 | ) | | (189 | ) | | 183 |
| | 97 | % |
Segment sales
In 2017, our Truck segment net sales increased by $406 million, or 8%, primarily due to higher volumes in our Core markets, an increase in Mexico truck volumes, an increase in sales of GM-branded units manufactured for GM, and higher used truck sales. Chargeouts from our Core markets were up 8%, which is reflective of an improvement in our Class 8 volumes and market share. The improvement represents a 17% increase in Class 6 and 7 medium trucks, a 3% increase in Class 8 heavy trucks, a 9% increase in Class 8 severe service trucks and a 1% increase in buses.
Segment loss
In 2017, our Truck segment loss decreased by $183 million, or 97%, primarily driven by the impact of higher volumes in our Core markets and Mexico, a decrease in used truck losses, lower adjustments to pre-existing warranties, improved material costs, partially offset by market pressures, charges related to the MaxxForce engine EGR product litigation of $31 million, and a decrease in Other Income.
In 2017, we recorded charges in our Truck segment for our used truck reserve of $111 million compared to charges of $187 million in the respective prior year period. During the second quarter of 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and lower domestic pricing to enable higher sales velocity.
In 2017, we recorded charges in our Truck segment for adjustments to pre-existing warranties of $8 million compared to charges of $78 million in the prior year. The decline in charges is primarily due to the reduction in claim frequency across both the Medium Duty and Big Bore engine families in our Truck segment. The impact decreased the reserve for our standard warranty obligations.
Additionally, the decline in Other Income during 2017 is due to a one-time $15 million fee received from a third party in the first quarter of 2016, deferred income for an IP license of $19 million in the second quarter of 2016, $13 million of IP license income in the third quarter of 2016, and an overall decline in the allocable share base of Access Fees from our Parts segment as a result of lower engineering and product development costs in recent years.
|
| | | | | | | | | | | | | | |
| (in millions, except % change) | 2017 | | 2016 | | Change | | % Change |
| Parts segment sales, net | $ | 2,392 |
| | $ | 2,427 |
| | $ | (35 | ) | | (1 | )% |
| Parts segment profit | 616 |
| | 640 |
| | (24 | ) | | (4 | )% |
Segment sales
In 2017, our Parts segment net sales decreased by $35 million, or 1%, primarily due to lower BDP sales and lower North America volumes, partially offset by higher U.S. and Canada parts sales related to the Fleetrite™ brand and remanufactured parts sales.
Segment profit
In 2017, our Parts segment profit decreased by $24 million, or 4%, primarily due to margin declines in BDP and in our U.S. market, partially offset by higher other income of $6 million related to the sale of a business line and lower intercompany access fees. Access fees are allocated to the Parts segment from the Truck segment, primarily for development of new products, and consist of certain engineering and product development costs, depreciation expense, and SG&A costs. The decrease in the allocable share of fees in 2017 is due to significant decreases in engineering and product development costs in recent years.
Global Operations Segment
|
| | | | | | | | | | | | | | |
| (in millions, except % change) | 2017 | | 2016 | | Change | | % Change |
| Global Operations segment sales, net | $ | 309 |
| | $ | 341 |
| | $ | (32 | ) | | (9 | )% |
| Global Operations segment loss | (7 | ) | | (21 | ) | | 14 |
| | 67 | % |
Segment sales
In 2017,2020, our Global Operations segment net sales decreased by $32$90 million, or 9%,26%. The decrease was primarily driven by $81 million of lower engine and component volumes in our South America engine operations which declined 31% duetriggered by temporary production stoppages related to the COVID-19 pandemic, along with $69 million from the impact of continued weakness in the Brazilian economy as well as the cessation of sales to an OEM customer in 2016. The decrease in volume wasunfavorable foreign currency exchange rates. These decreases were partially offset by $64 million from the appreciationimpact of the Brazilian real against the U.S. dollar as the average conversion rate strengthened by 11% compared with the prior year period.favorable product mix in 2020.
Segment lossresults
In 2017,2020, our Global Operations segment loss decreasedprofit was comparable to 2019, primarily driven by $14the recognition of an asset impairment charge of $12 million or 67%, primarilyin 2020 and an $8 million decline due to lower manufacturing and SG&A expenses as a result of our prior year cost reduction efforts, a one-time benefit of $9 million recognized as an adjustment to pre-existing warranties and higher other incomevolumes triggered by temporary production stoppages related to the sale of machinery and equipment. These increases were partiallyCOVID-19 pandemic, offset by an increase inhigher restructuring charges in Brazil related to cost reduction actions consisting2019 of personnel costs for employee separation and related benefits.$11 million, of which $5 million were reversed in 2020.
Financial Services Segment
| | | (in millions, except % change) | 2017 | | 2016 | | Change | | % Change | 2020 | | 2019 | | Change | | % Change |
| Financial Services segment revenues, net | $ | 235 |
| | $ | 235 |
| | $ | — |
| | — | % | $ | 217 |
| | $ | 297 |
| | $ | (80 | ) | | (27 | )% |
| Financial Services segment profit | 77 |
| | 100 |
| | (23 | ) | | (23 | )% | 65 |
| | 123 |
| | (58 | ) | | (47 | )% |
Segment revenues
In 2017,2020, our Financial Services segment net revenues decreased by $80 million or 27%. Revenues were comparablelower in 2020 by $54 million due to the prior year primarily driven by higherlower average yields from lower interest rates and higher revenues from operating leases in Mexico, offset by$28 million lower due to lower average finance receivable balances and unfavorable movements in foreign currency exchange rates impacting our Mexican portfolio.receivables from lower volumes.
Segment profit
In 2017,2020, our Financial Services segment profit decreased by $23$58 million or 23%47%. TheIn 2020, there was an $80 million decrease is primarily drivendue to lower revenues and a $7 million decrease due to an increased provision for losses related to the retail portfolio in Mexico, partially offset by the pay down$36 million of certain intercompany loan receivables in the prior yearlower interest expense resulting from lower borrowing requirements and lower interest margin resulting from an increase in our average borrowing rate.rates.
Supplemental Information
The following tables provide additional information on truck industry retail units, market share data, order units, backlog units and chargeout units. These tables present key metrics and trends that provide quantitative measures of our performance.
Truck Industry Retail Deliveries
The following table summarizes approximate industry retail deliveries for our Core markets, categorized by relevant class, according to Wards Auto and IHS Markit ("Polk") and our Core retail deliveries: | | | | For the Years Ended October 31, | | 2018 vs 2017 | | 2017 vs 2016 | For the Years Ended October 31, | | 2020 vs 2019 | | 2019 vs 2018 |
| (in units) | 2018 | | 2017 | | 2016 | | Change | | % Change | | Change | | % Change | 2020 | | 2019 | | 2018 | | Change | | % Change | | Change | | % Change |
| Core Markets (U.S. and Canada) | | | | | | | | | | | | | | | | | | | | | | | | | | |
School buses(A) | 33,100 |
| | 35,100 |
| | 32,800 |
| | (2,000 | ) | | (6 | )% | | 2,300 |
| | 7 | % | 28,400 |
| | 33,900 |
| | 33,100 |
| | (5,500 | ) | | (16 | )% | | 800 |
| | 2 | % |
| Class 6 and 7 medium trucks | 98,800 |
| | 86,100 |
| | 86,800 |
| | 12,700 |
| | 15 | % | | (700 | ) | | (1 | )% | 77,300 |
| | 112,200 |
| | 98,800 |
| | (34,900 | ) | | (31 | )% | | 13,400 |
| | 14 | % |
| Class 8 heavy trucks | 206,400 |
| | 146,200 |
| | 165,700 |
| | 60,200 |
| | 41 | % | | (19,500 | ) | | (12 | )% | 154,000 |
| | 235,700 |
| | 206,400 |
| | (81,700 | ) | | (35 | )% | | 29,300 |
| | 14 | % |
Class 8 severe service trucks(B) | 70,300 |
| | 60,600 |
| | 61,100 |
| | 9,700 |
| | 16 | % | | (500 | ) | | (1 | )% | 65,200 |
| | 79,700 |
| | 70,300 |
| | (14,500 | ) | | (18 | )% | | 9,400 |
| | 13 | % |
Total Core Markets(B) | 408,600 |
| | 328,000 |
| | 346,400 |
| | 80,600 |
| | 25 | % | | (18,400 | ) | | (5 | )% | 324,900 |
| | 461,500 |
| | 408,600 |
| | (136,600 | ) | | (30 | )% | | 52,900 |
| | 13 | % |
Combined class 8 trucks(B) | 276,700 |
| | 206,800 |
| | 226,800 |
| | 69,900 |
| | 34 | % | | (20,000 | ) | | (9 | )% | 219,200 |
| | 315,400 |
| | 276,700 |
| | (96,200 | ) | | (31 | )% | | 38,700 |
| | 14 | % |
| Navistar Core retail deliveries | 71,400 |
| | 56,700 |
| | 54,700 |
| | 14,700 |
| | 26 | % | | 2,000 |
| | 4 | % | 51,900 |
| | 86,800 |
| | 71,400 |
| | (34,900 | ) | | (40 | )% | | 15,400 |
| | 22 | % |
_________________________
| |
(A) | The School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag. |
| |
(B) | Retail deliveries include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016. |
(A) The School bus retail market deliveries include buses classified as B, C, and D and are being reported on a one-month lag.
Truck Retail Delivery Market Share
The following table summarizes our approximate retail delivery market share percentages for the Class 6 through 8 U.S. and Canada truckour Core markets, based on market-wide information from Wards Auto and Polk: |
| | | | | | | | |
| | For the Years Ended October 31, |
| | 2018 | | 2017 | | 2016 |
| Core Markets (U.S. and Canada) | | | | | |
School buses(A) | 33 | % | | 32 | % | | 34 | % |
| Class 6 and 7 medium trucks | 23 | % | | 25 | % | | 21 | % |
| Class 8 heavy trucks | 14 | % | | 11 | % | | 10 | % |
Class 8 severe service trucks(B) | 13 | % | | 13 | % | | 13 | % |
Total Core Markets(B) | 17 | % | | 17 | % | | 16 | % |
Combined class 8 trucks(B) | 14 | % | | 12 | % | | 11 | % |
_______________________
| |
(A) | The School bus retail delivery market share includes buses classified as B, C, and D and are being reported on a one-month lag. |
| |
(B) | Retail delivery market share includes CAT-branded units sold to Caterpillar under our North America supply agreement during 2016. |
|
| | | | | | | | |
| | For the Years Ended October 31, |
| | 2020 | | 2019 | | 2018 |
| Core Markets (U.S. and Canada) | | | | | |
| School buses | 37.8 | % | | 35.8 | % | | 33.2 | % |
| Class 6 and 7 medium trucks | 21.0 | % | | 27.0 | % | | 23.3 | % |
| Class 8 heavy trucks | 9.5 | % | | 13.8 | % | | 13.7 | % |
| Class 8 severe service trucks | 15.8 | % | | 14.8 | % | | 12.9 | % |
| Total Core Markets | 16.0 | % | | 18.8 | % | | 17.5 | % |
| Combined class 8 trucks | 11.4 | % | | 14.1 | % | | 13.5 | % |
Truck Orders, net
We define orders as written commitments received from customers and dealers during the year to purchase trucks. Net orders represent new orders received during the year less order cancellations of orders made during the same year. Orders do not represent guarantees of purchases by customers or dealers and are subject to cancellation. Orders may be either sold orders, which will be built for specific customers, or stock orders, which will generally be built for dealer inventory for eventual sale to customers. These orders may be placed at our assembly plants in the U.S. and Mexico for destinations anywhere in the world and include trucks and buses. Historically, we have had an increase in net orders for stock inventory from our dealers at the end of the year due to a combination of demand and, from time to time, incentives to the dealers. Increases in stock orders typically translate to higher future chargeouts. The following table summarizes our approximate net orders for Core units: | | | | For the Years Ended October 31, | | 2018 vs 2017 | | 2017 vs 2016 | For the Years Ended October 31, | | 2020 vs 2019 | | 2019 vs 2018 |
| (in units) | 2018 |
| 2017 | | 2016 | | Change | | % Change | | Change | | % Change | 2020 |
| 2019 | | 2018 | | Change | | % Change | | Change | | % Change |
| Core Markets (U.S. and Canada) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| School buses | 12,800 |
| | 11,000 |
| | 11,900 |
| | 1,800 |
| | 16 | % | | (900 | ) | | (8 | )% | 10,000 |
| | 12,600 |
| | 12,800 |
| | (2,600 | ) | | (21 | )% | | (200 | ) | | (2 | )% |
| Class 6 and 7 medium trucks | 34,700 |
| | 21,200 |
| | 16,900 |
| | 13,500 |
| | 64 | % | | 4,300 |
| | 25 | % | 13,400 |
| | 23,600 |
| | 34,700 |
| | (10,200 | ) | | (43 | )% | | (11,100 | ) | | (32 | )% |
| Class 8 heavy trucks | 42,400 |
| | 18,900 |
| | 6,300 |
| | 23,500 |
| | 124 | % | | 12,600 |
| | 200 | % | 13,200 |
| | 23,300 |
| | 42,400 |
| | (10,100 | ) | | (43 | )% | | (19,100 | ) | | (45 | )% |
Class 8 severe service trucks(A) | 15,000 |
| | 8,800 |
| | 7,700 |
| | 6,200 |
| | 70 | % | | 1,100 |
| | 14 | % | 7,400 |
| | 10,300 |
| | 15,000 |
| | (2,900 | ) | | (28 | )% | | (4,700 | ) | | (31 | )% |
Total Core Markets(A) | 104,900 |
| | 59,900 |
| | 42,800 |
| | 45,000 |
| | 75 | % | | 17,100 |
| | 40 | % | 44,000 |
| | 69,800 |
| | 104,900 |
| | (25,800 | ) | | (37 | )% | | (35,100 | ) | | (33 | )% |
Combined class 8 trucks(A) | 57,400 |
| | 27,700 |
| | 14,000 |
| | 29,700 |
| | 107 | % | | 13,700 |
| | 98 | % | 20,600 |
| | 33,600 |
| | 57,400 |
| | (13,000 | ) | | (39 | )% | | (23,800 | ) | | (41 | )% |
_______________________
| |
(A) | Orders include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016. |
Truck Backlogs
We define order backlogs ("backlogs") as orders yet to be built as of the end of the period. Our backlogs do not represent guarantees of purchases by customers or dealers and are subject to cancellation. Although backlogs are one of many indicators of market demand, other factors such as changes in production rates, internal and supplier available capacity, new product introductions, and competitive pricing actions may affect point-in-time comparisons. Backlogs exclude units in inventory awaiting additional modifications or delivery to the end customer. The following table summarizes our approximate backlog for Core units: | | | | For the Years Ended October 31, | | 2018 vs 2017 | | 2017 vs 2016 | For the Years Ended October 31, | | 2020 vs 2019 | | 2019 vs 2018 |
| (in units) | 2018 | | 2017 | | 2016 | | Change | | % Change | | Change | | % Change | 2020 | | 2019 | | 2018 | | Change | | % Change | | Change | | % Change |
| Core Markets (U.S. and Canada) | | | | | | | | | | | | | | | | | | | | | | | | | | |
| School buses | 2,400 |
| | 1,700 |
| | 2,100 |
| | 700 |
| | 41 | % | | (400 | ) | | (19 | )% | 1,200 |
| | 2,100 |
| | 2,400 |
| | (900 | ) | | (43 | )% | | (300 | ) | | (13 | )% |
| Class 6 and 7 medium trucks | 14,500 |
| | 4,600 |
| | 4,100 |
| | 9,900 |
| | 215 | % | | 500 |
| | 12 | % | 6,900 |
| | 8,900 |
| | 14,500 |
| | (2,000 | ) | | (22 | )% | | (5,600 | ) | | (39 | )% |
| Class 8 heavy trucks | 20,800 |
| | 6,800 |
| | 4,700 |
| | 14,000 |
| | 206 | % | | 2,100 |
| | 45 | % | 10,100 |
| | 11,200 |
| | 20,800 |
| | (1,100 | ) | | (10 | )% | | (9,600 | ) | | (46 | )% |
Class 8 severe service trucks(A) | 7,700 |
| | 2,500 |
| | 2,100 |
| | 5,200 |
| | 208 | % | | 400 |
| | 19 | % | 3,100 |
| | 6,100 |
| | 7,700 |
| | (3,000 | ) | | (49 | )% | | (1,600 | ) | | (21 | )% |
Total Core Markets(A) | 45,400 |
| | 15,600 |
| | 13,000 |
| | 29,800 |
| | 191 | % | | 2,600 |
| | 20 | % | 21,300 |
| | 28,300 |
| | 45,400 |
| | (7,000 | ) | | (25 | )% | | (17,100 | ) | | (38 | )% |
Combined class 8 trucks(A) | 28,500 |
| | 9,300 |
| | 6,800 |
| | 19,200 |
| | 206 | % | | 2,500 |
| | 37 | % | 13,200 |
| | 17,300 |
| | 28,500 |
| | (4,100 | ) | | (24 | )% | | (11,200 | ) | | (39 | )% |
_______________________
| |
(A) | Backlogs include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016. |
Truck Chargeouts
We define chargeouts as trucks that have been invoiced to customers. The units held in dealer inventory represent the principal difference between retail deliveries and chargeouts. The following table summarizes our approximate worldwide chargeouts:
| | | | For the Years Ended October 31, | | 2018 vs 2017 | | 2017 vs 2016 | For the Years Ended October 31, | | 2020 vs 2019 | | 2019 vs 2018 |
| (in units) | 2018 |
| 2017 | | 2016 | | Change | | % Change | | Change | | % Change | 2020 |
| 2019 | | 2018 | | Change | | % Change | | Change | | % Change |
| Core Markets (U.S. and Canada) | | | | | | | | | | | | | | | | | | | | | | | | | | |
School buses(A) | 12,200 |
| | 11,300 |
| | 11,200 |
| | 900 |
| | 8 | % | | 100 |
| | 1 | % | 11,100 |
| | 13,000 |
| | 12,200 |
| | (1,900 | ) | | (15 | )% | | 800 |
| | 7 | % |
| Class 6 and 7 medium trucks | 24,300 |
| | 20,900 |
| | 17,800 |
| | 3,400 |
| | 16 | % | | 3,100 |
| | 17 | % | 15,400 |
| | 29,200 |
| | 24,300 |
| | (13,800 | ) | | (47 | )% | | 4,900 |
| | 20 | % |
| Class 8 heavy trucks | 27,800 |
| | 16,800 |
| | 16,300 |
| | 11,000 |
| | 65 | % | | 500 |
| | 3 | % | 13,700 |
| | 33,100 |
| | 27,800 |
| | (19,400 | ) | | (59 | )% | | 5,300 |
| | 19 | % |
Class 8 severe service trucks(B) | 9,600 |
| | 8,300 |
| | 7,600 |
| | 1,300 |
| | 16 | % | | 700 |
| | 9 | % | 10,200 |
| | 11,900 |
| | 9,600 |
| | (1,700 | ) | | (14 | )% | | 2,300 |
| | 24 | % |
| Total Core Markets | 73,900 |
| | 57,300 |
| | 52,900 |
| | 16,600 |
| | 29 | % | | 4,400 |
| | 8 | % | 50,400 |
| | 87,200 |
| | 73,900 |
| | (36,800 | ) | | (42 | )% | | 13,300 |
| | 18 | % |
| Non "Core" defense | 700 |
| | 800 |
| | 500 |
| | (100 | ) | | (13 | )% | | 300 |
| | 60 | % | — |
| | 100 |
| | 700 |
| | (100 | ) | | (100 | )% | | (600 | ) | | (86 | )% |
Other markets(C)(A) | 9,600 |
| | 10,800 |
| | 9,900 |
| | (1,200 | ) | | (11 | )% | | 900 |
| | 9 | % | 15,600 |
| | 19,200 |
| | 9,600 |
| | (3,600 | ) | | (19 | )% | | 9,600 |
| | 100 | % |
| Total worldwide units | 84,200 |
| | 68,900 |
| | 63,300 |
| | 15,300 |
| | 22 | % | | 5,600 |
| | 9 | % | 66,000 |
| | 106,500 |
| | 84,200 |
| | (40,500 | ) | | (38 | )% | | 22,300 |
| | 26 | % |
| Combined class 8 trucks | 37,400 |
| | 25,100 |
| | 23,900 |
| | 12,300 |
| | 49 | % | | 1,200 |
| | 5 | % | 23,900 |
| | 45,000 |
| | 37,400 |
| | (21,100 | ) | | (47 | )% | | 7,600 |
| | 20 | % |
_____________________________
| |
| (A) | The School bus chargeouts include buses classified as B, C, and D and are being reported on a one-month lag. |
| |
(B) | Chargeouts include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016. |
| |
(C) | Other markets primarily consist of Class 4/5 vehicles, Export Truck, Mexico, and Mexico.post-sale Navistar Defense. Other markets include certain Class 4/5 vehicle chargeouts of 7,300 and 9,000 GM-branded units sold to GM for the years ended October 31, 2020 and 2019, respectively. |
Liquidity and Capital Resources
Consolidated cash, cash equivalents, and marketable securities
| | | | As of October 31, | As of October 31, |
| (in millions) | 2018 |
| 2017 |
| 2016 | 2020 |
| 2019 |
| 2018 |
| Consolidated cash and cash equivalents | $ | 1,320 |
| | $ | 706 |
| | $ | 804 |
| $ | 1,843 |
| | $ | 1,370 |
| | $ | 1,320 |
|
| Consolidated marketable securities | 101 |
| | 370 |
| | 46 |
| — |
| | — |
| | 101 |
|
| Consolidated cash, cash equivalents, and marketable securities | $ | 1,421 |
| | $ | 1,076 |
| | $ | 850 |
| $ | 1,843 |
| | $ | 1,370 |
| | $ | 1,421 |
|
| | | | As of October 31, | As of October 31, |
| (in millions) | 2018 | | 2017 | | 2016 | 2020 | | 2019 | | 2018 |
| Manufacturing operations | $ | 1,362 |
| | $ | 1,036 |
| | $ | 800 |
| $ | 1,749 |
| | $ | 1,328 |
| | $ | 1,362 |
|
| Financial Services operations | 59 |
| | 40 |
| | 50 |
| 94 |
| | 42 |
| | 59 |
|
| Consolidated cash, cash equivalents, and marketable securities | $ | 1,421 |
| | $ | 1,076 |
| | $ | 850 |
| $ | 1,843 |
| | $ | 1,370 |
| | $ | 1,421 |
|
Manufacturing cash, cash equivalents, and marketable securities
Manufacturing cash, cash equivalents, and marketable securities, and Financial Services cash, cash equivalents and marketable securities are not presented in accordance with, and should not be viewed as an alternative to, U.S. GAAP. This non-GAAP financial information should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. However, we believe that non-GAAP reporting provides meaningful information and therefore we use it to supplement our U.S. GAAP reporting by identifying items that may not be related to the Corecore manufacturing business. We provide this information for an additional analysis of our ability to meet our operating requirements, capital expenditures, equity investments, and financial obligations. Manufacturing cash, cash equivalents, and marketable securities represent our consolidated cash, cash equivalents, and marketable securities, if any, which excludes cash, cash equivalents, and marketable securities of our Financial Services operations. We include marketable securities with our cash and cash equivalents when assessing our liquidity position as our investments are highly liquid in nature.
Consolidated cash, cash equivalents, and marketable securities totaled $1.4 billion at October 31, 2018, which includes an immaterial amount of cash and cash equivalents primarily attributable to BDP that is generally not available to satisfy our obligations. For additional information on the consolidationtotaled $1.8 billion as of BDP, see Note 1, SummaryOctober 31, 2020 and $1.4 billion as of Significant Accounting Policies, to the accompanying consolidated financial statements.October 31, 2019.
Cash Requirements
We generate cash flows for operations from the sale of trucks, buses, diesel engines, and parts, as well as from product financing provided to our dealers and retail customers by our Financial Services operations. We fund our operations and strategic plans primarily with cash, cash generated from operations, debt and equity. It is our opinion that, in the absence of significant extraordinary cash demands, our: (i) level of cash, cash equivalents, and marketable securities, (ii) current and forecasted cash flow from our Manufacturing operations and Financial Services operations, (iii) availability under various funding facilities, (iv) current and forecasted availability from various funding alliances, and (v) access to capital in the capital markets, will provide sufficient funds to meet operating requirements, capital expenditures, investments, and financial obligations on both a short-term and long-term basis. Future Manufacturing operations debt obligations are expected to be met through a combination of cash generation from operations and refinancing activities. We also believe the quality of our underlying portfolio of receivables will ensure the ongoing funding from various sources and alliance partners and will permit our Financial Services operations to meet our financing requirements and those of our dealers, and retail customers.
In response to the significant extraordinary cash demands presented by the COVID-19 pandemic, we have implemented a series of temporary measures to preserve liquidity. These actions include the postponement of certain discretionary spending, taking advantage of the broad-based employer relief provided under the CARES Act, a delay in certain 401(k) company matching contributions until 2021, and deferrals of a portion of the base salaries of certain current employees and executives. Taken together, these measures conserved approximately $300 million in cash over the fiscal year ending October 31, 2020. We terminated the deferral of a portion of base salaries as of September 1, 2020 and these amounts were repaid in November 2020. A large portion of the broad-based employer relief actions under the CARES Act that we benefited from in 2020 are expected to be repaid in 2021, while the remaining employer relief actions are not required to be repaid until 2022 and 2023.
We have capacityability under our variouscertain debt arrangements to raise additional cash by incurring incremental debt. The covenants in all of our debt agreements permit us to refinance existing debt instruments as they mature. OurIn July 2020, Navistar Financial Services Corporation ("NFSC") issued $300 million of two-year investor notes which are secured by assets of the wholesale notes owner trust. The proceeds were used to repay the $300 million of investor notes that matured in September 2020.
On August 4, 2020, we completed a certain tax-exempt bond financing in which the Illinois Finance Authority (the “IFA”) issued and sold $225 million aggregate principal amount of Recovery Zone Facility Revenue Refunding Bonds (Navistar International Corporation Project) Series 2020 due October 15, 2040 (the “2020 Bonds"). The proceeds of the 2020 Bonds were loaned to the Company pursuant to a loan agreement dated as of July 1, 2020. The proceeds from the issuance of the 2020 Bonds were used, together with certain other funds of the Company, for refunding (1) the $135 million aggregate principal amount of IFA Recovery Zone Facility Revenue Bonds (Navistar International Corporation Project), Series 2010 due October 15, 2040 (the “IFA 2010 Bonds”) and (2) $90 million aggregate principal amount of The County of Cook, Illinois Recovery Zone Facility Revenue Bonds (Navistar International Corporation Project), Series 2010 due October 15, 2040 (the “Cook County Bonds”; together with the IFA 2010 Bonds, the “2010 Bonds”) for which a notice of redemption was issued on August 24, 2020, and was completed on October 15, 2020. Beginning on August 1, 2030, the 2020 Bonds are subject to optional redemption at the direction of the Company, in whole or in part. In addition, if the Company is acquired by TRATON SE or one of its affiliates, the Company may, at its option, redeem all, but not less than all, of the 2020 Bonds. In each case, the Company will pay a redemption price equal to 100% of the principal amount thereof, plus accrued interest, if any, to the redemption date. The interest rate on the 2020 Bonds is 4.75% and the interest rate on the 2010 Bonds was 6.75%. The 2020 Bonds are senior unsecured general obligations with a subsidiary guaranty from Navistar, Inc.
In January 2020, our TRAC facility was renewed and extended to June 2021, with a capacity range of $100 million to $200 million.
In April 2020, we took additional actions to strengthen our financial flexibility through the issuance of $600 million of our 9.5% Senior Secured Convertible Notes mature in April 2019,Notes.
In May 2020, the maturity date of our VFN facility was extended to May 2021, and the maximum capacity remained at which time we expect to either repay from cash-on-hand and/or refinance with long term debt.$350 million.
Our Manufacturing operations sold $8.5$6.8 billion,$7.410.5 billion and $7.2$8.5 billion of wholesale notes and accounts receivable to our Financial Services operations during the years ended October 31, 2018, 20172020, 2019 and 2016,2018, respectively. The total outstanding balance of wholesale notes and accounts receivable purchased was $1.7$1.2 billion and $1.4$1.7 billion as of October 31, 20182020 and 2017,2019, respectively. Total
NFC paid a $30 million and $20 million dividend to NI in 2020 and 2019, respectively, and total loans outstanding from our Financial Services operations to our Manufacturing operations were $212$363 million and $91$281 million as of October 31, 20182020 and 2017,2019, respectively.
Included in loans made from Financial Services operations to Manufacturing operations is a new $150 Loans outstanding include: an unsecured loan balance with NFC of $200 million loan made during the year endedas of both October 31, 2018 in which NFC loaned certain proceeds from its successful $400 million Term Loan B financing. Also included in loans made from Financial Services operations to Manufacturing operations is an intercompany2020 and 2019; financing from NFC that is secured by a first priority lien on used truck inventory of $63 million and certain related assets (the "Intercompany Used Truck Loan"). As$25 million as of October 31, 20182020 and October 31, 2017, our borrowings under the Intercompany Used Truck Loan were zero2019, respectively; and $29 million, respectively. Our Manufacturing operations also have an intercompany revolving loan agreement (the "Intercompany Revolving Loan") with our captive insurance company under our Financial Services segment. During the year endedAs of October 31, 2018, our borrowings2020 and 2019, the outstanding balance under the Intercompany Revolving Loan agreement remained at$7 million.
Our Financial Services operations in Mexico extendwas $20 million and $16 million, respectively. There was $80 million and $40 million outstanding under a working capital loansloan from our Mexico financial operations to our ManufacturingMexico manufacturing operations in Mexico for orders received. received as of October 31, 2020 and 2019, respectively.
As of October 31, 2018 and October 31, 2017, the2020, there were no borrowings outstanding under NI's $125 million asset-based credit facility, which is also used to secure certain outstanding letters of our Manufacturing operations in Mexico under these loan agreements were $55 million, for both periods.credit.
See Note 9, 11, Debt, to the accompanying consolidated financial statements for a description of our credit facilities and long-term debt obligations.
Cash Flow Overview
|
| | | | | | | | | | | |
| | Year Ended October 31, 2018 |
| (in millions) | Manufacturing
Operations(A) | | Financial Services Operations and Adjustments(A) | | Consolidated Statement of Cash Flows |
| Net cash provided by (used in) operating activities | $ | 419 |
| | $ | (150 | ) | | $ | 269 |
|
| Net cash provided by (used in) investing activities | 54 |
| | (113 | ) | | (59 | ) |
| Net cash provided by financing activities | 137 |
| | 277 |
| | 414 |
|
| Effect of exchange rate changes on cash and cash equivalents | (15 | ) | | 5 |
| | (10 | ) |
| Increase in cash and cash equivalents | 595 |
| | 19 |
| | 614 |
|
| Cash and cash equivalents at beginning of the year | 666 |
| | 40 |
| | 706 |
|
| Cash and cash equivalents at end of the year | $ | 1,261 |
| | $ | 59 |
| | $ | 1,320 |
|
|
| | | | | | | | | | | |
| | Year Ended October 31, 2020 |
| (in millions) | Manufacturing
Operations(A) | | Financial Services Operations and Adjustments(A) | | Consolidated Statement of Cash Flows |
| Net cash provided by (used in) operating activities | $ | (70 | ) | | $ | 544 |
| | $ | 474 |
|
| Net cash used in investing activities | (132 | ) | | (85 | ) | | (217 | ) |
| Net cash provided by (used in) financing activities | 637 |
| | (456 | ) | | 181 |
|
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (20 | ) | | (2 | ) | | (22 | ) |
| Increase in cash, cash equivalents and restricted cash | 415 |
| | 1 |
| | 416 |
|
| Cash, cash equivalents and restricted cash at beginning of the year | 1,378 |
| | 179 |
| | 1,557 |
|
| Cash, cash equivalents and restricted cash at end of the year | $ | 1,793 |
| | $ | 180 |
| | $ | 1,973 |
|
|
| | | | | | | | | | | |
| Year Ended October 31, 2017 |
| (in millions) | Manufacturing
Operations(A) |
| Financial Services Operations and Adjustments(A) |
| Consolidated Statement of Cash Flows |
| Net cash provided by operating activities | $ | 10 |
| | $ | 99 |
| | $ | 109 |
|
| Net cash used in investing activities | (489 | ) | | (53 | ) | | (542 | ) |
| Net cash provided by (used in) financing activities | 389 |
| | (51 | ) | | 338 |
|
| Effect of exchange rate changes on cash and cash equivalents | (5 | ) | | 2 |
| | (3 | ) |
| Decrease in cash and cash equivalents | (95 | ) | | (3 | ) | | (98 | ) |
| Cash and cash equivalents at beginning of the year | 761 |
| | 43 |
| | 804 |
|
| Cash and cash equivalents at end of the year | $ | 666 |
| | $ | 40 |
| | $ | 706 |
|
|
| | | | | | | | | | | |
| Year Ended October 31, 2019 |
| (in millions) | Manufacturing
Operations(A) |
| Financial Services Operations and Adjustments(A) |
| Consolidated Statement of Cash Flows |
| Net cash provided by operating activities | $ | 395 |
| | $ | 55 |
| | $ | 450 |
|
| Net cash provided by (used in) investing activities | 70 |
| | (138 | ) | | (68 | ) |
| Net cash provided by (used in) financing activities | (373 | ) | | 115 |
| | (258 | ) |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (9 | ) | | (3 | ) | | (12 | ) |
| Increase in cash, cash equivalents and restricted cash | 83 |
| | 29 |
| | 112 |
|
| Cash, cash equivalents and restricted cash at beginning of the year | 1,295 |
| | 150 |
| | 1,445 |
|
| Cash, cash equivalents and restricted cash at end of the year | $ | 1,378 |
| | $ | 179 |
| | $ | 1,557 |
|
|
| | | | | | | | | | | |
| | Year Ended October 31, 2016 |
| (in millions) | Manufacturing
Operations(A) | | Financial Services Operations and Adjustments(A) | | Consolidated Statement of Cash Flows |
| Net cash provided by operating activities | $ | 56 |
| | $ | 211 |
| | $ | 267 |
|
| Net cash provided by (used in) investing activities | 3 |
| | (70 | ) | | (67 | ) |
| Net cash used in financing activities | (203 | ) | | (150 | ) | | (353 | ) |
| Effect of exchange rate changes on cash and cash equivalents | 28 |
| | 17 |
| | 45 |
|
| Increase (decrease) in cash and cash equivalents | (116 | ) | | 8 |
| | (108 | ) |
| Cash and cash equivalents at beginning of the year | 877 |
| | 35 |
| | 912 |
|
| Cash and cash equivalents at end of the year | $ | 761 |
| | $ | 43 |
| | $ | 804 |
|
|
| | | | | | | | | | | |
| | Year Ended October 31, 2018 |
| (in millions) | Manufacturing
Operations(A) | | Financial Services Operations and Adjustments(A) | | Consolidated Statement of Cash Flows |
| Net cash provided by (used in) operating activities | $ | 417 |
| | $ | (150 | ) | | $ | 267 |
|
| Net cash provided by (used in) investing activities | 66 |
| | (132 | ) | | (66 | ) |
| Net cash provided by financing activities | 137 |
| | 277 |
| | 414 |
|
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | (15 | ) | | 5 |
| | (10 | ) |
| Increase in cash, cash equivalents and restricted cash | 605 |
| | — |
| | 605 |
|
| Cash, cash equivalents and restricted cash at beginning of the year | 690 |
| | 150 |
| | 840 |
|
| Cash, cash equivalents and restricted cash at end of the year | $ | 1,295 |
| | $ | 150 |
| | $ | 1,445 |
|
_________________________
| |
| (A) | Manufacturing operations cash flows and Financial Services operations cash flows are not presented in accordance with, and should not be viewed as an alternative to, U.S. GAAP. This non-GAAP financial information should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP. However, we believe that non-GAAP reporting provides meaningful information and therefore we use it to supplement our U.S. GAAP reporting by identifying items that may not be related to the Core manufacturing business. Management often uses this information to assess and measure the performance and liquidity of our operating segments. Our Manufacturing operations, for this purpose, include our Truck segment, Global Operations segment, Parts segment, and Corporate items which include certain eliminations. The reconciling differences between these non-GAAP financial measures and our U.S. GAAP consolidated financial statements in Item 1, 8, Financial Statements and Supplementary Data, are our Financial Services operations and adjustments required to eliminate certain intercompany transactions between Manufacturing operations and Financial Services operations. Our Financial Services operations cash flows are presented consistent with their treatment in our Condensed Consolidated Statements of Cash Flows and may not be consistent with how they would be treated on a stand-alone basis. We have chosen to provide this supplemental information to allow additional analysis, to illustrate the respective cash flows giving effect to the equity basis cash flow shown above, and to provide an additional measure of performance and liquidity. |
Manufacturing Operations
Manufacturing Operations Cash Flow from Operating Activities
Cash used in operating activities was $70 million in 2020, as compared to cash provided by operating activities was $419 million, $10of $395 million and $56$417 million in 2018, 20172019 and 2016,2018, respectively. The net decrease in cash flow from operating activities in 2020 compared to 2019 was primarily attributable to a decrease in net income, a lower decrease in accounts receivable and a decrease in other current liabilities, partially offset by a higher decrease in inventories, a decrease in other current assets and a lower decrease in accounts payable. The lower amount of cash generation from operating activities in 20182019 compared to 20172018 was primarily attributable to higher net income, lower increases in accounts receivable, other current and noncurrent assets, and net payables with our Financial Services operations, increasesdecreases in accounts payable and other current and noncurrent liabilities and a higher increase in other current assets partially offset by a decrease in inventories, higher inventories.collections of accounts receivable, a decrease in intercompany receivables from Financial Services and a dividend received from Financial Services.
Cash paid for interest, net of amounts capitalized, was $160 million, $196 million, and $226 million $223 million,in 2020, 2019, and $227 million in 2018, 2017, and 2016, respectively.
We paid $86 million, $203 million, and $186 million $193 million,for 2020, 2019, and $199 million for 2018, 2017, and 2016 respectively, for costs associated with postretirement benefits including pension and postretirement health care expenses for employees and surviving spouses and dependents, the funding of trust assets, and other postretirement payments. These postretirement benefits did not include any cash payments made from trust assets to beneficiaries.
Manufacturing Operations Cash Flow from Investing Activities
Cash used in investing activities was $132 million in 2020 compared to cash provided by investing activities was $54of $70 million, and $3$66 million in 2019 and 2018, and 2016, respectively, asrespectively. The decrease in cash flow from investing activities in 2020 compared to cash used2019 was primarily attributable to lower maturities of marketable securities and lower proceeds from asset sales, including the 2019 sales of a majority interest in investing activities of $489 millionNavistar Defense and our joint venture in 2017.China with JAC. The net increase in cash flow from investing activities in 20182019 compared to 20172018 was primarily attributable to lower purchasesdecreases in the purchase of marketable securities and equipment leased to others, higher maturities of marketable securities partially offset by a decrease inand proceeds from the sale of marketable securities,a majority interest in Navistar Defense and the sale of our joint venture in China with JAC, partially offset by an increase in capital expenditures and an increase in the amount of restricted cash, higher purchases of equipment leased to others, and lower proceeds from sales of property and equipment. During 2018, salesnet liquidations of marketable securities totaled $460 million and maturities of marketable securities totaled $60 million, compared with $652 million of sales and $28 million of maturities of marketable securities and $539 million of sales and $43 million of maturities of marketable securities during 2017 and 2016, respectively.securities.
Manufacturing Operations Cash Flow from Financing Activities
Cash provided by financing activities was $137 million and $389$637 million in 2018 and 2017, respectively,2020 compared to cash used in financing activities of $203$373 million in 2016.2019 and cash provided by financing activities of $137 million in 2018. The net increase in cash provided by financing activities in 2020 compared to 2019 was primarily attributable to $600 million of proceeds received from the issuance of the 9.5% Senior Secured Notes, higher issuances of other long-term debt and lower principal payments on long-term debt, partially offset by lower proceeds from finance lease obligations. The net decrease in cash flow from financing activities in 20182019 compared to 20172018 was primarily attributable to higher principal repaymentsthe maturity and repayment of long-term debt, a decreaseour 4.75% Senior Subordinated Convertible Notes in the amount of proceeds received from the issuance of common stock and higher debt issuance costs, partially offset by higherApril 2019, lower proceeds from the issuance of long-term debt, lower proceeds from loans made from Financial Services operations to Manufacturing operations and lower proceeds from finance lease obligations, partially offset by lower payments on long-term debt and a decrease in the amount of stockdebt issuance costs and funding under the Intercompany Loan.costs.
Financial Services Operations
Financial Services Operations and Adjustments to Cash Flow from Operating Activities
Cash provided by operating activities was $544 million in 2020 and $55 million in 2019 as compared to cash used in operating activities wasof $150 million in 2018, compared to cash provided by operating activities of $99 million and $211 million in 2017 and 2016, respectively.2018. The decreaseincrease in cash provided by operating activities in 20182020 was primarily due to an increase in net collections on finance receivables, partially offset by a decrease in segment profit. The net increase in cash provided by operating activities in 2019 was primarily due to the increase in segment profit realized from an improved funding strategy, partially offset by a reduction in intercompany finance receivables funded.fees. The decreaseincrease in cash providedsegment profit was partially offset by operating activities in 2017 was primarily due to an increase in the levelbalance of finance receivables funded, compareda dividend paid to a decrease in the prior year period, the utilization of a trade payable with our Manufacturing operations, and a slight decline in segment profitthe repayment of our Financial Servicesintercompany payables to the Manufacturing operations.
Cash paid for interest, net of amounts capitalized, was $58 million, $91 million, and $80 million $71 million,in 2020, 2019, and $64 million in 2018, 2017, and 2016, respectively.
Financial Services Operations and Adjustments to Cash Flow from Investing Activities
Cash used inby investing activities was $113$85 million, $53$138 million and $70$132 million in 2020, 2019, and 2018, 2017, and 2016, respectively. ChangesIn 2020 the decrease in restricted cash levels required under our secured borrowings, along withused by investing activities was primarily due to a decrease in purchases of equipment leased to others, were the primary sources and uses of cash from investing activities in 2018, 2017, and 2016. In 2018, the increase in cash used inby investing activities in 2019 was primarily due to thean increase in purchases of equipment leased to others, partially offset by a decline in restricted cash levels under our secured borrowings. The decrease in cash used in investing activities in 2017 was primarily due to a decline in purchases of equipment leased to others, partially offset by an increase in restricted cash levels.others.
Financial Services Operations and Adjustments to Cash Flow from Financing Activities
Cash providedused by financing activities was $456 million in 2020 compared to cash provided of $115 million and $277 million in 2018, compared to cash used in financing activities of $51 million2019, and $150 million in 2017, and 20162018, respectively. The net increase in cash used by financing activities in 2020 was primarily due to the repayment of borrowings from the increase in net collections of finance receivables and the decrease in borrowing requirements related to the decrease in purchases of equipment leased to others. The decrease in cash provided by financing activities in 20182019 was primarily due to thea lower increase in borrowing levels associated with the increase in the level ofused to fund finance receivables funded. The net decrease in cash used in financing activities in 2017 was primarily dueand purchases of equipment leased to others, and the increase in borrowing levels associated with the increase in the levelrepayment of finance receivables funded comparedintercompany payables to the prior year period, partially offset by an increase in repayments of debt using intercompany loan repayments received from our Manufacturing operations.
Debt
Funding of Financial Services
The Financial Services segment has traditionally relied upon secured borrowings on finance receivables, short and long-term bank borrowings, medium and long-term debt, and commercial paper in Mexico to fund its provision of financing to our dealersdealer and retail customers.customer financing. As of October 31, 2018,2020, our funding consisted of asset-backed securitization debt of $948 million, senior secured term debt of $394$724 million, bank borrowings and revolving credit facilities of $519 million, commercial paper of $75$940 million and borrowings of $105$170 million secured by operating and finance leases.
We use a number ofseveral SPEs to securitize and sell receivables. Navistar Financial Securities Corporation ("NFSC") finances wholesale notes, International Truck Leasing Corporation ("ITLC") finances operating leases and some finance leases, and TRAC finances retail accounts.
Our Mexican financial services operations include Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad Regulada ("NFM"), which issueissues debt to provide vehicle financing to our dealers and retail customers in Mexico.
The following table sets forth the utilization under our bank credit and revolving funding facilities in place as of October 31, 2018:2020:
| | | Company | | Instrument Type | | Total
Amount | | Purpose of Funding | | Amount
Utilized | | Matures or Expires | | Instrument Type | | Total
Amount | | Purpose of Funding | | Amount
Utilized | | Matures or Expires |
| (in millions) | (in millions) | | | | | | | | | | (in millions) | | | | | | | | | |
| NFSC | | Wholesale note trust | | $ | 900 |
| | Eligible wholesale notes | | $ | 820 |
| | 2019-2020 | | Wholesale note trust | | $ | 950 |
| | Eligible wholesale notes | | $ | 610 |
| | 2021-2022 |
| NFC | | Credit agreement(A) | | 269 |
| | Finance receivables and general corporate purposes | | 21 |
| | 2021 | | Credit agreement(A) | | 748 |
| | Finance receivables and general corporate purposes | | 538 |
| | 2024 |
| NFM | | Bank lines | | 588 |
| | Finance receivables and general corporate purposes | | 498 |
| | 2019-2024 | | Bank lines | | 584 |
| | Finance receivables and general corporate purposes | | 403 |
| | 2021-2025 |
| TRAC | | Revolving retail accounts | | 100 |
| | Eligible retail accounts | | 100 |
| | 2020 | | Revolving retail accounts | | 200 |
| | Eligible retail accounts | | 117 |
| | 2021 |
______________________
| |
| (A) | NFM can borrow up to $81$100 million, if not used by NFC. |
We are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary's income before interest expense, capital contributions from NI, and income taxes at not less than 125% of its total interest expense. Under these agreements, if NFC's consolidated income before interest expense, capital contributions from NI, and income taxes is less than 125% of its interest expense, NI must make a capital contribution to NFC to achieve the required ratio. No such payments were required for the years ended October 31, 2018, 2017,2020, 2019, and 2016.2018.
Derivative Instruments
We use derivative financial instruments as part of our overall interest rate, foreign currency, and commodity risk management strategies to reduce our interest rate exposure, to potentially increase the return on invested funds, to reduce exchange rate risk for transactional exposures denominated in currencies other than the functional currency, and to minimize commodity price volatility. The fair values of these derivatives are recorded as assets or liabilities on a gross basis in our Consolidated Balance Sheets. For more information on derivatives and related market risks, see Item 7A, Quantitative and Qualitative Disclosures about Market Risk.
Capital Resources
We expend capital to support our operating and strategic plans. Such expenditures include investments to meet regulatory and emissions requirements, maintain capital assets, develop new products or improve existing products, and to enhance capacity or productivity. Many of the associated projects have long lead-times and require commitments in advance of actual spending.
Business units provide their estimates of costs of capital projects, expected returns, and benefits to senior management. Those projects are evaluated from the perspective of expected return and strategic importance, with a capital expenditure goal of approximately $150 million in 2019, exclusive of capital expenditures for equipment leased to others.importance. See Note 9, Debt7, Property and Equipment, net, to the accompanying consolidated financial statements.
ConsolidatedNon-GAAP Financial Performance Measures
EBITDA, Adjusted EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA,Net Income, which excludesexclude certain identified items that we do not consider to be part of our ongoing business, are not in accordance with, and should not be viewed as an alternative to, U.S. GAAP. This non-GAAP financial information should be considered supplemental to, and not as a substitute for, or superior to, financial measures calculated in accordance with U.S. GAAP.
We believe EBITDA providesthese non-GAAP measures provide meaningful information about the performance of our business and therefore we use itthem to supplement our U.S. GAAP reporting. We believe that Adjusted EBITDA improvesthey improve the comparability of year-to-year results and isare representative of our underlying performance. Management uses this information to assess and measure the performance of our operating segments. We have chosen to provide this supplemental information for an additional analysis of our operating results, to illustrate the results of operations giving effect to the non-GAAP adjustments shown in the below reconciliations, and to provide an additional measuremeasures of performance.
EBITDA reconciliation: | | | | For the Years Ended October 31, | For the Years Ended October 31, |
| (in millions) | 2018 |
| 2017 | | 2016 | 2020 |
| 2019 | | 2018 |
| Income (loss) from continuing operations attributable to NIC, net of tax | $ | 340 |
|
| $ | 29 |
| | $ | (97 | ) | |
| Net income (loss) attributable to NIC | | $ | (347 | ) |
| $ | 221 |
| | $ | 340 |
|
| Plus: |
|
|
|
|
| | |
|
|
|
|
| | |
| Depreciation and amortization expense | 211 |
|
| 223 |
| | 225 |
| 199 |
|
| 193 |
| | 211 |
|
Manufacturing interest expense(A) | 235 |
|
| 265 |
| | 247 |
| 199 |
|
| 207 |
| | 235 |
|
| Adjusted for: |
|
|
|
|
| | |
|
|
|
|
| | |
| Income tax expense | (52 | ) |
| (10 | ) | | (33 | ) | |
| Income tax (expense) benefit | | 59 |
|
| (19 | ) | | (52 | ) |
| EBITDA | $ | 838 |
|
| $ | 527 |
| | $ | 408 |
| $ | (8 | ) |
| $ | 640 |
| | $ | 838 |
|
______________________ | |
| (A) | Manufacturing interest expense is the net interest expense primarily generated for borrowings that support the manufacturing and corporate operations, adjusted to eliminate intercompany interest expense with our Financial Services segment. The following table reconciles Manufacturing interest expense to the consolidated interest expense. |
| | | | For the Years Ended October 31, | For the Years Ended October 31, |
| (in millions) | 2018 |
| 2017 | | 2016 | 2020 |
| 2019 | | 2018 |
| Interest expense | $ | 327 |
|
| $ | 351 |
| | $ | 327 |
| $ | 268 |
|
| $ | 312 |
| | $ | 327 |
|
| Less: Financial Services interest expense | 92 |
|
| 86 |
| | 80 |
| 69 |
|
| 105 |
| | 92 |
|
| Manufacturing interest expense | $ | 235 |
|
| $ | 265 |
| | $ | 247 |
| $ | 199 |
|
| $ | 207 |
| | $ | 235 |
|
Adjusted EBITDA Reconciliation: |
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
EBITDA (reconciled above) | $ | 838 |
|
| $ | 527 |
| | $ | 408 |
|
| Adjusted for significant items of: |
|
|
|
|
| | |
Adjustments to pre-existing warranties(A) | (9 | ) |
| (1 | ) | | 78 |
|
Asset impairment charges(B) | 14 |
|
| 13 |
| | 27 |
|
Restructuring of manufacturing operations(C) | (1 | ) | | 13 |
| | 10 |
|
EGR product litigation(D) | 1 |
| | 31 |
| | — |
|
Gain on sale (E) | — |
| | (6 | ) | | — |
|
Debt refinancing charges(F) | 46 |
| | 5 |
| | — |
|
One-time fee received(G) | — |
|
| — |
| | (15 | ) |
Pension settlement(H) | 9 |
| | — |
| | — |
|
Settlement gain(I) | (72 | ) | | — |
| | — |
|
| Total adjustments | (12 | ) |
| 55 |
| | 100 |
|
| Adjusted EBITDA | $ | 826 |
|
| $ | 582 |
| | $ | 508 |
|
_____________________ |
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
EBITDA (reconciled above) | $ | (8 | ) |
| $ | 640 |
| | $ | 838 |
|
| Adjusted for significant items of: |
|
|
|
|
| | |
Adjustments to pre-existing warranties(A) | 40 |
|
| 3 |
| | (9 | ) |
Asset impairment charges(B) | 28 |
|
| 7 |
| | 14 |
|
Restructuring of manufacturing operations(C) | 2 |
| | 14 |
| | (1 | ) |
MaxxForce Advanced EGR engine lawsuits(D) | — |
| | 129 |
| | 1 |
|
Legal settlement(E) | 58 |
| | — |
| | — |
|
Shy profit-sharing accrual(F) | 289 |
| | — |
| | — |
|
Gain on sale(G) | — |
| | (56 | ) | | — |
|
Debt refinancing charges(H) | 5 |
| | 6 |
| | 46 |
|
Pension settlement(I) | 7 |
| | 142 |
| | 9 |
|
Settlement gain(J) | (1 | ) | | (3 | ) | | (72 | ) |
| Total adjustments | 428 |
|
| 242 |
| | (12 | ) |
| Adjusted EBITDA | $ | 420 |
|
| $ | 882 |
| | $ | 826 |
|
Adjusted Net Income (Loss) attributable to NIC: |
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
| Net income (loss) attributable to NIC | $ | (347 | ) | | $ | 221 |
| | $ | 340 |
|
| Adjusted for significant items of: | | | | | |
Adjustments to pre-existing warranties(A) | 40 |
| | 3 |
| | (9 | ) |
Asset impairment charges(B) | 28 |
| | 7 |
| | 14 |
|
Restructuring of manufacturing operations(C) | 2 |
| | 14 |
| | (1 | ) |
MaxxForce Advanced EGR engine lawsuits(D) | — |
| | 129 |
| | 1 |
|
Legal settlement(E) | 58 |
| | — |
| | — |
|
Shy profit-sharing accrual(F) | 289 |
| | — |
| | — |
|
Gain on sale(G) | — |
| | (56 | ) | | — |
|
Debt refinancing charges(H) | 5 |
| | 6 |
| | 46 |
|
Pension settlement(I) | 7 |
| | 142 |
| | 9 |
|
Settlement gain(J) | (1 | ) | | (3 | ) | | (72 | ) |
| Total adjustments | 428 |
| | 242 |
| | (12 | ) |
Tax effect (K) | (71 | ) | | (40 | ) | | (1 | ) |
| Adjusted net income (loss) attributable to NIC | $ | 10 |
| | $ | 423 |
| | $ | 327 |
|
| |
| (A) | Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior periods. Such adjustments typically occur when claims experience deviates from historical and expected trends. Our warranty liability is generally affected by component failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available. |
| |
| (B) | During 2020, we recorded $28 million of asset impairment charges, comprised of $16 million of asset impairment charges related to certain assets under operating leases and certain other long-lived assets in our Truck segment and $12 million of asset impairment charges related to long-lived assets in our Brazil asset group in our Global Operations segment. During 2019, we recorded $7 million of asset impairment charges relating to certain assets under operating leases in our Truck segment. During 2018, we recorded $14 million of impairment charges related to the exit of our railcar business in Cherokee, Alabama, certain long-lived assets and certain assets under operating leases in our Truck and Financial Services segments. During 2017, we recorded $13 million of asset impairment charges in our Truck segment relating to assets held for sale of our Conway, Arkansas fabrication business and for certain assets under operating leases. During 2016, the charges primarily included $17 million related to certain long-lived assets and $8 million related to certain operating leases. We also determined that $1 million of trademark asset carrying value was impaired. |
| |
| (C) | During 2020, we recorded net restructuring charges of $2 million due to restructuring activity throughout the organization. During 2019, we recorded charges of $14 million primarily related to cost reduction actions recorded in Costs of product sold and Restructuring charges in ourGlobal Operations segment. During 2018, we recognized a benefit of $1 million related to adjustments for restructuring charges in our Truck, Global Operations and Corporate segments. During 2017, we recorded charges of $13 million primarily attributable to $41 million of charges related to our plan to cease production at our Melrose Park Facility, a net benefit of $36 million related to the resolution of the closing agreement and wind up charges for our Chatham, Ontario plant, and the release of $1 million in other postretirement benefit liabilities in connection with the sale of our fabrication business in Conway, Arkansas. We also recorded $6 million of restructuring charges in Brazil related to cost reduction actions consisting of personnel costs for employee separation and related benefits. During 2016, we recorded $7 million of charges related to the 2011 closure of our Chatham, Ontario plant and $3 million for cost reduction and other strategic initiatives associated with the divestiture of non-strategic facilities and efforts to optimize our cost structure. |
| |
| (D) | During 2019, we recognized a net charge of $129 million related to the MaxxForce Advanced EGR engine class action settlement and related litigation in our Truck segment. During 2018, we recognized an additionala charge of $1 million for a jury verdict related to the MaxxForce Advanced EGR engine EGR product litigation in our Truck segment. During 2017, we recognized a charge of $31 million related to that same jury verdictlawsuits in our Truck segment. |
| |
| (E) | During 2017,2020, we recorded a charge of $58 million, including $8 million of legal and other fees, related to a proposed legal settlement with the Department of Justice, related to Navistar Defense. |
| |
| (F) | During 2020, we recorded a charge of $289 million related to the Shy profit-sharing accrual. |
| |
| (G) | During 2019, we recognized a gain of $6$51 million related to the sale of a majority interest in the Navistar Defense business line in our PartsTruck segment, and a gain of $5 million related to the sale of our joint venture in China with JAC in our Global Operations segment. |
| |
(F)(H) | During 2020 we recorded a charge of $5 million for the write-off of debt issuance costs and discounts associated with the 6.75% Tax Exempt Bonds. During 2019, we recorded a charge of $6 million for the write-off of debt issuance costs and discounts associated with the NFC Term Loan. During 2018, we recorded a charge of $46 million for the write off of debt issuance costs and discounts associated with the repurchase of our 8.25% Senior Notes and the refinancing of our previously existing Term Loan. During 2017, we recorded a charge of $5 million related to third party fees and debt issuance costs associated with the replacement of our Term Loan with our Term Loan Credit Agreement and the refinancing of the revolving portion of the NFC bank credit facility in our Financial Services segment. |
| |
(G) | During 2016, we received a $15 million one-time fee from a third party. |
| |
(H)(I) | During 2020, 2019 and 2018, we purchased a group annuity contractcontracts for certain retired pension plan participants resulting in a plan remeasurement.remeasurements. As a result, we recorded a pension settlement accounting chargecharges of $7 million, $142 million and $9 million, respectively, in SG&A expenses.Other expense, net in Corporate. |
| |
(I)(J) | During 2020 and 2019, we recorded interest income of $1 million and $3 million, respectively, in Other expense, net derived from the prior year settlement of a business economic loss claim. During 2018, we settled a business economic loss claim relating to our Alabama engine manufacturing facility in which we will receive a net present value of $70 million, net of our fees and costs, from the Deepwater Horizon Settlement Program. WeAs a result, we recorded the $70 million net present value of the settlement of $70 million and related interest income of $2 million in Other Income,expense, net. |
| |
| (K) | Tax effect is calculated by excluding the tax impact of the non-GAAP adjustments from the tax provision calculations. |
Pension and Other Postretirement Benefits
Our pension plans are funded by contributions made from Company assets in accordance with applicable U.S. and Canadian government regulations. The regulatory funding requirements are computed using an actuarially determined funded status, which is determined using assumptions that often differ from assumptions used to measure the funded status for U.S. GAAP. U.S. funding targets are determined by rules promulgated under the Pension Protection Act of 2006 (the "PPA").PPA. The PPA additionally requires underfunded plans to achieve 100% funding over a period of time. From time to time, we have discussions with and receive requests for certain information from the Pension Benefit Guaranty Corporation ("PBGC"). The PBGC was created by ERISA to encourage the continuation and maintenance of private-sector defined benefit pension plans, provide timely and uninterrupted payment of pension benefits, and keep pension insurance premiums at a minimum. In July 2012, the Moving Ahead for Progress in the 21st Century Act was signed into law, impacting the minimum funding requirements for pension plans, but not otherwise impacting our accounting for pension benefits. In August 2014, the Highway and Transportation Funding Act of 2014, which included an extension of pension funding interest rate relief, was signed into law. The Bi-Partisan Budget Act of 2015 was signed into law in November of 2015 and provided for further extension of interest rate relief. These legislative measures will reduce our funding requirements over the next fourtwo years.
In 20182020 and 2017,2019, we contributed $132$35 million and $112$140 million, respectively, to our U.S. and Canadian pension plans (the "Plans") to meet regulatory minimum funding requirements. In 20192020, we deferred $157 million of previously expected contributions until the first quarter of 2021 under the provisions of the CARES Act. In 2021 we expect to contribute approximately $140$320 million to meet the minimum required contributions for all plans. Future contributions are dependent upon a number ofseveral factors, principally the changes in values of plan assets, changes in interest rates, and the impact of any future funding relief. We currently expect that from 2020 throughin 2022 and 2023, we will be required to contribute approximately $175$170 million to $200and $160 million, per year to the Plans,respectively, depending on asset performance and discount rates.
Our contributions to other post-employment benefit ("OPEB") plans totaled $1 million in both 2020 and $2 million in 2018 and 2017, respectively.2019. Other postretirement benefit obligations, such as retiree medical, are primarily funded in accordance with a 1993 settlement agreement (the "1993 Settlement Agreement") between us, our employees, retirees, and collective bargaining organizations, which eliminated certain benefits provided prior to that date and provided for cost sharing between us and participants in the form of premiums, co-payments, and deductibles. We expect to contribute $1 million to our OPEB plans during 2019.2021.
As part of the 1993 Settlement Agreement, a Base Program Trust was established in June 1993 to provide a vehicle for funding the health care liability through our contributions and retiree premiums. A separate independent Retiree Supplemental Benefit Program was also established, which included our contribution of Class B Common Stock, originally valued at $513 million, to potentially reduce retiree premiums, co-payments, and deductibles and provide additional benefits in subsequent periods. In addition to the Base Program Trust, we are contingently obligated to make profit sharing contributions to the Retiree Supplemental Benefit Trust to potentially improve upon the basic benefits provided through the Base Program Trust. These profit sharing contributions are determined by means of a calculation as established through the 1993 Settlement Agreement. There were noIn 2020, we did not record any profit sharing contributions toaccruals based on the Retiree Supplemental Benefit Trust duringoperating performance of the years ended October 31, 2018, 2017 and 2016. Duringentities that are included in the determination of qualifying profits. In 2019, we recorded $21 million of profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits which was paid in the first quarter of 2020. In 2018, we recorded $30 million of profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits which will bewas paid in the first quarter of 2019. There were no profit sharing contributions to the Retiree Supplemental Benefit Trust during the year ended October 31, 2018.
The funded status of our plans is derived by subtracting the actuarially-determined present value of the projected benefit obligations from the fair value of plan assets at year end.
The underfunded status of our pension plans on a U.S. GAAP basis decreased $254increased $47 million during 20182020 primarily due to cash contributions and an increasea decrease in the discount rate, partially offset by lower than expected asset returns.changes in demographic assumptions. Our actual return on assets during 20182020 was approximately (1.4)%3.5% for the U.S. pension plans. The weighted average discount rates used to measure the postretirement benefit obligation ("PBO") were 4.4%2.6% and 3.5%3.1% at October 31, 20182020 and 2017,2019, respectively.
The underfunded status of our health and life insurance benefits decreased by $154$457 million. This wasThe decrease is primarily driven by an increase in the discount rate and favorable claims experience and updated per capita cost assumptions.and trend assumptions due to favorable contract negotiations with insurers. Contributing to the improved funded status is an enhanced gainshare feature on the Medicare Advantage benefit in the amount of $248 million that will offset certain retiree healthcare costs and $180 million is attributable to improved pricing and rebates on prescription drugs.
We continue to seek opportunities to control our pension and other postretirement benefits expenses.
For more information, see Note 10, 12, Postretirement Benefits, to the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We enter into various arrangements not recognized in our Consolidated Balance Sheets that have or could have an effect on our financial condition, results of operations, liquidity, capital expenditures, or capital resources. The principal off-balance sheet arrangements that we enter into are guarantees that could obligate us to make future payments if the primary entity fails to perform under its contractual obligations. These include residual value guarantees, for which our losses are generally capped, stand-by letters of credit and surety bonds, credit and purchase commitments and indemnifications. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet recognition and measurement provisions. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under various guarantees that are not recognized in our Consolidated Balance Sheets. We do not believe claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows. For more information, see Note 1315, Commitments and Contingencies, to the accompanying consolidated financial statements.
Contractual Obligations
The following table provides aggregated information on our outstanding contractual obligations as of October 31, 2018:2020:
| | | | Payments Due by Year Ending October 31, | Payments Due by Year Ending October 31, |
| (in millions) | Total | | 2019 | | 2020-2021 | | 2022-2023 | | 2024+ | Total(F) | | 2021 | | 2022-2023 | | 2024-2025 | | 2026+ |
| Type of contractual obligation: | | | | | | | | | | | | | | | | | | |
Long-term debt obligations(A) | $ | 5,388 |
| | $ | 926 |
| | $ | 1,181 |
| | $ | 67 |
| | $ | 3,214 |
| $ | 5,322 |
| | $ | 613 |
| | $ | 674 |
| | $ | 1,234 |
| | $ | 2,801 |
|
Interest on long-term debt(B) | 1,720 |
| | 299 |
| | 472 |
| | 414 |
| | 535 |
| 1,293 |
| | 258 |
| | 472 |
| | 366 |
| | 197 |
|
Financing arrangements and capital lease obligations(C) | 14 |
| | 5 |
| | 8 |
| | 1 |
| | — |
| |
| Financing arrangements | | 4 |
| | 3 |
| | 1 |
| | — |
| | — |
|
Finance lease obligations(C) | | 2 |
| | 1 |
| | 1 |
| | — |
| | — |
|
Operating lease obligations(D) | 133 |
| | 32 |
| | 51 |
| | 32 |
| | 18 |
| 138 |
| | 35 |
| | 53 |
| | 27 |
| | 23 |
|
Purchase obligations(E) | 216 |
| | 51 |
| | 105 |
| | 36 |
| | 24 |
| 159 |
| | 33 |
| | 86 |
| | 38 |
| | 2 |
|
| Total | $ | 7,471 |
| | $ | 1,313 |
| | $ | 1,817 |
| | $ | 550 |
| | $ | 3,791 |
| $ | 6,918 |
| | $ | 943 |
| | $ | 1,287 |
| | $ | 1,665 |
| | $ | 3,023 |
|
_____________________
| |
| (A) | Excludes offsetting discounts and issuance costs of $58$43 million and Financed Lease Obligations of $122$45 million. For more information, see Note 9, 11, Debt, to the accompanying consolidated financial statements. |
| |
| (B) | Amounts represent estimated contractual interest payments on outstanding debt. Rates in effect as of October 31, 20182020 are used for variable rate debt. For more information, see Note 9, 11, Debt, to the accompanying consolidated financial statements. |
| |
| (C) | We lease many of our facilities as well as other property and equipment under financing arrangements and capitalfinance leases in the normal course of business, including $2 million of interest obligations. Excludes a $1 million capital lease which is non-cash.business. For more information, see Note 6, 7, Property and Equipment, Net, to the accompanying consolidated financial statements. |
| |
| (D) | Lease obligations for facility closures are included in operating leases. Future operating lease obligations are not recognized in our Consolidated Balance Sheets. For more information, see Note 6, Property and Equipment, Net, 10, Leases, to the accompanying consolidated financial statements. |
| |
| (E) | Purchase obligations include various commitments in the ordinary course of business that would include the purchase of goods or services which are not recognized in our Consolidated Balance Sheets. We also include certain contractual obligations recognized in our Consolidated Balance Sheets for which payments will be made beyond the next year. |
| |
| (F) | Note that payments due in less than one year are included in 2021. |
Due to the uncertainty with respect to the timing of cash payments associated with the settlement of audits with taxing authorities and because of existing net operating loss carryforwards, the preceding table excludes uncertain tax positions of $27$20 million. We do not expect to make significant payments of these liabilities within the next year. For additional information, see Note 11, 13, Income Taxes, to the accompanying consolidated financial statements.
We have entered into industrial participation agreements, commonly known as offset agreements, with customers outside of the U.S. to facilitate economic value back to entities within the foreign nations as the result of their procurement of goods and services from us. These commitments may be satisfied by our placement of supply contracts to established companies within the foreign nations, providing capabilities to the foreign nations, or the creation of joint ventures that generate profits and hire nationals from within the foreign nations. In certain cases, penalties could be imposed if we do not meet our industrial participation commitments. As of October 31, 2018, we have outstanding industrial participation agreements totaling $228 million that extend through 2026. Purchase order commitments associated with fulfilling the industrial participation agreements are included in the purchase commitments amount above.
In addition to the above contractual obligations, we are also required to fund our Plans in accordance with the requirements of the PPA. In 2020, we deferred $157 million of previously expected contributions until the first quarter of 2021 under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). As such, we expect to contribute approximately $140$320 million in 20192021 to meet the minimum required contributions for all Plans. We currently expect that from 2020 throughin 2022 and 2023, we will be required to contribute $175$170 million to $200$160 million per year to the Plans, depending on asset performance and discount rates in the next several years. For additional information, see Note 10, 12, Postretirement Benefits, to the accompanying consolidated financial statements.
Other Information
Income Taxes
We file a consolidated U.S. federal income tax return for NIC and its eligible domestic subsidiaries. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for tax benefit carryforwards and the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax liabilities and assets at the end of each period are determined using enacted tax rates.
As of October 31, 20182020 and 2017,2019, we had deferred tax asset valuation allowances of $2.2$2.0 billion and $3.3 billion, respectively.in each period. A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides that important factors in determining whether a deferred tax asset will be realized are whether there has been sufficient taxable income in recent years and whether sufficient taxable income is expected in future years in order to utilize the deferred tax asset.
We believe that our evaluation of deferred tax assets and the need for a valuation allowance against such assets involve critical accounting estimates because they are subject to, among other things, estimates of future taxable income in the U.S. and in non-U.S. tax jurisdictions. These estimates are susceptible to change and dependent upon events that may or may not occur. Our assessment of the need for a valuation allowance is material to the assets reported on our Consolidated Balance Sheets and changes in the valuation allowance may be material to our results of operations. We intend to continue to assess our valuation allowance in accordance with the guidance on accounting for income taxes.
We may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. (expense) benefit. Total interest and penalties related to our uncertain tax positions resulted in income tax benefitsbenefit of $1 million, and $6 million, and anincome tax expense of less than $1 million, and income tax benefit of $1 million for the years ended October 31, 2020, 2019, and 2018 2017, and 2016 respectively.
We released $14 million of uncertain tax positions based on administrative practice and precedents of relevant tax authorities in 2017.
As of October 31, 20182020 and 2017,2019, the amount of liability for uncertain tax positions was $27$20 million and $34$21 million, respectively. If these unrecognized tax benefits are recognized, all would impact our effective tax rate, except for positions for which we maintain a full valuation allowance against certain deferred tax assets. In this case, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carryforwards, which would be offset by a full valuation allowance. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.
We apply the intraperiod tax allocation rules to allocate income taxes among continuing operations, discontinued operations, other comprehensive income (loss), and additional paid-in capital when we meet the criteria as prescribed in the guidance.
Environmental Matters
We have been named a potentially responsible party ("PRP"), in conjunction with other parties, in a number of cases arising under an environmental protection law, the Comprehensive Environmental Response, Compensation, and Liability Act, popularly known as the "Superfund" law. These cases involve sites that allegedly received wastes from current or former Company locations. Based on information available to us which, in most cases, consists of data related to quantities and characteristics of material generated at current or former Company locations, material allegedly shipped by us to these disposal sites, as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of our share, if any, of the probable costs and accruals and is recorded in our consolidated financial statements. These accruals are generally recognized no later than completion of the remedial feasibility study and are not discounted to their present value. We review all accruals on a regular basis and believe that, based on these calculations, our share of the potential additional costs for the cleanup of each site will not have a material effect on our financial condition, results of operations, or cash flows.
In addition, other sites formerly owned by us or where we are currently operating have been identified as having soil and groundwater contamination. While investigations and cleanup activities continue at these and other sites, we believe that we have appropriate accruals to cover costs to complete the cleanup of all sites.
Impact of Environmental Regulation
Government regulation related to climate change is under consideration at the U.S. federal and state levels. Because our products use fossil fuels, they may be impacted indirectly due to regulation, such as a cap and trade program, affecting the cost of fuels. The EPAUnited States Environmental Protection Agency ("EPA") and NHTSANational Highway Traffic Safety Administration ("NHTSA") issued final rules for GHGgreenhouse gas ("GHG") phase 1 emissions and fuel economy on September 15, 2011. These began to apply in calendar year 2014 and2011, which rules were fully implemented in model year 2017. The agencies' stated goals for these rules were to increase the use of currently existing technologies. We are complying with these rules through use of existing technologies and implementation of emerging technologies as they become available. The EPA and NHTSA adopted a final rule onin October 25, 2016 with the next phase of federal GHG emission and fuel economy regulations. This rule contains more stringent emissions levels for engines and vehicles and will take effect for engines and vehicles manufactured in modelcalendar year 2021 and be implemented in three stages culminating in model year 2027. EPA issued a proposed rule on March 16, 2020 containing largely technical amendments focused on the heavy duty GHG test procedures as well as other technical changes. The Company, along with the industry, is currently evaluating these changes. Canada also adoptedhas finalized a heavy duty phase 2 GHG rulemaking, alignedwhich is substantially similar to EPA regulations with EPA and NHTSA phase 2 rules.more stringent requirements for heavy haul tractors.
In December 2014, California adopted GHG emission rules for heavy duty vehicles equivalent to EPA phase 1 rules and is in the process of adopting its phase 2 equivalent rules. In 2014, California also adopted an optional lower emission standard for oxides of nitrogen ("NOx") in California. California has stated its intention to lower NOx standards for California-certified engines and has requested that the EPA lower its standards. In June 2016, several regional air quality management districts in California and other states, as well as the environmental agencies for several states, petitioned the EPA to adopt lower NOx emission standards for on-road heavy duty trucks and engines. The EPA responded to the petition in December 2016 stating that it would consider additional NOx regulations targeting model year 2024. On November 14, 2018January 6, 2020 the EPA announcedsubmitted an Advanced Notice of Proposed Rulemaking for publication in the “Cleaner Trucks Initiative”Federal Register. Within the advanced proposal the EPA is soliciting comments towards a potential rule which will beginwould take effect in the 2027 timeframe. The EPA is considering regulatory process for a reducedchanges to address lower NOx emissions regulation while also streamlining compliancestandards, updates to test procedures to capture real world emissions, updates to certification and in-use testing protocol, extended emissions warranty and regulatory useful life. On April 18, 2019, the California Air Resources Board ("CARB") released a white paper providing an outline of measures it feels may be feasible, including lowered NOx and particular matter emission standards, changes in testing protocols, extended emission warranty periods, changes to durability demonstration periods, in-use testing and various other changes that are being considered for implementation between 2022 and 2027. On June 23, 2020 CARB solicited comments on a proposal that lowers emissions in two stages in 2024 and 2027, culminating in a NOx standard of 0.02 g. In addition, CARB proposed increasing stringency on useful life periods, warranty requirements and certification testing requirements. We will monitorNavistar, with the industry trade group and other companies, intends to comment on this proposal and to participate actively in this rulemaking. EPA and CARB may also consider other actions, including extended emission warranties.regulatory proceeding. We do not anticipate a rule becoming final until after the 2020 calendar year. California is currently considering regulatory requirements to expand the zero emissions truck market, including the mandated sale of certain vehicles. It issued and approved a proposal that would require between 5 and 9 percent of the heavy duty vehicle fleet sold into California to be comprised of zero emission vehicles in 2024 with the percentage increasing thereafter. This rule is not yet final, but is anticipated that it will be issued as a final rule in 2021.
We expect that heavy duty vehicle and engine fuel economy and GHG emissions rules will be under consideration in other global jurisdictions in the future. These standards will require significant investments of capital and will significantly increase costs of development for engines and vehicles, and will require us to incur administrative costs arising from implementation of the standard.The EPA also issued a final rule in October 2015 that lowered the National Ambient Air Quality Standard for ozone to 70 parts per billion. This rule could lead to future lower emission standards for substances that contribute to ozone depletion, including NOx from vehicles, at the federal and state levels. Our facilities may be subject to regulation related to climate change and climate change itself may also have some impact on our operations. However, these impacts are currently uncertain and we cannot predict the nature and scope of those impacts.
These standards will require significant investments of capital and will significantly increase costs of development, costs of materials, and warranty costs for engines and vehicles and will require us to incur administrative costs arising from the implementation of the standards.
Securitization Transactions
None of our securitization or trust arrangements qualify for sales accounting treatment or as an off-balance sheet arrangement. As a result, the transferred receivables and the associated secured borrowings are included in our Consolidated Balance Sheets and no gain or loss is recorded for these transactions.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of our consolidated financial statements, we use estimates and make judgments and assumptions about future events that affect the reported amounts of assets, liabilities, revenue, expenses, and the related disclosures. Our assumptions, estimates, and judgments are based on historical experience, current trends, and other factors we believe are relevant at the time we prepare our consolidated financial statements.
Our significant accounting policies are discussed in Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements and should be reviewed in connection with the following discussion. We believe that the following policies are the most critical to aid in fully understanding and evaluating our reported results as they require us to make difficult, subjective, and complex judgments. In determining whether an estimate is critical, we consider if:
the nature of the estimate or assumption is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change, or
the impact of the estimate or assumption on financial condition or operating performance is material.
Pension and Other Postretirement Benefits
We provide pension and other postretirement benefits to a substantial portion of our employees, former employees, and their beneficiaries. The assets, liabilities, and expenses we recognize and disclosures we make about plan actuarial and financial information are dependent on the assumptions used in calculating such amounts. The primary assumptions include factors such as discount rates, health care cost trend rates, inflation, expected return on plan assets, retirement rates, mortality rates, rate of compensation increases, and other factors including management's plans regarding plant rationalization activities. Changes to our business environment could result in changes to the assumptions, the effects of which could be material.
Plant rationalization activities impact the determination of whether a plan curtailment or settlement has occurred. Key considerations include, but are not limited to, expected future service credit, the remaining years of recall rights of the workforce, and the extent to which minimum service requirements (in the case of healthcare benefits) have been met.
The discount rates are obtained by matching the anticipated future benefit payments for the plans to a high quality corporate bond yield curve to establish a weighted average discount rate for each plan.
| |
| • | Health care cost trend rates are developed based upon historical retiree cost trend data, short term health care outlook, and industry benchmarks and surveys. The OPEB liability estimate is impacted by the level of premiums paid to and gainshare received from insurers, rebates from pharmaceutical companies and government subsidies received on prescription drugs. Future levels of subsidies could also be impacted by the outcome of our Retiree Health Care Litigation (as described in Note 15, Commitments and Contingencies, to the accompanying consolidated financial statements), which could be material. The inflation assumptions used are based upon both our specific trends and nationally expected trends. |
The expected return on plan assets is derived from historical plan returns, expected long-term performance of asset classes, asset allocations, input from an external pension investment advisor, and risks and other factors adjusted for our specific investment strategy. The focus is on long-term trends and provides for the consideration of recent plan performance.
Retirement rates are based upon actual and projected plan experience.
Mortality rates are developed from actual and projected plan experience for the U.S. postretirement benefit plans. Our actuaries conduct an experience study every five years as part of the process to select a best estimate of mortality. We consider both standard mortality tables and improvement factors as well as the plans’ actual experience when selecting a best estimate. During 2015, we conducted a new experience study as scheduled and, as a result, updated our mortality assumptions.
The rate of compensation increase reflects our long-term actual experience and our projected future increases.
The sensitivities stated below are based upon changing one assumption at a time, but often economic factors impact multiple assumptions simultaneously.
| | | | October 31, 2018 | | 2019 Expense | October 31, 2020 | | 2021 Expense |
| | Obligations | | | | | Obligations | | | | |
| (in millions) | Pension | | OPEB | | Pension | | OPEB | Pension | | OPEB | | Pension | | OPEB |
| Discount rate: | | | | | | | | | | | | | | |
| Increase of 1.0% | $ | (273 | ) | | $ | (113 | ) | | $ | 1 |
| | $ | 6 |
| $ | (271 | ) | | $ | (51 | ) | | $ | 5 |
| | $ | — |
|
| Decrease of 1.0% | 316 |
| | 134 |
| | (2 | ) | | 1 |
| 318 |
| | 61 |
| | (7 | ) | | — |
|
| Expected return on assets: | | | | | | | | | | | | | | |
| Increase of 1.0% | — |
| | — |
| | (21 | ) | | (3 | ) | N/A |
| | N/A |
| | (20 | ) | | (2 | ) |
| Decrease of 1.0% | — |
| | — |
| | 21 |
| | 3 |
| N/A |
| | N/A |
| | 20 |
| | 2 |
|
As modeled above, net periodic postretirement benefits expense is not highly sensitive to changes in discount rates in the current interest rate environment due to the relatively short duration of the closed plans.
Income Taxes
We account for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between the financial statement carrying values of existing assets and liabilities and their respective tax bases. Deferred tax assets are also recorded with respect to net operating losses and other tax attribute carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the years in which temporary differences are expected to be recovered or settled. Valuation allowances are established when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the income from continuing operations in the period that includes the enactment date.
The ultimate recovery of deferred tax assets is dependent upon the amount and timing of future taxable income and other factors such as the taxing jurisdiction in which the asset is to be recovered. A high degree of judgment is required to determine if, and the extent to which, valuation allowances should be recorded against deferred tax assets. We have provided valuation allowances at October 31, 20182020 and 20172019 aggregating $2.2$2.0 billion and $3.3 billion, respectively,in each period, against such assets based on our assessment of past operating results, estimates of future taxable income, and the feasibility of tax planning strategies. Although we believe that our approach to estimates and judgments as described herein is reasonable, actual results could differ and we may be exposed to increases or decreases in income taxes that could be material.
We recognize the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. We recognize interest and penalties related to uncertain tax positions as part of Income tax expense.
We apply the intraperiod tax allocation rules to allocate income taxes among continuing operations, discontinued operations, other comprehensive income (loss), and additional paid-in capital when we meet the criteria as prescribed in the guidance.
Impairment of Long-Lived Assets
We test long-lived assets (other than goodwill and intangible assets with indefinite lives) or asset groups for recoverability when events and circumstances indicate that the carrying value of an asset or asset group may not be recoverable. Estimates of undiscounted future cash flows used to test the recoverability of a long-lived asset or asset group include only the future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset or asset group. If the asset or asset group is determined to not be recoverable, an impairment loss is measured as the amount by which the carrying amount of the long-lived asset or asset group exceeds its fair value.
Our impairment loss calculations require us to apply judgments in estimating future cash flows and asset fair values. This judgment includes developing cash flow projections and, at times, assessing probability weightings to certain business scenarios. Other long-lived assets could become impaired in the future or require additional charges as a result of declines in profitability due to changes in volume, market pricing, cost, manner in which an asset is used, expectation of sale or disposal of an asset, physical condition of an asset, laws and regulations, or the business environment. Significant adverse changes to our business environment and future cash flows could cause us to record additional impairment charges or accelerated depreciation in future periods, which could be material.
Revenue
Our Manufacturing operations recognize revenueWe account for a contract when we meet four basic criteria: (i) persuasive evidence that a customer arrangement exists, (ii)it has approval and commitment from both parties, the pricerights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is fixed or determinable, (iii) collectability is reasonably assured, and (iv) delivery of product has occurred or services have been rendered. Sales are generally recognized when risk of ownership passes.probable.
SalesTruck sales arrangements with U.S. fleet customers are often complex and non-standard, and may include pricing allowances and other sales incentives, such as rebates, financing incentives, trade allowances and residual value guarantees, for which losses are generally capped. SalesTruck sales to fleet customers are recognized in accordance with the terms of each contract. In certain arrangements, the evaluation of financing incentives and residual value guarantees may result in the transaction being recorded as a borrowing oran operating lease.lease, as we retain control in the leased property. Concurrent with our recognition of revenue, we recognize price allowances and the cost of incentive programs in the normal course of business based on programs offered to our fleet customers.
Product Warranty
We generally offer one to five-year warranty coverage for our truck, bus, and engine products, as well as our service parts. Terms and conditions vary by product, customer, and country. We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers.
Our warranty estimates are established using historical information about the nature, frequency, timing, and average cost of warranty claims. Warranty claims are influenced by numerous factors, including new product introductions, technological developments, the competitive environment, the design and manufacturing process, and the complexity and related costs of component parts. We estimate our warranty accrual for our engines and trucks based on engine types and model years. Our warranty accruals take into account the projected ultimate cost-per-unit ("CPU") utilizing historical claims information. The CPU represents the total cash projected to be spent for warranty claims for a particular model year during the warranty period, divided by the number of units sold. The projection of the ultimate CPU is affected by component failure rates, repair costs, and the timing of failures in the product life cycle. Warranty claims inherently have a high amount of variability in timing and severity and can be influenced by external factors. Our warranty estimation process takes into consideration numerous variables that contribute to the precision of the estimate, but also add to the complexity of the model. Including numerous variables also reduces the sensitivity of the model to any one variable. We perform periodic reviews of warranty spend data to allow for timely consideration of the effects on warranty accruals.
Initial warranty estimates for new model year products are based on the previous model year product's warranty experience until the new product progresses sufficiently through its life cycle and related claims data becomes mature. Historically, warranty claims experience for launch-year products has been higher compared to the prior model-year engines; however, over time we have been able to refine both the design and manufacturing process to reduce both the volume and the severity of warranty claims. New product launches require a greater use of judgment in developing estimates until historical experience becomes available.
We record adjustments to pre-existing warranties for changes in our estimate of warranty costs for products sold in prior fiscal years. Such adjustments typically occur when claims experience deviates from historic and expected trends. During 2018We recognized a net charge for adjustments to pre-existing warranties of $40 million and 2017, we recognized$3 million in 2020 and 2019, respectively, and a benefit for adjustments to pre-existing warranties of $9 million and $1 million, respectively, compared to a charge of $77 million in 2016.2018.
When we identify cost effective opportunities to address issues in products sold or corrective actions for safety issues, we initiate product recalls or field campaigns. As a result of the uncertainty surrounding the nature and frequency of product recalls and field campaigns, the liability for such actions is generally recorded when we commit to a product recall or field campaign. In each subsequent quarter after a recall or field campaign is initiated the recorded liability balance is analyzed, reviewed, and adjusted if necessary to reflect any changes in the anticipated average cost of repair or number of repairs to be completed prospectively. Included in 20182020 warranty expense was $10$23 million of charges related to new field campaign issuances as well as changes in estimates of previously issued campaigns, as compared to $21$27 million and $17$10 million in 20172019 and 2016,2018, respectively. The charges were primarily recognized as adjustments to pre-existing warranties.
As we continue to identify opportunities to improve the design and manufacturing of our engines we may incur additional charges for product recalls and field campaigns to address identified issues.
Optional extended warranty contracts can be purchased for periods ranging from one to ten years. Warranty revenues related to extended warranty contracts are amortized to income, over the life of the contract, (a) in 2020 and 2019 in proportion to the costs expected to be incurred in satisfying the obligation under the contract and (b) in 2018 using the straight-line method. Costs under extended warranty contracts are expensed as incurred. We recognize losses on defined pools of extended warranty contracts when the expected costs for a given pool of contracts exceed related unearned revenue. In 2020, we recognized an immaterial net benefit related to extended warranty contracts on our proprietary big-bore engines. In 2019, we recognized a net benefit of $14 million related to extended warranty contracts on our proprietary big-bore engines, which included a benefit of $13 million related to pre-existing warranties. In 2018, we recognized a net benefitcharge of $29 million related to extended warranty contracts on our proprietary Big-Borebig-bore engines, which includesincluded a benefit of $33 million related to pre-existing warranties. In 2017, we recognized a net charge of $8 million related to extended warranty contracts on our proprietary Big-Bore engines, which includes a charge of $3 million related to pre-existing warranties. Future warranty experience, pricing of extended warranty contracts, and external market factors may cause us to recognize additional charges as losses on extended service contracts in future periods.
When collection is reasonably assured, we also estimate the amount of warranty claim recoveries to be received from our suppliers and record them in Other current assets and Other noncurrent assets. Recoveries related to specific product recalls, in which a supplier confirms its liability under the recall, are recorded in Trade and other receivables, net. Warranty costs and recoveries are included in Costs of products sold.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Recently Issued Accounting Standards
The information required to be set forth under this heading is incorporated by reference from Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements included in Part II, Item 8.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Our primary market risks include fluctuations in interest rates and currency exchange rates. We are also exposed to changes in the prices of commodities used in our Manufacturing operations. Commodity price risk related to our current commodity financial instruments are not material. We do not hold a material portfolio of market risk sensitive instruments for trading purposes.
We have established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate market risk. These procedures include the monitoring of our level of exposure to each market risk, the funding of variable rate receivables primarily with variable rate debt, and limiting the amount of fixed rate receivables that may be funded with floating rate debt. These procedures also include the use of derivative financial instruments to mitigate the effects of interest rate fluctuations and to reduce our exposure to exchange rate risk.
Interest rate risk
Interest rate risk is the risk that we will incur economic losses due to adverse changes in interest rates. We measure our interest rate risk by estimating the net amount by which the fair value of all of our interest rate sensitive assets and liabilities would be impacted by selected hypothetical changes in market interest rates. At both October 31, 20182020 and 2017,2019, the net fair value of our liabilities with exposure to interest rate risk was $5 billion. Assuming a hypothetical instantaneous 10% adverse change in interest rates as of October 31, 20182020 and 2017,2019, the fair value of these liabilities would increase by $139$110 million and $91$142 million, respectively. At both October 31, 20182020 and 2017,2019, the net fair value of our assets with exposure to interest rate risk was $2 billion. Interest rate risk is minimal as these assets are largely short-term in nature. Assuming a hypothetical instantaneous 10% adverse change in interest rates as of October 31, 20182020 and 2017,2019, the fair value of these assets would both decrease by $4 million for both periods.$5 million.
Commodity price risk
We are exposed to changes in the prices of commodities, particularly for aluminum, copper, precious metals, resins, diesel fuel, and steel and their impact on the acquisition cost of various parts used in our Manufacturing operations. We have been able to mitigate the effects of price increases via a combination of design changes, material substitution, global sourcing, and price performance. In certain cases, we use derivative instruments to reduce exposure to price changes. During 20182020 and 2017,2019, we purchased approximately $403$352 million and $376$506 million, respectively, of commodities subject to market risk. Assuming a hypothetical instantaneous 10% adverse change in commodity pricing, we would have incurred additional costs of $40$35 million and $38$51 million in 20182020 and 2017,2019, respectively. Commodity price risk associated with our derivative position at October 31, 20182020 and 20172019 is not material to our operating results or financial position.
Foreign currency risk
Foreign currency risk is the risk that we will incur economic losses due to adverse changes in foreign currency exchange rates. Our primary exposures to foreign currency exchange rate fluctuations are the Canadian dollar/U.S. dollar, Mexican peso/U.S. dollar, euro/U.S. dollar, and Brazilian real/U.S. dollar. At October 31, 20182020 and 2017,2019, the net fair value of our liabilities with exposure to foreign currency risk was $260$89 million and $238$159 million, respectively. Assuming that no offsetting derivative financial instruments exist, the reduction in earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive instruments would be $26$9 million and $24$16 million at October 31, 20182020 and 2017,2019, respectively. At October 31, 20182020 and 2017,2019, the net fair value of our assets with exposure to foreign currency risk was $180$51 million and $168$108 million, respectively. Assuming that no offsetting derivative financial instruments exist, the reduction in earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive instruments would be $18$5 million and $17$11 million at October 31, 20182020 and 2017,2019, respectively.
For further information regarding fair value estimates, please see Note 12, 14, Fair Value Measurements to the accompanying consolidated financial statements.
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| Item 8. | Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
| | | Notes to Consolidated Financial Statements | Notes to Consolidated Financial Statements | | Notes to Consolidated Financial Statements | |
| 1 | | | | |
| 2 | | | | |
| 3 | | | Restructuring, Impairments and Divestitures | |
| 4 | | | | |
| 5 | | | | |
| 6 | | | | |
| 7 | | | | |
| 8 | | | | |
| 9 | | | | |
| 10 | | | Leases | |
| 11 | | | | |
| 12 | | | | |
| 13 | | | | |
| 14 | | | | |
| 15 | | | | |
| 16 | | | | |
| 17 | | | | |
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| 19 | | | | |
| 20 | | | | |
| 21 | | | |
| 22 | | | 130 |
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Navistar International Corporation:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Navistar International Corporation and subsidiaries (the Company) as of October 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive income, (loss), stockholders’ deficit, and cash flows for each of the years in the three‑year period ended October 31, 2018,2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of October 31, 20182020 and 2017,2019, and the results of its operations and its cash flows for each of the years in the three‑year period ended October 31, 2018,2020, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of October 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated December 18, 201817, 2020 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Sales Incentives for U.S. Fleet Customers
As discussed in Note 2 to the consolidated financial statements, the Company recognizes price allowances and the cost of incentive programs to fleet customers in connection with sales arrangements. Specifically, sales arrangements with U.S. fleet customers are often complex and non-standard, and may include price allowances and sales incentives, which include rebates, residual value guarantees, trade allowances and financing incentives.
We determined the identification and evaluation of price allowances and sales incentives offered to U.S. fleet customers to be a critical audit matter because ascertaining the population of price allowances and sales incentives within contracts involved challenging auditor judgment due to variability within the individual U.S. fleet customer contracts. In addition, evaluating the accounting impact of the price allowances and sales incentives, including measurement and timing of revenue recognition, required complex auditor judgment.
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of certain internal controls over the Company’s process to identify the price allowances and sales incentives in the sales agreements, assess the associated accounting impacts and authorize special pricing terms. We selected a sample of contracts to read and assess the accounting treatment for significant U.S. fleet sales agreements entered into during the year. We also inspected the sample of contracts to evaluate the population and treatment of price allowances and sales incentives identified by the Company, and to assess the accounting impact of new or unusual terms. Representations of the Company were obtained to assess the listing of existing and in-process agreements and new incentives, and to determine the contractual terms constituted the entirety of the arrangements. Further, we evaluated the Company’s representations by externally confirming contractual terms and the population of agreements with certain fleet customers.
/s/ KPMG LLP
We have served as the Company’s auditor since 2006.
Chicago, Illinois
December 18, 201817, 2020
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Navistar International Corporation:
Opinion on Internal Control Over Financial Reporting
We have audited Navistar International Corporation’s and subsidiaries’ (the Company) internal control over financial reporting as of October 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2018,2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of October 31, 20182020 and 2017,2019, the related consolidated statements of operations, comprehensive income, (loss), stockholders’ deficit, and cash flows for each of the years in the three-year period ended October 31, 2018,2020, and the related notes (collectively, the consolidated financial statements), and our report dated December 18, 201817, 2020 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Overover Financial Reporting.Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.deteriorate.
/s/ KPMG LLP
Chicago, Illinois
December 18, 201817, 2020
Navistar International Corporation and Subsidiaries
Consolidated Statements of Operations
| | | | For the Years Ended October 31, | For the Years Ended October 31, |
| (in millions, except per share data) | 2018 |
| 2017 | | 2016 | 2020 |
| 2019 | | 2018 |
| Sales and revenues | | | | | | | | | | |
| Sales of manufactured products, net | $ | 10,090 |
| | $ | 8,428 |
| | $ | 7,976 |
| $ | 7,335 |
| | $ | 11,061 |
| | $ | 10,090 |
|
| Finance revenues | 160 |
| | 142 |
| | 135 |
| 168 |
| | 190 |
| | 160 |
|
| Sales and revenues, net | 10,250 |
| | 8,570 |
| | 8,111 |
| 7,503 |
| | 11,251 |
| | 10,250 |
|
| Costs and expenses | | | | | | | | | | |
| Costs of products sold | 8,317 |
| | 7,037 |
| | 6,812 |
| 6,221 |
| | 9,245 |
| | 8,317 |
|
| Restructuring charges | (1 | ) | | 3 |
| | 10 |
| 2 |
| | 12 |
| | (1 | ) |
| Asset impairment charges | 14 |
| | 13 |
| | 27 |
| 28 |
| | 7 |
| | 14 |
|
| Selling, general and administrative expenses | 922 |
| | 878 |
| | 802 |
| 1,021 |
| | 934 |
| | 828 |
|
| Engineering and product development costs | 297 |
| | 251 |
| | 247 |
| 321 |
| | 319 |
| | 297 |
|
| Interest expense | 327 |
| | 351 |
| | 327 |
| 268 |
| | 312 |
| | 327 |
|
| Other income, net | (46 | ) | | (21 | ) | | (76 | ) | |
| Other expense, net | | 32 |
| | 164 |
| | 48 |
|
| Total costs and expenses | 9,830 |
| | 8,512 |
| | 8,149 |
| 7,893 |
| | 10,993 |
| | 9,830 |
|
| Equity in income of non-consolidated affiliates | — |
| | 6 |
| | 6 |
| 2 |
| | 4 |
| | 0 |
|
| Income (loss) from continuing operations before income taxes | 420 |
| | 64 |
| | (32 | ) | |
| Income tax expense | (52 | ) | | (10 | ) | | (33 | ) | |
| Income (loss) from continuing operations | 368 |
| | 54 |
| | (65 | ) | |
| Income from discontinued operations, net of tax | — |
| | 1 |
| | — |
| |
| Income (loss) before income taxes | | (388 | ) | | 262 |
| | 420 |
|
| Income tax (expense) benefit | | 59 |
| | (19 | ) | | (52 | ) |
| Net income (loss) | 368 |
|
| 55 |
| | (65 | ) | (329 | ) | | 243 |
| | 368 |
|
| Less: Net income attributable to non-controlling interests | 28 |
| | 25 |
| | 32 |
| 18 |
| | 22 |
| | 28 |
|
| Net income (loss) attributable to Navistar International Corporation | $ | 340 |
| | $ | 30 |
| | $ | (97 | ) | $ | (347 | ) | | $ | 221 |
| | $ | 340 |
|
| | | |
| | | | |
| | |
| Amounts attributable to Navistar International Corporation common shareholders: | | |
|
| | | |
| Income (loss) from continuing operations, net of tax | $ | 340 |
| | $ | 29 |
| | $ | (97 | ) | |
| Income from discontinued operations, net of tax | — |
| | 1 |
| | — |
| |
| Net income (loss) | $ | 340 |
| | $ | 30 |
| | $ | (97 | ) | |
| | | | | | | |
| Earnings (loss) per share: | | | | | | |
| Basic: | | | | | | |
| Continuing operations | $ | 3.44 |
| | $ | 0.31 |
| | $ | (1.19 | ) | |
| Discontinued operations | — |
| | 0.01 |
| | — |
| |
| | $ | 3.44 |
| | $ | 0.32 |
| | $ | (1.19 | ) | |
| |
|
| | | | | |
| Diluted: |
|
| | | | | |
| Continuing operations | $ | 3.41 |
| | $ | 0.31 |
| | $ | (1.19 | ) | |
| Discontinued operations | — |
| | 0.01 |
| | — |
| |
| | $ | 3.41 |
| | $ | 0.32 |
| | $ | (1.19 | ) | |
| Income (loss) per share attributable to Navistar International Corporation: | | | |
|
| | |
| Basic | | $ | (3.48 | ) | | $ | 2.23 |
| | $ | 3.44 |
|
| Diluted | | $ | (3.48 | ) | | $ | 2.22 |
| | $ | 3.41 |
|
| | | | | | | | | | | |
| Weighted average shares outstanding: | | | | | | | | | | |
| Basic | 98.9 |
| | 93.0 |
| | 81.7 |
| 99.7 |
| | 99.3 |
| | 98.9 |
|
| Diluted | 99.6 |
| | 93.5 |
| | 81.7 |
| 99.7 |
| | 99.5 |
| | 99.6 |
|
Navistar International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss)
| | | (in millions) | For the Years Ended October 31, | For the Years Ended October 31, |
| 2018 | | 2017 | | 2016 | 2020 | | 2019 | | 2018 |
| Net income (loss) | $ | 368 |
| | $ | 55 |
| | $ | (65 | ) | $ | (329 | ) | | $ | 243 |
| | $ | 368 |
|
| Other comprehensive income (loss): | | | | | | | | | | |
| Foreign currency translation adjustment | (32 | ) | | (3 | ) | | 7 |
| (83 | ) | | (6 | ) | | (32 | ) |
| Unrealized gain on marketable securities, net of tax | — |
| | (1 | ) | | — |
| |
| Defined benefit plans, net of tax | 323 |
| | 433 |
| | (46 | ) | 322 |
| | 14 |
| | 323 |
|
| Total other comprehensive income (loss) | 291 |
| | 429 |
| | (39 | ) | |
| Total other comprehensive income | | 239 |
| | 8 |
| | 291 |
|
| Comprehensive income (loss) | 659 |
| | 484 |
| | (104 | ) | (90 | ) | | 251 |
| | 659 |
|
| Less: Net income attributable to non-controlling interests | 28 |
| | 25 |
| | 32 |
| 18 |
| | 22 |
| | 28 |
|
| Total comprehensive income (loss) attributable to Navistar International Corporation | $ | 631 |
| | $ | 459 |
| | $ | (136 | ) | $ | (108 | ) | | $ | 229 |
| | $ | 631 |
|
Navistar International Corporation and Subsidiaries
Consolidated Balance Sheets | | | | As of October 31, | As of October 31, |
| (in millions, except per share data) | 2018 | | 2017 | 2020 | | 2019 |
| ASSETS | | | | | | |
| Current assets | | | | | | |
| Cash and cash equivalents | $ | 1,320 |
| | $ | 706 |
| $ | 1,843 |
| | $ | 1,370 |
|
| Restricted cash and cash equivalents | 62 |
| | 83 |
| 64 |
| | 133 |
|
| Marketable securities | 101 |
| | 370 |
| |
| Trade and other receivables, net | 456 |
| | 391 |
| 273 |
| | 338 |
|
| Finance receivables, net | 1,898 |
| | 1,565 |
| 1,371 |
| | 1,923 |
|
| Inventories, net | 1,110 |
| | 857 |
| 763 |
| | 911 |
|
| Other current assets | 189 |
| | 188 |
| 263 |
| | 277 |
|
| Total current assets | 5,136 |
| | 4,160 |
| 4,577 |
| | 4,952 |
|
| Restricted cash | 63 |
| | 51 |
| 66 |
| | 54 |
|
| Trade and other receivables, net | 49 |
| | 13 |
| 7 |
| | 10 |
|
| Finance receivables, net | 260 |
| | 220 |
| 251 |
| | 274 |
|
| Investments in non-consolidated affiliates | 50 |
| | 56 |
| 31 |
| | 31 |
|
| Property and equipment, net | 1,370 |
| | 1,326 |
| 1,298 |
| | 1,309 |
|
| Operating lease right of use assets | | 119 |
| | — |
|
| Goodwill | 38 |
| | 38 |
| 38 |
| | 38 |
|
| Intangible assets, net | 30 |
| | 40 |
| 18 |
| | 25 |
|
| Deferred taxes, net | 121 |
| | 129 |
| 117 |
| | 117 |
|
| Other noncurrent assets | 113 |
| | 102 |
| 115 |
| | 107 |
|
| Total assets | $ | 7,230 |
| | $ | 6,135 |
| $ | 6,637 |
| | $ | 6,917 |
|
| LIABILITIES and STOCKHOLDERS’ DEFICIT | | | | | | |
| Liabilities | | | | | | |
| Current liabilities | | | | | | |
| Notes payable and current maturities of long-term debt | $ | 946 |
| | $ | 1,169 |
| $ | 640 |
| | $ | 871 |
|
| Accounts payable | 1,606 |
| | 1,292 |
| 1,278 |
| | 1,341 |
|
| Other current liabilities | 1,255 |
| | 1,184 |
| 1,453 |
| | 1,363 |
|
| Total current liabilities | 3,807 |
| | 3,645 |
| 3,371 |
| | 3,575 |
|
| Long-term debt | 4,521 |
| | 3,889 |
| 4,690 |
| | 4,317 |
|
| Postretirement benefits liabilities | 2,097 |
| | 2,497 |
| 1,705 |
| | 2,103 |
|
| Other noncurrent liabilities | 731 |
| | 678 |
| 693 |
| | 645 |
|
| Total liabilities | 11,156 |
| | 10,709 |
| 10,459 |
| | 10,640 |
|
| Stockholders’ deficit | | | | | | |
| Series D convertible junior preference stock | 2 |
| | 2 |
| 2 |
| | 2 |
|
| Common stock, $0.10 par value per share (103.1 shares issued and 220 shares authorized at both dates) | 10 |
| | 10 |
| 10 |
| | 10 |
|
| Additional paid-in capital | 2,731 |
| | 2,733 |
| 2,726 |
| | 2,730 |
|
| Accumulated deficit | (4,593 | ) | | (4,933 | ) | (4,566 | ) | | (4,409 | ) |
| Accumulated other comprehensive loss | (1,920 | ) | | (2,211 | ) | (1,865 | ) | | (1,912 | ) |
| Common stock held in treasury, at cost (4.2 and 4.6 shares, respectively) | (161 | ) | | (179 | ) | |
| Common stock held in treasury, at cost (3.5 and 3.9 shares, respectively) | | (133 | ) | | (147 | ) |
| Total stockholders’ deficit attributable to Navistar International Corporation | (3,931 | ) | | (4,578 | ) | (3,826 | ) | | (3,726 | ) |
| Stockholders’ equity attributable to non-controlling interests | 5 |
| | 4 |
| 4 |
| | 3 |
|
| Total stockholders’ deficit | (3,926 | ) | | (4,574 | ) | (3,822 | ) | | (3,723 | ) |
| Total liabilities and stockholders’ deficit | $ | 7,230 |
| | $ | 6,135 |
| $ | 6,637 |
| | $ | 6,917 |
|
See Notes to Consolidated Financial Statements
62
Navistar International Corporation and Subsidiaries
Consolidated Statements of Cash Flows | | | | For the Years Ended October 31, | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 | 2020 | | 2019 | | 2018 |
| Cash flows from operating activities | | | | | | | | | | |
| Net income (loss) | $ | 368 |
| | $ | 55 |
| | $ | (65 | ) | $ | (329 | ) | | $ | 243 |
| | $ | 368 |
|
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | |
| Depreciation and amortization | 140 |
| | 150 |
| | 146 |
| 136 |
| | 132 |
| | 140 |
|
| Depreciation of equipment leased to others | 71 |
| | 73 |
| | 79 |
| 63 |
| | 61 |
| | 71 |
|
| Deferred taxes, including change in valuation allowance | 4 |
| | (6 | ) | | (9 | ) | (80 | ) | | (31 | ) | | 4 |
|
| Asset impairment charges | 14 |
| | 13 |
| | 27 |
| 28 |
| | 7 |
| | 14 |
|
| Loss (gain) on sales of investments and businesses, net | — |
| | (5 | ) | | 2 |
| |
| Gain on sales of investments and businesses, net | | 0 |
| | (56 | ) | | 0 |
|
| Amortization of debt issuance costs and discount | 31 |
| | 49 |
| | 37 |
| 14 |
| | 19 |
| | 31 |
|
| Stock-based compensation | 32 |
| | 28 |
| | 16 |
| 25 |
| | 23 |
| | 32 |
|
| Provision for doubtful accounts, net of recoveries | 10 |
| | 7 |
| | 13 |
| 16 |
| | 4 |
| | 10 |
|
| Equity in income of non-consolidated affiliates, net of dividends | 7 |
| | 1 |
| | 6 |
| (2 | ) | | (2 | ) | | 5 |
|
| Write-off of debt issuance cost and discount | 43 |
| | 5 |
| | — |
| 5 |
| | 6 |
| | 43 |
|
| Other non-cash operating activities | (23 | ) | | (28 | ) | | (12 | ) | (5 | ) | | (9 | ) | | (23 | ) |
| Changes in other assets and liabilities, exclusive of the effects of businesses disposed: | | | | | | | | | | |
| Trade and other receivables | (109 | ) | | (125 | ) | | 134 |
| 36 |
| | 141 |
| | (109 | ) |
| Finance receivables | (405 | ) | | (123 | ) | | 251 |
| 490 |
| | (42 | ) | | (405 | ) |
| Inventories | (257 | ) | | 82 |
| | 205 |
| 136 |
| | 103 |
| | (257 | ) |
| Accounts payable | 317 |
| | 159 |
| | (193 | ) | (77 | ) | | (250 | ) | | 317 |
|
| Other assets and liabilities | 26 |
| | (226 | ) | | (370 | ) | 18 |
| | 101 |
| | 26 |
|
| Net cash provided by operating activities | 269 |
| | 109 |
| | 267 |
| 474 |
| | 450 |
| | 267 |
|
| Cash flows from investing activities | | | | | | | | | | |
| Purchases of marketable securities | (251 | ) | | (1,011 | ) | | (485 | ) | 0 |
| | 0 |
| | (251 | ) |
| Sales of marketable securities | 460 |
| | 659 |
| | 555 |
| 0 |
| | 0 |
| | 460 |
|
| Maturities of marketable securities | 60 |
| | 28 |
| | 43 |
| 0 |
| | 102 |
| | 60 |
|
| Net change in restricted cash and cash equivalents | 9 |
| | (22 | ) | | 5 |
| |
| Capital expenditures | (113 | ) | | (102 | ) | | (116 | ) | (148 | ) | | (134 | ) | | (113 | ) |
| Purchases of equipment leased to others | (232 | ) | | (137 | ) | | (132 | ) | (97 | ) | | (152 | ) | | (232 | ) |
| Proceeds from sales of property and equipment | 11 |
| | 35 |
| | 24 |
| 13 |
| | 14 |
| | 11 |
|
| Investments in non-consolidated affiliates | — |
| | (1 | ) | | (2 | ) | (5 | ) | | 0 |
| | 0 |
|
| Proceeds from (payments for) sales of affiliates | (3 | ) | | 9 |
| | 41 |
| 19 |
| | 100 |
| | (3 | ) |
| Other investing activities | | 1 |
| | 2 |
| | 2 |
|
| Net cash used in investing activities | (59 | ) | | (542 | ) | | (67 | ) | (217 | ) | | (68 | ) | | (66 | ) |
| Cash flows from financing activities | | | | | | | | | | |
| Proceeds from issuance of securitized debt | 339 |
| | 322 |
| | 413 |
| 389 |
| | 363 |
| | 339 |
|
| Principal payments on securitized debt | (364 | ) | | (336 | ) | | (346 | ) | (352 | ) | | (316 | ) | | (364 | ) |
| Net change in secured revolving credit facilities | 135 |
| | 111 |
| | (148 | ) | (255 | ) | | 12 |
| | 135 |
|
| Proceeds from issuance of non-securitized debt | 3,248 |
| | 582 |
| | 222 |
| 847 |
| | 209 |
| | 3,248 |
|
| Principal payments on non-securitized debt | (2,920 | ) | | (489 | ) | | (315 | ) | (341 | ) | | (1,044 | ) | | (2,920 | ) |
| Net change in notes and debt outstanding under revolving credit facilities | (10 | ) | | (112 | ) | | (149 | ) | (74 | ) | | 527 |
| | (10 | ) |
| Principal payments under financing arrangements and capital lease obligations | — |
| | — |
| | (3 | ) | |
| Debt issuance costs | (41 | ) | | (29 | ) | | (16 | ) | (18 | ) | | (9 | ) | | (41 | ) |
| Proceeds from financed lease obligations | 63 |
| | 61 |
| | 22 |
| 0 |
| | 22 |
| | 63 |
|
| Issuance of common stock | — |
| | 256 |
| | — |
| |
| Stock issuance costs | — |
| | (11 | ) | | — |
| |
| Proceeds from exercise of stock options | 8 |
| | 12 |
| | — |
| 4 |
| | 4 |
| | 8 |
|
| Dividends paid by subsidiaries to non-controlling interest | (27 | ) | | (26 | ) | | (34 | ) | (17 | ) | | (24 | ) | | (27 | ) |
| Other financing activities | (17 | ) | | (3 | ) | | 1 |
| (2 | ) | | (2 | ) | | (17 | ) |
| Net cash provided by (used in) financing activities | 414 |
| | 338 |
| | (353 | ) | 181 |
| | (258 | ) | | 414 |
|
| Effect of exchange rate changes on cash and cash equivalents | (10 | ) | | (3 | ) | | 45 |
| |
| Increase (decrease) in cash and cash equivalents | 614 |
| | (98 | ) | | (108 | ) | |
| Cash and cash equivalents at beginning of the year | 706 |
| | 804 |
| | 912 |
| |
| Cash and cash equivalents at end of the year | $ | 1,320 |
| | $ | 706 |
| | $ | 804 |
| |
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | | (22 | ) | | (12 | ) | | (10 | ) |
| Increase in cash, cash equivalents and restricted cash | | 416 |
| | 112 |
| | 605 |
|
| Cash, cash equivalents and restricted cash at beginning of the year | | 1,557 |
| | 1,445 |
| | 840 |
|
| Cash, cash equivalents and restricted cash at end of the year | | $ | 1,973 |
| | $ | 1,557 |
| | $ | 1,445 |
|
See Notes to Consolidated Financial Statements
63
Navistar International Corporation and Subsidiaries
Consolidated Statements of Stockholders’ Deficit
| | | (in millions) | Series D
Convertible
Junior
Preference
Stock | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive Income (Loss) | | Common
Stock
Held in
Treasury,
at cost | | Stockholders'
Equity
Attributable
to Non-controlling
Interests | | Total | Series D
Convertible
Junior
Preference
Stock | | Common
Stock | | Additional
Paid-in
Capital | | Accumulated
Deficit | | Accumulated
Other
Comprehensive Income (Loss) | | Common
Stock
Held in
Treasury,
at cost | | Stockholders'
Equity
Attributable
to Non-controlling
Interests | | Total |
| Balance as of October 31, 2015 | $ | 2 |
| | $ | 9 |
| | $ | 2,499 |
| | $ | (4,866 | ) | | $ | (2,601 | ) | | $ | (210 | ) | | $ | 7 |
| | $ | (5,160 | ) | |
| Net income (loss) | — |
| | — |
| | — |
| | (97 | ) | | — |
| | — |
| | 32 |
| | (65 | ) | |
| Total other comprehensive loss | — |
| | — |
| | — |
| | — |
| | (39 | ) | | — |
| | — |
| | (39 | ) | |
| Stock-based compensation | — |
| | — |
| | 4 |
| | — |
| | — |
| | — |
| | — |
| | 4 |
| |
| Stock ownership programs | ��� |
| | — |
| | (5 | ) | | — |
| | — |
| | 5 |
| | — |
| | — |
| |
| Cash dividends paid to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (34 | ) | | (34 | ) | |
| Acquisition of remaining ownership interest from non-controlling interest holder | — |
| | — |
| | 1 |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| |
| Balance as of October 31, 2016 | $ | 2 |
| | $ | 9 |
| | $ | 2,499 |
| | $ | (4,963 | ) | | $ | (2,640 | ) | | $ | (205 | ) | | $ | 5 |
| | $ | (5,293 | ) | |
| Net income | — |
| | — |
| | — |
| | 30 |
| | — |
| | — |
| | 25 |
| | 55 |
| |
| Total other comprehensive income | — |
| | — |
| | — |
| | — |
| | 429 |
| | — |
| | — |
| | 429 |
| |
| Stock-based compensation | — |
| | — |
| | 6 |
| | — |
| | — |
| | — |
| | — |
| | 6 |
| |
| Stock ownership programs | — |
| | — |
| | (15 | ) | | — |
| | — |
| | 26 |
| | — |
| | 11 |
| |
| Cash dividends paid to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (26 | ) | | (26 | ) | |
| Issuance of common stock | — |
| | 2 |
| | 254 |
| | — |
| | — |
| | — |
| | — |
| | 256 |
| |
| Stock issuance costs | — |
| | — |
| | (11 | ) | | — |
| | — |
| | — |
| | — |
| | (11 | ) | |
| Other | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) | |
| Balance as of October 31, 2017 | $ | 2 |
| | $ | 10 |
| | $ | 2,733 |
| | $ | (4,933 | ) | | $ | (2,211 | ) | | $ | (179 | ) | | $ | 4 |
| | $ | (4,574 | ) | $ | 2 |
| | $ | 10 |
| | $ | 2,733 |
| | $ | (4,933 | ) | | $ | (2,211 | ) | | $ | (179 | ) | | $ | 4 |
| | $ | (4,574 | ) |
| Net income | — |
| | — |
| | — |
| | 340 |
| | — |
| | — |
| | 28 |
| | 368 |
| — |
| | — |
| | — |
| | 340 |
| | — |
| | — |
| | 28 |
| | 368 |
|
| Total other comprehensive income | — |
| | — |
| | — |
| | — |
| | 291 |
| | — |
| | — |
| | 291 |
| — |
| | — |
| | — |
| | — |
| | 291 |
| | — |
| | — |
| | 291 |
|
| Stock-based compensation | — |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | — |
| | 10 |
| — |
| | — |
| | 10 |
| | — |
| | — |
| | — |
| | — |
| | 10 |
|
| Stock ownership programs | — |
| | — |
| | (11 | ) | | — |
| | — |
| | 18 |
| | — |
| | 7 |
| — |
| | — |
| | (11 | ) | | — |
| | — |
| | 18 |
| | — |
| | 7 |
|
| Cash dividends paid to non-controlling interest | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (27 | ) | | (27 | ) | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (27 | ) | | (27 | ) |
| Issuance of common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Stock issuance costs | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Stock deferral and issuance - directors | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| |
| Balance as of October 31, 2018 | $ | 2 |
| | $ | 10 |
| | $ | 2,731 |
| | $ | (4,593 | ) | | $ | (1,920 | ) | | $ | (161 | ) | | $ | 5 |
| | $ | (3,926 | ) | $ | 2 |
| | $ | 10 |
| | $ | 2,731 |
| | $ | (4,593 | ) | | $ | (1,920 | ) | | $ | (161 | ) | | $ | 5 |
| | $ | (3,926 | ) |
| Net income | | — |
| | — |
| | — |
| | 221 |
| | — |
| | — |
| | 22 |
| | 243 |
|
| Total other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
| ASC-606 modified retrospective adoption | | — |
| | — |
| | — |
| | (37 | ) | | — |
| | — |
| | — |
| | (37 | ) |
| Stock-based compensation | | — |
| | — |
| | 11 |
| | — |
| | — |
| | — |
| | — |
| | 11 |
|
| Stock ownership programs | | — |
| | — |
| | (12 | ) | | — |
| | — |
| | 14 |
| | — |
| | 2 |
|
| Cash dividends paid to non-controlling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (24 | ) | | (24 | ) |
| Balance as of October 31, 2019 | | $ | 2 |
| | $ | 10 |
| | $ | 2,730 |
| | $ | (4,409 | ) | | $ | (1,912 | ) | | $ | (147 | ) | | $ | 3 |
| | $ | (3,723 | ) |
| Net income (loss) | | — |
| | — |
| | — |
| | (347 | ) | | — |
| | — |
| | 18 |
| | (329 | ) |
| Total other comprehensive income | | — |
| | — |
| | — |
| | — |
| | 239 |
| | — |
| | — |
| | 239 |
|
| Reclassification of stranded tax effects | | — |
| | — |
| | — |
| | 192 |
| | (192 | ) | | — |
| | — |
| | 0 |
|
| Stock-based compensation | | — |
| | — |
| | 5 |
| | — |
| | — |
| | — |
| | — |
| | 5 |
|
| Stock ownership programs | | — |
| | — |
| | (9 | ) | | (2 | ) | | — |
| | 14 |
| | — |
| | 3 |
|
| Cash dividends paid to non-controlling interest | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (17 | ) | | (17 | ) |
| Balance as of October 31, 2020 | | $ | 2 |
| | $ | 10 |
| | $ | 2,726 |
| | $ | (4,566 | ) | | $ | (1,865 | ) | | $ | (133 | ) | | $ | 4 |
| | $ | (3,822 | ) |
See Notes to Consolidated Financial Statements
64
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies
Organization and Description of the Business
Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer collectively to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We operate in four4 principal industry segments: Truck, Parts, Global Operations (collectively called "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively called "Financial Services operations"). These segments are discussed in Note 14, 16, Segment Reporting.
Our fiscal year ends on October 31. As such, all references to 2018, 2017,2020, 2019, and 20162018 contained within this Annual Report on Form 10-K relate to the fiscal year, unless otherwise indicated.
Basis of Presentation and Consolidation
The accompanying audited consolidated financial statements include the assets, liabilities, and results of operations of our Manufacturing operations which include majority-owned dealers ("Dealcors"), and our Financial Services operations, including VIEs of which we are the primary beneficiary. The effects of transactions among consolidated entities have been eliminated to arrive at the consolidated amounts.
Variable Interest Entities
We have an interest in several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our VIEs that we are the primary beneficiary because we have the power to direct the activities of the VIE that most significantly impact its economic performance and we have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of these VIEs. Assets of these entities are not readily available to satisfy claims against our general assets.
We are the primary beneficiary of our Blue Diamond Parts, LLC ("BDP") joint venture with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of $39$37 million and $49$32 million, and liabilities of $4$3 million and $13$4 million, as of October 31, 20182020 and 2017, respectively, including2019, respectively. Assets include $4 million and $10$2 million of cash and cash equivalents at the respective dates,as of October 31, 2020 and 2019, respectively, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have recourse to our general credit. In October 2019, Ford notified the Company of its intention to dissolve the BDP joint venture effective October 2021.
Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of $994$661 million and $869$927 million as of October 31, 20182020 and 2017,2019, respectively, and liabilities of $852$610 million and $754$838 million as of October 31, 20182020 and 2017,2019, respectively, all of which are involved in securitizations that are treated as asset-backed debt. In addition, our Consolidated Balance Sheets include secured assets of $370$397 million and $278$537 million as of October 31, 20182020 and 2017,2019, respectively, and corresponding liabilities of $205$288 million and $194$279 million, at the respective dates, which are related to other secured transactions that do not qualify for sale accounting treatment, and therefore, are treated as borrowings secured by operating and finance leases. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent that the related VIEs are required to make principal and interest payments. Investors in securitizations of these entities have either no recourse, or limited recourse, to our general credit.
We also have an interest in other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.
We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability tocan exercise significant influence over operating and financial policies. Equity in income of non-consolidated affiliates includes our share of the net income of these entities.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Related Party Transactions
We have a series of commercial relationships and agreements with TRATON AG (formerly Volkswagen Truck & Bus AG)SE and certain of its subsidiaries and affiliates ("TRATON Group"), who holds 16.8% of our common stock, for royalties related to use of certain engine technology, contract manufacturing operations performed by us, the sale of engines, the sale and purchase of parts, and a procurement joint venture. We have also entered intohave development agreements with TRATON Group involving certain engine and transmission projects. This development work is being expensed as incurred. During the third quarter of 2020, we informed MAN, a subsidiary of the TRATON Group, of the cancellation of a certain engine program. The parties disagree about the effects of the cancellation under the terms of the applicable agreement and are having commercial discussions related to the consequences of the program cancellation. The ultimate resolution may result in additional expenses which could be material. We are unable to estimate the amount of these expenses at this time. Revenue recognized for the years ended October 31, 20182020, 2019 and 2017,2018 was approximately $146$122 million, $157 million and $119$146 million, respectively. Net expenses incurred for the years ended October 31, 2020, 2019 and 2018 and 2017 were $27$48 million, $37 million and $7$27 million, respectively, included primarily in Engineering and product development costs in our Consolidated Statements of Operations. Our receivable from TRATON Group was $10$18 million and $13 million as of October 31, 20182020 and 2017,2019, respectively. Our payable to TRATON Group was $25$90 million and $5$55 million as of October 31, 20182020 and 2017,2019, respectively.
Revenue Recognition
Our Manufacturing operations recognize revenue whenWe have an exclusive long-term agreement to supply military and commercial parts and chassis to our former defense business, ND Holdings, LLC (“Navistar Defense”), in which we meet four basic criteria: (i) persuasive evidence thatretain a customer arrangement exists, (ii) the price is fixed or determinable, (iii) collectability is reasonably assured,30% ownership interest. We also entered into an intellectual property agreement and (iv) delivery of product has occurred ora transition services have been rendered. Sales are generally recognized when risk of ownership passes.
Sales to fleet customers and governmental entities are recognized in accordance with the terms of each contract. Revenue on certain customer requested bill and hold arrangements is not recognized until after the customer is notified that the product (i) has been completed according to customer specifications, (ii) has passed our quality control inspections, and (iii) is ready for delivery based upon the established delivery terms and risk of loss has transferred.
An allowance for sales returns is recorded as a reduction to revenue based upon estimates using historical information about returns.agreement. For the saleyears ended October 31, 2020 and 2019, revenue recognized was approximately $48 million and $57 million, respectively. As of service parts that include a component, we record revenue on a gross basis including the fair market value of the core. A core component is the basic forging or casting, such as an engine block, that can be remanufactured by a certified remanufacturing supplier. When a dealer returns a core within the specified eligibility period, we provide a core return credit, which is applied to the customer's account balance. At times, we may mark up the core charge beyond the amount we are charged by the supplier. This mark-up is recorded as a liability, as it represents the amount that will be paid to the dealer upon return of the core componentOctober 31, 2020 and is in excess of the fair value to be received2019, our receivables from the supplier.
Concurrent with our recognition of revenue, we recognize price allowancesNavistar Defense were $8 million and the cost of incentive programs in the normal course of business based on programs offered to dealers or fleet customers. Estimates are made for sales incentives on certain vehicles in dealer stock inventory based on historical experience and announced special programs. Historically, we have had an increase in net orders for stock inventory from our dealers at the end of the year due to a combination of demand and, from time to time, incentives to dealers.$29 million, respectively.
Truck sales to the U.S. and foreign governments of non-commercial products manufactured to government specifications, and other contract manufacturing arrangements, are recognized using the units-of-delivery measure under the percentage-of-completion accounting method as units are delivered and accepted, if required, by the customer.
Certain terms or modifications to U.S. and foreign government contracts may be unpriced; that is, the work to be performed is defined, but the related contract price is to be negotiated at a later date. In situations where we can reliably estimate a profit margin in excess of costs incurred, revenue and gross margin are recorded for delivered contract items. Otherwise, revenue is recognized when the price has been agreed with the government and costs are deferred when it is probable that the costs will be recovered.
Shipping and handling amounts billed to our customers are included in Sales of manufactured products, net and the related shipping and handling costs incurred are included in Costs of products sold.
Financial Services operations recognize revenue from retail notes, finance leases, wholesale notes, retail accounts, and wholesale accounts as Finance revenues over the term of the receivables utilizing the effective interest method. Certain direct origination costs and fees are deferred and recognized as adjustments to yield and are reported as part of interest income over the life of the receivable. Loans are considered to be impaired when we conclude it is probable the customer will not be able to make full payment according to contractual terms after reviewing the customer's financial performance, payment ability, capital-raising potential, management style, economic situation, and other factors. The accrual of interest on such loans is discontinued when the loan becomes 90 days or more past due. Finance revenues on these loans are recognized only to the extent cash payments are received. We resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Operating lease revenues are recognized on a straight-line basis over the life of the lease. Recognition of revenue is suspended when management determines the collection of future revenue is not probable. Recognition of revenue is resumed if collection again becomes probable.
Selected receivables are securitized and sold to public and private investors with limited recourse. Our Financial Services operations continue to service the sold receivables. These transactions do not qualify for sale accounting under U.S. GAAP and are therefore accounted for as secured borrowing transactions.
Cash and Cash Equivalents
All highly liquid financial instruments with original maturities of 90 days or less, consisting primarily of U.S. Treasury bills, federal agency securities, and commercial paper, are classified as cash equivalents.
Restricted cash is related to our securitization facilities, senior and subordinated floating rate asset-backed notes, wholesale trust agreements, indentured trust agreements, letters of credit, Environmental Protection Agency ("EPA") requirements, and workers compensation requirements. The restricted cash and cash equivalents for our securitized facilities are restricted to pay interest expense, principal, or other amounts associated with our securitization agreements.
Marketable Securities
Marketable securities consist of available-for-sale securities and are measured and reported at fair value. The difference between amortized cost and fair value is recorded as a component of Accumulated other comprehensive loss ("AOCL") in Stockholders' Deficit, net of taxes. Most securities with remaining maturities of less than twelve months and other investments needed for current cash requirements are classified as current in our Consolidated Balance Sheets. Gains and losses on the sale of marketable securities are determined using the specific identification method and are recorded in Other income, net.
We evaluate our investments in marketable securities at the end of each reporting period to determine if a decline in fair value is other than temporary. When a decline in fair value is determined to be other than temporary, an impairment charge is recorded and a new cost basis in the investment is established. Our marketable securities are classified as Level 1 in the fair value hierarchy.
Derivative Instruments
We utilize derivative instruments to manage certain exposure to changes in foreign currency exchange rates, interest rates, and commodity prices. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these derivative instruments are recognized in our operating results or included in AOCL, depending on whether the derivative instrument is a fair value or cash flow hedge and whether it qualifies for hedge accounting treatment. We elected to apply the normal purchase and normal sale exclusion to certain commodity contracts that are entered into to be used in production within a reasonable time during the normal course of business. For the years ended October 31, 2018, 2017,2020, 2019, and 2016,2018, we elected not to use hedge accounting and all changes in the fair value of our derivatives, except for those qualifying under the normal purchases and normal sales exception, were recognized in our operating results.
Gains and losses on derivative instruments are recognized in Costs of products sold, Interest expense, or Other income,expense, net depending on the underlying exposure. The exchange of cash associated with derivative transactions is classified in the Consolidated Statements of Cash Flows in the same category as the cash flows from the items subject to the economic hedging relationships.
Trade and Finance Receivables
Trade Receivables
Trade accounts receivable and trade notes receivable primarily arise from sales of goods to independently owned and operated dealers, original equipment manufacturers ("OEMs"), and commercial customers in the normal course of business.
Finance Receivables
Finance receivables consist of the following:
| |
| • | Retail notes—Retail notes primarily consist of fixed rate loans to commercial customers to facilitate their purchase of new and used trucks, and related equipment. |
Retail notes—Retail notes primarily consist of fixed rate loans to commercial customers to facilitate their purchase of new and used trucks, and related equipment.
Finance leases—Finance leases consist of direct financing leases to commercial customers for acquisition of new and used trucks, and related equipment.
66
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Wholesale notes—Wholesale notes primarily consist of variable rate loans to our dealers for the purchase of new and used trucks, and related equipment.
Retail accounts—Retail accounts consist of short-term accounts receivable that finance the sale of products to commercial customers.
Wholesale accounts—Wholesale accounts consist of short-term accounts receivable primarily related to the sales of items other than trucks, and related equipment (e.g. service parts) to dealers.
| |
| • | Finance leases—Finance leases consist of direct financing leases to commercial customers for acquisition of new and used trucks, and related equipment. |
| |
| • | Wholesale notes—Wholesale notes primarily consist of variable rate loans to our dealers for the purchase of new and used trucks, and related equipment. |
| |
| • | Retail accounts—Retail accounts consist of short-term accounts receivable that finance the sale of products to commercial customers. |
| |
| • | Wholesale accounts—Wholesale accounts consist of short-term accounts receivable primarily related to the sales of items other than trucks, and related equipment (e.g. service parts) to dealers. |
Finance receivables are classified as held-to-maturity and are recorded at gross value less unearned income and are reported net of allowances for doubtful accounts. Unearned revenue is amortized to revenue over the life of the receivable using the effective interest method. Our Financial Services operations purchase the majority of the wholesale notes receivable and some retail notes and accounts receivable arising from our Manufacturing operations. The Financial Services operations retain as collateral a security interest in the equipment associated with retail notes, wholesale notes, and finance leases.
Sales of Trade and Finance Receivables
We sell finance receivables using a process commonly known as securitization, whereby asset-backed securities are sold via public offering or private placement. None of our securitizations qualify for sales accounting treatment or as an off-balance sheet arrangement. As a result, the transferred receivables and the associated secured borrowings are included in our Consolidated Balance Sheets and no gain or loss is recorded on the sale.
We also act as servicer of transferred receivables. The servicing duties include collecting payments on receivables and preparing monthly investor reports on the performance of the receivables that are used by the trustee to distribute monthly interest and principal payments to investors. While servicing the receivables, we apply the same servicing policies and procedures that are applied to our owned receivables.
On a limited basis, we have sold certain receivables to third party lenders, without recourse or future obligations, and generally with no gain or loss.
Allowance for Doubtful Accounts
An allowance for doubtful accounts is established through a charge to Selling, general and administrative ("SG&A") expenses. The allowance is an estimate of the amount required to absorb probable losses on trade and finance receivables that may become uncollectible. The receivables are charged off when amounts due are determined to be uncollectible.
We have two portfolio segments of finance receivables based on the type of financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory. As the initial measurement attributes and the monitoring and assessment of credit risk or the performance of the receivables are consistent within each of our receivable portfolios, we determined that each portfolio consisted of one class of receivable.
Impaired receivables are specifically identified and segregated from the remaining portfolio. The expected loss on impaired receivables is fully reserved in a separate calculation as a specific reserve based on the unique ability of the customer to pay and the estimated value of the collateral. The historical loss experience and portfolio quality trends of the retail portfolio segment compared to the wholesale portfolio segment are inherently different. A specific reserve on impaired retail receivables is recorded if the estimated fair value of the underlying collateral, net of selling costs, is less than the principal balance of the receivable. We calculate a general reserve on the remaining loan portfolio by applying loss ratios which are determined using actual loss experience and customer payment history, in conjunction with current economic and portfolio quality trends. In addition, we analyze specific economic indicators such as tonnage, fuel prices, and gross domestic product for additional insight into the overall state of the economy and its potential impact on our portfolio.
To establish a specific reserve for impaired wholesale receivables, we consider the same factors discussed above but also consider the financial strength of the dealer and key management, the timeliness of payments, the number and location of satellite locations, the number of dealers of competitor manufacturers in the market area, the type of equipment normally financed, and the seasonality of the business.
Repossessions
Gains or losses arising from the sale of repossessed collateral supporting finance receivables and operating leases are recognized in Other income,expense, net. Repossessed assets are recorded within Inventories at the lower of historical cost or fair value, less estimated costs to sell.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Inventories
Inventories are valued at the lower of cost orand net realizable value ("NRV"). Cost is principally determined using the first-in, first-out method. Our gross used truck inventory was $154$135 million at October 31, 20182020 compared to $206$200 million at October 31, 2017,2019, offset by reserves of $31$37 million and $110 million, respectively.in both periods.
In valuing our used truck inventory, we are required to make assumptions regarding the level of reserves required to value inventories at their NRV. Our judgments and estimates for used truck inventory are based on an analysis of current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. The NRV is subject to change based on numerous conditions, including age, specifications, mileage, timing of sales, market mix and current and forecasted pricing. While calculations are made after taking these factors into account, significant management judgment regarding expectations for future events is involved. Future events that could significantly influence our judgment and related estimates include general economic conditions in markets where our products are sold, actions of our competitors, and the ability to sell used trucks in a timely manner.
The following table presents our used truck reserve:
| | | | For the Years Ended October 31, | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 | 2020 | | 2019 | | 2018 |
| Balance at beginning of period | $ | 110 |
| | $ | 208 |
| | $ | 110 |
| $ | 37 |
| | $ | 31 |
| | $ | 110 |
|
Additions charged to expense(A) | 50 |
| | 111 |
| | 187 |
| 99 |
| | 69 |
| | 50 |
|
Deductions/Other adjustments(B) | (129 | ) | | (209 | ) | | (89 | ) | (99 | ) | | (63 | ) | | (129 | ) |
| Balance at end of period | $ | 31 |
| | $ | 110 |
| | $ | 208 |
| $ | 37 |
| | $ | 37 |
| | $ | 31 |
|
_________________________
| |
| (A) | Additions charged to expense reflects the increase of the reserve for inventory on hand. During 2017, we implemented a shift in market mix to include an increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and lower domestic pricing to enable higher sales velocity. |
| |
| (B) | Deductions/Other adjustments include reductions of the reserve related to the sale of units. |
Property and Equipment
We report land, buildings, leasehold improvements, machinery and equipment (including tooling and pattern equipment), furniture, fixtures, and equipment, and equipment leased to others at cost, net of depreciation. We initially record assets under capitalfinance lease obligations at the lower of their fair value or the present value of the aggregate future minimum lease payments. We depreciate our assets using the straight-line method over the shorter of the lease term or the estimated useful lives of the assets.
The ranges of estimated useful lives are as follows: |
| |
| | Years |
| Buildings | 20 - 50 |
| Leasehold improvements | 3 - 20 |
| Machinery and equipment | 3 - 12 |
| Furniture, fixtures, and equipment | 3 - 15 |
| Equipment leased to others | 1 - 10 |
Long-lived assets are evaluated periodically to determine if an adjustment to the depreciation and amortization period or to the unamortized balance is warranted. Such evaluation is based principally on the expected utilization of the long-lived assets.
We depreciate trucks, tractors, and trailers leased to customers under operating lease agreements on a straight-line basis to the equipment's estimated residual value over the lease term. The residual values of the equipment represent estimates of the value of the assets at the end of the lease contracts and are initially recorded based on estimates of future market values. Realization of the residual values is dependent on our future ability to market the equipment. We review residual values periodically to determine that recorded amounts are appropriate, and the equipment is not impaired.
Maintenance and repairs of property and equipment are expensed as incurred. We capitalize replacements and improvements that increase the estimated useful life or productive capacity of an asset and we capitalize interest on major construction and development projects while in progress.
Gains or losses on disposition of property and equipment are recognized in Other expense, net.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Gains or losses on disposition of property and equipment are recognized in Other income, net.
We test for impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value of an asset or asset group (hereinafter referred to as "asset group") may not be recoverable by comparing the sum of the estimated undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the carrying value.
During 2017,2020, we identified a triggering event related to our operations in Brazil due to the impacts of the COVID-19 pandemic, which resulted in declines in actual and forecasted results. We performed an impairment test as of April 30, 2020 on the long-lived assets of the Brazilian asset group. As a result, we recorded impairment charges of $12 million in our Global Operations segment. We also concluded that we had triggering events related to certain trucks under operating leases, due to declines in expected residual values, and certain other long-lived assets. As a result, we recorded charges of $10 million and $6 million, respectively, in our Truck segment. It is reasonably possible that within the next twelve months, we could recognize additional impairment charges for certain trucks under operating leases where Navistar is a lessor, which could be material, if we experience continued declines in excess of our forecasted expected residual values, as a result of the COVID-19 pandemic, the demand for used trucks or a change in the mix of sales through various market channels.
During 2019, we identified a triggering event related to continued economic weakness in Brazil which resultedand the initiation of strategic cost reduction actions in the decline in forecasted results for the Brazilian asset group. The Brazilian asset group, which is included in ourthe Global Operations segment. As a result, we estimated the recoverable amount of the asset group and determined that the sum of the estimated undiscounted future cash flows exceeds the carrying value and the asset group was not impaired. Significant adverse changes to our business environment and future cash flows could cause us to recordFor more information regarding asset impairment charges in future periods, which could be material.see Note 3, Restructuring, Impairments and Divestitures.
Included in equipment leased to others are trucks that we produced or acquired to lease to customers as well as equipment that is financed by BMOBank of Montreal ("BMO") that does not qualify for revenue recognition, as we retained substantial riskscontrol of ownership in the leased property, which are accounted for as operating leases and borrowings, respectively.leases. In the Consolidated Statement of Cash Flows, the related expenditures are reflected as the Purchases of equipment leased to others in the investing section.
Goodwill and Indefinite-LivedOther Intangible Assets
Goodwill represents the excess of the cost of an acquired business over the amounts assigned to the net assets. Goodwill is not amortized but is tested for impairment at a reporting unit level on an annual basis or more frequently, if circumstances change or an event occurs that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Qualitative factors may be assessed to determine whether it is more likely than not that the fair value of the reporting unit is less than its carrying amount. If the qualitative assessment indicates that the carrying amount is more likely than not higher than the fair value, goodwill is tested for impairment based on a two-step test. The first step compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, thus the second step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test shall be performed to measure the amount of impairment loss, if any. The second step compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.
Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The income approach is based on discounted cash flows which are derived from internal forecasts and economic expectations for each respective reporting unit.
An intangible asset determined to have an indefinite useful life is not amortized until its useful life is determined to no longer be indefinite. Indefinite-lived intangible assets are evaluated each reporting period to determine whether events and circumstances continue to support an indefinite useful life. Indefinite-lived intangible assets are tested for impairment annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test consists of a comparison of the fair value of the indefinite-lived intangible asset with its carrying amount. If the carrying amount of an indefinite-lived intangible asset exceeds its fair value, an impairment loss is recognized in an amount equal to that excess.
Significant judgment is applied when evaluating if an intangible asset has a finite useful life. In addition, for indefinite-lived intangible assets, significant judgment is applied in testing for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, and incorporating general economic and market conditions.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Intangible assets subject to amortization are also evaluated for impairment periodically or when indicators of impairment are determined to exist. We test for impairment of intangible assets, subject to amortization, by comparing the sum of the estimated undiscounted future cash flows expected to result from the operation of the asset group and its eventual disposition to the carrying value. If the sum of the undiscounted future cash flows is less than the carrying value, the fair value of the asset group is determined. The amount of impairment is calculated by subtracting the fair value of the asset group from the carrying value of the asset group. Intangible assets, subject to amortization, could become impaired in the future or require additional charges as a result of declines in profitability due to changes in volume, market pricing, cost, manner in which an asset is used, physical condition of an asset, laws and regulations, or the business environment. We amortize the cost of intangible assets over their respective estimated useful lives, generally on a straight-line basis.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The ranges for the amortization periods are generally as follows: |
| |
| | Years |
| Customer base and relationships | 3 - 15 |
| Trademarks | 20 |
| Other | 3 - 18 |
During the third quarter of 2016, the economic downturn in Brazil resulted in the continued decline in actual and forecasted results for the Brazilian engine reporting unit with an indefinite-lived intangible asset. As a result, we performed an impairment analysis in the third quarter of 2016 utilizing the income approach, based on discounted cash flows, which are derived from internal forecasts and economic expectations. It was determined that the carrying value of the trademark exceeded its fair value. As a result, we determined that the trademark was impaired and recognized an impairment charge of $1 million. The non-cash impairment charges were included in Asset impairment charges in our Consolidated Statements of Operations. The Brazilian engine reporting unit is included in our Global Operations segment.
Investments in Non-consolidated Affiliates
Equity method investments are recorded at original cost and adjusted periodically to recognize (i) our proportionate share of the investees' net income or losses after the date of investment, (ii) additional contributions made and dividends or distributions received, and (iii) impairment losses resulting from adjustments to fair value.
We assess the potential impairment of our equity method investments and determine fair value based on valuation methodologies, as appropriate, including the present value of estimated future cash flows, estimates of sales proceeds, and market multiples. If an investment is determined to be impaired and the decline in value is other than temporary, we record an appropriate write-down.
Debt Issuance Costs
We amortize debt issuance costs, discounts and premiums over the remaining life of the related debt using the effective interest method. The related income or expense is included in Interest expense. We record debt issuance costs, discounts and premiums associated with term debt as a direct deduction from, or addition to, the face amount of the debt. We record debt issuance costs associated with line-of-credit debt as other assets.
Pensions and Postretirement Benefits
We use actuarial methods and assumptions to account for our pension plans and other postretirement benefit plans. Pension and other postretirement benefits expense includes the actuarially computed cost of benefits earned during the current service period, the interest cost on accrued obligations, the expected return on plan assets, the straight-line amortization of net actuarial gains and losses and plan amendments, and adjustments due to settlements and curtailments. For more information regarding pension plans and other postretirement benefit plans see Note 12, Postretirement Benefits.
Engineering and Product Development Costs
Engineering and product development costs arise from ongoing costs associated with improving existing products and manufacturing processes and for the introduction of new truck and engine components and products and are expensed as incurred.
Advertising Costs
Advertising costs are expensed as incurred and are included in SG&A expenses. These costs totaled $17 million, $31 million, $26 million, and $13$31 million for the years ended October 31, 2020, 2019, and 2018, 2017,respectively.
Navistar International Corporation and 2016, respectively.Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Contingency Accruals
We accrue for loss contingencies associated with outstanding litigation for which we have determined it is probable that a loss has occurred and the amount of loss can be reasonably estimated. Our asbestos, product liability, environmental, and workers compensation accruals also include estimated future legal fees associated with the loss contingencies, as we believe we can reasonably estimate those costs. In all other instances, legal fees are expensed as incurred. These expenses may be recorded in Costs of products sold, SG&A expenses, or Other income,expense, net. These estimates are based on our expectations of the scope, length to complete, and complexity of the claims. In the future, additional adjustments may be recorded as the scope, length, or complexity of outstanding litigation changes.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Warranty
We generally offer one to five-year warranty coverage for our truck, bus, and engine products, as well as our service parts. Terms and conditions vary by product, customer, and country. We accrue warranty related costs under standard warranty terms and for certain claims outside the contractual obligation period that we choose to pay as accommodations to our customers.
Our warranty estimates are established using historical information about the nature, frequency, timing, and average cost of warranty claims. Warranty claims are influenced by numerous factors, including new product introductions, technological developments, the competitive environment, the design and manufacturing process, and the complexity and related costs of component parts. We estimate our warranty accrual for our engines and trucks based on engine types and model years. Our warranty accruals take into account the projected ultimate cost-per-unit ("CPU") utilizing historical claims information. The CPU represents the total cash projected to be spent for warranty claims for a particular model year during the warranty period, divided by the number of units sold. The projection of the ultimate CPU is affected by component failure rates, repair costs, and the timing of failures in the product life cycle. Warranty claims inherently have a high amount of variability in timing and severity and can be influenced by external factors. Our warranty estimation process takes into consideration numerous variables that contribute to the precision of the estimate, but also add to the complexity of the model. Including numerous variables also reduces the sensitivity of the model to any one variable. We perform periodic reviews of warranty spend data to allow for timely consideration of the effects on warranty accruals.
Initial warranty estimates for new model year products are based on the previous model year product's warranty experience until the new product progresses sufficiently through its life cycle and related claims data becomes mature. Historically, warranty claims experience for launch-year products has been higher compared to the prior model-year engines; however, over time we have been able to refine both the design and manufacturing process to reduce both the volume and the severity of warranty claims. New product launches require a greater use of judgment in developing estimates until historical experience becomes available.
We record adjustments to pre-existing warranties for changes in our estimate of warranty costs for products sold in prior fiscal years. Such adjustments typically occur when claims experience deviates from historic and expected trends. For 2018 and 2017, we recognized a benefit to pre-existing warranties of $9 million and $1 million, respectively, as compared to charges of $77 million in 2016. Future events and circumstances could materially change these estimates and require additional adjustments to our liability.
When we identify cost effective opportunities to address issues in products sold or corrective actions for safety issues, we initiate product recalls or field campaigns. As a result of the uncertainty surrounding the nature and frequency of product recalls and field campaigns, the liability for such actions areis generally recorded when we commit to a product recall or field campaign. Each subsequent quarter after a recall or campaign is initiated the recorded liability balance is analyzed, reviewed, and adjusted if necessary to reflect any changes in the anticipated average cost of repair or number of repairs to be completed prospectively. Included in 20182020 warranty expense were $10$23 million of charges related to new campaign issuances as well as changes in estimates of previously issued campaigns, as compared to $21$27 million and $17$10 million in 20172019 and 2016,2018, respectively. The charges were primarily recognized as adjustments to pre-existing warranties. As we continue to identify opportunities to improve the design and manufacturing of our engines we may incur additional charges for product recalls and field campaigns to address identified issues.
Optional extended warranty contracts can be purchased for periods ranging from one to ten years. Warranty revenues related to extended warranty contracts are amortized to income, over the life of the contract, (a) in 2020 and 2019 in proportion to the costs expected to be incurred in satisfying the obligation under the contract and (b) in 2018 using the straight-line method. Costs under extended warranty contracts are expensed as incurred. We recognize losses on defined pools of extended warranty contracts when the expected costs for a given pool of contracts exceed related unearned revenue.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
When collection is reasonably assured, we also estimate the amount of warranty claim recoveries to be received from our suppliers and record them in Other current assets and Other noncurrent assets. Recoveries related to specific product recalls, in which a supplier confirms its liability under the recall, are recorded in Trade and other receivables, net. Warranty costs and recoveries are included in Costs of products sold.
Although we believe that the estimates and judgments discussed herein are reasonable, actual results could differ and we may be exposed to increases or decreases in our warranty accrual that could be material.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Product Warranty Liability
The following table presents accrued product warranty and deferred warranty revenue activity: | | | | For the Years Ended October 31, | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 | 2020 | | 2019 | | 2018 |
| Balance at beginning of period | $ | 629 |
| | $ | 818 |
| | $ | 994 |
| $ | 510 |
| | $ | 529 |
| | $ | 629 |
|
| Costs accrued and revenues deferred | 211 |
| | 199 |
| | 186 |
| 162 |
| | 249 |
| | 211 |
|
| Currency translation adjustment | 1 |
| | (1 | ) | | 3 |
| |
Adjustments to pre-existing warranties(A) | (9 | ) | | (1 | ) | | 77 |
| 40 |
| | 3 |
| | (9 | ) |
| Payments and revenues recognized | (303 | ) | | (386 | ) | | (442 | ) | (263 | ) | | (283 | ) | | (303 | ) |
Other adjustments(B) | | 0 |
| | 12 |
| | 1 |
|
| Balance at end of period | 529 |
| | 629 |
| | 818 |
| 449 |
| | 510 |
| | 529 |
|
| Less: Current portion | 255 |
| | 307 |
| | 396 |
| 209 |
| | 233 |
| | 255 |
|
| Noncurrent accrued product warranty and deferred warranty revenue | $ | 274 |
| | $ | 322 |
| | $ | 422 |
| $ | 240 |
| | $ | 277 |
| | $ | 274 |
|
________________________ | |
| (A) | Adjustments to pre-existing warranties reflect changes in our estimate of warranty costs for products sold in prior fiscal periods. Such adjustments typically occur when claims experience deviates from historicalhistoric and expected trends. Our warranty liability is generally affected by component failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available. |
In(B) Other adjustments in 2019 include a $14 million increase in revenues deferred in connection with the second quarteradoption of 2016, we recordedthe new revenue standard (as defined below regarding Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 606), partially offset by a charge for$2 million reduction in liability related to the sale of a majority interest in our defense business, Navistar Defense. In 2018, Other adjustments to pre-existing warranties of $46 million or a charge of $0.56 per diluted share. The charge primarily relates to increases in both claim frequency and cost of repair across both the Medium Duty and Big Bore engine families. The charge increased the reserve for our standard warranty obligations as well as the loss positions related to our Big Bore extended service contracts. Adjustments to pre-existing warranties in 2016 include a benefit of $1 million related to our Workhorse Custom Chassis operations, which are reported in Discontinued Operations in our Consolidated Statements of Operations.currency translation adjustments.
The impact of income taxes on the 2018, 2017, and 2016 adjustments are not material due to our deferred tax valuation allowances on our U.S. deferred tax assets.
Extended Warranty Programs
The amount of deferred revenueIn 2020, we recognized an immaterial net benefit related to extended warranty programs was $255contracts on our proprietary big-bore engines. In 2019, we recognized a net benefit of $14 million $271 million, and $325 million at October 31, 2018, 2017, and 2016, respectively. Revenue recognized under ourrelated to extended warranty programs was $104contracts on our proprietary big-bore engines, which included a benefit of $13 million $144 million, and $150 million for the years ended October 31, 2018, 2017, and 2016, respectively.
related to pre-existing warranties. In 2018, we recognized a net benefit of $29 million related to extended warranty contracts on our proprietary Big-Borebig-bore engines, which includesincluded a benefit of $33 million related to pre-existing warranties. In 2017, we recognized a net charge of $8 million related to extended warranty contracts on our proprietary Big-Bore engines, which includes a charge of $3 million related to pre-existing warranties. In 2016, we recognized a net charge of $34 million related to extended warranty contracts on our proprietary Big-Bore engines, which includes a charge of $26 million related to pre-existing warranties.
Stock-based Compensation
We have various plans that provide for the granting of stock-based compensation to certain employees, directors, and consultants, which is further described in Note 17, 19, Stock-Based Compensation Plans. Shares are issued upon option exercise from Common stock held in treasury.
For transactions in which we obtain employee services in exchange for an award of equity instruments, we measure the cost of the services based on the grant date fair value of the award. We recognize the cost over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period). Costs related to plans with graded vesting are generally recognized using a straight-line method.
Foreign Currency Translation
We translate the financial statements of foreign subsidiaries whose local currency is their functional currency to U.S. dollars using period-end exchange rates for assets and liabilities and weighted average exchange rates for each period for revenues and expenses. Differences arising from exchange rate changes are included in the Foreign currency translation adjustment component of AOCL.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
For foreign subsidiaries whose functional currency is the U.S. dollar, we remeasure non-monetary balance sheet accounts and the related income statement accounts at historical exchange rates. Gains and losses arising from fluctuations in currency exchange rates on transactions denominated in currencies other than the functional currency are recognized in earnings as incurred. We recognized a net foreign currency transaction gain of $5 million in 2020, and net foreign currency transaction losses of $4 million, and $2 million $16 million,in 2019 and less than $1 million in 2018, 2017, and 2016, respectively, which were recorded in Other income,expense, net.
Income Taxes
We file a consolidated U.S. federal income tax return for NIC and its eligible domestic subsidiaries. Our non-U.S. subsidiaries file income tax returns in their respective local jurisdictions. We account for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax benefit carryforwards. Deferred tax assets and liabilities at the end of each period are determined using enacted tax rates. A valuation allowance is established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized.
We recognize the tax benefit from an uncertain tax position claimed or expected to be claimed on a tax return only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement.
We apply the intraperiod tax allocation rules to allocate income taxes among continuing operations, discontinued operations, other comprehensive income (loss), and additional paid-in capital when we meet the criteria as prescribed in the rules.
Earnings Per Share
The calculation of basic earnings per share is based on the weighted average number of our shares of common stock outstanding during the applicable period. The calculation for diluted earnings per share recognizes the effect of all potential dilutive shares of common stock that were outstanding during the respective periods, unless their impact would be anti-dilutive.
Diluted earnings per share recognizes the dilution that would occur if securities or other contracts to issue common stock were exercised or converted into shares using the treasury stock method.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses for the periods presented. Significant estimates and assumptions are used for, but are not limited to, pension and other postretirement benefits, allowance for doubtful accounts, income tax contingency accruals and valuation allowances, product warranty accruals, used truck inventory valuations, asbestos and other product liability accruals, asset impairment charges, restructuring charges and litigation-related accruals. Actual results could differ from our estimates.
Concentration Risks
Our financial condition, results of operations, and cash flows are subject to concentration risks related to our significant unionized workforce. As of October 31, 2018,2020, approximately 8,200,6,500, or 99%98%, of our hourly workers and approximately 700, or 13%, of our salaried workers, are represented by labor unions and are covered by collective bargaining agreements. Our current master collective bargaining agreement with theIn January 2019, certain of our United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") represented employees executed a new six-year master collective bargaining agreement with a ratification date of December 17, 2018 that replaced the prior agreement which expired in October 2018 and we are in negotiations with the UAW to enter into a new collective bargaining agreement.2018. Our future operations may be affected by changes in governmental procurement policies, budget considerations, changing national defense requirements, and political, regulatory and economic developments in the U.S. and certain foreign countries (primarily Canada, Mexico, and Brazil).
Due to disruptions in our supply chain resulting from the COVID-19 pandemic, our global manufacturing activities at certain of our production facilities have been impacted. Some of our suppliers are the sole source for a particular supply item (e.g., the majority of engines, parts and manufactured components) and cannot be quickly or inexpensively re-sourced to another supplier due to long lead times and contractual commitments that might be required by another supplier in order to provide the component or materials. We continue to monitor our supply chain, though production has resumed by us and our suppliers. Production volumes may be volatile in the near future due to supplier constraints, which may materially impact the results of our operations.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Recently IssuedAdopted Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued ASU No. 2018-15, "Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40) Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement". This ASU provides guidance on evaluating the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) and determining when the arrangement includes a software license. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2021. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In March 2018, the FASB issued ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118". This ASU updates the income tax accounting in U.S. GAAP to reflect the SEC's interpretive guidance released on December 22, 2017, when the Tax Cuts and Jobs Act (H.R.1) (the "Tax Act") was signed into law. For more information regarding the impact of the Tax Act, see Note 11, Income Taxes.
In February 2018, the FASB issued ASUAccounting Standard Update ("ASU") No. 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220)". This ASU provides guidance on a reclassification from accumulated other comprehensive income to retained earnings for the effect of the tax rate change resulting from the Tax Act.Cuts and Jobs Act of 2017 (the "Tax Act"). The amendments eliminate the stranded tax effects resulting from the Tax Act and will improve the usefulness of information reported to financial statement users. We adopted this ASU on November 1, 2019 which resulted in a decrease to Accumulated deficit and an increase of Accumulated other comprehensive loss on our Consolidated Balance Sheet in the amount of $192 million related to the reclassification of the stranded tax effects.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842), and subsequently issued various ASUs to clarify the implementation guidance in ASU 2016-02. This ASU is effectiverequires lessees to recognize, on the balance sheet, assets and liabilities for fiscal years,the rights and interim periods within those fiscal years, beginning after December 15, 2018,obligations created by leases of greater than twelve months. The accounting by lessors remained largely unchanged. We adopted this ASU by using the optional modified retrospective basis on November 1, 2019, with early adoption permitted. This ASU is effective forno effect on our Accumulated deficit.
We elected the ‘package of practical expedients’, which permits us innot to reassess under the first quarternew standard our prior conclusions about lease identification, lease classification and initial direct costs, as well as the practical expedient related to land easements. We did not elect the use-of-hindsight. For lessor accounting, we elected to exclude taxes collected from customers, such as sales, use and value added, from the measurement of fiscal 2020. lease income and expense.
We are currently evaluatingevaluated our lease population to assess the impacteffect of this ASUthe guidance on our consolidated financial statements.statements and recorded right of use assets for operating leases related to certain property and equipment of $111 million and lease liabilities of $114 million. The new lease standard also resulted in changes in the classification of certain sales that were previously recorded as borrowings, as we retained control of the related equipment, in Long-term debt in our Consolidated Balance Sheets. Under the new lease standard, on a prospective basis, these transactions are classified as operating lease liabilities recognized as Other current liabilities and Other noncurrent liabilities in our Consolidated Balance Sheets. In addition, the new lease standard requires lessors to classify cash receipts from leases within operating activities. As a result, cash receipts from operating leases which were accounted for as borrowings are presented as an operating cash inflow rather than the previous presentation as a financing cash inflow.
The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. For more information on leases, refer to Note 10, Leases.
In March 2017, the FASB issued ASU No. 2017-07, "Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost". This ASU requires that an employer disaggregate the service cost component from the other components of net periodic benefit cost. In addition, only the service cost component will be eligible for capitalization. The amendments in this update are required to be applied retrospectively for the presentation of the service cost component and the other components of net periodic benefit cost in the Consolidated Statement of Operations and prospectively, on and after the adoption date, for the capitalization of the service cost component of net periodic benefit cost in assets. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. ThisWe adopted this ASU is effective for us in the first quarter of fiscal 2019. The guidance,on November 1, 2018, using a retrospective approach, which requires retrospective application, will resultresulted in a reclassification of certain net periodic benefit costs from Selling, general and administrative ("SG&A&A") expenses to Other Income,expense, net in our Consolidated Statements of Operations in the amountsamount of $94 million and $127 million as offor the year ended October 31, 2018 and 2017, respectively.
In January 2017, the FASB issued ASU No. 2017-01, "Business Combinations (Topic 805): Clarifying the Definition of a Business". This ASU provides a new framework2018. See Note 12, Postretirement Benefits for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This ASU creates an initial screening test that reduces the population of transactions that an entity needs to analyze to determine whether there is an input and substantive processes in the acquisition or disposal. Fewer transactions are expected to involve acquiring or selling a business. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2019. Adoption will require a prospective transition. The potential impact of this new guidance will be assessed for future acquisitions or dispositions, but we do not expect the impact of this ASU to have a material effect on our consolidated financial statements.additional information.
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows: Restricted Cash" (Topic 230). This ASU requires that a statement of cash flows explain the change during the period in the total of cash, and cash equivalents, including amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. This2017. We adopted this ASU is effective for us in the first quarter of fiscal 2019. Adoption will requireon November 1, 2018 using a retrospective transition.transition approach.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
In October 2016, the FASB issued ASU No. 2016-16, "Income Taxes: Intra-Entity Transfers of Assets Other Than Inventory” (Topic 740). This ASU update requires entities to recognize the income tax consequences of many intercompany asset transfers at the transaction date. The seller and buyer will immediately recognize the current and deferred income tax consequences of an intercompany transfer of an asset other than inventory. The tax consequences were previously deferred. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2019. Adoption will require a modified retrospective transition. We do not expect the impact of this ASU to have a material effect on our consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows: Classification of Certain Cash Receipts and Cash Payments” (Topic 230).This ASU provides guidance on how entities should classify eight specific cash flow transactions for which diversity in practice exists. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2019. Adoption will require a retrospective transition.We do not expect the impact of this ASU to have a material effect on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” (Topic 326). This ASU sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, and certain off-balance sheet credit exposures. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Adoption will require a modified retrospective transition. This ASU is effective for us in the first quarter of fiscal 2021. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, "Leases" (Topic 842). This ASU requires lessees to recognize, on the balance sheet, assets and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. This ASU is effective for us in the first quarter of fiscal 2020. We expect to adopt this ASU in the first quarter of fiscal 2020 on a modified retrospective basis, with the cumulative effect adjustment recognized into Accumulated deficit as of November 1, 2019. We will continue to evaluate the impact of this ASU on our consolidated financial statements.
In May 2014, the FASB issued ASU No. 2014-09, "Revenue from Contracts with Customers" (Topic 606) (“ASC 606”), which supersedes the revenue recognition requirements in ASC 605, "Revenue Recognition." This ASU is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. This ASU also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB issued ASU No. 2015-14, which postponed the effective date of ASU No. 2014-09 to fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted on the original effective date for fiscal years beginning after December 15, 2016. We analyzed the impact of the ASU on our portfolio of customer contracts which will resultresulted in a changechanges in the timing and the amount of revenue recognized and gross versus net accounting for certain revenue streams in comparison with currentprevious guidance.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
On November 1, 2018, we adopted the new accounting standard ASC 606, Revenue"Revenue from Contracts with CustomersCustomers" and all the related amendments (“new revenue standard”) using the modified retrospective method.method to all contracts. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. Based on our preliminary assessment, the cumulative effect adjustment upon adoption of the new revenue standard will havehad a net immaterial$37 million impact on our Accumulated deficit. deficit. The primary impacts include an increase in Accumulated deficit due to an increase in the refund liability owed to our customers for future returns of core components. Previously our refund liability was recorded net of our future trade-in value to our suppliers. Under the new revenue standard, we will be recordingrecord a liability for the amounts owed to our customers and a deposit asset for the amount we are currently eligible to receive from our suppliers. An additional increase relates to a change in the recognition pattern of revenue for extended servicewarranty contracts. Revenue from these contracts was recognized on a straight-line basis over the life of the contract. Under the new revenue standard, revenue for extended servicewarranty contracts will beis recorded in proportion to the costs expected to be incurred in satisfying the obligations based on historical cost patterns over the life of similar contracts.
The increase in Accumulated deficit is partially offset by certain contracts where revenue recognition occurred as units were delivered and accepted. Under the new revenue standard, when the contract transfers control of a good to a customer as services or production occurs, revenue will beis recognized over time. An additional decrease in Accumulated deficit relates to certain sales that were recorded as leases or borrowings as we retained substantial risks of ownership.control in the leased property. Under the new revenue standard, revenue will beis recognized upon transfer of control for these transactions, less the value of any guarantees provided to the customer. The adoption of the new revenue standard will resultresulted in changes in the classification of Sales and revenues, net and Costs of products sold in our Consolidated Statements of Operations. The new revenue standard will also resultresulted in changes in the classification of certain assets and liabilities in our Consolidated Balance Sheets.
We will providehave revised our relevant policy and procedures and provided expanded revenue recognition disclosures based on the new qualitative and quantitative disclosure requirements of the new revenue standard in our Quarterly ReportNote 2, Revenue.
Recently Issued Accounting Standards
In December 2019, the FASB issued Accounting Standard Update ASU No. 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes". This ASU simplifies the accounting for income taxes by removing certain exceptions previously included in the guidance. In addition, the ASU provides new guidance on Form 10-Qaccounting for specific taxes and minor codification improvements. This ASU is effective for us in the first quarter of fiscal year 2022, with early adoption permitted. We are currently evaluating the impact of this ASU on our consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses: Measurement of Credit Losses on Financial Instruments” (Topic 326), and subsequently issued various ASUs to clarify the implementation guidance in ASU 2016-13. This ASU sets forth an expected credit loss model which requires the measurement of expected credit losses for financial instruments based on historical experience, current conditions and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, and certain off-balance sheet credit exposures. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019, with early adoption permitted. Adoption will require a modified retrospective transition. This ASU is effective for us in the first quarter of fiscal year 2021. The impact of this ASU on our consolidated financial statements will primarily result from our Financial Services operations and certain financial guarantees. We have developed models that capture the relationship between commonly available economic indicators and historical loss rates and default probabilities from which we expect to estimate credit losses throughout the amortization period of our finance and trade receivables and certain other credit exposures. Considering the economic conditions and forecasts existing as of November 1, 2020, the adoption will increase our credit loss allowance and other current liabilities by an immaterial amount using the modified retrospective method prescribed in this ASU.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
2. Revenue
We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable.
Disaggregation of Revenue
The following tables disaggregate our external revenue by product type: |
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Truck | | Parts | | Global Operations | | Financial
Services | | Corporate
and
Eliminations | | Total |
| Year Ended October 31, 2020 | | | | | | | | | | | |
Truck products and services(A) | $ | 4,590 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 12 |
| | $ | 4,602 |
|
| Truck contract manufacturing | 356 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 356 |
|
| Used trucks | 189 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 189 |
|
| Engines | 0 |
| | 198 |
| | 190 |
| | 0 |
| | 0 |
| | 388 |
|
| Parts | 3 |
| | 1,643 |
| | 52 |
| | 0 |
| | 0 |
| | 1,698 |
|
| Extended warranty contracts | 102 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 102 |
|
| Sales of manufactured products, net | 5,240 |
| | 1,841 |
| | 242 |
| | 0 |
| | 12 |
| | 7,335 |
|
Retail financing(C) | 0 |
| | 0 |
| | 0 |
| | 146 |
| | (9 | ) | | 137 |
|
Wholesale financing(C) | 0 |
| | 0 |
| | 0 |
| | 31 |
| | 0 |
| | 31 |
|
| Finance revenues | 0 |
| | 0 |
| | 0 |
| | 177 |
| | (9 | ) | | 168 |
|
| Sales and revenues, net | $ | 5,240 |
| | $ | 1,841 |
| | $ | 242 |
| | $ | 177 |
| | $ | 3 |
| | $ | 7,503 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Truck | | Parts | | Global Operations | | Financial
Services | | Corporate
and
Eliminations | | Total |
| Year Ended October 31, 2019 | | | | | | | | | | | |
Truck products and services(A)(B) | $ | 7,727 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 12 |
| | $ | 7,739 |
|
| Truck contract manufacturing | 399 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 399 |
|
| Used trucks | 257 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 257 |
|
| Engines | 0 |
| | 309 |
| | 232 |
| | 0 |
| | 0 |
| | 541 |
|
| Parts | 5 |
| | 1,930 |
| | 77 |
| | 0 |
| | 0 |
| | 2,012 |
|
| Extended warranty contracts | 113 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 113 |
|
| Sales of manufactured products, net | 8,501 |
| | 2,239 |
| | 309 |
| | 0 |
| | 12 |
| | 11,061 |
|
Retail financing(C) | 0 |
| | 0 |
| | 0 |
| | 145 |
| | (3 | ) | | 142 |
|
Wholesale financing(C) | 0 |
| | 0 |
| | 0 |
| | 48 |
| | 0 |
| | 48 |
|
| Finance revenues | 0 |
| | 0 |
| | 0 |
| | 193 |
| | (3 | ) | | 190 |
|
| Sales and revenues, net | $ | 8,501 |
| | $ | 2,239 |
| | $ | 309 |
| | $ | 193 |
| | $ | 9 |
| | $ | 11,251 |
|
________________________
| |
| (A) | Includes other markets primarily consisting of Bus, Export Truck and Mexico. |
(B) Includes military sales of $62 million. In December 2018, we completed the sale of a 70% equity interest in Navistar Defense. See Note 3, Restructuring, Impairments and Divestitures for additional information.
| |
| (C) | Retail financing and Wholesale financing revenues in the Financial Services segment include interest revenue of $58 million and $31 million, respectively, for the year ended October 31, 2020, and $56 million and $48 million, respectively, for the year ended October 31, 2019. |
Trucks, Truck Contract Manufacturing, Used trucks, Engines and Parts
Revenue for our Truck products and services, certain Truck contract manufacturing, Used trucks, certain Engines and Parts is recognized at a point in time when control is transferred to the customer. Our Trucks, Used trucks, Engines, and Parts have a standard warranty, the estimated cost of which is included in Costs of products sold.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Prior to our sale of a 70% equity interest in Navistar Defense, certain truck sales to the U.S. government of non-commercial products manufactured to government specification were recognized over time as the goods were manufactured. Certain truck and other contract manufacturing arrangements, unrelated to Navistar Defense, continue to be recognized over time. We recognize revenue over time when the finished assets have no alternative use and we have a right to payment for work performed in the event of a contract cancellation or when we create or enhance an asset that the customer controls as it is being created or enhanced. We recognize revenue using a cost-based input method because it best depicts our progress in satisfying the performance obligation. The selection of the method requires judgement and is based on the nature of the products or services to be provided.
Certain terms or modifications to U.S. and foreign government contracts may have been unpriced; that is, the work to be performed was defined, but the related contract price was to be negotiated at a later date. In situations where we could reliably estimate a profit margin in excess of costs incurred, revenue and gross margin were recorded for delivered contract items. Otherwise, revenue was recognized when the price had been agreed with the applicable government and costs were deferred when it was probable that the costs would be recovered.
An allowance for parts sales returns is recorded as a reduction to revenue based upon estimates using historical information about returns. This includes when we are a reseller of certain service parts that include a core component. A core component is the basic forging or casting, such as an engine block, that can be remanufactured by a certified remanufacturing supplier. When a dealer returns a core component within the specified eligibility period, we refund the core return deposit, which is applied to the customer's account balance.
Extended Warranty Contracts
We sell separately-priced extended warranty contracts that can be purchased for periods ranging from one to ten years. Warranty revenue related to extended warranty contracts is recognized over the life of the contract in proportion to the costs expected to be incurred in satisfying the obligation under the contract. Costs under extended warranty contracts are expensed as incurred. We recognize losses on defined pools of extended warranty contracts when the remaining expected costs for a given pool of contracts exceed the related deferred revenue.
Retail and Wholesale Financing
Financial Services operations recognize revenue from retail notes, finance leases, wholesale notes, retail accounts, and wholesale accounts as Finance revenues over the term of the receivables utilizing the effective interest method. Certain direct origination costs and fees are deferred and recognized as adjustments to yield and are reported as part of interest income over the life of the receivable. Loans are impaired when we conclude it is probable the customer will not be able to make full payment according to contractual terms after reviewing the customer's financial performance, payment ability, capital-raising potential, management style, economic situation, and other factors. The accrual of interest on such loans is suspended when the loan becomes 90 days or more past due. Finance revenues on these loans are recognized only to the extent cash payments are received. We resume accruing interest on these accounts when payments are current according to the terms of the loans and future payments are reasonably assured.
Operating lease revenues are recognized on a straight-line basis over the life of the lease. Recognition of revenue is suspended when management determines the collection of future revenue is not probable. Recognition of revenue is resumed if collection again becomes probable.
Performance Obligations
Generally, revenue from our sales is recognized at a point in time when control is transferred to the customer which generally occurs upon shipment from our plants and distribution centers or at the time of delivery to our customers. The standard payment term is less than 30 days, but we may extend payment terms on selected receivables. We have elected the practical expedient that allows us to not assess whether a contract has a significant financing component when the time between cash collection and transfer of control is less than one year.
We recognize price allowances, returns and the cost of incentive programs in the normal course of business based on programs offered to dealers or fleet customers. Estimates are made for sales incentives on certain vehicles in dealer stock inventory based on historical experience and announced special programs. The estimated sales incentives and returns are adjusted at the earlier of when the estimate of consideration we expect to receive changes or the consideration becomes fixed. For contracts where there is more than one performance obligation, discounts are allocated to all of the performance obligations in the contract based on their relative standalone selling prices.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Truck sales arrangements with U.S. fleet customers are often complex and non-standard, and may include pricing allowances and other sales incentives, such as rebates, financing incentives, trade allowances and residual value guarantees, for which losses are generally capped. Truck sales to fleet customers are recognized in accordance with the terms of each contract. In certain arrangements, the evaluation of financing incentives and residual value guarantees may result in the transaction being recorded as an operating lease, as we retain control in the leased property. Concurrent with our recognition of revenue, we recognize price allowances and the cost of incentive programs in the normal course of business based on programs offered to our fleet customers.
Revenue on bill and hold arrangements is not recognized until after the customer is notified that the product (i) has been completed according to customer specifications, (ii) has passed our quality control inspections, (iii) is ready for physical transfer to the customer and (iv) the reason for the bill and hold arrangement is substantive.
We have elected to account for shipping and handling activities that occur subsequent to transfer of control as a fulfillment cost and not as a separate performance obligation. The costs are recognized as an expense in Costs of products sold when control of the related performance obligation has transferred to the customer. We do not disclose the transaction price related to order backlogs as they have an original expected duration of less than one year.
We exclude from revenue any sales taxes, value added taxes and other related taxes collected from customers.
The impact of changes to revenue related to performance obligations satisfied in prior periods was not material to our consolidated financial statements in 2020.
Contract Balances
Most of our contracts are for a period of less than one year. We have certain long-term contract manufacturing and extended warranty contracts that extend beyond one year. We record deferred revenue, primarily related to extended warranty contracts, when we receive consideration from a customer prior to transferring goods or services under the terms of a sales contract. This deferred revenue represents contract liabilities which are included in our Consolidated Balance Sheets as components of current and long-term liabilities. The amount of manufacturing contract liabilities as of October 31, 2020 is not material to our consolidated financial statements.
The amount of deferred revenue related to extended warranty programs was $245 million, $279 million, and $255 million at October 31, 2020, 2019, and 2018, respectively. Revenue recognized under our extended warranty programs was $101 million, $113 million, and $104 million for the years ended October 31, 2020, 2019, and 2018, respectively. We expect to recognize revenue under our extended warranty programs of approximately $89 million in 2021, $73 million in 2022, $45 million in 2023, $23 million in 2024, $8 million in 2025 and an aggregate amount of $7 million thereafter.
Contract Costs
We recognize incremental costs to obtain contracts as an asset if they are recoverable. As a practical expedient, we recognize the costs of obtaining a contract as an expense when the related contract period is less than one year. We had no contract costs capitalized as of October 31, 2020 and 2019.
2. Restructurings3. Restructuring, Impairments and ImpairmentsDivestitures
Restructuring charges are recorded based on restructuring plans that have been committed to by management and are, in part, based upon management's best estimates of future events. Changes to the estimates may require future adjustments to the restructuring liabilities.
Restructuring Liability
The following tables summarize the activity in the restructuring liability, which excludes pension and other postretirement contractual termination benefits: |
| | | | | | | | | | | | | | | | | | | |
| (in millions) | Balance at October 31, 2017 | | Additions | | Payments | | Adjustments | | Balance at October 31, 2018 |
| Employee termination charges | $ | 14 |
| | $ | 3 |
| | $ | (10 | ) | | $ | (4 | ) | | $ | 3 |
|
| Lease vacancy | — |
| | — |
| | — |
| | — |
| | — |
|
| Other | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Restructuring liability | $ | 15 |
| | $ | 3 |
| | $ | (10 | ) | | $ | (4 | ) | | $ | 4 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | Balance at October 31, 2016 | | Additions | | Payments | | Adjustments | | Balance at October 31, 2017 |
| Employee termination charges | $ | 5 |
| | $ | 22 |
| | $ | (12 | ) | | $ | (1 | ) | | $ | 14 |
|
| Lease vacancy | 1 |
| | — |
| | (1 | ) | | — |
| | — |
|
| Other | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Restructuring liability | $ | 7 |
| | $ | 22 |
| | $ | (13 | ) | | $ | (1 | ) | | $ | 15 |
|
|
| | | | | | | | | | | | | | | | | | | |
| (in millions) | Balance at October 31, 2015 | | Additions | | Payments | | Adjustments | | Balance at October 31, 2016 |
| Employee termination charges | $ | 62 |
| | $ | 4 |
| | $ | (63 | ) | | $ | 2 |
| | $ | 5 |
|
| Lease vacancy | 5 |
| | — |
| | (4 | ) | | — |
| | 1 |
|
| Other | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Restructuring liability | $ | 68 |
| | $ | 4 |
| | $ | (67 | ) | | $ | 2 |
| | $ | 7 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Cost-Reductions and Other Strategic Initiatives
From time to time, we have announced, and we may continue to announce, actions to control spending across the Company with targeted reductions of certain costs. We are focused on continued reductions in discretionary spending, including reductions resulting from efficiencies, and prioritizing or eliminating certain programs or projects.
Voluntary separation program and reduction-in-force actions
During 2015, we initiated new cost-reduction actions, including a reduction-in-force in the U.S. and Brazil. As a result of these actions, we recognized restructuring charges of $13 million in personnel costs for employee termination and related benefits, which were primarily paid throughout 2016.
We also offered the majority of our U.S.-based non-represented salaried employees the opportunity to apply for a voluntary separation program ("VSP"). As a result of these actions, we recognized restructuring charges of $37 million. The restructuring charges primarily consist of personnel costs for employee termination and related benefits. In addition, we initiated new cost-reduction actions, including a reduction-in-force in Brazil. As a result of these actions, we recognized restructuring charges of $10 million in personnel costs for employee termination and related benefits, which were paid throughout 2016.
Global operations employee separation actions
During 2017, we initiated cost-reduction actions impacting our workforce in Brazil. As a result of these actions, we recognized restructuring charges of $6 million in personnel costs for employee separation and related benefits. During 2018, we recognized a benefit of $1 million upon the completion of these separation actions. This benefit was recorded in our Global operations segment within Restructuring charges in our Consolidated Statements of Operations.
North American Manufacturing Restructuring Activities
We continue to focus on our core Truck and Parts businesses and evaluate our portfolio of assets to validate their strategic and financial fit. This allows us to close or divest non-strategic businesses and identify opportunities to restructure our business and rationalize our Manufacturing operations in an effort to optimize our cost structure.
For those areas that fall outside our strategic businesses, we are evaluating alternatives which could result in additional restructuring and other related charges in the future, including but not limited to: (i) impairments, (ii) accelerated depreciation, (iii) costs for employee and contractor termination and other related benefits, and (iii)(iv) charges for pension and other postretirement contractual benefits and curtailments. These charges could be significant.
ChathamDuring 2020, we recorded net restructuring activities
During 2011, we committedcharges of $2 million. This includes $7 million of charges due to close our Chatham, Ontario heavy truck plant, which had been idled since June 2009. At that time, we recognized curtailment and contractual termination chargesrestructuring activity throughout the organization partially offset by $5 million of benefit related to postretirement plans. Basedadjustments on a ruling regarding pension benefits received from the Financial Services Tribunal in Ontario, Canada, in the third quarter of 2014, we recognized additionalpreviously recorded charges of $14 million related to the 2011 closure of the Chatham, Ontario plant. Unsuccessful efforts to appeal the ruling in the Ontario court system ended in December 2015. In April 2016, we filed a qualified partial wind-up report for approval by the Financial Services Commission of Ontario ("FSCO"). In January 2017, FSCO issued its approval of the partial wind-up report. In February 2017, we finalized the resolution of statutory severance pay for former employees related to the closure of our Chatham, Ontario plant, resulting in a charge of $6 million in the first quarter of 2017. During the third quarter of 2017, we finalized the Chatham closure agreement. This resulted in the release of $66 million in other post-employment benefit ("OPEB") liabilities. In addition, a pension settlement accounting charge of $23 million was recorded as a result of lump-sum payments made to certain pension plan participants. These charges and benefits were recorded in our Truck segment within Restructuring charges in our Consolidated Statements ofGlobal Operations. segment.
Melrose Park Facility restructuring activities
In the third quarter of 2017, we committed to a plan to cease engine production at our plant in Melrose Park, Illinois (“Melrose Park Facility”) in the third quarter of fiscal year 2018. As a result, in the third quarter of 2017, we recognized charges of $41 million in our Truck segment. The charges include $23 million related to pension and OPEB liabilities and $8 million for severance pay recorded in Restructuring charges in our Consolidated Statements of Operations. We also recorded $10 million of inventory reserves and other related charges Costs of products sold in our Consolidated Statements of Operations. During2018, we recognized a benefit of $2 million related to the finalized cessation of production agreement. This benefit was recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. Production at the Melrose Park Facility ceased in May 2018.
See Note 10, Postretirement benefits for further discussion.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Global Operations restructuring activities
During 2019, we ceased production at our MWM Motores engine facility in Jesus Maria, Argentina and initiated structural cost reductions in Brazil. As a result, we recognized charges of $3 million of inventory reserves and other related charges in Costs of products sold and $11 million in Restructuring charges in our Consolidated Statements of Operations in our Global Operations segment.
During 2018, we recognized a benefit of $1 million upon the completion of cost-reduction actions impacting our workforce in Brazil. These impacts were recorded in our Global Operations segment within Restructuring charges in our Consolidated Statements of Operations.
Asset Impairments
The following table reconcilesDuring 2020, we identified a triggering event related to our Asset impairment chargesoperations in our Consolidated Statements of Operations: |
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
| Intangible asset impairment charge | $ | — |
| | $ | — |
| | $ | 1 |
|
| Other asset impairment charges related to continuing operations | 14 |
| | 13 |
| | 26 |
|
| Total asset impairment charges | $ | 14 |
| | $ | 13 |
| | $ | 27 |
|
As a resultBrazil due to the impacts of the economic downturnCOVID-19 pandemic, which resulted in Brazil in 2016 causing declines in actual and forecasted results, we testedresults. We performed an impairment test as of April 30, 2020 on the indefinite-lived intangiblelong-lived assets of the Brazilian asset of our Brazilian engine reporting unit for potential impairment.group. As a result, we determined that the trademark asset carrying value was impaired, resulting inrecorded charges of $12 million in our Global Operations segment.
During 2020, 2019 and 2018, we concluded that we had triggering events primarily related to certain trucks under operating leases, due to declines in expected residual values. As a result, we recorded charges of $10 million, $6 million, and $5 million, respectively, in our Truck segment.
During 2020, 2019 and 2018, we concluded that we had triggering events related to certain long-lived assets. As a result, we recorded charges of $6 million and $1 million for the year ended October 31, 2016. For more information, see Note 1, Summaryin our Truck Segment in 2020 and 2019, respectively, and charges of Significant Accounting Policies.$6 million and $1 million in our Truck segment and Financial Services segment, respectively, in 2018.
During 2018, we concluded that we had triggering events related to the sale of our railcar business in Cherokee, Alabama requiring the impairment of certain long-lived assets. As a result, we recorded a charge of $2 million in our Truck segment. In February 2018, we completed the sale of the business. We also concluded that we had triggering events related to other certain long-lived assets, and recorded additional charges of $6 million in our Truck segment and a charge of $1 million in our Financial Services segment.
During 2017, we concluded that we had a triggering event in connection with the sale of our fabrication business in Conway, Arkansas requiring the impairment of certain assets. As a result, we recorded charges of $5 million in our Truck segment.
During 2018 and 2017, we concluded that we had triggering events related to certain assets under operating leases. As a result, we recorded charges of $5 million and $8 million, respectively, in our Truck segment.
During 2016, we concluded that we had triggering events related to certain long-lived assets in our Truck segment. As a result, certain long-lived assets were determined to be impaired, resulting in charges of $17 million. Included in the charges was a $3 million asset impairment related to the sale of Pure Power Technologies, LLC, a components business focused on air and fuel systems. During 2016, we also concluded that we had triggering events related to certain operating leases. As a result, we recorded $8 million of asset impairment charges in our Truck segment.
These charges were recorded in Asset impairment charges in our Consolidated Statements of Operations.
See Note 12, 14, Fair Value Measurements, for information on the valuation of impaired operating leases and other assets.
Navistar Defense Divestiture
In December 2018, we completed the sale of a 70% equity interest in Navistar Defense to an affiliate of Cerberus Capital Management, L.P. In connection with the closing of the transaction, we entered into an exclusive long-term agreement to supply military and commercial parts and chassis to Navistar Defense. We also entered into an intellectual property agreement and a transition services agreement concurrent with the sale.
The Navistar Defense purchase price, adjusted for certain calendar year 2018 chargeouts, was approximately $140 million, which was subject to additional adjustments for working capital, transfers of certain liabilities and commitments, and other items. The transaction also included an immaterial amount of additional consideration, not included in the gain on the sale, based on cash proceeds from certain contracts which exceed defined thresholds.
During 2019, we recognized a gain on the sale in our Truck segment of $51 million in Other expense, net in our Consolidated Statements of Operations.
3.4. Finance Receivables
Finance receivables are receivables of our Financial Services operations. Finance receivables generally consist of wholesale notes and accounts, as well as retail notes, finance leases and accounts. Total finance receivables reported on the Consolidated Balance Sheets are net of an allowance for doubtful accounts. Total assets of our Financial Services operations net of intercompany balances are $2.6were $2.2 billion and $2.2$2.8 billion as of October 31, 20182020 and 2017,2019, respectively.
Included in total assets of our Financial Services operations are finance receivables of $2.2$1.6 billion and $1.8$2.2 billion as of October 31, 20182020 and 2017,2019, respectively. We have two2 portfolio segments of finance receivables that we distinguish based on the type of customer and nature of the financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
In connection with the COVID-19 pandemic, we have received extension requests from certain customers in the retail note and finance lease portfolios. These requests were generally granted for short-term extensions (6 months or less), without interest or principal forgiveness. The related credit exposure was not material to the consolidated financial statements. We will continue to monitor our portfolios in light of the ongoing economic uncertainties resulting from the COVID-19 pandemic. We may offer additional extensions and modifications to customers going forward in order to maximize the recoverability of outstanding receivable balances.
Our Finance receivables, net in our Consolidated Balance Sheets consist of the following: | | | | As of October 31, | As of October 31, |
| (in millions) | 2018 | | 2017 | 2020 | | 2019 |
| Retail portfolio | $ | 720 |
| | $ | 559 |
| $ | 622 |
| | $ | 854 |
|
| Wholesale portfolio | 1,460 |
| | 1,246 |
| 1,025 |
| | 1,366 |
|
| Total finance receivables | 2,180 |
| | 1,805 |
| 1,647 |
| | 2,220 |
|
| Less: Allowance for doubtful accounts | 22 |
| | 20 |
| 25 |
| | 23 |
|
| Total finance receivables, net | 2,158 |
| | 1,785 |
| 1,622 |
| | 2,197 |
|
Less: Current portion, net(A) | 1,898 |
| | 1,565 |
| 1,371 |
| | 1,923 |
|
| Noncurrent portion, net | $ | 260 |
| | $ | 220 |
| $ | 251 |
| | $ | 274 |
|
_________________________ | |
| (A) | The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash flows because of prepayments, extensions, delinquencies, credit losses, and renewals. |
As of October 31, 2018,2020, contractual maturities of our finance receivables are as follows:
|
| | | | | | | | | | | |
| (in millions) | Retail Portfolio | | Wholesale Portfolio | | Total |
| Due in: | | | | | |
| 2021 | $ | 384 |
| | $ | 1,025 |
| | $ | 1,409 |
|
| 2022 | 133 |
| | 0 |
| | 133 |
|
| 2023 | 87 |
| | 0 |
| | 87 |
|
| 2024 | 49 |
| | 0 |
| | 49 |
|
| 2025 | 19 |
| | 0 |
| | 19 |
|
| Thereafter | 4 |
| | 0 |
| | 4 |
|
| Gross finance receivables | 676 |
| | 1,025 |
| | 1,701 |
|
| Less: Unearned finance income | 54 |
| | 0 |
| | 54 |
|
| Total finance receivables | $ | 622 |
| | $ | 1,025 |
| | $ | 1,647 |
|
|
| | | | | | | | | | | |
| (in millions) | Retail Portfolio | | Wholesale Portfolio | | Total |
| Due in: | | | | | |
| 2019 | $ | 471 |
| | $ | 1,460 |
| | $ | 1,931 |
|
| 2020 | 133 |
| | — |
| | 133 |
|
| 2021 | 94 |
| | — |
| | 94 |
|
| 2022 | 57 |
| | — |
| | 57 |
|
| 2023 | 18 |
| | — |
| | 18 |
|
| Thereafter | 4 |
| | — |
| | 4 |
|
| Gross finance receivables | 777 |
| | 1,460 |
| | 2,237 |
|
| Less: Unearned finance income | 57 |
| | — |
| | 57 |
|
| Total finance receivables | $ | 720 |
| | $ | 1,460 |
| | $ | 2,180 |
|
Securitizations
Our Financial Services operations transfer wholesale notes, retail accounts receivable, finance leases, and operating leases to special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities issued. In addition to servicing receivables, our continued involvement in the SPEs may include an economic interest in the transferred receivables and, in some cases, managing exposure to interest rate changes on the securities using interest rate swaps or interest rate caps. There were no transfers of finance receivables that qualified for sale accounting treatment as of October 31, 20182020 and 2017,2019, and as a result, the transferred finance receivables are included in our Consolidated Balance Sheets and the related interest earned is included in Finance revenues.
We transfer eligible finance receivables into trusts in order to issue asset-backed securities. These trusts are VIEs of which we are determined to be the primary beneficiary and, therefore, the assets and liabilities of the trusts are included in our Consolidated Balance Sheets. The outstanding balance of finance receivables transferred into these VIEs was $956$649 million and $797$874 million as of October 31, 20182020 and 2017,2019, respectively.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were $235$182 million and $163$358 million as of October 31, 20182020 and 2017,2019, respectively. For more information on assets and liabilities of consolidated VIEs and other securitizations accounted for as secured borrowings by our Financial Services segment, see Note 1, Summary of Significant Accounting Policies.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Finance Revenues
The following table presents the componentsportion of our Finance revenues infrom our Consolidated Statements of Operations: Financial Services segment: |
| | | | | | | | | | | |
| | As of October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
| Retail notes and finance leases revenue | $ | 63 |
| | $ | 60 |
| | $ | 50 |
|
| Wholesale notes interest | 59 |
| | 118 |
| | 105 |
|
| Operating lease revenue | 85 |
| | 86 |
| | 72 |
|
| Retail and wholesale accounts interest | 10 |
| | 33 |
| | 30 |
|
| Gross finance revenues | 217 |
| | 297 |
| | 257 |
|
| Less: Intercompany revenues | 40 |
| | 104 |
| | 97 |
|
| Finance revenues | $ | 177 |
| | $ | 193 |
| | $ | 160 |
|
|
| | | | | | | | | | | |
| | As of October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
| Retail notes and finance leases revenue | $ | 50 |
| | $ | 41 |
| | $ | 38 |
|
| Wholesale notes interest | 105 |
| | 102 |
| | 107 |
|
| Operating lease revenue | 72 |
| | 68 |
| | 66 |
|
| Retail and wholesale accounts interest | 30 |
| | 24 |
| | 24 |
|
| Gross finance revenues | 257 |
| | 235 |
| | 235 |
|
| Less: Intercompany revenues | 97 |
| | 93 |
| | 100 |
|
| Finance revenues | $ | 160 |
| | $ | 142 |
| | $ | 135 |
|
4.5. Allowance for Doubtful Accounts
Our two2 finance receivables portfolio segments, retail and wholesale, each consist of one1 class of receivable based on: (i) initial measurement attributes of the receivables, and (ii) the assessment and monitoring of risk and performance of the receivables. For more information, see Note 3, 4, Finance Receivables.
The following tables present the activity related to our allowance for doubtful accounts for our retail portfolio segment, wholesale portfolio segment, and trade and other receivables: |
| | | | | | | | | | | | | | | |
| | For the Year Ended October 31, 2020 |
| (in millions) | Retail
Portfolio | | Wholesale
Portfolio | | Trade and
Other
Receivables | | Total |
| Allowance for doubtful accounts, at beginning of period | $ | 20 |
| | $ | 3 |
| | $ | 21 |
| | $ | 44 |
|
| Provision for doubtful accounts | 12 |
| | (1 | ) | | 5 |
| | 16 |
|
| Charge-offs | (9 | ) | | 0 |
| | (2 | ) | | (11 | ) |
| Recoveries | 1 |
| | 0 |
| | 0 |
| | 1 |
|
Other(A) | (1 | ) | | 0 |
| | (5 | ) | | (6 | ) |
| Allowance for doubtful accounts, at end of period | $ | 23 |
| | $ | 2 |
| | $ | 19 |
| | $ | 44 |
|
|
| | | | | | | | | | | | | | | |
| | For the Year Ended October 31, 2018 |
| (in millions) | Retail
Portfolio | | Wholesale
Portfolio | | Trade and
Other
Receivables | | Total |
| Allowance for doubtful accounts, at beginning of period | $ | 17 |
| | $ | 3 |
| | $ | 28 |
| | $ | 48 |
|
| Provision for doubtful accounts | 7 |
| | — |
| | 3 |
| | 10 |
|
| Charge-off of accounts | (7 | ) | | — |
| | (1 | ) | | (8 | ) |
| Recoveries | 3 |
| | — |
| | — |
| | 3 |
|
Other(A) | (1 | ) | | — |
| | (2 | ) | | (3 | ) |
| Allowance for doubtful accounts, at end of period | $ | 19 |
| | $ | 3 |
| | $ | 28 |
| | $ | 50 |
|
| | | | For the Year Ended October 31, 2017 | For the Year Ended October 31, 2019 |
| (in millions) | Retail
Portfolio | | Wholesale
Portfolio | | Trade and
Other
Receivables | | Total | Retail
Portfolio | | Wholesale
Portfolio | | Trade and
Other
Receivables | | Total |
| Allowance for doubtful accounts, at beginning of period | $ | 19 |
| | $ | 2 |
| | $ | 28 |
| | $ | 49 |
| $ | 19 |
| | $ | 3 |
| | $ | 28 |
| | $ | 50 |
|
| Provision for doubtful accounts | 4 |
| | 1 |
| | 2 |
| | 7 |
| 5 |
| | 0 |
| | (1 | ) | | 4 |
|
| Charge-off of accounts | (7 | ) | | — |
| | (1 | ) | | (8 | ) | |
| Charge-offs | | (6 | ) | | 0 |
| | (6 | ) | | (12 | ) |
| Recoveries | 1 |
| | — |
| | — |
| | 1 |
| 2 |
| | 0 |
| | 0 |
| | 2 |
|
Other(A) | — |
| | — |
| | (1 | ) | | (1 | ) | |
| Allowance for doubtful accounts, at end of period | $ | 17 |
| | $ | 3 |
| | $ | 28 |
| | $ | 48 |
| $ | 20 |
| | $ | 3 |
| | $ | 21 |
| | $ | 44 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
| | | | For the Year Ended October 31, 2016 | For the Year Ended October 31, 2018 |
| (in millions) | Retail Portfolio | | Wholesale Portfolio | | Trade and Other Receivables | | Total | Retail Portfolio | | Wholesale Portfolio | | Trade and Other Receivables | | Total |
| Allowance for doubtful accounts, at beginning of period | $ | 22 |
| | $ | 4 |
| | $ | 22 |
| | $ | 48 |
| $ | 17 |
| | $ | 3 |
| | $ | 28 |
| | $ | 48 |
|
| Provision for doubtful accounts | 8 |
| | (2 | ) | | 6 |
| | 12 |
| 7 |
| | 0 |
| | 3 |
| | 10 |
|
| Charge-off of accounts | (9 | ) | | — |
| | (3 | ) | | (12 | ) | |
| Charge-offs | | (7 | ) | | 0 |
| | (1 | ) | | (8 | ) |
| Recoveries | — |
| | — |
| | — |
| | — |
| 3 |
| | 0 |
| | 0 |
| | 3 |
|
Other(A) | (2 | ) | | — |
| | 3 |
| | 1 |
| (1 | ) | | 0 |
| | (2 | ) | | (3 | ) |
| Allowance for doubtful accounts, at end of period | $ | 19 |
| | $ | 2 |
| | $ | 28 |
| | $ | 49 |
| $ | 19 |
| | $ | 3 |
| | $ | 28 |
| | $ | 50 |
|
____________________
| |
| (A) | Amounts include impact from currency translation. |
The accrual of interest income is discontinuedsuspended on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. In certain cases, weWe may continue to collect payments on our impaired finance receivables. Certain loss reserves on impaired finance receivables are recorded by our Truck segment under trade and other receivables above.
The following table presents information regarding impaired finance receivables: |
| | | | | | | | | | | | | | | | | | | | | | | |
| | October 31, 2020 | | October 31, 2019 |
| (in millions) | Retail
Portfolio | | Wholesale
Portfolio | | Total | | Retail
Portfolio | | Wholesale
Portfolio | | Total |
| Impaired finance receivables with specific loss reserves | $ | 31 |
| | $ | 0 |
| | $ | 31 |
| | $ | 23 |
| | $ | 0 |
| | $ | 23 |
|
| Impaired finance receivables without specific loss reserves | 0 |
| | 0 |
| | 0 |
| | 1 |
| | 0 |
| | 1 |
|
| Specific loss reserves on impaired finance receivables | 12 |
| | 0 |
| | 12 |
| | 11 |
| | 0 |
| | 11 |
|
| Finance receivables on non-accrual status | 31 |
| | 0 |
| | 31 |
| | 24 |
| | 0 |
| | 24 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | October 31, 2018 | | October 31, 2017 |
| (in millions) | Retail
Portfolio | | Wholesale
Portfolio | | Total | | Retail
Portfolio | | Wholesale
Portfolio | | Total |
| Impaired finance receivables with specific loss reserves | $ | 20 |
| | $ | — |
| | $ | 20 |
| | $ | 16 |
| | $ | — |
| | $ | 16 |
|
| Impaired finance receivables without specific loss reserves | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Specific loss reserves on impaired finance receivables | 9 |
| | — |
| | 9 |
| | 7 |
| | — |
| | 7 |
|
| Finance receivables on non-accrual status | 20 |
| | — |
| | 20 |
| | 16 |
| | — |
| | 16 |
|
The average balances of the impaired finance receivables in the retail portfolio were $19$29 million and $18$21 million for the years ended October 31, 20182020 and 2017,2019, respectively. See Note 12, 14, Fair Value Measurements, for information on the valuation of impaired finance receivables.
In response to the COVID-19 pandemic, we have granted limited payment extensions to certain customers who were not past due before the pandemic. There was no forgiveness of principal or interest in connection with these extensions. As a result, we concluded that these extensions were not troubled debt restructurings ("TDR"). We have TDRs in the normal course of our Financial Services operations; however, such amounts are not material.
We use the aging of our receivables as well as other inputs when assessing credit quality. The following table presents the aging analysis for finance receivables: |
| | | | | | | | | | | | | | | | | | | | | | | |
| | October 31, 2020 | | October 31, 2019 |
| (in millions) | Retail
Portfolio | | Wholesale
Portfolio | | Total | | Retail
Portfolio | | Wholesale
Portfolio | | Total |
| Current, and up to 30 days past due | $ | 558 |
| | $ | 1,024 |
| | $ | 1,582 |
| | $ | 753 |
| | $ | 1,365 |
| | $ | 2,118 |
|
| 30-90 days past due | 44 |
| | 1 |
| | 45 |
| | 76 |
| | 1 |
| | 77 |
|
| Over 90 days past due | 20 |
| | 0 |
| | 20 |
| | 25 |
| | 0 |
| | 25 |
|
| Total finance receivables | $ | 622 |
| | $ | 1,025 |
| | $ | 1,647 |
| | $ | 854 |
| | $ | 1,366 |
| | $ | 2,220 |
|
|
| | | | | | | | | | | |
| | As of October 31, 2018 |
| (in millions) | Retail
Portfolio | | Wholesale
Portfolio | | Total |
| Current, and less than 30 days past due | $ | 655 |
| | $ | 1,459 |
| | $ | 2,114 |
|
| 30-90 days past due | 51 |
| | 1 |
| | 52 |
|
| Over 90 days past due | 14 |
| | — |
| | 14 |
|
| Total finance receivables | $ | 720 |
| | $ | 1,460 |
| | $ | 2,180 |
|
5. Inventories
The following table presents the components of Inventories in our Consolidated Balance Sheets: |
| | | | | | | |
| | As of October 31, |
| (in millions) | 2018 | | 2017 |
| Finished products | $ | 671 |
| | $ | 584 |
|
| Work in process | 118 |
| | 33 |
|
| Raw materials | 321 |
| | 240 |
|
| Total inventories, net | $ | 1,110 |
| | $ | 857 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
6. Property and Equipment, NetInventories
The following table presents the components of Inventories in our Consolidated Balance Sheets: |
| | | | | | | |
| | As of October 31, |
| (in millions) | 2020 | | 2019 |
| Finished products | $ | 516 |
| | $ | 640 |
|
| Work in process | 25 |
| | 21 |
|
| Raw materials | 222 |
| | 250 |
|
| Total inventories, net | $ | 763 |
| | $ | 911 |
|
7. Property and Equipment, Net
The following table presents the components of Property and equipment, net in our Consolidated Balance Sheets:
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2020 | | 2019 |
| Land | $ | 115 |
| | $ | 97 |
|
| Buildings | 561 |
| | 572 |
|
| Leasehold improvements | 15 |
| | 13 |
|
| Machinery and equipment | 1,848 |
| | 2,031 |
|
| Furniture, fixtures, and equipment | 414 |
| | 471 |
|
| Equipment leased to others | 561 |
| | 562 |
|
| Construction in progress | 119 |
| | 51 |
|
| Total property and equipment, at cost | 3,633 |
| | 3,797 |
|
| Less: Accumulated depreciation and amortization | 2,335 |
| | 2,488 |
|
| Property and equipment, net | $ | 1,298 |
| | $ | 1,309 |
|
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2018 | | 2017 |
| Land | $ | 92 |
| | $ | 92 |
|
| Buildings | 554 |
| | 548 |
|
| Leasehold improvements | 24 |
| | 27 |
|
| Machinery and equipment | 2,028 |
| | 2,057 |
|
| Furniture, fixtures, and equipment | 461 |
| | 426 |
|
| Equipment leased to others | 665 |
| | 586 |
|
| Construction in progress | 44 |
| | 64 |
|
| Total property and equipment, at cost | 3,868 |
| | 3,800 |
|
| Less: Accumulated depreciation and amortization | 2,498 |
| | 2,474 |
|
| Property and equipment, net | $ | 1,370 |
| | $ | 1,326 |
|
Certain of our property and equipment serve as collateral for borrowings. See Note 9, 11, Debt, for description of borrowings.
Equipment leased to others and assets under financing arrangements and capitalfinance lease obligations are as follows: |
| | | | | | | |
| | As of October 31, |
| (in millions) | 2020 | | 2019 |
| Equipment leased to others | $ | 561 |
| | $ | 562 |
|
| Less: Accumulated depreciation | 144 |
| | 126 |
|
| Equipment leased to others, net | $ | 417 |
| | $ | 436 |
|
| | | | |
| Buildings, machinery, and equipment under financing arrangements and finance lease obligations | $ | 6 |
| | $ | 20 |
|
| Less: Accumulated depreciation and amortization | 4 |
| | 18 |
|
| Assets under financing arrangements and finance lease obligations, net | $ | 2 |
| | $ | 2 |
|
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2018 | | 2017 |
| Equipment leased to others | $ | 665 |
| | $ | 586 |
|
| Less: Accumulated depreciation | 177 |
| | 191 |
|
| Equipment leased to others, net | $ | 488 |
| | $ | 395 |
|
| | | | |
| Buildings, machinery, and equipment under financing arrangements and capital lease obligations | $ | 25 |
| | $ | 61 |
|
| Less: Accumulated depreciation and amortization | 21 |
| | 41 |
|
| Assets under financing arrangements and capital lease obligations, net | $ | 4 |
| | $ | 20 |
|
For the years ended October 31, 2018, 2017, and 2016, depreciation expense, amortization expense related to assets under financing arrangements and capital lease obligations, and interest capitalized on construction projects are as follows:
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
| Depreciation expense | $ | 133 |
| | $ | 138 |
| | $ | 134 |
|
| Depreciation of equipment leased to others | 71 |
| | 73 |
| | 79 |
|
| Amortization expense | 2 |
| | 3 |
| | 5 |
|
| Interest capitalized | 2 |
| | 2 |
| | 3 |
|
Certain depreciation expense on buildings used for administrative purposes is recorded in SG&A expenses.
Capital Expenditures
At October 31, 2018, 2017, and 2016, commitments for capital expenditures were $36 million, $27 million, and $24 million, respectively. At October 31, 2018, 2017, and 2016, liabilities related to capital expenditures that are included in accounts payable were $50 million, $48 million, and $21 million, respectively.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Leases
We lease certain land, buildings, and equipment under non-cancelable operating leases and capital leases expiring at various dates through 2027. Operating leases generally have 1 to 20 year terms, with one or more renewal options, with terms to be negotiated at the time of renewal. Various leases include provisions for rent escalation to recognize increased operating costs or require us to pay certain maintenance and utility costs. Our rent expense forFor the years ended October 31, 2020, 2019, and 2018, 2017,depreciation expense, amortization expense related to assets under financing arrangements and 2016 was $40 million, $49 million, and $53 million, respectively. Rental income from subleases for the years ended October 31, 2018, 2017, and 2016 was $5 million, $11 million, and $12 million, respectively.
Future minimum lease payments at October 31, 2018, for those leases having an initial or remaining non-cancelable lease term in excess of one year and certain leases that are treated as finance lease obligations, and interest capitalized on construction projects are as follows:
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
| Depreciation expense | $ | 135 |
| | $ | 129 |
| | $ | 133 |
|
| Depreciation of equipment leased to others | 63 |
| | 61 |
| | 71 |
|
| Amortization expense | 0 |
| | 0 |
| | 2 |
|
| Interest capitalized | 2 |
| | 1 |
| | 2 |
|
|
| | | | | | | | | | | |
| (in millions) | Financing
Arrangements
and Capital
Lease Obligations | | Operating
Leases | | Total |
| 2019 | $ | 5 |
| | $ | 32 |
| | $ | 37 |
|
| 2020 | 4 |
| | 28 |
| | 32 |
|
| 2021 | 4 |
| | 23 |
| | 27 |
|
| 2022 | 1 |
| | 18 |
| | 19 |
|
| 2023 | 1 |
| | 14 |
| | 15 |
|
| Thereafter | — |
| | 18 |
| | 18 |
|
| | 15 |
| | $ | 133 |
| | $ | 148 |
|
| Less: Interest portion | 2 |
| | |
| | |
|
| Total | $ | 13 |
| | | | |
Capital Expenditures
At October 31, 2020, 2019, and 2018, commitments for capital expenditures were $212 million, $37 million, and $36 million, respectively. At October 31, 2020, 2019, and 2018, liabilities related to capital expenditures that are included in accounts payable were $76 million, $46 million, and $50 million, respectively.
Asset Retirement Obligations
We have a number ofnumerous asset retirement obligations in connection with certain owned and leased locations, leasehold improvements, and sale and leaseback arrangements. Certain of our production facilities contain asbestos that would have to be removed if such facilities were to be demolished or undergo a major renovation. The fair value of the conditional asset retirement obligations as of the balance sheet date has been determined to be immaterial. Asset retirement obligations relating to the cost of removing improvements to leased facilities or returning leased equipment at the end of the associated agreements are not material.
7.8. Goodwill and Other Intangible Assets, Net
For our reporting unitunits with goodwill or intangible assets not subject to amortization, we perform a goodwill impairment testtests on an annual basis on August 1st,1, or more frequently if circumstances change or an event occurs that would more likely than not reduce the fair value of thea reporting unit below its carrying amount. All of ourOur goodwill is included in our Parts segment. As part of our goodwill impairment analysis for this reporting unit in the current year, we performed a qualitative assessment.
Our intangible assets that are not subject to amortization includesinclude a trademark in our Brazilian engine reporting unit within our Global Operations segment of $18$12 million and $21$17 million as of October 31, 20182020 and 2017,2019, respectively. During the third quarter of 2016, we determined that $1 million of the trademark asset carrying value was impaired. For more information, see Note 2, Restructuring and Impairments.
Information regarding our intangible assets that are subject to amortization is as follows: | | | | As of October 31, 2018 | As of October 31, 2020 |
| (in millions) | Customer
Base and
Relationships | | Trademarks, Patents and Other | | Total | Customer
Base and
Relationships | | Trademarks, Patents and Other | | Total |
| Gross carrying value | $ | 68 |
| | $ | 84 |
| | $ | 152 |
| $ | 61 |
| | $ | 83 |
| | $ | 144 |
|
| Accumulated amortization | (66 | ) | | (74 | ) | | (140 | ) | (61 | ) | | (77 | ) | | (138 | ) |
| Net of amortization | $ | 2 |
| | $ | 10 |
| | $ | 12 |
| $ | 0 |
| | $ | 6 |
| | $ | 6 |
|
|
| | | | | | | | | | | |
| | As of October 31, 2019 |
| (in millions) | Customer
Base and
Relationships | | Trademarks, Patents and Other | | Total |
| Gross carrying value | $ | 66 |
| | $ | 84 |
| | $ | 150 |
|
| Accumulated amortization | (66 | ) | | (76 | ) | | (142 | ) |
| Net of amortization | $ | 0 |
| | $ | 8 |
| | $ | 8 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | |
| | As of October 31, 2017 |
| (in millions) | Customer
Base and
Relationships | | Trademarks, Patents and Other | | Total |
Gross carrying value(A) | $ | 71 |
| | $ | 83 |
| | $ | 154 |
|
Accumulated amortization(A) | (67 | ) | | (68 | ) | | (135 | ) |
| Net of amortization | $ | 4 |
| | $ | 15 |
| | $ | 19 |
|
__________________________
(A) During 2018, we identified certain intangible assets subject to amortization which were fully amortized and no longer in use as of October 31, 2017. As a result, we have reduced both the Gross carrying value and Accumulated amortization by $2 million for Customer Base and Relationships and $34 million for Trademarks, Patents and Other. These reclassifications did not impact our Consolidated Statements of Operations or Consolidated Balance Sheets.
We recorded amortization expense for our finite-lived intangible assets of $7$2 million, $12$3 million, and $12$7 million for the years ended October 31, 2018, 2017,2020, 2019, and 2016,2018, respectively. Future estimated amortization expense for our finite-lived intangible assets for the remaining years is as follows:
|
| | | |
| (in millions) | Estimated
Amortization |
| 2021 | $ | 1 |
|
| 2022 | 1 |
|
| 2023 | 1 |
|
| 2024 | 1 |
|
| 2025 | 0 |
|
| Thereafter | 2 |
|
|
| | | |
| (in millions) | Estimated
Amortization |
| 2019 | $ | 3 |
|
| 2020 | 2 |
|
| 2021 | 1 |
|
| 2022 | 1 |
|
| 2023 | 1 |
|
| Thereafter | 4 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
8.9. Investments in Non-consolidated Affiliates
Investments in non-consolidated affiliates is comprised of our interests in partially-owned affiliates of which our ownership percentages range from 30% to 50%. We do not control these affiliates, but have the ability to exercise significant influence over their operating and financial policies. We account for them using the equity method of accounting. We made no0 new and incremental investments in these non-consolidated affiliates for 20182020 and 2017.2019.
The following table summarizes 100% of the combined assets, liabilities, and equity of our equity method affiliates as of October 31:
|
| | | | | | | |
| | (Unaudited) |
| (in millions) | 2020 | | 2019 |
| Assets: | |
| Current assets | $ | 158 |
| | $ | 186 |
|
| Noncurrent assets | 92 |
| | 128 |
|
| Total assets | $ | 250 |
| | $ | 314 |
|
| Liabilities and equity: | | | |
| Current liabilities | $ | 73 |
| | $ | 96 |
|
| Noncurrent liabilities | 58 |
| | 93 |
|
| Total liabilities | 131 |
| | 189 |
|
| Partners' capital and stockholders' equity: | | | |
| NIC | 31 |
| | 32 |
|
| Third parties | 88 |
| | 93 |
|
| Total partners' capital and stockholders' equity | 119 |
| | 125 |
|
| Total liabilities and equity | $ | 250 |
| | $ | 314 |
|
|
| | | | | | | |
| | (Unaudited) |
| (in millions) | 2018 | | 2017 |
| Assets: | |
| Current assets | $ | 336 |
| | $ | 286 |
|
| Noncurrent assets | 168 |
| | 179 |
|
| Total assets | $ | 504 |
| | $ | 465 |
|
| Liabilities and equity: | | | |
| Current liabilities | $ | 307 |
| | $ | 257 |
|
| Noncurrent liabilities | 38 |
| | 38 |
|
| Total liabilities | 345 |
| | 295 |
|
| Partners' capital and stockholders' equity: | | | |
| NIC | 53 |
| | 56 |
|
| Third parties | 106 |
| | 114 |
|
| Total partners' capital and stockholders' equity | 159 |
| | 170 |
|
| Total liabilities and equity | $ | 504 |
| | $ | 465 |
|
The following table summarizes 100% of the combined results of operations of our equity method affiliates for the years ended October 31: |
| | | | | | | | | | | |
| | (Unaudited) |
| (in millions) | 2020 | | 2019 | | 2018 |
| Net sales | $ | 348 |
| | $ | 391 |
| | $ | 505 |
|
| Costs, expenses, and income tax expense | 344 |
| | 385 |
| | 507 |
|
| Net income (loss) | $ | 4 |
| | $ | 6 |
| | $ | (2 | ) |
|
| | | | | | | | | | | |
| | (Unaudited) |
| (in millions) | 2018 | | 2017 | | 2016 |
| Net sales | $ | 505 |
| | $ | 497 |
| | $ | 584 |
|
| Costs, expenses, and income tax expense | 507 |
| | 488 |
| | 571 |
|
| Net income (loss) | $ | (2 | ) | | $ | 9 |
| | $ | 13 |
|
We recorded sales to certain of these affiliates totaling $45 million, $61 million, and $4 million $5 million,in 2020, 2019, and $6 million in 2018, 2017, and 2016, respectively. We also purchased $166$74 million, $156$123 million, and $207$166 million of products and services from certain of these affiliates in 2020, 2019, and 2018, 2017,respectively.
Navistar International Corporation and 2016, respectively.Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Amounts due to and due from our affiliates arising from the sale and purchase of products and services as of October 31 are as follows:
|
| | | | | | | |
| (in millions) | 2020 | | 2019 |
| Receivables due from affiliates | $ | 7 |
| | $ | 32 |
|
| Payables due to affiliates | 8 |
| | 13 |
|
|
| | | | | | | |
| (in millions) | 2018 | | 2017 |
| Receivables due from affiliates | $ | 1 |
| | $ | 1 |
|
| Payables due to affiliates | 22 |
| | 19 |
|
As10. Leases
We account for a lease when an asset has been identified and when the contract conveys the right to control the use of the identified asset in exchange for consideration for a period of time. We determine whether an arrangement is or contains a lease at inception.
Lessee
We lease certain land, buildings, and equipment under operating and finance leases for our distribution centers, manufacturing facilities and our corporate offices, expiring at various dates through 2030. Operating leases generally have 1 to 20 year terms, with options to extend the lease. Terms are generally negotiated at the time of renewal. Options to terminate are not common and may be included at the discretion of the lessor. Certain leases may include provisions for rent escalation based on actual costs incurred by the lessor. Variable lease payments, which are not material, are not included as right of use assets or lease liabilities in our Consolidated Balance Sheets and are expensed as incurred. Generally, our lease agreements do not contain any residual value guarantees or restrictive covenants.
All real estate leases and equipment leases, with an initial term greater than 12 months, result in the recognition of a right of use asset and lease liability recognized on our Consolidated Balance Sheets. Certain equipment leases with a term less than 12 months do not result in the recognition of right of use assets or lease liabilities. We recognize lease expense for those leases, which are not material, on a straight-line basis over the lease term.
We sublease certain real estate to third parties. Rental income from subleases for the years ended October 31, 2020, 2019 and 2018 and 2017, our share of net unfunded earnings in non-consolidated affiliates totaled $1was $3 million, $3 million and $7$5 million, respectively.
We generally combine fixed lease and non-lease components for those leases we have entered into or reassessed after the adoption of the new lease standard. These assets primarily include real estate, manufacturing equipment and vehicles. The implicit rate of the majority of our leases is not known; therefore, we use our incremental borrowing rate in determining the present value of lease payments. For leases denominated in a foreign currency, the incremental borrowing rate is adjusted by replacing the U.S. credit-free spread with that of the specific country.
For the year ended October 31, 2020, we incurred operating lease costs recorded in Costs of products sold of $9 million and operating lease costs recorded in SG&A expenses of $25 million. These charges were recognized in our Consolidated Statements of Operations. Finance lease costs were not material to our Consolidated Statements of Operations.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
9. Debt
The following tables present the components of Notes payable and current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheets:
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2018 |
| 2017 |
| Manufacturing operations | | | |
| Senior Secured Term Loan Credit Agreement, due 2025, net of unamortized discount of $7 and unamortized debt issuance costs of $11 | $ | 1,570 |
| | $ | — |
|
| Senior Secured Term Loan Credit Facility, as amended, due 2020, net of unamortized discount of $7, and unamortized debt issuance costs of $9 | — |
| | 1,003 |
|
| 6.625% Senior Notes, due 2026, net of unamortized debt issuance costs of $17 | 1,083 |
| | — |
|
| 8.25% Senior Notes, due 2022, net of unamortized discount of $13 and unamortized debt issuance costs of $14 | — |
| | 1,423 |
|
| 4.50% Senior Subordinated Convertible Notes, due 2018, net of unamortized discount of $5 and unamortized debt issuance costs of $1 | — |
| | 194 |
|
| 4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $5 and $14, respectively, and unamortized debt issuance costs of $1 and $3, respectively | 405 |
| | 394 |
|
| Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040, net of unamortized debt issuance costs of $5 at both dates | 220 |
| | 220 |
|
| Financed lease obligations | 122 |
| | 130 |
|
| Other | 26 |
| | 43 |
|
| Total Manufacturing operations debt | 3,426 |
| | 3,407 |
|
| Less: Current portion | 461 |
| | 286 |
|
| Net long-term Manufacturing operations debt | $ | 2,965 |
| | $ | 3,121 |
|
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2018 | | 2017 |
| Financial Services operations | | | |
| Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2023, net of unamortized debt issuance costs of $4 and $5, respectively | $ | 948 |
| | $ | 849 |
|
| Senior secured NFC Term Loan, due 2025, net of unamortized discount of $2, and unamortized debt issuance costs of $4 | 394 |
| | — |
|
| Bank credit facilities, at fixed and variable rates, due dates from 2019 through 2024, net of unamortized debt issuance costs of $2 and $2, respectively | 519 |
| | 616 |
|
| Commercial paper, at variable rates, program matures in 2022 | 75 |
| | 92 |
|
| Borrowings secured by operating and finance leases, at various rates, due serially through 2024 | 105 |
| | 94 |
|
| Total Financial Services operations debt | 2,041 |
| | 1,651 |
|
| Less: Current portion | 485 |
| | 883 |
|
| Net long-term Financial Services operations debt | $ | 1,556 |
| | $ | 768 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table presents balance sheet information related to operating leases:
|
| | | |
| (in millions) | As of October 31, 2020 |
| Operating lease right of use assets | $ | 119 |
|
Finance lease right of use assets(A) | 2 |
|
| Total right of use assets | $ | 121 |
|
| Operating lease liabilities | |
| Other current liabilities | $ | 30 |
|
| Other noncurrent liabilities | 92 |
|
| Finance lease liabilities | |
| Notes payable and current maturities of long-term debt | 1 |
|
| Long-term debt | 1 |
|
| Total lease liabilities | $ | 124 |
|
| |
| (A) | Finance lease right of use assets are included in Property and Equipment, net on our Consolidated Balance Sheets. |
The following table presents maturities of lease liabilities:
|
| | | | | | | |
| | As of October 31, 2020 |
| (in millions) | Finance Leases | | Operating Leases |
| 2021 | $ | 1 |
| | $ | 35 |
|
| 2022 | 1 |
| | 30 |
|
| 2023 | 0 |
| | 23 |
|
| 2024 | 0 |
| | 17 |
|
| 2025 | 0 |
| | 10 |
|
| Thereafter | 0 |
| | 23 |
|
| Total lease payments | 2 |
| | 138 |
|
| Less: Present value discount | 0 |
| | 16 |
|
| Total lease liabilities | $ | 2 |
| | $ | 122 |
|
The following table presents cash flow information related to operating leases:
|
| | | |
| (in millions) | For the Year Ended October 31, 2020 |
| Cash paid for amounts included in the measurement of lease liabilities | |
| Operating cash flows from operating leases | $ | 40 |
|
| Right of use assets obtained in exchange for lease liabilities | $ | 44 |
|
The following table presents the weighted-average remaining lease term and discount rate:
|
| | | | | |
| | As of October 31, 2020 |
| | Finance Leases | | Operating Leases |
| Weighted-average remaining lease term | 3.4 |
| | 5.42 |
|
| Weighted-average discount rate | 4.3 | % | | 4.5 | % |
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Lessor
We primarily lease trucks, tractors, and trailers to retail customers and dealers in the U.S. and Mexico through our Financial Services segment. These leases are classified as either operating or finance leases, expire at various dates, and typically have terms which allow an extension or fair value options to purchase the asset at the end of the lease term. The terms of leases generally range from 2 to 7 years, though extension periods may be for a shorter time. Our Financial Services segment manages the relationship with Navistar Capital (a program of BMO Harris Bank N.A. and Bank of Montreal (together, “BMO”)). Navistar Capital is our third-party preferred source of retail and lease customer financing for equipment offered by us and our dealers in the U.S. For certain Navistar Capital financed contracts which contain an end of term option for us to purchase the leased equipment if the customer declines to do so, we recognize the equipment subject to an operating lease as an asset on our Consolidated Balance Sheets. For more information related to the BMO arrangement, see Note 15, Commitments and Contingencies. We have also leased certain real estate to third parties to manage excess capacity through our Corporate segment.
We depreciate trucks, tractors, and trailers leased to customers under operating lease agreements on a straight-line basis to the equipment's estimated residual value over the lease term. The residual values of the equipment leased under operating lease agreements represent estimates of the value of the assets at the end of the lease contracts and are initially recorded based on estimates of future market values. Realization of the residual values is dependent on our future ability to market the equipment. We work with our customers and dealers to manage the sale of lease returns and the recovery of residual exposure. We also review residual values periodically to determine that recorded amounts are appropriate and the equipment is not impaired. For more information on key inputs and valuation methodologies in evaluating impairment of assets under operating lease agreements, see Note 14, Fair Value Measurements. For more information regarding impaired finance receivables see Note 5, Allowance for Doubtful Accounts, and Note 3, Restructuring, Impairments and Divestitures for impaired assets under operating leases.
The following table presents revenue from finance and operating leases, included in our Consolidated Statements of Operations:
|
| | | | | | | | |
| | | For the Year Ended October 31, 2020 |
| (in millions) | | Finance Leases(A) | | Operating Leases |
| Sales of manufactured products, net | | $ | 0 |
| | $ | 22 |
|
| Finance revenues | | 31 |
| | 75 |
|
| Other expense, net | | 0 |
| | 5 |
|
| Total lease revenue | | $ | 31 |
| | $ | 102 |
|
_______________________
(A) Finance revenues consist primarily of interest income. Additional fees, such as late fees, are not material to our consolidated financial statements.
The following table presents the carrying amount of equipment leased to others, included in Property and Equipment, net in our Consolidated Balance Sheets:
|
| | | | | | | |
| (in millions) | October 31, 2020 | | October 31, 2019 |
| Equipment leased to others, at original cost | $ | 561 |
| | $ | 562 |
|
| Less: Accumulated depreciation | 144 |
| | 126 |
|
| Equipment leased to others, net | $ | 417 |
| | $ | 436 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table presents payments due from operating leases:
|
| | | |
| (in millions) | October 31, 2020 |
| 2021 | $ | 95 |
|
| 2022 | 83 |
|
| 2023 | 76 |
|
| 2024 | 53 |
|
| 2025 | 29 |
|
| Thereafter | 38 |
|
| Total | $ | 374 |
|
The following table presents maturities of finance lease receivables reconciled to the net investment in finance leases:
|
| | | |
| (in millions) | October 31, 2020 |
| 2021 | $ | 83 |
|
| 2022 | 68 |
|
| 2023 | 44 |
|
| 2024 | 26 |
|
| 2025 | 11 |
|
| Thereafter | 2 |
|
| Total | 234 |
|
| Less: Unearned interest income | 48 |
|
| Net investment in finance leases | $ | 186 |
|
Operating and finance lease contracts generally may be repaid or refinanced prior to contractual maturity. Accordingly, this presentation should not be regarded as a forecast of future cash.
11. Debt
The following tables present the components of Notes payable and current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheets:
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2020 |
| 2019 |
| Manufacturing operations | | | |
| Senior Secured Term Loan Credit Agreement, due 2025, net of unamortized discount of $5 and $6, respectively, and unamortized debt issuance costs of $8 and $10, respectively | $ | 1,543 |
| | $ | 1,556 |
|
| 9.5% Senior Secured Notes, due 2025, net of unamortized debt issuance costs of $11 | 589 |
| | — |
|
| 6.625% Senior Notes, due 2026, net of unamortized debt issuance costs of $13 and $15, respectively | 1,087 |
| | 1,085 |
|
| Loan Agreement related to 4.75% Tax-Exempt Bonds, due 2040, net of unamortized debt issuance costs of $2 | 223 |
| | — |
|
| Loan Agreement related to 6.75% Tax-Exempt Bonds, due 2040, net of unamortized debt issuance costs of $5 | 0 |
| | 220 |
|
| Financed lease obligations | 45 |
| | 60 |
|
| Other | 9 |
| | 11 |
|
| Total Manufacturing operations debt | 3,496 |
| | 2,932 |
|
| Less: Current portion | 45 |
| | 32 |
|
| Net long-term Manufacturing operations debt | $ | 3,451 |
| | $ | 2,900 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2020 | | 2019 |
| Financial Services operations | | | |
| Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2022, net of unamortized debt issuance costs of $3 and $4, respectively | $ | 724 |
| | $ | 991 |
|
| Bank credit facilities, at fixed and variable rates, due dates from 2021 through 2025, net of unamortized debt issuance costs of $1 and $1, respectively | 940 |
| | 1,059 |
|
| Commercial paper, at variable rates, program matures in 2022 | 0 |
| | 84 |
|
| Borrowings secured by operating and finance leases, at various rates, due serially through 2024 | 170 |
| | 122 |
|
| Total Financial Services operations debt | 1,834 |
| | 2,256 |
|
| Less: Current portion | 595 |
| | 839 |
|
| Net long-term Financial Services operations debt | $ | 1,239 |
| | $ | 1,417 |
|
Manufacturing Operations
Senior Secured Term Loan Credit Agreement
On November 6, 2017, we signedWe have a definitive credit agreement relating to a seven-year senior secured term loan credit facility in an aggregate principal amount of $1.6 billion (“Term Loan Credit Agreement”), guaranteed by Navistar International Corporation and twelve of its subsidiaries. Under the terms of the Term Loan Credit Agreement, the interest rate on the outstanding loan is based, at our option, on an adjusted Eurodollar Rate, plus a margin of 3.50%, or a Base Rate, plus a margin of 2.50%. The Term Loan Credit Agreement requires quarterly amortization payments of $4 million with the balance due at maturity on November 6, 2024. A portion of the proceeds from the Term Loan Credit Agreement was used to repay all outstanding loans under our previously existing Senior Secured Term Loan Credit Facility ("Term Loan"), to redeem a portion of the previously outstanding 8.25% senior notes ("8.25% Senior NotesNotes") and to pay accrued and unpaid interest thereon, and pay certain transaction fees and expenses incurred in connection with the new Term Loan Credit Agreement.
The remainder ofUpon the proceedsrepayment of the Term Loan Credit Agreement will be used for ongoing working capital purposes and general corporate purposes.
Senior Secured Term Loan Credit Facility
In February 2017, the Term Loan was amended, pursuant to which the Company's remaining approximately $1.0 billion loan was repriced and provisions regarding European Union bail-in legislation were inserted. The amendment reduced the interest rate applicable to the outstanding loan by 1.50%. Under the terms of the amendment, the interest rate on the outstanding loan was based, at our option, on an adjusted Eurodollar Rate, plus a margin of 4.00%, or a Base Rate, plus a margin of 3.00%. In connection with the amendment, we paid a consent fee equal to 0.25% of the aggregate principal amount, a call protection fee equal to 1.00% of the aggregate principal amount, and certain other fees. During the second quarter of 2017, we recorded a charge of $4 million related to certain third party fees and debt issuance costs associated with the repricing of our Term Loan. The remaining debt issuance costs were recorded as a direct deduction from the carrying amount of the Term Loan and amortized through Interest expense over the remaining life of the Term Loan.
Upon the full repayment in the first quarter of 2018, we recorded approximately $16 million of charges related to the extinguishment of unamortized debt issuance costs associated with the Term Loan, included in Other income,expense, net on our Consolidated Statements of Operations.
9.5% Senior Secured Notes, due 2025
On April 27, 2020, we issued $600 million aggregate principal amount of 9.5% senior secured notes, due 2025 ("9.5% Senior Secured Notes"). Interest is payable on May 1 and November 1 of each year beginning on November 1, 2020 until the maturity date of May 1, 2025. The proceeds from the 9.5% Senior Secured Notes are being used for general corporate purposes in addition to certain transaction fees and expenses incurred in connection with the new 9.5% Senior Secured Notes. Debt issuance costs of $12 million were recorded as a direct deduction from the carrying amount and will be amortized through Interest expense over the life. The 9.5% Senior Secured Notes are subject to specific redemption pricing, restrictive payments, and change of control provisions.
6.625% Senior Notes
On November 6, 2017, we issued $1.1 billion in aggregate principal amount of 6.625% senior notes, due 2026 ("6.625% Senior Notes"). Interest is payable on the 6.625% Senior Notes on May 1 and November 1 of each year beginning on May 1, 2018 until the maturity date of November 1, 2025. The proceeds from the 6.625% Senior Notes offering were used to redeem a portion of our previously existing 8.25% Senior Notes, to pay accrued and unpaid interest thereon, and pay the associated prepayment premiums, certain transaction fees and expenses incurred in connection with the new 6.625% Senior Notes.
8.25% Senior Notes
In January 2017, we issued an additional $250 million principal amount of 8.25% Senior Notes, bringingUpon the aggregate principal amount to $1.45 billion at that time. Debt issuance costs of $4 million were recorded as a direct deduction from the carrying amount and were amortized through Interest expense over the remaining life. As a result of the transaction, the effective interest rateredemption of the 8.25% Senior Notes became 8.51%. The proceeds were used for general corporate purposes, including working capital and capital expenditures.
In November 2017, the 8.25% Senior Notes, in the full aggregate principal amountbalance of $1.45 billion were redeemed using proceeds from the 6.625% Senior Notes and the Senior Secured Term Loan Credit Agreement. Inin the first quarter of 2018, we recorded approximately $30 million of charges related to the extinguishment of unamortized debt issuance costs and tender premiums associated with the 8.25% Senior Notes, included in Other income,expense, net on our Consolidated Statements of Operations.
4.50% Senior Subordinated Convertible Notes
In October 2013, we completed the private sale of $200 million of 4.50% senior subordinated convertible notes due October 2018 ("2018 Convertible Notes"). We received proceeds of $196 million, net of $3 million of issuance costs and a $1 million issuance discount. The 2018 Convertible Notes were senior subordinated unsecured obligations of the Company. The 2018 Convertible Notes were fully repaid upon maturity in October 2018, and none were converted into our common stock.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
4.75% Senior Subordinated Convertible Notes
During the second quarter of 2014, we completed the private sale of $411 million of the 2019 Convertible Notes, including a portion of the underwriter's over-allotment option. We received proceeds of $402 million, net of $9 million of issuance costs. Interest is payable on April 15 and October 15 of each year until the maturity date. The 2019 Convertible Notes are senior subordinated unsecured obligations of the Company.
In accounting for the issuance, the 2019 Convertible Notes were separated into a debt component and an equity component, resulting in the debt component being recorded at estimated fair value without consideration given to the conversion feature. The excess of the principal amount of the liability component over the carrying amount is treated as debt discount and will be amortized to Interest expense using the effective interest method over the term of the 2019 Convertible Notes. We estimated the fair value of the liability component at $367 million. The equity component of $44 million is recorded inAdditional paid-in capital and will not be remeasured as long as it continues to meet the conditions for equity classification. Issuance costs are also allocated between the debt and equity components resulting in $8 million of debt issuance costs recorded as an offset of the 2019 Convertible Notes in Long-term debt and $1 million recorded as a reduction in Additional paid-in capital. The liability component of the debt issuance costs will be amortized to Interest expense over the term of the 2019 Convertible Notes.
We have the option to redeem the 2019 Convertible Notes for cash, in whole or in part, on any business day on or after April 20, 2017 if the last reported sale price of our common stock has been at least 130% of the conversion price then in effect for at least 20 trading days (whether or not consecutive), during any 30 consecutive trading day period ending within 10 trading days immediately prior to the date of the redemption notice ("Optional Redemption"). The redemption price is equal to 100% of the principal amount of the 2019 Convertible Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date.
Holders may convert the 2019 Convertible Notes into our common stock at any time after October 15, 2018. Prior to October 15, 2018, holders could only convert upon the occurrence of specified trigger events, as more fully described in the 2019 Convertible Notes indenture. The conversion rate is 18.4946 shares of common stock per $1,000 principal amount of 2019 Convertible Notes (equivalent to a conversion price of approximately $54.07 per share of common stock). The conversion rate may be adjusted for anti-dilution provisions and the conversion price may be decreased by the Board of Directors to the extent permitted by law and listing requirements. The 2019 Convertible Notes can be settled, at our election, in common stock, cash, or a combination of common stock and cash.
Loan Agreement related to the Tax ExemptTax-Exempt Bonds
In October 2010, we benefited from the issuance of certain tax-exempt bond financings, of which: (i) the Illinois Finance Authority issued and sold $135 million aggregate principal amount of Recovery Zone Facility Revenue Refunding Bonds due October 15, 2040, and (ii) The County of Cook, Illinois issued and sold $90 million aggregate principal amount of Recovery Zone Facility Revenue Bonds also due October 15, 2040 (collectively the "Tax Exempt Bonds"). The Tax Exempt Bonds were issued pursuant to separate, but substantially identical, indentures of trust dated as of October 1, 2010. The proceeds of the Tax Exempt Bonds were loaned by each issuer to the Company pursuant to separate, but substantially identical, loan agreements dated as of October 1, 2010. The proceeds from the issuance of the Tax Exempt Bonds were restricted for capital expenditures related to financing the relocation of our headquarters, the expansion of an existing warehouse facility, and the development of certain industrial and testing facilities, together with related improvements and equipment. The payment of principal and interest on the Tax Exempt Bonds is guaranteed under separate, but substantially identical, bond guarantees issued by NI. The Tax Exempt Bonds are special, limited obligations of each issuer, payable out of the revenues and income derived under the related loan agreements and related guarantees. The Tax Exempt Bonds bear interest at the fixed rate of 6.50% per annum, payable each April 15 and October 15, commencing April 15, 2011. Beginning on October 15, 2020, the Tax Exempt Bonds are subject to optional redemption at the direction of the Company, in whole or in part, at the redemption price equal to 100% of the principal amount thereof, plus accrued interest, if any, to the redemption date. In November 2010, we finalized the purchase of the property and buildings that we developed into our new world headquarters site. As of October 31, 2018, none of the $225 million remains to be reimbursed under the Tax Exempt Bonds.
On November 6, 2017, there was an amendment to the CompanyTax-Exempt Bonds that increased the interest rate to 6.75% and granted of a junior priority lien on certain collateral securing the Company's Term Loan Credit Agreement. We entered into the First Amendment to Loan Agreement with The County of Cook, Illinois and the First Amendment to Loan Agreement with the Illinois Finance Authority (“Tax ExemptTax-Exempt Bond Amendments”) to adjust various covenants included in the loan agreements relating to the Tax ExemptTax-Exempt Bonds, including to permit the Company to incur secured debt up to $1.7 billion, in exchange for a coupon increase from 6.50% to 6.75% and the grant of a junior priority lien on certain collateral securing the Company’s Term Loan Credit Agreement. The Tax-Exempt Bonds were repaid on October 15, 2020 using the proceeds from the 2020 Bonds (as defined below). The early repayment of these Tax-Exempt Bonds resulted in the write off of unamortized debt issuance costs of $5 million.
NavistarOn August 4, 2020, we completed a certain tax-exempt bond refinancing in which the Illinois Finance Authority (the “IFA”) issued and sold $225 million aggregate principal amount of Recovery Zone Facility Revenue Refunding Bonds (Navistar International Corporation Project) Series 2020 due October 15, 2040 ("the 2020 Bonds"). The proceeds from the issuance of the 2020 Bonds were used, together with certain other funds of the Company, for the purposes of refunding (1) the $135 million aggregate principal amount of IFA Recovery Zone Facility Revenue bonds (Navistar International Corporation Project), Series 2010 due October 15, 2040 and Subsidiaries
Notes(2) $90 million aggregate principal amount of The County Cook, Illinois Recovery Zone Facility Revenue Bonds (Navistar International Corporation Project), Series 2010 due October 15, 2040 (collectively the "2010 Bonds") on October 15, 2020. The interest rate on the 2020 Bonds is 4.75%. The 2020 Bonds were issued pursuant to Consolidated Financial Statements—(Continued)an indenture of trust and the proceeds of the 2020 Bonds were loaned by IFA to the Company pursuant to a loan agreement and promissory note, each dated as of July 1, 2020. The payment of principal and interest on the 2020 Bonds is guaranteed under a guarantee issued by NI. The 2020 Bonds are special, limited obligations of the IFA, payable out of the revenues and income derived under the related loan agreement, promissory note and guarantee. Beginning on August 1, 2030, the 2020 Bonds are subject to optional redemption at the direction of the Company, in whole or in part. In addition, if the Company is acquired by TRATON SE or one of its affiliates, the Company may, at its option, redeem all, but not less than all, of the 2020 Bonds. In each case, the Company will pay a redemption price equal to 100% of the principal amount thereof, plus accrued interest, if any, to the redemption date. The 2020 Bonds are senior unsecured general obligations with a subsidiary guaranty from NI.
Financed Lease Obligations
We havePrior to the adoption of ASC 842, we accounted for as borrowings certain third-party equipment financings by BMO (as defined in Note 15, Commitments and Contingencies), our preferred source of retail customer financing for equipment offered by us and our dealers in the U.S. The initial transactions dodid not qualify for revenue recognition as we retain substantial risksretained control of ownership in the leased property. As a result, the proceeds from the transfer aretransfers were recorded as ana financed lease obligation and amortized to revenue over the term of the financing. The remaining obligation will be amortized through 20232024, with interest rates ranging from 3.98%3.77% to 12.52%5.91%.
Amended and Restated Asset-Based Credit Facility
In August 2017, we amended and extended ourWe have a $125 million asset-based credit facility ("Amended and Restated Asset-Based Credit Facility") which was previously due in May 2018. The 2017 amendment extended thehas a maturity date toof August 2022 and reduced the revolving facility from $175 million to $125 million.2022. The borrowing base of the revolving facility is secured by a first priority security interest in certain of NI's aftermarket parts inventory locations and contains customary covenants, representations and warranties. Our borrowing capacity under the amended facility is subject to a $13 million liquidity block and is impacted by outstanding standby letters of credit issued under this facility and the amount of eligible inventory. Borrowings under the Amended and Restated Asset-Based Credit Facility accrue interest at a rate equal to a base rate or an adjusted LIBOR rate plus a spread. The spread is 175 basis points for Base Rate borrowings and 275 basis points for LIBOR borrowings. As of October 31, 2018,2020 and 2019, we had no0 borrowings outstanding but did have availability to borrow under the Amended and Restated Asset-Based Credit Facility. Amounts borrowed under this facility for the twelve months ended October 31, 2020 were $60 million. Repayments under this facility for the twelve months ended October 31, 2020, were $60 million. These borrowings and repayments are classified under the line item Net change in secured revolving credit facilities in the Consolidated Statements of Cash Flows. There were no borrowings or repayments in the years ended 2019 and 2018.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Financial Services Operations
Asset-backed Debt
In November 2016,December 2017, the maturity date of the variable funding notes ("VFN") facility was extended from May 2017 to November 2017, and the maximum capacity was reduced from $500 million to $450 million. In May 2017, the VFN facility was extended to May 2018, and the maximum capacity was reduced to $425 million. In December 2017, the maturity date of our VFN facility was extended from May 2018 to December 2018, and the maximum capacity was reduced from $425 million to $350 million. In November 2018, the maturity of the VFN facility was extended from December 2018 to May 2020. TheIn April 2019, the VFN facility is securedcapacity was temporarily increased from $350 million to $550 million until the earlier of June 28, 2019, or the completion of a qualifying wholesale asset-backed term facility. In June 2019, the capacity decreased from $550 million to $350 million, upon the sale of $300 million of two-year investor notes by assets of the wholesale note owner trust.
In October 2016, Navistar Financial Securities Corporation ("NFSC") issued $300 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $250 million of investor notes that matured in October 2016.
In June 2017, NFSC issued $250 million of two-year investor notes secured by assets of the wholesale note owner trust.. Proceeds were used, in part, to replace the $250 million of investor notes that matured in June 2017.2019. In May 2020, the maturity date of the VFN facility was extended to May 2021, and the maximum capacity remained $350 million. The VFN facility and investor notes are secured by assets of the wholesale note owner trust. Amounts borrowed under this facility for the twelve months ended October 31, 2020, 2019 and 2018 were $300 million, $1,495 million and $590 million, respectively. Repayments under this facility for the twelve months ended October 31, 2020, 2019 and 2018 were $515 million, $1,540 million and $455 million, respectively. These borrowings and repayments are classified under the line item Net change in secured revolving credit facilities in the Consolidated Statements of Cash Flows.
In September 2018, NFSC issued $300 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $300 million of investor notes that matured in September 2018. In July 2020, NFSC issued $300 million of two-year investor notes secured by assets of the wholesale note owner trust. Proceeds were used, in part, to replace the $300 million of NFSC investor notes that matured in September 2020.
Our Mexican financial services affiliate, Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad Regulada ("NFM"), issues secured notes, denominated in Mexican pesos, which are secured by retail finance receivables. The aggregate balance of these notes was $31 millionzero and $67$13 million, net of issuance costs, at October 31, 2018,2020, and 2017,2019, respectively. These notes mature at various dates through March 2023.
In December 2016,January 2018, Truck Retail Accounts Corporation ("TRAC"), a special purpose, wholly-owned subsidiary of NFC, renewed theextended its one-year revolving facility to October 2017. In May 2017, this facility was renewed to April 2018. In January 2018, the maturity date of our $100 million TRAC fundingrevolving facility was extended from April 2018 to January 2019, and in December 2018, the maturity was further extended to January 2020. In April 2019, the maximum capacity of the TRAC funding facility was increased from $100 million to $150 million, and further increased to $200 million in October 2019. In January 2020, the TRAC funding facility was renewed and extended to June 2021, with a capacity range of $100 million to $200 million. Borrowings under this facility are secured by eligible retail accounts receivable. Amounts borrowed under this facility for the twelve months ended October 31, 2020, 2019 and 2018 were $294 million, $800 million and $336 million, respectively. Repayments under this facility for the twelve months ended October 31, 2020, 2019 and 2018 were $334 million, $743 million and $336 million, respectively. These borrowings and repayments are classified under the line item Net change in secured revolving credit facilities in the Consolidated Statements of Cash Flows.
The majority of the above asset-backed debt is issued by consolidated SPEs and is payable out of collections on the finance receivables sold to the SPEs. This debt is the legal obligation of the SPEs and not NFC or NFM. Assets used as collateral include finance receivables, restricted cash and other assets. The carrying amount of the assets used as collateral for asset-backed debt were $1.4$1.1 billion and $1.1$1.3 billion at October 31, 20182020 and 2017,2019, respectively. See Note 3, 4, Finance Receivables, for more information on finance receivables used to secure asset-backed debt.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Term Loan
In July 2018, NFC entered into a $400 million seven-year senior secured term loan facility ("NFC Term Loan"). The NFC Term Loan is secured by a first-priority security interest in certain assets of NFC and ranks equal to that of NFC's bank credit facility. The initial funding interest rate is LIBOR plus a margin of 3.75%. NFC has the option to use a defined alternate base rate. Debt issuance costs and the original issuance discount of $4 million and $2 million, respectively, were recorded as a direct deduction from the carrying amount and will amortize through Interest expense over the life of the loan. The NFC Term Loan requires quarterly principal amortization payments of $1 million, with the balance due at maturity.
Bank Credit Facilities
In May 2016, NFC amended and extended its bank credit facility which was originally due in December 2016. The 2016 amendment extended the maturity date to June 2018 and initially reduced the revolving portion of the facility from $500 million to $400 million. In December 2016, and in accordance with the amendment, the revolving portion of the facility was reduced to a maximum of $275 million, the term loan portion of the facility was paid down to $82 million, and the quarterly principal payments were reduced from $9 million to $2 million. The amendment allows NFC to increase revolving or term loan commitments, subject to obtaining commitments from existing or new lenders to provide additional or increased revolving commitments and/or additional term loans, to permit a maximum total facility size of $700 million after giving effect to any such increase and without taking into account the non-extended loans and commitments.
In September 2017, the revolving portion of the bank credit facility was amended and extended to a maturity date of September 2021. The capacity of the facility was reduced from $275 million to $269 million in June 2018. The borrowings on the revolving portion of the facility totaled $21 million and $127 million as of October 31, 2018 and 2017, respectively.
On June 1, 2018, in accordance with the terms of the May 2016 amended and extended NFC bank credit facility, of NFC, the term loan portion was paid in full and the revolving portion capacity was reduced from $275 million to $269 million. The balance of the term loan portion of the facility as of October 31, 2017, was $75 million. On June 12, 2018, certain leverage covenants and baskets under the NFC bank credit facility were amended to allow for completion of the senior secured NFC term loan ("NFC Term Loan") in July 2018. In May 2019, NFC increased the capacity of its revolving bank credit facility from $269 million to $748 million and extended the maturity from September 2021 to May 2024. The additional capacity was used to fully repay the NFC Term Loan balance of $398 million. The early repayment of the NFC Term Loan resulted in July 2018.the write off of unamortized debt issuance costs and discount of $6 million. The borrowings on the revolving portion of the facility totaled $538 million and $623 million as of October 31, 2020 and 2019, respectively.
We borrow funds under various bank credit lines denominated in U.S. dollars and Mexican pesos to be used for investment in our Mexican financial services operations. As of October 31, 2018,2020, borrowings outstanding under these arrangements were $498$402 million, of which 28%20% was denominated in U.S. dollars and 72%80% in Mexican pesos. As of October 31, 2017,2019, borrowings outstanding under these arrangements were $414$437 million, of which 35%11% was denominated in U.S. dollars and 65%89% in Mexican pesos. The interest rates on the dollar-denominated debt are at a negotiated fixed rate or at a variable rate based on LIBOR, and the interest rates on peso-denominated debt are based on the Interbank Interest Equilibrium Rate.
Covenants of the NFC bank credit facility restrict certain payments such as dividends. In the years ended October 31, 2018
Navistar International Corporation and 2017, NFC paid no dividends. In the year ended October 31, 2016, NFC paid cash dividends and returned capitalSubsidiaries
Notes to NI in the aggregate amount of $220 million.Consolidated Financial Statements—(Continued)
Commercial Paper
Effective February 2017, our Mexican financial services operation entered into a five-year commercial paper program for up to P1.8 billion (the equivalent of approximately $91$84 million at October 31, 2018)2020). This program replaced the program that matured in December 2016. In October 2018, the commercial paper program was increased to P3.0 billion (the equivalent of approximately $151$140 million at October 31, 2018)2020).
Borrowings Secured by Operating and Finance Leases
International Truck Leasing Corporation ("ITLC"), a special purpose, wholly-owned subsidiary of NFC, provides NFC with another source to obtain borrowings secured by leases. The balances are classified under Financial Services operations debt as borrowings secured by leases. ITLC's assets are available to satisfy its creditors' claims prior to such assets becoming available for ITLC's use or to NFC or affiliated companies. For the years ended October 31, 20182020 and 2017,2019, ITLC issued new borrowings of $38$61 million and $31 million, respectively. The balance of these secured borrowings issued by ITLC totaled $105$117 million and $94$91 million as of October 31, 20182020 and 2017,2019, respectively. The carrying amount of assets used as collateral was $125$144 million and $117$109 million as of October 31, 20182020 and 2017,2019, respectively. ITLC does not have any unsecured debt.
Navistar International CorporationFor the years ended October 31, 2020 and Subsidiaries2019, NFC issued new borrowings secured by leases of $28 million and $31 million, respectively. The balance of these secured borrowings issued by NFC totaled $53 million and $31 million as of October 31, 2020 and 2019, respectively. The carrying amount of assets used as collateral was $51 million and $30 million as of October 31, 2020 and 2019, respectively.
Notes to Consolidated Financial Statements—(Continued)
Future Maturities
The aggregate contractual annual maturities for debt as of October 31, 2018,2020, are as follows:
| | | | Manufacturing
Operations (A) | | Financial
Services
Operations | | Total | Manufacturing
Operations | | Financial
Services
Operations | | Total |
| (in millions) | | | | | | | | | | |
| 2019 | $ | 467 |
| | $ | 487 |
| | $ | 954 |
| |
| 2020 | 41 |
| | 962 |
| | 1,003 |
| |
| 2021 | 80 |
| | 187 |
| | 267 |
| $ | 45 |
| | $ | 595 |
| | $ | 640 |
|
| 2022 | 31 |
| | 26 |
| | 57 |
| 28 |
| | 432 |
| | 460 |
|
| 2023 | 20 |
| | 10 |
| | 30 |
| 27 |
| | 211 |
| | 238 |
|
| 2024 | | 18 |
| | 597 |
| | 615 |
|
| 2025 | | 616 |
| | 3 |
| | 619 |
|
| Thereafter | 2,833 |
| | 381 |
| | 3,214 |
| 2,801 |
| | 0 |
| | 2,801 |
|
| Total debt | 3,472 |
| | 2,053 |
| | 5,525 |
| 3,535 |
| | 1,838 |
| | 5,373 |
|
| Less: Unamortized discount and unamortized debt issuance costs | 46 |
| | 12 |
| | 58 |
| 39 |
| | 4 |
| | 43 |
|
| Net debt | $ | 3,426 |
| | $ | 2,041 |
| | $ | 5,467 |
| $ | 3,496 |
| | $ | 1,834 |
| | $ | 5,330 |
|
Debt and Lease Covenants
We have certain public and private debt agreements, including the Senior Secured Term Loan Credit Agreement, the 9.5% Senior Secured Notes, the 6.625% Senior Notes, the loan agreements for the Tax Exempt2020 Bonds, and the Amended and Restated Asset-Based Credit Facility, which limit our ability to incur additional indebtedness, pay dividends, buy back our stock, and take other actions. The terms of our 2019 Convertible Notes (the "Notes") do not contain covenants that could limit the amount of debt we may issue, or restrict us from paying dividends or repurchasing our other securities. However, the indentures for the Notes define circumstances under which we would be required to repurchase the Notes and include limitations on consolidation, merger, and sale of our assets. As of October 31, 2018,2020, we were in compliance with these covenants.
We are also required under certain agreements with public and private lenders of NFC to ensure that NFC and its subsidiaries maintain their income before interest expense and income taxes at not less than 125% of their total interest expense. Under these agreements, if NFC's consolidated income, including capital contributions made by NIC or NI, before interest expense and income taxes is less than 125% of its interest expense, NIC or NI must make payments to NFC to achieve the required ratio. During the years ended October 31, 2020, 2019, and 2018, 2017, and 2016, no0 such payments were made.
Covenants of the NFC bank credit facility restrict or limit certain payments such as dividends paid to NI. NFC was able to pay dividends of $30 million and $20 million to NI for the years ended October 31, 2020 and 2019, respectively, within the limits of these covenants. In the year ended October 31, 2018, NFC paid no dividends.
Our Mexican financial services operations also have debt covenants, which require the maintenance of certain financial ratios. As of October 31, 2018,2020, we were in compliance with those covenants.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
10.12. Postretirement Benefits
Defined Benefit Plans
We provide postretirement benefits to a substantial portion of our employees and retirees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, surviving spouses and dependents.
Obligations and Funded Status
A summary of the changes in benefit obligations and plan assets is as follows:
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Health and Life
Insurance Benefits |
| (in millions) | 2020 | | 2019 | | 2020 | | 2019 |
| Change in benefit obligations | | | | | | | |
| Benefit obligations at beginning of year | $ | 3,347 |
| | $ | 3,344 |
| | $ | 1,087 |
| | $ | 1,245 |
|
| Service cost | 8 |
| | 7 |
| | 3 |
| | 3 |
|
| Interest on obligations | 84 |
| | 121 |
| | 28 |
| | 49 |
|
| Actuarial loss (gain) | 64 |
| | 405 |
| | (457 | ) | | (138 | ) |
| Plan amendment | 0 |
| | 4 |
| | 0 |
| | — |
|
| Settlements | (11 | ) | | (263 | ) | | 0 |
| | 0 |
|
| Currency translation | (1 | ) | | (5 | ) | | 0 |
| | 0 |
|
| Plan participants' contributions | 0 |
| | 0 |
| | 37 |
| | 35 |
|
| Subsidy receipts | 0 |
| | 0 |
| | 37 |
| | 37 |
|
| Benefits paid | (249 | ) | | (266 | ) | | (136 | ) | | (144 | ) |
| Benefit obligations at end of year | $ | 3,242 |
| | $ | 3,347 |
| | $ | 599 |
| | $ | 1,087 |
|
| Change in plan assets | | | |
| | | | |
| Fair value of plan assets at beginning of year | $ | 2,013 |
| | $ | 2,162 |
| | $ | 283 |
| | $ | 297 |
|
| Actual return on plan assets | 58 |
| | 232 |
| | 7 |
| | 20 |
|
| Settlements | (11 | ) | | (263 | ) | | 0 |
| | 0 |
|
| Currency translation | (1 | ) | | (5 | ) | | 0 |
| | 0 |
|
Employer contributions(A) | 35 |
| | 136 |
| | 1 |
| | 1 |
|
| Benefits paid | (233 | ) | | (249 | ) | | (39 | ) | | (35 | ) |
| Fair value of plan assets at end of year | $ | 1,861 |
| | $ | 2,013 |
| | $ | 252 |
| | $ | 283 |
|
| Funded status at year end | $ | (1,381 | ) | | $ | (1,334 | ) | | $ | (347 | ) | | $ | (804 | ) |
_________________________
| |
| (A) | Employer contributions as of October 31, 2019 consisted of $140 million, net of a $4 million return of plan assets to the Company. |
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Health and Life
Insurance Benefits |
| (in millions) | 2020 | | 2019 | | 2020 | | 2019 |
| Amounts recognized in our Consolidated Balance Sheets consist of: | | | |
| | | | |
| Noncurrent asset | $ | 5 |
| | $ | 3 |
| | $ | 0 |
| | $ | 0 |
|
| Current liability | (18 | ) | | (18 | ) | | (10 | ) | | (20 | ) |
| Noncurrent liability | (1,368 | ) | | (1,319 | ) | | (337 | ) | | (784 | ) |
| Net liability recognized | $ | (1,381 | ) | | $ | (1,334 | ) | | $ | (347 | ) | | $ | (804 | ) |
| | | | | | | | |
| Amounts recognized in our accumulated other comprehensive loss consist of: | | | |
| | | | |
| Net actuarial loss (gain) | $ | 2,133 |
| | $ | 2,086 |
| | $ | (478 | ) | | $ | (33 | ) |
| Net prior service cost | 3 |
| | 4 |
| | 0 |
| | 0 |
|
| Net amount recognized | $ | 2,136 |
| | $ | 2,090 |
| | $ | (478 | ) | | $ | (33 | ) |
The underfunded status of our pension plans on a U.S. GAAP basis increased $47 million during 2020 primarily due to a decrease in the discount rate, partially offset by changes in demographic assumptions.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Health and Life
Insurance Benefits |
| (in millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Change in benefit obligations | | | | | | | |
| Benefit obligations at beginning of year | $ | 3,799 |
| | $ | 4,027 |
| | $ | 1,435 |
| | $ | 1,708 |
|
| Service cost | 7 |
| | 7 |
| | 4 |
| | 5 |
|
| Interest on obligations | 108 |
| | 107 |
| | 43 |
| | 47 |
|
| Actuarial loss (gain) | (251 | ) | | (18 | ) | | (159 | ) | | (183 | ) |
| Settlements | (25 | ) | | (52 | ) | | — |
| | — |
|
| Contractual termination benefits | — |
| | 10 |
| | — |
| | 4 |
|
| Curtailments and other | — |
| | (2 | ) | | — |
| | (58 | ) |
| Currency translation | (8 | ) | | 17 |
| | — |
| | — |
|
| Plan participants' contributions | — |
| | — |
| | 40 |
| | 36 |
|
| Subsidy receipts | — |
| | — |
| | 42 |
| | 42 |
|
| Benefits paid | (286 | ) | | (297 | ) | | (160 | ) | | (166 | ) |
| Benefit obligations at end of year | $ | 3,344 |
| | $ | 3,799 |
| | $ | 1,245 |
| | $ | 1,435 |
|
| Change in plan assets | | | |
| | | | |
| Fair value of plan assets at beginning of year | $ | 2,363 |
| | $ | 2,310 |
| | $ | 333 |
| | $ | 333 |
|
| Actual return on plan assets | (30 | ) | | 256 |
| | 4 |
| | 38 |
|
| Settlements | (25 | ) | | (52 | ) | | — |
| | — |
|
| Currency translation | (8 | ) | | 18 |
| | — |
| | — |
|
| Employer contributions | 132 |
| | 112 |
| | 1 |
| | 2 |
|
| Benefits paid | (270 | ) | | (281 | ) | | (41 | ) | | (40 | ) |
| Fair value of plan assets at end of year | $ | 2,162 |
| | $ | 2,363 |
| | $ | 297 |
| | $ | 333 |
|
| Funded status at year end | $ | (1,182 | ) | | $ | (1,436 | ) | | $ | (948 | ) | | $ | (1,102 | ) |
|
| | | | | | | | | | | | | | | |
| | Pension Benefits | | Health and Life
Insurance Benefits |
| (in millions) | 2018 | | 2017 | | 2018 | | 2017 |
| Amounts recognized in our Consolidated Balance Sheets consist of: | | | |
| | | | |
| Noncurrent asset | $ | 18 |
| | $ | 16 |
| | $ | — |
| | $ | — |
|
| Current liability | (17 | ) | | (16 | ) | | (34 | ) | | (41 | ) |
| Noncurrent liability | (1,183 | ) | | (1,436 | ) | | (914 | ) | | (1,061 | ) |
| Net liability recognized | $ | (1,182 | ) | | $ | (1,436 | ) | | $ | (948 | ) | | $ | (1,102 | ) |
| | | | | | | | |
| Amounts recognized in our accumulated other comprehensive loss consist of: | | |
| | | | |
| Net actuarial loss | $ | 2,007 |
| | $ | 2,183 |
| | $ | 104 |
| | $ | 252 |
|
| Net prior service benefit | — |
| | — |
| | — |
| | — |
|
| Net amount recognized | $ | 2,007 |
| | $ | 2,183 |
| | $ | 104 |
| | $ | 252 |
|
The accumulated benefit obligation for pension benefits, a measure that excludes the effect of prospective salary and wage increases, was $3.2 billion and $3.3 billion and $3.8 billion forat October 31, 20182020 and 2017,2019, respectively.
The cumulative postretirement benefit adjustment included in the Consolidated Statement of Stockholders' Deficit at October 31, 2018 is net of $503 million of deferred taxes related to our postretirement benefit plans.
Navistar International Corporationplans of $197 million and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
$464 million, at October 31, 2020 and 2019, respectively.
Information for pension plans with accumulated benefit obligations in excess of plan assets were as follows:
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2020 | | 2019 |
| Projected benefit obligations | $ | 3,234 |
| | $ | 3,325 |
|
| Accumulated benefit obligations | 3,217 |
| | 3,307 |
|
| Fair value of plan assets | 1,849 |
| | 1,991 |
|
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2018 | | 2017 |
| Projected benefit obligations | $ | 3,065 |
| | $ | 3,487 |
|
| Accumulated benefit obligations | 3,051 |
| | 3,471 |
|
| Fair value of plan assets | 1,865 |
| | 2,035 |
|
Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. As of October 31, 2018,2020, we have met all regulatory funding requirements. In 2018,2020 and 2019, we contributed $132$35 million and $140 million, respectively, to our pension plans to meet regulatory funding requirements. During the first quarter of 2019, we accelerated the payment of a substantial portion of our 2019 minimum required funding. In 2020, we deferred $157 million of previously expected contributions until the first quarter of 2021 under the provisions of the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). We expect to contribute approximately $140$320 million to our pension plans during 2019.2021.
We primarily fund other post-employment benefit ("OPEB")OPEB obligations, such as retiree medical, in accordance with the 1993 Settlement Agreement, which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of our then applicable retiree health care and life insurance benefits. In 2018,2020, we contributed $1 million to our OPEB plans to meet legal funding requirements. We expect to contribute $1 million to our OPEB plans during 2019.2021.
We have certain unfunded pension plans, under which we make payments directly to employees. Benefit payments of $16 million and $17 million for both October 31, 20182020 and 20172019, respectively, are included within the amount of Benefits paid in the Change in benefit obligation section above, but are not included in the Change in plan assets section, because the payments are made directly by us and not by separate trusts that are used in the funding of our other pension plans.
We also have certain OPEB benefits that are paid from Company assets (instead of trust assets). Payments from Company assets, net of participant contributions and subsidy receipts, result in differences between benefits paid as presented under Change in benefit obligation and Change in plan assets of $23 million and $37 million for 2020 and $48 million for 2018 and 2017,2019, respectively.
Components of Net Periodic Benefit Expense and Other Amounts Recognized in Other Comprehensive Loss
The components of our postretirement benefits expense included in our Consolidated Statements of Operations consist of the following: |
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
| Pension expense | $ | 63 |
| | $ | 232 |
| | $ | 72 |
|
| Health and life insurance expense | 11 |
| | 31 |
| | 33 |
|
| Total postretirement benefits expense | $ | 74 |
| | $ | 263 |
| | $ | 105 |
|
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
| Pension expense | $ | 72 |
| | $ | 121 |
| | $ | 82 |
|
| Health and life insurance expense | 33 |
| | (3 | ) | | 71 |
|
| Total postretirement benefits expense | $ | 105 |
| | $ | 118 |
| | $ | 153 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Components of Net Periodic Benefit Expense
Net periodic benefit expense included in our Consolidated Statements of Operations, and other amounts recognized in our Consolidated Statements of Stockholders' Deficit, for the years ended October 31 is comprised of the following:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | Pension Benefits | | Health and Life
Insurance Benefits |
| (in millions) | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Service cost for benefits earned during the period | $ | 8 |
| | $ | 7 |
| | $ | 7 |
| | $ | 3 |
| | $ | 3 |
| | $ | 4 |
|
| Interest on obligation | 84 |
| | 121 |
| | 108 |
| | 28 |
| | 49 |
| | 43 |
|
| Amortization of cumulative loss (gain) | 97 |
| | 94 |
| | 106 |
| | (1 | ) | | (1 | ) | | 9 |
|
| Amortization of prior service cost (benefit) | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Settlements | 7 |
| | 143 |
| | 9 |
| | 0 |
| | 0 |
| | 0 |
|
| Premiums on pension insurance | 11 |
| | 10 |
| | 3 |
| | 0 |
| | 0 |
| | 0 |
|
| Expected return on assets | (145 | ) | | (143 | ) | | (161 | ) | | (19 | ) | | (20 | ) | | (23 | ) |
| Net periodic benefit expense | $ | 63 |
| | $ | 232 |
| | $ | 72 |
| | $ | 11 |
| | $ | 31 |
| | $ | 33 |
|
| Other Changes in plan assets and benefit obligations recognized in other comprehensive loss (income) | | | | | | | | | | | |
| Actuarial net loss (gain) | $ | 151 |
| | $ | 316 |
| | $ | (61 | ) | | $ | (445 | ) | | $ | (138 | ) | | $ | (139 | ) |
| Prior service cost | 0 |
| | 4 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Amortization of cumulative (loss) gain | (97 | ) | | (94 | ) | | (106 | ) | | 1 |
| | 1 |
| | (9 | ) |
| Amortization of prior service benefit (cost) | (1 | ) | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Settlements | (7 | ) | | (143 | ) | | (9 | ) | | 0 |
| | 0 |
| | 0 |
|
| Total recognized in other comprehensive income | $ | 46 |
| | $ | 83 |
| | $ | (176 | ) | | $ | (444 | ) | | $ | (137 | ) | | $ | (148 | ) |
| Total net postretirement benefits (income) expense and other comprehensive loss (income) | $ | 109 |
| | $ | 315 |
| | $ | (104 | ) | | $ | (433 | ) | | $ | (106 | ) | | $ | (115 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | Pension Benefits | | Health and Life
Insurance Benefits |
| (in millions) | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Service cost for benefits earned during the period | $ | 7 |
| | $ | 7 |
| | $ | 9 |
| | $ | 4 |
| | $ | 5 |
| | $ | 5 |
|
| Interest on obligation | 108 |
| | 107 |
| | 118 |
| | 43 |
| | 47 |
| | 58 |
|
| Amortization of cumulative loss | 106 |
| | 116 |
| | 104 |
| | 9 |
| | 22 |
| | 31 |
|
| Amortization of prior service cost (benefit) | — |
| | — |
| | — |
| | — |
| | — |
| | (1 | ) |
| Settlements | 9 |
| | 23 |
| | — |
| | — |
| | — |
| | — |
|
| Contractual termination benefits | — |
| | 10 |
| | 3 |
| | — |
| | 4 |
| | 4 |
|
| Curtailments and other | — |
| | — |
| | — |
| | — |
| | (58 | ) | | — |
|
| Premiums on pension insurance | 3 |
| | 15 |
| | 15 |
| | — |
| | — |
| | — |
|
| Expected return on assets | (161 | ) | | (157 | ) | | (167 | ) | | (23 | ) | | (23 | ) | | (26 | ) |
| Net periodic benefit expense | $ | 72 |
| | $ | 121 |
| | $ | 82 |
| | $ | 33 |
| | $ | (3 | ) | | $ | 71 |
|
| Other Changes in plan assets and benefit obligations recognized in other comprehensive loss (income) | | | | | | | | | | | |
| Actuarial net loss (gain) | $ | (61 | ) | | $ | (116 | ) | | $ | 313 |
| | $ | (139 | ) | | $ | (197 | ) | | $ | (115 | ) |
| Amortization of cumulative loss | (106 | ) | | (116 | ) | | (104 | ) | | (9 | ) | | (22 | ) | | (31 | ) |
| Amortization of prior service benefit (cost) | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
|
| Settlements | (9 | ) | | (23 | ) | | — |
| | — |
| | — |
| | — |
|
| Curtailments | — |
| | (2 | ) | | — |
| | — |
| | — |
| | — |
|
| Currency translation | — |
| | — |
| | (1 | ) | | — |
| | — |
| | — |
|
| Total recognized in other comprehensive loss (income) | $ | (176 | ) | | $ | (257 | ) | | $ | 208 |
| | $ | (148 | ) | | $ | (219 | ) | | $ | (145 | ) |
| Total net postretirement benefits (income) expense and other comprehensive loss (income) | $ | (104 | ) | | $ | (136 | ) | | $ | 290 |
| | $ | (115 | ) | | $ | (222 | ) | | $ | (74 | ) |
For the year ended October 31, 2019, we adopted ASU No. 2017-07 "Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost." This ASU requires that an employer disaggregate the service cost component from the other components of net periodic benefit cost. As a result, we have reclassified certain net periodic benefit costs from SG&A expenses to Other expense, net in our Consolidated Statements of Operations. The guidance, which required retrospective application, resulted in a reclassification of $94 million for the year ended October 31, 2018.
For the years ended October 31, 2020, 2019 and 2018, we purchased a group annuity contractcontracts for certain retired pension plan participants resulting in a plan remeasurement.remeasurements. The purchase of the group annuity contracts was funded directly by the assets of our pension plans. As a result, ain 2020, 2019 and 2018, net actuarial lossgains of $2 million, wasnet actuarial losses of $11 million and net actuarial losses of $2 million, respectively, were recognized as a componentcomponents of Accumulated other comprehensive loss and anon-cash pension settlement accounting expenseexpenses of $7 million, $142 million and $9 million, wasrespectively, were recognized in SG&A expensesOther expense, net in our Consolidated Statements of Operations.
In April 2016,2020 and 2019, respectively, in accordance with the intraperiod tax allocation rules, we filedrecorded a qualified partial wind-up report for approval by FSCOnet benefit of $75 million and $5 million, respectively, related to the 2011 closure of our Chatham, Ontario plant. FSCO provided formal approvaldomestic continuing operations in January 2017. As a result of an ongoing administration review ordered in conjunction with the partial wind-up, we recognized $1 million of contractual termination charges in the first quarter of 2017. During the third quarter of 2017, we finalized the Chatham closure agreement. This resulted in the release of $66 million in other postemployment benefit ("OPEB") liabilities. In addition, a pension settlement accounting charge of $23 million was recorded as a result of lump-sum payments made to certain pension plan participants. These charges and benefits were recordedIncome tax expense in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 2, Restructurings, and impairments for further discussion. As a resultan offsetting reduction in Other comprehensive income due to the remeasurement of thecertain pension and OPEB plan remeasurements in connection with the finalization of the Chatham closure agreement, net actuarial gains of $21 million were recognized as a component of Accumulated other comprehensive loss in the third quarter of 2017.plans.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
In the third quarter of 2017, we committed to a plan to cease engine production at our Melrose Park Facility in the third quarter of fiscal year 2018. As a result, in the third quarter of 2017, we recognized $9 million of pension and $4 million of OPEB contractual termination benefits charges and $10 million of OPEB curtailment charges. These charges were recorded in our Truck segment within Restructuring charges in our Consolidated Statements of Operations. See Note 2, Restructurings and impairments for further discussion. A pension curtailment gain of $2 million and net actuarial gains of $91 million resulting from pension and OPEB remeasurements in connection with our Melrose Park Facility announcement were recognized as a component of Accumulated other comprehensive loss in the third quarter of 2017.
Also, during 2017, in accordance with the intraperiod tax allocation rules, we recorded a net benefit of $28 million related to domestic continuing operations in Income tax expense in our Consolidated Statements of Operations, and an offsetting reduction in Other comprehensive income due to the remeasurement of certain pension and OPEB plans.
The estimated amounts for the defined benefit pension plans and the other postretirement benefit plans that will be amortized from AOCL into net periodic benefit expense over the next fiscal year are as follows:
|
| | | | | | | |
| (in millions) | Pension Benefits | | Health and Life Insurance Benefits |
| Amortization of prior service cost | $ | 1 |
| | $ | 0 |
|
| Amortization of cumulative losses/(gains) | 107 |
| | (40 | ) |
|
| | | | | | | |
| (in millions) | Pension Benefits | | Health and Life Insurance Benefits |
| Amortization of prior service cost (benefit) | $ | — |
| | $ | — |
|
| Amortization of cumulative losses/(gains) | 98 |
| | (1 | ) |
Cumulative unrecognized actuarial gains and losses for postretirement benefit plans, where substantially all of the plan participants are inactive, are amortized over the average remaining life expectancy of the inactive plan participants. Otherwise, cumulative gains and losses are amortized over the average remaining service period of active employees.
Plan amendments unrelated to negotiated labor contracts are amortized over the average remaining service period of active employees or the remaining life expectancy of the inactive participants based upon the nature of the amendment and the participants impacted. Plan amendments arising from negotiated labor contracts are amortized over the length of the contract.
Assumptions
The weighted average rate assumptions used in determining benefit obligations for the years ended October 31, 20182020 and 20172019 are:
| | | | Pension Benefits | | Health and Life Insurance Benefits | Pension Benefits | | Health and Life Insurance Benefits |
| | 2018 | | 2017 | | 2018 | | 2017 | 2020 | | 2019 | | 2020 | | 2019 |
| Discount rate used to determine present value of benefit obligation at end of year | 4.4 | % | | 3.5 | % | | 4.4 | % | | 3.6 | % | 2.6 | % | | 3.1 | % | | 2.5 | % | | 3.1 | % |
| Expected rate of increase in future compensation levels | 3.5 | % | | 3.5 | % | | — |
| | — |
| 3.5 | % | | 3.5 | % | | 0 |
| | 0 |
|
The weighted average rate assumptions used in determining net postretirement benefits expense for 2018, 2017,2020, 2019, and 20162018 were:
|
| | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Health and Life Insurance Benefits |
| | 2020 | | 2019 | | 2018 | | 2020 | | 2019 | | 2018 |
| Discount rate used to determine service cost | 3.3 | % | | 4.6 | % | | 3.9 | % | | 3.3 | % | | 4.6 | % | | 3.9 | % |
| Discount rate used to determine interest cost | 2.6 | % | | 4.0 | % | | 3.0 | % | | 2.7 | % | | 4.1 | % | | 3.1 | % |
| Expected long-term rate of return on plan assets | 7.2 | % | | 7.4 | % | | 7.2 | % | | 7.3 | % | | 7.5 | % | | 7.5 | % |
| Expected rate of increase in future compensation levels | 3.5 | % | | 3.5 | % | | 3.5 | % | | 0 |
| | 0 |
| | 0 |
|
|
| | | | | | | | | | | | | | | | | |
| | Pension Benefits | | Health and Life Insurance Benefits |
| | 2018 | | 2017 | | 2016 | | 2018 | | 2017 | | 2016 |
| Discount rate used to determine service cost | 3.9 | % | | 3.9 | % | | 4.5 | % | | 3.9 | % | | 4.0 | % | | 4.6 | % |
| Discount rate used to determine interest cost | 3.0 | % | | 2.8 | % | | 3.1 | % | | 3.1 | % | | 2.9 | % | | 3.3 | % |
| Expected long-term rate of return on plan assets | 7.2 | % | | 7.2 | % | | 7.5 | % | | 7.5 | % | | 7.5 | % | | 7.5 | % |
| Expected rate of increase in future compensation levels | 3.5 | % | | 3.5 | % | | 3.5 | % | | — |
| | — |
| | — |
|
The actuarial assumptions used to compute the net postretirement benefits expense (income) are based upon information available as of the beginning of the year, specifically market interest rates, past experience, and our best estimate of future economic conditions. Changes in these assumptions may impact the measurement of future benefit costs and obligations. In computing future costs and obligations, we must make assumptions about such things as employee mortality and turnover, expected salary and wage increases, discount rates, expected returns on plan assets, and expected future cost increases. Three of these items have a significant impact on the level of expense recognized: (i) discount rates, (ii) expected rates of return on plan assets, and (iii) healthcare cost trend rates.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
We determine the discount rate for our pension and OPEB obligations by matching anticipated future benefit payments for the plans to a high-quality corporate bond yield curve to establish a weighted average discount rate for each plan.
We determine our assumption as to expected return on plan assets by evaluating historical performance, investment community forecasts, and current market conditions. We consider the current asset mix as well as our targeted asset mix when establishing the expected return on plan assets.
Health care cost trend rates have been established through a review of actual recent cost trends and projected future trends. Our retiree medical and drug cost trend assumptions are our best estimate of expected inflationary increases to healthcare costs. Due to the number of former employees and their beneficiaries included in our retiree population (approximately 30,000)25,000), the trend assumptions are based upon both our specific trends and nationally expected trends.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The weighted average rate of increase in the per capita cost of postretirement health care benefits provided through U.S. plans representing 92%80% of our other postretirement benefit obligation, is projected to be 14.4%3.1% in 20192021 and was estimated as 7.1%10.1% for 2018. Our projections assume that the rate will2020. The 3.1% is assumed to increase to 10.1% in 2022 and then decrease to 5% by the year 20232026 and remain at that level each year thereafter.
The OPEB liability estimate is impacted by the level of premiums paid to and gainshare received from insurers, rebates from pharmaceutical companies and government subsidies received on prescription drugs. Future levels of subsidies could also be impacted by the outcome of our Retiree Health Care Litigation, which could be material.
The effect of changing the health care cost trend rate by one-percentage point for each future year is as follows:
|
| | | | | | | |
| (in millions) | One-Percentage
Point Increase | | One-Percentage
Point Decrease |
| Effect on total of service and interest cost components | $ | 5 |
| | $ | (4 | ) |
| Effect on postretirement benefit obligation | 77 |
| | (57 | ) |
|
| | | | | | | |
| (in millions) | One-Percentage
Point Increase | | One-Percentage
Point Decrease |
| Effect on total of service and interest cost components | $ | 8 |
| | $ | (7 | ) |
| Effect on postretirement benefit obligation | 169 |
| | (143 | ) |
Plan Assets
The accounting guidance on fair value measurements specifies a fair value hierarchy based upon the observability of inputs used in valuation techniques (Level 1, 2 and 3). See Note 12, 14, Fair Value Measurements, for a discussion of the fair value hierarchy.
The following describes the methods and significant assumptions used to estimate fair value of the investments:
| |
| • | Cash and short-term investments—Valued at cost plus earnings from investments for the period, which approximates fair market value due to the short-term duration. Cash equivalents are valued at net asset value as provided by the administrator of the fund. |
| |
| • | U.S. Government and agency securities—Valued at the closing price reported on the active market on which the security is traded or valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor's and SIX Telekurs. |
| |
| • | Corporate debt securities—Valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor's and SIX Telekurs. |
| |
| • | Common and preferred stock—Valued at the closing price reported on the active market on which the security is traded. |
| |
| • | Collective trusts, Partnerships/joint venture interests, Real estate and Hedge funds—Valued at the net asset value provided by the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding. |
| |
| • | Insurance Linked Securities—Valued at the net asset value provided by the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities, then divided by the number of units outstanding. |
| |
| • | Derivatives—Valued monthly for the trustee using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor’s and SIX Telekurs. Valued monthly by the trustee using various providers of derivatives pricing, most notably Numerix, Markit and Super Derivatives. |
Cash and short-term investments—Valued at cost plus earnings from investments for the period, which approximates fair market value due to the short-term duration. Cash equivalents are valued at net asset value as provided by the administrator of the fund.
U.S. Government and agency securities—Valued at the closing price reported on the active market on which the security is traded or valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor's and Telekurs.
98Corporate debt securities—Valued by the trustee at year-end using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor's and Telekurs.
Common and preferred stock—Valued at the closing price reported on the active market on which the security is traded.
Collective trusts, Partnerships/joint venture interests and Hedge funds—Valued at the net asset value provided by the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities, divided by the number of units outstanding.
Insurance Linked Securities—Valued at the net asset value provided by the administrator of the fund. The net asset value is based on the value of the underlying assets owned by the fund, minus its liabilities, then divided by the number of units outstanding.
Derivatives -Valued monthly for the trustee using various pricing services of financial institutions, including Interactive Data Corporation, Standard & Poor’s and Telekurs. Valued monthly by the trustee using various providers of derivatives pricing, most notably Numerix, Markit and Super Derivatives.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Pension Assets
The fair value of the pension plan assets by category is summarized below:
| | | | As of October 31, 2018 | | As of October 31, 2017 | As of October 31, 2020 | | As of October 31, 2019 |
| (in millions) | Level 1 | | Level 2 | | Level 3 | | NAV | | Total | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total | Level 1 | | Level 2 | | Level 3 | | NAV | | Total | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total |
| Asset Category | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cash and Cash Equivalents | $ | 77 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 77 |
| | $ | 86 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 86 |
| $ | 54 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 54 |
| | $ | 68 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 68 |
|
Collective Trusts and Other | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| U.S. Equity | 293 |
| | — |
| | — |
| | — |
| | 293 |
| | 316 |
| | — |
| | — |
| | — |
| | 316 |
| 0 |
| | 286 |
| | 0 |
| | 0 |
| | 286 |
| | 281 |
| | 0 |
| | 0 |
| | 0 |
| | 281 |
|
| Canadian Equity | 16 |
| | — |
| | — |
| | — |
| | 16 |
| | 19 |
| | — |
| | — |
| | — |
| | 19 |
| |
| International Equity | 270 |
| | — |
| | — |
| | — |
| | 270 |
| | 327 |
| | — |
| | — |
| | — |
| | 327 |
| 0 |
| | 240 |
| | 0 |
| | 0 |
| | 240 |
| | 283 |
| | 0 |
| | 0 |
| | 0 |
| | 283 |
|
| Global Equity | 205 |
| | — |
| | — |
| | — |
| | 205 |
| | 235 |
| | — |
| | — |
| | — |
| | 235 |
| 0 |
| | 211 |
| | 0 |
| | 0 |
| | 211 |
| | 219 |
| | 0 |
| | 0 |
| | 0 |
| | 219 |
|
| Fixed Income - Long Duration Credit | — |
| | 283 |
| | — |
| | — |
| | 283 |
| | — |
| | 508 |
| | — |
| | — |
| | 508 |
| 0 |
| | 320 |
| | 0 |
| | 0 |
| | 320 |
| | 0 |
| | 296 |
| | 0 |
| | 0 |
| | 296 |
|
| Fixed Income - Long Duration Government | — |
| | 156 |
| | — |
| | — |
| | 156 |
| | — |
| | 20 |
| | — |
| | — |
| | 20 |
| 0 |
| | 140 |
| | 0 |
| | 0 |
| | 140 |
| | 0 |
| | 173 |
| | 0 |
| | 0 |
| | 173 |
|
| Fixed Income - Intermediate Duration Government | — |
| | 48 |
| | — |
| | — |
| | 48 |
| | — |
| | — |
| | — |
| | — |
| | — |
| 0 |
| | 22 |
| | 0 |
| | 0 |
| | 22 |
| | 0 |
| | 79 |
| | 0 |
| | 0 |
| | 79 |
|
| Fixed Income - High Yield | — |
| | 157 |
| | — |
| | — |
| | 157 |
| | — |
| | 214 |
| | — |
| | — |
| | 214 |
| 0 |
| | 89 |
| | 0 |
| | 0 |
| | 89 |
| | 0 |
| | 154 |
| | 0 |
| | 0 |
| | 154 |
|
| Fixed Income - Canadian Bond | — |
| | 194 |
| | — |
| | — |
| | 194 |
| | — |
| | 213 |
| | — |
| | — |
| | 213 |
| 0 |
| | 11 |
| | 0 |
| | 0 |
| | 11 |
| | 0 |
| | 20 |
| | 0 |
| | 0 |
| | 20 |
|
| Global Real Estate | — |
| | 135 |
| | — |
| | — |
| | 135 |
| | — |
| | 144 |
| | — |
| | — |
| | 144 |
| 0 |
| | 157 |
| | 0 |
| | 0 |
| | 157 |
| | 0 |
| | 138 |
| | 0 |
| | 0 |
| | 138 |
|
| Global Infrastructure | — |
| | — |
| | — |
| | 9 |
| | 9 |
| | — |
| | — |
| | — |
| | 10 |
| | 10 |
| |
| Insurance linked Securities | — |
| | — |
| | — |
| | 45 |
| | 45 |
| | — |
| | — |
| | — |
| | — |
| | — |
| 0 |
| | 0 |
| | 0 |
| | 24 |
| | 24 |
| | 0 |
| | 0 |
| | 0 |
| | 34 |
| | 34 |
|
| Hedge Fund of Funds | — |
| | — |
| | — |
| | 202 |
| | 202 |
| | — |
| | — |
| | — |
| | 210 |
| | 210 |
| 0 |
| | 0 |
| | 0 |
| | 181 |
| | 181 |
| | 0 |
| | 0 |
| | 0 |
| | 187 |
| | 187 |
|
| Private Equity | — |
| | — |
| | — |
| | 32 |
| | 32 |
| | — |
| | — |
| | — |
| | 43 |
| | 43 |
| 0 |
| | 0 |
| | 0 |
| | 17 |
| | 17 |
| | 0 |
| | 0 |
| | 0 |
| | 23 |
| | 23 |
|
| Private Credit | — |
| | — |
| | — |
| | 22 |
| | 22 |
| | — |
| | — |
| | — |
| | — |
| | — |
| 0 |
| | 0 |
| | 0 |
| | 89 |
| | 89 |
| | 0 |
| | 0 |
| | 0 |
| | 47 |
| | 47 |
|
| Real Estate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| 0 |
| | 0 |
| | 0 |
| | 19 |
| | 19 |
| | 0 |
| | 0 |
| | 0 |
| | 9 |
| | 9 |
|
Total(A) | $ | 861 |
| | $ | 973 |
| | $ | — |
| | $ | 310 |
| | $ | 2,144 |
| | $ | 983 |
| | $ | 1,099 |
| | $ | 1 |
| | $ | 263 |
| | $ | 2,346 |
| |
Total(B) | | $ | 54 |
| | $ | 1,476 |
| | $ | 0 |
| | $ | 330 |
| | $ | 1,860 |
| | $ | 851 |
| | $ | 860 |
| | $ | 0 |
| | $ | 300 |
| | $ | 2,011 |
|
___________________
| |
| (A) | In the fourth quarter of 2020, we utilized a valuation perspective for the Collective Trust whereby we valued those instruments in their entirety. In prior years we used a "look through" approach to individual components of the trust instrument to determine an aggregate fair value. As result of this change, the Collective Trust components are classified as Level 2 in the current period as compared to Level 1 in prior periods. |
| |
| (B) | In addition, the table above includes the fair value of Canadian pension assets translated at the exchange rates as of October 31, 20182020 and 2017,2019, respectively, while the change in the plan asset table includes the fair value of Canadian pension assets translated at historical foreign currency rates. |
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Other Postretirement Benefits
The fair value of other postretirement benefit plan assets by category is summarized below:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of October 31, 2020 | | As of October 31, 2019 |
| (in millions) | Level 1 | | Level 2 | | Level 3 | | NAV | | Total | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total |
| Asset Category | | | | | | | | | | | | | | | | | | | |
| Cash and Cash Equivalents | $ | 11 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 11 |
| | $ | 8 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 8 |
|
| Fixed Income | | | | | | | | | | | | | | | | | | | |
| U.S. Credit Bonds | 0 |
| | 46 |
| | 0 |
| | 0 |
| | 46 |
| | 0 |
| | 58 |
| | 0 |
| | 0 |
| | 58 |
|
Collective Trusts and Other(A) | | | | | | | | | | | | | | | | | | | |
| U.S. Equity | 0 |
| | 51 |
| | 0 |
| | 0 |
| | 51 |
| | 58 |
| | 0 |
| | 0 |
| | 0 |
| | 58 |
|
| International Equity | 0 |
| | 51 |
| | 0 |
| | 0 |
| | 51 |
| | 57 |
| | 0 |
| | 0 |
| | 0 |
| | 57 |
|
| Fixed Income - Multi-Asset Credit | 0 |
| | 28 |
| | 0 |
| | 0 |
| | 28 |
| | 9 |
| | 19 |
| | 0 |
| | 0 |
| | 28 |
|
| Real Estate (REITs) | 0 |
| | 0 |
| | 0 |
| | 20 |
| | 20 |
| | 0 |
| | 0 |
| | 0 |
| | 26 |
| | 26 |
|
| Insurance Linked Securities | 0 |
| | 0 |
| | 0 |
| | 4 |
| | 4 |
| | 0 |
| | 0 |
| | 0 |
| | 6 |
| | 6 |
|
| Hedge Fund of Funds | 0 |
| | 0 |
| | 0 |
| | 37 |
| | 37 |
| | 0 |
| | 0 |
| | 0 |
| | 37 |
| | 37 |
|
| Private Equity | 0 |
| | 0 |
| | 0 |
| | 4 |
| | 4 |
| | 0 |
| | 0 |
| | 0 |
| | 5 |
| | 5 |
|
| Total | $ | 11 |
| | $ | 176 |
| | $ | 0 |
| | $ | 65 |
| | $ | 252 |
| | $ | 132 |
| | $ | 77 |
| | $ | 0 |
| | $ | 74 |
| | $ | 283 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of October 31, 2018 | | As of October 31, 2017 |
| (in millions) | Level 1 | | Level 2 | | Level 3 | | NAV | | Total | | Level 1 | | Level 2 | | Level 3 | | NAV | | Total |
| Asset Category | | | | | | | | | | | | | | | | | | | |
| Cash and Cash Equivalents | $ | 11 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 11 |
| | $ | 6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 6 |
|
| Fixed Income | | | | | | | | | | | | | | | | | | | |
| U.S. Credit Bonds | — |
| | 61 |
| | — |
| | — |
| | 61 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Corporate and Government Bonds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 62 |
| | — |
| | — |
| | 62 |
|
| Government Bonds | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 8 |
| | — |
| | — |
| | 8 |
|
| Collective Trusts and Other | | | | | | | | | | | | | | | | | | | |
| U.S. Equity | 59 |
| | — |
| | — |
| | — |
| | 59 |
| | 71 |
| | — |
| | — |
| | — |
| | 71 |
|
| International Equity | 59 |
| | — |
| | — |
| | — |
| | 59 |
| | 74 |
| | — |
| | — |
| | — |
| | 74 |
|
| Fixed Income - Multi-Asset Credit | 9 |
| | 17 |
| | — |
| | — |
| | 26 |
| | — |
| | 29 |
| | — |
| | — |
| | 29 |
|
| Real Estate (REITs) | — |
| | — |
| | — |
| | 26 |
| | 26 |
| | — |
| | — |
| | — |
| | 24 |
| | 24 |
|
| Mutual Fund | — |
| | — |
| | — |
| | — |
| | — |
| | 9 |
| | — |
| | — |
| | — |
| | 9 |
|
| Insurance Linked Securities | — |
| | — |
| | — |
| | 8 |
| | 8 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Hedge Fund of Funds | — |
| | — |
| | — |
| | 39 |
| | 39 |
| | — |
| | — |
| | — |
| | 39 |
| | 39 |
|
| Private Equity | — |
| | — |
| | — |
| | 8 |
| | 8 |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
|
| Total | $ | 138 |
| | $ | 78 |
| | $ | — |
| | $ | 81 |
| | $ | 297 |
| | $ | 160 |
| | $ | 99 |
| | $ | — |
| | $ | 74 |
| | $ | 333 |
|
| |
| (A) | In the fourth quarter of 2020, we utilized a valuation perspective for the Collective Trust whereby we valued those instruments in their entirety. In prior years we used a "look through" approach to individual components of the trust instrument to determine an aggregate fair value. As result of this change, the Collective Trust components are classified as Level 2 in the current period as compared to Level 1 in prior periods. |
The investment strategy of the postretirement pension plans (the "Plans") is based on many factors including broad economic factors, historical and prospective information regarding capital market performance, investment strategies available to an asset pool of this size, the current regulatory environment, the Plans’ liabilities and the expected interaction between assets and liabilities. The primary objective of the strategy is to manage assets in such a way that will allow the eventual satisfaction of obligations to the Plans’ participants and beneficiaries. To meet the primary objective the portfolios will be structured to provide liquidity to meet the Plans’ benefit payment obligations and administration expenses, offer a reasonable probability of achieving growth in assets that will assist in closing the Plans’ funding gap and enable the Plans to satisfy their liabilities.
Given the relationship between risk and return a moderately aggressive risk profile was implemented. Primary emphasis is to strike a balance between portfolio stability and portfolio appreciation.
In line with the Plans' return objectives and risk parameters, target asset allocations which were established following a 2015 asset liability study, are approximately 70% return-seeking assets and 30% liability-hedging assets. The return-seeking assets include long only equities (both active and passive, domestic and international, across the capitalization range) to capture long-term growth opportunities, hedge fund of funds to diversify the equity beta, return seeking credit (including high yield debt, emerging market debt and bank loans) to provide a meaningful level of absolute return and diversify equity beta, global real estate to diversify the equity beta and private equity. The liability-hedging assets are invested in high-quality, investment grade bonds with durations that approximate the durations of the liabilities. The objective of the liability hedging assets is to dampen the Plans’ surplus volatility.
All assets are managed by external investment managers. Each investment manager is expected to prudently manage the assets in a manner consistent with the investment objectives, guidelines, and constraints outlined in their Investment Management Agreements and the Investment Policy Statement. Managers are not permitted to invest outside of the asset class mandate (e.g.(i.e., equity, fixed income, alternatives) or strategy for which they are appointed.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Expected Future Benefit Payments
The expected future benefit payments for the years ending October 31, 20192021 through 20232025 and the five years ending October 31, 20282030 are estimated as follows:
| | | (in millions) | Pension Benefit Payments | | Other Postretirement Benefit Payments(A) | Pension Benefit Payments | | Other Postretirement Benefit Payments(A) |
| 2019 | $ | 283 |
| | $ | 76 |
| |
| 2020 | 278 |
| | 85 |
| |
| 2021 | 271 |
| | 91 |
| $ | 249 |
| | $ | 31 |
|
| 2022 | 264 |
| | 93 |
| 243 |
| | 40 |
|
| 2023 | 257 |
| | 95 |
| 236 |
| | 46 |
|
| 2024 through 2028 | 1,173 |
| | 454 |
| |
| 2024 | | 229 |
| | 46 |
|
| 2025 | | 222 |
| | 45 |
|
| 2026 through 2030 | | 995 |
| | 199 |
|
________________________
| |
| (A) | Payments are net of expected participant contributions and expected federal subsidy receipts. |
Defined Contribution Plans and Other Contractual Arrangements
Our defined contribution plans cover a substantial portion of domestic salaried employees and certain domestic represented employees. The defined contribution plans contain a 401(k) feature and provide most participants with a matching contribution from the Company. We depositIn light of recent developments relating to the COVID-19 pandemic, we have implemented cash conservation initiatives including a delay in certain 401(k) company matching contributions until 2021. The matching contribution delay was effective March 1, 2020. Prior to this, the matching contribution annually.contributions for non-represented employees were deposited monthly. Many participants covered by the plans receive annual Company contributions to their retirement accounts based on an age-weighted percentage of the participant's eligible compensation for the calendar year. Defined contribution expense pursuant to these plans was $33 million, in 2018,$35 million, and $29$33 million in both 20172020, 2019, and 2016.2018, respectively.
In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees pursuant to a certain Retiree Supplemental Benefit Program under the 1993 Settlement Agreement ("Supplemental Benefit Program"), is not part of our consolidated financial statements.
Our contingent profit sharing obligations under a certain Supplemental Benefit Trust Profit Sharing Plan ("Supplemental Benefit Trust Profit Sharing Plan") will continue until certain funding targets defined by the 1993 Settlement Agreement are met. As noted within the Profit Sharing Disputes section of Note 15, Commitments and Contingencies, the Company requested the Court reform the 1993 Settlement Agreement to provide clarity regarding certain “Profit Sharing Cessation Date” provisions, which relate to the timing and impact of the cessation of the Company’s Profit Sharing Plan contributions. We are currently unable to determine whether we have achieved the certain funding targets that may result in profit sharing cessation. Upon profit sharing cessation, the company may have ongoing responsibilities related to amortized actuarial and investment losses. In 2018,2020, we recorded $30 million indid not record any profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits. In 2019, we recorded $21 million. For more information on pending arbitration regarding the Supplemental Benefit Trust Profit Sharing Plan, see Note 13, 15, Commitments and Contingencies.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
11.13. Income Taxes
On December 22, 2017,March 27, 2020, the TaxCARES Act was signed into U.S. law.enacted in response to the COVID-19 pandemic. The TaxCARES Act reducescontains numerous income tax provisions, such as relaxing the statutory corporatelimitations on the deductibility of interest and the carryback of net operating losses for specific periods. We have performed an analysis of these provisions and due to the unavailability of excess taxable income in the current or carry back periods, and the application of a valuation allowance to deferred tax assets, the Company's effective income tax rate from 35% to 21%, effective January 1, 2018. In accordance withand its tax provision are currently unaffected by the Internal Revenue Code, we have utilized a blended rate of 23.3% for our fiscal 2018 tax year by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date. This rate reduction requires us to remeasure our deferred taxes as of the date the Tax Act was enacted. Our U.S. deferred tax assets, net of deferred tax liabilities, were remeasured and reduced by $983 million, entirely offset by a valuation allowance reduction. As a result, the remeasurement of our deferred tax assets, net of deferred tax liabilities, including the valuation allowance, did not impact our income tax expense or net income.
The Tax Act includes a mandatory deemed repatriation of earnings of the Company’s foreign subsidiaries. We have provisionally calculated and included $147 million of foreign earnings in taxable income due to this deemed repatriation. The income tax effect of the deemed repatriation will be offset with existing deferred tax assets. The deferred tax impact has a valuation allowance offset, resulting in no impact on our income tax expense or net income.
The Tax Act also adds many new provisions, including changes to limits on the deductions for executive compensation and interest expense, a tax on global intangible low‐taxed income (“GILTI”), the base erosion anti‐abuse tax (“BEAT”) and a deduction for foreign derived intangible income (“FDII”). We are still evaluating the impact of these provisions of the TaxCARES Act.
Additionally, the CARES Act provides for refundable employee retention credits and the deferral of the employer-paid portion of social security taxes. As of October 31, 2020, we elected to defer the employer-paid portion of social security taxes for the remainder of 2020, to be repaid equally in December 2021 and December 2022. The total employer-paid portion of social security taxes deferred as of October 31, 2020 is $16 million. We intend to claim the refundable employee retention tax credits provided under the CARES Act, which do not apply until our taxable year beginning November 1, 2018. Companies can either account for taxes on GILTI as incurred or recognize deferred taxes when basis differences existbe used to offset payroll tax liabilities. We estimate the potential benefits that are expectedthe employee retention credits can provide to affect the amount of the GILTI inclusion upon reversal. The Company is electing to account for taxes on GILTI as incurred.be approximately $3.6 million.
We have not completed our accounting for the income tax effects of the Tax Act. However, we have computed estimates or “provisional” amounts as permitted by the SEC’s Staff Accounting Bulletin No. 118 (“SAB”) issued on December 22, 2017. Under the SAB, companies are allowed a measurement period of up to one year from the date of enactment to complete the accounting for the effects of the Tax Act. We will continue to evaluate the Tax Act’s impact, which may change as a result of additional Treasury guidance, federal or state legislative actions, or changes in accounting standards or related interpretations. The Company’s analyses performed to date are sufficient to calculate a reasonable estimate of the impacts of the Tax Act.
The following table presents the domestic and foreign components of Income (loss) from continuing operations before income taxes in our Consolidated Statements of Operations:
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
| Domestic | $ | 246 |
| | $ | (74 | ) | | $ | (95 | ) |
| Foreign | 174 |
| | 138 |
| | 63 |
|
| Income (loss) from continuing operations before income taxes | $ | 420 |
| | $ | 64 |
| | $ | (32 | ) |
The following table presents the components of Income tax expense in our Consolidated Statements of Operations:
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
| Current: | | | | | |
| Federal | $ | — |
| | $ | 4 |
| | $ | (1 | ) |
| State and local | (1 | ) | | 10 |
| | (4 | ) |
| Foreign | (47 | ) | | (30 | ) | | (36 | ) |
| Total current expense | $ | (48 | ) | | $ | (16 | ) | | $ | (41 | ) |
| Deferred: | | | | | |
| Federal | $ | 2 |
| | $ | 19 |
| | $ | 13 |
|
| State and local | (1 | ) | | 4 |
| | (1 | ) |
| Foreign | (5 | ) | | (17 | ) | | (4 | ) |
| Total deferred benefit (expense) | $ | (4 | ) | | $ | 6 |
| | $ | 8 |
|
| Total income tax expense | $ | (52 | ) | | $ | (10 | ) | | $ | (33 | ) |
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table presents the domestic and foreign components of Income (loss) before income taxes in our Consolidated Statements of Operations:
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
| Domestic | $ | (476 | ) | | $ | 220 |
| | $ | 246 |
|
| Foreign | 88 |
| | 42 |
| | 174 |
|
| Income (loss) before income taxes | $ | (388 | ) | | $ | 262 |
| | $ | 420 |
|
The following table presents the components of Income tax (expense) benefit in our Consolidated Statements of Operations:
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
| Current: | | | | | |
| Federal | $ | (1 | ) | | $ | 2 |
| | $ | 0 |
|
| State and local | (1 | ) | | 3 |
| | 1 |
|
| Foreign | 23 |
| | 46 |
| | 47 |
|
| Total current expense | $ | 21 |
| | $ | 51 |
| | $ | 48 |
|
| Deferred: | | | | | |
| Federal | $ | (60 | ) | | $ | (1 | ) | | $ | (2 | ) |
| State and local | (15 | ) | | (5 | ) | | 1 |
|
| Foreign | (5 | ) | | (26 | ) | | 5 |
|
| Total deferred (benefit) expense | $ | (80 | ) | | $ | (32 | ) | | $ | 4 |
|
| Total income tax (benefit) expense | $ | (59 | ) | | $ | 19 |
| | $ | 52 |
|
The following table presents a reconciliation of statutory federal income tax benefit (expense)expense (benefit) recorded in Income tax expense(expense) benefit in our Consolidated Statements of Operations: |
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
Federal income tax (benefit) expense(A) | $ | (81 | ) | | $ | 55 |
| | $ | 98 |
|
| State income taxes, net of federal benefit | 2 |
| | 2 |
| | 3 |
|
| Credits and incentives | 11 |
| | 16 |
| | 50 |
|
| Adjustments to valuation allowances | 110 |
| | (94 | ) | | (1,120 | ) |
| Foreign operations | (4 | ) | | 1 |
| | 2 |
|
| Adjustments to uncertain tax positions | (2 | ) | | 2 |
| | 1 |
|
| Intraperiod tax allocation offset to equity components | (75 | ) | | (5 | ) | | 0 |
|
| Non-controlling interest adjustment | (4 | ) | | (5 | ) | | (6 | ) |
| Foreign inclusions | (7 | ) | | 34 |
| | 0 |
|
| Tax law change | (20 | ) | | — |
| | — |
|
| Tax act mandatory repatriation | 0 |
| | 0 |
| | 34 |
|
| Tax act US deferred remeasurement | 0 |
| | 0 |
| | 983 |
|
| Other | 11 |
| | 13 |
| | 7 |
|
| Recorded income tax (benefit) expense | $ | (59 | ) | | $ | 19 |
| | $ | 52 |
|
(A) Federal income tax expense was taxed at a rate of 21% for the years ended 2020 and 2019 and 23% for the year ended 2018.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
Federal income tax benefit (expense)(A) | $ | (98 | ) | | $ | (22 | ) | | $ | 11 |
|
| State income taxes, net of federal benefit | (3 | ) | | (3 | ) | | (3 | ) |
| Credits and incentives | (50 | ) | | 8 |
| | 3 |
|
| Adjustments to valuation allowances | 1,120 |
| | (57 | ) | | (132 | ) |
| Foreign operations | (2 | ) | | 4 |
| | 53 |
|
| Unremitted foreign earnings | — |
| | — |
| | 37 |
|
| Adjustments to uncertain tax positions | (1 | ) | | 15 |
| | (10 | ) |
| Intraperiod tax allocation offset to equity components | — |
| | 28 |
| | — |
|
| Non-controlling interest adjustment | 6 |
| | 9 |
| | 11 |
|
| Tax Act Mandatory Repatriation | (34 | ) | | — |
| | — |
|
Tax Act US Deferred Remeasurement
| (983 | ) | | — |
| | — |
|
| Other | (7 | ) | | 8 |
| | (3 | ) |
| Recorded income tax expense | $ | (52 | ) | | $ | (10 | ) | | $ | (33 | ) |
_________________________
| |
(A) | Federal income tax benefit (expense) was taxed at a rate of 23.3% for the year ended 2018, and 35% for the years ended 2017 and 2016. |
The tax effect of pretax income or loss from continuing operations generally should be determined by a computation that does not consider the tax effects of items that are not included in continuing operations. An exception to that incremental approach is applied when there is a loss from continuing operations and income in another category of earnings (for example, discontinued operations, other comprehensive income, additional paid in capital, etc.). In that situation, a tax provision is first allocated to the other categories of earnings. A related tax benefit is then recorded in continuing operations. This exception to the general rule applies even when a valuation allowance is in place at the beginning and end of the year. While intraperiod tax allocations do not change the overall tax provision, it may result in a gross-up of the individual components, thereby changing the amount of tax provision included in each category of income. During 2017,2020 and 2019, we recorded a $28$75 million and $5 million, respectively, for intraperiod allocation benefitbenefits in domestic continuing operations associated with certain post retirementpostretirement plan remeasurement gains.
Not including the effect of the federal income tax rate change, as a result of the Tax Act, which reduces the statutory corporate income tax rate from 35% to 21%, effective January 1, 2018, we recognized an income tax expense of $110 million, and an income tax benefit of $137$94 million and income tax expense of $57$137 million, for the change in the valuation allowance for the years ended October 31, 20182020, 2019 and 2017,2018, respectively.
At October 31, 2018,2020, undistributed earnings of foreign subsidiaries were $308$379 million. Except for the tax effect of the Tax Act deemed repatriation, incomeIncome taxes have not been provided on foreign undistributed earnings, whether previously taxed or not, because they are either considered to be permanently invested in foreign subsidiaries or are expected to be repatriated without significant incremental U.S. federal, state or foreign withholding taxes. It is impracticable to determine the exact amount of unrecognized deferred tax liabilities.
The following table presents the components of the deferred tax asset (liability):
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2020 | | 2019 |
| Deferred tax assets attributable to: | | | |
| Employee benefits liabilities | $ | 501 |
| | $ | 578 |
|
| Net operating loss ("NOL") carryforwards | 801 |
| | 782 |
|
| Product liability and warranty accruals | 151 |
| | 165 |
|
| Research and development | 179 |
| | 144 |
|
| Tax credit carryforwards | 183 |
| | 196 |
|
| Other | 395 |
| | 279 |
|
| Gross deferred tax assets | 2,210 |
| | 2,144 |
|
| Less: Valuation allowances | 2,020 |
| | 2,011 |
|
| Net deferred tax assets | $ | 190 |
| | $ | 133 |
|
| Deferred tax liabilities attributable to: | | | |
| Other | $ | (73 | ) | | $ | (18 | ) |
| Total deferred tax liabilities | $ | (73 | ) | | $ | (18 | ) |
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | |
| | As of October 31, |
| (in millions) | 2018 | | 2017 |
| Deferred tax assets attributable to: | | | |
| Employee benefits liabilities | $ | 615 |
| | $ | 1,073 |
|
| Net operating loss ("NOL") carryforwards | 979 |
| | 1,383 |
|
| Product liability and warranty accruals | 172 |
| | 290 |
|
| Research and development | 114 |
| | 209 |
|
| Tax credit carryforwards | 212 |
| | 262 |
|
| Other | 238 |
| | 277 |
|
| Gross deferred tax assets | 2,330 |
| | 3,494 |
|
| Less: Valuation allowances | 2,182 |
| | 3,326 |
|
| Net deferred tax assets | $ | 148 |
| | $ | 168 |
|
| Deferred tax liabilities attributable to: | | | |
| Other | $ | (27 | ) | | $ | (39 | ) |
| Total deferred tax liabilities | $ | (27 | ) | | $ | (39 | ) |
At October 31, 2018,2020, deferred tax assets attributable to NOL carryforwards include $560$495 million attributable to U.S. federal NOL carryforwards, $178$165 million attributable to state NOL carryforwards, and $241$141 million attributable to foreign NOL carryforwards. If not used to reduce future taxable income, U.S. federal NOLs are scheduled to expire beginning in 2032. State NOLs can be carried forward for initial periods of 5 to 20 years, and are scheduled to expire in 20192021 to 2038.2040. Approximately one fourththird of our foreign net operating losses will expire beginning in 2029,2027, and another approximate one third of our foreign net operating losses will expire beginning in 2033, while the majority of the remaining balanceone third has no expiration date. The majority of our tax credits can be carried forward for initial periods of 20 years and are scheduled to expire between 20192021 and 2038.2040.
A valuation allowance is required to be established or maintained when, based on currently available information, it is more likely than not that all or a portion of a deferred tax asset will not be realized. The guidance on accounting for income taxes provides important factors in determining whether a deferred tax asset will be realized, including whether there has been sufficient taxable income in recent years and whether sufficient income can reasonably be expected in future years in order to utilize the deferred tax asset.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
For the year ended October 31, 2018,2020, we have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance.
We earnedincurred domestic incomelosses from continuing operations for the year ended October 31, 20182020 and incurred domestic losses from continuing operationsincome for the years ended October 31, 20172019 and 2016.2018. The positive evidence of domestic income from the yearyears ended October 31, 2019 and 2018 does not outweigh the negative evidence of cumulative losses from prior years. The qualitative and quantitative analysis of current and expected domestic earnings, industry volumes, tax planning strategies, and general business risks resulted in a more likely than not conclusion of not being able to realize a significant portion of our deferred tax assets as of October 31, 2018.2020.
We have evaluated the need to maintain a valuation allowance for deferred tax assets based on our assessment of whether it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Appropriate consideration is given to all available evidence, both positive and negative, in assessing the need for a valuation allowance. We continue to maintain a valuation allowances on the majority of our U.S. deferred tax assets as well as certain foreign deferred tax assets that we believe, on a more-likely-than-not basis, will not be realized based on current forecasted results. For all remaining deferred tax assets, while we believe that it is more likely than not that they will be realized, we believe that it is reasonably possible that additional deferred tax asset valuation allowances could be required in the next twelve months.
The total deferred tax asset valuation allowances were $2.2 billion and $3.3$2.0 billion at both October 31, 20182020 and 2017, respectively.2019. In the event we released all of our valuation allowances, almost all would impact income taxes as a benefit in our Consolidated Statements of Operations.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of October 31, 2018,2020, the amount of liability for uncertain tax positions was $27$20 million. The liability at October 31, 20182020 has a recorded offsetting tax benefit associated with various issues that total $9$10 million. If the unrecognized tax benefits are recognized, all would impact our effective tax rate, except for positions for which we maintain a full valuation allowance against certain deferred tax assets. In this case, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carryforward, which would be offset by a full valuation allowance.
Changes in the liability for uncertain tax positions are summarized as follows:
|
| | | | | | | |
| | For the years ended October 31, |
| (in millions) | 2020 | | 2019 |
| Liability for uncertain tax positions at November 1 | $ | 21 |
| | $ | 27 |
|
| Additions as a result of positions taken in prior periods | 1 |
| | 3 |
|
| Decrease as a result of positions taken in prior periods | (2 | ) | | (2 | ) |
| Settlements | 0 |
| | (7 | ) |
| Liability for uncertain tax positions at October 31 | $ | 20 |
| | $ | 21 |
|
|
| | | | | | | |
| | For the years ended October 31, |
| (in millions) | 2018 | | 2017 |
| Liability for uncertain tax positions at November 1 | $ | 34 |
| | $ | 50 |
|
| Additions as a result of positions taken in prior periods | 2 |
| | — |
|
| Decrease as a result of positions taken in prior periods | (7 | ) | | (15 | ) |
| Settlements | (2 | ) | | (1 | ) |
| Liability for uncertain tax positions at October 31 | $ | 27 |
| | $ | 34 |
|
We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. Total interest and penalties related to our uncertain tax positions resulted in income tax benefitsbenefit of $1 million, and $6 million and income tax expense of less than $1 million, and income tax benefit of $1 million for the years ended October 31, 2018, 2017,2020, 2019, and 2016,2018, respectively. The total interest and penalties accrued were $3 million and $4 million for the years ended October 31, 20182020 and 2017,2019, respectively. We released $14 million of uncertain tax positions based on administrative practice and precedents of relevant tax authorities in 2017.
We have open tax years back to 2001 with various significant taxing jurisdictions including the U.S., Canada, Mexico, and Brazil. In connection with the examination of tax returns, contingencies may arise that generally result from differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. In fiscal 2018, we received a favorable ruling from the Brazilian court in connection with certain Brazil indirect federal taxes (PIS and COFINS) credits. During the fourth quarter of 2020, we estimated that it was probable to receive a benefit of $7 million, net of reserves, (translated into US dollars as of October 31, 2020) associated with tax years 2002 to 2010. We recorded $3 million of a benefit in Sales of manufactured products, net and $4 million of interest income in Interest expense (income) in our Consolidated Statements of Operations in our Global Operations segment. Timing on realization of these recoveries is dependent upon the timing of administrative approvals and generation of federal tax liabilities eligible for offset or sale. The Brazilian IRS has filed a Motion of Clarification on this matter with the Brazilian Supreme Court, which is awaiting decision as of the time of this disclosure. Additional contingencies that would result in tax recoveries may be resolved in future periods which could be material.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
We believe we have sufficient accruals for our contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.
12.14. Fair Value Measurements
For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:
Level 1—based upon quoted prices for identical instruments in active markets,
Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and
| |
| • | Level 1—based upon quoted prices for identical instruments in active markets, |
| |
| • | Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and |
Level 3—based upon one or more significant unobservable inputs.
The following section describes key inputs and assumptions in our valuation methodologies:
Cash Equivalents and Restricted Cash Equivalents—Cash equivalents are highly liquid investments with an original maturity of 90 days or less which may include U.S. government and federal agency securities, commercial paper, and other highly liquid investments. The carrying amounts of cash and cash equivalents and restricted cash approximate fair value because of the short-term maturity and highly liquid nature of these instruments.
Marketable Securities—Our marketable securities portfolios are classified as available-for-sale and may include investments in U.S. government and federal agency securities, commercial paper and other investments with an original maturity greater than 90 days. We use quoted prices from active markets to determine fair value.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Derivative Assets and Liabilities—We measure the fair value of derivatives assuming that the unit of account is an individual derivative transaction and that each derivative could be sold or transferred on a stand-alone basis. We classify within Level 2 our derivatives that are traded over-the-counter and valued using internal models based on observable market inputs.
Guarantees—We provide certain guarantees of payments and residual values, to which losses are generally capped, to specific counterparties. The fair value of these guarantees includes a contingent component and a non-contingent component that are based upon internally developed models using unobservable inputs. We classify these liabilities within Level 3. For more information regarding guarantees, see Note 13, 15, Commitments and Contingencies.
Impaired Finance Receivables and Impaired Assets Under Operating Leases—Fair values of the underlying collateral are determined by current and forecasted sales prices, aging of and demand for used trucks, and the mix of sales through various market channels. For more information regarding impaired finance receivables, see Note 4, 5, Allowance for Doubtful Accounts, and for more information regarding impaired assets under operating leases, see Note 2, 3, Restructuring, Impairments and Impairments.Divestitures.
Impaired Property, Plant and Equipment—We generally measure the fair value by discounting future cash flows expected to be received from the operation of, or disposition of, the asset or asset group that has been determined to be impaired. When appropriate, we utilize alternative methods for the measurement of fair value such as market and cost approaches. For more information regarding the impairment of property, plant and equipment, see Note 2, 3, Restructuring, Impairments and Impairments.Divestitures.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table presents the financial instruments measured at fair value on a recurring basis: | | | | As of October 31, 2018 | | As of October 31, 2017 | As of October 31, 2020 | | As of October 31, 2019 |
| (in millions) | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total | Level 1 | | Level 2 | | Level 3 | | Total | | Level 1 | | Level 2 | | Level 3 | | Total |
| Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Marketable securities: | | | | | | | | | | | | | | | | |
| U.S. government and federal agency securities | $ | 101 |
| | $ | — |
| | $ | — |
| | $ | 101 |
| | $ | 370 |
| | $ | — |
| | $ | — |
| | $ | 370 |
| |
| Derivative financial instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity forward contracts(A) | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 3 |
| | — |
| | 3 |
| $ | 0 |
| | $ | 4 |
| | $ | 0 |
| | $ | 4 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
Foreign currency contracts(A) | — |
| | — |
| | — |
| | — |
| | — |
| | 3 |
| | — |
| | 3 |
| 0 |
| | 5 |
| | 0 |
| | 5 |
| | 0 |
| | 1 |
| | 0 |
| | 1 |
|
Interest rate caps(B) | — |
| | 2 |
| | — |
| | 2 |
| | — |
| | 1 |
| | — |
| | 1 |
| |
| Total assets | $ | 101 |
| | $ | 4 |
| | $ | — |
| | $ | 105 |
| | $ | 370 |
| | $ | 7 |
| | $ | — |
| | $ | 377 |
| $ | 0 |
| | $ | 9 |
| | $ | 0 |
| | $ | 9 |
| | $ | 0 |
| | $ | 1 |
| | $ | 0 |
| | $ | 1 |
|
| Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivative financial instruments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commodity forward contracts(C) | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1 |
| | $ | — |
| | $ | 1 |
| |
Foreign currency contracts(C) | — |
| | — |
| | — |
| | — |
| | — |
| | 1 |
| | — |
| | 1 |
| |
Commodity forward contracts(B) | | $ | 0 |
| | $ | 2 |
| | $ | 0 |
| | $ | 2 |
| | $ | 0 |
| | $ | 1 |
| | $ | 0 |
| | $ | 1 |
|
Foreign currency contracts(B) | | 0 |
| | 3 |
| | 0 |
| | 3 |
| | 0 |
| | 2 |
| | 0 |
| | 2 |
|
| Guarantees | — |
| | — |
| | 24 |
| | 24 |
| | — |
| | — |
| | 21 |
| | 21 |
| 0 |
| | 0 |
| | 29 |
| | 29 |
| | 0 |
| | 0 |
| | 27 |
| | 27 |
|
| Total liabilities | $ | — |
| | $ | — |
| | $ | 24 |
| | $ | 24 |
| | $ | — |
| | $ | 2 |
| | $ | 21 |
| | $ | 23 |
| $ | 0 |
| | $ | 5 |
| | $ | 29 |
| | $ | 34 |
| | $ | 0 |
| | $ | 3 |
| | $ | 27 |
| | $ | 30 |
|
_________________________ | |
| (A) | The asset valuevalues of commodity forward contracts and foreign currency contracts isare included in Other current assets and Other noncurrent assets in the accompanying Consolidated Balance Sheets. |
| |
| (B) | The asset value of interest rate caps is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.
|
| |
(C) | The liability valuevalues of commodity forward contracts and foreign currency contracts isare included in Other current liabilities and Other noncurrent liabilities in the accompanying Consolidated Balance Sheets. |
The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy: |
| | | | | | | |
| (in millions) | October 31, 2020 | | October 31, 2019 |
| Guarantees at beginning of period | $ | (27 | ) | | $ | (24 | ) |
| Net issuances | (8 | ) | | (6 | ) |
| Settlements | 6 |
| | 3 |
|
| Guarantees at end of period | $ | (29 | ) | | $ | (27 | ) |
|
| | | | | | | |
| (in millions) | October 31, 2018 | | October 31, 2017 |
| Guarantees, at beginning of period | $ | (21 | ) | | $ | (23 | ) |
| Transfers out of Level 3 | — |
| | — |
|
| Issuances | (7 | ) | | (2 | ) |
| Settlements | 4 |
| | 4 |
|
| Guarantees, at end of period | $ | (24 | ) | | $ | (21 | ) |
| Change in unrealized gains on assets (liabilities) still held | $ | — |
| | $ | — |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table presents the financial instruments measured at fair value on a nonrecurring basis: | | | (in millions) | October 31, 2018 |
| October 31, 2017 | October 31, 2020 |
| October 31, 2019 |
| Level 2 financial instruments | | | | | | |
Impaired finance receivables (A) | $ | 20 |
| | $ | 16 |
| $ | 31 |
| | $ | 23 |
|
| Specific loss reserve | (9 | ) | | (7 | ) | (12 | ) | | (11 | ) |
| Fair value | $ | 11 |
| | $ | 9 |
| $ | 19 |
| | $ | 12 |
|
_________________________ | |
| (A) | Certain impaired finance receivables are measured at fair value on a nonrecurring basis. An impairment charge is recorded for the amount by which the carrying value of the receivables exceeds the fair value of the underlying collateral, net of remarketing costs. Fair values of the underlying collateral are determined by reference to dealer vehicle value publications adjusted for certain market factors. |
In addition to the methods and assumptions we use for the financial instruments recorded at fair value as discussed above, we use the following methods and assumptions to estimate the fair value for our other financial instruments that are not marked to market on a recurring basis. The carrying amounts of Cash and cash equivalents, Restricted cash, and Accounts payable approximate fair values because of the short-term maturity and highly liquid nature of these instruments. Finance receivables generally consist of retail and wholesale accounts and notes.
The carrying amounts of Trade and other receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest rate terms. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The fair values of our retail notes are estimated by discounting expected cash flows at current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.
The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.75% Tax Exempt4.75% Tax-Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax ExemptTax-Exempt Bonds is classified as Level 2. Trading in our 6.625% Senior Notes and our 9.5% Senior Secured Notes is limited to qualified institutional buyers; therefore, the notes are classified as Level 2. The fair values of our Level 3 debt instruments are generally determined using internally developed valuation techniques such as discounted cash flow modeling. Inputs such as discount rates and credit spreads reflect our estimates of assumptions that market participants would use in pricing the instrument and may be unobservable.
The following tables present the carrying values and estimated fair values of financial instruments: |
| | | | | | | | | | | | | | | | | | | |
| | As of October 31, 2020 |
| | Estimated Fair Value | | Carrying Value |
| (in millions) | Level 1 | | Level 2 | | Level 3 | | Total | |
| Assets | | | | | | | | | |
| Retail notes | $ | 0 |
| | $ | 0 |
| | $ | 223 |
| | $ | 223 |
| | $ | 222 |
|
| Liabilities | | | | | | | | | |
| Debt: | | | | | | | | | |
| Manufacturing operations | | | | | | | | | |
| Senior Secured Term Loan Credit Agreement, due 2025 | 0 |
| | 0 |
| | 1,538 |
| | 1,538 |
| | 1,543 |
|
| 9.5% Senior Secured Notes, due 2025 | 0 |
| | 665 |
| | 0 |
| | 665 |
| | 589 |
|
| 6.625% Senior Notes, due 2026 | 0 |
| | 1,137 |
| | 0 |
| | 1,137 |
| | 1,087 |
|
| Loan Agreement related to 4.75% Tax-Exempt Bonds, due 2040 | 0 |
| | 227 |
| | 0 |
| | 227 |
| | 223 |
|
| Financed lease obligations | 0 |
| | 0 |
| | 46 |
| | 46 |
| | 45 |
|
Other(A) | 0 |
| | 0 |
| | 7 |
| | 7 |
| | 7 |
|
| Financial Services operations | | | | | | | | | |
| Asset-backed debt issued by consolidated SPEs, due serially through 2022 | 0 |
| | 0 |
| | 726 |
| | 726 |
| | 724 |
|
| Bank credit facilities, due dates from 2021 through 2025 | 0 |
| | 0 |
| | 914 |
| | 914 |
| | 940 |
|
| Borrowings secured by operating and finance leases, due serially through 2024 | 0 |
| | 0 |
| | 171 |
| | 171 |
| | 170 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following tables present the carrying values and estimated fair values of financial instruments: |
| | | | | | | | | | | | | | | | | | | |
| | As of October 31, 2018 |
| | Estimated Fair Value | | Carrying Value |
| (in millions) | Level 1 | | Level 2 | | Level 3 | | Total | |
| Assets | | | | | | | | | |
| Retail notes | $ | — |
| | $ | — |
| | $ | 180 |
| | $ | 180 |
| | $ | 183 |
|
| Liabilities | | | | | | | | | |
| Debt: | | | | | | | | | |
| Manufacturing operations | | | | | | | | | |
| Senior Secured Term Loan Credit Agreement, due 2025 | — |
| | — |
| | 1,597 |
| | 1,597 |
| | 1,570 |
|
| 6.625% Senior Notes, due 2026 | — |
| | 1,122 |
| | — |
| | 1,122 |
| | 1,083 |
|
4.75% Senior Subordinated Convertible Notes, due 2019(A) | 412 |
| | — |
| | — |
| | 412 |
| | 405 |
|
| Loan Agreement related to 6.75% Tax Exempt Bonds, due 2040 | — |
| | 235 |
| | — |
| | 235 |
| | 220 |
|
| Financed lease obligations | — |
| | — |
| | 122 |
| | 122 |
| | 122 |
|
| Other | — |
| | — |
| | 25 |
| | 25 |
| | 26 |
|
| Financial Services operations | | | | | | | | | |
| Asset-backed debt issued by consolidated SPEs, due serially through 2023 | — |
| | — |
| | 949 |
| | 949 |
| | 948 |
|
| Senior secured NFC Term Loan, due 2025 | — |
| | — |
| | 400 |
| | 400 |
| | 394 |
|
| Bank credit facilities, due dates from 2019 through 2024 | — |
| | — |
| | 511 |
| | 511 |
| | 519 |
|
| Commercial paper, program matures in 2022 | 75 |
| | — |
| | — |
| | 75 |
| | 75 |
|
| Borrowings secured by operating and finance leases, due serially through 2024 | — |
| | — |
| | 104 |
| | 104 |
| | 105 |
|
107 |
| | | | | | | | | | | | | | | | | | | |
| | As of October 31, 2019 |
| | Estimated Fair Value | | Carrying Value |
| (in millions) | Level 1 | | Level 2 | | Level 3 | | Total | |
| Assets | | | | | | | | | |
| Retail notes | $ | 0 |
| | $ | 0 |
| | $ | 205 |
| | $ | 205 |
| | $ | 208 |
|
| Liabilities | | | | | | | | | |
| Debt: | | | | | | | | | |
| Manufacturing operations | | | | | | | | | |
| Senior Secured Term Loan Credit Agreement, due 2025 | 0 |
| | 0 |
| | 1,552 |
| | 1,552 |
| | 1,556 |
|
| 6.625% Senior Notes, due 2026 | 0 |
| | 1,122 |
| | 0 |
| | 1,122 |
| | 1,085 |
|
| Loan Agreement related to 6.75% Tax-Exempt Bonds, due 2040 | 0 |
| | 234 |
| | 0 |
| | 234 |
| | 220 |
|
| Financed lease obligations | 0 |
| | 0 |
| | 60 |
| | 60 |
| | 60 |
|
Other (A) | 0 |
| | 0 |
| | 9 |
| | 9 |
| | 9 |
|
| Financial Services operations | | | | | | | | | |
| Asset-backed debt issued by consolidated SPEs, due serially through 2022 | 0 |
| | 0 |
| | 995 |
| | 995 |
| | 991 |
|
| Bank credit facilities, due dates from 2021 through 2025 | 0 |
| | 0 |
| | 1,038 |
| | 1,038 |
| | 1,059 |
|
| Commercial paper, at variable rates, program matures in 2022 | 84 |
| | 0 |
| | 0 |
| | 84 |
| | 84 |
|
| Borrowings secured by operating and finance leases, due serially through 2024 | 0 |
| | 0 |
| | 122 |
| | 122 |
| | 122 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | |
| | As of October 31, 2017 |
| | Estimated Fair Value | | Carrying Value |
| (in millions) | Level 1 | | Level 2 | | Level 3 | | Total | |
| Assets | | | | | | | | | |
| Retail notes | $ | — |
| | $ | — |
| | $ | 153 |
| | $ | 153 |
| | $ | 161 |
|
| Liabilities | | | | | | | | | |
| Debt: | | | | | | | | | |
| Manufacturing operations | | | | | | | | | |
| Senior Secured Term Loan Credit Facility, due 2020 | — |
| | — |
| | 1,019 |
| | 1,019 |
| | 1,003 |
|
| 8.25% Senior Notes, due 2022 | 1,450 |
| | — |
| | — |
| | 1,450 |
| | 1,423 |
|
4.50% Senior Subordinated Convertible Notes, due 2018(A) | 208 |
| | — |
| | — |
| | 208 |
| | 194 |
|
4.75% Senior Subordinated Convertible Notes, due 2019(A) | 446 |
| | — |
| | — |
| | 446 |
| | 394 |
|
| Loan Agreement related to 6.50% Tax Exempt Bonds, due 2040 | — |
| | 243 |
| | — |
| | 243 |
| | 220 |
|
| Financed lease obligations | — |
| | — |
| | 130 |
| | 130 |
| | 130 |
|
| Other | — |
| | — |
| | 23 |
| | 23 |
| | 39 |
|
| Financial Services operations | | | | | | | | | |
| Asset-backed debt issued by consolidated SPEs, due serially through 2023 | — |
| | — |
| | 851 |
| | 851 |
| | 849 |
|
| Bank credit facilities, due dates from 2019 through 2024 | — |
| | — |
| | 592 |
| | 592 |
| | 616 |
|
| Commercial paper, program matures in 2022 | 92 |
| | — |
| | — |
| | 92 |
| | 92 |
|
| Borrowings secured by operating and finance leases, due serially through 2024 | — |
| | — |
| | 94 |
| | 94 |
| | 94 |
|
| |
| (A) | The carrying value represents the consolidated financial statement amountExcludes non-financial instrument debt of the debt which excludes the allocation$2 million as of the conversion feature to equity, while the estimated fair value is derived from quoted prices in active markets which include the equity feature.both October 31, 2020 and 2019. |
13.15. Commitments and Contingencies
Guarantees
We occasionally provide guarantees that could obligate us to make future payments if the primary entity fails to perform under its contractual obligations. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet the recognition and measurement provisions of U.S. GAAP. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under various guarantees. We do not believe that claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.
Under the terms of the Navistar Capital Operating Agreement, Navistar Capital, (a program of BMO Harris Bank N.A. and Bank of Montreal (together “BMO”)) is our third-party preferred source of retail and lease customer financing for equipment offered by us and our dealers in the U.S. The Navistar Capital Operating Agreement, as amended, contains a loss sharing arrangement for certain credit losses. Under the loss sharing arrangement, as amended,under which we generally reimburse BMO for excess credit losses as defined in excess of the first 10% of the financed value of a contract; for certain leases we reimburse BMO for credit losses up to a maximum of the first 9.5% of the financed value of those lease contracts.arrangement. Our exposure to loss is mitigated because contracts under the Navistar Capital Operating Agreement are secured by the financed equipment. There were $1.5 billion and $1.4$1.6 billion of outstanding loan principal and operating lease payments receivable at October 31, 20182020 and 2017,2019, respectively, financed through the Navistar Capital Operating Agreement and subject to the loss sharing arrangements in the U.S. The related financed values of these outstanding contracts were $2.5 billion and $2.4$2.7 billion at October 31, 20182020 and 2017,2019, respectively. We have recognized a guarantee liability for our portion of estimated Navistar Capital credit losses. Generally, we do not carry the contracts under the Navistar Capital Operating Agreement on our Consolidated Balance Sheets. However,Sheets. In response to the COVID-19 pandemic, BMO has restructured certain loans that are subject to the loss sharing arrangement. We have increased our estimated guarantee liability for potential COVID-19 related credit losses by an amount which was not material to our consolidated financial statements.
For certain Navistar Capitalthird-party financed contracts, which we have accounted for as borrowings, we have recognized equipment leased to others of $104$39 million and $116$51 million and financed lease and other obligations of $122$49 million and $129$60 million, in our Consolidated Balance Sheets as of October 31, 20182020 and 2017,2019, respectively.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
We also have issued a limited number of residual value guarantees, for which losses are generally capped. If substantial risk of losscontrol has not transferred, we generally account for these arrangements as operating leases and revenue is recognized on a straight-line basis over the term of the lease. If substantial risk of losscontrol has transferred, revenue is recognized upon sale and the amounts of the guarantees are estimated and recorded. Our guarantees are contingent upon the fair value of the leased assets at the end of the lease term. We have recognized liabilities for some of these guarantees in our Consolidated Balance Sheets as they meet recognition and measurement provisions. In addition to the liabilities that have been recognized, we are contingently liable for other potential losses under various guarantees that are not recognized in our Consolidated Balance Sheets. We do not believe claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.
We obtain certain stand-by letters of credit and surety bonds from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. As of October 31, 2018,2020, the amount of stand-by letters of credit and surety bonds issued was $122$85 million.
In addition, as of October 31, 2018,2020, we have $162had $140 million of outstanding purchase commitments and contracts with $16$20 million of cancellationscancellation fees with expiration dates through 2026. We have entered into industrial participation agreements, commonly known as offset agreements, with customers outside of the U.S. to facilitate economic value back to entities within the foreign nations as the result of their procurement of goods and services from us. These commitments may be satisfied by our placement of supply contracts to established companies within the foreign nations, providing capabilities to the foreign nations, or the creation of joint ventures that generate profits and hire nationals from within the foreign nations. In certain cases, penalties could be imposed if we do not meet our industrial participation commitments. As of October 31, 2018, we have outstanding industrial participation agreements totaling $228 million that extend through 2026. Purchase order commitments associated with fulfilling the industrial participation agreements are included in the purchase commitments amount above.2028.
In the ordinary course of business, we also provide routine indemnifications and other guarantees, the terms of which range in duration and often are not explicitly defined. We do not believe these will result in claims that would have a material impact on our financial condition, results of operations, or cash flows.
Environmental Liabilities
We have been named a potentially responsible party ("PRP"), in conjunction with other parties, in a number of cases arising under an environmental protection law, the Comprehensive Environmental Response, Compensation, and Liability Act, popularly known as the "Superfund" law. These cases involve sites that allegedly received wastes from current or former Company locations. Based on information available to us which, in most cases, consists of data related to quantities and characteristics of material generated at current or former Company locations, material allegedly shipped by us to these disposal sites, as well as cost estimates from PRPs and/or federal or state regulatory agencies for the cleanup of these sites, a reasonable estimate is calculated of our share of the probable costs, if any, and accruals are recorded in our consolidated financial statements. These accruals are generally recognized no later than upon completion of the remedial feasibility study and are not discounted to their present value. We review all accruals on a regular basis and believe that, based on these calculations, our share of the potential additional costs for the cleanup of each site will not have a material effect on our financial condition, results of operations, or cash flows.
In addition, other sites formerly owned by us or where we are currently operating have been identified as having soil and groundwater contamination. While investigations and cleanup activities continue at these sites, we believe that we have appropriate accruals to cover costs to complete the cleanup of all sites.
We have accrued $18 million for these and other environmental matters, which are included within Other current liabilities and Other noncurrent liabilities, as of October 31, 2018.2020. The majority of these accrued liabilities are expected to be paid subsequent to 2019.2021.
Along with other vehicle manufacturers, we have been subject to an increaseda number of asbestos-related claims in recent years.claims. In general, these claims relate to illnesses alleged to have resulted from asbestos exposure from component parts found in older vehicles, although some cases relate to the alleged presence of asbestos in our facilities. In these claims, we are generally not the sole defendant, and the claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. We have strongly disputed these claims, and it has been our policy to defend against them vigorously. Historically, the actual damages paid out to claimants have not been material in any year to our financial condition, results of operations, or cash flows. It is possible that the number of these asbestos-related claims, will continue to grow, and that the costs for resolving asbestos related claimsthem, could become significant in the future.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Legal Proceedings
Overview
We are subject to various claims arising in the ordinary course of business and are party to various legal proceedings that constitute ordinary, routine litigation incidental to our business. The majority of these claims and proceedings relate to commercial, product liability, and warranty matters. In addition, from time to time we are subject to various claims and legal proceedings related to employee compensation, benefits, and benefits administration including, but not limited to, compliance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Department of Labor requirements.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
In our opinion, apart from the actions set forth below, the disposition of these proceedings and claims, after taking into account recorded accruals and the availability and limits of our insurance coverage, will not have a material adverse effect on our business or our financial condition, results of operations, or cash flows.
Profit Sharing Disputes
Pursuant to the 1993 Settlement Agreement, the program administrator and named fiduciary of the Supplemental Benefit Program is the Supplemental Benefit Program Committee, (the "Committee"), composed of individuals not appointed by NI or NIC. In August 2013, the Committee filed a motion for leave to (a) amend its February 2013 complaint (which sought injunctive relief for the Company to provide certain information to which itthe Committee was allegedly entitled under the Supplemental Benefit Trust Profit Sharing Plan) and (b) file a proposed amended complaint (the "Profit Sharing Complaint") in the U.S. District Court for the Southern District of Ohio (the "Court"). Leave to file the Profit Sharing Complaint was granted by the Court in October 2013. In its Profit Sharing Complaint, the Committee alleged that the Company breached the 1993 Settlement Agreement and violated ERISA by failing to properly calculate profit sharing contributions due under the Supplemental Benefit Trust Profit Sharing Plan. The Committee seeksPlan and sought damages in excess of $50 million, injunctive relief and reimbursement of attorneys' fees and costs. Following the resolution of a procedural dispute by the U.S. Court of Appeals for the 6th Circuit, in May 2015 the Court ordered that the claims in the Profit Sharing Complaint be arbitrated pursuant to the dispute resolution procedures in the Supplemental Benefit Trust Profit Sharing Plan. In November 2015, theThe Company and the Committee selected an arbitrator and the arbitration discovery process commenced. On August 1, 2016, the parties submitted briefs on issues related to the scope of the arbitration. On June 29, 2017, the arbitrator ruled, among other things, that the arbitration will include Supplemental Benefit Trust Profit Sharing Plan calculations for the years ending October 31, 2001 through October 31, 2014. The Company disputes the arbitrator's June 29, 2017 ruling. On May 2, 2018,February 17, 2020, the Committee submittedfiled its written submission with the arbitrator and requested a damages award of $588 million composed of $252 million in profit sharing contributions that the Committee asserts are due under the Profit Sharing Plan and $336 million of lost earnings that the Committee asserts the Supplemental Trust would have earned had those profit sharing contributions been made and invested. The Company’s written submission to the arbitrator a proposed schedulewas filed March 16, 2020 and the Committee's reply was filed April 7, 2020. On June 5, 2020 the parties and the arbitrator agreed the only years at issue for the presentationarbitration are the years ending October 31, 2006 and 2008 through 2011. On September 15, 2020, the arbitrator issued a "Tentative Award" concluding the Company made certain incorrect Profit Sharing Plan calculations, rejecting the Committee's claim for lost earnings, and awarding the maximum rate of interest on the Tentative Award as allowed by Illinois law. Under Illinois statute 815 ILCS 2O5/2, the maximum prejudgment interest rate is 5% per year. On December 2, 2020, after additional briefing and closing arguments, the arbitrator informed the parties that the next arbitrator ruling issued would not include a computation amount and would not materially change from the Tentative Award. The Company disputes the Tentative Award. On December 11, 2020, the arbitrator issued a “Semi-Final Award”, concluding again, that the Company made certain incorrect Profit Sharing Plan calculations, rejecting again the Committee’s claim for lost earnings, and awarding the maximum rate of interest on the Semi-Final Award as allowed by Illinois law. The Company disputes the Semi-Final Award. The arbitrator ordered the parties to meet and confer and jointly recalculate Profit Sharing Plan contributions for years ending October 31, 2006 and 2008 through 2011 based on the Semi-Final Award. If the parties do not agree on the final contribution amounts, the parties are required to submit their calculations by February 1, 2021, and the arbitrator will perform the final calculations to include in a final award.
By letter dated February 14, 2019, the Committee indicated the Profit Sharing Plan calculation for the plan year ending October 31, 2018 reflects numerous positions that have caused the Committee to dispute the Profit Sharing Plan calculations in the past, and on that basis the Committee disagrees with the 2018 calculation. The Committee also requested information about the 2018 calculation. On March 12, 2019, the Committee filed a motion to enforce the 1993 Settlement Agreement for the Company’s failure to respond to the Committee’s February 14, 2019 information requests. On May 15, 2019, the Company responded to the information requests. The motion to enforce is still pending with the Court, but on October 30, 2019, the Company and the Committee met with the Court regarding the motion to enforce, and agreed on a plan for the Company to respond to the Committee’s information and document requests related to the 2018 calculation (which also relates to the information requested for the Profit Sharing Plan calculations for the years ending October 31, 2001 through October 31, 2014). Furthermore, the Committee informed the Company, by letter dated January 19, 2020, that it disputes the Company's Profit Sharing Plan calculations for the years ending October 31, 2015 through October 31, 2019. For Profit Sharing Plan calculations for the years ending October 31, 2015 through 2020, the Company and the Committee have agreed to confer regarding the impact of the issues to be addressed in the arbitration. On September 21, 2018, the arbitrator set a schedule to rule on all issues and determinearbitrator's final calculations in April 2020. award, when issued, as referenced above.
As noted under “Retiree Health Care Litigation” below, on August 14, 2018, the Company filed a motion to schedule a status hearing, in which the Company requested an in-person hearing to discuss the possibility of a global resolution of various disputes under the 1993 Settlement Agreement, including the pending Profit Sharing Complaint. As a result, in-person hearings, an in-personin-chambers conference and several telephone conferences were held with the Court and on April 17, 2020, the Company filed a motion to reform the 1993 Settlement Agreement. A hearing on the motion to reform the 1993 Settlement Agreement was held on NovemberJune 1, 2020.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
On September 9, 2020, the Committee filed a motion to dismiss the Company's filed statement regarding “Phase 2” of the hearings, in which the Company requested the Court to reform the 1993 Settlement Agreement to provide clarity regarding certain “Profit Sharing Cessation Date” provisions, which relate to the timing and impact of the cessation of the Company’s Profit Sharing Plan contributions. The Committee argues the Court lacks jurisdiction because there are no pending disputes regarding the Profit Sharing Cessation Date provisions, and any future disputes fall under an arbitration provision in the 1993 Settlement Agreement. On September 30, 2020, the Company filed its opposition to the Committee’s motion to dismiss, and on October 14, 2020 the Committee filed its reply. The Company’s motion to reform the 1993 Settlement Agreement, including the Committee’s motion to dismiss regarding Phase 2 2018, and subsequentof the hearings, is pending with the Court. Additional hearings and/or conferences may follow.be scheduled in the future.
In addition, various local bargaining units of the UAW have filed separate grievances pursuant to the profit sharing plans under various collective bargaining agreements in effect between the Company and the UAW that may have similar legal and factual issues as the Profit Sharing Complaint.
Based on our assessment of the facts underlying the claims in the above actions, we recorded a charge in the Company's fiscal quarter ending in October 31, 2020 in the amount of $289 million for the estimated liability, including $85 million for estimated interest, related to the arbitrator's Semi-Final Award noted above. The award is not final and is subject to change based upon final calculations and such change could be material. The charge is included in SG&A expenses in our Consolidated Statement of Operations, and includes an estimated liability for all years ending on or before October 31, 2020. Other than the aforementioned, we are unable to provide meaningful quantification of how the final resolution of these claims may impact our future consolidated financial condition, results of operations, or cash flows.
Retiree Health Care Litigation
On October 21, 2016, two lawsuits were filed in the U.S. District Court for the Southern District of Ohio relating to postretirement healthcare and life insurance obligations under the 1993 Settlement Agreement. The first lawsuit (the “Committee’s Complaint”) was filed by the Supplemental Benefit Program Committee.
The Committee’s Complaint was filed against NIC, NI, NFC and a former affiliate, all of which are parties to the 1993 Settlement Agreement. Since January 1, 2012, the Navistar, Inc. Retiree Health Benefit Trust, created pursuant to the 1993 Settlement Agreement (the “Base Trust”), has received certain Medicare Part D subsidies from the federal Centers for Medicare and Medicaid Services that were made available for prescription drug benefits provided to Medicare-eligible seniors pursuant to the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 and has also received certain Medicare Part D coverage-gap discounts from prescription drug manufacturers that were made available to eligible seniors pursuant to the Patient Protection and Affordable Care Act (collectively, the “Subsidies”).
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The Committee alleges, among other things, that the defendants breached the 1993 Settlement Agreement since January 1, 2012 by causing the Base Trust to allocate the Subsidies in a manner that improperly decreased the defendants’ contributions to the Base Trust and increased retiree contributions. The Committee seeks damages, attorneys’ fees and costs for all alleged violations of the 1993 Settlement Agreement, including approximately $26 million which the Committee alleges is the eligible retirees’ “fair share” of the Subsidies that were allegedly misappropriated by the defendants from January, 2012 through April, 2015.
The second lawsuit was filed with the Court by two2 individual members of the Committee (the “Committee Members”) who are retirees and participants in the Navistar, Inc. Health Benefit and Life Insurance Plan (the “Plan”) created pursuant to the 1993 Settlement Agreement. The Committee Members’ complaint (the “Committee Members’ Complaint”) was filed against NIC, NI, NFC and certain other former or current affiliates, all of which are parties or employers as defined in the 1993 Settlement Agreement. The Committee Members allege,alleged, among other things, that the Company violated the terms of the Plan, breached a fiduciary duty under ERISA, and engaged in ERISA-prohibited transactions by improperly using the Plan’s assets (a portion of certain Medicare Part D subsidies and a portion of certain Medicare Part D coverage-gap discounts (collectively, the Subsidies)"Subsidies"), in each case that were received by Navistar, Inc. Retiree Health Benefit Trust created pursuant to the 1993 Settlement Agreement (the "Base Trust")) for the Company’s benefit.
The Committee Members requestrequested that the courtCourt order the defendants to restore all losses to the Base Trust, including approximately $26 million, which the Committee Members allege is the Plan participants’ “fair share” of the Subsidies that were allegedly misappropriated by the defendants from January 2012 through April 2015. The Committee Members also requestrequested that the courtCourt enjoin the defendants from alleged future violations of the Plan and ERISA with respect to treatment of the Subsidies, order the defendants to remedy all alleged ERISA-prohibited transactions and pay the Committee Members’ attorneys’ fees and costs.
The defendants filed motions to dismiss each respective complaint on January 10, 2017. On May 10, 2017, the court dismissed the Committee's Complaint with prejudice, stating that the Committee lacked standing to bring its claims. With respect to the Committee Members’ Complaint, the court declined to dismiss the complaint, but ordered the parties to conduct discovery regarding whether the Committee Members’ Complaint is barred by the applicable statute of limitations and to file a motion for summary judgment thereafter on that issue of timeliness. The defendants filed their motion for summary judgment on September 21, 2017, the Committee Members’ filed their opposition on November 2, 2017, and the defendants filed their reply on November 22, 2017. On June 26, 2018, the court conditionally overruled the defendants’ motion for summary judgment. The courtCourt bifurcated the case and in September 2018 the Court conducted a trial on the issue of whether the Committee Members’ Complaint is barred by the applicable statute of limitations in September 2018.limitations. On November 20, 2018, the Committee Members filed a motion for sanctions, alleging various discovery and trial misconduct by the defendants, and requestingrequested that the courtCourt enter judgment in favor of the Committee Members with respect to the statute of limitations issue and award attorneys’ fees to the Committee Members. On December 11, 2018,March 26, 2019, the defendants filed their opposition toCourt granted the Committee Members’ motion for sanctions.sanctions and subsequently extended the statute of limitations discovery period to October 7, 2019. Briefing on the statute of limitations issue was completed in January 2020. The Court also ordered the Company to pay certain of the Committee Members' legal and other costs to file the motion for sanctions and to conduct additional discovery related to the statute of limitations issue.
On August 14, 2018, under the original Shy et. al. v. Navistar International Corporation, Civil Action No. 3:92-CV-333 (S.D. Ohio 1992), wethe Company filed a motion to schedule a status hearing to request an in-person hearing to discuss the possibility of a global resolution of various disputes under the 1993 Settlement Agreement, including but not limited to resolving the pending Profit Sharing Complaint and Committee Members’ Complaint described above. As a result, in-person hearings, an in-personin-chambers conference and several telephone conferences were held with the Court and on April 17, 2020, the Company filed a motion to reform the 1993 Settlement Agreement. A hearing on the motion to reform the 1993 Settlement Agreement was held on November 2, 2018,June 1, 2020. Additional hearings and/or conferences may be scheduled in the future.
Navistar International Corporation and subsequent hearings are expectedSubsidiaries
Notes to follow.Consolidated Financial Statements—(Continued)
Based on our assessment of the facts underlying the claims in the above actions, we are unable to provide meaningful quantification of how the final resolution of these claims may impact our future consolidated financial condition, results of operations, or cash flows. However, future levels of the Subsidies could be impacted by the outcome of the above actions, which could be material to the Company's OPEB obligation. For more information see Note 12, Postretirement Benefits.
FATMA Notice
International Indústria Automotiva da América do Sul Ltda. ("IIAA"), formerly known as Maxion International Motores S/A ("Maxion"), now a wholly owned subsidiary of the Company, received a notice (the “FATMA Notice”) in July 2010 from the State of Santa Catarina Environmental Protection Agency ("FATMA") in Brazil. The FATMA Notice alleged that Maxion sent waste to a facility owned and operated by a company known as Natureza (the “Natureza Facility”) and that soil and groundwater contamination had occurred at the Natureza Facility.
The FATMA Notice asserted liability against Maxion and assessed an initial penalty in the amount of R$2 million (the equivalent of approximately less than US$1 million at October 31, 2018)2020), which is not final or due and final until all administrative appeals are exhausted. Maxion was one of numerous companies that received similar notices. IIAA filed an administrative defense in August 2010 and has not yet received a decision following that filing.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
In addition to the matter described above, there is a suit pending in the federal court of Brazil in which the federal district attorney has sued (a) FATMA, for claims related to FATMA’s actions in connection with licensing and inspection procedures related to the Natureza Facility, and (b) Selamix, as the current owner of the Natureza Facility. In this federal suit, Selamix was found liable for the contamination at the Natureza Facility due to it being the successor owner of the facility. However, the federal court’s decision does not prohibit Selamix from seeking to recover its damages from third parties that contributed to the contamination at the Natureza Facility.
In connection with the FATMA Notice, IIAA presented a motion toJanuary 2018, the district attorney of the State of Santa Catarina (the “SC"SC District Attorney”Attorney") to set forth its defenses and correct inaccuracies in the FATMA Notice in August 2017. In September 2017, the SC District Attorney informed IIAA that it intended to present a Consent Agreement to all of the companies that sent waste to Natureza to determine the allocation of the liability for generating the waste which led to the contamination of the Natureza Facility. IIAA then filed a motion requesting that the SC District Attorney consider certain facts and circumstances prior to presenting the Consent Agreement.
In January 2018, the SC District Attorney,, local and state authorities, Selamix, IIAA and the 14 other companies (together, the "Companies") that are alleged to have significantly contributed to the contamination met to discuss the matter. Selamix then presented three proposals for conducting a preliminary environmental assessment in the area to determine the allocation of liability among the companies. In March 2018, Selamix informed the SC District Attorney that it would voluntarily conduct a preliminary environmental study at the Natureza Facility in an attempt to determine and allocate the liability for the contamination pursuant to an agreement with all of the companiesCompanies after the study is completed. The SC District Attorney agreed to suspend further inquiry into the matter until Selamix’s study had been completed. The other companies involved in the matter have expressed an interest in having an independent environmental study conducted. The SC District Attorney has indicated that it may consider requiring an independent environmental study after Selamix’s environmental study is completed.
In June 2018, Selamix presented its Environmental Preliminary Assessment Report to the SC District Attorney and the other companiesCompanies alleged to have contributed to the contamination and the report indicated that the entire property should be subject to further studies to confirm the type and extent of the contamination due to signs of buried residues in several areas.contamination. Selamix also presented commercial proposals from two additional different companies specializing in environmental studies to perform the next steps of the technical work. The SC District Attorney then requested a third commercial proposal whichproposal. One of the commercial proposals included an Environmental Preliminary Assessment Report ("Phase 1 Study") and indicated that a Phase 2 assessment should be performed. In July 2019, the SC District Attorney requested that each of the Companies (including IIAA) inform the SC District Attorney of whether they intended to contribute to the costs of the portion of the Phase 2 assessment related to geophysical investigations to identify buried drums at the Natureza Facility. The request did not include any information related to the potential range of the associated costs or indicate whether contributions for the cost of the other portions of the Phase 2 assessment would be sought from the Companies (including IIAA). IIAA responded to the request indicating that it would not contribute to the cost of the Phase 2 assessment related to geophysical investigations and requested a meeting with the SC District Attorney to discuss the next steps in the process.
In late February 2020, IIAA became aware that the SC District Attorney filed an action in the civil court of Santa Catarina against nine of the Companies (including IIAA), Selamix, and the Municipality of Schroeder (where the Natureza Facility is located) requesting that the defendants in the action bear all of the potential costs of the investigation needed to determine the parties responsible for the contamination and manage the remediation of the contamination at the Natureza Facility and that the defendants place funds in escrow to cover such costs. Prior to ruling on these issues, the court has indicated that it will schedule a hearing to allow the defendants to set forth their defenses. In May 2020, the Municipality of Schroeder presented its defenses to the court and alleged that (i) it was not liable for contamination after FATMA, as a state agency, became responsible for the environmental licensing of Natureza, (ii) Selamix should be held liable for the contamination, and (iii) the other defendants (including IIAA) should be held liable for the contamination because their irregular disposal of toxic material contributed to the environmental damage. On July 22, 2020 IIAA received the official letter establishing its deadline to present its response to the Municipality of Schroeder’s defenses. On October 5, 2020, IIAA presented and paid for by Selamix.
its defense. IIAA continues to dispute the allegations in the FATMA Notice and intends to continue to vigorously defend itself. Currently, no demands
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Based on our assessment of the facts underlying the claims in the above actions, we are unable to provide meaningful quantification of how the final resolution of these claims may impact our future consolidated financial condition, results of operations, or offers are outstanding.cash flows.
Sao Paulo Groundwater Notice
In March 2014, IIAA, along with other nearby companies, received from the Sao Paulo District Attorney (the "District Attorney") a notice and proposed Consent Agreement relating to alleged neighborhood-wide groundwater contamination at or around its Sao Paulo manufacturing facility. The proposed Consent Agreement sought certain groundwater investigations and other technical relief and proposed sanctions in the amount of R$3 million (the equivalent of approximately less than US$1 million at October 31, 2018)2020). In November 2014, IIAA extended a settlement offer. The parties remained in discussions and IIAA’s settlement offer which was never accepted, rejected or countered by the District Attorney.
On August 31, 2016, the District Attorney filed civil actions against IIAA and other companies in the Central Forum of the capital of the State of SãoSao Paulo seeking soil and groundwater investigation and remediation, together with monetary payment in an unspecified amount. IIAA filed its defense to the civil action on January 26, 2017, alleging that IIAA hashad made all necessary investigations and hashad taken remedial measures to address the contamination and that Companhia Ambiental do Estado de SãoSao Paulo, ("CETESB"), the environmental agency of SãoSao Paulo State, hashad agreed to the remedial measures taken by IIAA. On June 20, 2017, IIAA presented a petition requesting a 90-day suspension of the lawsuit. IIAA has since held and is currently engaged in discussions with the District Attorney regarding settlement of this matter. The District Attorney agreed to an initial suspension on June 30, 2017 and a subsequent suspension for an additional 90 days which ended on July 9, 2018.
A new district attorney (the “New District Attorney”) assumed responsibility for the case in February 2018. The New District Attorney indicated that it would like the companies involved to try to reach a settlement agreement as to the remediation efforts to be taken after having discussions and negotiations with the New District Attorney’s technical experts. IIAA attempted to schedule a meeting withOn September 10, 2019, the judge granted the New District Attorney’s technical experts.Attorney's request to require answers from the Department of Water and Electric Energy ("DAEE") and Sao Paulo State Sewage Company ("SABESP"), but DAEE and SABESP did not provide any additional relevant information. IIAA met withhas not yet received the New District Attorney on July 25, 2018. The New District Attorney has indicated that he will request information related to the status of the current remediation needs from CETESB. After receiving that information, the New District Attorney has indicated that he will schedule a meeting with IIAA to discuss the proposed terms of a potential settlement agreement and granted a third suspension on August 14, 2018 which ended on November 14, 2018.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Attorney's opinion.
There are no current demands or offers outstanding.
Based on our assessment of the facts underlying the claims in the above actions, we are unable to provide meaningful quantification of how the final resolution of these claims may impact our future consolidated financial condition, results of operations, or cash flows.
MaxxForce Engine EGR Warranty Litigation
On June 24, 2014, N&C Transportation Ltd. ("N&C") filed a putative class action lawsuit against NIC, NI, Navistar Canada Inc., and Harbour International Trucks in Canada in the Supreme Court of British Columbia (the "N&C Action"). Subsequently, seven additional, similar putative class action lawsuits have been filed in various courts in Canada, including Alberta, Manitoba, Ontario, and Quebec (together with the N&C Action, the "Canadian Actions").
From June 13-17, 2016, the court conducted a certification hearing in the N&C Action. On November 16, 2016, the courtSupreme Court of British Columbia certified a Canada-wide class comprised of persons who purchased heavy-duty trucks equipped with Advanced EGR MaxxForce 11, MaxxForce 13, and MaxxForce 15 engines designed to meet 2010 EPA regulations. The court in the N&C Action denied certification to persons who operated but did not buy the trucks in question. On November 2, 2017, NIC, NI, Navistar Canada Inc. and Harbour International Trucks filed a notice of appeal. On December 8, 2017, the plaintiff filed a notice of cross-appeal. Both the appeal and cross-appeal were heard by the British Columbia Court of Appeal on February 9, 2018. On August 1, 2018, the appellate court denied our appealaffirmed the November 2016 decision and granted, in part, N&C's cross-appeal and as such certified three additional narrow issues on whether misrepresentations were made in Navistar's advertising materials. On September 28, 2018, Navistar sought leave to appeal the certification decision to the Supreme Court of Canada and such leave is still pending. Aside from that application, theThe next step will be an attendance before the case management judge regarding the details of the notice of certification to be given to the class. No date for this attendance has been set.
On June 5, 2017, a hearing was held in the Quebec putative class action lawsuit captioned 4037308 Canada Inc. v. Navistar Canada Inc., NI, and NIC. At that hearing, the court ruled on certain motions regarding evidence related to certification but deferred a ruling on plaintiff’s proposed amendment to narrow the proposed class to Quebec-only purchasers and lessees of model year 2010-13 vehicles containing MaxxForce 11, 13, and 15 liter engines. On November 23, 2017, we filed a motion to stay the Quebec case until the British Columbia Court of Appeal rules on the certification order in the N&C Action. The stay motion was filed on November 23, 2017 and was granted on December 7, 2017. The decision of the British Columbia Court of Appeal was provided to the Quebec court. On September 6, 2018, the stay was extended until the Supreme Court of Canada decides the application for leave to appeal in the N&C Action.
In the Manitoba putative class action lawsuit captioned Vern Brown v. Navistar International Corporation and Navistar Canada, Inc., the court held a case management conference on June 29, 2018, after the plaintiff failed to file a complete certification record by the previously court-ordered due date. The plaintiff advised that it expected to file its remaining certification affidavits by August 31, 2018, and the court suspended certification scheduling in the interim. The plaintiff filed an additional affidavit on July 5, 2018. On September 5, 2018, the court adjourned the certification application indefinitely to allow the plaintiff to obtain an expert report. There are no certification or other hearings scheduled in any of the other Canadian Actions at this time.
On July 7, 2014, Par 4 Transport, LLC filed a putative class action lawsuit against NI in the United States District Court for the Northern District of Illinois (the "Par 4 Action"). Subsequently, seventeen17 additional putative class action lawsuits were filed in various United States district courts, including the Northern District of Illinois, the Eastern District of Wisconsin, the Southern District of Florida, the Middle District of Pennsylvania, the Southern District of Texas, the Western District of Kentucky, the District of Minnesota, the Northern District of Alabama, and the District of New Jersey (together with the Par 4 Action, the "U.S. Actions"). Some of the U.S. Actions namenamed both NIC and NI, and allegealleged matters substantially similar to the Canadian Actions. More specifically, one or more of the Canadian Actions and the U.S. Actions (collectively, the "EGR Class Actions") seek to certify a class of persons or entities in Canada or the United States who purchased and/or leased a ProStar or other Navistar vehicle equipped with a model year 2008-2013 MaxxForce Advanced EGR engine.
In substance, the EGR Class Actions allege that the MaxxForce Advanced EGR engines are defective and that the Company and NI failed to disclose and correct the alleged defect. The EGR Class Actions assert claims based on theories of contract, breach of warranty, consumer fraud, unfair competition, misrepresentation and negligence. The EGR Class Actions seek relief in the form of monetary damages, punitive damages, declaratory relief, interest, fees, and costs.
On October 3,
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
In December 2014, NIC and NI filed a motion before the United States Judicial Panel on Multidistrict Litigation (the "MDL Panel") seeking to transfer and consolidateissued an order consolidating before Judge Joan B. Gottschall of the United States District Court for the Northern District of Illinois all of the then-pending U.S. Actions, as well as certain non-class action MaxxForce Advanced EGR engine lawsuits pending in various federal district courts.
On December 17, 2014, Navistar's motion to consolidate the U.S. Actions and certain other non-class action lawsuits was granted. The MDL Panel issued an order consolidating all of the U.S. Actions that were pending on the date of Navistar’s motion before Judge Gottschall in the United States District Court for the Northern District of IllinoisOctober 3, 2014 (the "MDL Action").
Navistar International CorporationIn May 2019, the parties completed negotiation of a settlement agreement (the "The Settlement Agreement") to resolve the U.S. Actions. The plaintiffs submitted the Settlement Agreement to the court for preliminary approval on May 28, 2019. The Settlement Agreement class consists of entities and Subsidiaries
Notesnatural persons who owned or leased a 2011-2014 model year vehicle equipped with a MaxxForce 11 or 13 liter engine certified to Consolidated Financial Statements—(Continued)
The MDL Panel also consolidated intomeet EPA 2010 emissions standards without selective catalytic reduction technology, provided that the MDL Action certain non-class action MaxxForce Advanced EGR engine lawsuits pendingvehicle was purchased or leased in the various federal district courts. Non-class federal lawsuits presenting pre-trial issues similarU.S.
Among other things, the Settlement Agreement requires that (1) the parties establish a non-reversionary common fund consisting of cash (the “Cash Fund”) and rebates (the “Rebate Fund”) with a total value of $135 million (the “Settlement Fund”); (2) NIC and NI contribute $85 million to the MDL Action continueCash Fund, which will be used to be transferredpay all settlement fees and expenses, service awards, attorneys’ fees and costs, and cash payments to members of the settlement class; (3) NI commit to make available rebates with a face value in the aggregate of $50 million to the MDL Action. Approximately 24 such actionsRebate Fund; and (4) the settlement class release NIC and NI and their affiliates from all claims and potential claims arising from or related to the allegations in the U.S. Actions, except for claims for personal injury or damage to third-party property. The Settlement Agreement further provides that dollars or value remaining in either the Cash Fund or the Rebate Fund after claims are currently pending.
Atprocessed will be used to pay approved claims from the requestother fund if the other fund is oversubscribed (the “Waterfall”). The Settlement Agreement states that NIC and NI deny all claims in the U.S. Actions, deny wrongdoing, liability or damage of any kind, and deny that NIC and NI acted improperly or wrongfully in any way. Any Waterfall from the Rebate Fund to the Cash Fund is capped at $35 million. We are waiting for the final adjudication of the various law firms representingclaims by the plaintiffs inadministrator. It is possible that a Waterfall from the MDL Action, on March 5, 2015, Judge Gottschall enteredRebate Fund to the Cash Fund could occur.
On June 12, 2019, the court preliminarily approved the settlement. Members of the class were provided notice of the Settlement Agreement and an order inopportunity to object or opt out. Any members of the MDL Action appointing interim lead counsel and interim liaison counsel forclass who opted out would not receive any benefit from the plaintiffs. On May 11, 2015, lead counsel for the plaintiffsSettlement Agreement or be bound by it.
Four class members filed a First Master Consolidated Class Action Complaint ("Consolidated Complaint"). The partiesconsolidated objection to the MDL Action exchanged initial disclosures on May 29, 2015. The Company answered the Consolidated Complaint on July 13, 2015. On September 22, 2016, lead counsel for the plaintiffs filed a First Amended Consolidated Class Action Complaint (the “Amended Consolidated Complaint”). The Amended Consolidated Complaint added twenty-five additional named plaintiffs. NI and NIC answered the Amended Consolidated ComplaintSettlement Agreement on October 20, 2016.
10, 2019. On May 27, 2016, Judge Gottschall entered a Case Management Order setting a July 13, 2017 date for plaintiffs' class certification motion. On November 30, 2016,January 3, 2020, the court entered an order referring discovery mattersrejecting the objection and finding the settlement to a magistrate judge for supervision. Pursuant to the magistrate’s order, the parties jointly filed a new proposed case management order on January 25, 2017, which extended the fact discovery deadline to November 22, 2017. On January 31, 2017, the parties filed a joint motion with Judge Gottschall requesting adjustment of the class action briefing schedule to April 24, 2018. On February 2, 2017, Judge Gottschallbe "fair, reasonable, and adequate." The court also granted the parties' motion extending the deadline to complete the class certification briefing to April 24, 2018. On February 6, 2017, the magistrate approved the parties' schedule set forth in the case management order jointly filed on January 25, 2017. In September 2017, the plaintiffs filed a motion to further extend the case deadlines. On October 5, 2017, Judge Gottschall entered an Agreed Order Extending the Discovery Cutoff ordering that fact discovery relevant to class certification be completed by March 13, 2018 and that the class certification briefing be completed by July 31, 2018. On March 5, 2018, Judge Gottschall extended the fact discovery deadline to be completed by May 25, 2018 and ordered that the class certification briefing be completed by October 22, 2018. Fact discovery relevant to class certification is now substantially complete. On June 19, 2018, Judge Gottschall extended the deadline for completion of a class certification briefing to November 30, 2018.
On October 13, 2017, lead counsel for the class plaintiffs filed a Motion for Leave to File a Second Amended Consolidatedapproval of an award of attorneys' fees and costs. On January 21, 2020, the court entered an Order Granting Final Approval of Class Action Complaint, as well as a Motion for Voluntary DismissalSettlement, Award of Claims without Prejudice relatingAttorneys' Fees and Costs and Final Order and Judgment. On February 3, 2020, NIC and NI funded $85 million to 15 previously named plaintiffs. On January 4, 2018, Judge Gottschall granted both motions. On January 9, 2018, the plaintiffs filed a Second Amended Consolidated Class Action Complaint. The Second Amended Consolidated Class Action Complaint removed 15 named plaintiffs and substituted in eight new named plaintiffs. As a result, the total number of named plaintiffs is now 37 andCash Fund.
In February 2020, three class action cases were dismissed entirely without prejudice because there were no longer any remaining plaintiffs in those cases. On August 16, 2018, Judge Gottschall entereda minute order setting a status hearing for September 26, 2018 in light of the ongoing settlement efforts of the parties. During the September 26, 2018 status hearing, the parties advised the court that additional settlement discussions were scheduled. Accordingly, on September 27, 2018 Judge Gottschall entered a minute order extending class plaintiffs' deadline to file a motion for class certification and supporting expert reports until November 16, 2018 and setting the next status hearing for December 15, 2018. On November 13, 2018, Judge Gottschall entered a minute order extending class plaintiffs’ deadline to file a motion for class certification and supporting experts to December 20, 2018. On December 13, 2018, Judge Gottschall entered a minute order further extending the filing date for plaintiffs’ motion for class certification and supporting expert materials to February 20, 2019. No other class briefing dates have been scheduled.
On November 11, 2017, seven plaintiffs (the “Direct Action Plaintiffs”)members intervened in the MDL moved for a separate trialAction and discovery schedule independent offiled motions asking the class action schedule. On January 2, 2018, Judge Gottschall granted in partcourt to exclude them from the settlement or to permit them to opt out after the opt out deadline. In April and June 2020, the court denied in part the Direct Action Plaintiffs’ motion, allowingthese motions. In May 2020, two of the Direct Action Plaintiffsintervening class members appealed the court's April 2020 order to begin limited discoverythe 7th Circuit Court of Appeals. The Company's opposition brief was filed on plaintiff-specific issues. The parties submitted competing proposed discovery schedules. In a minute order dated January 26, 2018, Judge Gottschall declined to enter either schedule but ordered the parties to conferAugust 19, 2020. Oral argument was held on a schedule for prioritizing the plaintiff-specific discovery after the close of fact discovery relevant to class certification issues. The parties are currently engaged in discovery. One of the Direct Action Plaintiffs filed a motion for leave to file a First Amended Complaint on September 25, 2018 and that motion was granted by the court in a minute order dated December 13, 2018.November 2, 2020.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
There are also non-class action MaxxForce Advanced EGR engine lawsuits filed against the Company in various federal and state courts. A number of non-class action lawsuits have been resolved in favor of the Company prior to or at trial or settled for immaterial amounts. Approximately 40Several cases have been resolved at trial with varying results. Other state court non-class actions are pending at this time. One of the non-class action lawsuits ("Milan"), alleging violations of the Tennessee Consumer Protection Act and fraud and involving approximately 235 trucks, was tried in Tennessee state court in August 2017. On August 10, 2017 the Milanand resulted in a jury returned a verdict of approximately $31 million against the Company, including $20 million in punitive damages. On October 2, 2017, the Company filed various motions in the trialOther federal and state court challenging the verdict, including a Motion for Judgment Notwithstanding the Verdict or, in the Alternative, a New Trial and Motion to Disapprove of the Award of Punitive Damages. The hearing on these motions was held on December 1, 2017 and the court denied our motions, denied Milan’s motion for pre-judgment interest and granted Milan $1.4 million in fees and costs. On January 11, 2018, the Company filed a Notice of Appeal in the Tennessee Court of Appeals challenging the verdict. Briefing on the appeal is currently scheduled to be completed by March 18, 2019. actions remain pending at this time.
In the third quarter of 2017, we recorded $31 million of charges in SG&A expenses in ourConsolidated Statements of Operations. related to the Milan lawsuit.
On August 14, 2019, a three-judge panel of the Tennessee Court of Appeals issued a unanimous opinion reversing the $31 million judgment and $1 million of fees and costs previously awarded to the Milan plaintiffs following an appeal filed by the Company in January 2018 challenging the jury verdict. In addition, the Tennessee Court of Appeals affirmed the trial court’s judgment for Navistar on the Milan plaintiff's warranty claims. On October 11, 2019, the Milan plaintiffs filed an application for permission to appeal this ruling to the Tennessee Supreme Court. On January 16, 2020, the Tennessee Supreme Court granted permission to appeal. The Company filed its opposition brief on August 19, 2020. Oral argument was held on November 4, 2020.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Based on our assessment of the facts underlying the claims in the above actions, the Company has recorded a charge in the Company’s fiscal second quarter ended April 30, 2019 in the amount of $159 million as a reserve for its expected obligations under the Settlement Agreement as well as for current period liabilities and potential future settlements with respect to certain other MaxxForce Advanced EGR engine lawsuits that are not included in the Settlement Agreement. In addition, the Company has released a liability of $32 million, related to the judgment reversal in the Milan case in the third quarter ended July 31, 2019. These impacts were recorded in SG&A expenses in our Consolidated Statements of Operations. As noted above, with respect to the Settlement Agreement and the claims filed in connection with it, it is possible that a Waterfall from the Rebate Fund to the Cash Fund could result in an additional cash impact. Other than the aforementioned, we are unable to provide further meaningful quantification of how the final resolution of these claimsmatters may impact our future consolidated financial condition, results of operations or cash flows.
EPA Clean Air Act Litigation
In February 2012, NI received a Notice of Violation ("NOV") from the United States Environmental Protection Agency (the "EPA") pertaining to certain heavy-duty diesel engines which, according to the EPA, were not completely assembled by NI until calendar year 2010 and, therefore, were not covered by NI's model year 2009 certificates of conformity. The NOV concluded that NI's introduction into commerce of each of these engines violated the Federal Clean Air Act.
On July 14, 2015, the Department of Justice ("DOJ"), on behalf of the EPA, filed a lawsuit against NIC and NI in the U.S. District Court for the Northern District of Illinois. Similar to the NOV, the lawsuit alleges that NIC and NI introduced into commerce approximately 7,749 heavy-duty diesel engines that were not covered by model year 2009 certificates of conformity because those engines were not completely assembled until calendar year 2010, resulting in violations of the Federal Clean Air Act. On July 16, 2015, the DOJ filed an Amended Complaintamended complaint clarifying the amount of civil penalties being sought. The lawsuit requests injunctive relief and the assessment of civil penalties of up to $37,500 for each violation. On September 14, 2015, NIC and NI each filed an Answer and Affirmative Defenses to the Amended Complaint. We dispute the allegations in the lawsuit.
Discovery in the matter is proceeding in two phases. Fact discovery for the liability phase commenced on December 9, 2015. Pursuant to the court's Minute Order entered on July 12, 2017, the Phase I liability fact discovery was completed as of November 9, 2017.
On May 13, 2016, the DOJ, on behalf of the EPA, filed a motion for summary judgment on liability. On June 30, 2016, NIC and NI opposed the EPA's motion for summary judgment, and NIC cross-moved for summary judgment against the EPA. On March 1, 2017, the court entered a Memorandum Opinion and Order (i) granting a motion by the DOJ’s motionDOJ for summary judgment on the issue of liability with respect to NI, (ii) denying a motion by the DOJ’s motionDOJ for summary judgment on the issue of liability with respect to NIC, and (iii) denying NIC’sa motion by NIC for summary judgment.judgment against the EPA.
On April 3, 2018, the parties jointly filed a stipulation of dismissal with prejudice for NIC only. The stipulation with prejudice has no effect on the claims made against NI. With the dismissal of NIC, the matter moved to the remedy phase with respect to NI. The court enteredDiscovery for the remedy phase had been complete. On July 30, 2020, NI filed a scheduling ordermotion for partial summary judgment as to certain aspects of the remedy sought by the DOJ. A hearing on May 3, 2018, settingNI's motion for partial summary judgement was held on December 15, 2020 and at the conclusion of the hearing took the motion under advisement.
At a fact discovery deadlinestatus conference on October 22, 2020, the parties reported on the status of May 22, 2019, expert reportongoing settlement discussions. Further mediation sessions were held in November and deposition deadlines through November 7, 2019, and a deadline for submission of dispositive motions of December 9, 2019.2020.
Based on our assessment of the facts underlying the amended complaint above, potential charges towe recorded an additional charge of $4 million in the first quarter of 2020 in SG&A expenses in our Consolidated Statements of Operations, and resulting in a total recorded estimated liability of $6 million at October 31, 2020 on our Consolidated Balance Sheets. Totalcash outlays in future periods could range from $2$6 million to $291 million related to the resolution of this matter. Other than the aforementioned, we are unable to provide further meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition, results of operations or cash flows.
American Intermodal Container Manufacturing
In 2014, NI began negotiating a contract manufacturing agreement (the “Manufacturing Agreement”) with American Intermodal Container Manufacturing, Inc. and American Intermodal Container Manufacturing Co., LLC (together, “AICM”), pursuant to which NI agreed to manufacture freight containers on AICM’s behalf for J.B. Hunt. Before the negotiations were completed, the members of AICM’s board became involved in a dispute regarding the ownership and control of AICM which resulted in a majority of the AICM board members acting to remove two of the other board members (the “Removed Directors”).
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
NI and its subsidiary, International Truck and Engine Investments Corporation (“ITEIC”), subsequently entered into the Manufacturing Agreement with AICM. On October 1, 2014, the Removed Directors filed a suit against AICM and its remaining board members (together, the “AICM Defendants”) in the Supreme Court of New York in New York County, alleging that the AICM Defendants had improperly (a) removed the Removed Directors and (b) taken control of AICM. The suit alleged: (i) breach of contract (relating to the ownership and control of AICM); (ii) promissory estoppel; (iii) tortious interference with contract; (iv) breach of fiduciary duty; (v) aiding and abetting breach of fiduciary duty; (vi) tortious interference with prospective business relations; and (vii) declaratory judgment. The Removed Directors claimed damages of not less than $50 million.
On September 29, 2016, the Removed Directors filed a Motion for Leave to Amend Complaint to add NI, ITEIC and J.B. Hunt as defendants, alleging that NI and ITEIC personnel allied and conspired with the AICM Defendants to (a) support the AICM Defendants in breaching the ownership contract of the Removed Defendants, (b) remove the Removed Directors, and (c) wrongfully interfere with certain AICM fundraising efforts. NI filed its opposition to this motion on November 9, 2016 and the Removed Directors replied on November 18, 2016. On February 7, 2018, the court issued an order granting the Removed Directors’ Motion for Leave to Amend Complaint to add claims against NI, ITEIC and J.B. Hunt for (i) tortious interference with contract and (ii) aiding and abetting breach of fiduciary duty.
The court denied the Removed Directors’ request to add a claim for tortious interference with prospective business relations against NI, ITEIC and J.B. Hunt. The Removed Directors claim damages against NI, ITEIC and J.B. Hunt of not less than $50 million.
On February 27, 2018, the Removed Directors filed an amended complaint (the “Amended Complaint”) in conformance with the court’s February 7, 2018 order. On April 30, 2018, NI and ITEIC filed an answer to the Amended Complaint denying liability and asserting affirmative defenses and counterclaims, including counterclaims against AICM for indemnification and breach of contract (seeking to recover amounts due to NI) under the Manufacturing Agreement. NI and ITEIC have vigorously defended their position that they are not liable for the claims asserted by the Removed Directors.
On November 20, 2018, NI, ITEIC and the Removed Directors agreed to settle this suit without any payment by NI, ITEIC or the Removed Directors. NI, ITEIC and the Removed Directors entered a settlement agreement on or about December 12, 2018. The Removed Directors have agreed to file a stipulation of discontinuance with prejudice with respect to their claims against NI and ITEIC.
Brazil Truck Dealer Disputes
In January 2014, IIAA initiated an arbitration proceeding under the International Chamber of Commerce rules seeking payment for goods sold and unpaid, in the amount of R$64 million (approximately US$17 million as of October 31, 2018), including penalties and interest, from a group of affiliated truck dealers in Brazil. The truck dealers are affiliated with each other, but not with us, and are collectively referred to as Navitrucks. In the proceeding, IIAA also seeks a declaration of fault against Navitrucks related to the termination of the truck dealer agreements between IIAA and Navitrucks. Navitrucks responded in part by submitting counterclaims against IIAA seeking the amount of R$128 million (approximately US$34 million as of October 31, 2018) for damages related to alleged unfulfilled promises and injury to Navitrucks’ reputation. In October 2014, Navitrucks amended their counterclaims by increasing the amount of damages. During a preliminary hearing before the arbitral tribunal on March 24, 2015, the parties agreed to submit all of the pending claims between the parties to the exclusive jurisdiction of the arbitral tribunal. Pursuant to the timetable issued in the arbitration proceeding, IIAA presented its complaint in July 2015, Navitrucks filed its answer and counterclaims on August 24, 2015, and IIAA filed its rebuttal and answer to Navitrucks’ counterclaims on October 22, 2015. On December 7, 2015, Navitrucks filed its rebuttal to IIAA’s answer to counterclaims. On June 13-15, 2016, the arbitral tribunal held hearings on the parties presenting witnesses and evidence.
On July 18, 2016, IIAA and Navitrucks presented additional documents and information related to the hearing held on June 13-15, 2016. On September 30, 2016, the parties presented their final allegations. On April 20, 2017, the arbitral tribunal issued a partial award (the "Initial Award") granting a portion of the relief sought by each of the parties. Specifically, the arbitral tribunal's Initial Award held that: (a) Navitrucks failed to pay certain amounts to IIAA for the purchase of vehicles under its agreements with IIAA, thereby breaching its contractual obligations; and (b) IIAA breached its contractual obligations under its agreements with Navitrucks due to its failure to fulfill its promises to invest in products, infrastructure, and a dealership network.Furthermore, the arbitral tribunal held that, due to the mutual breach of the agreements between IIAA and Navitrucks, the agreements should be deemed terminated.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
On June 3, 2017, IIAA and Navitrucks filed an application to clarify certain interpretations of the Initial Award and to correct clerical errors in the Initial Award. IIAA also requested an award to (a) set the indisputable amount of the Initial Award, and (2) order Navitrucks to promptly pay such amount. On June 8, 2017, the arbitral tribunal invited IIAA and Navitrucks to present their respective comments on each other’s applications on or before June 27, 2017. On June 3, 2017 and June 27, 2017, IIAA and Navitrucks, respectively, filed their comments. On September 29, 2017, the arbitral tribunal issued a decision on the applications filed by both parties in which it rejected all of the requests made in the applications of both parties. On October 31, 2017, the arbitral tribunal issued a decision relating to the timeline for the production of technical evidence to be used in the calculation phase in which the actual monetary amount of the damages owed by each party to the other will be definitively determined.
As determined by the arbitral tribunal, IIAA (a) designated its expert assistant and disclosed the questions to be answered by the arbitral expert (official expert designated by the arbitral tribunal); (b) presented a summary of the amount that Navitrucks owes to IIAA in accordance with the previous calculation and related award issued on April 20, 2017; and (c) presented its replies to the Navitrucks' petitions.
On May 11, 2018, the arbitral tribunal issued a decision allowing the calculation to be made by the parties’ experts and scheduled the calculation phase hearing for August 16, 2018. On July 6, 2018, each party’s experts presented their reports indicating the calculation of the total amount due from each party to the other party. On August 6, 2018, the parties jointly filed a petition informing the arbitral tribunal that they reached an agreement as to the total amount due from each party to the other party. Pursuant to the agreement, Navitrucks agreed that it owes IIAA the total amount of R$107 million (approximately US$29 million as of October 31, 2018) after deducting the agreed amount of Navitrucks' claim against IIAA.
In addition, the parties requested: (a) the cancellation of the hearing scheduled for August 16, 2018; (b) a 15 day period for the parties to present their respective costs incurred in connection with the arbitral proceeding; and (c) the closure of the calculation phase with the final ruling of merits.
On August 13, 2018, the arbitral tribunal issued a decision canceling the hearing scheduled for August 16, 2018 and directed the parties to prove their respective incurred costs in connection with the arbitral proceeding and to specify whether there were any additional productions of evidence or considerations by August 23, 2018.
On August 23, 2018, IIAA filed a petition indicating that its costs incurred in connection with the arbitral proceeding were R$6 million (approximately US$2 million as of October 31, 2018). On the same date, Navitrucks filed a petition indicating that its costs incurred in connection with the arbitral proceeding were R$3 million (approximately less than US$1 million as of October 31, 2018). On September 18, 2018, the arbitral tribunal issued a decision (i) declaring the end of the evidence phase, (ii) ordering the parties to present their closing arguments on or before October 31, 2018, and (iii) stating that the final decision on the merits will be issued on or before December 20, 2018.
We have recorded no receivable related to this matter in our Consolidated Financial Statements.
In addition, another truck dealer and two truck fleet owners in Brazil have separate adversarial proceedings pending against IIAA that may have similar legal and factual issues as the Navitrucks claim. These other claims are not material either individually or in the aggregate.
Other
U.S. Department of Defense MatterMRAP Litigation
In the third quarter of 2016, Navistar Defense, LLC ("ND"NDLLC") received a subpoena from the United States Department of Defense Inspector General (the "DOD IG"). The subpoena requested documents relating to ND'sNDLLC's sale of its independent suspension systems ("ISS") for military vehicles to the government for the period from January 1, 2009 through December 31, 2010. On June 3, 2016, ND met with government representatives, including representatives from the DOD IG and the DOJ, to discuss the matter.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Since then, ND has beenBeginning in ongoing discussions with the DOD IG and the DOJ. NDJune 2016, NDLLC made submissions of documents responsive to the subpoena in June and August 2016 and has completed its subpoena response. On May 1, 2017, ND metresponse and engaged in ongoing discussions with government representatives, including representatives from the DOD IG and the DOJ, to further discuss the matter, includingDOJ. Such discussions included assertions that NDNDLLC may have overcharged the United States for the ISS components. ND agreed to provide additional information relating to the pricing of the ISS components. The parties met again on June 13, 2017. In August 2017, NDNDLLC received a letter from the DOJ claiming that NDNDLLC made false and misleading statements during the course of price negotiations and during the Defense Contract Audit Agency audit which resulted in NDNDLLC overcharging the United States for the ISS components by approximately $88 million and asking for treble damages and penalties for a total demand of approximately $264 million. ND hasNDLLC responded to the DOJ’s demand letter explaining its position that it has no liability in this matter and outlining the bases for such position and stating that NDNDLLC intends to vigorously defend its position. ND and the DOJ communicated between October 5, 2017 and December 8, 2017 to discuss their respective positions on both liability and damages. The parties have engaged in discussions related to mediation, but there is currently no written agreement or schedule for mediation.
On December 8, 2017, NDNDLLC received another subpoena from the DOD IG which requested documents relating to ND'sNDLLC's pricing of the Mine Resistant Ambush Protected (“MRAP”) vehicle and its sale of parts to the government for the period from January 1, 2006 through December 31, 2013. NDNDLLC responded to the subpoena and made four productions of responsive documents.subpoena.
On July 10, 2018, NDNDLLC received another subpoena from the DOD IG requesting additional custodian emails and documents related to the MRAP and ISS components. ND is respondingNDLLC responded to the subpoena and has made several productions of responsive documents.subpoena. Additionally, in September and October 2018, the DOJ conducted interviews of certain current and/orand former employees and may conduct additional interviewsemployees.
On December 3, 2019, the DOJ filed a complaint against NDLLC in the future.U.S. District Court for the District of Columbia partially intervening in what had been a sealed False Claims Act (“FCA”) case previously filed by a relator. The relator, a former NDLLC employee, filed his initial complaint in September 2013 in the U.S. District Court for the District of Columbia. The relator filed an amended complaint on November 1, 2019, alleging that NDLLC submitted false pricing support to the government in connection with three MRAP contract parts or part systems - the chassis, the engine, and 13 components of the 3,898 ISS kits (“Relator’s ISS Claim”). The relator alleges single damages of $1.1 billion for the chassis, $36 million for the engine, and $119 million for the Relator’s ISS Claim, totaling approximately $1.3 billion in single damages and $3.8 billion in treble damages. The DOJ’s complaint in partial intervention alleges that NDLLC submitted false pricing support in connection with 11 of the components of 3,803 ISS kits and seeks damages of an unspecified amount under the FCA and common law theories of mistake, unjust enrichment, and fraud. On January 10, 2020, NDLLC filed a motion to transfer venue to the Northern District of Illinois. On January 16, 2020, the U.S. District Court for the District of Columbia entered an order staying deadlines to respond to the complaints, pending resolution of the motion to transfer venue.
At this time, we are unableOn November 5, 2020, the parties filed a Joint Motion to predictStay and Notice of Settlement in Principle, explaining that the outcome of these matters, including whetherparties have reached a settlement will be reached, or provide meaningful quantification of how the finalin principle for a comprehensive resolution of this matter may impactthe claims in both DOJ's and Relator's complaints. We recorded an accrual of $58 million in the fourth quarter, which included $8 million of legal and other fees, related to the settlement in principle. On November 6, 2020, the Court granted the motion, staying the action until February 5, 2021, and denying without prejudice the pending motion to transfer venue. The Court ordered that on or before February 5, 2021, the parties must file a joint stipulation of dismissal or a joint status report.
Customer Dispute
On August 20, 2020, a customer, Hirschbach Motor Lines, Inc. ("Hirschbach"), filed a complaint against Navistar International Corporation and Navistar, Inc. in the Northern District of Iowa federal court, alleging various causes of action (including allegations relating to the parties' contractual relationship) and requesting monetary damages (including punitive damages and attorneys' fees). On October 13, 2020, Hirschbach and Navistar International Corporation filed a stipulation of dismissal without prejudice as to Navistar International Corporation. Navistar, Inc. filed a motion to dismiss the complaint on October 15, 2020. The court has issued a seal order for the complaint and its exhibits, as well as Navistar, Inc.'s motion to dismiss.
Following settlement discussions, the parties reached an agreement in principle to resolve the claims asserted in the Hirschbach lawsuit. On December 7, 2020, the court entered an order staying all further action in the case and directing the parties to file a stipulated dismissal within 30 days. The amount of the agreement in principle was recorded in the fourth quarter of 2020 and was not material to our future consolidated financial condition, results of operations, or cash flows.
Deepwater Horizon Settlement Program
On June 3, 2018, we concluded the settlement of a business economic loss claim relating to our Alabama engine manufacturing facility. We will receive a gross amount of $85 million with a net present value of $70 million, net of our fees and costs, from the Deepwater Horizon Settlement Program. The cash proceeds will be received in installments in 2019 and 2020. The net present value of the settlement was recorded in our third quarter 2018 financial results in Other Income, net in our Consolidated Statements of Operations, and Other current and Other non-current assets in our Consolidated Balance Sheets.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
14.16. Segment Reporting
The following is a description of our four4 reporting segments:
Our Truck segment manufactures and distributes Class 4 through 8 trucks buses, military and government vehiclesbuses under the International and IC Bus ("IC") brands, and produces engines under our proprietary brand name and parts required to support the military truck lines.name. This segment sells its products in the U.S., Canada, and Mexico markets, as well as through our export truck business. In an effort
Navistar International Corporation and Subsidiaries
Notes to strengthen and maintain our dealer network, this segment occasionally acquires and operates dealer locations for the purpose of transitioning ownership.Consolidated Financial Statements—(Continued)
Our Parts segment provides customers with proprietary products needed to support the International commercial truck, IC Bus, proprietary engine lines, and export parts business, as well as our other product lines. Our Parts segment also provides a wide selection of other standard truck, trailer, and engine aftermarket parts. Also included in the Parts segment are the operating results of BDP, which manages the sourcing, merchandising, and distribution of certain service parts we sell to Ford in North America.
Our Global Operations segment primarily consists of Brazil engine operations which produce diesel engines under contract manufacturing arrangements, as well as under the MWM brand, for sale to OEMs in South America. In addition, our Global Operations segmentalso includes the operating resultssale of our joint ventureengine aftermarket parts, primarily in China with Anhui Jianghuai Automobile Co ("JAC").
South America.Our Financial Services segment provides retail, wholesale, and lease financing of products sold by the Truck and Parts segments and their dealers within the U.S. and Mexico, as well as financing for wholesale accounts and selected retail accounts receivable. This segment also facilitates financing relationships in the U.S. and other countries to support our Manufacturing Operations.
Corporate contains those items that are not included in our four4 segments.
Segment Profit (Loss)
We define segment profit (loss) as net income (loss) from continuing operations attributable to NIC, excluding income tax benefit (expense). Selected financial information from our Consolidated Statements of Operations and our Consolidated Balance Sheets is as follows:
The costs of profit sharing and annual incentive compensation for the Manufacturing operations are included in corporate expenses.
Interest expense and interest income for the Manufacturing operations are reported in corporate expenses.
The Financial Services segment finances certain sales to our dealers in North America, which include an interest-free period that varies in length that is subsidized by our Truck and Parts segments. Additionally, the Financial Services segment reports intersegment revenues from secured and unsecured loans to the Manufacturing operations. Certain retail sales financed by the Financial Services segment, primarily NFC, require the Manufacturing operations, primarily the Truck segment, to share a portion of any credit losses.
We allocate "access fees" to the Parts segment from the Truck segment for certain engineering and product development costs, depreciation expense, and SG&A expenses incurred by the Truck segment based on the relative percentage of certain sales, as adjusted for cyclicality.
| |
| • | Other than the items discussed above, the selected financial information presented below is presented in accordance with our policies described in Note 1, Summary of Significant Accounting Policies. |
The following tables present selected financial information presented below is presented in accordance withfor our policies described in Note 1, Summary of Significant Accounting Policies.
reporting segments:
119 |
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Truck | | Parts | | Global Operations | | Financial
Services(A) | | Corporate
and
Eliminations | | Total |
| Year Ended October 31, 2020 | | | | | | | | | | | |
| External sales and revenues, net | $ | 5,240 |
| | $ | 1,841 |
| | $ | 242 |
| | $ | 177 |
| | $ | 3 |
| | $ | 7,503 |
|
| Intersegment sales and revenues | 72 |
| | 5 |
| | 11 |
| | 40 |
| | (128 | ) | | 0 |
|
| Total sales and revenues, net | $ | 5,312 |
| | $ | 1,846 |
| | $ | 253 |
| | $ | 217 |
| | $ | (125 | ) | | $ | 7,503 |
|
| Income (loss) from continuing operations attributable to NIC, net of tax | $ | (141 | ) | | $ | 448 |
| | $ | 0 |
| | $ | 65 |
| | $ | (719 | ) | | $ | (347 | ) |
| Income tax benefit | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 59 |
| | 59 |
|
| Segment profit (loss) | $ | (141 | ) | | $ | 448 |
| | $ | 0 |
| | $ | 65 |
| | $ | (778 | ) | | $ | (406 | ) |
| Depreciation and amortization | $ | 116 |
| | $ | 6 |
| | $ | 6 |
| | $ | 65 |
| | $ | 6 |
| | $ | 199 |
|
| Interest expense | 0 |
| | 0 |
| | 0 |
| | 69 |
| | 199 |
| | 268 |
|
| Equity in income (loss) of non-consolidated affiliates | 1 |
| | 1 |
| | 0 |
| | 0 |
| | 0 |
| | 2 |
|
Capital expenditures(B) | 124 |
| | 8 |
| | 3 |
| | 0 |
| | 13 |
| | 148 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following tables present selected financial information for our reporting segments:
| | | (in millions) | Truck | | Parts | | Global Operations | | Financial
Services(A) | | Corporate
and
Eliminations | | Total | Truck | | Parts | | Global Operations | | Financial
Services(A) | | Corporate
and
Eliminations | | Total |
| Year Ended October 31, 2018 | | | | | | | | | | | | |
| Year Ended October 31, 2019 | | | | | | | | | | | | |
| External sales and revenues, net | $ | 7,386 |
| | $ | 2,399 |
| | $ | 305 |
| | $ | 160 |
| | $ | — |
| | $ | 10,250 |
| $ | 8,501 |
| | $ | 2,239 |
| | $ | 309 |
| | $ | 193 |
| | $ | 9 |
| | $ | 11,251 |
|
| Intersegment sales and revenues | 104 |
| | 8 |
| | 55 |
| | 97 |
| | (264 | ) | | — |
| 84 |
| | 6 |
| | 34 |
| | 104 |
| | (228 | ) | | 0 |
|
| Total sales and revenues, net | $ | 7,490 |
| | $ | 2,407 |
| | $ | 360 |
| | $ | 257 |
| | $ | (264 | ) | | $ | 10,250 |
| $ | 8,585 |
| | $ | 2,245 |
| | $ | 343 |
| | $ | 297 |
| | $ | (219 | ) | | $ | 11,251 |
|
| Income (loss) from continuing operations attributable to NIC, net of tax | $ | 397 |
| | $ | 569 |
| | $ | 2 |
| | $ | 88 |
| | $ | (716 | ) | | $ | 340 |
| $ | 269 |
| | $ | 598 |
| | $ | 0 |
| | $ | 123 |
| | $ | (769 | ) | | $ | 221 |
|
| Income tax expense | — |
| | — |
| | — |
| | — |
| | (52 | ) | | (52 | ) | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (19 | ) | | (19 | ) |
| Segment profit (loss) | $ | 397 |
| | $ | 569 |
| | $ | 2 |
| | $ | 88 |
| | $ | (664 | ) | | $ | 392 |
| $ | 269 |
| | $ | 598 |
| | $ | 0 |
| | $ | 123 |
| | $ | (750 | ) | | $ | 240 |
|
| Depreciation and amortization | $ | 130 |
| | $ | 6 |
| | $ | 10 |
| | $ | 55 |
| | $ | 10 |
| | $ | 211 |
| $ | 104 |
| | $ | 5 |
| | $ | 11 |
| | $ | 64 |
| | $ | 9 |
| | $ | 193 |
|
| Interest expense | — |
| | — |
| | — |
| | 92 |
| | 235 |
| | 327 |
| 0 |
| | 0 |
| | 0 |
| | 105 |
| | 207 |
| | 312 |
|
| Equity in income (loss) of non-consolidated affiliates | 2 |
| | 3 |
| | (5 | ) | | — |
| | — |
| | — |
| 2 |
| | 3 |
| | (1 | ) | | 0 |
| | 0 |
| | 4 |
|
Capital expenditures(B) | 99 |
| | 2 |
| | 3 |
| | 1 |
| | 8 |
| | 113 |
| 101 |
| | 7 |
| | 2 |
| | 2 |
| | 22 |
| | 134 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Truck | | Parts | | Global Operations | | Financial
Services(A) | | Corporate
and
Eliminations | | Total |
| Year Ended October 31, 2017 | | | | | | | | | | | |
| External sales and revenues, net | $ | 5,770 |
| | $ | 2,369 |
| | $ | 279 |
| | $ | 142 |
| | $ | 10 |
| | $ | 8,570 |
|
| Intersegment sales and revenues | 39 |
| | 23 |
| | 30 |
| | 93 |
| | (185 | ) | | — |
|
| Total sales and revenues, net | $ | 5,809 |
| | $ | 2,392 |
| | $ | 309 |
| | $ | 235 |
| | $ | (175 | ) | | $ | 8,570 |
|
| Income (loss) from continuing operations attributable to NIC, net of tax | $ | (6 | ) | | $ | 616 |
| | $ | (7 | ) | | $ | 77 |
| | $ | (651 | ) | | $ | 29 |
|
| Income tax expense | — |
| | — |
| | — |
| | — |
| | (10 | ) | | (10 | ) |
| Segment profit (loss) | $ | (6 | ) | | $ | 616 |
| | $ | (7 | ) | | $ | 77 |
| | $ | (641 | ) | | $ | 39 |
|
| Depreciation and amortization | $ | 137 |
| | $ | 11 |
| | $ | 13 |
| | $ | 51 |
| | $ | 11 |
| | $ | 223 |
|
| Interest expense | — |
| | — |
| | — |
| | 86 |
| | 265 |
| | 351 |
|
| Equity in income (loss) of non-consolidated affiliates | 4 |
| | 3 |
| | (1 | ) | | — |
| | — |
| | 6 |
|
Capital expenditures(B) | 82 |
| | 2 |
| | 5 |
| | 1 |
| | 12 |
| | 102 |
|
120 |
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Truck | | Parts | | Global Operations | | Financial
Services(A) | | Corporate
and
Eliminations | | Total |
| Year Ended October 31, 2018 | | | | | | | | | | | |
| External sales and revenues, net | $ | 7,386 |
| | $ | 2,399 |
| | $ | 305 |
| | $ | 160 |
| | $ | 0 |
| | $ | 10,250 |
|
| Intersegment sales and revenues | 104 |
| | 8 |
| | 55 |
| | 97 |
| | (264 | ) | | 0 |
|
| Total sales and revenues, net | $ | 7,490 |
| | $ | 2,407 |
| | $ | 360 |
| | $ | 257 |
| | $ | (264 | ) | | $ | 10,250 |
|
| Income (loss) from continuing operations attributable to NIC, net of tax | $ | 397 |
| | $ | 569 |
| | $ | 2 |
| | $ | 88 |
| | $ | (716 | ) | | $ | 340 |
|
| Income tax expense | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (52 | ) | | (52 | ) |
| Segment profit (loss) | $ | 397 |
| | $ | 569 |
| | $ | 2 |
| | $ | 88 |
| | $ | (664 | ) | | $ | 392 |
|
| Depreciation and amortization | $ | 130 |
| | $ | 6 |
| | $ | 10 |
| | $ | 55 |
| | $ | 10 |
| | $ | 211 |
|
| Interest expense | 0 |
| | 0 |
| | 0 |
| | 92 |
| | 235 |
| | 327 |
|
| Equity in income (loss) of non-consolidated affiliates | 2 |
| | 3 |
| | (5 | ) | | 0 |
| | 0 |
| | 0 |
|
Capital expenditures(B) | 99 |
| | 2 |
| | 3 |
| | 1 |
| | 8 |
| | 113 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Truck | | Parts | | Global Operations | | Financial Services | | Corporate and Eliminations | | Total |
| Segment assets, as of: | | | | | | | | | | | |
| October 31, 2020 | $ | 1,619 |
| | $ | 663 |
| | $ | 216 |
| | $ | 2,191 |
| | $ | 1,948 |
| | $ | 6,637 |
|
| October 31, 2019 | 1,705 |
| | 688 |
| | 296 |
| | 2,774 |
| | 1,454 |
| | 6,917 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Truck | | Parts | | Global Operations | | Financial
Services(A) | | Corporate
and
Eliminations | | Total |
| Year Ended October 31, 2016 | | | | | | | | | | | |
| External sales and revenues, net | $ | 5,271 |
| | $ | 2,398 |
| | $ | 296 |
| | $ | 135 |
| | $ | 10 |
| | $ | 8,110 |
|
| Intersegment sales and revenues | 132 |
| | 29 |
| | 45 |
| | 100 |
| | (305 | ) | | 1 |
|
| Total sales and revenues, net | $ | 5,403 |
| | $ | 2,427 |
| | $ | 341 |
| | $ | 235 |
| | $ | (295 | ) | | $ | 8,111 |
|
| Income (loss) from continuing operations attributable to NIC, net of tax | $ | (189 | ) | | $ | 640 |
| | $ | (21 | ) | | $ | 100 |
| | $ | (627 | ) | | $ | (97 | ) |
| Income tax expense | — |
| | — |
| | — |
| | — |
| | (33 | ) | | (33 | ) |
| Segment profit (loss) | $ | (189 | ) | | $ | 640 |
| | $ | (21 | ) | | $ | 100 |
| | $ | (594 | ) | | $ | (64 | ) |
| Depreciation and amortization | $ | 129 |
| | $ | 13 |
| | $ | 18 |
| | $ | 50 |
| | $ | 15 |
| | $ | 225 |
|
| Interest expense | — |
| | — |
| | — |
| | 80 |
| | 247 |
| | 327 |
|
| Equity in income (loss) of non-consolidated affiliates | 5 |
| | 4 |
| | (3 | ) | | — |
| | — |
| | 6 |
|
Capital expenditures(B) | 97 |
| | 2 |
| | 4 |
| | 2 |
| | 11 |
| | 116 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| (in millions) | Truck | | Parts | | Global Operations | | Financial Services | | Corporate and Eliminations | | Total |
| Segment assets, as of: | | | | | | | | | | | |
| October 31, 2018 | $ | 2,085 |
| | $ | 636 |
| | $ | 331 |
| | $ | 2,648 |
| | $ | 1,530 |
| | $ | 7,230 |
|
| October 31, 2017 | 1,621 |
| | 632 |
| | 378 |
| | 2,207 |
| | 1,297 |
| | 6,135 |
|
| |
| (A) | Total sales and revenues in the Financial Services segment include interest revenues of $182$130 million, $165$208 million, and $167$182 million for the years ended October 31, 2018, 2017,2020, 2019, and 2016,2018, respectively. |
| |
| (B) | Exclusive of purchases of equipment leased to others and liabilities related to capital expenditures. |
No single customer accounted for more than 10% of consolidated sales and revenues for the years ended October 31, 2018, 20172020, 2019 and 2016.2018.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Sales and revenues to external customers classified by significant products and services were as follows: |
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
| Sales and revenues: | | | | | |
| Trucks | $ | 5,249 |
| | $ | 8,496 |
| | $ | 7,323 |
|
| Parts | 1,698 |
| | 2,021 |
| | 2,215 |
|
| Engine | 388 |
| | 541 |
| | 552 |
|
| Financial Services | 168 |
| | 193 |
| | 160 |
|
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
| Sales and revenues: | | | | | |
| Trucks | $ | 7,323 |
| | $ | 5,706 |
| | $ | 5,176 |
|
| Parts | 2,215 |
| | 2,177 |
| | 2,216 |
|
| Engine | 552 |
| | 545 |
| | 583 |
|
| Financial Services | 160 |
| | 142 |
| | 136 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Information concerning principal geographic areas is presented as follows: | | | | For the Years Ended October 31, | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 | 2020 | | 2019 | | 2018 |
Sales and revenues:(A) | | | | | | | | | | |
| United States | $ | 7,223 |
| | $ | 6,375 |
| | $ | 6,227 |
| $ | 6,123 |
| | $ | 9,097 |
| | $ | 7,223 |
|
| Canada | 868 |
| | 708 |
| | 604 |
| 589 |
| | 918 |
| | 868 |
|
| Mexico | 933 |
| | 708 |
| | 575 |
| 397 |
| | 688 |
| | 933 |
|
| Brazil | 263 |
| | 237 |
| | 240 |
| 215 |
| | 268 |
| | 263 |
|
| Other | 963 |
| | 542 |
| | 465 |
| 179 |
| | 280 |
| | 963 |
|
| | | | As of October 31, | As of October 31, |
| (in millions) | 2018 | | 2017 | 2020 | | 2019 |
Long-lived assets:(B)(A) | | | | | | |
| United States | $ | 1,099 |
| | $ | 1,068 |
| $ | 1,063 |
| | $ | 1,017 |
|
| Canada | 9 |
| | 11 |
| 6 |
| | 7 |
|
| Mexico | 249 |
| | 226 |
| 252 |
| | 283 |
|
| Brazil | 73 |
| | 90 |
| 30 |
| | 62 |
|
| Other | 8 |
| | 9 |
| 3 |
| | 3 |
|
__________________________
| |
(A) | During 2018, we identified certain sales included in Other which should have been classified as United States. As a result, for the years ended October 31, 2017 and 2016, we have reclassified $31 million and $41 million of sales, respectively. These reclassifications did not impact our Consolidated Statements of Operations or our segment sales and revenues.(A) Long-lived assets consist of Property and equipment, net, Goodwill, and Intangible assets, net. |
| |
(B) | Long-lived assets consist of Property and equipment, net, Goodwill, and Intangible assets, net.
|
15.17. Stockholders' Deficit
Preferred and Preference Stocks
NIC has authorized 30 million shares of preferred stock, none of which have been issued, with a par value of $1.00 per share. NIC has authorized 10 million shares of preference stock with a par value of $1.00 per share. Currently, Series B Nonconvertible Junior Preference Stock ("Series B") and Series D Convertible Junior Preference Stock ("Series D") are outstanding.
The UAW holds the Series B and is currently entitled to elect one member of our Board of Directors. As of October 31, 20182020 and 2017,2019, there was one share of Series B Preference stock with a par value of $1.00 per share authorized and outstanding.
At both October 31, 20182020 and 2017,2019, there were 70,182 shares of Series D issued and outstanding. These shares were issued with a par value of $1.00 per share, an optional redemption price, and a liquidation preference of $25 per share plus accrued dividends. The Series D stock may be converted into NIC common stock at the holder's option (subject to adjustment in certain circumstances); upon conversion each share of Series D stock is converted to 0.3125 shares of common stock. The Series D stock ranks senior to common stock as to dividends and liquidation and receives dividends at a rate of 120% of the cash dividends on common stock as declared on an as-converted basis.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
Common Stock
Changes in shares of common stock and treasury stock were as follows: |
| | | | | | | | |
| (in millions) | Common Stock | | Treasury Stock | | Shares Outstanding |
| Balance as of October 31, 2015 | 86.8 |
| | 5.3 |
| | 81.5 |
|
| Shares issued | — |
| | (0.1 | ) | | 0.1 |
|
| Shares acquired | — |
| | — |
| | — |
|
| Balance as of October 31, 2016 | 86.8 |
| | 5.2 |
| | 81.6 |
|
| Shares issued | 16.3 |
| | (0.7 | ) | | 17.0 |
|
| Shares acquired | — |
| | 0.1 |
| | (0.1 | ) |
| Balance as of October 31, 2017 | 103.1 |
| | 4.6 |
| | 98.5 |
|
| Shares issued | — |
| | (0.5 | ) | | 0.5 |
|
| Shares acquired | — |
| | 0.1 |
| | (0.1 | ) |
| Balance as of October 31, 2018 | 103.1 |
| | 4.2 |
| | 98.9 |
|
On February 28, 2017, we consummated our previously announced strategic alliance with TRATON Group, which included an equity investment in the Company by TRATON Group pursuant to the Stock Purchase Agreement, the License and Supply Framework Agreement and the Procurement JV Framework Agreement. Pursuant to the TRATON Group Stock Purchase Agreement, on February 28, 2017 we issued and TRATON Group purchased 16.2 million of our shares of common stock for an aggregate purchase price of $256 million at $15.76 per share (an estimated 19.9% stake (16.6% on a fully-diluted basis) in the Company). |
| | | | | | | | |
| (in millions) | Common Stock | | Treasury Stock | | Shares Outstanding |
| Balance as of October 31, 2017 | 103.1 |
| | 4.6 |
| | 98.5 |
|
| Shares issued | 0 |
| | (0.5 | ) | | 0.5 |
|
| Shares acquired | 0 |
| | 0.1 |
| | (0.1 | ) |
| Balance as of October 31, 2018 | 103.1 |
| | 4.2 |
| | 98.9 |
|
| Shares issued | 0 |
| | (0.5 | ) | | 0.5 |
|
| Shares acquired | 0 |
| | 0.2 |
| | (0.2 | ) |
| Balance as of October 31, 2019 | 103.1 |
| | 3.9 |
| | 99.2 |
|
| Shares issued | 0 |
| | (0.6 | ) | | 0.6 |
|
| Shares acquired | 0 |
| | 0.2 |
| | (0.2 | ) |
| Balance as of October 31, 2020 | 103.1 |
| | 3.5 |
| | 99.6 |
|
Additional Paid in Capital
In accounting for the issuance of the former 4.5% Senior Subordinated Convertible Notes due 2018 ("2018 Convertible Notes,Notes"), a debt component and an equity component were separated resulting in the debt component being recorded at its estimated fair value without consideration given to the conversion feature. We estimated the fair value of the liability component at $177 million. The resulting equity component of $22 million, net of $1 million of discount, was recorded inAdditional paid in capital. Issuance costs were also allocated between the debt and equity components resulting in an immaterial amount being recorded as a reduction in Additional paid in capital. The 2018 Convertible Notes were fully repaid upon maturity in October 2018, and none were converted into our common stock.
In accounting for the issuance of the former 2019 Convertible Notes, the debt component and equity component were separated, resulting in the debt component being recorded at its estimated fair value without consideration given to the conversion feature. We estimated the fair value of the liability component at $367 million. The resulting equity component of $44 million was recorded in Additional paid in capitaland will not be remeasured as long as it continues to meet the conditions for equity classification.. Issuance costs were also allocated between debt and equity components with $1 million being recorded as a reduction in Additional paid in capital.
For more information on our 2018 Convertible Notes andThe 2019 Convertible Notes see Note 9, Debt.were fully repaid upon maturity in April 2019, and none were converted into our common stock.
Accumulated Other Comprehensive Loss
The following table presents changes in Accumulated other comprehensive loss, net of tax, included in our Consolidated Statements of Shareholders' Deficit:
|
| | | | | | | | | | | |
| (in millions) | Foreign Currency Translation Adjustments | | Defined Benefit Plans | | Total |
| Balance as of October 31, 2019 | $ | (321 | ) | | $ | (1,591 | ) | | $ | (1,912 | ) |
Other comprehensive income (loss) before reclassifications(A) | (83 | ) | | 220 |
| | 137 |
|
| Amounts reclassified out of accumulated other comprehensive loss | 0 |
| | 102 |
| | 102 |
|
| Net current-period other comprehensive income (loss) | (83 | ) | | 322 |
| | 239 |
|
Reclassification of stranded tax effects(B) | $ | — |
| | $ | (192 | ) | | $ | (192 | ) |
| Balance as of October 31, 2020 | $ | (404 | ) | | $ | (1,461 | ) | | $ | (1,865 | ) |
|
| | | | | | | | | | | | | | | |
| (in millions) | Unrealized Gain on Marketable Securities | | Foreign Currency Translation Adjustments | | Defined Benefit Plans | | Total |
| Balance as of October 31, 2017 | $ | — |
| | $ | (283 | ) | | $ | (1,928 | ) | | $ | (2,211 | ) |
| Other comprehensive income (loss) before reclassifications | — |
| | (32 | ) | | 201 |
| | 169 |
|
| Amounts reclassified out of accumulated other comprehensive loss | — |
| | — |
| | 122 |
| | 122 |
|
| Net current-period other comprehensive income (loss) | — |
| | (32 | ) | | 323 |
| | 291 |
|
| Balance as of October 31, 2018 | $ | — |
| | $ | (315 | ) | | $ | (1,605 | ) | | $ | (1,920 | ) |
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | |
| (in millions) | Foreign Currency Translation Adjustments | | Defined Benefit Plans | | Total |
| Balance as of October 31, 2018 | $ | (315 | ) | | $ | (1,605 | ) | | $ | (1,920 | ) |
| Other comprehensive loss before reclassifications | (6 | ) | | (178 | ) | | (184 | ) |
| Amounts reclassified out of accumulated other comprehensive loss | 0 |
| | 192 |
| | 192 |
|
| Net current-period other comprehensive income (loss) | (6 | ) | | 14 |
| | 8 |
|
| Balance as of October 31, 2019 | $ | (321 | ) | | $ | (1,591 | ) | | $ | (1,912 | ) |
| | | (in millions) | Unrealized Gain on Marketable Securities | | Foreign Currency Translation Adjustments | | Defined Benefit Plans | | Total | Foreign Currency Translation Adjustments | | Defined Benefit Plans | | Total |
| Balance as of October 31, 2016 | $ | 1 |
| | $ | (280 | ) | | $ | (2,361 | ) | | $ | (2,640 | ) | |
| Balance as of October 31, 2017 | | $ | (283 | ) | | $ | (1,928 | ) | | $ | (2,211 | ) |
Other comprehensive income (loss) before reclassifications(A) | (1 | ) | | (3 | ) | | 279 |
| | 275 |
| (32 | ) | | 201 |
| | 169 |
|
| Amounts reclassified out of accumulated other comprehensive loss | — |
| | — |
| | 154 |
| | 154 |
| 0 |
| | 122 |
| | 122 |
|
| Net current-period other comprehensive income (loss) | (1 | ) | | (3 | ) | | 433 |
| | 429 |
| (32 | ) | | 323 |
| | 291 |
|
| Balance as of October 31, 2017 | $ | — |
| | $ | (283 | ) | | $ | (1,928 | ) | | $ | (2,211 | ) | |
| Balance as of October 31, 2018 | | $ | (315 | ) | | $ | (1,605 | ) | | $ | (1,920 | ) |
_________________________
| |
| (A) | Other comprehensiveComprehensive income before reclassifications for Defined Benefit Plans includes a $28$75 million intraperiod tax allocation and $8allocation. |
| |
| (B) | During the fiscal year ended October 31, 2020, we reclassified $192 million of stranded tax effects out of Accumulated other comprehensive loss and into Accumulated deficit. The stranded tax effects remained a component of Accumulated other comprehensive loss as a result of the remeasurement of our deferred tax assets.assets related to our U.S. Pension and OPEB Plans through the statement of operations, to the new U.S. federal tax rate of 21% through our Consolidated Statement of Operations. As a result, stranded tax effects within Accumulated other comprehensive loss which would not be realized at the established historical tax rates have now been adjusted through equity. |
|
| | | | | | | | | | | | | | | |
| (in millions) | Unrealized Gain on Marketable Securities | | Foreign Currency Translation Adjustments | | Defined Benefit Plans | | Total |
| Balance as of October 31, 2015 | $ | 1 |
| | $ | (287 | ) | | $ | (2,315 | ) | | $ | (2,601 | ) |
| Other comprehensive income (loss) before reclassifications | — |
| | 7 |
| | (177 | ) | | (170 | ) |
| Amounts reclassified out of accumulated other comprehensive loss | — |
| | — |
| | 131 |
| | 131 |
|
| Net current-period other comprehensive income (loss) | — |
| | 7 |
| | (46 | ) | | (39 | ) |
| Balance as of October 31, 2016 | $ | 1 |
| | $ | (280 | ) | | $ | (2,361 | ) | | $ | (2,640 | ) |
The following table presents the amounts reclassified from Accumulated other comprehensive loss and the affected line item in our Consolidated Statements of Operations:
|
| | | | | | | | | | | | | | |
| | | | | For the Years Ended October 31, |
| | | Location in Consolidated
Statements of Operations | | 2020 | | 2019 | | 2018 |
| Defined benefit plans | | | | | | | | |
| Amortization of pension service cost | | Other expense, net | | $ | 1 |
| | $ | 0 |
| | $ | 0 |
|
| Amortization of actuarial loss | | Other expense, net | | 96 |
| | 93 |
| | 114 |
|
| Settlements | | Other expense, net | | 7 |
| | 143 |
| | 9 |
|
| | | Total before tax | | 104 |
| | 236 |
| | 123 |
|
| | | Income tax expense | | (2 | ) | | (44 | ) | | (1 | ) |
| Total reclassifications for the period, net of tax | | $ | 102 |
| | $ | 192 |
| | $ | 122 |
|
|
| | | | | | | | | | | | | | |
| | | | | For the Years Ended October 31, |
| | | Location in Consolidated
Statements of Operations | | 2018 | | 2017 | | 2016 |
| Defined benefit plans | | | | | | | | |
| Amortization of prior service benefit | | Selling, general and administrative expenses | | $ | — |
| | $ | — |
| | $ | (1 | ) |
| Amortization of actuarial loss | | Selling, general and administrative expenses | | 114 |
| | 138 |
| | 133 |
|
| Settlements | | Selling, general and administrative expenses | | 9 |
| | — |
| | — |
|
| Settlements | | Restructuring | | — |
| | 23 |
| | — |
|
| | | Total before tax | | 123 |
| | 161 |
| | 132 |
|
| | | Income tax expense | | (1 | ) | | (7 | ) | | (1 | ) |
| Total reclassifications for the period, net of tax | | $ | 122 |
| | $ | 154 |
| | $ | 131 |
|
Dividend Restrictions
Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for the year in which the dividend is declared or the preceding year, and no dividend may be paid on common stock at any time during which the capital of outstanding preferred stock or preference stock exceeds our net assets.
Certain debt instruments, including our 6.625% Senior Notes indenture, our 9.50% Senior Secured Notes indenture, our Loan Agreement with regard to the Tax ExemptTax-Exempt Bonds and our Amended Term Loan Credit Agreement, contain terms that include various negative covenants and restrictions, including, among others, certain limitations on dividends. We have not paid dividends on our common stock since 1980.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
16.18. Earnings (Loss) Per Share Attributable to Navistar International Corporation
The following table presents the information used in the calculation of our basic and diluted earnings (loss) per share for continuing operations, discontinued operations, and net income (loss), all attributable to NIC in our Consolidated Statements of Operations: |
| | | | | | | | | | | | |
| | | For the Years Ended October 31, |
| (in millions, except per share data) | | 2020 | | 2019 | | 2018 |
| Numerator: | | | | | | |
| Net income (loss) attributable to Navistar International Corporation common stockholders | | $ | (347 | ) | | $ | 221 |
| | $ | 340 |
|
| | | | | | | |
| Denominator: | | | | | | |
| Weighted average shares outstanding: | | | | | | |
| Basic | | 99.7 |
| | 99.3 |
| | 98.9 |
|
| Effect of dilutive securities | | 0 |
| | 0.2 |
| | 0.7 |
|
| Diluted | | 99.7 |
| | 99.5 |
| | 99.6 |
|
| | | | | | | |
| Earnings (loss) per share attributable to Navistar International Corporation: | | | | | | |
| Basic | | $ | (3.48 | ) | | $ | 2.23 |
| | $ | 3.44 |
|
| Diluted | | $ | (3.48 | ) | | $ | 2.22 |
| | $ | 3.41 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | | | | | | |
| | | For the Years Ended October 31, |
| (in millions, except per share data) | | 2018 | | 2017 | | 2016 |
| Numerator: | | | | | | |
| Amounts attributable to Navistar International Corporation common stockholders: | | | | | | |
| Income (loss) from continuing operations, net of tax | | $ | 340 |
| | $ | 29 |
| | $ | (97 | ) |
| Income from discontinued operations, net of tax | | — |
| | 1 |
| | — |
|
| Net income (loss) | | $ | 340 |
| | $ | 30 |
| | $ | (97 | ) |
| | | | | | | |
| Denominator: | | | | | | |
| Weighted average shares outstanding: | | | | | | |
| Basic | | 98.9 |
| | 93.0 |
| | 81.7 |
|
| Effect of dilutive securities | | 0.7 |
| | 0.5 |
| | — |
|
| Diluted | | 99.6 |
| | 93.5 |
| | 81.7 |
|
| | | | | | | |
| Earnings (loss) per share attributable to Navistar International Corporation: | | | | | | |
| Basic: | | | | | | |
| Continuing operations | | $ | 3.44 |
| | $ | 0.31 |
| | $ | (1.19 | ) |
| Discontinued operations | | — |
| | 0.01 |
| | — |
|
| Net income (loss) | | $ | 3.44 |
| | $ | 0.32 |
| | $ | (1.19 | ) |
| Diluted: | | | | | | |
| Continuing operations | | $ | 3.41 |
| | $ | 0.31 |
| | $ | (1.19 | ) |
| Discontinued operations | | — |
| | 0.01 |
| | — |
|
| Net income (loss) | | $ | 3.41 |
| | $ | 0.32 |
| | $ | (1.19 | ) |
The conversion rate on our 4.5% Senior Subordinatedformer 2018 Convertible Notes due 2018 (the "2018 Convertible Notes") was 17.1233 shares of common stock per $1,000 principal amount of 2018 Convertible Notes, equivalent to an initial conversion price of approximately $58.40 per share of common stock. The 2018 Convertible Notes had an anti-dilutive effect when calculating diluted earnings per share aswhen our average stock price was less than $58.40 for all periods presented. The 2018 Convertible Notes were fully repaid upon maturity in October 2018, and none were converted into our common stock.
The conversion rate on our 4.75% Senior Subordinatedformer 2019 Convertible Notes due 2019 (the "2019 Convertible Notes") iswas 18.4946 shares of common stock per $1,000 principal amount of 2019 Convertible Notes, equivalent to an initial conversion price of approximately $54.07 per share of common stock. The 2019 Convertible Notes havehad an anti-dilutive effect when calculating diluted earnings per share when our average stock price iswas less than $54.07.
For more information on our 2018 Convertible Notes and$54.07 for all periods presented. The 2019 Convertible Notes see Note 9, Debt.
In February 2017, we consummated our previously announced strategic alliance with TRATON Group, which included an equity investmentwere fully repaid upon maturity in the Company by TRATON Group pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), a LicenseApril 2019 and Supply Framework Agreement and a Procurement JV Framework Agreement.
Pursuant to the Stock Purchase Agreement, on February 28, 2017 we issued and TRATON Group purchased 16.2 million shares ofnone were converted into our common stock for an aggregate purchase price of $256 million at $15.76 per share (a 19.9% stake at the time of purchase (16.6% on a fully-diluted basis)) in the Company, excluding stock issuance costs.stock.
The computation of diluted earnings per share also excludes outstanding options and other common stock equivalents in periods where inclusion of such potential common stock instruments would be anti-dilutive.
For the year ended October 31, 2016,2020, no dilutive securities were included in the computation of diluted earnings per share because they would have been anti-dilutive due to the net loss attributable to NIC. Additionally,
For the year ended October 31, 2018, certain securities have been excluded from the computation of earnings per share, as our average stock price was less than their respective exercise prices. For the years ended October 31, 2018, 2017, and 2016, theThe aggregate shares not included were 9.8 million, 13.9 million, and 15.0 million, respectively.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
For the year ended October 31, 2018, the aggregate shares not included in the computation of earnings per sharewhich were primarily comprised of 7.6 million shares related to the 2019 Convertible Notes. For the years ended October 31, 2017 and 2016, the aggregate shares not included in the computation of earnings per share were primarily comprised of 3.4 million shares related to the 2018 Convertible Notes and 7.6 million sharesrelated to the 2019 Convertible Notes.
17.19. Stock-based Compensation Plans
2013 Performance Incentive Plan
The 2013 Performance Incentive Plan ("2013 PIP") was approved by the Board of Directors on December 11, 2012 and subsequently approved by the stockholders on February 19, 2013. The plan was first amended on February 11, 2015.2015 and then subsequently amended on December 9, 2019. The 2013 PIP provides for the grant of annual cash incentive awards to all employees (including the Company’s executive officers), and stock options, restricted stock or stock unit awards, stock appreciation rights and other stock-based awards to all employees (including the Company’s executive officers), any consultants of the Company and its subsidiaries, and all non-employee directors serving on the Company’s Board of Directors. The awards granted under the 2013 PIP are established by our Board of Directors or a committee thereof at the time of issuance.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The 2013 PIP replaced on a prospective basis, our 2004 Performance Incentive Plan, and will expire in February 2023. A total of 3,665,500 shares of common stock were reserved for awards under the 2013 Plan.PIP. The number of shares authorized and available for issuance under the 2013 PIP will be increased by shares of stock subject to an option or award under the 2013 PIP, the Company’s 2004 Performance Incentive Plan, or the Ownership Program as further described below, (collectively, the "Existing Plans"), that isare canceled, expired, forfeited, settled in cash, or otherwise terminated after February 19, 2013 without a delivery of shares to the participant of such plan, including shares used to satisfy the exercise price of a stock option or a tax withholding obligation arising in connection with an award. As of October 31, 2018, 3,142,9172020, 3,949,512 shares remain available for issuance under the 2013 PIP. Shares issued under the Plan may be newly issued shares or reissued Treasury shares.
Other Plans and Grants
The following plans were approved by our Board of Directors but were not approved and were not required to be approved by our stockholders: the Executive Stock Ownership Program, as amended from time to time (the "Ownership Program"), and the Non-Employee Directors Deferred Fee Plan (the "Deferred Fee Plan").
Ownership Program—In June 1997, our Board of Directors approved the terms of the Ownership Program. In general, under the Ownership Program in existence through November 2013, all officers and senior managers were required to acquire, by direct purchase or through salary or annual bonus reduction, an ownership interest in the Company by acquiring a designated amount of our common stock based on organizational level. Participants were required to hold such stock for the entire period in which they are employed by the Company. The Ownership Program was amended and restated effective November 1, 2013 on a going forward basis. The new guidelines (i) increased stock ownership guideline multiples to six times salary for the President and CEO and up to three times salary for other senior executives; (ii) modified retention requirements for Company granted equity until ownership requirements are met; (iii) added a holding period for shares acquired through transactions with Company granted equity after the executives satisfy the stock ownership requirement; (iv) eliminated the granting of premium shares as an inducement to executives fulfilling stock ownership guidelines on an accelerated basis; and (v) eliminated the required time frame to fulfill stock ownership guidelines. Under the prior Ownership Program, participants were entitled to defer their cash bonus into deferred share units ("DSUs"), which vested immediately. There were 2,365 DSUs outstanding as of October 31, 2018. Premium share units ("PSUs") were also eligible to be awarded to participants who complete their ownership requirement on an accelerated basis. PSUs vested annually, pro rata over three years. There were 29,712 PSUs outstanding as of October 31, 2018 under the prior Ownership Program. Each vested DSU and PSU will be settled by delivery of one share of common stock within ten days after a participant's termination of employment or at such later date as required by IRC Section Rule 409A. PSUs and DSUs awarded between February 19, 2013 and October 31, 2013 were issued under the 2013 PIP.
Deferred Fee Plan—Under the Deferred Fee Plan, non-employee directors may elect to defer payment of all or a portion of their retainer fees and meeting fees in cash (with interest) or in stock units. Deferrals in the deferred stock account are valued as if each deferral was vested in NIC common stock as of the deferral date. As of October 31, 2018, 19,491deferred shares were outstanding under the Deferred Fee Plan. Beginning on September 30, 2013, shares deferred by non-employee directors have been issued out of the 2013 PIP. The Deferred Fee Plan was amended and restated effective February 11, 2015 on a going forward basis.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
| |
| • | Ownership Program—In June 1997, our Board of Directors approved the terms of the Ownership Program. In general, under the Ownership Program in existence through November 2013, all officers and senior managers were required to acquire, by direct purchase or through salary or annual bonus reduction, an ownership interest in the Company by acquiring a designated amount of our common stock based on organizational level. Participants were required to hold such stock for the entire period in which they are employed by the Company. The Ownership Program was amended and restated effective November 1, 2013 on a going forward basis. The new guidelines (i) increased stock ownership guideline multiples to six times salary for the President and CEO and up to three times salary for other senior executives; (ii) modified retention requirements for Company granted equity until ownership requirements are met; (iii) added a holding period for shares acquired through transactions with Company granted equity after the executives satisfy the stock ownership requirement; (iv) eliminated the granting of premium shares as an inducement to executives fulfilling stock ownership guidelines on an accelerated basis; and (v) eliminated the required time frame to fulfill stock ownership guidelines. Under the prior Ownership Program, participants were entitled to defer their cash bonus into deferred share units ("DSUs"), which vested immediately. There were 2,365 DSUs outstanding as of October 31, 2020. Premium share units ("PSUs") were also eligible to be awarded to participants who complete their ownership requirement on an accelerated basis. PSUs vested annually, pro rata over three years. There were 28,500 PSUs outstanding as of October 31, 2020 under the prior Ownership Program. Each vested DSU and PSU will be settled by delivery of 1 share of common stock within 10 days after a participant's termination of employment or at such later date as required by IRC Section Rule 409A. PSUs and DSUs awarded between February 19, 2013 and October 31, 2013 were issued under the 2013 PIP. |
| |
| • | Deferred Fee Plan—Under the Deferred Fee Plan, non-employee directors may elect to defer payment of all or a portion of their annual cash retainer in cash (with interest) or in stock units and may elect to defer all or a portion of their annual equity retainer in deferred stock units. Deferrals in the deferred stock account are valued as if each deferral was vested in NIC common stock as of the deferral date. As of October 31, 2020, 28,833deferred shares were outstanding under the Deferred Fee Plan. Beginning on September 30, 2013, shares deferred by non-employee directors have been issued out of the 2013 PIP. The Deferred Fee Plan was amended and restated effective February 11, 2015 and then subsequently amended on December 9, 2019. |
Stock Options
Stock options represent the right to purchase a specified number of shares of common stock at a specified exercise price. Generally, stock options are awarded with an exercise price equal to the fair market value of the common stock at grant date. The stock options granted prior to December 2009 generally have a ten-year contractual life. Stock options granted in December 2009 through November 2016 were granted with a seven-year contractual life. Since December 2016, stock options have been granted with a ten-year contractual life. Stock options are valued using the Black-Scholes option pricing model and vest ratably over a three-year period.
The following table summarizes stock options activity:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | 2018 | | 2017 | | 2016 |
| | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Options outstanding, at beginning of year | 2,408 |
| | $ | 38.81 |
| | 2,835 |
| | $ | 38.89 |
| | 2,886 |
| | $ | 39.33 |
|
| Granted | 236 |
| | 40.44 |
| | 301 |
| | 27.88 |
| | 35 |
| | 10.6 |
|
| Exercised | (236 | ) | | 32.78 |
| | (325 | ) | | 30.25 |
| | — |
| | — |
|
| Forfeited/expired | (628 | ) | | 56.64 |
| | (403 | ) | | 38.13 |
| | (86 | ) | | 42.30 |
|
| Options outstanding, at end of year | 1,780 |
| | 28.98 |
| | 2,408 |
| | 38.81 |
| | 2,835 |
| | 38.89 |
|
| Options exercisable, at end of year | 1,396 |
| | 33.55 |
| | 2,073 |
| | 40.72 |
| | 2,695 |
| | 39.29 |
|
The following table summarizes information about stock options outstanding:
|
| | | | | | | | | | | | | |
| | Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| Range of Exercise Prices: | (in thousands) | | (in years) | | | | (in millions) |
| $ 10.60 - $ 31.19 | 813 |
| | 3.7 |
| | $ | 28.19 |
| | $ | 4.3 |
|
| $ 31.20 - $ 39.32 | 684 |
| | 0.9 |
| | 37.02 |
| | — |
|
| $ 39.33 - $ 68.65 | 283 |
| | 7.3 |
| | 41.52 |
| | — |
|
| Options Outstanding | 1,780 |
| | | | | | |
The following table summarizes information about stock options exercisable:
|
| | | | | | | | | | | | | |
| | Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| Range of Exercise Prices: | (in thousands) | | (in years) | | | | (in millions) |
| $ 10.60 - $ 31.19 | 637 |
| | 2.5 |
| | $ | 28.52 |
| | $ | 3.2 |
|
| $ 31.20 - $ 39.32 | 678 |
| | 0.8 |
| | 37.05 |
| | — |
|
| $ 39.33 - $ 68.65 | 81 |
| | 2.4 |
| | 43.86 |
| | — |
|
| Options Exercisable | 1,396 |
| | | | | | |
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes stock options activity:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | 2020 | | 2019 | | 2018 |
| | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Options outstanding, at beginning of year | 1,737 |
| | $ | 33.82 |
| | 1,780 |
| | $ | 33.70 |
| | 2,408 |
| | $ | 38.81 |
|
| Granted | 0 |
| | 0 |
| | 284 |
| | 33.83 |
| | 236 |
| | 40.44 |
|
| Exercised | (142 | ) | | 28.81 |
| | (94 | ) | | 23.98 |
| | (236 | ) | | 32.78 |
|
| Forfeited/expired | (661 | ) | | 33.65 |
| | (233 | ) | | 36.86 |
| | (628 | ) | | 56.64 |
|
| Options outstanding, at end of year | 934 |
| | 34.71 |
| | 1,737 |
| | 33.82 |
| | 1,780 |
| | 33.70 |
|
| Options exercisable, at end of year | 686 |
| | 34.35 |
| | 1,242 |
| | 33.50 |
| | 1,396 |
| | 33.55 |
|
The following table summarizes information about stock options outstanding:
|
| | | | | | | | | | | | | |
| | Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| Range of Exercise Prices: | (in thousands) | | (in years) | | | | (in millions) |
| $ 10.60 - $ 30.94 | 261 |
| | 6.3 |
| | $ | 26.72 |
| | $ | 4.3 |
|
| $ 30.95 - $ 39.32 | 410 |
| | 4.9 |
| | 35.35 |
| | 3.2 |
|
| $ 39.33 - $ 43.86 | 263 |
| | 5.2 |
| | 41.61 |
| | 0.5 |
|
| Options Outstanding | 934 |
| | | | | | |
The following table summarizes information about stock options exercisable:
|
| | | | | | | | | | | | | |
| | Shares | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | | Aggregate Intrinsic Value |
| Range of Exercise Prices: | (in thousands) | | (in years) | | | | (in millions) |
| $ 10.60 - $ 30.94 | 237 |
| | 6.1 |
| | $ | 26.66 |
| | $ | 3.9 |
|
| $ 30.95 - $ 39.32 | 249 |
| | 2.8 |
| | 35.55 |
| | 1.9 |
|
| $ 39.33 - $ 43.86 | 200 |
| | 4.5 |
| | 41.93 |
| | 0.3 |
|
| Options Exercisable | 686 |
| | | | | | |
There were no options granted during the year ended October 31, 2020. The weighted average grant date fair value of options granted during the years ended October 31, 2019, and 2018 2017,was $16.15, and 2016 was $18.90, $13.61, and $5.15, respectively. The total intrinsic value of stock options exercised during the years ended October 31, 2020, 2019, and 2018 2017, and 2016 was $2.5$1 million, $2.6$2 million, and zero,$3 million, respectively. The fair value of each option grant was estimated on the grant date using the Black-Scholes option-pricing model.
The following table summarizes the annual weighted average assumptions:
|
| | | | | | | |
| | For the Years Ended October 31, |
| | 2020 | | 2019 | | 2018 |
| Risk-free interest rate | N/A | | 2.5 | % | | 2.5 | % |
| Expected volatility | N/A | | 48.8 | % | | 49.1 | % |
| Expected life (in years) | N/A | | 5.6 |
| | 5.3 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
|
| | | | | | | | |
| | For the Years Ended October 31, |
| | 2018 | | 2017 | | 2016 |
| Risk-free interest rate | 2.5 | % | | 1.9 | % | | 1.7 | % |
| Expected volatility | 49.1 | % | | 55.2 | % | | 56.8 | % |
| Expected life (in years) | 5.3 |
| | 5.0 |
| | 4.8 |
|
The use of the Black-Scholes option-pricing model requires us to make certain estimates and assumptions. The risk-free interest rate utilized is the implied yield on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term assumption on the grant date, rounded to the nearest half year. A dividend yield assumption of 0% is used for all grants based on our history of not paying a dividend to any class of stock and future expectations. Expected volatility is based on a blend of our historical stock prices and implied volatilities from traded options in our stock. The weighted average expected life in years for all grants as a group is then calculated for each year.
Restricted Stock
Restricted stock represents common stock issued subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Restricted stock is valued based on the fair value of the common stock at grant date and except for the restricted stock issued to non-employee directors, vests either ratably over a three-year period or cliff-vest at the end of a three-year period. Restricted stock issued to non-employee directors representin the years ended October 31, 2019 and 2018 represents their first quarterly retainer fees and immediately vestvests at grant date. No restricted stock was issued for the year ended October 31, 2020.
The following table summarizes restricted stock activity:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | 2020 | | 2019 | | 2018 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Nonvested, at beginning of year | 0 |
| | $ | 0 |
| | 0 |
| | $ | 0 |
| | 0 |
| | $ | 0 |
|
| Granted | 0 |
| | 0 |
| | 5 |
| | 32.30 |
| | 4 |
| | 34.97 |
|
| Vested | 0 |
| | 0 |
| | (5 | ) | | 32.30 |
| | (4 | ) | | 34.97 |
|
| Nonvested, at end of year | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | 2018 | | 2017 | | 2016 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Nonvested, at beginning of year | — |
| | $ | — |
| | — |
| | $ | — |
| | — |
| | $ | — |
|
| Granted | 4 |
| | 34.97 |
| | 5 |
| | 24.62 |
| | 5 |
| | 12.52 |
|
| Vested | (4 | ) | | 34.97 |
| | (5 | ) | | 24.62 |
| | (5 | ) | | 12.52 |
|
| Nonvested, at end of year | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
The aggregate grant date fair value of restricted stock vested for the years ended October 31, 2018, 20172019 and 20162018 was $0.1 million.million for each period.
Restricted Stock Units
Restricted stock units ("RSUs") represent the right to receive shares of common stock ("share-settled RSUs") or the cash ("cash-settled RSUs") value of one share of common stock in the future, with the right to future delivery of the shares or cash subject to forfeiture or other restrictions that will lapse upon satisfaction of specified conditions. Share and cash-settled RSUs are valued based on the fair value of the common stock at grant date and vest either ratably over a three-year period or cliff-vest at the end of a one-year or three-year period. Cash-settled RSUs are classified as liabilities and are remeasured at each reporting date until settlement.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following tables summarize RSUs activity for the years ended October 31:
|
| | | | | | | | | | | | | | | | | | | | |
| | Share-Settled RSUs |
| | 2020 | | 2019 | | 2018 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Nonvested, at beginning of year | 476 |
| | $ | 33.82 |
| | 502 |
| | $ | 25.01 |
| | 619 |
| | $ | 15.04 |
|
| Granted | 21 |
| | 36.36 |
| | 178 |
| | 34.93 |
| | 168 |
| | 40.05 |
|
| Vested | (181 | ) | | 28.36 |
| | (194 | ) | | 11.84 |
| | (214 | ) | | 9.59 |
|
| Forfeited | (9 | ) | | 35.70 |
| | (10 | ) | | 38.24 |
| | (71 | ) | | 20.24 |
|
| Nonvested, at end of year | 307 |
| | 37.16 |
| | 476 |
| | 33.82 |
| | 502 |
| | 25.01 |
|
| | | | | | | | | | | | |
| | Cash-Settled RSUs |
| | 2020 | | 2019 | | 2018 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Nonvested, at beginning of year | 385 |
| | $ | 35.07 |
| | 428 |
| | $ | 28.58 |
| | 587 |
| | $ | 18.02 |
|
| Granted | 0 |
| | 0 |
| | 226 |
| | 34.97 |
| | 187 |
| | 40.12 |
|
| Vested | (188 | ) | | 33.69 |
| | (230 | ) | | 22.89 |
| | (319 | ) | | 16.42 |
|
| Forfeited | (21 | ) | | 35.68 |
| | (39 | ) | | 34.99 |
| | (27 | ) | | 22.76 |
|
| Nonvested, at end of year | 176 |
| | 36.47 |
| | 385 |
| | 35.07 |
| | 428 |
| | 28.58 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | Share-Settled RSUs |
| | 2018 | | 2017 | | 2016 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Nonvested, at beginning of year | 619 |
| | $ | 15.04 |
| | 613 |
| | $ | 8.74 |
| | 69 |
| | $ | 28.60 |
|
| Granted | 168 |
| | 40.05 |
| | 210 |
| | 27.28 |
| | 624 |
| | 8.76 |
|
| Vested | (214 | ) | | 9.59 |
| | (204 | ) | | 8.74 |
| | (66 | ) | | 28.66 |
|
| Forfeited | (71 | ) | | 20.24 |
| | — |
| | — |
| | (14 | ) | | 13.07 |
|
| Nonvested, at end of year | 502 |
| | 25.01 |
| | 619 |
| | 15.04 |
| | 613 |
| | 8.74 |
|
| | | | | | | | | | | | |
| | Cash-Settled RSUs |
| | 2018 | | 2017 | | 2016 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Nonvested, at beginning of year | 587 |
| | $ | 18.02 |
| | 817 |
| | $ | 13.95 |
| | 498 |
| | $ | 29.96 |
|
| Granted | 187 |
| | 40.12 |
| | 258 |
| | 27.48 |
| | 650 |
| | 7.26 |
|
| Vested | (319 | ) | | 16.42 |
| | (456 | ) | | 15.92 |
| | (231 | ) | | 26.06 |
|
| Forfeited | (27 | ) | | 22.76 |
| | (32 | ) | | 20.17 |
| | (100 | ) | | 22.19 |
|
| Nonvested, at end of year | 428 |
| | 28.58 |
| | 587 |
| | 18.02 |
| | 817 |
| | 13.95 |
|
The aggregate grant date fair value of RSUs vested during the years ended October 31, 2020, 2019, and 2018 2017, and 2016 was $7$11 million, $9$8 million, and $8$7 million, respectively.
Performance-based Stock Options
Performance-based stock options represent the right to receive shares of common stock in the future, with the right to future delivery of the shares subject to forfeiture or other restrictions that will lapse upon satisfaction of a combination of the following conditions: service, market and performance conditions. Performance-based stock options have a seven-year contractual life. Performance-based stock options subject to service and performance conditions are valued using the Black-Scholes option pricing model and cliff-vest at the end of a three-year period if performance measures are met. Performance-based stock options subject to service and market conditions are valued using a Monte Carlo simulation and cliff-vest at the end of a three-year period if performance measures are met.
The following table summarizes the performance-based stock options subject to service and performance conditions activity:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | 2020 | | 2019 | | 2018 |
| | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Options outstanding, at beginning of year | 123 |
| | $ | 27.67 |
| | 152 |
| | $ | 27.59 |
| | 599 |
| | $ | 27.59 |
|
| Exercised | (42 | ) | | 27.67 |
| | (29 | ) | | 27.23 |
| | (13 | ) | | 27.67 |
|
| Forfeited | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (434 | ) | | 27.59 |
|
| Options outstanding, at end of year | 81 |
| | 27.67 |
| | 123 |
| | 27.67 |
| | 152 |
| | 27.59 |
|
| Options exercisable, at end of year | 81 |
| | 27.67 |
| | 123 |
| | 27.67 |
| | 152 |
| | 27.59 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | 2018 | | 2017 | | 2016 |
| | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Options outstanding, at beginning of year | 599 |
| | $ | 27.59 |
| | 973 |
| | $ | 30.47 |
| | 1,409 |
| | $ | 31.64 |
|
| Exercised | (13 | ) | | 27.67 |
| | — |
| | — |
| | — |
| | — |
|
| Forfeited | (434 | ) | | 27.59 |
| | (374 | ) | | 35.09 |
| | (436 | ) | | 34.22 |
|
| Options outstanding, at end of year | 152 |
| | 27.59 |
| | 599 |
| | 27.59 |
| | 973 |
| | 30.47 |
|
There were 151,968 performance-based stock options subject to service and performance conditions exercisable during the year ended October 31, 2018.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
The following table summarizes the performance-based stock options subject to service and market conditions activity:
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | 2020 | | 2019 | | 2018 |
| | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Options outstanding, at beginning of year | 200 |
| | $ | 27.24 |
| | 387 |
| | $ | 27.24 |
| | 431 |
| | $ | 27.24 |
|
| Exercised | (200 | ) | | 27.24 |
| | (186 | ) | | 27.24 |
| | (44 | ) | | 27.24 |
|
| Forfeited | 0 |
| | 0 |
| | (1 | ) | | 27.24 |
| | 0 |
| | 0 |
|
| Options outstanding, at end of year | 0 |
| | 0 |
| | 200 |
| | 27.24 |
| | 387 |
| | 27.24 |
|
| Options exercisable, at end of year | 0 |
| | 0 |
| | 200 |
| | 27.24 |
| | 387 |
| | 27.24 |
|
|
| | | | | | | | | | | | | | | | | | | | |
| | For the Years Ended October 31, |
| | 2018 | | 2017 | | 2016 |
| | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Options outstanding, at beginning of year | 431 |
| | $ | 27.24 |
| | 567 |
| | $ | 27.24 |
| | 615 |
| | $ | 27.24 |
|
| Exercised | (44 | ) | | 27.24 |
| | (130 | ) | | 27.24 |
| | — |
| | — |
|
| Forfeited | — |
| | — |
| | (6 | ) | | 27.24 |
| | (48 | ) | | 27.24 |
|
| Options outstanding, at end of year | 387 |
| | 27.24 |
| | 431 |
| | 27.24 |
| | 567 |
| | 27.24 |
|
| Options exercisable, at end of year | 387 |
| | 27.24 |
| | 431 |
| | 27.24 |
| | 567 |
| | 27.24 |
|
The total intrinsic value of performance-based stock options exercised was $2 million and $1 million during the years ended October 31, 2020 and 2018, andrespectively. There was minimal intrinsic value for performance-based options exercised during the year ended October 31, 2017 was $0.9 million and $1.5 million, respectively.2019.
Performance-based Stock Units
Performance-based stock units ("PUs") represent the right to receive one share of common stock ("share-settled PUs") or cash equal to the value of one share of common stock ("cash-settled PUs") in the future, with the right to future delivery of the shares or cash subject to forfeiture or other restrictions that will lapse upon satisfaction of a combination of the following conditions: service, market, and performance conditions. Share and cash-settled PUs subject to service and performance conditions are valued based on the fair value of the common stock at grant date and vest either at the end of the performance period or cliff-vest at the end of a three-year period if performance measures are met. Cash-settled PUs subject to service and market conditions are valued using a Monte Carlo simulation and cliff-vest at the end of a three-year period if performance measures are met. Cash-settled PUs are classified as liabilities and are remeasured at each reporting date until settlement. There were no nonvested share-settled PUs subject to service and performance conditions, nor any cash-settled PUs subject to service and market conditions outstanding for the years ended October 31, 2020, 2019, and 2018.
The following tables summarize cash-settled PUs activity for the years ended October 31:
|
| | | | | | | | | | | | | | | | | | | | |
| | Share-Settled PUs subject to Service and Performance Conditions |
| | 2018 | | 2017 | | 2016 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Nonvested, at beginning of year | — |
| | $ | — |
| | — |
| | $ | — |
| | 244 |
| | $ | 28.73 |
|
| Forfeited | — |
| | — |
| | — |
| | — |
| | (244 | ) | | 28.73 |
|
| Nonvested, at end of year | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
|
| | | | | | | | | | | | | | | | | | | | | |
| | Cash-Settled PUs subject to Service and Performance Conditions |
| | 2018 | | 2017 | | 2016 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Nonvested, at beginning of year | 220 |
| | $ | 27.59 |
| | 379 |
| | $ | 30.63 |
| | $ | 434 |
| | $ | 30.64 |
|
| Granted | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Vested | (121 | ) | | 27.59 |
| | — |
| | — |
| | — |
| | — |
|
| Forfeited | (99 | ) | | 27.59 |
| | (159 | ) | | 34.86 |
| | (55 | ) | | 30.65 |
|
| Nonvested, at end of year | — |
| | — |
| | 220 |
| | 27.59 |
| | 379 |
| | 30.63 |
|
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
| | | | Cash Settled PUs subject to Service and Market Conditions | Cash-Settled PUs subject to Service and Performance Conditions |
| | 2018 | | 2017 | | 2016 | 2020 | | 2019 | | 2018 |
| | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value | | Shares | | Weighted Average Grant Date Fair Value |
| | (in thousands) | | | | (in thousands) | | | | (in thousands) | | | (in thousands) | | | | (in thousands) | | | | (in thousands) | | |
| Nonvested, at beginning of year | — |
| | $ | — |
| | 70 |
| | $ | 50.52 |
| | 172 |
| | $ | 69.64 |
| 0 |
| | $ | 0 |
| | 0 |
| | $ | 0 |
| | 220 |
| | $ | 27.59 |
|
| Granted | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Vested | | 0 |
| | 0 |
| | 0 |
| | 0 |
| | (121 | ) | | 27.59 |
|
| Forfeited | — |
| | — |
| | (70 | ) | | 50.52 |
| | (102 | ) | | 82.86 |
| 0 |
| | 0 |
| | 0 |
| | 0 |
| | (99 | ) | | 27.59 |
|
| Nonvested, at end of year | — |
| | — |
| | — |
| | — |
| | 70 |
| | 50.52 |
| 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
| | 0 |
|
Total Share-Based Compensation Expense
Total share-based compensation expense for the years ended October 31, 2020, 2019, and 2018 2017, and 2016 was $11 million, $17 million $25and $17 million, and $15 million, respectively. As of October 31, 2018, the minimum performance measures for the fiscal year 2014 performance-based stock options and cash-settled PUs were not met and no share-based compensation expense was recorded. However, fiscal year 2015 and 2016 performance-based stock options and cash-settled PUs partially met the overall performance measures, and share-based compensation expense recorded was based on the interpolated calculated future pay out. Share-based compensation expense will be adjusted each reporting period based on the available current performance measures information for all awards subject to performance conditions. We record share-based compensation expense on a straight-line basis over the required service period which is equal to the vesting period, beginning on the grant date. Share-based compensation expense is included in Selling, general and administrative expenses in the Consolidated Statements of Operations. As of October 31, 2018,2020, there was $14$5 million of total unrecognized compensation expense related to non-vested share-based awards which is expected to be recognized over a weighted average period of approximately oneyear.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
We received cash of $8$4 million, $12$4 million, and zero$8 million during the years ended October 31, 2018, 20172020, 2019 and 2016,2018, respectively, related to stock options exercised. We used cash of $13$7 million, $13$8 million, and $2$13 million during the years ended October 31, 2018, 2017,2020, 2019, and 2016,2018, respectively, to settle cash-settled RSUs. We did not realize any tax benefit from stock options exercised for fiscal years 20182020, 2019 and 2017. There were no stock options exercised in 2016.2018.
20. Supplemental Cash Flow Information
The following table provides additional information about our Consolidated Statements of Cash Flows:
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2020 | | 2019 | | 2018 |
| Equity in income of affiliated companies, net of dividends | | | | | |
| Equity in income of non-consolidated affiliates | $ | (2 | ) | | $ | (4 | ) | | $ | 0 |
|
| Dividends from non-consolidated affiliates | 0 |
| | 2 |
| | 5 |
|
| Equity in income of non-consolidated affiliates, net of dividends | $ | (2 | ) | | $ | (2 | ) | | $ | 5 |
|
| Other non-cash operating activities | | | | | |
| Gain on sale of property and equipment | $ | 2 |
| | $ | (1 | ) | | $ | 0 |
|
| Loss on sale and impairment of repossessed collateral | 5 |
| | 3 |
| | 1 |
|
| Income from non-cash leases | (12 | ) | | (11 | ) | | (24 | ) |
| Other non-cash operating activities | $ | (5 | ) | | $ | (9 | ) | | $ | (23 | ) |
| Changes in other assets and liabilities | | | | | |
| Other current assets | $ | 4 |
| | $ | (38 | ) | | $ | (7 | ) |
| Other noncurrent assets | (22 | ) | | (12 | ) | | (19 | ) |
| Other current liabilities | 49 |
| | 115 |
| | 116 |
|
| Postretirement benefits liabilities, net | (13 | ) | | 54 |
| | (131 | ) |
| Other noncurrent liabilities | (11 | ) | | (21 | ) | | 58 |
|
| Other, net | 11 |
| | 3 |
| | 9 |
|
| Changes in other assets and liabilities | $ | 18 |
| | $ | 101 |
| | $ | 26 |
|
| Cash paid during the year | | | | | |
| Interest, net of amounts capitalized | $ | 218 |
| | $ | 287 |
| | $ | 306 |
|
| Income taxes, net of refunds | 27 |
| | 47 |
| | 18 |
|
| Non-cash investing and financing activities | | | | | |
| Transfers to inventories from property and equipment for leases to others | (11 | ) | | (15 | ) | | (9 | ) |
21. Selected Quarterly Financial Data (Unaudited)
The following tables provide ourquarterly condensed consolidated statements of operations and financial data:
|
| | | | | | | | | | | | | | | |
| | First Quarter Ended January 31, | | Second Quarter Ended April 30, |
| (in millions, except for per share data and stock prices) | 2020 | | 2019 | | 2020 | | 2019 |
| Sales and revenues, net | $ | 1,838 |
| | $ | 2,433 |
| | $ | 1,925 |
| | $ | 2,996 |
|
Manufacturing gross margin(A) | 265 |
| | 407 |
|
| 253 |
| | 455 |
|
| Net income (loss) attributable to Navistar International Corporation | $ | (36 | ) | | $ | 11 |
|
| $ | (38 | ) | | $ | (48 | ) |
| | | | | | | | |
| Earnings (loss) per share attributable to Navistar International Corporation: | | | | | | | |
Basic(B) | $ | (0.36 | ) | | $ | 0.11 |
| | $ | (0.38 | ) | | $ | (0.48 | ) |
Diluted(B) | $ | (0.36 | ) | | $ | 0.11 |
| | $ | (0.38 | ) | | $ | (0.48 | ) |
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
18. Supplemental Cash Flow Information
The following table provides additional information about our Consolidated Statements of Cash Flows:
|
| | | | | | | | | | | | | | | |
| | Third Quarter Ended July 31, | | Fourth Quarter Ended October 31, |
| (in millions, except for per share data and stock prices) | 2020 | | 2019 | | 2020 | | 2019 |
| Sales and revenues, net | $ | 1,675 |
| | $ | 3,042 |
| | $ | 2,065 |
| | $ | 2,780 |
|
Manufacturing gross margin(A) | 251 |
| | 495 |
| | 345 |
| | 459 |
|
| Net income (loss) attributable to Navistar International Corporation | $ | (37 | ) | | $ | 156 |
| | $ | (236 | ) | | $ | 102 |
|
| | | | | | | | |
| Earnings (loss) per share attributable to Navistar International Corporation: | | | | | | | |
Basic(B) | $ | (0.37 | ) | | $ | 1.57 |
| | $ | (2.36 | ) | | $ | 1.03 |
|
Diluted(B) | $ | (0.37 | ) | | $ | 1.56 |
| | $ | (2.36 | ) | | $ | 1.02 |
|
|
| | | | | | | | | | | |
| | For the Years Ended October 31, |
| (in millions) | 2018 | | 2017 | | 2016 |
| Equity in income of affiliated companies, net of dividends | | | | | |
| Equity in income of non-consolidated affiliates | $ | — |
| | $ | (6 | ) | | $ | (6 | ) |
| Dividends from non-consolidated affiliates | 7 |
| | 7 |
| | 12 |
|
| Equity in income of non-consolidated affiliates, net of dividends | $ | 7 |
| | $ | 1 |
| | $ | 6 |
|
| Other non-cash operating activities | | | | | |
| Loss (gain) on sale of property and equipment | $ | — |
| | $ | (9 | ) | | $ | 2 |
|
| Loss on sale and impairment of repossessed collateral | 1 |
| | 7 |
| | 6 |
|
| Income from non-cash leases | (24 | ) | | (26 | ) | | (20 | ) |
| Other non-cash operating activities | $ | (23 | ) | | $ | (28 | ) | | $ | (12 | ) |
| Changes in other assets and liabilities | | | | | |
| Other current assets | $ | (7 | ) | | $ | (19 | ) | | $ | 8 |
|
| Other noncurrent assets | (19 | ) | | (38 | ) | | (11 | ) |
| Other current liabilities | 116 |
| | (35 | ) | | (165 | ) |
| Postretirement benefits liabilities | (131 | ) | | (65 | ) | | (47 | ) |
| Other noncurrent liabilities | 58 |
| | (62 | ) | | (114 | ) |
| Other, net | 9 |
| | (7 | ) | | (41 | ) |
| Changes in other assets and liabilities | $ | 26 |
| | $ | (226 | ) | | $ | (370 | ) |
| Cash paid during the year | | | | | |
| Interest, net of amounts capitalized | $ | 306 |
| | $ | 294 |
| | $ | 291 |
|
| Income taxes, net of refunds | 18 |
| | 19 |
| | 44 |
|
| Non-cash investing and financing activities | | | | | |
| Property and equipment acquired under capital leases | $ | — |
| | $ | — |
| | $ | 1 |
|
| Transfers to inventories from property and equipment for leases to others | (9 | ) | | (7 | ) | | (27 | ) |
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
19. Selected Quarterly Financial Data (Unaudited)
The following tables provide ourquarterly condensed consolidated statements of operations and financial data:
|
| | | | | | | | | | | | | | | |
| | First Quarter Ended January 31, | | Second Quarter Ended April 30, |
| (in millions, except for per share data and stock prices) | 2018 | | 2017 | | 2018 | | 2017 |
| Sales and revenues, net | $ | 1,905 |
| | $ | 1,663 |
| | $ | 2,422 |
| | $ | 2,096 |
|
Manufacturing gross margin(A) | 335 |
| | 259 |
|
| 395 |
| | 287 |
|
| Amounts attributable to Navistar International Corporation common shareholders: | | | | | | | |
| Income (loss) from continuing operations, net of tax | $ | (73 | ) | | $ | (62 | ) | | $ | 55 |
| | $ | (80 | ) |
| Income (loss) from discontinued operations, net of tax | — |
| | — |
| | — |
| | — |
|
| Net income (loss) | $ | (73 | ) | | $ | (62 | ) |
| $ | 55 |
| | $ | (80 | ) |
| Earnings (loss) per share attributable to Navistar International Corporation: | | | | | | | |
| Basic: | | | | | | | |
Continuing operations(B) | $ | (0.74 | ) | | $ | (0.76 | ) | | $ | 0.56 |
| | $ | (0.86 | ) |
Discontinued operations(B) | — |
| | — |
| | — |
| | — |
|
| | $ | (0.74 | ) | | $ | (0.76 | ) |
| $ | 0.56 |
| | $ | (0.86 | ) |
| Diluted: | | | | | | | |
Continuing operations(B) | $ | (0.74 | ) | | $ | (0.76 | ) | | $ | 0.55 |
| | $ | (0.86 | ) |
Discontinued operations(B) | — |
| | — |
| | — |
| | — |
|
| | $ | (0.74 | ) | | $ | (0.76 | ) |
| $ | 0.55 |
| | $ | (0.86 | ) |
|
| | | | | | | | | | | | | | | |
| | Third Quarter Ended July 31, | | Fourth Quarter Ended October 31, |
| (in millions, except for per share data and stock prices) | 2018 | | 2017 | | 2018 | | 2017 |
| Sales and revenues, net | $ | 2,606 |
| | $ | 2,213 |
| | $ | 3,317 |
| | $ | 2,598 |
|
Manufacturing gross margin(A) | 470 |
| | 375 |
| | 573 |
| | 470 |
|
| Amounts attributable to Navistar International Corporation common shareholders: | | | | | | | |
| Income from continuing operations, net of tax | $ | 170 |
| | $ | 36 |
| | $ | 188 |
| | $ | 135 |
|
| Income from discontinued operations, net of tax | — |
| | 1 |
| | — |
| | — |
|
| Net income | $ | 170 |
| | $ | 37 |
| | $ | 188 |
| | $ | 135 |
|
| Earnings per share attributable to Navistar International Corporation: | | | | | | | |
| Basic: | | | | | | | |
Continuing operations(B) | $ | 1.72 |
| | $ | 0.37 |
| | $ | 1.90 |
| | $ | 1.37 |
|
Discontinued operations(B) | — |
| | 0.01 |
| | — |
| | — |
|
| | $ | 1.72 |
| | $ | 0.38 |
| | $ | 1.90 |
| | $ | 1.37 |
|
| Diluted: | | | | | | | |
Continuing operations(B) | $ | 1.71 |
| | $ | 0.37 |
| | $ | 1.89 |
| | $ | 1.36 |
|
Discontinued operations(B) | — |
| | 0.01 |
| | — |
| | — |
|
| | $ | 1.71 |
| | $ | 0.38 |
| | $ | 1.89 |
| | $ | 1.36 |
|
_______________________(A) Manufacturing gross margin is calculated by subtracting Costs of products sold from Sales of manufactured products, net.
| |
| (B) | Earnings per share in each quarter is computed using the weighted-average number of shares outstanding during that quarter while earnings per share for the full year is computed using the weighted-average number of shares outstanding during the year. Thus, the sum of the four quarters earnings per share may not equal the full year earnings per share. |
22. Subsequent Events
On November 7, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with TRATON SE, a Societas Europaea (“Parent”) and Dusk Inc., a Delaware corporation and a wholly owned indirect subsidiary of Parent (“Merger Subsidiary”), pursuant to which Merger Subsidiary will be merged with and into the Company (the “Merger”), with the Company continuing as the surviving company in the Merger as a wholly owned indirect subsidiary of Parent (the “Surviving Corporation”). Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), (a) each share of common stock of the Company, par value $0.10 per share (“Company Stock”) outstanding immediately prior to the Effective Time, unless otherwise provided by the Merger Agreement, shall be automatically canceled and converted into the right to receive $44.50 in cash, without interest (the “Common Merger Consideration”); (b) each share of Series D Convertible Junior Preference Stock of the Company, par value $1.00 per share (“Series D Stock”) outstanding immediately prior to the Effective Time, unless otherwise provided in the Merger Agreement, shall be automatically canceled and converted into an amount in cash, without interest, equal to the portion of the Common Merger Consideration that would have been payable in respect of such share of Series D Stock had such share of Series D Stock been converted into Company Stock pursuant to the terms of the certificate of incorporation of the Company in effect immediately prior to the Effective Time; and (c) the sole share of Series B Nonconvertible Junior Preference Stock of the Company, par value $1.00 (“Series B Stock”), issued and outstanding immediately prior to the Effective Time, shall be unaffected by the Merger and shall remain outstanding as one share of Series B Stock of the Surviving Corporation, with the same rights, powers, preferences and privileges attributable to the sole share of Series B Stock immediately prior to the Effective Time.
Consummation of the Merger is subject to various closing conditions, including, (i) the adoption of the Merger Agreement by the affirmative vote of the holders of a majority of the outstanding shares of Company Stock entitled to vote on such matter at a meeting of the Company’s stockholders, (ii) the expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as well as certain non-U.S. regulatory approvals, and (iii) the absence of any law or order (whether temporary, preliminary or permanent) by a governmental entity that restrains or otherwise prohibits the Merger or the other transactions contemplated by the Merger Agreement. The Merger Agreement also contains customary representations, warranties and covenants of the Company, Parent and Merger Subsidiary. The Company has also made certain covenants in the Merger Agreement, including covenants regarding the operation of the business of the Company and its subsidiaries prior to the Effective Time.
Navistar International Corporation and Subsidiaries
Notes to Consolidated Financial Statements—(Continued)
20. Subsequent Events
The Merger Agreement may be terminated by each of the Company and Parent under certain circumstances, including if the Merger is not consummated by September 30, 2021 (the “End Date”), provided that the End Date may be automatically extended until December 31, 2021 if (a) all of the conditions to the closing of the Merger are satisfied other than the receipt of regulatory approvals or approval from the Committee on Foreign Investment in the United States (“CFIUS”), or (b) if a CFIUS filing request is received by the parties prior to the closing of the Merger; provided further that no party may terminate the Merger Agreement if such party’s breach resulted in or caused the failure of a condition to consummate the Merger by the End Date. The Merger Agreement also provides for certain other customary termination rights for the Company and Parent, and further provides that a termination fee in the amount of $125,000,000 will be payable by the Company to Parent in connection with the termination of the Merger Agreement under certain specified circumstances. In November 2018, we entered into a definitive agreement with Cerberus Capital Management, L.P.the event that the stockholders of the Company do not approve the Merger at the Company’s stockholder meeting, the Company shall reimburse Parent and its affiliates (“Cerberus”)for 100% of their documented out-of-pocket fees and expenses in an amount up to sell a 70% equity interest$25,000,000 actually incurred in our defense business, Navistar Defense, LLC (“Navistar Defense”),connection with the Merger Agreement. If the Company is required to pay Parent the termination fee and to reimburse Parent for a total valueits expenses, the termination fee will be reduced by the amount paid as reimbursement for out-of-pocket fees and expenses of approximately $140 million, adjusted for certain current year chargeouts. Parent, such that the Company will not be required to pay an amount in excess of $125,000,000.
The total value is subjectCompany and Parent have agreed to additional adjustments relateduse their reasonable best efforts to working capital,obtain the transfer of certain liabilitiesnecessary regulatory approvals to consummate the Merger, including preparing and commitments,filing all notices, reports and other items. The agreement also includes an exclusive long term supply agreement for commercial partsfilings and chassis. The transaction is subjectdefending through litigation any proceeding seeking to customary closing conditions, including regulatory clearances. We expectprevent the transaction to close in the first quarter of 2019.Merger.
| |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None.
Item 9A.Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
In connection with the preparation of this report, management, under the supervision and with the participation of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of October 31, 2018.2020. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of October 31, 2018,2020, our disclosure controls and procedures were effective.
(b) Changes in Internal Control over Financial Reporting
There were no material changes in our internal control over financial reporting identified in connection with the evaluation required by Rules 13a-15 and 15d-15 under the Exchange Act that occurred during the quarter ended October 31, 20182020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c) Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting is a process designed by, and under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by management and our Board of Directors to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. Internal control over financial reporting includes those policies and procedures that:
Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets of the Company.
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. GAAP and that receipts and expenditures of the Company are being made in accordance with authorization of our management and our Board of Directors.
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our consolidated financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements. Also, projections of any evaluation of the effectiveness of our internal control over financial reporting to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the internal control over financial reporting as of October 31, 20182020 using the criteria set forth by the Internal Control Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of that evaluation, management concluded that our internal control over financial reporting was effective as of October 31, 2018.2020.
Our independent registered public accounting firm, KPMG LLP, has audited the Company's consolidated financial statements and the effectiveness of the Company's internal control over financial reporting as of October 31, 2018.2020. Their reports appear in this Annual Report on Form 10-K.
| |
| Item 9B. | Other Information |
None.
PART III
| |
| Item 10. | Directors, Executive Officers, and Corporate Governance |
A list of our executive officers and their respective biographical information appears in Part I, Item 1 of this report. Information about our directors may be found under the caption "Proposal 1-Election of Directors" in our proxy statement, upon filing, for the 20192021 annual meeting of stockholders scheduled to be held on February 12, 2019March 2, 2021 (the "Proxy Statement"). Information about our Audit Committee may be found under the captions "Board Committees and Meetings" and "Report of the Audit Committee Report" in the Proxy Statement.Statement, upon filing. Information about the procedures by which security holders may recommend nominees to our Board of Directors may be found under the caption "Nominating DirectorsShareholder Nominations" in the Proxy Statement.Statement, upon filing. That information is, upon filing, incorporated herein by reference.
The information in the Proxy Statement to be set forth under the captions "Delinquent Section 16(a) Beneficial Ownership Reporting Compliance" Reports", if applicable,and "Code of Conduct" is, upon filing, incorporated herein by reference.
| |
| Item 11. | Executive Compensation |
The information in the Proxy Statement to be set forth under the caption "ExecutiveCompensation" is, upon filing, incorporated herein by reference.
| |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
The information in the Proxy Statement to be set forth under the captions "Persons Owning More Than Five Percent of NavistarCompany Common Stock," "NavistarCompany Common Stock Owned by Executive Officers and Directors," and "Equity Compensation Plan Information" is, upon filing, incorporated herein by reference.
| |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence |
The information to be set forth in the Proxy Statement under the captions "Transactions with Related Party Transactions and Approval PolicyPersons" and "DirectorBoard Independence Determinations" is, upon filing, incorporated herein by reference.
| |
| Item 14. | Principal Accounting Fees and Services |
Information concerning principal accountant fees and services appearswill appear in the Proxy Statement under the heading "Fees of Independent Registered Public Accounting Firm Fee Information" and is, upon filing, incorporated herein by reference.
PART IV
| |
| Item 15. | Exhibits and Financial Statement Schedules |
Financial Statements
See Item 8—Financial Statements and Supplementary Data
Financial statement schedules are omitted because of the absence of the conditions under which they are required or because information called for is shown in the consolidated financial statements and notes thereto. |
| | | | |
| Exhibit: | | Description | | Page |
| (3) | | | | E-1 |
| (4) | | | | E-2 |
| (10) | | | | E-3 |
| (11) | | | | |
| (21) | | | | E-10 |
| (23.1) | | | | E-11 |
| (24) | | | | E-12 |
| (31.1) | | | | E-13 |
| (31.2) | | | | E-14 |
| (32.1) | | | | E-15 |
| (32.2) | | | | E-16 |
| (99.1) | | | | E-17 |
| (101.INS) | | XBRL Instance Document | | N/A |
| (101.SCH) | | XBRL Taxonomy Extension Schema Document | | N/A |
| (101.CAL) | | XBRL Taxonomy Extension Calculation Linkbase Document | | N/A |
| (101.LAB) | | XBRL Taxonomy Extension Label Linkbase Document | | N/A |
| (101.PRE) | | XBRL Taxonomy Extension Presentation Linkbase Document | | N/A |
| (101.DEF) | | XBRL Taxonomy Extension Definition Linkbase Document | | N/A |
|
| | | | |
| Exhibit: | | Description | | Page |
| (2.1) | | Recapitalization Agreement, by and among Navistar, Inc., Navistar International Corporation, ND Holdings LLC, ND Intermediate, LLC, Navistar Defense LLC and Olive Investor, L.P. dated as of November 30, 2018*. Filed as Exhibit 2.1 to Current Report on Form 8-K dated December 31, 2018 and filed on January 7, 2019. Commission File No. 001-09618.
| | N/A |
| (2.2) | |
| | N/A |
| (2.3) | | | | N/A |
| (3) | | | | N/A |
| (4) | | | | N/A |
| (4.1) | | | | N/A |
| (10) | | | | N/A |
| (21) | | | | N/A |
| (23.1) | | | | N/A |
| (24) | | | | N/A |
| (31.1) | | | | N/A |
| (31.2) | | | | N/A |
| (32.1) | | | | N/A |
| (32.2) | | | | N/A |
| (99.1) | | | | E-17 |
| (99.2) | | | | N/A |
| (99.3) | | | | N/A |
| (101.INS) | | XBRL Instance Document | | N/A |
| (101.SCH) | | XBRL Taxonomy Extension Schema Document | | N/A |
| (101.CAL) | | XBRL Taxonomy Extension Calculation Linkbase Document | | N/A |
| (101.LAB) | | XBRL Taxonomy Extension Label Linkbase Document | | N/A |
| (101.PRE) | | XBRL Taxonomy Extension Presentation Linkbase Document | | N/A |
| (101.DEF) | | XBRL Taxonomy Extension Definition Linkbase Document | | N/A |
| (104) | | Cover Page Interactive Data File (embedded within Inline XBRL documents and included in Exhibit 101) | | N/A |
* Certain schedules and attachments referenced in the Recapitalization Agreement have been omitted in accordance with Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule and attachment will be furnished supplementally to the U.S. Securities and Exchange Commission upon request.
All exhibits other than those indicated above are omitted because of the absence of the conditions under which they are required or because the information called for is shown in the consolidated financial statements and notes thereto in the Annual Report on Form 10-K for the period ended October 31, 2018.2020.
Item 16. Summary
None.
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/ SAMARA A. STRYCKER |
| | Samara A. Strycker |
| | Senior Vice President and Corporate Controller |
| | (Principal Accounting Officer) |
December 18, 201817, 2020
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ TROY A. CLARKEPERSIO V. LISBOA | | Chairman, President,
Chief Executive Officer (Principal Executive Officer) | | December 18, 201817, 2020 |
| Persio V. Lisboa | | | |
| | | | |
| /s/ TROY A. CLARKE | | Executive Chairman and Chairman of the Board
| | December 17, 2020 |
| Troy A. Clarke | | | |
| | | | | |
| /s/ WALTER G. BORST | | Executive Vice President and Chief Financial Officer (Principal Financial Officer) | | December 18, 201817, 2020 |
| Walter G. Borst | | | |
| | | | | |
| /s/ SAMARA A. STRYCKER | | Senior Vice President and Corporate Controller (Principal Accounting Officer) | | December 18, 201817, 2020 |
| Samara A. Strycker | | | |
| | | | | |
| /s/ JOSÉ MARIA ALAPONT | | Director | | December 18, 201817, 2020 |
| José Maria Alapont | | | | |
| | | | | |
| /s/ STEPHEN R. D'ARCY | | Director | | December 18, 201817, 2020 |
| Stephen R. D'Arcy | | | | |
| | | | | |
| /s/ JEFFREY A. DOKHO | | Director | | December 18, 201817, 2020 |
| Jeffrey A. Dokho | | | | |
| | | | | |
| /s/ VINCENT J. INTRIERI | | Director | | December 18, 201817, 2020 |
| Vincent J. Intrieri | | | | |
| | | | |
/s/ RAYMOND T. MILLER | | Director | | December 18, 2018 |
Raymond T. Miller | | | | |
| | | | | |
| /s/ MARK H. RACHESKY | | Director | | December 18, 201817, 2020 |
| Mark H. Rachesky | | | | |
| | | | |
/s/ ANDREAS H. RENSCHLER | | Director | | December 18, 2018 |
Andreas H. Renschler | | | | |
| | | | | |
| /s/ CHRISTIAN SCHULZ | | Director | | December 18, 201817, 2020 |
| Christian Schulz | | | | |
| | | | | |
| /s/ KEVIN M. SHEEHAN |
| Director |
| December 18, 201817, 2020 |
| Kevin M. Sheehan | | | | |
| | | | | |
| /s/ DENNIS A. SUSKIND | | Director | | December 18, 201817, 2020 |
| Dennis A. Suskind | | | | |
| | | | | |
| /s/ JANET T. YEUNG |
| Director |
| December 17, 2020 |
| Janet T. Yeung | | | | |
| | | | |
