UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington,��D.C. 20549

Form 10-Q

(Mark One)



þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~July 31, 2016~~April 30, 2017



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)



Delaware	36-3359573
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2701 Navistar Drive, Lisle, Illinois	60532
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code (331) 332-5000

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. Yes þ No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes þ No 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. See definition of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)

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 ~~August~~May 31, ~~2016,~~2017, the number of shares outstanding of the registrant’s common stock was ~~81,616,811,~~98,148,404, net of treasury shares.

NAVISTAR INTERNATIONAL CORPORATION FORM 10-Q

TABLE OF CONTENTS



		Page
PART I—Financial Information
Item 1.	Financial Statements (Unaudited)	5
	Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016 ~~and 2015~~	5
	Consolidated Statements of Comprehensive Income (Loss) for the three and ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016 ~~and 2015~~	6
	Consolidated Balance Sheets as of ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015~~2016	7
	Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016 ~~and 2015~~	8
	Consolidated Statements of Stockholders' Deficit for the ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016 ~~and 2015~~	9
	Notes to Consolidated Financial Statements	10
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4745
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	6662
Item 4.	Controls and Procedures	6762

PART II
Item 1.	Legal Proceedings	6863
Item 1A.	Risk Factors	6863
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6963
Item 3.	Defaults upon Senior Securities	6963
Item 4.	Mine Safety Disclosures	6963
Item 5.	Other Information	6963
Item 6.	Exhibits	7063
	~~Signatures~~Signature	7164

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;

the ~~anticipated consummation and~~ implementation of our ~~recently announced~~new strategic alliance with Volkswagen Truck & ~~Bus;~~Bus GmbH ("VW T&B");

our development 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 long-term goals, and activities to accomplish such strategies and goals;

our ability to implement our ~~new~~ strategy focused on ~~establishing a leading market position based on uptime advantage~~growing the core business, seeking new sources of revenue, driving operational excellence, leveraging the VW T&B alliance, investing in our people, and ~~a customer-centric culture, leading with connected vehicle offerings, providing customers with meaningful innovation and tailored solutions, and developing effective leaders at every level,~~improving our financial performance, as well as the results we expect to achieve from the implementation of our ~~new~~ strategy;

our expectations related to new product launches;

anticipated results from the realignment of our leadership and management structure;

anticipated benefits from acquisitions, strategic alliances, and joint ventures we complete;

our expectations and estimates relating to restructuring activities, including restructuring ~~and integration~~ charges and timing of cash payments related thereto, and operational flexibility, savings, and efficiencies from such restructurings;

our expectations relating to the ~~possible~~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 ~~retail finance~~ revenues;

our expectations and estimates relating to our used truck inventory;

our anticipated costs relating to the implementation of our emissions compliance strategy and other product modifications that may be required to meet other federal, state, and foreign regulatory requirements;

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 and other assets;

costs relating to litigation and similar matters;

estimates relating to pension plan contributions and unfunded pension and postretirement benefits;

trends relating to commodity prices; and

anticipated trends, expectations, and outlook relating to matters affecting our financial condition or results of operations.

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, included within our Annual Report on Form 10-K for the fiscal year ended October 31, ~~2015,~~2016 which was filed on December ~~17, 2015,~~20, 2016, 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 Quarterly Report on Form 10-Q. 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. Any materials we file with, or furnish to, the SEC may also be read and/or copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

PART I—Financial Information


Item 1.	Financial Statements

Navistar International Corporation and Subsidiaries

Consolidated Statements of Operations

(Unaudited)


	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended April 30,						Six Months Ended April 30,
(in millions, except per share data)	2016			2015			2016			2015			2017			2016			2017			2016
Sales and revenues
Sales of manufactured products, net	$	2,052		$	2,501		$	5,946		$	7,544		$	2,063		$	2,164		$	3,692		$	3,894
Finance revenues	34			37			102			108			33			33			67			68
Sales and revenues, net	2,086			2,538			6,048			7,652			2,096			2,197			3,759			3,962
Costs and expenses
Costs of products sold	1,757			2,172			5,068			6,577			1,776			1,845			3,146			3,311
Restructuring charges	5			13			11			22			2			3			9			6
Asset impairment charges	12			7			17			15			5			3			7			5
Selling, general and administrative expenses	197			220			604			704			221			202			421			407
Engineering and product development costs	62			71			181			226			65			61			128			119
Interest expense	84			75			246			227			89			81			171			162
Other income, net	(15		)	(6		)	(62		)	(37		)
Other expense (income), net													9			(25		)	1			(47		)
Total costs and expenses	2,102			2,552			6,065			7,734			2,167			2,170			3,883			3,963
Equity in income of non-consolidated affiliates	2			3			3			6			2			2			5			1
Loss from continuing operations before income taxes	(14		)	(11		)	(14		)	(76		)
Income (loss) before income taxes													(69		)	29			(119		)	—
Income tax expense	(14		)	(12		)	(25		)	(37		)	(6		)	(16		)	(10		)	(11		)
Loss from continuing operations	(28		)	(23		)	(39		)	(113		)
Income from discontinued operations, net of tax	—			2			—			2
Net loss	(28		)	(21		)	(39		)	(111		)
Net income (loss)													(75		)	13			(129		)	(11		)
Less: Net income attributable to non-controlling interests	6			7			24			23			5			9			13			18
Net loss attributable to Navistar International Corporation	$	(34	)	$	(28	)	$	(63	)	$	(134	)
Net income (loss) attributable to Navistar International Corporation													$	(80	)	$	4		$	(142	)	$	(29	)

Amounts attributable to Navistar International Corporation common shareholders:
Loss from continuing operations, net of tax	$	(34	)	$	(30	)	$	(63	)	$	(136	)
Income from discontinued operations, net of tax	—			2			—			2
Net loss	$	(34	)	$	(28	)	$	(63	)	$	(134	)

Earnings (loss) per share:
Basic:
Continuing operations	$	(0.42	)	$	(0.37	)	$	(0.77	)	$	(1.67	)
Discontinued operations	—			0.03			—			0.03
	$	(0.42	)	$	(0.34	)	$	(0.77	)	$	(1.64	)

Diluted:
Continuing operations	$	(0.42	)	$	(0.37	)	$	(0.77	)	$	(1.67	)
Discontinued operations	—			0.03			—			0.03
	$	(0.42	)	$	(0.34	)	$	(0.77	)	$	(1.64	)
Income (loss) per share attributable to Navistar International Corporation:
Basic													$	(0.86	)	$	0.05		$	(1.62	)	$	(0.35	)
Diluted													(0.86		)	0.05			(1.62		)	(0.35		)

Weighted average shares outstanding:
Basic	81.7			81.6			81.7			81.5			93.3			81.7			87.5			81.7
Diluted	81.7			81.6			81.7			81.5			93.3			82.0			87.5			81.7

See Notes to Consolidated Financial Statements

Navistar International Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)


(in millions)	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended April 30,					Six Months Ended April 30,
	2016			2015			2016			2015			2017			2016		2017			2016
Net loss	$	(28	)	$	(21	)	$	(39	)	$	(111	)
Net income (loss)													$	(75	)	$	13	$	(129	)	$	(11	)
Other comprehensive income (loss):
Foreign currency translation adjustment	(10		)	(47		)	7			(133		)	4			50		(8		)	17
Defined benefit plans (net of tax)	34			33			82			98
Total other comprehensive income (loss)	24			(14		)	89			(35		)
Defined benefit plans, net of tax													34			15		69			48
Total other comprehensive income													38			65		61			65
Comprehensive income (loss)	(4		)	(35		)	50			(146		)	(37		)	78		(68		)	54
Less: Net income attributable to non-controlling interests	6			7			24			23			5			9		13			18
Total comprehensive income (loss) attributable to Navistar International Corporation	$	(10	)	$	(42	)	$	26		$	(169	)	$	(42	)	$	69	$	(81	)	$	36

See Notes to Consolidated Financial Statements

Navistar International Corporation and Subsidiaries

Consolidated Balance Sheets


	July 31, 2016			October 31, 2015			April 30, 2017			October 31, 2016
(in millions, except per share data)
ASSETS	(Unaudited)						(Unaudited)
Current assets
Cash and cash equivalents	$	547		$	912		$	771		$	804
Restricted cash and cash equivalents	115			—			112			64
Marketable securities	140			159			178			46
Trade and other receivables, net	301			429			300			276
Finance receivables, net	1,410			1,779			1,459			1,457
Inventories, net	1,084			1,135			946			944
Deferred taxes, net	—			36
Other current assets	175			172			181			168
Total current assets	3,772			4,622			3,947			3,759
Restricted cash	66			121			48			48
Trade and other receivables, net	16			13			17			16
Finance receivables, net	203			216			232			220
Investments in non-consolidated affiliates	60			66			55			53
Property and equipment (net of accumulated depreciation and amortization of $2,591 and $2,546, respectively)	1,257			1,345
Property and equipment (net of accumulated depreciation and amortization of $2,480 and $2,553, respectively)							1,324			1,241
Goodwill	38			38			38			38
Intangible assets (net of accumulated amortization of $133 and $120, respectively)	56			57
Intangible assets (net of accumulated amortization of $130 and $124, respectively)							46			53
Deferred taxes, net	153			128			161			161
Other noncurrent assets	98			86			84			64
Total assets	$	5,719		$	6,692		$	5,952		$	5,653
LIABILITIES and STOCKHOLDERS’ DEFICIT
Liabilities
Current liabilities
Notes payable and current maturities of long-term debt	$	1,389		$	1,110		$	744		$	907
Accounts payable	1,003			1,301			1,240			1,113
Other current liabilities	1,141			1,377			1,138			1,183
Total current liabilities	3,533			3,788			3,122			3,203
Long-term debt	3,676			4,188			4,321			3,997
Postretirement benefits liabilities	2,907			2,995			2,941			3,023
Deferred taxes, net	—			14
Other noncurrent liabilities	737			867			695			723
Total liabilities	10,853			11,852			11,079			10,946
Stockholders’ deficit
Series D convertible junior preference stock	2			2			2			2
Common stock, $0.10 par value per share (86.8 shares issued and 220 shares authorized at both dates)	9			9
Common stock (103.1 and 86.8 shares issued, respectively, and $0.10 par value per share and 220 shares authorized at both dates)							10			9
Additional paid-in capital	2,499			2,499			2,732			2,499
Accumulated deficit	(4,929		)	(4,866		)	(5,105		)	(4,963		)
Accumulated other comprehensive loss	(2,512		)	(2,601		)	(2,579		)	(2,640		)
Common stock held in treasury, at cost (5.2 and 5.3 shares, respectively)	(206		)	(210		)
Common stock held in treasury, at cost (4.9 and 5.2 shares, respectively)							(191		)	(205		)
Total stockholders’ deficit attributable to Navistar International Corporation	(5,137		)	(5,167		)	(5,131		)	(5,298		)
Stockholders’ equity attributable to non-controlling interests	3			7			4			5
Total stockholders’ deficit	(5,134		)	(5,160		)	(5,127		)	(5,293		)
Total liabilities and stockholders’ deficit	$	5,719		$	6,692		$	5,952		$	5,653

See Notes to Consolidated Financial Statements

Navistar International Corporation and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Nine Months Ended July 31,						Six Months Ended April 30,
(in millions)	2016			2015			2017			2016
Cash flows from operating activities
Net loss	$	(39	)	$	(111	)	$	(129	)	$	(11	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	111			165			75			74
Depreciation of equipment leased to others	53			56			37			37
Deferred taxes, including change in valuation allowance	—			(9		)	(2		)	(3		)
Asset impairment charges	17			15			7			5
Loss on sales of investments and businesses, net	2			—			—			2
Amortization of debt issuance costs and discount	27			28			23			17
Stock-based compensation	9			8			12			7
Provision for doubtful accounts, net of recoveries	9			(6		)	7			8
Equity in income of non-consolidated affiliates, net of dividends	5			2			1			—
Write-off of debt issuance cost and discount							4			—
Other non-cash operating activities	(12		)	(28		)	(9		)	(8		)
Changes in other assets and liabilities, exclusive of the effects of businesses disposed	(196		)	(134		)	(133		)	(232		)
Net cash used in operating activities	(14		)	(14		)	(107		)	(104		)
Cash flows from investing activities
Purchases of marketable securities	(378		)	(515		)	(589		)	(283		)
Sales of marketable securities	358			764			440			177
Maturities of marketable securities	39			63			17			37
Net change in restricted cash and cash equivalents	(64		)	(192		)	(48		)	(19		)
Capital expenditures	(83		)	(72		)	(66		)	(53		)
Purchases of equipment leased to others	(94		)	(58		)	(37		)	(78		)
Proceeds from sales of property and equipment	20			12			14			17
Investments in non-consolidated affiliates	(1		)	—			(2		)	—
Proceeds from sales of affiliates	36			7			—			36
Acquisition of intangibles	—			(4		)
Net cash provided by (used in) investing activities	(167		)	5
Net cash used in investing activities							(271		)	(166		)
Cash flows from financing activities
Proceeds from issuance of securitized debt	72			490			5			75
Principal payments on securitized debt	(69		)	(247		)	(56		)	(19		)
Net change in secured revolving credit facilities	26			(9		)	21			38
Proceeds from issuance of non-securitized debt	163			166			383			110
Principal payments on non-securitized debt	(235		)	(234		)	(278		)	(162		)
Net change in notes and debt outstanding under revolving credit facilities	(151		)	(41		)	42			(105		)
Principal payments under financing arrangements and capital lease obligations	(1		)	(2		)	(1		)	(1		)
Debt issuance costs	(12		)	(10		)	(18		)	(1		)
Proceeds from financed lease obligations	17			26			16			12
Issuance of common stock							256			—
Stock issuance costs							(11		)	—
Proceeds from exercise of stock options	—			1			3			—
Dividends paid by subsidiaries to non-controlling interest	(28		)	(27		)	(15		)	(19		)
Other financing activities	1			(27		)	(3		)	1
Net cash provided by (used in) financing activities	(217		)	86			344			(71		)
Effect of exchange rate changes on cash and cash equivalents	33			(27		)	1			18
Increase (decrease) in cash and cash equivalents	(365		)	50
Decrease in cash and cash equivalents							(33		)	(323		)
Cash and cash equivalents at beginning of the period	912			497			804			912
Cash and cash equivalents at end of the period	$	547		$	547		$	771		$	589

See Notes to Consolidated Financial Statements

Navistar International Corporation and Subsidiaries

Consolidated Statements of ~~Stockholders’~~Stockholders' Deficit

(Unaudited)


(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, 2016																							$	2	$	9		$	2,499		$	(4,963	)	$	(2,640	)	$	(205	)	$	5		$	(5,293	)
Net income (loss)																							—		—			—			(142		)	—			—			13			(129		)
Total other comprehensive income																							—		—			—			—			61			—			—			61
Stock-based compensation																							—		—			3			—			—			—			—			3
Stock ownership programs																							—		—			(13		)	—			—			14			—			1
Cash dividends paid to non-controlling interest																							—		—			—			—			—			—			(15		)	(15		)
Issuance of common stock																							—		2			254			—			—			—			—			256
Stock issuance costs																							—		—			(11		)	—			—			—			—			(11		)
Other																							—		(1		)	—			—			—			—			1			—
Balance as of April 30, 2017																							$	2	$	10		$	2,732		$	(5,105	)	$	(2,579	)	$	(191	)	$	4		$	(5,127	)
Balance as of October 31, 2015	$	2	$	9	$	2,499		$	(4,866	)	$	(2,601	)	$	(210	)	$	7		$	(5,160	)	$	2	$	9		$	2,499		$	(4,866	)	$	(2,601	)	$	(210	)	$	7		$	(5,160	)
Net income (loss)	—		—		—			(63		)	—			—			24			(39		)	—		—			—			(29		)	—			—			18			(11		)
Total other comprehensive income	—		—		—			—			89			—			—			89			—		—			—			—			65			—			—			65
Stock-based compensation	—		—		3			—			—			—			—			3			—		—			2			—			—			—			—			2
Stock ownership programs	—		—		(4		)	—			—			4			—			—			—		—			(4		)	—			—			4			—			—
Cash dividends paid to non-controlling interest	—		—		—			—			—			—			(28		)	(28		)	—		—			—			—			—			—			(19		)	(19		)
Acquisition of remaining ownership interest from non-controlling interest holder	—		—		1			—			—			—			—			1			—		—			1			—			—			—			—			1
Balance as of July 31, 2016	$	2	$	9	$	2,499		$	(4,929	)	$	(2,512	)	$	(206	)	$	3		$	(5,134	)

Balance as of October 31, 2014	$	3	$	9	$	2,500		$	(4,682	)	$	(2,263	)	$	(221	)	$	34		$	(4,620	)
Net income (loss)	—		—		—			(134		)	—			—			23			(111		)
Total other comprehensive loss	—		—		—			—			(35		)	—			—			(35		)
Transfer from redeemable equity securities upon exercise or expiration of stock options	—		—		1			—			—			—			—			1
Stock-based compensation	—		—		9			—			—			—			—			9
Stock ownership programs	—		—		(9		)	—			—			9			—			—
Cash dividends paid to non-controlling interest	—		—		—			—			—			—			(27		)	(27		)
Acquisition of remaining ownership interest from non-controlling interest holder	—		—		(4		)	—			—			—			(23		)	(27		)
Balance as of July 31, 2015	$	3	$	9	$	2,497		$	(4,816	)	$	(2,298	)	$	(212	)	$	7		$	(4,810	)
Other																							—		—			—			—			—			—			1			1
Balance as of April 30, 2016																							$	2	$	9		$	2,498		$	(4,895	)	$	(2,536	)	$	(206	)	$	7		$	(5,121	)

See Notes to Consolidated Financial Statements

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

Organization and Description of the Business

Navistar International Corporation ("NIC"), incorporated under the laws of the State of Delaware in 1993, is a holding company whose principal operating entities are Navistar, Inc. ("NI") and Navistar Financial Corporation ("NFC"). References herein to the "Company," "we," "our," or "us" refer collectively to NIC and its consolidated subsidiaries, including certain variable interest entities ("VIEs") of which we are the primary beneficiary. We operate in four principal industry segments: Truck, Parts, Global Operations (collectively called "Manufacturing operations"), and Financial Services, which consists of NFC and our foreign finance operations (collectively called "Financial Services operations"). These segments are discussed in Note ~~12,~~11, Segment Reporting.

Our fiscal year ends on October 31. As such, all references to ~~2016~~2017 and ~~2015~~2016 contained within this Quarterly Report on Form 10-Q relate to the fiscal year, unless otherwise indicated.

Basis of Presentation and Consolidation

The accompanying unaudited consolidated financial statements include the assets, liabilities, and results of operations of our Manufacturing operations, 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.

We prepared the accompanying unaudited consolidated financial statements in accordance with United States ("U.S.") generally accepted accounting principles ("U.S. GAAP") for interim financial information and the instructions to the Quarterly Report on Form 10-Q and Article 10 of Regulation S-X issued by the U.S. Securities and Exchange Commission ("SEC"). Accordingly, they do not include all of the information and notes required by U.S. GAAP for comprehensive annual financial statements.

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting policies described in our Annual Report on Form 10-K for the year ended October 31, ~~2015,~~2016, which should be read in conjunction with the disclosures therein. In our opinion, these interim consolidated financial statements reflect all adjustments, consisting of normal recurring adjustments, necessary to present fairly the financial condition, results of operations, and cash flows for the periods presented. Operating results for interim periods are not necessarily indicative of annual operating results.

Variable Interest Entities

We have an interest in several VIEs, primarily joint ventures, established to manufacture or distribute products and enhance our operational capabilities. We have determined for certain of our VIEs that we are the primary beneficiary because we have the power to direct the activities of the VIE that most significantly impact its economic performance and we have the obligation to absorb losses of, or the right to receive benefits from, the VIE that could potentially be significant to the VIE. Accordingly, we include in our consolidated financial statements the assets and liabilities and results of operations of those entities, even though we may not own a majority voting interest. The liabilities recognized as a result of consolidating these VIEs do not represent additional claims on our general assets; rather they represent claims against the specific assets of these VIEs. Assets of these entities are not readily available to satisfy claims against our general assets.

We are the primary beneficiary of our Blue Diamond Parts, LLC ("BDP") joint venture with Ford Motor Company ("Ford"). As a result, our Consolidated Balance Sheets include assets of ~~$40~~$43 million and ~~$50~~$51 million and liabilities of $17 million and $16 million as of April 30, 2017 and October 31, 2016, respectively, including $12 million and ~~$7 million as of July 31, 2016 and October 31, 2015, respectively, including $3 million and $7~~$6 million of cash and cash equivalents, at the respective dates, which are not readily available to satisfy claims against our general assets. The creditors of BDP do not have recourse to our general credit.

On May 29, 2015, we acquired Ford's remaining 25% ownership in our Blue Diamond Truck ("BDT") joint venture for $27 million. The acquisition of Ford's remaining ownership of the BDT joint venture did not have a material impact on our consolidated net loss for the three or nine months ended July 31, 2015.

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

Our Financial Services segment consolidates several VIEs. As a result, our Consolidated Balance Sheets include secured assets of ~~$1.0 billion~~$943 million and ~~$1.1 billion~~$865 million as of ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, respectively, and liabilities of ~~$850~~$703 million and ~~$844~~$722 million as of ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, 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 ~~$178~~$254 million and ~~$235~~$249 million as of ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, respectively, and corresponding liabilities of ~~$118~~$123 million and ~~$107~~$136 million, at the respective dates, which are related to other secured transactions that do not qualify for sale accounting treatment, and therefore, are treated as borrowings secured by operating and finance leases. Investors that hold securitization debt have a priority claim on the cash flows generated by their respective securitized assets to the extent that the related VIEs are required to make principal and interest payments. Investors in securitizations of these entities have no recourse to our general credit.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

We also have an interest in other VIEs, which we do not consolidate because we are not the primary beneficiary. Our financial support and maximum loss exposure relating to these non-consolidated VIEs are not material to our financial condition, results of operations, or cash flows.

We use the equity method to account for our investments in entities that we do not control under the voting interest or variable interest models, but where we have the ability to exercise significant influence over operating and financial policies. Equity in income of non-consolidated affiliates includes our share of the net income of these entities.

~~Product Warranty Liability~~

~~The following table presents accrued product warranty and deferred warranty revenue activity:~~

Nine Months Ended July 31,
(in millions) 2016 2015
Balance at beginning of period $ 994
$ 1,197
Costs accrued and revenues deferred^(B)
141
208
Currency translation adjustment 2
(7 )
Adjustments to pre-existing warranties^(A)
70
(38 )
Payments and revenues recognized^(B)
(339 ) (344 )
Balance at end of period 868
1,016
Less: Current portion 423
466
Noncurrent accrued product warranty and deferred warranty revenue $ 445
$ 550

~~_________________________~~

~~(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 historic and expected trends. Our warranty liability is generally affected by component failure rates, repair costs, and the timing of failures. Future events and circumstances related to these factors could materially change our estimates and require adjustments to our liability. In addition, new product launches require a greater use of judgment in developing estimates until historical experience becomes available.

Inthe second quarter of 2016, we recorded a charge for adjustments to pre-existing warranties of $46 million or $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 increases 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 the three and nine months ended July 31, 2015 include a benefit of $2 million related to our Workhorse Custom Chassis operations, which are reported in Discontinued Operations in our ~~Consolidated Statements of Operations.~~ Inthe first quarter of 2015, we recorded a benefit for adjustments to pre-existing warranties of $57 million or $0.70 per diluted share. The impact of income taxes on the 2016 and 2015 adjustments are not material due to our deferred tax valuation allowances on our U.S. deferred tax assets.

~~(B)~~

~~During the third quarter of 2016, we determined that the amortization of loss reserves for Big Bore extended service contracts, which were included within~~ ~~Costs accrued and revenues deferred,~~ ~~should be applied to~~ ~~Payments and revenues recognized~~. As a result, for the nine months ended July 31, 2015, we have reclassified $31 million of amortization of loss reserves in order to conform to our current presentation. The reclassification did not impact our ~~Consolidated Statements of Operations~~ ~~or our~~ ~~Consolidated Balance Sheets~~.

~~Extended Warranty Programs~~

The amount of deferred revenue related to extended warranty programs was $345 million and $401 million at July 31, 2016 and October 31, 2015, respectively. Revenue recognized under our extended warranty programs was $37 million and $113 million, in the three and nine months ended July 31, 2016, respectively, and $40 million and $115 million for the three and nine months ended July 31, 2015, respectively.

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

~~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 July 31, 2016, approximately 5,400, or 82%, of our hourly workers and approximately 300, or 6%, of our salaried workers, are represented by labor unions and are covered by collective bargaining agreements. 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).

~~Indefinite-Lived Intangible Assets~~

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.

During the third quarter of 2015, 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, a trademark, of $24 million. As a result, we performed an impairment analysis in the third quarter of 2015 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 $3 million. In the third quarter of 2016, we recognized an additional impairment charge of $1 million related to this trademark. 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 the Global Operations segment.~~

Inventories

Inventories are valued at the lower of cost or market. Cost is principally determined using the first-in, first-out method. Our gross used truck inventory ~~increased~~decreased to ~~approximately $430~~$342 million at ~~July 31, 2016~~April 30, 2017 from ~~$390~~$410 million at October 31, ~~2015,~~2016, offset by reserves of ~~$166~~$216 million and ~~$110~~$208 million, respectively. ~~During the nine months ended July 31, 2016, additional reserves of $56 million were recorded primarily in~~ ~~Costs of products sold~~.

In valuing our used truck inventory, we are required to make assumptions regarding the level of reserves required to value inventories at their net realizable value ("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.

~~Recently Adopted Accounting Standards~~The following table presents our used truck reserve:



	Six Months Ended April 30,
(in millions)	2017			2016
Balance at beginning of period	$	208		$	110
Additions charged to expense^(A)	88			84
Deductions/Other adjustments^(B)	(80		)	(26		)
Balance at end of period	$	216		$	168

_________________________

(A)

Additions charged to expense reflect the increase of the reserve for inventory on hand. 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 the second quarter of 2017 and 2016, we recorded a charge of $60 million and $38 million, respectively, in Costs of Products Sold in our Consolidated Statements of Operations.


(B)	Deductions/Other adjustments reflect reductions of the reserve primarily related to the sale of units to certain export markets and our Mexican subsidiary currency translation adjustments.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Product Warranty Liability

The following table presents accrued product warranty and deferred warranty revenue activity:



	Six Months Ended April 30,
(in millions)	2017			2016
Balance at beginning of period	$	818		$	994
Costs accrued and revenues deferred^(A)	87			94
Currency translation adjustment	(1		)	1
Adjustments to pre-existing warranties^(B)	(10		)	51
Payments and revenues recognized^(A)	(206		)	(233		)
Balance at end of period	688			907
Less: Current portion	352			429
Noncurrent accrued product warranty and deferred warranty revenue	$	336		$	478

_________________________

(A)

During the third quarter of 2016, we determined that the amortization of loss reserves for Big Bore extended service contracts, which were included within Costs accrued and revenues deferred, should be applied to Payments and revenues recognized. As a result, for the six months ended April 30, 2016, we have reclassified $25 million of amortization of loss reserves in order to conform to our current presentation. The reclassification did not impact our Consolidated Statements of Operations or our Consolidated Balance Sheets.

(B)

In the ~~nine~~second quarter of 2016, we recorded a charge for adjustments to pre-existing warranties of $46 million or $0.56 per diluted share. The pre-existing charges primarily related to increases in both claim frequency and cost of repair across both the Medium Duty and Big Bore engine families. These charges increase the reserve for Navistar's standard warranty obligations as well as the loss positions related to our Big Bore extended service contract.

Extended Warranty Programs

The amount of deferred revenue related to extended warranty programs was $287 million and $325 million at April 30, 2017 and October 31, 2016, respectively. Revenue recognized under our extended warranty programs was $47 million and $81 million for the three and six months ended ~~July 31,~~April 30, 2017, respectively, and $38 million and $76 million for the three and six months ended April 30, 2016, ~~we have not adopted any new accounting guidance~~respectively.

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that ~~has had a material impact on our~~affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the consolidated financial ~~statements.~~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 April 30, 2017, approximately 6,300, or 95%, of our hourly workers and approximately 900, or 17%, of our salaried workers, are represented by labor unions and are covered by collective bargaining agreements. Our future operations may be affected by changes in governmental procurement policies, tax 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).

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Recently Issued Accounting Standards

In ~~May 2014,~~January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, "Business Combinations" (Topic 805). This ASU provides a new framework for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This ASU creates an initial screening test (Step 1) 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 (Step 2). Fewer transactions are expected to involve acquiring or selling a business. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. Adoption will require a prospective transition. We do not expect the impact of this ASU to have a material effect on our consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows" (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. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. 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 October 2016, the FASB issued ASU No. 2016-16, "Income Taxes” (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. Our effective date for this ASU is November 1, 2018. Adoption will require a modified retrospective transition. 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” (Topic 326). The 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. Our effective date is November 1, 2020. 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. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Our effective date for this ASU is November 1, 2019. Adoption will require a modified retrospective transition. We are currently evaluating 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), 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. The 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. Our effective date for this ASU is November 1, 2018. We are ~~currently evaluating~~in the ~~method~~process of ~~adoption and~~completing our initial assessment of the potential 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~~statements and liabilities for the rights and obligations created by leases of greater than twelve months. The accounting by lessors will remain largely unchanged. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Our effective date for this ASU is November 1, 2019. Adoption will require a modified retrospective transition. We are currently evaluating the method of adoption and the impact of this ASUhave not concluded on our ~~consolidated financial statements.~~adoption methodology.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The 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. Our effective date is November 1, 2020. We are currently evaluating the method of adoption and the impact of this ASU on our consolidated financial statements.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

2. Restructurings and Impairments

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 ~~includes amounts related to discontinued operations and~~ excludes pension and other postretirement contractual termination benefits:


(in millions)	Balance at October 31, 2015		Additions		Payments			Adjustments		Balance at July 31, 2016		Balance at October 31, 2016		Additions		Payments			Adjustments			Balance at April 30, 2017
Employee termination charges	$	62	$	4	$	(58	)	$	2	$	10	$	5	$	8	$	(3	)	$	(1	)	$	9
Lease vacancy	5		—		(4		)	—		1		1		—		(1		)	—			—
Other	1		—		—			—		1		1		—		—			—			1
Restructuring liability	$	68	$	4	$	(62	)	$	2	$	12	$	7	$	8	$	(4	)	$	(1	)	$	10


(in millions)	Balance at October 31, 2014		Additions		Payments			Adjustments			Balance at July 31, 2015		Balance at October 31, 2015		Additions		Payments			Adjustments		Balance at April 30, 2016
Employee termination charges	$	8	$	17	$	(7	)	$	(2	)	$	16	$	62	$	6	$	(49	)	$	—	$	19
Lease vacancy	11		—		(6		)	—			5		5		—		(3		)	—		2
Other	1		2		(2		)	—			1		1		—		—			—		1
Restructuring liability	$	20	$	19	$	(15	)	$	(2	)	$	22	$	68	$	6	$	(52	)	$	—	$	22

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

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) costs for employee and contractor termination and other related benefits, and (iii) charges for pension and other postretirement contractual benefits and curtailments. These charges could be significant.

Chatham restructuring activities

In the third quarter of 2011, we committed to close our Chatham, Ontario heavy truck plant, which had been idled since June 2009. At that time, we recognized curtailment and contractual termination charges related to postretirement plans. Based on a ruling regarding pension benefits received from the Financial Services Tribunal in Ontario, Canada, in the third quarter of 2014, we recognized additional charges of $14 million related to the 2011 closure of the Chatham, Ontario plant. ~~We appealed this ruling, but it was upheld in a July 3, 2015 decision issued by the Divisional Court of Ontario. On July 23, 2015, we filed a notice of motion for leave~~Unsuccessful efforts to appeal to the ~~Court of Appeal for Ontario, which was perfected on August 25, 2015 through an additional filing. On December 21, 2015,~~ruling in the Ontario ~~Court of Appeal denied the motion for leave to appeal.~~court system ended in December 2015. On April 25, 2016, we filed a qualified partial wind-up report for approval by the Financial Services Commission of ~~Ontario. Potential charges in future periods could range from $0 million to $60 million, primarily related to pension, postretirement costs and termination benefits, which are subject to governmental~~Ontario ("FSCO"). On January 12, 2017, FSCO issued its approval ~~employee negotiation, acceptance rates and~~of the partial wind-up report. On February 27, 2017, we finalized the resolution of ~~disputes~~statutory severance pay for former employees related ~~thereto. In addition, we are continuing~~ to evaluate the impact of the ruling on prior plan administration practices, and, as a result, we have recognized $5 million of charges in the third quarter of 2016. We do not expect material future charges.

~~Foundry Facilities~~

~~In December 2014, we announced~~ the closure of our Indianapolis, Indiana foundry facility; on June 30, 2015, we closed this facility; and on August 19, 2016, we sold this facility. In addition, on April 30, 2015, we sold our Waukesha, Wisconsin foundry operations. AsChatham, Ontario plant, resulting in a ~~result~~charge of ~~these actions, the Truck segment recognized charges of $3 million and $28~~$6 million in the ~~three and nine months ended July 31, 2015, respectively, for the acceleration~~first quarter of ~~depreciation of certain assets related to foundry and engine facilities. These charges are~~2017. The charge is reported within ~~Costs of products sold~~ ~~in our~~ ~~Consolidated Statements of Operations.~~

~~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.

In the third quarter of 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 will primarily be paid throughout 2016.

~~Asset Impairments~~

~~The following table reconciles our~~ ~~Asset impairment~~Restructuring charges in our Consolidated Statements of ~~Operations:~~Operation

Three Months Ended July 31, Nine Months Ended July 31,
(in millions) 2016 2015 2016 2015
Intangible asset impairment charge $ 1
$ 3
$ 1
$ 3
Other asset impairment charges related to continuing operations 11
4
16
12
Total asset impairment charges $ 12
$ 7
$ 17
$ 15

~~As a result of~~s. Once the ~~economic downturn in Brazil causing declines in actual~~wind-up is complete, severance has been paid, and ~~forecasted results, we tested the indefinite-lived intangible asset of our Brazilian engine reporting unit~~pension elections have been made by participants, there may be adjustments made to pension and post-retirement accruals which could be material. See Note 7, Postretirement benefits for potential impairment. As a result, in the third quarters of 2016 and 2015, we determined that the trademark asset carrying value was impaired, resulting in charges of $1 million and $3 million, respectively. For more information, see Note 1, further discussion.~~Summary of Significant Accounting Policies.~~

In the nine months ended July 31, 2016, we recorded $3 million of asset impairment charges in the Truck segment related to the sale of Pure Power Technologies, a components business focused on air and fuel systems, in February 2016.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Asset Impairments

In the ~~third quarters of 2016 and 2015,~~six months ended April 30, 2017, we concluded that we had triggering events related to certain ~~long-lived~~ assets ~~in the Truck segment.~~under operating leases. As a result, ~~certain long-lived assets were determined to be impaired, resulting in a~~ charges of ~~$11~~$7 million were recorded in our Truck segment.

In the six months ended April 30, 2016, we concluded that we had a triggering event in connection with the potential sale of Pure Power Technologies, LLC ("PPT"), a components business focused on air and fuel systems, requiring the impairment of certain assets. As a result, charges of $3 million ~~respectively. Additionally,~~were recorded in our Truck segment. In February 2016, we completed the ~~first quarter~~sale of ~~2015,~~PPT. In the six months ended April 30, 2016, we also concluded that we had a triggering event related to certain ~~operating leases.~~long-lived assets. As a result, ~~the~~charges of $2 million were recorded in our Truck ~~segment recorded $7 million of asset impairment charges.~~segment.

~~All of these~~These charges ~~are recognized~~were recorded in Asset impairment charges in ourConsolidated Statements of Operations.

See Note 9, Fair Value Measurements, for information on the valuation of impaired operating leases and other assets.

3. 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 $2.1 billion ~~and $2.5 billion~~ as of ~~July 31, 2016~~both April 30, 2017 and October 31, ~~2015, respectively.~~2016. Included in total assets of our Financial Services operations are finance receivables of ~~$1.6 billion and $2.0~~$1.7 billion as of ~~July 31, 2016~~both April 30, 2017 and October 31, ~~2015, respectively.~~2016. We have two portfolio segments of finance receivables that we distinguish based on the type of customer and nature of the financing inherent to each portfolio. The retail portfolio segment represents loans or leases to end-users for the purchase or lease of vehicles. The wholesale portfolio segment represents loans to dealers to finance their inventory.

Our Finance receivables, net in our Consolidated Balance Sheets consist of the following:


(in millions)	July 31, 2016		October 31, 2015		April 30, 2017		October 31, 2016
Retail portfolio	$	406	$	554	$	545	$	499
Wholesale portfolio	1,228		1,467		1,169		1,199
Total finance receivables	1,634		2,021		1,714		1,698
Less: Allowance for doubtful accounts	21		26		23		21
Total finance receivables, net	1,613		1,995		1,691		1,677
Less: Current portion, net^(A)	1,410		1,779		1,459		1,457
Noncurrent portion, net	$	203	$	216	$	232	$	220

_________________________


(A)	The current portion of finance receivables is computed based on contractual maturities. Actual cash collections typically vary from the contractual cash flows because of prepayments, extensions, delinquencies, credit losses, and renewals.

Securitizations

Our Financial Services operations transfer wholesale notes, retail accounts receivable, ~~retail notes,~~ finance leases, and operating leases to special purpose entities ("SPEs"), which generally are only permitted to purchase these assets, issue asset-backed securities, and make payments on the securities issued. In addition to servicing receivables, our continued involvement in the SPEs may include an economic interest in the transferred receivables and, in some cases, managing exposure to interest rate changes on the securities using interest rate swaps or interest rate caps. There were no transfers of finance receivables that qualified for sale accounting treatment as of ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, 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 ~~retail note owner trusts or~~ wholesale note owner trusts in order to issue asset-backed securities. These trusts are VIEs of which we are determined to be the primary beneficiary and, therefore, the assets and liabilities of the trusts are included in our Consolidated Balance Sheets. The outstanding balance of finance receivables transferred into these VIEs was ~~$917~~$854 million and ~~$1.0 billion~~$829 million as of ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, respectively. Other finance receivables related to secured transactions that do not qualify for sale accounting treatment were ~~$54~~$126 million and ~~$96~~$108 million as of ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, respectively. For more information on assets and liabilities of consolidated VIEs and other securitizations accounted for as secured borrowings by our Financial Services segment, see Note 1, Summary of Significant Accounting Policies.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Finance Revenues

The following table presents the components of our Finance revenues in our Consolidated Statements of Operations:


	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended April 30,				Six Months Ended April 30,
(in millions)	2016			2015			2016			2015			2017		2016		2017		2016
Retail notes and finance leases revenue	$	9		$	12		$	28		$	37		$	10	$	9	$	19	$	19
Wholesale notes interest	29			27			81			75			24		26		47		52
Operating lease revenue	17			16			49			46			16		16		33		32
Retail and wholesale accounts interest	5			8			19			25			6		7		11		14
Gross finance revenues	60			63			177			183			56		58		110		117
Less: Intercompany revenues	(26		)	(26		)	(75		)	(75		)	23		25		43		49
Finance revenues	$	34		$	37		$	102		$	108		$	33	$	33	$	67	$	68

4. Allowance for Doubtful Accounts

Our two finance receivables portfolio segments, retail and wholesale, each consist of one class of receivable based on: (i) initial measurement attributes of the receivables, and (ii) the assessment and monitoring of risk and performance of the receivables. For more information, see Note 3, Finance Receivables.

The following tables present the activity related to our allowance for doubtful accounts for our retail portfolio segment, wholesale portfolio segment, and trade and other receivables:

Three Months Ended July 31, 2016 Three Months Ended July 31, 2015
(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 $ 21
$ 4
$ 26
$ 51
$ 25
$ 3
$ 30
$ 58
Provision for doubtful accounts, net of recoveries 2
(1 ) —
1
2
—
—
2
Charge-off of accounts (3 ) —
(1 ) (4 ) —
—
(1 ) (1 )
Other^(A)
(2 ) —
2
—
(2 ) —
(3 ) (5 )
Allowance for doubtful accounts, at end of period $ 18
$ 3
$ 27
$ 48
$ 25
$ 3
$ 26
$ 54


	Nine Months Ended July 31, 2016												Nine Months Ended July 31, 2015											Three Months Ended April 30, 2017										Three Months Ended April 30, 2016
(in millions)	Retail Portfolio			Wholesale Portfolio			Trade and Other Receivables			Total			Retail Portfolio			Wholesale Portfolio		Trade and Other Receivables			Total			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		$	24		$	3	$	38		$	65		$	19		$	2	$	28	$	49		$	19		$	4	$	23	$	46
Provision for doubtful accounts, net of recoveries	5			(1		)	4			8			7			—		—			7			1			—		—		1			1			—		1		2
Charge-off of accounts	(7		)	—			(2		)	(9		)	(1		)	—		(4		)	(5		)	(1		)	—		—		(1		)	(1		)	—		—		(1		)
Other^(A)	(2		)	—			3			1			(5		)	—		(8		)	(13		)	2			—		—		2			2			—		2		4
Allowance for doubtful accounts, at end of period	$	18		$	3		$	27		$	48		$	25		$	3	$	26		$	54		$	21		$	2	$	28	$	51		$	21		$	4	$	26	$	51



	Six Months Ended April 30, 2017											Six Months Ended April 30, 2016
(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		$	22		$	4	$	22		$	48
Provision for doubtful accounts, net of recoveries	6			—		1			7			3			—		4			7
Charge-off of accounts	(4		)	—		(1		)	(5		)	(4		)	—		(1		)	(5		)
Other^(A)	—			—		—			—			—			—		1			1
Allowance for doubtful accounts, at end of period	$	21		$	2	$	28		$	51		$	21		$	4	$	26		$	51

~~_________________________~~____________________


(A)	Amounts include impact from currency translation.

The accrual of interest income is discontinued on certain impaired finance receivables. Impaired finance receivables include accounts with specific loss reserves and certain accounts that are on non-accrual status. In certain cases, we continue to collect payments on our impaired finance receivables.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

The following table presents information regarding impaired finance receivables:


	July 31, 2016						October 31, 2015						April 30, 2017						October 31, 2016
(in millions)	Retail Portfolio		Wholesale Portfolio		Total		Retail Portfolio		Wholesale Portfolio		Total		Retail Portfolio		Wholesale Portfolio		Total		Retail Portfolio		Wholesale Portfolio		Total
Impaired finance receivables with specific loss reserves	$	18	$	—	$	18	$	21	$	—	$	21	$	23	$	—	$	23	$	15	$	—	$	15
Impaired finance receivables without specific loss reserves	—		—		—		—		—		—		—		—		—		—		—		—
Specific loss reserves on impaired finance receivables	9		—		9		9		—		9		10		—		10		8		—		8
Finance receivables on non-accrual status	18		—		18		21		—		21		23		—		23		15		—		15

The average balances of the impaired finance receivables in the retail portfolio were ~~$18~~$17 million and $21 million during the ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016, ~~and 2015,~~ respectively. See Note 9, Fair Value Measurements, for information on the valuation of impaired finance receivables.

We use the aging of our receivables as well as other inputs when assessing credit quality. The following table presents the aging analysis for finance receivables:


	July 31, 2016						October 31, 2015						April 30, 2017						October 31, 2016
(in millions)	Retail Portfolio		Wholesale Portfolio		Total		Retail Portfolio		Wholesale Portfolio		Total		Retail Portfolio		Wholesale Portfolio		Total		Retail Portfolio		Wholesale Portfolio		Total
Current, and up to 30 days past due	$	356	$	1,226	$	1,582	$	486	$	1,461	$	1,947	$	505	$	1,166	$	1,671	$	449	$	1,198	$	1,647
30-90 days past due	34		1		35		48		4		52		24		1		25		37		—		37
Over 90 days past due	16		1		17		20		2		22		16		2		18		13		1		14
Total finance receivables	$	406	$	1,228	$	1,634	$	554	$	1,467	$	2,021	$	545	$	1,169	$	1,714	$	499	$	1,199	$	1,698

5. Inventories

The following table presents the components of Inventories in our Consolidated Balance Sheets:


(in millions)	July 31, 2016		October 31, 2015		April 30, 2017		October 31, 2016
Finished products	$	809	$	837	$	619	$	678
Work in process	31		34		57		46
Raw materials	244		264		270		220
Total inventories, net	$	1,084	$	1,135	$	946	$	944

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

6. Debt

The following tables present the components of Notes payable and current maturities of long-term debt and Long-term debt in our Consolidated Balance Sheets:


(in millions)	July 31, 2016		October 31, 2015		April 30, 2017		October 31, 2016
Manufacturing operations
Senior Secured Term Loan Credit Facility, as amended, due 2020, net of unamortized discount of $14 and $17, respectively	$	1,020	$	1,023
8.25% Senior Notes, due 2022, net of unamortized discount of $16 and $18, respectively	1,184		1,182
4.50% Senior Subordinated Convertible Notes, due 2018, net of unamortized discount of $11 and $14, respectively	189		186
4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $26 and $32, respectively	385		379
Debt of majority-owned dealerships	13		28
Senior Secured Term Loan Credit Facility, as amended, due 2020, net of unamortized discount of $12 and $14, respectively, and unamortized debt issuance costs of $13 and $7, respectively					$	1,002	$	1,009
8.25% Senior Notes, due 2022 net of unamortized discount of $14 and $15, respectively, and unamortized debt issuance costs of $15 and $12, respectively					1,421		1,173
4.50% Senior Subordinated Convertible Notes, due 2018, net of unamortized discount of $8 and $10, respectively, and unamortized debt issuance costs of $1 at both dates					192		189
4.75% Senior Subordinated Convertible Notes, due 2019, net of unamortized discount of $19 and $24, respectively, and unamortized debt issuance costs of $4 at both dates					388		383
Financing arrangements and capital lease obligations	44		49		38		42
Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040	225		225
Loan Agreement related to 6.5% Tax Exempt Bonds, due 2040, net of unamortized debt issuance costs of $5 at both dates					220		220
Financed lease obligations	61		111		102		52
Other	10		15		20		28
Total Manufacturing operations debt	3,131		3,198		3,383		3,096
Less: Current portion	67		103		85		71
Net long-term Manufacturing operations debt	$	3,064	$	3,095	$	3,298	$	3,025


(in millions)	July 31, 2016		October 31, 2015		April 30, 2017		October 31, 2016
Financial Services operations
Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2021	$	867	$	870
Bank credit facilities, at fixed and variable rates, due dates from 2016 through 2021	874		1,063
Commercial paper, at variable rates, program matures in 2017	93		86
Asset-backed debt issued by consolidated SPEs, at fixed and variable rates, due serially through 2022, net of unamortized debt issuance costs of $5 and $6, respectively					$	735	$	753
Bank credit facilities, at fixed and variable rates, due dates from 2017 through 2021, net of unamortized debt issuance costs of $2 and $3, respectively					766		861
Commercial paper, at variable rates, program matures in 2022					93		96
Borrowings secured by operating and finance leases, at various rates, due serially through 2021	100		81		88		98
Total Financial Services operations debt	1,934		2,100		1,682		1,808
Less: Current portion	1,322		1,007		659		836
Net long-term Financial Services operations debt	$	612	$	1,093	$	1,023	$	972

~~Financial Services~~Manufacturing Operations

~~Asset-backed Debt~~Senior Secured Term Loan Credit Facility

In ~~April 2016, Truck Retail Accounts Corporation~~February 2017, the Senior Secured Term Loan Credit Facility ("~~TRAC"~~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 reduces the interest rate applicable to the outstanding loan by 1.50%. Under the terms of the amendment, the interest rate on the outstanding loan is based, at our option, on an adjusted Eurodollar Rate, plus a margin of 4.00%, ~~one~~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 ~~consolidated SPEs, renewed its $100 million revolving facility for one year, to April 2017. Borrowings under this facility are secured by eligible retail accounts receivable.~~

~~In February 2016,~~Term Loan. The remaining debt issuance costs were recorded as a direct deduction from the ~~maximum capacity of NFC’s wholesale variable funding notes ("VFN") facility was increased from $375 million to $500 million. The VFN facility is secured by assets~~carrying amount of the ~~wholesale note owner trust. In May 2016,~~Term Loan and will be amortized through Interest expense over the ~~maturity date~~remaining life of the ~~VFN facility was extended from October 2016 to May 2017.~~Term Loan.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Senior Notes

In October 2009, we completed the sale of $1.0 billion aggregate principal amount of our 8.25% Senior Notes due 2022 ("Senior Notes"). In March 2013, we completed the sale of an additional $300 million aggregate principal amount of Senior Notes. In January 2017, we issued an additional $250 million aggregate principal amount of Senior Notes. Interest related to the Senior Notes is payable on May 1 and November 1 of each year until the maturity date of November 1, 2021. The Senior Notes are senior unsecured obligations of the Company.

We received net proceeds of approximately $250 million from the January 2017 issuance of additional Senior Notes, which included accrued interest of $4 million, offset by underwriter fees of $4 million. The debt issuance costs were recorded as a direct deduction from the carrying amount of the Senior Notesand will be amortized through Interest expense over the remaining life of the Senior Notes. As a result of the transaction, the effective interest rate of the Senior Notes is now 8.5%. The proceeds from the January 2017 sale of additional Senior Notes are being used for general corporate purposes, including working capital and capital expenditures.

Financial Services Operations

Asset-backed Debt

In November 2016, 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 was extended to May 2018, and the maximum capacity was reduced to $425 million. The VFN facility is secured by assets of the wholesale note owner trust.

In May 2017, Truck Retail Accounts Corporation ("TRAC"), one of our consolidated SPEs, renewed its $100 million revolving facility to April 2018. Borrowings under this facility are secured by eligible retail accounts receivable.

Bank Credit Facilities

In May 2016, NFC amended and extended its 2011 bank credit facility which was originally due in December 2016. The 2016 amendment ~~extends~~extended the maturity date to June 2018 and initially reduced the revolving portion of the facility from $500 million to $400 million. ~~The~~In December 2016, and in accordance with the amendment, the revolving portion ~~will be further~~of the facility was reduced to a maximum of $275 million, ~~effective in December 2016.~~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 borrowings on the revolving portion of the facility totaled ~~$300~~$274 million as of July 31, 2016. The amendment also provides for a reduction in the term loan facility to $82 million, effective in December 2016, at which time the quarterly principal payments are reduced from $9 million to $2 million.April 30, 2017. The balance of the term loan portion of the facility was ~~$221~~$80 million as of ~~July 31, 2016.~~April 30, 2017. 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.

InCommercial Paper

Effective February 2017, our Mexican financial services operation entered into a five-year commercial paper program for up to ₱1.8 billion (the equivalent of approximately US$94 million at April 30, 2017). This program replaced the ~~three and nine months ended July 31, 2016, NFC paid $50 million and $80 million, respectively,~~program that matured in ~~cash dividends to Navistar, Inc. Dividends are subject to the restricted payment covenants set forth in the NFC bank credit facility.~~December 2016.

7. Postretirement Benefits

Defined Benefit Plans

We provide postretirement benefits to a substantial portion of our employees and retirees. Costs associated with postretirement benefits include pension and postretirement health care expenses for employees, retirees, surviving spouses and dependents.

Generally, the pension plans are non-contributory. Our policy is to fund the pension plans in accordance with applicable U.S. and Canadian government regulations and to make additional contributions from time to time. For the three and ~~nine~~six months ended ~~July 31, 2016,~~April 30, 2017, we contributed ~~$20~~$24 million and ~~$60~~$46 million, respectively, and for the three and ~~nine~~six months ended ~~July 31, 2015, we contributed $11~~April 30, 2016, $21 million and ~~$73~~$40 million, respectively, to our pension plans to meet regulatory funding requirements. We expect to contribute approximately ~~$40~~$65 million to our pension plans during the remainder of ~~2016.~~2017.

We primarily fund other post-employment benefit ("OPEB") obligations, such as retiree medical, in accordance with athe 1993 Settlement Agreement (the "1993 Settlement Agreement"), which requires us to fund a portion of the plans' annual service cost to a retiree benefit trust (the "Base Trust"). The 1993 Settlement Agreement resolved a class action lawsuit originally filed in 1992 regarding the restructuring of our then applicable retiree health care and life insurance benefits. Contributions for the three and ~~nine~~six months ended ~~July 31,~~April 30, 2017, and 2016, ~~and 2015,~~ as well as anticipated contributions for the remainder of ~~2016,~~2017, are not material.

~~Components of Net Periodic Benefit Expense~~

~~Net periodic benefit expense included in our~~ ~~Consolidated Statements of Operations~~ ~~is comprised of the following:~~

Three Months Ended July 31, Nine Months Ended July 31,
Pension Benefits Health and Life
Insurance Benefits Pension Benefits Health and Life
Insurance Benefits
(in millions) 2016 2015 2016 2015 2016 2015 2016 2015
Service cost for benefits earned during the period $ 2
$ 3
$ 1
$ 2
$ 7
$ 9
$ 4
$ 5
Interest on obligation 29
35
14
17
88
106
44
53
Amortization of cumulative loss 26
25
8
10
78
74
24
29
Amortization of prior service benefit —
—
—
(1 ) —
—
(1 ) (3 )
Contractual termination benefits 1
—
4
—
3
(1 ) 4
(1 )
Premiums on pension insurance 4
3
—
—
12
8
—
—
Expected return on assets (41 ) (48 ) (6 ) (7 ) (125 ) (145 ) (19 ) (22 )
Net periodic benefit expense $ 21
$ 18
$ 21
$ 21
$ 63
$ 51
$ 56
$ 61

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

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 periods ended April 30 is comprised of the following:



	Three Months Ended April 30,												Six Months Ended April 30,
	Pension Benefits						Health and Life Insurance Benefits						Pension Benefits						Health and Life Insurance Benefits
(in millions)	2017			2016			2017			2016			2017			2016			2017			2016
Service cost for benefits earned during the period	$	2		$	3		$	2		$	2		$	4		$	5		$	3		$	3
Interest on obligation	26			29			12			15			53			59			24			30
Amortization of cumulative loss	30			26			5			8			59			52			11			16
Amortization of prior service benefit	—			—			—			(1		)	—			—			—			(1		)
Contractual termination benefits	—			2			—			—			1			2			—			—
Premiums on pension insurance	4			4			—			—			8			8			—			—
Expected return on assets	(39		)	(42		)	(6		)	(7		)	(79		)	(84		)	(12		)	(13		)
Net periodic benefit expense	$	23		$	22		$	13		$	17		$	46		$	42		$	26		$	35

In 2016, we changed the approach utilized to estimate the service cost and interest cost components of net periodic benefit cost for our major defined benefit postretirement plans. Historically, we estimated the service cost and interest cost components using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. In 2016, we began using a spot rate approach for the estimation of service and interest cost for our major plans by applying specific spot rates along the yield curve to the relevant projected cash flows, to provide a better estimate of service and interest costs. ~~Interest on~~

In April 2016, we filed a qualified partial wind-up report for approval by FSCO related to the ~~obligation as reported above is $9 million and $4 million lower~~2011 closure of our Chatham, Ontario plant. FSCO provided formal approval in the three months ended July 31, 2016 for pension and for health and life insurance, respectively, and $27 million and $12 million lower in the nine months ended July 31, 2016 for pension and for health and life insurance, respectively, asJanuary 2017. As a result of ~~using~~an ongoing administration review ordered in conjunction with the ~~spot rate approach compared~~partial wind-up, we recognized $1 million of contractual termination charges in the first quarter of 2017. Once the wind-up is complete, severance has been paid, and pension elections have been made by participants, there may be adjustments made to ~~the historical approach.~~pension and post-retirement accruals which could be material.

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 deposit the matching contribution annually. 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 $7$9 million and ~~$22~~$16 million in the three and ~~nine~~six months ended ~~July 31, 2016,~~April 30, 2017, respectively, and $7$8 million and ~~$24~~$15 million in the three and ~~nine~~six months ended ~~July 31, 2015,~~April 30, 2016, respectively.

In accordance with the 1993 Settlement Agreement, an independent Retiree Supplemental Benefit Trust (the "Supplemental Trust") was established. The Supplemental Trust, and the benefits it provides to certain retirees pursuant to a certain Retiree Supplemental Benefit Program under the 1993 Settlement Agreement ("Supplemental Benefit Program"), is not part of our consolidated financial statements.

Our contingent profit sharing obligations under a certain Supplemental Benefit Trust Profit Sharing Plan ("Supplemental Benefit Trust Profit Sharing Plan") will continue until certain funding targets defined by the 1993 Settlement Agreement are met. We have recorded no profit sharing accruals based on the operating performance of the entities that are included in the determination of qualifying profits. For more information on pending arbitration regarding the Supplemental Benefit Trust Profit Sharing Plan, see Note ~~11,~~10, Commitments and Contingencies.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

8. Income Taxes

We compute, on a quarterly basis, an estimated annual effective tax rate considering ordinary income and related income tax expense. For all periods presented, U.S. and certain foreign results are excluded from ordinary income due to ordinary losses for which no benefit can be recognized. Ordinary income refers to income (loss) before income tax expense excluding significant unusual or infrequently occurring items. The tax effect of a significant unusual or infrequently occurring item is recorded in the interim period in which the item occurs. Items included in income tax expense in the periods in which they occur include the tax effects of material restructurings, impairments, cumulative effect of changes in tax laws or rates, foreign exchange gains and losses, adjustments to uncertain tax positions, and adjustments to our valuation allowance due to changes in judgment regarding the ability to realize deferred tax assets in future years.

In the first quarter of 2016, we reviewed the impact of recently enacted U.S. tax legislation, the most significant of which is the Protecting Americans from Tax Hikes Act of 2015 ("PATH Act of 2015"), which extended the rules allowing us to forego bonus depreciation in exchange for refunds of previously paid Alternative Minimum Tax ("AMT"). This change resulted in the likely realization of our deferred AMT credits, on a more likely than not basis, which supports the release of the associated valuation allowance. In addition, the PATH Act of 2015 extended the "look-through rule," under subpart F of the U.S. Internal Revenue Code, which had expired for us on September 30, 2015. The "look-through rule" had provided an exception to the U.S. taxation of certain income generated by foreign subsidiaries. The rule was extended in December 2015 with retroactive effect to the beginning of our 2016 fiscal year, and the rule will remain in place through our 2020 fiscal year. This rule extension allowed us to reverse recently recognized deferred tax liabilities associated with earnings in foreign jurisdictions. However, since the reversal of this deferred tax liability also had an associated and completely offsetting valuation allowance effect, there was no impact to total deferred taxes due to this change.

Also in the first quarter of 2016, we elected to early adopt the provisions of ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This ASU requires the offset of all deferred tax assets and liabilities, including valuation allowances, for each tax-paying jurisdiction within each tax-paying component. The net deferred tax must be presented as a single noncurrent amount for each jurisdiction. In accordance with the adoption provisions of ASU 2015-17, we have chosen to apply this change prospectively, and as a result, prior year amounts are maintained as originally filed.

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

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. As mentioned above, we have concluded that the valuation allowance on our U.S. deferred AMT credits is no longer necessary due to the enactment of the PATH Act of 2015. This partial valuation allowance release resulted in an income tax benefit of $13 million which was recorded in the first quarter of 2016. We continue to maintain a valuation allowance on the majority of our ~~remaining~~ 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.~~realized based on current forecasted results. For all remaining deferred tax assets, while we believe ~~at July 31, 2016~~ 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.

We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position. The tax benefits recognized in the consolidated financial statements from such a position are measured based on the largest benefit that has a greater than fifty percent likelihood of being realized upon ultimate settlement. As of ~~July 31, 2016,~~April 30, 2017, the amount of liability for uncertain tax positions was ~~$42~~$48 million. The liability at ~~July 31, 2016~~April 30, 2017 has a recorded offsetting tax benefit associated with various issues that total ~~$12~~$14 million. If the unrecognized tax benefits are recognized, all would impact our effective tax rate. However, to the extent we continue to maintain a full valuation allowance against certain deferred tax assets, the effect may be in the form of an increase in the deferred tax asset related to our net operating loss carryforward, which would be offset by a full valuation allowance.

We recognize interest and penalties related to uncertain tax positions as part of Income tax expense. For the three and ~~nine~~six months ended ~~July 31, 2016,~~April 30, 2017, total interest and penalties related to our uncertain tax positions resulted in an income tax expense of less than $1 million, for both periods.

We have open tax years back to 2001 with various significant taxing jurisdictions including the U.S., Canada, Mexico, and Brazil. In connection with the examination of tax returns, contingencies may arise that generally result from differing interpretations of applicable tax laws and regulations as they relate to the amount, timing, or inclusion of revenues or expenses in taxable income, or the sustainability of tax credits to reduce income taxes payable. We believe we have sufficient accruals for our contingent tax liabilities. Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns, although actual results may differ. While it is probable that the liability for unrecognized tax benefits may increase or decrease during the next twelve months, we do not expect any such change would have a material effect on our financial condition, results of operations, or cash flows.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

9. Fair Value Measurements

For assets and liabilities measured at fair value on a recurring and nonrecurring basis, a three-level hierarchy of measurements based upon observable and unobservable inputs is used to arrive at fair value. Observable inputs are developed based on market data obtained from independent sources, while unobservable inputs reflect our assumptions about valuation based on the best information available in the circumstances. Depending on the inputs, we classify each fair value measurement as follows:

Level 1—based upon quoted prices for identical instruments in active markets,

Level 2—based upon quoted prices for similar instruments, prices for identical or similar instruments in markets that are not active, or model-derived valuations, all of whose significant inputs are observable, and

Level 3—based upon one or more significant unobservable inputs.

The following section describes key inputs and assumptions in our valuation methodologies:

Cash Equivalents and Restricted Cash Equivalents—We classify highly liquid investments, with an original maturity of 90 days or less, including U.S. Treasury bills, federal agency securities, and commercial paper, as cash equivalents. 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 primarily include investments in U.S. government securities and commercial paper 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)~~

~~(Unaudited)~~

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. In certain cases, market data is not available and we estimate inputs such as in situations where trading in a particular commodity is not active. Measurements based upon these unobservable inputs are classified within Level 3. ~~For more information regarding derivatives, see Note 10,~~ ~~Financial Instruments and Commodity Contracts~~.

Guarantees—We provide certain guarantees of payments and residual values, to which losses are generally capped, to specific counterparties. ~~Fair~~The fair value of these guarantees isincludes a contingent component and a non-contingent component that are based upon internally developed models ~~that utilize current market-based assumptions and historical data.~~using unobservable inputs. We classify these liabilities within Level 3. For more information regarding guarantees, see Note ~~11,~~10, 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, Allowance for Doubtful Accounts, and for more information regarding impaired assets under operating leases, see Note 2, Restructuring and Impairments.

Impaired Property, Plant and Equipment— We measure the fair value by discounting future cash flows expected to be received from the operation of, or disposition of, the asset or asset group that has been determined to be impaired. For more information regarding the impairment of property, plant and equipment, see Note 2, Restructuring and Impairments.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

The following table presents the financial instruments measured at fair value on a recurring basis:


	July 31, 2016								October 31, 2015								As of April 30, 2017								As of October 31, 2016
(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. Treasury bills	$	49	$	—	$	—	$	49	$	53	$	—	$	—	$	53	$	64	$	—	$	—	$	64	$	6	$	—	$	—	$	6
Other	91		—		—		91		106		—		—		106		114		—		—		114		40		—		—		40
Derivative financial instruments:
Commodity forward contracts^(A)	—		5		—		5		—		—		—		—		—		1		—		1		—		2		—		2
Foreign currency contracts^(A)	—		—		—		—		—		1		—		1		—		4		—		4		—		—		—		—
Interest rate caps^(B)																	—		1		—		1		—		1		—		1
Total assets	$	140	$	5	$	—	$	145	$	159	$	1	$	—	$	160	$	178	$	6	$	—	$	184	$	46	$	3	$	—	$	49
Liabilities
Derivative financial instruments:
Commodity forward contracts^(B)	$	—	$	1	$	—	$	1	$	—	$	2	$	—	$	2
Foreign currency contracts^(B)	—		1		—		1		—		2		—		2
Commodity forward contracts^(C)																	$	—	$	1	$	—	$	1	$	—	$	—	$	—	$	—
Foreign currency contracts^(C)																	—		9		—		9		—		—		—		—
Guarantees	—		—		23		23		—		—		10		10		—		—		19		19		—		—		23		23
Total liabilities	$	—	$	2	$	23	$	25	$	—	$	4	$	10	$	14	$	—	$	10	$	19	$	29	$	—	$	—	$	23	$	23

_________________________


(A)	The asset value of commodity forward contracts and foreign currency contracts is included in Other current assets ~~as of July 31, 2016 and October 31, 2015~~ in the accompanying Consolidated Balance Sheets.


(B)	The asset value of interest rate caps is included in Other noncurrent assets in the accompanying Consolidated Balance Sheets.


(C)	The liability value of commodity forward contracts and foreign currency contracts is included in Other current liabilities ~~as of July 31, 2016 and October 31, 2015~~ in the accompanying Consolidated Balance Sheets.

The following table presents the changes for those financial instruments classified within Level 3 of the valuation hierarchy:


	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended April 30,						Six Months Ended April 30,
(in millions)	2016			2015			2016			2015			2017			2016			2017			2016
Guarantees, at beginning of period	$	(19	)	$	(7	)	$	(10	)	$	(8	)	$	(23	)	$	(10	)	$	(23	)	$	(10	)
Transfers out of Level 3	—			—			—			—			—			—			—			—
Issuances	(5		)	(4		)	(16		)	(4		)
Net terminations (issuances)													2			(10		)	1			(11		)
Settlements	1			1			3			2			2			1			3			2
Guarantees, at end of period	$	(23	)	$	(10	)	$	(23	)	$	(10	)	$	(19	)	$	(19	)	$	(19	)	$	(19	)
Change in unrealized gains on assets (liabilities) still held	$	—		$	—		$	—		$	—

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

~~The following table presents the financial instruments measured at fair value on a nonrecurring basis:~~

(in millions) July 31, 2016
October 31, 2015
Level 2 financial instruments
Carrying value of impaired finance receivables ^(A)
$ 18
$ 21
Specific loss reserve (9 ) (9 )
Fair value $ 9
$ 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 retail and wholesale notes. The carrying amounts of Trade and other receivables and retail and wholesale accounts approximate fair values as a result of the short-term nature of the receivables. The carrying amounts of wholesale notes approximate fair values as a result of the short-term nature of the wholesale notes and their variable interest rate terms. Due to the nature of the aforementioned financial instruments, they have been excluded from the fair value amounts presented in the table below.

The fair values of our retail notes are estimated by discounting expected cash flows at estimated current market rates. The fair values of our retail notes are classified as Level 3 financial instruments.

The fair values of our debt instruments classified as Level 1 were determined using quoted market prices. The 6.5% Tax Exempt Bonds, due 2040, are traded, but the trading market is illiquid, and as a result, the Loan Agreement underlying the Tax Exempt Bonds is classified as Level 2. 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.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

The following tables present the carrying values and estimated fair values of financial instruments:


	As of July 31, 2016										As of April 30, 2017
	Estimated Fair Value								Carrying Value		Estimated Fair Value								Carrying Value
(in millions)	Level 1		Level 2		Level 3		Total				Level 1		Level 2		Level 3		Total
Assets
Retail notes	$	—	$	—	$	144	$	144	$	136	$	—	$	—	$	151	$	151	$	155
Notes receivable	—		—		1		1		1		—		—		—		—		—
Liabilities
Debt:
Manufacturing operations
Senior Secured Term Loan Credit Facility, as Amended, due 2020	—		—		973		973		1,020		—		—		1,041		1,041		1,002
8.25% Senior Notes, due 2022	893		—		—		893		1,184		1,470		—		—		1,470		1,421
4.50% Senior Subordinated Convertible Notes, due 2018^(A)	—		—		137		137		189		—		—		197		197		192
4.75% Senior Subordinated Convertible Notes, due 2019^(A)	—		—		258		258		385		—		—		401		401		388
Debt of majority-owned dealerships	—		—		15		15		13
Financing arrangements	—		—		15		15		38		—		—		16		16		34
Loan Agreement related to 6.50% Tax Exempt Bonds, due 2040	—		227		—		227		225		—		229		—		229		220
Financed lease obligations	—		—		61		61		61		—		—		102		102		102
Other	—		—		10		10		10		—		—		20		20		20
Financial Services operations
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2021	—		—		863		863		867
Bank credit facilities, at fixed and variable rates, due dates from 2016 through 2021	—		—		860		860		874
Commercial paper, at variable rates, program matures in 2017	93		—		—		93		93
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2022											—		—		737		737		735
Bank credit facilities, at fixed and variable rates, due dates from 2017 through 2021											—		—		752		752		766
Commercial paper, at variable rates, program matures in 2022											93		—		—		93		93
Borrowings secured by operating and finance leases, at various rates, due serially through 2021	—		—		100		100		100		—		—		89		89		88

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)


	As of October 31, 2015										As of October 31, 2016
	Estimated Fair Value								Carrying Value		Estimated Fair Value								Carrying Value
(in millions)	Level 1		Level 2		Level 3		Total				Level 1		Level 2		Level 3		Total
Assets
Retail notes	$	—	$	—	$	170	$	170	$	166	$	—	$	—	$	153	$	153	$	151
Notes receivable	—		—		3		3		3		—		—		1		1		1
Liabilities
Debt:
Manufacturing operations
Senior Secured Term Loan Credit Facility, as Amended, due 2020	—		—		1,014		1,014		1,023		—		—		1,037		1,037		1,009
8.25% Senior Notes, due 2022	998		—		—		998		1,182		1,180		—		—		1,180		1,173
4.50% Senior Subordinated Convertible Notes, due 2018^(A)	—		—		148		148		186		—		—		189		189		189
4.75% Senior Subordinated Convertible Notes, due 2019^(A)	—		—		289		289		379		—		—		382		382		383
Debt of majority-owned dealerships	—		—		28		28		28
Financing arrangements	—		—		17		17		43		—		—		17		17		37
Loan Agreement related to 6.50% Tax Exempt Bonds, due 2040	—		233		—		233		225		—		233		—		233		220
Financed lease obligations	—		—		111		111		111		—		—		52		52		52
Other	—		—		17		17		15		—		—		26		26		28
Financial Services operations
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2018	—		—		865		865		870
Bank credit facilities, at fixed and variable rates, due dates from 2016 through 2020	—		—		1,048		1,048		1,063
Commercial paper, at variable rates, program matures in 2017	86		—		—		86		86
Borrowings secured by operating and finance leases, at various rates, due serially through 2020	—		—		80		80		81
Asset-backed debt issued by consolidated SPEs, at various rates, due serially through 2017											—		—		754		754		753
Bank credit facilities, at fixed and variable rates, due dates from 2017 through 2021											—		—		851		851		861
Commercial paper, at variable rates, program matures in 2022											96		—		—		96		96
Borrowings secured by operating and finance leases, at various rates, due serially through 2021											—		—		98		98		98

_________________________


(A)	The carrying value represents the consolidated financial statement amount of the debt which excludes the allocation of the conversion feature to equity, while the fair value is based on internally developed valuation techniques such as discounted cash flow modeling for Level 3 convertible notes which include the equity feature.

~~10. Financial Instruments and Commodity Contracts~~

~~Derivative Financial 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, reduce exchange rate risk for transactional exposures denominated in currencies other than the functional currency, and minimize the effect of commodity price volatility. From time to time, we use foreign currency forward and option contracts to manage the risk of exchange rate movements that would affect the value of our foreign currency cash flows. Foreign currency exchange rate movements create a degree of risk by affecting the value of sales made and costs incurred in currencies other than the functional currency. In addition, we also use commodity forward contracts to manage our exposure to variability in certain commodity prices.

We generally do not enter into derivative financial instruments for speculative or trading purposes and did not during the three and nine months ended July 31, 2016 and 2015. None of our derivatives qualified for hedge accounting treatment during the three and nine months ended July 31, 2016 and 2015.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

The majority of our derivative contracts are transacted under International Swaps and Derivatives Association master agreements. Each agreement permits the net settlement of amounts owed in the event of default or certain other termination events. For derivative financial instruments, we have elected not to offset derivative positions in the balance sheet with the same counterparty under the same agreement. Collateral is generally not required to be provided by our counter-parties for derivative contracts. However, certain of our derivative contracts contain provisions that require us to provide collateral if certain loss thresholds are exceeded. Collateral of $1 million was provided as of both July 31, 2016 and October 31, 2015. We manage exposure to counter-party credit risk by entering into derivative financial instruments with various major financial institutions that can be expected to fully perform under the terms of such instruments. We do not anticipate nonperformance by any of the counter-parties. Our exposure to credit risk in the event of nonperformance by the counter-parties is limited to those assets that have been recorded, but have not yet been received in cash. At July 31, 2016 and October 31, 2015, our exposure to the credit risk of others was $5 million and $1 million, respectively.

~~The following table presents the location and amount of (income) loss recognized in our~~ ~~Consolidated Statements of Operations~~ ~~related to derivatives:~~

Three Months Ended July 31, Nine Months Ended July 31,
(in millions) Location in Consolidated Statements of Operations 2016 2015 2016 2015
Interest rate caps Interest expense $ —
$ 1
$ —
$ 1
Cross currency swaps Other income, net (1 ) (1 ) (1 ) 2
Foreign currency contracts Other income, net (4 ) (6 ) —
(5 )
Commodity forward contracts Costs of products sold —
(1 ) (2 ) 4
Total (income) loss $ (5 ) $ (7 ) $ (3 ) $ 2

~~Foreign Currency Contracts~~

~~During~~ ~~2016~~ ~~and~~ ~~2015~~, we entered into foreign exchange forward and option contracts as economic hedges of anticipated cash flows denominated in Brazilian reais, euros, Canadian dollars, and Mexican pesos. All contracts were entered into to protect against the risk that the eventual cash flows resulting from certain transactions would be affected by changes in exchange rates between the U.S. dollar and the respective foreign currency.

~~The following table presents the outstanding foreign currency contracts as of July 31, 2016 and October 31, 2015:~~



~~(in millions)~~	~~Currency~~	~~Notional Amount~~		~~Maturity~~
~~As of July 31, 2016~~
~~Forward exchange contract~~	~~EUR~~	€	12	~~July 2016 - October 2016~~^(A)
~~Forward exchange contract~~	~~CAD~~	C$	30	~~July 2016 - September 2016~~^(B)
~~Forward exchange contract~~	~~MXN~~	₱	~~759~~	~~July 2016 - August 2016~~^(C)
~~As of October 31, 2015~~
~~Forward exchange contract~~	~~EUR~~	€	30	~~November 2015 - October 2016~~^(D)
~~Forward exchange contract~~	~~CAD~~	C$	25	~~November 2015~~
~~Forward exchange contract~~	~~MXN~~	₱	~~1,270~~	~~November 2015~~

~~_________________________~~

(A) Forward exchange contracts of €2 million matured in July 2016 but settled in August 2016, €3 million matured in August 2016, €4 million mature in September 2016, and €3 million mature in October 2016.

~~(B) Forward exchange contracts of C$15 million matured in July 2016 but settled in August 2016, C$10 million matured in August 2016, and C$5 million mature in September 2016.~~

~~(C) Forward exchange contracts of ₱380 million matured in July 2016 but settled in August 2016 and ₱379 million matured in August 2016.~~

(D) Forward exchange contracts of €2 million settled in November 2015, €3 million matured in November 2015, €3 million matured in December 2015, €4 million matured in January 2016, and €2 million mature each month from February 2016 through October 2016.

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

~~Commodity Forward Contracts~~

~~During~~ ~~2016~~ ~~and~~ ~~2015, we entered into commodity forward contracts as economic hedges of our exposure to variability in commodity prices for diesel fuel and steel. As of~~ ~~July 31, 2016, we had outstanding diesel fuel contracts with aggregate notional values of~~ ~~$11 million~~ ~~and outstanding steel contracts with aggregate notional values of~~ ~~$13 million~~. The commodity forward contracts have various maturity dates through March 31, 2017. As of October 31, 2015, we had outstanding diesel fuel contracts with aggregate notional values of $24 million and outstanding steel contracts with aggregate notional values of $6 million. All of these contracts were entered into to protect against the risk that the eventual cash flows related to purchases of the commodities will be affected by changes in prices.

~~Interest-Rate Contracts~~

~~From time to time, we enter into various interest-rate contracts, interest rate caps, and cross currency swaps. As of both~~ ~~July 31, 2016~~ ~~and~~ ~~October 31, 2015, there were~~ no outstanding cross currency swaps. We are exposed to interest rate and exchange rate risk as a result of our borrowing activities. The objective of these contracts is to mitigate fluctuations in earnings, cash flows, and fair value of borrowings. Our Mexican financial services operation uses interest rate caps and cross currency swaps to protect against the potential of rising interest rates as required by the terms of its variable-rate asset-backed securities, and fluctuations in the value of the peso, as required under our Mexican bank credit facilities. As of July 31, 2016 and October 31, 2015, the notional amount of our outstanding interest rate caps at our Mexican financial services operation was $128 million and $108 million, respectively.

~~11.~~10. 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.

In March 2010, we entered into an operating agreement with GE Capital which contains automatic extensions and is subject to early termination provisions (the "Navistar Capital Operating Agreement"). Effective December 1, 2015, GE Capital assignedUnder the terms of the Navistar Capital Operating Agreement, to BMO Financial Group and its wholly-owned subsidiary BMO Harris Bank N.A. (together ~~“BMO”~~"BMO") ~~as part of General Electric’s sale of its GE Transportation Finance business. Under the terms of the Navistar Capital Operating Agreement, GE Capital was, and now BMO~~ is our third-party preferred source of retail customer financing for equipment offered by us and our dealers in the U.S. We refer to this alliance as "Navistar Capital." The Navistar Capital Operating Agreement contains a loss sharing arrangement for certain credit losses. Under the loss sharing arrangement, as amended, we generally reimburse our financing partner for credit losses in excess of the first 10% of the financed value of a contract; for certain leases we reimburse our financing partner for credit losses up to a maximum of the first 9.5% of the financed value of those lease contracts. Our exposure to loss is mitigated because contracts under the Navistar Capital Operating Agreement are secured by the financed equipment. There were $1.4 billion and $1.5 billion of outstanding loan principal and operating lease payments receivable at ~~both July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, 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 $2.3 billion and $2.4 billion ~~and $2.3 billion~~ at ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, respectively. Generally, we do not carry the contracts under the Navistar Capital Operating Agreement on our Consolidated Balance Sheets. However, for certain Navistar Capital financed contracts which we have accounted for as borrowings, we have recognized equipment leased to others of ~~$57~~$93 million and ~~$102~~$48 million and financed lease obligations of ~~$61~~$102 million and ~~$110~~$51 million, in our Consolidated Balance Sheets as of ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, respectively.

Based on our historic experience of losses on similar contracts and the nature of the loss sharing arrangement, we do not believe our share of losses related to balances currently outstanding will be material.

We also have issued a limited number of residual value guarantees, ~~in connection with various leases. The~~for which losses are generally capped. If substantial risk of loss has not transferred, we account for these arrangements as operating leases and revenue is recognized on a straight-line basis over the term of the lease. If substantial risk of loss 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. ~~The amount~~We have recognized liabilities for some of ~~losses related to~~ these ~~arrangements has not been material to our~~ ~~Consolidated Statements of Operations~~ or ~~Condensed Consolidated Statements of Cash Flows~~ ~~and the value of the~~ guarantees ~~and accruals recorded are not material to~~in our Consolidated Balance Sheets.

~~Navistar International Corporation~~ as they meet recognition and ~~Subsidiaries~~

~~Notes~~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 ~~Financial Statements—(Continued)~~

~~(Unaudited)~~

Balance Sheets. We do not believe claims that may be made under such guarantees would have a material effect on our financial condition, results of operations, or cash flows.

We obtain certain stand-by letters of credit and surety bonds from third-party financial institutions in the ordinary course of business when required under contracts or to satisfy insurance-related requirements. As of ~~July 31, 2016,~~April 30, 2017, the amount of stand-by letters of credit and surety bonds was ~~$97~~$85 million.

In addition, as of ~~July 31, 2016,~~April 30, 2017, we have ~~entered into various~~$22 million of outstanding purchase commitments ~~of $16 million~~ and contracts ~~that have~~with $40 million of cancellation fees ~~of $59 million~~ with ~~various~~ expiration dates through ~~2020.~~2021.

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.

~~Two~~

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

In addition, other sites formerly owned by us ~~Solar Turbines in San Diego, California, and the Canton Plant in Canton, Illinois, were identified as having soil and groundwater contamination. Two sites in Sao Paulo, Brazil, one at which~~or where we are currently operating ~~and one where we formerly operated, were~~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 ~~adequate~~appropriate accruals to cover costs to complete the cleanup of all sites.

We have accrued $20 million for these and other environmental matters, which are included within Other current liabilities and Other noncurrent liabilities, as of ~~July 31, 2016.~~April 30, 2017. The majority of these accrued liabilities are expected to be paid subsequent to ~~2017.~~2018.

Along with other vehicle manufacturers, we have been subject to an increased number of asbestos-related claims in recent years. In general, these claims relate to illnesses alleged to have resulted from asbestos exposure from component parts found in older vehicles, although some cases relate to the alleged presence of asbestos in our facilities. In these claims, we are generally not the sole defendant, and the claims name as defendants numerous manufacturers and suppliers of a wide variety of products allegedly containing asbestos. We have strongly disputed these claims, and it has been our policy to defend against them vigorously. Historically, the actual damages paid out to claimants have not been material in any year to our financial condition, results of operations, or cash flows. It is possible that the number of these claims will continue to grow, and that the costs for resolving asbestos related claims could become significant in the future.

Legal Proceedings

Overview

We are subject to various claims arising in the ordinary course of business, and are party to various legal proceedings that constitute ordinary, routine litigation incidental to our business. The majority of these claims and proceedings relate to commercial, product liability, and warranty matters. In addition, from time to time we are subject to various claims and legal proceedings related to employee compensation, benefits, and benefits administration including, but not limited to, compliance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and Department of Labor requirements. 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.

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

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"), ~~comprised~~composed of ~~non-Company individuals.~~individuals not appointed by NI or NIC. In August 2013, the Committee filed a motion for leave to amend its February 2013 complaint (which sought injunctive relief for the Company to provide certain information to which it was allegedly entitled under the Supplemental Benefit Trust Profit Sharing Plan) and a proposed amended complaint (the "Profit Sharing Complaint") in the U.S. District Court for the Southern District of Ohio (the "Court"). Leave to file the Profit Sharing Complaint was granted by the Court in October 2013. In its Profit Sharing Complaint, the Committee alleged the Company breached the 1993 Settlement Agreement and violated ERISA by failing to properly calculate profit sharing contributions due under the Supplemental Benefit Trust Profit Sharing Plan. The Committee seeks damages in excess of $50 million, injunctive relief and reimbursement of attorneys' fees and costs. ~~In October 2013,~~Following the ~~Company filed~~resolution of a ~~Motion to Dismiss~~procedural dispute by the Profit Sharing Complaint and to compel the Committee to comply with the dispute resolution procedures set forth in the Supplemental Benefit Trust Profit Sharing Plan. In March 2014, the Court denied the Company's Motion to Dismiss and ruled, among other things, that the Company waived its right to compel the Committee to comply with the dispute resolution provisions set forth in the Supplemental Benefit Trust Profit Sharing Plan. In April 2014, the Company appealed the Court's refusal to compel the Committee to comply with the dispute resolution process to theU.S. Court of Appeals for the 6th Circuit. The Company also filed a motion with the Court to stay all proceedings pending the appeal. In May 2014, the Court granted the motion to stay all proceedings, including discovery, pending the appeal. In March 2015, the 6^thCircuit, ~~Court of Appeals remanded the case to the Court with instructions that the Committee’s claims~~ in ~~the Profit Sharing Complaint be arbitrated. In~~ May 2015, the Court ordered that the claims in the Profit Sharing Complaint be arbitrated pursuant to the dispute resolution procedures in the Supplemental Benefit Trust Profit Sharing Plan. In November 2015, the Company and the Committee selected an arbitrator and the discovery process has commenced. On August 1, 2016, the parties submitted briefs on issues related to the scope of the arbitration.

In addition, various local bargaining units of the United Automobile, Aerospace and Agricultural Implement Workers of America ("UAW") have filed separate grievances pursuant to the profit sharing plans under various collective bargaining agreements in effect between the Company and the UAW that may have similar legal and factual issues as the Profit Sharing Complaint.

Based on our assessment of the facts underlying the claims in the above actions, we are unable to provide meaningful quantification of how the final resolution of these claims may impact our future consolidated financial condition, results of operations, or cash flows.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

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”). The Committee alleges, among other things, that the defendants breached the 1993 Settlement Agreement since January 1, 2012 by causing the Base Trust to allocate the Subsidies in a manner that improperly decreased the defendants’ contributions to the Base Trust and increased retiree contributions. The Committee seeks damages, attorneys’ fees and costs for all alleged violations of the 1993 Settlement Agreement, including approximately $26 million which the Committee alleges is the eligible retirees’ “fair share” of the Subsidies that were allegedly misappropriated by the defendants from January, 2012 through April, 2015.

The second lawsuit was filed by two individual members of the Committee (the “Committee Members”) who are retirees and participants in the Navistar, Inc. Health Benefit and Life Insurance Plan (the “Plan”) created pursuant to the 1993 Settlement Agreement. The Committee Members’ complaint (the “Committee Members’ Complaint”) was filed against NIC, NI, NFC and certain other former or current affiliates, all of which are parties or employers as defined in the 1993 Settlement Agreement. The Committee Members allege, among other things, that the Company violated the terms of the Plan, breached a fiduciary duty under the ERISA, and engaged in ERISA-prohibited transactions by improperly using the Plan’s assets (a portion of the Subsidies) for the Company’s benefit. The Committee Members request that the court order the defendants to restore all losses to the Base Trust, including approximately $26 million, which the Committee Members allege is the Plan participants’ “fair share” of the Subsidies that were allegedly misappropriated by the defendants from January 2012 through April 2015. The Committee Members also request that the court enjoin the defendants from alleged future violations of the Plan and ERISA with respect to treatment of the Subsidies, order the defendants to remedy all alleged ERISA-prohibited transactions and pay the Committee Members’ attorneys’ fees and costs.

The defendants filed motions to dismiss each respective complaint on January 10, 2017. On May 10, 2017, the court dismissed the Committee's Complaint with prejudice stating that the Committee lacked standing to bring its claims and overruled the defendants' motion to dismiss the Committee Members' Complaint, subject to the parties conducting limited discovery and filing cross-motions for summary judgment on whether the Committee Members' Complaint is barred by the statute of limitations by August 10, 2017.

On April 6, 2017, a motion was 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 motion was filed by the current "Other Member" of the Health Benefit Program Committee ("HBPC"). The HBPC is provided for in the 1993 Settlement Agreement and the HBPC currently consists of the Other Member, three members appointed by the Company ("Company Members"), and two members appointed by the UAW. NI and the Company Members are named as defendants in the motion. The motion alleges that NI and the Company Members impermissibly interfered with the Other Member's ability to discharge his rights and duties relating to eligibility for Plan benefits for an unknown number of non-represented employees and retirees. He requests the court (a) find that all prior Plan eligibility determinations made by NI and the HBPC are invalid to the extent they were not based on eligibility criteria in a plan which pre-dated the Plan; and (b) find all employees or retirees who were improperly denied Plan benefits based on the application of incorrect eligibility criteria, to retroactively enroll them in the Plan, and to reimburse those retirees for costs they incurred as a result of the prior improper determinations of Plan eligibility. He estimates 1,000 non-represented employees or retirees were wrongfully denied Plan benefits. He also requests the court direct him to oversee NI's compliance with the requested relief order. The defendants filed their response to the motion on May 11, 2017 and the Other Member filed his reply on May 17, 2017.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

FATMA Notice

International Indústria ~~de Motores~~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 in July 2010 from the State of Santa Catarina Environmental Protection Agency ("FATMA") in Brazil. The notice alleged that Maxion had sent wastes to a facility owned and operated by a company known as Natureza and that soil and groundwater contamination had occurred at the Natureza facility. The 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 ~~July 31, 2016)~~April 30, 2017), which is not due and final until all administrative appeals are exhausted. Maxion was one of numerous companies that received similar notices. IIAA filed an administrative defense in August 2010 and has not yet received a decision following that filing. IIAA disputes the allegations in the notice and intends to vigorously defend itself.

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 US$1 million at ~~July 31, 2016)~~April 30, 2017). In November 2014, IIAA extended a settlement offer. The parties remained in discussions and IIAA’s settlement offer was never accepted, rejected or countered by the District Attorney. On August 31, 2016, the District Attorney filed civil actions against IIAA and other companies seeking soil and groundwater investigation and remediation, together with monetary payment in an unspecified amount. IIAA filed its defense to the civil action on January 26, 2017, alleging that IIAA has ~~not yet been served with~~made all necessary investigations and has taken remedial measures to address the ~~action.~~

~~Navistar International Corporation~~contamination and ~~Subsidiaries~~

~~Notes~~that Companhia Ambiental do Estado de São Paulo (CETESB), the environmental agency of São Paulo State, has agreed to ~~Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

the remedial measures taken by IIAA.

MaxxForce Engine EGR Warranty Litigation

On June 24, 2014, N&C Transportation Ltd. filed a putative class action lawsuit against NIC, ~~Navistar, Inc.,~~NI, Navistar Canada Inc., and Harbour International Trucks ~~(collectively, "Navistar")~~ in Canada in the Supreme Court of British Columbia (the "N&C Action"). Subsequently, six additional, similar putative class action lawsuits have been filed in Canada (together with the N&C Action, the "Canadian Actions").

From June 13-17, 2016, the court conducted a certification hearing in the N&C Action. ~~There~~On November 16, 2016, the court certified a Canada-wide class comprised of persons who purchased heavy-duty trucks equipped with Advanced EGR MaxxForce 11, MaxxForce 13, and MaxxForce 15 engines designed to meet 2010 EPA regulations. The court in the N&C Action denied certification to persons who operated but did not buy the trucks in question. To date, no appeals have been filed, but the deadline for the Company to appeal the class certification decision has been extended indefinitely, subject to a 15-day termination.

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. The class authorization hearing in Quebec has not been scheduled, and there are no court dates 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 ~~Navistar, Inc.~~NI in the United States District Court for the Northern District of Illinois (the "Par 4 Action"). Subsequently, seventeen additional putative class action lawsuits were filed in various United States district courts, including the Northern District of Illinois, the Eastern District of Wisconsin, the Southern District of Florida, the Middle District of Pennsylvania, the Southern District of Texas, the Western District of Kentucky, the District of Minnesota, the Northern District of Alabama, and the District of New Jersey (together with the Par 4 Action, the "U.S. Actions"). Some of the U.S. Actions name both NIC and ~~Navistar, Inc. The U.S. Actions~~NI, and allege matters substantially similar to the Canadian Actions. More specifically, 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 ~~Navistar, Inc.~~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.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

On October 3, 2014, NIC and ~~Navistar, Inc.~~NI filed a motion before the United States Judicial Panel on Multidistrict Litigation (the "MDL Panel") seeking to transfer and consolidate before Judge Joan B. Gottschall of the United States District Court for the Northern District of Illinois all of the then-pending U.S. Actions, as well as certain non-class action MaxxForce Advanced EGR engine lawsuits pending in various federal district courts.

On December 17, 2014, Navistar's motion to consolidate the U.S. Actions and certain other non-class action lawsuits was granted. The MDL Panel issued an order consolidating all of the U.S. Actions that were pending on the date of Navistar’s motion before Judge Gottschall in the United States District Court for the Northern District of Illinois (the "MDL Action"). The MDL Panel also consolidated into the MDL Action certain non-class action MaxxForce Advanced EGR engine lawsuits pending in the various federal district courts, with the exception of one matter. For putative class action lawsuits filed subsequent to Navistar’s original motion, we continue to request that the MDL Panel similarly transfer and consolidate these U.S. Actions.courts.

At the request of the various law firms representing the plaintiffs in the MDL Action, on March 5, 2015, Judge Gottschall entered an order in the MDL Action appointing interim lead counsel and interim liaison counsel for the plaintiffs. On May 11, 2015, lead counsel for the plaintiffs filed a First Master Consolidated Class Action Complaint ("Consolidated Complaint"). The parties to the MDL Action exchanged initial disclosures on May 29, 2015. The Company answered the Consolidated Complaint on July 13, 2015. On September 22, 2016, lead counsel for the plaintiffs filed a First Amended Consolidated Class Action Complaint (the “Amended Consolidated Complaint”). The Amended Consolidated Complaint added twenty-five additional named plaintiffs. NI and NIC answered the Amended Consolidated Complaint on October 20, 2016.

On May 27, 2016, Judge Gottschall entered a Case Management Order setting a July 13, 2017 date for ~~plaintiffs’~~plaintiffs' class certification motion. ~~The next status conference~~On November 30, 2016, the court entered an order referring discovery matters 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 extends 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 ~~Court is set~~class action briefing schedule to April 24, 2018. On February 2, 2017, Judge Gottschall 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' January 25, 2017 proposed case management order extending the deadline for ~~October 28, 2016.~~fact discovery to November 22, 2017.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

EPA Clean Air Act Litigation

In February 2012, ~~Navistar, Inc.~~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 ~~Navistar, Inc.~~NI until calendar year 2010 and, therefore, were not covered by ~~Navistar, Inc.'s~~NI's model year 2009 certificates of conformity. The NOV concluded that ~~Navistar, Inc.'s~~NI's introduction into commerce of each of these engines violated the Federal Clean Air Act.

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

On July 14, 2015, the Department of Justice ("DOJ"), on behalf of the EPA, filed a lawsuit against NIC and ~~Navistar, Inc.~~NI in the U.S. District Court for the Northern District of Illinois. Similar to the NOV, the lawsuit alleges that NIC and ~~Navistar, Inc.~~NI introduced into commerce approximately 7,749 heavy-duty diesel engines that were not covered by model year 2009 certificates of conformity because those engines were not completely assembled until calendar year 2010, resulting in violations of the Federal Clean Air Act. On July 16, 2015, the DOJ filed an Amended Complaint clarifying the amount of civil penalties being sought. The lawsuit requests injunctive relief and the assessment of civil penalties of up to $37,500 for each violation. On September 14, 2015, NIC and ~~Navistar, Inc.~~NI each filed an Answer and Affirmative Defenses to the Amended Complaint. We dispute the allegations in the lawsuit.

Discovery in the matter ~~will proceed~~is proceeding in two ~~phases.~~phases: fact discovery followed by expert discovery. Fact discovery for the liability phase commenced on December 9, 2015. Pursuant to ~~a Case Management~~the court's Second Amended Scheduling Order entered on ~~August 1, 2016,~~January 23, 2017, the Phase I liability fact discovery is ~~currently scheduled~~ to be completed ~~on February~~by August 9, 2017, ~~followed by expert discovery,~~ and the deadline for dispositive motions is ~~July 20, 2017.~~set for February 16, 2018. After completion of the ~~first~~liability phase, the ~~Court~~court will ~~if necessary,~~ set further dates for a remedy phase.

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 ~~Navistar, Inc.~~NI opposed the EPA's motion for summary judgment, and NIC cross-moved for summary judgment against EPA. ~~The~~On March 1, 2017, the court ~~set~~entered a ~~ruling date of November 17, 2016 on both~~Memorandum Opinion and Order (i) granting the DOJ’s motion for summary judgment on the issue of liability with respect to NI, (ii) denying the DOJ’s motion for summary judgment on the issue of liability with respect to NIC, and ~~NIC's cross-motion~~(iii) denying NIC’s motion for summary judgment.

Based on our assessment of the facts underlying the complaint above, potential charges to the Consolidated Statement of Operations and cash outlays in future periods could range from $2 million to $291 million related to the resolution of this matter. Other than the aforementioned, we are unable to provide further meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition, results of operations or cash flows.

~~Shareholder Litigation~~

In March 2013, a putative class action complaint, alleging securities fraud, was filed against us by the Construction Workers Pension Trust Fund - Lake County and Vicinity, on behalf of itself and all other similarly situated purchasers of our common stock between the period of November 3, 2010 and August 1, 2012. A second class action complaint was filed in April 2013 by the Norfolk County Retirement System, individually and on behalf of all other similarly situated purchasers of our common stock between the period of June 9, 2010 and August 1, 2012. A third class action complaint was filed in April 2013 by Jane C. Purnell FBO Purnell Family Trust, on behalf of itself and all other similarly situated purchasers of our common stock between the period of November 3, 2010 and August 1, 2012. Each complaint named us as well as Daniel C. Ustian, our former President and Chief Executive Officer, and Andrew J. Cederoth, our former Executive Vice President and Chief Financial Officer as defendants. These complaints (collectively, the "10b-5 Cases") contain similar factual allegations which include, among other things, that we violated the federal securities laws by knowingly issuing materially false and misleading statements concerning our financial condition and future business prospects and that we misrepresented and omitted material facts in filings with the U.S. Securities Exchange Commission (“SEC") concerning the timing and likelihood of EPA certification of our EGR technology to meet 2010 EPA emission standards. The plaintiffs in these matters seek compensatory damages and attorneys' fees, among other relief.

In May 2013, an order was entered transferring and consolidating all 10b-5 Cases before one judge sitting in the U.S. District Court for the Northern District of Illinois and in July 2013, the Court appointed a lead plaintiff and lead plaintiff's counsel. The lead plaintiff filed a Consolidated Amended Complaint in October 2013. The Consolidated Amended Complaint enlarged the proposed class period to June 9, 2009 through August 1, 2012, and named fourteen additional current and former directors and officers as defendants. On December 17, 2013, defendants filed a motion to dismiss the Consolidated Amended Complaint. On July 22, 2014, the Court granted the defendants' Motion to Dismiss, denied the lead plaintiff's Motion to Strike as moot, and gave the lead plaintiff leave to file a second consolidated amended complaint by August 22, 2014.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

On August 22, 2014, the plaintiff filed a Second Amended Complaint, which narrowed the claims in two ways. First, the plaintiff abandoned its claims against the majority of the defendants. The Second Amended Complaint brought claims against only Navistar, Dan Ustian, Andrew J. Cederoth, Jack Allen, and Eric Tech. The plaintiff also shortened the putative class period. In the prior complaint, the class period began on June 9, 2009. In the Second Amended Complaint, it begins on March 10, 2010. Defendants filed their Motion to Dismiss the Second Amended Complaint on September 23, 2014. In November 2014, the plaintiff voluntarily dismissed Eric Tech as a defendant. On July 10, 2015, the Court issued its Opinion and Order on our Motion to Dismiss the Second Amended Complaint. The Motion to Dismiss was granted in part and denied in part. Specifically, the Court (i) dismissed all of plaintiff’s claims against the Company, Andrew J. Cederoth and Jack Allen and (ii) dismissed all of plaintiff’s claims against Daniel C. Ustian, the only remaining defendant, except for claims regarding two of Mr. Ustian’s statements. Further, all of the dismissed claims were dismissed with prejudice except for claims based on statements made subsequent to the lead plaintiff’s last purchase of the Company’s stock (the “Post-Purchase Claims”). The Court determined the lead plaintiff lacked standing to assert the Post-Purchase Claims and dismissed those claims without prejudice. At a December 1, 2015 status conference, the parties reported that a settlement in principle had been reached, subject to, among other things, final documentation, confirmatory discovery and Court approval, and the Court filed a minute entry reflecting such report. On May 25, 2016, the Court entered an order preliminarily approving the settlement, as well as the class notice to be sent in connection with the settlement. The Court scheduled the Final Approval Hearing for October 25, 2016.

In March 2013, James Gould filed a derivative complaint in the U.S. District Court for the Northern District of Illinois on behalf of the Company against us and certain of our current and former directors and former officers. The complaint alleges, among other things, that certain of our current and former directors and former officers committed a breach of fiduciary duty, waste of corporate assets and were unjustly enriched in relation to similar factual allegations made in the 10b-5 Cases. The plaintiff in this matter seeks compensatory damages, certain corporate governance reforms, certain injunctive relief, disgorgement of the proceeds of certain defendants' profits from the sale of Company stock, and attorneys' fees, among other relief. On May 3, 2013, the court entered a Stipulation and Order to Stay Action, staying the case pending further order of the court or entry of an order on the motion to dismiss the Consolidated Amended Complaint in the 10b-5 Cases. On July 31, 2014, after the amended complaint was dismissed, the parties filed a status report, and the court entered an order on August 27, 2014 continuing the stay pending a ruling on defendants' motion to dismiss the Second Amended Complaint in the 10b-5 Cases. In November 2015, the existing stay order in this derivative action was further extended through March 22, 2016. The court has further extended the stay several times. The current stay order extends the stay through October 27, 2016.

In August 2013, Abbie Griffin filed a derivative complaint in the State of Delaware Court of Chancery, on behalf of the Company against us and certain of our current and former directors and former officers. The complaint alleges, among other things, that certain of our current and former directors and former officers committed a breach of fiduciary duty, in relation to similar factual allegations made in the 10b-5 Cases. The plaintiff in this matter seeks compensatory damages, certain corporate governance reforms, certain injunctive relief, and attorneys' fees, among other relief. On August 29, 2013, the court entered an order staying the case pending resolution of the defendant's motion to dismiss the Consolidated Amended Complaint in the 10b-5 Cases. On August 5, 2014, the parties filed a status report with the court requesting that the August 2013 stay order remain in place pending a ruling on the motion to dismiss the Second Amended Complaint in the 10b-5 Cases and on November 9, 2014, the court entered an order continuing the stay pending a ruling on defendants’ motion to dismiss the Second Amended Complaint in the 10b-5 Cases. In August 2015, the court further extended the stay of this derivative action through December 3, 2015. The court has further extended the stay several times. The current stay order extends the stay through September 10, 2016.

Based on our assessment of the facts underlying these matters described above, we are unable to provide meaningful quantification of how the final resolution of these matters may impact our future consolidated financial condition, results of operations, or cash flows.

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

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$20 million as of ~~July 31, 2016)~~April 30, 2017), 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$40 million as of ~~July 31, 2016)~~April 30, 2017) 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 ~~such hearings.~~ 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 granting a portion of the relief sought by each of the parties. Specifically, the arbitral tribunal 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.

The damages calculation phase is the next step in the arbitration and is estimated to be one year or longer in duration. In the damages calculation phase, the actual monetary amount of the damages owed from one party to the other will be definitively determined.

As of ~~July 31, 2016,~~April 30, 2017, the approximate amount of the IIAA claim against Navitrucks is R$~~130~~145 million (approximately US$4045 million as of ~~July 31, 2016)~~April 30, 2017), of which Navitrucks has acknowledged that IIAA is entitled to a credit in the approximate amount of R$7381 million (approximately US$2325 million as of ~~July 31, 2016)~~April 30, 2017), and the approximate amount of the Navitrucks claim against IIAA is R$~~139~~153 million (approximately US$4348 million as of ~~July 31, 2016)~~April 30, 2017).

In addition, two other truck dealers 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.

IC Bus Civil RICO Litigation

On June 1, 2016, ~~plaintiffs~~Plaintiffs Polar Express School Bus and Lakeview Bus Lines filed a lawsuit against NIC, ~~Navistar, Inc.,~~NI, and IC Bus, LLC in the U.S. District Court for the Northern District of Illinois. The lawsuit alleges that the 40 IC brand buses owned or operated by ~~plaintiffs~~Plaintiffs contain defective ABS braking systems and also engines with defective emissions control systems. Plaintiffs claim that NIC, its subsidiaries, and their authorized dealers deliberately concealed the alleged defects, and the lawsuit seeks to plead causes of action under the Racketeer Influenced and Corrupt Organizations Act ~~(RICO)~~("RICO") and common law fraud. Plaintiffs seek compensatory damages in the amount of ~~$6.7~~$7 million, treble damages, punitive damages in the amount of $50 million, and attorneys’ fees and costs. We dispute the allegations in the lawsuit, and in August 2016 we filed a motion to dismiss this lawsuit in its ~~entirety on August 2, 2016.~~

~~Based on our assessment of~~entirety. On December 16, 2016, the ~~facts underlying~~Court granted the motion and dismissed Plaintiffs’ RICO claims inwithout prejudice. Having dismissed the ~~above actions, we~~federal claims, the Court declined to exercise supplemental jurisdiction over the state common law fraud claim. On December 16, 2016, the Court dismissed Plaintiffs’ Complaint but with leave to amend. On January 17, 2017, Plaintiffs filed their amended complaint. The allegations and relief sought 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.~~

~~Other~~

~~U.S. Securities and Exchange Administrative Order~~

In June 2012, Navistar received an informal inquiry from the Chicago Office of the Enforcement Division of the SEC seeking a number of categories of documents for the periods dating back to November 1, 2010, relating to various accounting and disclosure issues. We received a formal order of private investigation in July 2012. We have received subsequent subpoenas from the staff of the SEC in connection with their inquiry. In December 2014, the SEC filed an application in the United States District Court for the Northern District of Illinois seeking an order compelling the production of certain documents withheld by Navistar from its responsessubstantially similar to the ~~administrative subpoenas~~original complaint, except that Plaintiffs added causes of action for breach of warranty and breach of implied warranty. NIC and NI filed a motion to dismiss the amended complaint on February 17, 2017. Plaintiffs filed a notice of voluntary dismissal without prejudice on March 17, 2017, and the ~~basis of attorney-client privilege and/or~~court terminated the work product doctrine. The discovery dispute involved a small number of documents in relation to the number of documents already produced by Navistar. On June 30, 2015, following an in camera review of some of the documents at issue, the Court entered an Order sustaining the privilege claims in part and overruling the claims in part. The Court also entered related orders dated August 31, 2015 and Octobercase on March 21, 2015. Pursuant to those Orders, Navistar completed the production of those documents, or portions of documents, for which its privilege claims were denied, as well as other documents subject to the SEC’s December 2014 application that the Company determined were not privileged under the reasoning of the Court’s June 30, 2015 Order.2017.

3332

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

On August 13 and 17, 2015, the SEC staff transmitted “Wells Notices” in connection with the formal order of investigation from July 2012 described above. The Notices stated that the staff has made a preliminary determination to recommend that the SEC file an enforcement action against the Company and its former chief executive officer, Daniel Ustian, alleging violations of the Securities Exchange Act of 1934, certain related regulations, the Securities Act of 1933, and an August 5, 2010 Order Instituting Cease-and-Desist Proceedings against the Company. On September 17, 2015, Navistar submitted to the SEC a response to its Wells Notices. On October 13, 2015, Navistar met with the SEC to further respond to the Wells Notices, subsequent discussions followed, and the Company made an offer of settlement. On March 31, 2016, the SEC accepted the Company’s offer and issued an administrative cease-and-desist order reflecting the terms of the settlement. The Company neither admitted nor denied wrongdoing. The order includes negligence-based charges pertaining to periodic filing requirements and material misstatements or omissions related to three applications in 2011 and 2012 by Navistar to the EPA for certification of heavy-duty diesel engines emitting 0.2g of nitrogen oxide ("NOx"). The order also requires the Company to pay a civil penalty in the amount of $7.5 million, which the Company has paid and which it previously accrued for on its ~~Consolidated Balance Sheets~~ ~~as of October 31, 2015.~~Other

U.S. Department of Defense Subpoena

In the third quarter of 2016, Navistar Defense, LLC ("ND") received a subpoena from the United States Department of Defense Inspector ~~General.~~General (the "DOD IG"). The subpoena requested documents relating to ~~Navistar Defense's~~ND's sale of its independent suspension systems ("ISS") for military vehicles to the government for the ~~time~~ period offrom January 1, 2009 through December 31, 2010. ~~Navistar Defense~~On June 3, 2016, ND met with government representatives, including representatives from DOD IG and the U.S. Department of Justice, to discuss the matter. ND has been in ongoing discussions with the DOD IG and the Department of Justice. ND made ~~a submission~~submissions of documents responsive to the subpoena in June and ~~intends~~August 2016 and has substantially completed its subpoena response. On May 1, 2017, ND met with government representatives, including representatives from DOD IG and the U.S. Department of Justice, to ~~otherwise fully comply~~further discuss the matter. ND has agreed to provide additional information relating to pricing of the ISS and to meet with the ~~subpoena.~~government again on June 13, 2017. At this time, we are unable to predict the outcome of this matter or provide meaningful quantification of how the final resolution of this matter may impact our future consolidated financial condition, results of operations or cash flows.

~~12.~~11. Segment Reporting

The following is a description of our four reporting segments:

Our Truck segment manufactures and distributes Class 4 through 8 trucks, buses, and military vehicles 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. This segment sells its products in the U.S., Canada, and Mexico markets, as well as through our export truck business. In an effort to strengthen and maintain our dealer network, this segment occasionally acquires and operates dealer locations for the purpose of transitioning ownership.

Our Parts segment provides customers with proprietary products needed to support the International commercial truck, IC Bus, proprietary engine lines, and export parts business, as well as our other product lines. Our Parts segment also provides a wide selection of other standard truck, trailer, and engine aftermarket parts. Also included in the Parts segment are the operating results of BDP, which manages the sourcing, merchandising, and distribution of certain service parts we sell to Ford in North America.

Our Global Operations segment primarily consists of ~~the IIAA (formerly MWM International Industria De Motores Da America Do Sul Ltda. ("MWM")) engine and truck operations in Brazil. The IIAA~~Brazil engine operations which produce diesel engines ~~primarily~~ under contract manufacturing arrangements, as well as under the MWM brand, for sale to OEMs in South America. In addition, our Global Operations segment includes the operating results of our joint venture in China with Anhui Jianghuai Automobile Co ("JAC").

Our Financial Services segment provides retail, wholesale, and lease financing of products sold by the Truck and Parts segments and their dealers within the U.S. and Mexico, as well as financing for wholesale accounts and selected retail accounts receivable. This segment also facilitates financing relationships in other countries to support our Manufacturing Operations.

Corporate contains those items that are not included in our four segments.

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Segment Profit (Loss)

We define segment profit (loss) as net income (loss) attributable to NIC, excluding income tax benefit (expense). Selected financial information from our Consolidated Statements of Operations and our Consolidated Balance Sheets is as follows:



(in millions)	Truck			Parts		Global Operations			Financial Services^(A)		Corporate and Eliminations			Total
Three Months Ended April 30, 2017
External sales and revenues, net	$	1,391		$	604	$	66		$	33	$	2		$	2,096
Intersegment sales and revenues	7			6		4			23		(40		)	—
Total sales and revenues, net	$	1,398		$	610	$	70		$	56	$	(38	)	$	2,096
Income (loss) attributable to NIC, net of tax	$	(56	)	$	153	$	(7	)	$	15	$	(185	)	$	(80	)
Income tax expense	—			—		—			—		(6		)	(6		)
Segment profit (loss)	$	(56	)	$	153	$	(7	)	$	15	$	(179	)	$	(74	)
Depreciation and amortization	$	31		$	3	$	4		$	12	$	3		$	53
Interest expense	—			—		—			21		68			89
Equity in income of non-consolidated affiliates	1			1		—			—		—			2
Capital expenditures^(B)	14			1		2			1		2			20



(in millions)	Truck			Parts		Global Operations			Financial Services^(A)		Corporate and Eliminations			Total
Three Months Ended April 30, 2016
External sales and revenues, net	$	1,459		$	640	$	64		$	33	$	1		$	2,197
Intersegment sales and revenues	21			7		13			25		(66		)	—
Total sales and revenues, net	$	1,480		$	647	$	77		$	58	$	(65	)	$	2,197
Income (loss) attributable to NIC, net of tax	$	(23	)	$	176	$	(1	)	$	25	$	(173	)	$	4
Income tax expense	—			—		—			—		(16		)	(16		)
Segment profit (loss)	$	(23	)	$	176	$	(1	)	$	25	$	(157	)	$	20
Depreciation and amortization	$	29		$	4	$	4		$	12	$	4		$	53
Interest expense	—			—		—			19		62			81
Equity in income of non-consolidated affiliates	1			1		—			—		—			2
Capital expenditures^(B)	19			1		1			—		3			24



(in millions)	Truck				Parts		Global Operations			Financial Services^(A)		Corporate and Eliminations			Total
Six Months Ended April 30, 2017
External sales and revenues, net	$	2,408			$	1,167	$	112		$	67	$	5		$	3,759
Intersegment sales and revenues	17				13		8			43		(81		)	—
Total sales and revenues, net	$	2,425			$	1,180	$	120		$	110	$	(76	)	$	3,759
Income (loss) attributable to NIC, net of tax	$	(125	)		$	302	$	(11	)	$	28	$	(336	)	$	(142	)
Income tax expense	—				—		—			—		(10		)	(10		)
Segment profit (loss)	$	(125	)		$	302	$	(11	)	$	28	$	(326	)	$	(132	)
Depreciation and amortization	$	68			$	6	$	7		$	25	$	6		$	112
Interest expense	—			—	—		—			41		130			171
Equity in income of non-consolidated affiliates	2				2		1			—		—			5
Capital expenditures^(B)	57				1		3			1		4			66

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

~~Segment Profit (Loss)~~



(in millions)	Truck				Parts		Global Operations			Financial Services^(A)		Corporate and Eliminations			Total
Six Months Ended April 30, 2016
External sales and revenues, net	$	2,540			$	1,202	$	148		$	68	$	4		$	3,962
Intersegment sales and revenues	72				15		21			49		(157		)	—
Total sales and revenues, net	$	2,612			$	1,217	$	169		$	117	$	(153	)	$	3,962
Income (loss) attributable to NIC, net of tax	$	(74	)		$	326	$	(14	)	$	51	$	(318	)	$	(29	)
Income tax expense	—				—		—			—		(11		)	(11		)
Segment profit (loss)	$	(74	)		$	326	$	(14	)	$	51	$	(307	)	$	(18	)
Depreciation and amortization	$	63			$	7	$	9		$	24	$	8		$	111
Interest expense	—			—	—		—			38		124			162
Equity in income (loss) of non-consolidated affiliates	2				2		(3		)	—		—			1
Capital expenditures^(B)	44				2		2			—		5			53



(in millions)	Truck		Parts		Global Operations		Financial Services		Corporate and Eliminations		Total
Segment assets, as of:
April 30, 2017	$	1,680	$	613	$	342	$	2,132	$	1,185	$	5,952
October 31, 2016	1,520		594		407		2,116		1,016		5,653

_________________________


(A)	Total sales and revenues in the Financial Services segment include interest revenues of $40 million and $76 million for the three and six months ended April 30, 2017, respectively, and $42 million and $84 million for the three and six months ended April 30, 2016, respectively.


(B)	Exclusive of purchases of equipment leased to others.

12. Stockholders' Deficit

Accumulated Other Comprehensive Loss

~~We define segment profit (loss) as~~ The following table presents changes in Accumulated other comprehensive loss, net ~~income (loss) from continuing operations attributable to NIC, excluding income~~of tax, ~~expense. Selected financial information from~~included in our Consolidated Statements of ~~Operations~~Stockholders' Deficit ~~and our~~ ~~Consolidated Balance Sheets~~ ~~is as follows:~~:

(in millions) Truck
Parts
Global Operations
Financial
Services^(A)

Corporate
and
Eliminations
Total
Three Months Ended July 31, 2016

External sales and revenues, net $ 1,386
$ 589
$ 73
$ 34
$ 4
$ 2,086
Intersegment sales and revenues 9
8
12
26
(55 ) —
Total sales and revenues, net $ 1,395
$ 597
$ 85
$ 60
$ (51 ) $ 2,086
Income (loss) from continuing operations attributable to NIC, net of tax $ (54 ) $ 152
$ (5 ) $ 26
$ (153 ) $ (34 )
Income tax expense —
—
—
—
(14 ) (14 )
Segment profit (loss) $ (54 ) $ 152
$ (5 ) $ 26
$ (139 ) $ (20 )
Depreciation and amortization $ 29
$ 3
$ 4
$ 13
$ 4
$ 53
Interest expense —
—
—
21
63
84
Equity in income of non-consolidated affiliates 1
1
—
—
—
2
Capital expenditures^(B)
26
—
—
1
3
30

(in millions) Truck Parts Global Operations
Financial
Services^(A)
Corporate
and
Eliminations Total
Three Months Ended July 31, 2015
External sales and revenues, net $ 1,785
$ 614
$ 100
$ 37
$ 2
$ 2,538
Intersegment sales and revenues 49
11
9
26
(95 ) —
Total sales and revenues, net $ 1,834
$ 625
$ 109
$ 63
$ (93 ) $ 2,538
Income (loss) from continuing operations attributable to NIC, net of tax $ (36 ) $ 151
$ (26 ) $ 26
$ (145 ) $ (30 )
Income tax expense —
—
—
—
(12 ) (12 )
Segment profit (loss) $ (36 ) $ 151
$ (26 ) $ 26
$ (133 ) $ (18 )
Depreciation and amortization $ 40
$ 4
$ 6
$ 13
$ 5
$ 68
Interest expense —
—
—
19
56
75
Equity in income of non-consolidated affiliates 1
1
1
—
—
3
Capital expenditures^(B)
20
1
1
—
5
27



(in millions)	Unrealized Gain on Marketable Securities		Foreign Currency Translation Adjustments			Defined Benefit Plans			Total
Balance as of January 31, 2017	$	1	$	(292	)	$	(2,326	)	$	(2,617	)
Other comprehensive income before reclassifications	—		4			—			4
Amounts reclassified out of accumulated other comprehensive loss	—		—			34			34
Net current-period other comprehensive income	—		4			34			38
Balance as of April 30, 2017	$	1	$	(288	)	$	(2,292	)	$	(2,579	)



(in millions)	Unrealized Gain on Marketable Securities		Foreign Currency Translation Adjustments			Defined Benefit Plans			Total
Balance as of October 31, 2016	$	1	$	(280	)	$	(2,361	)	$	(2,640	)
Other comprehensive loss before reclassifications	—		(8		)	—			(8		)
Amounts reclassified out of accumulated other comprehensive loss	—		—			69			69
Net current-period other comprehensive income (loss)	—		(8		)	69			61
Balance as of April 30, 2017	$	1	$	(288	)	$	(2,292	)	$	(2,579	)

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

(in millions) Truck Parts Global Operations
Financial
Services^(A)
Corporate
and
Eliminations Total
Nine Months Ended July 31, 2016
External sales and revenues, net $ 3,926
$ 1,791
$ 221
$ 102
$ 8
$ 6,048
Intersegment sales and revenues 81
23
33
75
(212 ) —
Total sales and revenues, net $ 4,007
$ 1,814
$ 254
$ 177
$ (204 ) $ 6,048
Income (loss) from continuing operations attributable to NIC, net of tax $ (128 ) $ 478
$ (19 ) $ 77
$ (471 ) $ (63 )
Income tax expense —
—
—
—
(25 ) (25 )
Segment profit (loss) $ (128 ) $ 478
$ (19 ) $ 77
$ (446 ) $ (38 )
Depreciation and amortization $ 92
$ 10
$ 13
$ 37
$ 12
$ 164
Interest expense —
—
—
59
187
246
Equity in income (loss) of non-consolidated affiliates 3
3
(3 ) —
—
3
Capital expenditures^(B)
70
2
2
1
8
83

(in millions) Truck Parts Global Operations
Financial
Services^(A)
Corporate
and
Eliminations Total
Nine Months Ended July 31, 2015
External sales and revenues, net $ 5,349
$ 1,835
$ 353
$ 108
$ 7
$ 7,652
Intersegment sales and revenues 121
29
38
75
(263 ) —
Total sales and revenues, net $ 5,470
$ 1,864
$ 391
$ 183
$ (256 ) $ 7,652
Income (loss) from continuing operations attributable to NIC, net of tax $ (105 ) $ 429
$ (40 ) $ 72
$ (492 ) $ (136 )
Income tax expense —
—
—
—
(37 ) (37 )
Segment profit (loss) $ (105 ) $ 429
$ (40 ) $ 72
$ (455 ) $ (99 )
Depreciation and amortization $ 139
$ 11
$ 18
$ 37
$ 16
$ 221
Interest expense —
—
—
57
170
227
Equity in income (loss) of non-consolidated affiliates 4
3
(1 ) —
—
6
Capital expenditures^(B)
58
1
4
2
7
72



(in millions)	Unrealized Gain on Marketable Securities		Foreign Currency Translation Adjustments			Defined Benefit Plans			Total
Balance as of January 31, 2016	$	1	$	(320	)	$	(2,282	)	$	(2,601	)
Other comprehensive income (loss) before reclassifications	—		50			(18		)	32
Amounts reclassified out of accumulated other comprehensive loss	—		—			33			33
Net current-period other comprehensive income	—		50			15			65
Balance as of April 30, 2016	$	1	$	(270	)	$	(2,267	)	$	(2,536	)

(in millions) Truck Parts Global Operations
Financial
Services

Corporate
and
Eliminations
Total
Segment assets, as of:
July 31, 2016 $ 1,644
$ 608
$ 379
$ 2,132
$ 956
$ 5,719
October 31, 2015 1,876
641
409
2,455
1,311
6,692



(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	—		17			(18		)	(1		)
Amounts reclassified out of accumulated other comprehensive loss	—		—			66			66
Net current-period other comprehensive income	—		17			48			65
Balance as of April 30, 2016	$	1	$	(270	)	$	(2,267	)	$	(2,536	)

~~_________________________~~The following table presents the amounts reclassified from Accumulated other comprehensive loss and the affected line item in our Consolidated Statements of Operations:


~~(A)~~	Total sales and revenues in the Financial Services segment include interest revenues of $43 million and $127 million for the three and nine months ended July 31, 2016, respectively, and $46 million and $135 million for the three and nine months ended July 31, 2015, respectively.


~~(B)~~	~~Exclusive of purchases of equipment leased to others.~~



		Three Months Ended April 30,						Six Months Ended April 30,
	Location in Consolidated Statements of Operations	2017			2016			2017			2016
Defined benefit plans
Amortization of prior service benefit	Selling, general and administrative expenses	$	—		$	(1	)	$	—		$	(1	)
Amortization of actuarial loss	Selling, general and administrative expenses	35			34			70			67
	Total before tax	35			33			70			66
	Tax expense	(1		)	—			(1		)	—
Total reclassifications for the period, net of tax		$	34		$	33		$	69		$	66

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

13. ~~Stockholders' Deficit~~

~~Accumulated Other Comprehensive Loss~~

~~Changes in~~ ~~Accumulated other comprehensive loss, net of tax, included in the~~ ~~Consolidated Statements of Stockholders' Deficit, consisted of the following:~~

(in millions) Unrealized Gain on Marketable Securities Foreign Currency Translation Adjustments Defined Benefit Plans Total
Balance as of April 30, 2016 $ 1
$ (270 ) $ (2,267 ) $ (2,536 )
Other comprehensive loss before reclassifications —
(10 ) —
(10 )
Amounts reclassified out of accumulated other comprehensive loss —
—
34
34
Net current-period other comprehensive income (loss) —
(10 ) 34
24
Balance as of July 31, 2016 $ 1
$ (280 ) $ (2,233 ) $ (2,512 )

(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
(18 ) (11 )
Amounts reclassified out of accumulated other comprehensive loss —
—
100
100
Net current-period other comprehensive income —
7
82
89
Balance as of July 31, 2016 $ 1
$ (280 ) $ (2,233 ) $ (2,512 )

(in millions) Unrealized Gain on Marketable Securities Foreign Currency Translation Adjustments Defined Benefit Plans Total
Balance as of April 30, 2015 $ 1
$ (213 ) $ (2,072 ) $ (2,284 )
Other comprehensive loss before reclassifications —
(47 ) —
(47 )
Amounts reclassified out of accumulated other comprehensive loss —
—
33
33
Net current-period other comprehensive income (loss) —
(47 ) 33
(14 )
Balance as of July 31, 2015 $ 1
$ (260 ) $ (2,039 ) $ (2,298 )

(in millions) Unrealized Gain on Marketable Securities Foreign Currency Translation Adjustments Defined Benefit Plans Total
Balance as of October 31, 2014 $ 1
$ (127 ) $ (2,137 ) $ (2,263 )
Other comprehensive loss before reclassifications —
(133 ) —
(133 )
Amounts reclassified out of accumulated other comprehensive loss —
—
98
98
Net current-period other comprehensive income (loss) —
(133 ) 98
(35 )
Balance as of July 31, 2015 $ 1
$ (260 ) $ (2,039 ) $ (2,298 )

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

~~The following table displays the amounts reclassified from~~ ~~Accumulated other comprehensive loss~~ ~~and the affected line item in the~~ ~~Consolidated Statements of Operations:~~

Three Months Ended July 31, Nine Months Ended July 31,
Location in Consolidated
Statements of Operations 2016 2015 2016 2015
Defined benefit plans
Amortization of prior service benefit Selling, general and administrative expenses $ —
$ (1 ) $ (1 ) $ (3 )
Amortization of actuarial loss Selling, general and administrative expenses 34
34
101
102
Total before tax 34
33
100
99
Income tax expense —
—
—
(1 )
Total reclassifications for the period, net of tax $ 34
$ 33
$ 100
$ 98

~~14.~~ 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 loss,~~ all attributable to NIC in our Consolidated Statements of ~~Operations~~:Operations:

Three Months Ended July 31, Nine Months Ended July 31,
(in millions, except per share data) 2016
2015 2016 2015
Numerator:
Amounts attributable to Navistar International Corporation common stockholders:
Loss from continuing operations, net of tax $ (34 ) $ (30 ) $ (63 ) $ (136 )
Income from discontinued operations, net of tax —
2
—
2
Net loss $ (34 ) $ (28 ) $ (63 ) $ (134 )

Denominator:
Weighted average shares outstanding:
Basic 81.7
81.6
81.7
81.5
Effect of dilutive securities —
—
—
—
Diluted 81.7
81.6
81.7
81.5

Earnings (loss) per share attributable to Navistar International Corporation:
Basic:
Continuing operations $ (0.42 ) $ (0.37 ) $ (0.77 ) $ (1.67 )
Discontinued operations —
0.03
—
0.03
Net loss $ (0.42 ) $ (0.34 ) $ (0.77 ) $ (1.64 )
Diluted:

Continuing operations $ (0.42 ) $ (0.37 ) $ (0.77 ) $ (1.67 )
Discontinued operations —
0.03
—
0.03
Net loss $ (0.42 ) $ (0.34 ) $ (0.77 ) $ (1.64 )



	Three Months Ended April 30,					Six Months Ended April 30,
(in millions, except per share data)	2017			2016		2017			2016
Numerator:
Net income (loss) attributable to Navistar International Corporation common stockholders	$	(80	)	$	4	$	(142	)	$	(29	)

Denominator:
Weighted average shares outstanding:
Basic	93.3			81.7		87.5			81.7
Effect of dilutive securities	—			0.3		—			—
Diluted	93.3			82.0		87.5			81.7

Net income (loss) per share attributable to Navistar International Corporation:
Basic	$	(0.86	)	$	0.05	$	(1.62	)	$	(0.35	)
Diluted	(0.86		)	0.05		(1.62		)	(0.35		)

The conversion rate on our ~~4.50% senior subordinated convertible notes~~4.5% Senior Subordinated Convertible Notes due 2018 ~~("2018~~(the "2018 Convertible Notes") is 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 have an anti-dilutive effect when calculating diluted earnings per share when our average stock price is less than $58.40.

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

The conversion rate on our 4.75% ~~senior subordinated convertible notes~~Senior Subordinated Convertible Notes due ~~April~~ 2019 ~~("2019~~(the “2019 Convertible ~~Notes"~~Notes”) is 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 have an anti-dilutive effect when calculating diluted earnings per share when our average stock price is less than $54.07.

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 three ~~and nine~~ months ended ~~July 31,~~April 30, 2016, ~~and 2015,~~certain securities have been excluded from the computation of earnings per share, as our average stock price during the period was less than their respective exercise prices. For the three months ended April 30, 2016, the aggregate shares not included were 14.9 million.

For the three months ended April 30, 2017, 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, certain securities have been excluded from the computation of earnings per share, as our average stock price during the period was less than their respective exercise prices. For the three ~~and nine~~ months ended ~~July 31,~~April 30, 2017, the aggregate shares not included were 14.9 million.

In February 2017, we consummated our previously announced strategic alliance with Volkswagen Truck & Bus ("VW T&B"), which included an equity investment in the Company by VW T&B pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement"), a License and Supply Framework Agreement and a Procurement JV Framework Agreement. Pursuant to the Stock Purchase Agreement, on February 28, 2017 we issued and VW T&B purchased 16.2 million shares of our common stock for an aggregate purchase price of $256 million at $15.76 per share (a 19.9% stake (16.6% on a fully-diluted basis)) in the Company, excluding stock issuance costs.

For both the six months ended April 30, 2017 and 2016, 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, 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 both the six months ended April 30, 2017 and 2016, the aggregate shares not included were ~~15.2 million~~14.8 million.

Navistar International Corporation and ~~15.0 million, respectively.~~Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

For both the three and ~~nine~~six months ended ~~July 31, 2015, the aggregate shares not included were 15.0 million~~April 30, 2017 and ~~16.0 million, respectively.~~

~~For the three and nine months ended July 31,~~ 2016, ~~and 2015,~~ 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 shares related to the 2019 Convertible Notes.

~~15.~~14. Condensed Consolidating Guarantor and Non-guarantor Financial Information

The following tables set forth condensed consolidating balance sheets as of ~~July 31, 2016~~April 30, 2017 and October 31, ~~2015,~~2016, and condensed consolidating statements of operations and comprehensive income (loss) for the three and ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016, ~~and 2015,~~ and condensed consolidating statements of cash flows for the ~~nine~~six months ended ~~July 31, 2016~~April 30, 2017 and ~~2015.~~2016.

The information is presented as a result of ~~Navistar, Inc.’s~~NI’s guarantee, exclusive of its subsidiaries, of NIC’s indebtedness under our ~~8.25%~~ Senior Notes, ~~due 2022,~~ and obligations under our Loan Agreement related to the 6.5% Tax Exempt Bonds, due 2040. ~~Navistar, Inc.~~NI is a direct wholly-owned subsidiary of NIC. None of NIC’s other subsidiaries guarantee any of these notes or bonds. The guarantees are "full and unconditional," as those terms are used in Regulation S-X Rule 3-10, except that the guarantees will be automatically released in certain customary circumstances, such as when the subsidiary is sold or all of the assets of the subsidiary are sold, the capital stock is sold, when the subsidiary is designated as an "unrestricted subsidiary" for purposes of the respective indentures for each of the ~~8.25%~~ Senior Notes, ~~due 2022,~~ and the 6.5% Tax Exempt Bonds, due 2040, upon liquidation or dissolution of the subsidiary or upon legal or covenant defeasance, or satisfaction and discharge of the notes or bonds. Separate financial statements and other disclosures concerning ~~Navistar, Inc.~~NI have not been presented because management believes that such information is not material to investors. Within this disclosure only, "NIC" includes the financial results of the parent company only, with all of its wholly-owned subsidiaries accounted for under the equity method. Likewise, ~~"Navistar, Inc.,~~"NI," for purposes of this disclosure only, includes the consolidated financial results of its wholly-owned subsidiaries accounted for under the equity method and its operating units accounted for on a consolidated basis. "Non-Guarantor Subsidiaries" includes the combined financial results of all other non-guarantor subsidiaries. "Eliminations and Other" includes all eliminations and reclassifications to reconcile to the consolidated financial statements. NIC files a consolidated U.S. federal income tax return that includes ~~Navistar, Inc.~~NI and its U.S. subsidiaries. ~~Navistar, Inc.~~NI has a tax allocation agreement ("Tax Agreement") with NIC which requires ~~Navistar, Inc.~~NI to compute its separate federal income tax liability and remit any resulting tax liability to NIC. Tax benefits that may arise from net operating losses of ~~Navistar, Inc.~~NI are not refunded to Navistar, Inc. but may be used to offset future required tax payments under the Tax Agreement. The effect of the Tax Agreement is to allow NIC, the parent company, rather than ~~Navistar, Inc.,~~NI, to utilize current U.S. taxable losses of ~~Navistar, Inc.~~NI and all other direct or indirect domestic subsidiaries of NIC.



Condensed Consolidating Statement of Operations for the Three Months Ended April 30, 2017
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Sales and revenues, net	$	—		$	1,533		$	1,398		$	(835	)	$	2,096
Costs of products sold	—			1,381			1,215			(820		)	1,776
Restructuring charges	—			2			—			—			2
Asset impairment charges	—			5			—			—			5
All other operating expenses (income)	31			255			109			(11		)	384
Total costs and expenses	31			1,643			1,324			(831		)	2,167
Equity in income (loss) of affiliates	(49		)	38			1			12			2
Income (loss) before income taxes	(80		)	(72		)	75			8			(69		)
Income tax expense	—			—			(6		)	—			(6		)
Net income (loss)	(80		)	(72		)	69			8			(75		)
Less: Net income attributable to non-controlling interests	—			—			5			—			5
Net income (loss) attributable to Navistar International Corporation	$	(80	)	$	(72	)	$	64		$	8		$	(80	)

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)



Condensed Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended April 30, 2017
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries		Eliminations and Other			Consolidated
Net income (loss)	$	(80	)	$	(72	)	$	69	$	8		$	(75	)
Other comprehensive income (loss):
Foreign currency translation adjustment	4			—			4		(4		)	4
Defined benefit plans, net of tax	34			33			1		(34		)	34
Total other comprehensive income (loss)	38			33			5		(38		)	38
Comprehensive income (loss)	(42		)	(39		)	74		(30		)	(37		)
Less: Net income attributable to non-controlling interests	—			—			5		—			5
Total comprehensive income (loss) attributable to Navistar International Corporation	$	(42	)	$	(39	)	$	69	$	(30	)	$	(42	)



Condensed Consolidating Statement of Operations for the Six Months Ended April 30, 2017
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Sales and revenues, net	$	—		$	2,795		$	2,426		$	(1,462	)	$	3,759
Costs of products sold	—			2,485			2,094			(1,433		)	3,146
Restructuring charges	—			2			7			—			9
Asset impairment charges	—			7			—			—			7
All other operating expenses (income)	56			471			219			(25		)	721
Total costs and expenses	56			2,965			2,320			(1,458		)	3,883
Equity in income (loss) of affiliates	(86		)	61			3			27			5
Income (loss) before income taxes	(142		)	(109		)	109			23			(119		)
Income tax expense	—			—			(10		)	—			(10		)
Net income (loss)	(142		)	(109		)	99			23			(129		)
Less: Net income attributable to non-controlling interests	—			—			13			—			13
Net income (loss) attributable to Navistar International Corporation	$	(142	)	$	(109	)	$	86		$	23		$	(142	)



Condensed Consolidating Statement of Comprehensive Income (Loss) for the Six Months Ended April 30, 2017
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Net income (loss)	$	(142	)	$	(109	)	$	99		$	23		$	(129	)
Other comprehensive income (loss):
Foreign currency translation adjustment	(8		)	—			(8		)	8			(8		)
Defined benefit plans, net of tax	69			66			3			(69		)	69
Total other comprehensive income (loss)	61			66			(5		)	(61		)	61
Comprehensive income (loss)	(81		)	(43		)	94			(38		)	(68		)
Less: Net income attributable to non-controlling interests	—			—			13			—			13
Total comprehensive income (loss) attributable to Navistar International Corporation	$	(81	)	$	(43	)	$	81		$	(38	)	$	(81	)

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Condensed Consolidating Statement of Operations for the Three Months Ended July 31, 2016
(in millions) NIC Navistar,
Inc. Non-Guarantor
Subsidiaries Eliminations
and Other Consolidated
Sales and revenues, net $ —
$ 1,411
$ 1,432
$ (757 ) $ 2,086
Costs of products sold —
1,276
1,216
(735 ) 1,757
Restructuring charges —
(1 ) 6
—
5
Asset impairment charges —
—
12
—
12
All other operating expenses (income) 18
197
131
(18 ) 328
Total costs and expenses 18
1,472
1,365
(753 ) 2,102
Equity in income (loss) of affiliates (16 ) 63
1
(46 ) 2
Income (loss) before income taxes (34 ) 2
68
(50 ) (14 )
Income tax expense —
(1 ) (13 ) —
(14 )
Earnings (loss) from continuing operations (34 ) 1
55
(50 ) (28 )
Income (loss) from discontinued operations, net of tax —
—
—
—
—
Net income (loss) (34 ) 1
55
(50 ) (28 )
Less: Net income attributable to non-controlling interests —
—
6
—
6
Net income (loss) attributable to Navistar International Corporation $ (34 ) $ 1
$ 49
$ (50 ) $ (34 )

Condensed Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended July 31, 2016
(in millions) NIC Navistar,
Inc. Non-Guarantor
Subsidiaries Eliminations
and Other Consolidated
Net income (loss) $ (34 ) $ 1
$ 55
$ (50 ) $ (28 )
Other comprehensive income (loss):
Foreign currency translation adjustment (10 ) —
(10 ) 10
(10 )
Defined benefit plans (net of tax) 34
33
1
(34 ) 34
Total other comprehensive income (loss) 24
33
(9 ) (24 ) 24
Comprehensive income (loss) (10 ) 34
46
(74 ) (4 )
Less: Net income attributable to non-controlling interests —
—
6
—
6
Total comprehensive income (loss) attributable to Navistar International Corporation $ (10 ) $ 34
$ 40
$ (74 ) $ (10 )



Condensed Consolidating Balance Sheet as of April 30, 2017
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Assets
Cash and cash equivalents	$	333		$	101		$	337		$	—		$	771
Marketable securities	26			—			152			—			178
Restricted cash	16			6			138			—			160
Finance and other receivables, net	11			206			1,882			(91		)	2,008
Inventories	—			593			361			(8		)	946
Investments in non-consolidated affiliates	(7,488		)	6,313			52			1,178			55
Property and equipment, net	—			782			549			(7		)	1,324
Goodwill	—			—			38			—			38
Deferred taxes, net	—			10			152			(1		)	161
Other	5			127			180			(1		)	311
Total assets	$	(7,097	)	$	8,138		$	3,841		$	1,070		$	5,952
Liabilities and stockholders’ equity (deficit)
Debt	$	2,221		$	1,140		$	1,706		$	(2	)	$	5,065
Postretirement benefits liabilities	—			2,790			226			—			3,016
Amounts due to (from) affiliates	(8,026		)	10,948			(2,972		)	50			—
Other liabilities	3,839			(149		)	(630		)	(62		)	2,998
Total liabilities	(1,966		)	14,729			(1,670		)	(14		)	11,079
Stockholders’ equity (deficit) attributable to Navistar International Corporation	(5,131		)	(6,591		)	5,507			1,084			(5,131		)
Stockholders’ equity attributable to non-controlling interest	—			—			4			—			4
Total liabilities and stockholders’ equity (deficit)	$	(7,097	)	$	8,138		$	3,841		$	1,070		$	5,952

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Condensed Consolidating Statement of Operations for the Nine Months Ended July 31, 2016
(in millions) NIC Navistar,
Inc. Non-Guarantor
Subsidiaries Eliminations
and Other Consolidated
Sales and revenues, net $ —
$ 4,455
$ 4,055
$ (2,462 ) $ 6,048
Costs of products sold —
4,028
3,447
(2,407 ) 5,068
Restructuring charges —
3
8
—
11
Asset impairment charges —
2
15
—
17
All other operating expenses (income) 75
643
305
(54 ) 969
Total costs and expenses 75
4,676
3,775
(2,461 ) 6,065
Equity in income (loss) of affiliates 12
118
—
(127 ) 3
Income (loss) before income taxes (63 ) (103 ) 280
(128 ) (14 )
Income tax benefit (expense) —
10
(35 ) —
(25 )
Earnings (loss) from continuing operations (63 ) (93 ) 245
(128 ) (39 )
Income (loss) from discontinued operations, net of tax —
—
—
—
—
Net income (loss) (63 ) (93 ) 245
(128 ) (39 )
Less: Net income attributable to non-controlling interests —
—
24
—
24
Net income (loss) attributable to Navistar International Corporation $ (63 ) $ (93 ) $ 221
$ (128 ) $ (63 )



Condensed Consolidating Statement of Cash Flows for the Six Months Ended April 30, 2017
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Net cash provided by (used in) operating activities	$	(346	)	$	(669	)	$	188		$	720		$	(107	)
Cash flows from investing activities
Net change in restricted cash and cash equivalents	—			—			(48		)	—			(48		)
Net sales (purchases) of marketable securities	2			—			(134		)	—			(132		)
Capital expenditures and purchase of equipment leased to others	—			(70		)	(33		)	—			(103		)
Other investing activities	(250		)	6			6			250			12
Net cash provided by (used in) investing activities	(248		)	(64		)	(209		)	250			(271		)
Cash flows from financing activities
Net borrowings (repayments) of debt	244			704			(130		)	(720		)	98
Issuance of common stock, net of issuance costs	245			—			250			(250		)	245
Other financing activities	3			13			(15		)	—			1
Net cash provided by (used in) financing activities	492			717			105			(970		)	344
Effect of exchange rate changes on cash and cash equivalents	—			—			1			—			1
Increase (decrease) in cash and cash equivalents	(102		)	(16		)	85			—			(33		)
Cash and cash equivalents at beginning of the period	435			117			252			—			804
Cash and cash equivalents at end of the period	$	333		$	101		$	337		$	—		$	771

Condensed Consolidating Statement of Comprehensive Income (Loss) for the Nine Months Ended July 31, 2016
(in millions) NIC Navistar,
Inc. Non-Guarantor
Subsidiaries Eliminations
and Other Consolidated
Net income (loss) $ (63 ) $ (93 ) $ 245
$ (128 ) $ (39 )
Other comprehensive income (loss):
Foreign currency translation adjustment 7
—
7
(7 ) 7
Defined benefit plans (net of tax) 82
96
(14 ) (82 ) 82
Total other comprehensive income (loss) 89
96
(7 ) (89 ) 89
Comprehensive income (loss) 26
3
238
(217 ) 50
Less: Net income attributable to non-controlling interests —
—
24
—
24
Total comprehensive income (loss) attributable to Navistar International Corporation $ 26
$ 3
$ 214
$ (217 ) $ 26



Condensed Consolidating Statement of Operations for the Three Months Ended April 30, 2016
(in millions)	NIC		Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Sales and revenues, net	$	—	$	1,702		$	1,423		$	(928	)	$	2,197
Costs of products sold	—		1,548			1,208			(911		)	1,845
Restructuring charges	—		3			—			—			3
Asset impairment charges	—		2			1			—			3
All other operating expenses (income)	38		233			66			(18		)	319
Total costs and expenses	38		1,786			1,275			(929		)	2,170
Equity in income (loss) of affiliates	42		68			—			(108		)	2
Income (loss) before income taxes	4		(16		)	148			(107		)	29
Income tax expense	—		(2		)	(14		)	—			(16		)
Net income (loss)	4		(18		)	134			(107		)	13
Less: Net income attributable to non-controlling interests	—		—			9			—			9
Net income (loss) attributable to Navistar International Corporation	$	4	$	(18	)	$	125		$	(107	)	$	4

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Condensed Consolidating Balance Sheet as of July 31, 2016
(in millions) NIC Navistar,
Inc. Non-Guarantor
Subsidiaries Eliminations
and Other Consolidated
Assets
Cash and cash equivalents $ 197
$ 85
$ 265
$ —
$ 547
Marketable securities —
—
140
—
140
Restricted cash 16
3
162
—
181
Finance and other receivables, net 3
87
1,949
(109 ) 1,930
Inventories —
756
341
(13 ) 1,084
Investments in non-consolidated affiliates (7,577 ) 6,278
56
1,303
60
Property and equipment, net —
682
581
(6 ) 1,257
Goodwill —
—
38
—
38
Deferred taxes, net —
15
138
—
153
Other 28
124
178
(1 ) 329
Total assets $ (7,333 ) $ 8,030
$ 3,848
$ 1,174
$ 5,719
Liabilities and stockholders’ equity (deficit)
Debt $ 1,983
$ 1,123
$ 1,961
$ (2 ) $ 5,065
Postretirement benefits liabilities —
2,797
201
—
2,998
Amounts due to (from) affiliates (7,986 ) 10,722
(2,905 ) 169
—
Other liabilities 3,807
(119 ) (831 ) (67 ) 2,790
Total liabilities (2,196 ) 14,523
(1,574 ) 100
10,853
Stockholders’ equity attributable to non-controlling interest —
—
3
—
3
Stockholders’ equity (deficit) attributable to Navistar International Corporation (5,137 ) (6,493 ) 5,419
1,074
(5,137 )
Total liabilities and stockholders’ equity (deficit) $ (7,333 ) $ 8,030
$ 3,848
$ 1,174
$ 5,719



Condensed Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended April 30, 2016
(in millions)	NIC		Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Net income (loss)	$	4	$	(18	)	$	134		$	(107	)	$	13
Other comprehensive income (loss):
Foreign currency translation adjustment	50		—			50			(50		)	50
Defined benefit plans (net of tax)	15		31			(16		)	(15		)	15
Total other comprehensive income (loss)	65		31			34			(65		)	65
Comprehensive income (loss)	69		13			168			(172		)	78
Less: Net income attributable to non-controlling interests	—		—			9			—			9
Total comprehensive income (loss) attributable to Navistar International Corporation	$	69	$	13		$	159		$	(172	)	$	69



Condensed Consolidating Statement of Operations for the Six Months Ended April 30, 2016
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Sales and revenues, net	$	—		$	3,044		$	2,623		$	(1,705	)	$	3,962
Costs of products sold	—			2,752			2,231			(1,672		)	3,311
Restructuring charges	—			4			2			—			6
Asset impairment charges	—			2			3			—			5
All other operating expenses (income)	57			446			174			(36		)	641
Total costs and expenses	57			3,204			2,410			(1,708		)	3,963
Equity in income (loss) of affiliates	28			55			(1		)	(81		)	1
Income (loss) before income taxes	(29		)	(105		)	212			(78		)	—
Income tax benefit (expense)	—			11			(22		)	—			(11		)
Net income (loss)	(29		)	(94		)	190			(78		)	(11		)
Less: Net income attributable to non-controlling interests	—			—			18			—			18
Net income (loss) attributable to Navistar International Corporation	$	(29	)	$	(94	)	$	172		$	(78	)	$	(29	)



Condensed Consolidating Statement of Comprehensive Income (Loss) for the Six Months Ended April 30, 2016
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Net income (loss)	$	(29	)	$	(94	)	$	190		$	(78	)	$	(11	)
Other comprehensive income (loss):
Foreign currency translation adjustment	17			—			17			(17		)	17
Defined benefit plans (net of tax)	48			63			(15		)	(48		)	48
Total other comprehensive income (loss)	65			63			2			(65		)	65
Comprehensive income (loss)	36			(31		)	192			(143		)	54
Less: Net income attributable to non-controlling interests	—			—			18			—			18
Total comprehensive income (loss) attributable to Navistar International Corporation	$	36		$	(31	)	$	174		$	(143	)	$	36

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended July 31, 2016
(in millions) NIC Navistar,
Inc. Non-Guarantor
Subsidiaries Eliminations
and Other Consolidated
Net cash provided by (used in) operations $ (372 ) $ (225 ) $ 344
$ 239
$ (14 )
Cash flows from investing activities
Net change in restricted cash and cash equivalents —
4
(68 ) —
(64 )
Net sales (purchases) of marketable securities 113
—
(94 ) —
19
Capital expenditures and purchase of equipment leased to others —
(56 ) (121 ) —
(177 )
Other investing activities —
—
55
—
55
Net cash provided by (used in) investing activities 113
(52 ) (228 ) —
(167 )
Cash flows from financing activities
Net borrowings (repayments) of debt —
263
(151 ) (319 ) (207 )
Other financing activities —
18
(108 ) 80
(10 )
Net cash provided by (used in) financing activities —
281
(259 ) (239 ) (217 )
Effect of exchange rate changes on cash and cash equivalents —
—
33
—
33
Increase (decrease) in cash and cash equivalents (259 ) 4
(110 ) —
(365 )
Cash and cash equivalents at beginning of the period 456
81
375
—
912
Cash and cash equivalents at end of the period $ 197
$ 85
$ 265
$ —
$ 547

Condensed Consolidating Statement of Operations for the Three Months Ended July 31, 2015
(in millions) NIC
Navistar, Inc.
Non-Guarantor Subsidiaries
Eliminations and Other
Consolidated
Sales and revenues, net $ —

$ 1,892

$ 1,875

$ (1,229 )
$ 2,538
Costs of products sold —

1,752

1,627

(1,207 )
2,172
Restructuring charges —

5

8

—

13
Asset impairment charges —

—

7

—

7
All other operating expenses (income) 12

262

102

(16 )
360
Total costs and expenses 12

2,019

1,744

(1,223 )
2,552
Equity in income (loss) of affiliates (16 )
76

2

(59 )
3
Income (loss) before income taxes (28 )
(51 )
133

(65 )
(11 )
Income tax expense —

(1 )
(11 )
—

(12 )
Earnings (loss) from continuing operations (28 )
(52 )
122

(65 )
(23 )
Income from discontinued operations, net of tax —

—

2

—

2
Net income (loss) (28 )
(52 )
124

(65 )
(21 )
Less: Net income attributable to non-controlling interests —

—

7

—

7
Net income (loss) attributable to Navistar International Corporation $ (28 )
$ (52 )
$ 117

$ (65 )
$ (28 )



Condensed Consolidating Balance Sheet as of October 31, 2016
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Assets
Cash and cash equivalents	$	435		$	117		$	252		$	—		$	804
Marketable securities	27			—			19			—			46
Restricted cash	16			6			90			—			112
Finance and other receivables, net	(1		)	171			1,883			(84		)	1,969
Inventories	—			639			313			(8		)	944
Investments in non-consolidated affiliates	(7,714		)	6,253			57			1,457			53
Property and equipment, net	—			669			580			(8		)	1,241
Goodwill	—			—			38			—			38
Deferred taxes, net	—			10			150			1			161
Other	2			110			175			(2		)	285
Total assets	$	(7,235	)	$	7,975		$	3,557		$	1,356		$	5,653
Liabilities and stockholders’ equity (deficit)
Debt	$	1,965		$	1,100		$	1,841		$	(2	)	$	4,904
Postretirement benefits liabilities	—			2,865			233			—			3,098
Amounts due to (from) affiliates	(7,724		)	10,709			(3,040		)	55			—
Other liabilities	3,822			(152		)	(665		)	(61		)	2,944
Total liabilities	(1,937		)	14,522			(1,631		)	(8		)	10,946
Stockholders’ equity (deficit) attributable to Navistar International Corporation	(5,298		)	(6,547		)	5,183			1,364			(5,298		)
Stockholders’ equity attributable to non-controlling interest	—			—			5			—			5
Total liabilities and stockholders’ equity (deficit)	$	(7,235	)	$	7,975		$	3,557		$	1,356		$	5,653

Navistar International Corporation and Subsidiaries

Notes to Consolidated Financial Statements—(Continued)

(Unaudited)

Condensed Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended July 31, 2015
(in millions) NIC
Navistar, Inc.
Non-Guarantor Subsidiaries
Eliminations and Other
Consolidated
Net income (loss) $ (28 ) $ (52 ) $ 124
$ (65 ) $ (21 )
Other comprehensive income (loss):

Foreign currency translation adjustment (47 )
—

(47 )
47

(47 )
Defined benefit plans (net of tax) 33

8

25

(33 )
33
Total other comprehensive income (loss) (14 )
8

(22 )
14

(14 )
Comprehensive income (loss) (42 ) (44 ) 102
(51 ) (35 )
Less: Net income attributable to non-controlling interests —
—
7
—
7
Total comprehensive income (loss) attributable to Navistar International Corporation $ (42 )
$ (44 )
$ 95

$ (51 )
$ (42 )

Condensed Consolidating Statement of Operations for the Nine Months Ended July 31, 2015
(in millions) NIC Navistar, Inc. Non-Guarantor Subsidiaries Eliminations and Other Consolidated
Sales and revenues, net $ —
$ 5,511
$ 5,586
$ (3,445 ) $ 7,652
Costs of products sold —
5,025
4,932
(3,380 ) 6,577
Restructuring charges —
8
14
—
22
Asset impairment charges —
8
7
—
15
All other operating expenses (income) 62
808
306
(56 ) 1,120
Total costs and expenses 62
5,849
5,259
(3,436 ) 7,734
Equity in income (loss) of affiliates (72 ) 155
3
(80 ) 6
Income (loss) before income taxes (134 ) (183 ) 330
(89 ) (76 )
Income tax expense —
(3 ) (34 ) —
(37 )
Earnings (loss) from continuing operations (134 ) (186 ) 296
(89 ) (113 )
Income from discontinued operations, net of tax —
—
2
—
2
Net income (loss) (134 ) (186 ) 298
(89 ) (111 )
Less: Net income attributable to non-controlling interests —
—
23
—
23
Net income (loss) attributable to Navistar International Corporation $ (134 ) $ (186 ) $ 275
$ (89 ) $ (134 )

Condensed Consolidating Statement of Comprehensive Income (Loss) for the Nine Months Ended July 31, 2015
(in millions) NIC Navistar, Inc. Non-Guarantor Subsidiaries Eliminations and Other Consolidated
Net income (loss) $ (134 ) $ (186 ) $ 298
$ (89 ) $ (111 )
Other comprehensive income (loss):

Foreign currency translation adjustment (133 ) —
(133 ) 133
(133 )
Defined benefit plans (net of tax) 98
70
28
(98 ) 98
Total other comprehensive income (loss) (35 ) 70
(105 ) 35
(35 )
Comprehensive income (loss) (169 ) (116 ) 193
(54 ) (146 )
Less: Net income attributable to non-controlling interests —
—
23
—
23
Total comprehensive income (loss) attributable to Navistar International Corporation $ (169 ) $ (116 ) $ 170
$ (54 ) $ (169 )



Condensed Consolidating Statement of Cash Flows for the Six Months Ended April 30, 2016
(in millions)	NIC			Navistar, Inc.			Non-Guarantor Subsidiaries			Eliminations and Other			Consolidated
Net cash provided by (used in) operations	$	(293	)	$	(297	)	$	218		$	268		$	(104	)
Cash flows from investment activities
Net change in restricted cash and cash equivalents	—			2			(21		)	—			(19		)
Net sales (purchases) of marketable securities	65			—			(134		)	—			(69		)
Capital expenditures and purchase of equipment leased to others	—			(34		)	(97		)	—			(131		)
Other investing activities	—			—			53			—			53
Net cash provided by (used in) investing activities	65			(32		)	(199		)	—			(166		)
Cash flows from financing activities
Net borrowings (repayments) of debt	—			259			(26		)	(298		)	(65		)
Other financing activities	—			13			(49		)	30			(6		)
Net cash provided by (used in) financing activities	—			272			(75		)	(268		)	(71		)
Effect of exchange rate changes on cash and cash equivalents	—			—			18			—			18
Decrease in cash and cash equivalents	(228		)	(57		)	(38		)	—			(323		)
Cash and cash equivalents at beginning of the period	456			81			375			—			912
Cash and cash equivalents at end of the period	$	228		$	24		$	337		$	—		$	589

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

Condensed Consolidating Balance Sheet as of October 31, 2015
(in millions) NIC Navistar,
Inc. Non-Guarantor
Subsidiaries Eliminations
and Other Consolidated
Assets
Cash and cash equivalents $ 456
$ 81
$ 375
$ —
$ 912
Marketable securities 112
—
47
—
159
Restricted cash 16
7
98
—
121
Finance and other receivables, net 1
99
2,440
(103 ) 2,437
Inventories —
809
342
(16 ) 1,135
Investments in non-consolidated affiliates (7,679 ) 6,204
64
1,477
66
Property and equipment, net —
737
616
(8 ) 1,345
Goodwill —
—
38
—
38
Deferred taxes, net 7
20
137
—
164
Other 33
128
155
(1 ) 315
Total assets $ (7,054 ) $ 8,085
$ 4,312
$ 1,349
$ 6,692
Liabilities and stockholders’ equity (deficit)
Debt $ 1,971
$ 1,180
$ 2,151
$ (4 ) $ 5,298
Postretirement benefits liabilities —
2,909
179
—
3,088
Amounts due to (from) affiliates (7,574 ) 10,280
(2,879 ) 173
—
Other liabilities 3,716
207
(388 ) (69 ) 3,466
Total liabilities (1,887 ) 14,576
(937 ) 100
11,852
Stockholders’ equity attributable to non-controlling interest —
—
7
—
7
Stockholders’ equity (deficit) attributable to Navistar International Corporation (5,167 ) (6,491 ) 5,242
1,249
(5,167 )
Total liabilities and stockholders’ equity (deficit) $ (7,054 ) $ 8,085
$ 4,312
$ 1,349
$ 6,692

~~Navistar International Corporation and Subsidiaries~~

~~Notes to Consolidated Financial Statements—(Continued)~~

~~(Unaudited)~~

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended July 31, 2015
(in millions) NIC Navistar,
Inc. Non-Guarantor
Subsidiaries Eliminations
and Other Consolidated
Net cash provided by (used in) operations $ (106 ) $ 282
$ 62
$ (252 ) $ (14 )
Cash flows from investing activities
Net change in restricted cash and cash equivalents 1
1
(194 ) —
(192 )
Net sales of marketable securities 230
—
82
—
312
Capital expenditures and purchase of equipment leased to others —
(52 ) (78 ) —
(130 )
Other investing activities —
3
12
—
15
Net cash provided by (used in) investing activities 231
(48 ) (178 ) —
5
Cash flows from financing activities
Net borrowings (repayments) of debt —
(189 ) 176
126
113
Other financing activities —
(54 ) (99 ) 126
(27 )
Net cash provided by (used in) financing activities —
(243 ) 77
252
86
Effect of exchange rate changes on cash and cash equivalents —
—
(27 ) —
(27 )
Increase (decrease) in cash and cash equivalents 125
(9 ) (66 ) —
50
Cash and cash equivalents at beginning of the period 101
53
343
—
497
Cash and cash equivalents at end of the period $ 226
$ 44
$ 277
$ —
$ 547

~~16. Subsequent Events~~

On September 5, 2016, NIC and Volkswagen Truck & Bus GmbH (“VW T&B”) entered into a Stock Purchase Agreement (the "Stock Purchase Agreement"), pursuant to which the Company will issue and VW T&B will purchase an estimated 19.9% stake (16.6% on a pro forma basis) in the Company (the “Share Issuance”), and a Stockholder Agreement ("Stockholder Agreement"), which governs the rights and obligations of the parties in connection with the share issuance. The Board of Directors of the Company has approved the share issuance for purposes of Section 203 of the Delaware General Corporation Law (“DGCL”) and the Company and VW T&B have entered into an agreement which permits VW T&B to acquire up to 20% of the Company without triggering the restrictions that would otherwise be imposed under Section 203 of the DGCL. VW T&B will also designate two people who are approved by the Company to be appointed to Navistar's Board of Directors. Subject to the terms and conditions set forth in the Stock Purchase Agreement, at the closing, the Company will issue to VW T&B 16.2 million shares of common stock of the Company for a purchase price of $15.76 per share and an aggregate purchase amount of $256 million.

In addition to the agreements governing the Share Issuance, the Company’s operating subsidiary, Navistar, Inc. concurrently entered into a Framework Agreement Concerning Technology Licensing and Supply (the “License and Supply Framework Agreement”) and a Procurement JV Framework Agreement (the “Procurement JV Framework Agreement”) with VW T&B. Pursuant to the License and Supply Framework Agreement, the parties have agreed to use commercially reasonable efforts to enter into certain individual contracts in respect of the licensing and supply of certain engines and technologies, conduct feasibility studies in order to investigate the feasibility of sharing certain technologies and begin good faith discussions on possible collaboration with respect to certain powertrain combinations and other strategic initiatives. Under the Procurement JV Framework Agreement, the parties intend to form a sourcing joint venture entity to make recommendations for sourcing to the parties. Each party will make final sourcing decisions considering recommendations made by the Procurement JV.

The closing of the Stock Purchase Agreement is subject to certain regulatory approvals, the finalization of the definitive agreements governing the procurement joint venture and the finalization of the first definitive contract under the License and Supply Framework Agreement, among other customary closing conditions.


~~Item 2.~~	~~Management's Discussion and Analysis of Financial Condition and Results of Operations~~

Item 2. 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 contained in our Annual Report on Form 10-K for the year ended October 31, ~~2015.~~2016. 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 from items disclosed within the MD&A of our Annual Report on Form 10-K for the year ended October 31, ~~2015~~2016 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. Operating results for interim reporting periods are not necessarily indicative of annual operating results.

Executive Overview

Navistar is an international manufacturer of International^® brand commercial and military trucks, proprietary brand diesel engines, and IC ~~Bus™~~ Bus^TM("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 (our "Core" markets). We also provide retail, wholesale, and lease financing services for our trucks and parts.

~~Third~~Second Quarter Summary

During the ~~third~~second quarter of ~~2016,~~2017, we continued to take actions that we believe will improve our performance. The focus on our strategy ~~which~~ includes: ~~implementing~~growing the Core business, seeking new sources of revenue, driving operational excellence, leveraging the VW T&B alliance, investing in our ~~customer-centric strategy, completing new product launches,~~people, and improving our financial ~~performance, reducing costs, improving capacity utilization, and increasing profitable market share.~~performance. We believe our strategy will enable us to improve ~~our~~ sales and market share ~~as well as to add~~by offering more value to our customers.

~~We continue to focus on~~In January 2017, we issued an additional $250 million aggregate principal amount of our ~~Core markets. On February 1, 2016 we launched~~8.25% Senior Notes due in 2022 ("Senior Notes"). The proceeds from the ~~International® HX™ Series, the first in a series~~January 2017 issuance of ~~new product launches. The HX™ is a Class 8 premium vocational truck designed to deliver the strength~~additional Senior Notes are being used for general corporate purposes, including working capital and ~~durability required for the severe service industry.~~capital expenditures.

On May 16, 2016, we extended our relationship with General Motors Company ("GM") when we signed a long-term agreement to manufacture GM's G Van cutaway models at our Springfield, Ohio assembly plant. Production is to begin in the first calendar quarter of 2017. As previously announced, in August 2015, Navistar and GM signed a co-development agreement to build and sell a new line of Class 4/5 commercial vehicles. These new trucks will also be built in Springfield, Ohio starting in the first half of 2018 and will be distributed separately through GM and Navistar dealer networks.

We also continue to evaluate our portfolio of assets, with the purpose of closing or divesting non-strategic businesses and identifying opportunities to restructure our business and rationalize our Manufacturing operations to optimize our cost structure. In February ~~2016,~~2017, we ~~sold Pure Power Technologies, a components business focused on air~~amended the Senior Secured Term Loan Credit Facility to reprice our remaining $1.0 billion loan and ~~fuel systems. Additionally, on August 19, 2016,~~insert provisions regarding European Union bail-in legislation. The amendment reduces the interest rate applicable to the outstanding loan by 1.50%.

In February 2017, we ~~sold~~consummated our ~~engine and foundry facilities in Indianapolis, Indiana for an immaterial amount.~~

~~On September 5, 2016, we entered into a~~previously announced strategic alliance with VW T&B, which ~~includes~~included an equity investment in the Company by VW T&B pursuant to ~~the~~a Stock Purchase Agreement ~~as well as the~~(the "Stock Purchase Agreement"), a License and Supply Framework Agreement and ~~the~~a Procurement JV Framework Agreement. Pursuant to the Stock Purchase Agreement, ~~the Company will issue~~we issued and VW T&B ~~will~~purchased 16.2 million of our shares for an aggregate purchase ~~an estimated~~price of $256 million at $15.76 per share (a 19.9% stake (16.6% on a ~~pro forma~~fully-diluted basis)) in the ~~Company,~~Company.

We remain committed to product investment to increase customer value and to focus on our Core markets. In February 2017, we launched our new International® A26™ diesel engine. The A26™ is an all-new 12.4L engine design which we believe offers improved fuel economy and will deliver the ~~Company~~uptime that our customers demand. In April 2017, we launched the International® RH™ Series, our new Class 8 regional haul tractor powered by the new International® A26™ engine. The RH™ Series is designed to deliver further improvements in uptime and ~~VW T&B also entered into~~productivity for the ~~Stockholder Agreement which governs~~driver. We continue to realize our plan to release a new or redesigned product every six months through 2018.

We continue to seek new sources of revenue. In March 2017, Navistar Defense, LLC, was awarded two foreign military contracts by the ~~rights~~U.S. Army Contracting Command. The first is to produce and ~~obligations~~support MaxxPro® Dash DXM™ Mine Resistant Ambush Protected ("MRAP") vehicles for Pakistan. The second is to reset, upgrade and support MaxxPro® MRAP Excess Defense Article vehicles for the United Arab Emirates ("U.A.E."). The majority of the ~~parties~~work will take place at our West Point, Mississippi assembly plant. Delivery is planned to be completed for Pakistan in ~~connection with the Share Issuance. As part of the equity investment, VW T&B will acquire 16.2 million newly issued shares~~calendar year 2017 and for U.A.E. in ~~the Company and will pay $256 million at $15.76 per share.~~

Pursuant to the License and Supply Framework Agreement, the parties have agreed to use commercially reasonable efforts to enter into certain individual contracts in respect of the licensing and supply of certain engines and technologies, conduct feasibility studies in order to investigate the feasibility of sharing certain technologies and begin good faith discussions on possible collaboration with respect to certain powertrain combinations and other strategic initiatives. Under the Procurement JV Framework Agreement, the parties intend to form a sourcing joint venture entity to make recommendations for sourcing to the parties. Each party will make final sourcing decisions considering recommendations made by the Procurement JV.

4745

Financial Summary

Continuing Operations Results — In the ~~third~~second quarter of ~~2016,~~2017, our consolidated net sales and revenues were $2.1 billion, ~~down 18%~~a 5% decrease compared to the prior year quarter. ~~In the first nine months of 2016, our consolidated net sales and revenues were $6.0 billion, down 21% compared to the first nine months of 2015.~~ The ~~decreases~~decrease primarily ~~reflect~~reflects lower ~~sales~~volumes from our Truck segment.

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016,~~2017, we incurred a loss ~~from continuing operations~~ before income taxes of ~~$14~~$69 million ~~for both periods,~~and $119 million, respectively, compared to ~~a loss from continuing operations~~income before income taxes of ~~$11~~$29 million and ~~$76~~zero in the respective prior year periods. Our gross margin declined by $32 million and $38 million in the second quarter and first half of 2017, respectively, primarily due to market pressures in our Core markets, lower volumes, and higher used truck losses, partially offset by improved material costs in our Core markets, as well as a decrease in adjustments to pre-existing warranties. In the second quarter and first half of 2017, our Truck segment recorded charges to our used truck reserve of $60 million and $88 million compared to charges of $38 million and $84 million in the respective ~~periods in~~prior year periods. In the ~~prior year. The decline in the third~~second quarter of ~~2016 compared to the prior year period was primarily driven by higher~~2017, we recorded a charge for adjustments to pre-existing warranties ~~market pressures in Mexico, and lower used truck margins, partially offset by lower structural costs~~ of ~~$32~~$7 million ~~and improved product margin in our Core markets. The improvement~~compared to $46 million in the ~~first nine months of 2016 compared to the~~comparable prior year ~~period was driven by lower structural costs~~period. In the first half of ~~$145 million, improved product margin in our Core markets, and improved Other income, partially offset by higher~~2017, we recorded a net benefit for adjustments to pre-existing warranties ~~market pressures~~of $10 million compared to a charge of $51 million in ~~Mexico,~~the comparable prior year period. Net loss in the second quarter and first half of 2017 was further impacted by lower used truck margins, and an increase in our used truck reserves. Our gross used truck inventory increased to approximately $430 million at July 31, 2016 from $390 million at October 31, 2015 (offset by reserves of $166 million and $110 million, at the respective dates) due, in part, to an increase in used truck receipts coupled with a decrease in used truck sales. We continue to seek alternative channels to sell our used trucks, including certain export markets which have resulted in a lower price point Other Income as compared to ~~our domestic channels.~~the respective prior year periods.

In the ~~third~~second quarter of ~~2016,~~2017, consolidated net income ~~from continuing operations~~ attributable to NIC, before manufacturing interest, taxes, depreciation and amortization expenses (“EBITDA”) was ~~$96~~$47 million compared to EBITDA of $106 million for the comparable period in 2015. After excluding net charges of $36 million and $23 million in the third quarters of 2016 and 2015, respectively, Adjusted EBITDA was $132 million in the third quarter of 2016 compared to $129$135 million in the comparable ~~period~~prior year period. Excluding certain net charges, adjusted EBITDA ("Adjusted EBITDA") in ~~2015.~~the second quarter of 2017 was $65 million compared to $187 million in the comparable prior year period. In the first ~~nine months~~half of ~~2016 and 2015,~~2017, EBITDA was ~~$313~~$110 million ~~and $292 million, respectively. After excluding a net charge of $83 million and a net benefit of $7~~compared to $217 million in the ~~first nine months of 2016 and 2015, respectively,~~comparable prior year period. Excluding certain net charges, Adjusted EBITDA in the first half of 2017 was ~~$396~~$120 million ~~and $285~~compared to $264 million in the ~~first nine months of 2016 and 2015, respectively.~~comparable prior year period. EBITDA and Adjusted EBITDA 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 EBITDA.

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016,~~2017, after income taxes, the net loss ~~from continuing operations~~ attributable to NIC was ~~$34~~$80 million and ~~$63~~$142 million, or ~~$0.42~~$0.86 and ~~$0.77~~$1.62 per diluted share, ~~respectively. In the third quarter and first nine months~~compared to net income of ~~2015, after income taxes, the loss from continuing operations attributable to NIC was $30~~$4 million and ~~$136~~a loss of $29 million, or ~~$0.37~~$0.05 and ~~$1.67~~$0.35 per diluted share, ~~respectively.~~in the respective prior year periods.

We ended the ~~third~~second quarter of ~~2016~~2017 with ~~$687~~$949 million of consolidated cash, cash equivalents and marketable securities, compared to ~~$1.1 billion~~$850 million as of October 31, ~~2015.~~2016. The ~~decrease~~increase in consolidated cash, cash equivalents and marketable securities was primarily attributable to ~~decreases~~the issuance of $250 million of long-term debt, the receipt of $256 million in proceeds from the equity issuance to VW T&B, and an increase in accounts payable partially offset by the net loss, an increase in accounts receivable, restricted cash and other noncurrent assets as well as decreases in other current and noncurrent liabilities, ~~repayment of short-term~~ and ~~long-term debt, and~~higher payments for capital expenditures ~~partially offset by collections~~and purchases of ~~accounts and finance receivables, a decrease in inventories, and proceeds received from the sale of property and equipment.~~equipment leased to others.

4846

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.

Results of Operations for the three and ~~nine~~six months ended ~~July 31, 2016~~April 30, 2017 as compared to the three and ~~nine~~six months ended ~~July 31, 2015~~April 30, 2016


	Three Months Ended July 31,											Nine Months Ended July 31,											Three Months Ended April 30,											Six Months Ended April 30,
(in millions, except per share data and % change)	2016			2015			Change			% Change		2016			2015			Change			% Change		2017			2016			Change			% Change		2017			2016			Change			% Change
Sales and revenues, net	$	2,086		$	2,538		$	(452	)	(18	)%	$	6,048		$	7,652		$	(1,604	)	(21	)%	$	2,096		$	2,197		$	(101	)	(5	)%	$	3,759		$	3,962		$	(203	)	(5	)%
Costs of products sold	1,757			2,172			(415		)	(19	)%	5,068			6,577			(1,509		)	(23	)%	1,776			1,845			(69		)	(4	)%	3,146			3,311			(165		)	(5	)%
Restructuring charges	5			13			(8		)	(62	)%	11			22			(11		)	(50	)%	2			3			(1		)	(33	)%	9			6			3			50	%
Asset impairment charges	12			7			5			71	%	17			15			2			13	%	5			3			2			67	%	7			5			2			40	%
Selling, general and administrative expenses	197			220			(23		)	(10	)%	604			704			(100		)	(14	)%	221			202			19			9	%	421			407			14			3	%
Engineering and product development costs	62			71			(9		)	(13	)%	181			226			(45		)	(20	)%	65			61			4			7	%	128			119			9			8	%
Interest expense	84			75			9			12	%	246			227			19			8	%	89			81			8			10	%	171			162			9			6	%
Other income, net	(15		)	(6		)	(9		)	N.M.		(62		)	(37		)	(25		)	68	%
Other expense (income), net																							9			(25		)	34			N.M.		1			(47		)	48			N.M.
Total costs and expenses	2,102			2,552			(450		)	(18	)%	6,065			7,734			(1,669		)	(22	)%	2,167			2,170			(3		)	—	%	3,883			3,963			(80		)	(2	)%
Equity in income of non-consolidated affiliates	2			3			(1		)	(33	)%	3			6			(3		)	(50	)%	2			2			—			—	%	5			1			4			N.M.
Loss from continuing operations before income taxes	(14		)	(11		)	(3		)	27	%	(14		)	(76		)	62			(82	)%
Income (loss) before income taxes																							(69		)	29			(98		)	N.M.		(119		)	—			(119		)	N.M.
Income tax expense	(14		)	(12		)	(2		)	17	%	(25		)	(37		)	12			(32	)%	(6		)	(16		)	10			(63	)%	(10		)	(11		)	1			(9	)%
Loss from continuing operations	(28		)	(23		)	(5		)	22	%	(39		)	(113		)	74			(65	)%
Net income (loss)																							(75		)	13			(88		)	N.M.		(129		)	(11		)	(118		)	N.M.
Less: Net income attributable to non-controlling interests	6			7			(1		)	(14	)%	24			23			1			4	%	5			9			(4		)	(44	)%	13			18			(5		)	(28	)%
Loss from continuing operations^(A)	(34		)	(30		)	(4		)	13	%	(63		)	(136		)	73			(54	)%
Income from discontinued operations, net of tax	—			2			(2		)	N.M.		—			2			(2		)	N.M.
Net loss^(A)	$	(34	)	$	(28	)	$	(6	)	21	%	$	(63	)	$	(134	)	$	71		(53	)%
Net income (loss) attributable to Navistar International Corporation																							$	(80	)	$	4		$	(84	)	N.M.		$	(142	)	$	(29	)	$	(113	)	N.M.

Diluted income (loss) per share:^(A)
Continuing operations	$	(0.42	)	$	(0.37	)	$	(0.05	)	14	%	$	(0.77	)	$	(1.67	)	$	0.90		(54	)%
Discontinued operations	—			0.03			(0.03		)	N.M.		—			0.03			(0.03		)	N.M.
Diluted income (loss) per share^(A)																							$	(0.86	)	$	0.05		$	(0.91	)	N.M.		$	(1.62	)	$	(0.35	)	$	(1.27	)	N.M.
	$	(0.42	)	$	(0.34	)	$	(0.08	)	24	%	$	(0.77	)	$	(1.64	)	$	0.87		(53	)%
Diluted weighted average shares outstanding	81.7			81.6			0.1			—	%	81.7			81.5			0.2			—	%	93.3			82.0			11.3			14	%	87.5			81.7			5.8			7	%

_________________________


N.M.	Not meaningful.


(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:


	Three Months Ended July 31,											Nine Months Ended July 31,											Three Months Ended April 30,											Six Months Ended April 30,
(in millions, except % change)	2016			2015			Change			% Change		2016			2015			Change			% Change		2017			2016			Change			% Change		2017			2016			Change			% Change
Truck	$	1,395		$	1,834		$	(439	)	(24	)%	$	4,007		$	5,470		$	(1,463	)	(27	)%	$	1,398		$	1,480		$	(82	)	(6	)%	$	2,425		$	2,612		$	(187	)	(7	)%
Parts	597			625			(28		)	(4	)%	1,814			1,864			(50		)	(3	)%	610			647			(37		)	(6	)%	1,180			1,217			(37		)	(3	)%
Global Operations	85			109			(24		)	(22	)%	254			391			(137		)	(35	)%	70			77			(7		)	(9	)%	120			169			(49		)	(29	)%
Financial Services	60			63			(3		)	(5	)%	177			183			(6		)	(3	)%	56			58			(2		)	(3	)%	110			117			(7		)	(6	)%
Corporate and Eliminations	(51		)	(93		)	42			(45	)%	(204		)	(256		)	52			(20	)%	(38		)	(65		)	27			(42	)%	(76		)	(153		)	77			(50	)%
Total	$	2,086		$	2,538		$	(452	)	(18	)%	$	6,048		$	7,652		$	(1,604	)	(21	)%	$	2,096		$	2,197		$	(101	)	(5	)%	$	3,759		$	3,962		$	(203	)	(5	)%

In the ~~third~~second quarter of ~~2016, the~~2017, our Truck segment net sales decreased ~~$439~~$82 million, or ~~24%~~6%, primarily due to lower Core ~~truck volumes, a decline in our export truck~~ volumes, the impact of a shift in product mix in our Core markets, and ~~lower used~~the cessation of sales of CAT-branded units sold to Caterpillar, partially offset by an increase in Mexico truck ~~revenue.~~volumes. Chargeouts from our Core markets were down ~~23%, which is reflective of lower market share and Class 8 industry volumes.~~5%. In the first ~~nine months~~half of ~~2016, the~~2017, our Truck segment net sales decreased ~~$1.5 billion,~~by $187 million, or ~~27%~~7%, primarily due to lower Core ~~truck volumes, the cessation of BDT sales, a decline in our export truck~~ volumes, the impact of a shift in product mix in our Core markets, the cessation of sales of CAT-branded units sold to Caterpillar, and ~~lower used~~the decline in sales due to the sale of Pure Power Technologies, LLC ("PPT") in the second quarter of 2016, partially offset by an increase in Mexico truck ~~revenue. Chargeouts~~volumes. Truck chargeouts from our Core markets were down ~~19%, which is reflective of lower market share and Class 8 industry volumes.~~6%.

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016, the~~2017, our Parts segment ~~net~~ sales decreased by ~~$28~~$37 million, ~~and $50 million,~~for both periods, or 4%6% and 3%, respectively, primarily due to lower ~~volumes, unfavorable movements in foreign currency exchange rates,~~Blue Diamond Parts, LLC ("BDP") sales and ~~market pressures, primarily in Canada~~lower U.S. and ~~Mexico,~~export volumes, partially offset by ~~enhanced retail programs in~~higher U.S. and Canada parts sales related to Fleetrite™ brand and remanufactured parts sales.

In the second quarter and first half of 2017, our ~~U.S. market. Additionally, in the first nine months of 2016, segment results decreased due to an expected decline in BDP net sales driven by a decrease of units in operation as units age.~~

~~The~~ Global Operations segment net sales decrease of ~~$24~~$7 million and ~~$137~~$49 million, or ~~22%~~9% and ~~35%~~29%, ~~in the third quarter and first nine months of 2016,~~ respectively, was ~~primarily due to~~driven by lower volumes in our South ~~American~~America engine ~~operations~~operations. Engine and component volumes declined 44% and 59% during the second quarter and the first half of 2017, respectively, compared to the prior year periods due to the impact of economic ~~downturn~~weakness in ~~Brazil~~the Brazilian economy and a decrease in intercompany sales. The decrease in volume was partially offset by the appreciation of the Brazilian real as ~~well~~compared to the U.S. dollar as ~~unfavorable movements~~the average conversion rate has strengthened by 17% and 16% in ~~foreign currency exchange rates.~~the second quarter and first half of 2017, respectively, compared with the prior year periods. In the first half of 2017, our Global Operations segment net sales decrease was also attributable to the cessation of sales to an OEM customer in 2016.

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016, the~~2017, our Financial Services segment net revenues decreased by $3$2 million and $6$7 million, or 5%3% and 3%6%, ~~respectively,~~respectively. The decrease is primarily driven by a decline in interest revenues due to lower overall finance ~~receivable balances~~receivables and unfavorable movements in foreign currency exchange rates inimpacting our Mexican ~~portfolio. The decrease for the first nine months of 2016 is~~portfolio, partially offset by higher revenues from operating leases.

Costs of products sold

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016,~~2017, Costs of products sold decreased by ~~$415~~$69 million and ~~$1.5 billion,~~$165 million, respectively, reflecting the impact of market pressures, lower volumes, improved ~~purchasing~~material costs in our Core markets, ~~and the impact of~~ a ~~shift~~decrease in ~~product mix in our Core markets, partially offset by higher~~ adjustments to pre-existing ~~warranties. Additionally, in the first nine months of 2016, Costs of products sold decreased due to the cessation of BDT sales and~~warranties, offset by an increase in used truck ~~reserves.~~ losses.

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016, we recognized~~2017, our Truck segment recorded charges ~~for adjustments~~ to ~~pre-existing warranties~~our used truck reserve of ~~$19~~$60 million and ~~$70~~$88 million ~~respectively,~~ compared to charges of $38 million and $84 million in the respective prior year periods. 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 continue to seek alternative channels to sell our used trucks.

In the second quarter and first half of 2017, we recorded a charge for adjustments to pre-existing warranties of $3$7 million and a benefit ~~for adjustments~~of $10 million, respectively, compared to ~~pre-existing warranties~~charges of ~~$36~~$46 million and $51 million in the ~~respective prior year periods.~~second quarter and the first half of 2016, respectively. The decline in charges ~~in 2016 primarily relate~~is due to ~~increases~~the reduction in ~~both~~ claim frequency ~~and cost of repair~~ across both the Medium Duty and Big Bore engine ~~families. These charges increase~~families in our Truck segment. The impact decreased the reserve for ~~Navistar’s~~our standard warranty obligations as well as the loss positions related to our Big Bore extended service contracts. ~~For more information on our estimated warranty obligations, see Note 1,~~ ~~Summary of Significant Accounting Policies,~~ to

Other expense (income), net

In the ~~accompanying consolidated financial statements.~~

~~Restructuring Charges~~

~~We recognized restructuring charges of $5 million and $11 million in the third~~second quarter and first ~~nine months~~half of ~~2016, respectively, compared to $13 million and $22 million in the comparable prior year periods. In the third quarter of 2016,~~2017, we recognized charges of $5 million related to the 2011 closure of our Chatham, Ontario plant, based on a ruling received from the Financial Services Tribunal in Ontario, Canada. In the third quarter of 2015, we incurred restructuring charges of $13 million related to cost reduction actions, including a reduction-in-force in the U.S. and Brazil. For more information, see Note 3, ~~Restructuring and Impairments, to the accompanying consolidated financial statements.~~

~~Selling, general and administrative~~Other expenses

The Selling, general and administrative ("SG&A") expense decreases of $23 million and $100 million, in the third quarter and first nine months of 2016, respectively, are primarily due to the impact of our cost-reduction initiatives.

In the fourth quarter of 2015, we offered the majority of our U.S.-based non-represented salaried employees the opportunity to apply for a voluntary separation program. In the third quarter of 2015, we used attrition and an involuntary reduction in force to eliminate additional positions. In addition to these actions in the U.S., our Brazilian operations continued to restructure its business through various actions including utilization of an involuntary reduction in force to eliminate positions. As a result of these actions, we have realized year-over-year savings. For more information on these initiatives, see Note 2, ~~Restructurings and Impairments, to the accompanying consolidated financial statements.~~

~~Engineering and product development costs~~

~~The Engineering and product development cost decreases~~ of $9 million and $45 million, in the third quarter and first nine months of 2016, respectively, were primarily driven by our efforts to focus spending on our Core markets while putting less emphasis on engine development. Engineering spend is targeted at programs that will reduce cost, improve uptime for our customers, grow market share and allow us to meet new emissions standards in 2017. Over the next two years, we expect to introduce new vehicles across our entire product line.

~~Interest expense~~

~~In the third quarter and first nine months of 2016, interest expense increased $9 million and $19~~$1 million, respectively, compared to ~~the comparable prior year periods, primarily driven by the refinancing of our Amended Term Loan Credit Facility with a Senior Secured Term Loan Credit Facility in August 2015.~~

~~Other income, net~~

~~We recognized~~ Other income of ~~$15~~$25 million and ~~$62~~$47 million in the ~~third quarter and first nine months of 2016, respectively, compared to $6 million and $37 million in the comparable~~respective prior year periods. The ~~increase~~decline in Other ~~income in the first nine months of 2016~~Income is ~~primarily driven by~~due to the recognition of ~~IP license income~~a $15 million one-time fee received from a third party and the recognition of ~~$13 million in the third quarter of 2016,~~ deferred income for an IP license of $19 million in the first and second ~~quarter~~quarters of 2016, respectively, and ~~a $15 million one-time fee received from a third party~~unfavorable movements in ~~the first quarter of 2016, partially offset by the non-recurring gain of $14 million related to the settlement of a customer dispute recorded in the second quarter of the prior year.~~foreign currency exchange rates.

Income tax expense

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016,~~2017, we recognized income tax expense ~~from continuing operations~~ of ~~$14~~$6 million and ~~$25~~$10 million, ~~respectively,~~ compared to ~~$12~~$16 million and ~~$37~~$11 million in the ~~comparable~~respective prior year periods. The ~~decrease~~change in income tax expense ~~in the first nine months of 2016~~for both periods is primarily due to ~~the~~geographical mix and certain discrete items. The first half of 2017 was also impacted by a $13 million ~~income tax~~ benefit ~~recorded in the first quarter of 2016,~~ from the release of the valuation allowance on the U.S. AMT ~~credits as well as the effects of changes in geographical mix and certain discrete items. The release~~credit, due to U.S. enactment of the ~~valuation allowance on U.S. AMT credits is~~Protecting Americans from Tax Hikes Act of 2015 recognized in the ~~result~~first quarter of new tax legislation, which allows us to forego bonus depreciation in exchange for refunds of previously paid AMT. Other income taxes attributable to U.S. operations in both periods were limited to current state income taxes, and the effect of discrete items, due to the valuation allowances on most of our U.S. deferred tax assets.

At October 31, 2015, we had $2.6 billion of U.S. federal net operating loss carryforwards and $252 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 U.S. state and foreign net operating losses that are available to reduce cash payments of U.S. state and foreign taxes in future periods. We maintain valuation allowances on most of 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 an additional valuation allowance may be required on certain foreign deferred tax assets. For more information, see Note 8, ~~Income Taxes, to the accompanying consolidated financial statements.~~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 ~~2016~~2017 and ~~2015~~2016 relates to Ford's non-controlling interest in BDP.

5148

Segment Results of ~~Continuing~~ Operations

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 ~~12,~~11, Segment Reporting, to the accompanying consolidated financial statements.

Truck Segment



	Three Months Ended April 30,											Six Months Ended April 30,
(in millions, except % change)	2017			2016			Change			% Change		2017			2016			Change			% Change
Truck segment sales, net	$	1,398		$	1,480		$	(82	)	(6	)%	$	2,425		$	2,612		$	(187	)	(7	)%
Truck segment loss	(56		)	(23		)	(33		)	N.M.		(125		)	(74		)	(51		)	(69	)%

________________________

Three Months Ended July 31, Nine Months Ended July 31,
(in millions, except % change) 2016 2015 Change % Change 2016 2015 Change % Change
Truck segment sales, net $ 1,395
$ 1,834
$ (439 ) (24 )% $ 4,007
$ 5,470
$ (1,463 ) (27 )%
Truck segment loss (54 ) (36 ) (18 ) 50 % (128 ) (105 ) (23 ) 22 %


N.M.	Not meaningful.

Segment ~~revenue~~sales

In the ~~third~~second quarter of ~~2016, the~~2017, our Truck segment net sales decreased ~~$439~~by $82 million, or ~~24%~~6%, primarily due to lower Core ~~truck volumes, a decline in our export truck~~ volumes, the impact of a shift in product mix in our Core markets, and ~~lower used~~the cessation of sales of CAT-branded units sold to Caterpillar, partially offset by an increase in Mexico truck ~~revenue.~~volumes. Truck chargeouts from our Core markets were down ~~23%~~5%, which is reflective of lower ~~market share and~~ Class 8 industry volumes. The decline ~~represents an 8% decrease in Class 6 and 7 medium trucks,~~primarily reflects a ~~46%~~31% decrease in Class 8 heavy trucks and a ~~32%~~4% decrease in school buses, partially offset by a 13% increase in medium trucks. Truck chargeouts in Class 8 severe service trucks ~~partially offset by an 11% increase in school buses.~~were comparable to the prior year.

In the first ~~nine months~~half of ~~2016, the~~2017, our Truck segment net sales decreased ~~$1.5 billion,~~by $187 million, or ~~27%~~7%, primarily due to lower Core ~~truck volumes, the cessation of BDT sales, a decline in our export truck~~ volumes, the impact of a shift in product mix in our Core markets, the cessation of sales of CAT-branded units sold to Caterpillar, and ~~lower used~~the decline in sales due to the sale of PPT in the second quarter of 2016, partially offset by an increase in Mexico truck ~~revenue.~~volumes. Truck chargeouts from our Core markets were down ~~19%~~6%, which is reflective of lower ~~market share and~~ Class 8 industry volumes. The decline ~~represents~~primarily reflects a ~~6% decrease in Class 6 and 7 medium trucks, a 36%~~28% decrease in Class 8 heavy trucks and a ~~23%~~2% decrease in ~~Class 8~~school buses, partially offset by an 8% increase in medium trucks and a 3% increase in severe service trucks.

Segment loss

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016, the~~2017, our Truck segment loss increased by ~~$18~~$33 million and ~~$23~~$51 million, ~~or 50% and 22%,~~ respectively. Theincrease in segment loss was primarily driven by ~~higher adjustments to pre-existing warranties~~market pressures, the impact of lower Core market volumes, and ~~lower used truck margins,~~ a decrease in Other Income,partially offset by improved ~~SG&A and Engineering costs, the impact of a shift in product mix in our Core markets, improved purchasing~~material costs and lower ~~accelerated depreciation charges. Additionally, in the nine months~~adjustments to pre-existing warranties. The second quarter of ~~2016, segment results were~~2017 was also impacted by an increase in used truck losses.

In the second quarter and first half of 2017, our Truck segment recorded charges to our used truck reserve of ~~$51 million, which was partially offset by an increase in Other income.~~

SG&A expenses and Engineering and product development costs continued to decline in 2016. The lower SG&A expenses reflect the impact of our cost-reduction initiatives. The lower Engineering and product development costs were primarily due to our efforts to focus spending on our Core markets while placing less emphasis on engine development. Engineering spend is targeted at programs that will reduce cost, improve uptime for our customers, grow market share and allow us to meet new emissions standards in 2017. Over the next two years, we expect to introduce new vehicles across our entire product line.

~~The Truck segment also realized certain other improvements. The segment incurred lower accelerated depreciation charges for certain assets related to foundry and engine facilities by $3~~$60 million and ~~$26~~$88 millioncompared to charges of $38 million and $84 million in the ~~third quarter and first nine months of 2016, respectively, compared to the comparable~~respective prior year periods. ~~For more information, see Note 2,~~ ~~Restructurings and Impairments, to the accompanying consolidated financial statements. Additionally, in the first quarter of 2016, we recorded a $15 million one-time fee received from a third party; in~~During the second quarter of ~~2016,~~2017, we ~~recognized deferred income for~~implemented a shift in market mix to include an ~~IP license of $19 million;~~increase in volume to certain export markets, which have a lower price point as compared to sales through our domestic channels, and inlower domestic pricing to enable higher sales velocity. We continue to seek alternative channels to sell our used trucks.

In the ~~third~~second quarter of ~~2016, we recognized $13 million of IP license income in~~ ~~Other income, net~~.

~~Offsetting these factors are higher adjustments to pre-existing warranties. In the third quarter and first nine months of 2016, the~~2017, our Truck segment recorded ~~charges~~a charge for adjustments to pre-existing warranties of ~~$19~~$7 million ~~and $70 million, respectively,~~ compared to ~~charges for adjustments to pre-existing warranties~~$46 million in the prior year period. In the first half of ~~$3 million and~~2017, our Truck segment recorded a net benefit for adjustments to pre-existing warranties of ~~$33~~$1 million ~~respectively,~~compared to charges of $51 million in the ~~comparable~~ prior year ~~periods. These charges~~period. The improvement in ~~2016~~2017 primarily ~~relate~~relates to ~~increases~~a reduction in ~~both~~ claim frequency ~~and cost of repair~~ across both the Medium Duty and Big Bore engine families. ~~These charges increase~~This benefit decreased the reserve for our standard warranty obligations as well as the loss positions related to our Big Bore extended service contracts.

Additionally, the decline in Other Income during the second quarter and first half of 2017 is due to the recognition of a $15 million one-time fee received from a third party and the recognition of deferred income for an IP license of $19 million in the first and second quarter of the prior year periods, respectively.

5249

Parts Segment


	Three Months Ended July 31,									Nine Months Ended July 31,									Three Months Ended April 30,									Six Months Ended April 30,
(in millions, except % change)	2016		2015		Change			% Change		2016		2015		Change			% Change		2017		2016		Change			% Change		2017		2016		Change			% Change
Parts segment sales, net	$	597	$	625	$	(28	)	(4	)%	$	1,814	$	1,864	$	(50	)	(3	)%	$	610	$	647	$	(37	)	(6	)%	$	1,180	$	1,217	$	(37	)	(3	)%
Parts segment profit	152		151		1			1	%	478		429		49			11	%	153		176		(23		)	(13	)%	302		326		(24		)	(7	)%

Segment ~~revenue~~sales

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016, the~~2017, our Parts segment ~~net~~ sales decreased by ~~$28~~$37 million, ~~and $50 million,~~for both periods, or 4%6% and 3%, respectively, primarily due to lower ~~volumes, unfavorable movements in foreign currency exchange rates,~~BDP sales and ~~market pressures, primarily in Canada~~lower U.S. and ~~Mexico,~~export volumes, partially offset by ~~enhanced retail programs in our~~higher U.S. ~~market. Additionally, in the first nine months of 2016, segment results decreased due~~and Canada parts sales related to ~~an expected decline in BDP net sales driven by a decrease of units in operation as units age.~~Fleetrite™ brand and remanufactured parts sales.

Segment profit

In the ~~third~~second quarter and first half of ~~2016, the~~2017, our Parts segment profit ~~was comparable to the prior year while in the first nine months of 2016, the Parts segment increased its segment profit~~decreased by ~~$49~~$23 million and $24 million, or ~~11%~~13% and 7%, respectively, primarily due to margin ~~improvements~~declines in BDP and our ~~U.S. market, cost-reduction initiatives, and~~North American markets, which were offset by lower intercompany access ~~fees, partially offset by unfavorable movements in foreign currency exchange rates.~~fees. Access fees are allocated to ~~the~~our Parts segment from ~~the~~our Truck segment, primarily for development of new products, and consist of certain engineering and product development costs, depreciation expense, and SG&A costs. The lower fees ~~in 2016~~ are due to cost-reduction initiatives in the Truck ~~segment.~~segment, including significant decreases in engineering and product development costs in recent years.

Global Operations Segment



	Three Months Ended April 30,											Six Months Ended April 30,
(in millions, except % change)	2017			2016			Change			% Change		2017			2016			Change			% Change
Global Operations segment sales, net	$	70		$	77		$	(7	)	(9	)%	$	120		$	169		$	(49	)	(29	)%
Global Operations segment loss	(7		)	(1		)	(6		)	N.M.		(11		)	(14		)	3			21	%

_________________________

Three Months Ended July 31, Nine Months Ended July 31,
(in millions, except % change) 2016 2015 Change % Change 2016
2015 Change % Change
Global Operations segment sales, net $ 85
$ 109
$ (24 ) (22 )% $ 254
$ 391
$ (137 ) (35 )%
Global Operations segment loss (5 ) (26 ) 21
(81 )% (19 ) (40 ) 21
(53 )%


N.M.	Not meaningful.

Segment ~~revenue~~sales

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016, the~~2017, our Global Operations segment net sales decrease of ~~$24~~$7 million and ~~$137~~$49 million, or ~~22%~~9% and ~~35%~~29%, respectively, was ~~primarily~~ driven by ~~a decrease~~lower volumes in our South America engine ~~operations, reflecting lower~~operations. Engine and component volumes declined 44% and ~~unfavorable movements~~59% during the second quarter and the first half of 2017, respectively, compared to the prior year periods due to the impact of economic weakness in ~~foreign currency exchange rates,~~the Brazilian economy and a decrease in intercompany sales. The decrease in volume was partially offset by the appreciation of the Brazilian real as compared to the U.S. dollar as the average conversion rate ~~of the Brazilian real to the U.S. dollar~~ has ~~weakened~~strengthened by 8%17% and ~~21%, respectively. The continued economic downturn~~16% in the ~~Brazil economy has contributed to lower engine volumes of 46% and 34% in the third~~second quarter and first ~~nine months~~half of ~~2016,~~2017, respectively, compared towith the ~~comparable~~ prior year periods. In the first half of 2017, our Global Operations segment net sales decrease was also attributable to the cessation of sales to an OEM customer in 2016.

Segment loss

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016, the~~2017, our Global Operations segment ~~results improved~~loss increased by ~~$21~~$6 million ~~or 81%~~ and ~~53%,~~decreased by $3 million, respectively, primarily ~~driven~~due to lower volumes, partially offset by lower manufacturing and ~~structural~~SG&A costs as a result of our prior year restructuring and cost reduction ~~efforts and favorable movements in foreign currency exchange rates. The improvements for~~efforts. In the first ~~nine months~~half of ~~2016 were partially offset by the non-recurring net gain~~2017, our Global Operations segment loss improvement was also attributable to a one-time benefit of ~~$10~~$9 million ~~related~~recognized as an adjustment to ~~the settlement of a customer dispute recorded in the second quarter of the prior year.~~pre-existing warranties.

5350

Financial Services Segment


	Three Months Ended July 31,									Nine Months Ended July 31,									Three Months Ended April 30,									Six Months Ended April 30,
(in millions, except % change)	2016		2015		Change			% Change		2016		2015		Change			% Change		2017		2016		Change			% Change		2017		2016		Change			% Change
Financial Services segment revenues, net	$	60	$	63	$	(3	)	(5	)%	$	177	$	183	$	(6	)	(3	)%	$	56	$	58	$	(2	)	(3	)%	$	110	$	117	$	(7	)	(6	)%
Financial Services segment profit	26		26		—			—	%	77		72		5			7	%	15		25		(10		)	(40	)%	28		51		(23		)	(45	)%

Segment revenues

In the ~~third~~second quarter and first ~~nine months~~half of ~~2016, the~~2017, our Financial Services segment net revenues decreased by $3$2 million and $6$7 million, or 5%3% and 3%6%, respectively. The decrease ~~for both periods~~ is primarily driven by a decline in interest revenues due to lower overall finance ~~receivable balances~~receivables and unfavorable movements in foreign currency exchange rates inimpacting our Mexican ~~portfolio. The decrease for the first nine months of 2016 is~~portfolio, partially offset by higher revenues from operating leases.

Segment profit

In the ~~third~~second quarter and first half of ~~2016, the~~2017, our Financial Services segment profit ~~was comparable to the prior year while in the first nine months of 2016, segment profit increased~~decreased by $5$10 million and $23 million, or ~~7%.~~40% and 45%, respectively. The decrease is primarily driven by lower interest margins resulting from a decline in average finance receivables and an increase in ~~gains resulting~~our borrowing rate as well as a decline in other revenue due to lower interest income from ~~operating lease early terminations, decreases~~certain intercompany loans. The first half of 2017 was also impacted by an increase in the provision for loan losses in ~~Mexico and cost reduction initiatives, for both periods, were partially offset by a decrease in revenue, an increase in interest expense, and unfavorable movements in foreign currency exchange rates.~~Mexico.

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 ~~on the performance~~ of ~~the Truck and Global Operations segments.~~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 Communications and R.L. Polk & Co. ("Polk") and our Core retail deliveries:


	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended April 30,						Six Months Ended April 30,
(in units)	2016	2015	Change		% Change		2016	2015	Change		% Change		2017	2016	Change		% Change		2017	2016	Change		% Change
Core Markets (U.S. and Canada)
Core markets (U.S. and Canada)
School buses(A)	6,300	4,800	1,500		31	%	18,000	14,900	3,100		21	%	5,200	5,400	(200	)	(4	)%	12,600	11,700	900		8	%
Class 6 and 7 medium trucks	21,700	20,500	1,200		6	%	64,700	58,500	6,200		11	%	24,000	22,300	1,700		8	%	43,800	43,000	800		2	%
Class 8 heavy trucks	40,300	61,000	(20,700	)	(34	)%	129,900	163,100	(33,200	)	(20	)%	30,300	41,900	(11,600	)	(28	)%	62,300	89,600	(27,300	)	(30	)%
Class 8 severe service trucks(B)	15,300	17,000	(1,700	)	(10	)%	46,000	46,000	—		—	%	14,900	16,400	(1,500	)	(9	)%	28,600	30,700	(2,100	)	(7	)%
Total Core Markets	83,600	103,300	(19,700	)	(19	)%	258,600	282,500	(23,900	)	(8	)%
Total Core markets													74,400	86,000	(11,600	)	(13	)%	147,300	175,000	(27,700	)	(16	)%
Combined class 8 trucks	55,600	78,000	(22,400	)	(29	)%	175,900	209,100	(33,200	)	(16	)%	45,200	58,300	(13,100	)	(22	)%	90,900	120,300	(29,400	)	(24	)%
Navistar Core retail deliveries	11,700	16,200	(4,500	)	(28	)%	38,400	44,700	(6,300	)	(14	)%	13,700	13,900	(200	)	(1	)%	24,500	26,700	(2,200	)	(8	)%

_________________________


(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)	Core retail deliveries include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.

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 truck markets, based on market-wide information from Wards Communications and Polk:


	Three Months Ended										Three Months Ended
	July 31, 2016		April 30, 2016		January 31, 2016		October 31, 2015		July 31, 2015		April 30, 2017		January 31, 2017		October 31, 2016		July 31, 2016		April 30, 2016
Core Markets (U.S. and Canada)
Core markets (U.S. and Canada)
Class 6 and 7 medium trucks	20	%	27	%	20	%	19	%	24	%	29	%	20	%	18	%	20	%	27	%
Class 8 heavy trucks	9	%	11	%	10	%	11	%	12	%	11	%	9	%	13	%	9	%	11	%
Class 8 severe service trucks(A)	12	%	11	%	16	%	15	%	15	%	11	%	13	%	14	%	12	%	11	%
Combined class 8 trucks	10	%	11	%	11	%	12	%	13	%	11	%	10	%	13	%	10	%	11	%

_______________________


(A)	Retail delivery market share includes CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.

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 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:


	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended April 30,						Six Months Ended April 30,
(in units)	2016	2015	Change		% Change		2016	2015	Change		% Change		2017	2016	Change		% Change		2017	2016	Change		% Change
Core Markets (U.S. and Canada)
Core markets (U.S. and Canada)
School buses(A)	3,400	2,500	900		36	%	9,400	8,500	900		11	%	3,700	4,000	(300	)	(8	)%	5,800	6,000	(200	)	(3	)%
Class 6 and 7 medium trucks	3,200	2,900	300		10	%	12,000	11,900	100		1	%	4,700	3,500	1,200		34	%	11,200	8,800	2,400		27	%
Class 8 heavy trucks	2,600	8,100	(5,500	)	(68	)%	10,000	21,800	(11,800	)	(54	)%	4,400	3,300	1,100		33	%	8,100	7,400	700		9	%
Class 8 severe service trucks(B)	1,400	2,000	(600	)	(30	)%	5,600	6,800	(1,200	)	(18	)%	2,100	1,800	300		17	%	4,200	4,200	—		—	%
Total Core Markets	10,600	15,500	(4,900	)	(32	)%	37,000	49,000	(12,000	)	(24	)%
Total Core markets													14,900	12,600	2,300		18	%	29,300	26,400	2,900		11	%
Combined class 8 trucks	4,000	10,100	(6,100	)	(60	)%	15,600	28,600	(13,000	)	(45	)%	6,500	5,100	1,400		27	%	12,300	11,600	700		6	%

_______________________


(A)	The School bus orders include buses classified as B, C, and D and are being reported on a one-month lag.


(B)	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:


	As of July 31,						As of April 30,
(in units)	2016	2015	Change		% Change		2017	2016	Change		% Change
Core Markets (U.S. and Canada)
Core markets (U.S. and Canada)
School buses(A)	2,200	2,000	200		10	%	3,200	2,700	500		19	%
Class 6 and 7 medium trucks	3,400	4,600	(1,200	)	(26	)%	4,300	3,700	600		16	%
Class 8 heavy trucks	12,000	15,000	(3,000	)	(20	)%	6,600	12,800	(6,200	)	(48	)%
Class 8 severe service trucks(B)	1,900	2,100	(200	)	(10	)%	2,500	2,500	—		—	%
Total Core Markets	19,500	23,700	(4,200	)	(18	)%
Total Core markets							16,600	21,700	(5,100	)	(24	)%
Combined class 8 trucks	13,900	17,100	(3,200	)	(19	)%	9,100	15,300	(6,200	)	(41	)%

_______________________


(A)	The School bus backlogs include buses classified as B, C, and D and are being reported on a one-month lag.


(B)	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 from our continuing operations:~~chargeouts:


	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended April 30,						Six Months Ended April 30,
(in units)	2016	2015	Change		% Change		2016	2015	Change		% Change		2017	2016	Change		% Change		2017	2016	Change		% Change
Core Markets (U.S. and Canada)
Core markets (U.S. and Canada)
School buses(A)	3,900	3,500	400		11	%	8,500	8,500	—		—	%	2,700	2,800	(100	)	(4	)%	4,500	4,600	(100	)	(2	)%
Class 6 and 7 medium trucks	3,500	3,800	(300	)	(8	)%	13,600	14,500	(900	)	(6	)%	7,000	6,200	800		13	%	10,900	10,100	800		8	%
Class 8 heavy trucks	3,800	7,000	(3,200	)	(46	)%	12,300	19,100	(6,800	)	(36	)%	3,400	4,900	(1,500	)	(31	)%	6,100	8,500	(2,400	)	(28	)%
Class 8 severe service trucks(B)	1,900	2,800	(900	)	(32	)%	5,500	7,100	(1,600	)	(23	)%	1,900	1,900	—		—	%	3,700	3,600	100		3	%
Total Core Markets	13,100	17,100	(4,000	)	(23	)%	39,900	49,200	(9,300	)	(19	)%
Total Core markets													15,000	15,800	(800	)	(5	)%	25,200	26,800	(1,600	)	(6	)%
Non "Core" military	200	100	100		N.M.		400	100	300		N.M.		100	200	(100	)	(50	)%	300	200	100		50	%
Other markets^(A)(C)	2,800	2,900	(100	)	(3	)%	5,900	15,300	(9,400	)	(61	)%	2,300	1,400	900		64	%	4,000	3,100	900		29	%
Total worldwide units	16,100	20,100	(4,000	)	(20	)%	46,200	64,600	(18,400	)	(28	)%	17,400	17,400	—		—	%	29,500	30,100	(600	)	(2	)%
Combined class 8 trucks	5,700	9,800	(4,100	)	(42	)%	17,800	26,200	(8,400	)	(32	)%	5,300	6,800	(1,500	)	(22	)%	9,800	12,100	(2,300	)	(19	)%

_____________________________


~~N.M.~~(A)	~~Not meaningful.~~The School bus chargeouts include buses classified as B, C, and D and are being reported on a one-month lag.


~~(A)~~(B)	Chargeouts include CAT-branded units sold to Caterpillar under our North America supply agreement during 2016.


(C)	Other markets primarily consist of Export Truck and Mexico and also include chargeouts related to BDT of 6,000 units during the nine months ended July 31, 2015. There were no third party chargeouts related to BDT during the three and nine months ended July 31, 2016 or during the three months ended July 31, 2015, as Ford no longer purchases from BDT.Mexico.

5753

Liquidity and Capital Resources

Consolidated cash, cash equivalents, and marketable securities


	As of						As of
(in millions)	July 31, 2016		October 31, 2015		July 31, 2015		April 30, 2017		October 31, 2016
Consolidated cash and cash equivalents	$	547	$	912	$	547	$	771	$	804
Consolidated marketable securities	140		159		293		178		46
Consolidated cash, cash equivalents, and marketable securities	$	687	$	1,071	$	840	$	949	$	850


	As of						As of
(in millions)	July 31, 2016		October 31, 2015		July 31, 2015		April 30, 2017		October 31, 2016
Manufacturing operations	$	640	$	1,013	$	775	$	918	$	800
Financial Services operations	47		58		65		31		50
Consolidated cash, cash equivalents, and marketable securities	$	687	$	1,071	$	840	$	949	$	850

Manufacturing and Financial Services cash, cash equivalents, and marketable securities

Manufacturing cash, cash equivalents, and marketable securities, isand Financial Services cash, cash equivalents and marketable securities are not presented in accordance with, and should not be viewed as an alternative to, 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 GAAP. However, we believe that non-GAAP reporting provides meaningful information and therefore we use it to supplement our GAAP reporting by identifying items that may not be related to the core 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 represents our consolidated cash, cash equivalents, and marketable securities, 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 ~~$687~~$949 million at ~~July 31, 2016,~~April 30, 2017, 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 consolidation of BDP, see Note 1, Summary of Significant Accounting Policies, to the accompanying consolidated financial statements.

Cash Requirements

Our primary sources of liquidity are cash provided by operating activities, including cash flow 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. 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, ~~equity~~ 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 the financing requirements of Navistar, our dealers, and retail customers.

We have generally financed our Manufacturing operations with cash, funding from our Financial Services operations, equity, and access to the capital markets. We also have a $175 million Amended and Restated Asset-Based Credit Facility. Our borrowing capacity under this facility is subject to a $35 million liquidity block, less outstanding standby letters of credit issued under this facility, and is impacted by inventory levels at certain aftermarket parts inventory locations. As of ~~July 31, 2016,~~April 30, 2017, we had no borrowings, and we have limited availability to borrow under the Amended and Restated Asset-Based Credit Facility. However, we maintain capacity under our various debt arrangements to incur incremental debt. In addition, the covenants in all of our debt agreements permit us to refinance existing debt instruments as they mature.

Our ~~Financial Services~~Manufacturing operations ~~purchased $1.8 billion and $5.3~~sold $3.3 billion of wholesale notes and accounts receivable ~~from~~to our ~~Manufacturing~~Financial Services operations ~~for~~during the ~~three and nine~~six months ended ~~July 31, 2016, respectively.~~April 30, 2017. The total outstanding balance of wholesale notes and accounts receivable purchased was $1.3 billion as of ~~July 31, 2016.~~

~~NFC~~April 30, 2017. Our Financial Services operations also ~~makes intercompany~~make loans and provide dividends and return of capital to our Manufacturing operations. Total loans outstanding from our Financial Services operations to our Manufacturing operations ~~including the Intercompany~~were $152 million at April 30, 2017.

Included in loans made from Financial Services to Manufacturing operations is an intercompany financing from NFC that is secured by a first priority lien on used truck inventory, and certain related assets, (the "Intercompany Used Truck ~~Loan.~~Loan"). During the ~~nine~~six months ended ~~July 31, 2016~~April 30, 2017 we ~~increased~~decreased our borrowings under the Intercompany Used Truck Loan by ~~$37~~$97 million to ~~$155~~$38 million. ~~Also, in the third quarter of 2016, our captive insurance company under our Financial Services segment entered into~~Our Manufacturing operations also has an intercompany revolving loan agreement (the "Intercompany Revolving Loan") with our ~~Manufacturing operations. As of July 31, 2016,~~captive insurance company under our Financial Services segment. During the six months ended April 30, 2017, our borrowings under the Intercompany Revolving Loan agreement ~~totaled $14~~remained at $18 million. In the nine months ended July 31, 2016, our Manufacturing operations received $80 million in dividends from NFC, of which $50 million were funded by the partial repayment of the $270 million loan made by NFC to our Manufacturing operations in October 2013 (the “Intercompany Loan”). During 2015, our Manufacturing operations received $125 million in dividends from NFC, of which $80 million were funded by the partial repayment of the Intercompany Loan by our Manufacturing operations to NFC. Also during 2016, ourOur Financial Services operations in Mexico ~~extended~~extends working capital loans to our Manufacturing operations in Mexico for orders received. ~~As of July 31, 2016,~~During the six months ended April 30, 2017, the borrowings of our Manufacturing operations in Mexico under these loan agreements ~~totaled $51~~increased by $46 million to $96 million.

Our Financial Services operations have 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 products sold or leased by Navistar, our dealers, and retail customers. We use a number of ~~SPEs~~special purpose entities ("SPEs") to securitize receivables. Navistar Financial Securities Corporation ("NFSC") finances wholesale notes, ~~Navistar Financial Retail Receivables Corporation finances retail notes and finance leases,~~ International Truck Leasing Corporation finances operating leases and some finance leases, and ~~TRAC~~Truck Retail Accounts Corporation ("TRAC") finances retail accounts. Our Financial Services operations in Mexico ~~include Navistar Financial, S.A. de C.V., Sociedad Financiera de Objeto Multiple, Entidad No Regulada, and Navistar Comercial S.A. de C.V., which~~ provide vehicle financing, leasing and ~~Transportationes Agunte de Seguros, which provides~~ insurance brokerage services to our dealers and retail customers in Mexico.

As of ~~July 31, 2016,~~April 30, 2017, the aggregate amount available to fund finance receivables under our Financial Services facilities was ~~$499~~$464 million.

In February 2017, we consummated our previously announced strategic alliance with VW T&B. Pursuant to the Stock Purchase Agreement, we issued and VW T&B purchased 16.2 million of our shares for an aggregate purchase price of $256 million at $15.76 per share (a 19.9% stake in the Company (16.6% on a fully diluted basis)). The proceeds are being used for general corporate purposes.

In January 2017, we issued an additional $250 million aggregate principal amount of our Senior Notes. Interest related to the Senior Notes is payable on May 1 and November 1 of each year until the maturity date of November 1, 2021. The proceeds from the January 2017 issuance of additional Senior Notes are being used for general corporate purposes, including working capital and capital expenditures. For additional information, see Note 6, Debt, to the accompanying consolidated financial statements.

In May 2016, NFC amended and extended its 2011 bank credit facility which was originally due in December 2016. The 2016 amendment ~~extends~~extended the maturity date to June 2018 and initially reduced the revolving portion of the facility from $500 million to $400 million. ~~The revolving portion will be further reduced to $275 million effective~~In December 2016, and in ~~December 2016. The borrowings on~~accordance with the amendment, the revolving portion of the facility ~~totaled $300~~was further reduced to a maximum of $275 million, ~~as of July 31, 2016. The amendment also provides for a reduction in~~ the term loan portion of the facility was paid down to $82 million, ~~effective in December 2016. The balance of~~and the ~~term loan facility was $221~~quarterly principal payments were reduced from $9 million ~~as of July 31, 2016.~~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~~increase. The borrowings on the ~~non-extended loans and commitments. We plan to accommodate the December decrease~~revolving portion of the ~~bank~~ facility ~~with a partial pay down~~totaled $274 million as of April 30, 2017. The balance of the ~~Intercompany Used Truck Loan, and other funding actions and strategies available to us, including a subsequent increase in NFC’s bank~~term loan portion of the facility ~~asset sales or securitizations, other secured borrowings or developing, expanding and executing additional alliances to finance an increasing share~~was $80 million as of ~~Navistar, dealer or retail customer assets.~~April 30, 2017.

In ~~April,~~November 2016, NFSC extended the maturity date of the variable funding notes facility ("VFN") facility from May 2017 to November 2017, and the maximum capacity was reduced from $500 million to $450 million. In May 2017, NFSC extended its VFN facility to May 2018, and the maximum capacity was reduced to $425 million. The VFN facility is secured by assets of the wholesale note owner trust.

In December 2016, NFC extended its $100 million TRAC facility ~~until~~from April 2017 to October 2017. In ~~February, NFSC also increased~~May 2017, NFC extended its ~~VFN~~TRAC facility ~~from $375 million~~ to ~~$500 million and in May, the facility's maturity date was extended from October 2016 to May 2017.~~April 2018.

5955

Cash Flow Overview



	Six Months Ended April 30, 2017
(in millions)	Manufacturing Operations^(A)			Financial Services Operations and Adjustments^(A)			Condensed Consolidated Statement of Cash Flows
Net cash provided by (used in) operating activities	$	(222	)	$	115		$	(107	)
Net cash used in investing activities	(207		)	(64		)	(271		)
Net cash provided by (used in) financing activities	415			(71		)	344
Effect of exchange rate changes on cash and cash equivalents	—			1			1
Decrease in cash and cash equivalents	(14		)	(19		)	(33		)
Cash and cash equivalents at beginning of the period	761			43			804
Cash and cash equivalents at end of the period	$	747		$	24		$	771

Nine Months Ended July 31, 2016
(in millions)
Manufacturing
Operations^(A)

Financial Services Operations and Adjustments^(A)
Condensed Consolidated Statement of Cash Flows
Net cash provided by (used in) operating activities $ (228 ) $ 214
$ (14 )
Net cash used in investing activities (42 ) (125 ) (167 )
Net cash used in financing activities (120 ) (97 ) (217 )
Effect of exchange rate changes on cash and cash equivalents 23
10
33
Increase (decrease) in cash and cash equivalents (367 ) 2
(365 )
Cash and cash equivalents at beginning of the period 877
35
912
Cash and cash equivalents at end of the period $ 510
$ 37
$ 547


	Nine Months Ended July 31, 2015									Six Months Ended April 30, 2016
(in millions)	Manufacturing Operations^(A)			Financial Services Operations and Adjustments^(A)			Condensed Consolidated Statement of Cash Flows			Manufacturing Operations^(A)			Financial Services Operations and Adjustments^(A)			Condensed Consolidated Statement of Cash Flows
Net cash provided by (used in) operating activities(B)	$	35		$	(49	)	$	(14	)	$	(315	)	$	211		$	(104	)
Net cash provided by (used in) investing activities	257			(252		)	5
Net cash used in investing activities										(86		)	(80		)	(166		)
Net cash provided by (used in) financing activities(B)	(177		)	263			86			38			(109		)	(71		)
Effect of exchange rate changes on cash and cash equivalents	(48		)	21			(27		)	13			5			18
Increase (decrease) in cash and cash equivalents	67			(17		)	50			(350		)	27			(323		)
Cash and cash equivalents at beginning of the period	440			57			497			877			35			912
Cash and cash equivalents at end of the period	$	507		$	40		$	547		$	527		$	62		$	589

_________________________

(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, 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 GAAP. However, we believe that non-GAAP reporting provides meaningful information and therefore we use it to supplement our 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 GAAP consolidated financial statements in Item 1, 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.


(B)	Adjustments have been made within Net cash provided by (used in) operating activities and Net cash provided by (used in) financing activities sections to conform to the six months ended April 30, 2017 presentation. The reclassification did not impact our Condensed Consolidated Statements of Cash Flows.

Manufacturing Operations

Manufacturing Operations Cash Flow from Operating Activities

Cash used in operating activities was ~~$228~~$222 million and $315 million in the ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016, respectively. The lower use of cash from operating activities in 2017 compared to ~~cash provided~~2016 was primarily attributable to lower accounts payable payments, a smaller increase in inventories, and lower decreases in other current and noncurrent liabilities, partially offset by ~~operating activities~~a higher net loss, a decrease in the collection of ~~$35~~accounts receivable, an increase in other current assets, and a higher amount of repayments to Financial Services.

Cash paid for interest, net of amounts capitalized, was $114 million and $106 million in the ~~nine~~six months ended ~~July 31, 2015.~~April 30, 2017 and 2016, respectively.

Manufacturing Operations Cash Flow from Investing Activities

Cash used in investing activities was $207 million and $86 million in the six months ended April 30, 2017 and 2016, respectively. The net decrease in cash flow from ~~operating~~investing activities in ~~2016~~2017 compared to ~~2015~~2016 was primarily attributable to ahigher purchases and lower ~~reduction in inventories, an increase in noncurrent assets, decreases in accounts payable and other current liabilities due to~~maturities of marketable securities as well as higher payments for capital expenditures and ~~lower dividends received from our Financial Services operations,~~purchases of equipment leased to others partially offset by ~~a lower~~higher sales of marketable securities and higher proceeds from the sale of property and equipment.

Manufacturing Operations Cash Flow from Financing Activities

Cash provided by financing activities was $415 million and $38 million in the six months ended April 30, 2017 and 2016, respectively. The net ~~loss, an~~ increase in cash flow from financing activities in 2017 compared to 2016 was primarily attributable to issuing an additional $250 million of our Senior Notes and the ~~collection~~proceeds from the equity issuance to VW T&B, partially offset by repayments of ~~accounts receivable, and an increase in funding from~~loans to our Financial Services operations including funding under the Intercompany Used Truck Loan and other financing programs.

~~Cash paid for interest, net of amounts capitalized, was $173 million and $155 million in the nine months ended July 31, 2016 and 2015, respectively.~~

~~Manufacturing Operations Cash Flow from Investing Activities~~

~~Cash used in investing activities was~~$42 million in the nine months ended July 31, 2016, compared to cash provided by investing activities of $257 million in the nine months ended July 31, 2015. The net decrease in cash flow from investing activities in 2016 compared to 2015 was primarily attributable to lower sales and maturities of marketable securities and higher capital expenditures, partially offset by lower purchases of marketable securities and higher proceeds from sales of affiliates.

~~Manufacturing Operations Cash Flow from Financing Activities~~

Cash used in financing activities was $120 million and $177 million in the nine months ended July 31, 2016 and 2015, respectively. The net change in cash flow from financing activities in 2016 was primarily attributable to lower principal repayments of third party debt and lower principal repayments of the Intercompany Loan due to our Financial Services operations.

Financial Services Operations

Financial Services Operations and Adjustments to Cash Flow from Operating Activities

Cash provided by operating activities was ~~$214~~$115 million and $211 million in the ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016, ~~compared to cash used in operating activities of $49 million in the nine months ended July 31, 2015.~~respectively. The ~~increase~~net decrease in cash provided by operating activities in ~~2016~~2017 was primarily due to a lower decline in the level of finance receivables funded, and athe decline in ~~the amount~~segment profit of ~~dividends paid to~~ our Manufacturing operations as compared to the prior year period. The increase was partially offset by an increase in funding to our Manufacturing operations under the Intercompany Used Truck Loan and other financing programs.Financial Services operations.

Cash paid for interest, net of amounts capitalized, was ~~$48~~$34 million and ~~$46~~$31 million in the ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016, ~~and 2015,~~ respectively.

Financial Services Operations and Adjustments to Cash Flow from Investing Activities

Cash used in investing activities was ~~$125 million and $252~~$64 million in the ~~nine~~six months ended ~~July 31, 2016 and 2015, respectively.~~April 30, 2017 compared to cash used of $80 million in the comparable prior year period. Changes in restricted cash levels required under our secured borrowings, ~~were the primary sources and uses of cash from investing activities in 2016 and 2015,~~ along with purchases of equipment leased to ~~others.~~others, were the primary sources and uses, respectively, of cash from investing activities in 2017 and 2016. The decrease in cash used in investing activities in the current period was primarily due to ~~the decrease~~a decline in ~~the amount~~purchases of ~~restricted cash accumulated for the payoff of maturing investor notes,~~equipment leased to others, partially offset by an increase in ~~purchases of equipment leased to others.~~restricted cash levels.

Financial Services Operations and Adjustments to Cash Flow from Financing Activities

Cash used in financing activities was ~~$97~~$71 million and $109 million in the ~~nine~~six months ended ~~July 31,~~April 30, 2017 and 2016, ~~compared to cash provided by financing activities of $263 million in the nine months ended July 31, 2015.~~respectively. The net decrease in cash ~~flow from~~used in financing activities in ~~2016~~2017 was primarily due to the repayment of debt associated with the lower decline in the level of finance receivables ~~funded. The net decrease was partially offset by borrowings used to fund~~funded, and repayments received from the ~~increases in our~~Manufacturing operations for intercompany financing ~~programs to our Manufacturing operations.~~programs.

Consolidated EBITDA and Adjusted EBITDA

EBITDA and Adjusted EBITDA, which excludes 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 provides meaningful information about the performance of our business and therefore we use it to supplement our U.S. GAAP reporting. We believe that Adjusted EBITDA improves the comparability of year-to-year results, and is 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 ~~analyses~~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 measure of performance.

EBITDA reconciliation:


	Three Months Ended July 31,						Nine Months Ended July 31,						Three Months Ended April 30,						Six Months Ended April 30,
(in millions)	2016			2015			2016			2015			2017			2016			2017			2016
Loss from continuing operations attributable to NIC, net of tax	$	(34	)	$	(30	)	$	(63	)	$	(136	)
Income (loss) attributable to NIC, net of tax													$	(80	)	$	4		$	(142	)	$	(29	)
Plus:
Depreciation and amortization expense	53			68			164			221			53			53			112			111
Manufacturing interest expense^(A)	63			56			187			170			68			62			130			124
Less:
Income tax expense	(14		)	(12		)	(25		)	(37		)	(6		)	(16		)	(10		)	(11		)
EBITDA	$	96		$	106		$	313		$	292		$	47		$	135		$	110		$	217

______________________


(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:~~expense.

Three Months Ended July 31, Nine Months Ended July 31,
(in millions) 2016 2015 2016
2015
Interest expense $ 84
$ 75
$ 246

$ 227
Less: Financial services interest expense 21
19
59

57
Manufacturing interest expense $ 63
$ 56
$ 187

$ 170



	Three Months Ended April 30,				Six Months Ended April 30,
(in millions)	2017		2016		2017		2016
Interest expense	$	89	$	81	$	171	$	162
Less: Financial services interest expense	21		19		41		38
Manufacturing interest expense	$	68	$	62	$	130	$	124

Adjusted EBITDA Reconciliation:


	Three Months Ended July 31,				Nine Months Ended July 31,						Three Months Ended April 30,				Six Months Ended April 30,
(in millions)	2016		2015		2016			2015			2017		2016		2017			2016
EBITDA (reconciled above)	$	96	$	106	$	313		$	292		$	47	$	135	$	110		$	217
Less significant items of:
Adjustments to pre-existing warranties^(A)	19		3		70			(36		)	7		46		(10		)	51
North America asset impairment charges^(B)	11		4		16			12			5		3		7			5
Brazil asset impairment charges^(C)	1		3		1			3
Restructuring of North American manufacturing operations^(C)											2		—		9			—
Cost reduction and other strategic initiatives^(D)	5		13		11			18			—		3		—			6
Gain on settlement^(E)	—		—		—			(10		)
Brazil truck business actions^(F)	—		—		—			6
One-time fee received(G)	—		—		(15		)	—
Debt refinancing charges^(D)											4		—		4			—
One-time fee received^(E)											—		—		—			(15		)
Total adjustments	36		23		83			(7		)	18		52		10			47
Adjusted EBITDA	$	132	$	129	$	396		$	285		$	65	$	187	$	120		$	264

_____________________

(A)

(B)

In the ~~third quarter~~first and ~~first nine months~~second quarters of ~~2016,~~2017, the Truck segment recorded ~~$11~~$2 million and ~~$16~~$5 million, respectively, of asset impairment charges relating to certain ~~long-lived assets. In the third quarter of 2015, certain long-lived~~ assets ~~were determined to be impaired, resulting in a charge of $3 million.~~under operating leases. In the first ~~quarter~~and second quarters of ~~2015,~~2016, the Truck segment recorded $7$2 million and $3 million, respectively, of asset impairment charges relating to certain ~~operating leases.~~long lived assets.


(C)	In the ~~third~~first and second quarters of ~~2016 and 2015,~~2017, we ~~determined that $1 million and $3 million, respectively, of trademark asset carrying value was impaired.~~

~~(D)~~

Cost reduction and other strategic initiatives relates to costs associated with the divestiture of non-strategic facilities and efforts to optimize our cost structure. In the third quarter of 2016, we incurred $5recorded $7 million of restructuring charges related to the 2011 closure of our Chatham, Ontario plant ~~based on a ruling received from the Financial Services Tribunal in Ontario, Canada.~~ and $2 million of Corporate restructuring charges, respectively.


(D)	In the ~~third~~second quarter of ~~2015,~~2017, we ~~incurred restructuring charges~~recorded a charge of ~~$13~~$4 million related to ~~cost reduction actions, including a reduction-in-force in~~third party fees and debt issuance costs associated with the ~~U.S. and Brazil.~~repricing of our Term Loan.


(E)	In the second quarter of 2015, the Global Operations segment recognized a $10 million net gain related to the settlement of a customer dispute. The $10 million net gain for the settlement included restructuring charges of $4 million.


~~(F)~~	~~In the second quarter of 2015, our Global Operations segment recorded $6 million in inventory charges to right size the Brazil Truck business.~~


~~(G)~~	In the first quarter of 2016, we received a $15 million one-time fee from a third party which was recognized in Other ~~income,~~expense (income), net.

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"). 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~~the Employee Retirement Income Security Act of 1974 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 21^st 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 five years.

For the three and ~~nine~~six months ended ~~July 31, 2016,~~April 30, 2017, we contributed ~~$20~~$24 million and ~~$60~~$46 million, respectively, and for the three and ~~nine~~six months ended ~~July 31, 2015,~~April 30, 2016, we contributed ~~$11~~$21 million and ~~$73~~$40 million, respectively, to our U.S. and Canadian pension plans (the "Plans") to meet regulatory minimum funding requirements. We currently anticipate additional contributions of approximately ~~$40~~$65 million during the remainder of ~~2016.~~2017. Future contributions are dependent upon a number of factors, principally the changes in values of plan assets, changes in interest rates, the impact of any future funding relief, and the impact of funding resulting from the closure of our Chatham, Ontario plant. We currently expect that from ~~2017~~2018 through ~~2019,~~2020, we will be required to contribute ~~$100~~$135 million to ~~$200~~$205 million per year to the Plans, depending on asset performance and discount rates.

For more information, see Note 7, Postretirement Benefits, to the accompanying consolidated financial statements.

Other Information

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 are 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 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 ~~EPA~~United States Environmental Protection Agency (the "EPA") and the ~~United States~~ National Highway Traffic Safety Administration ("NHTSA") issued final rules for greenhouse gas ("GHG") emissions and fuel economy on September 15, 2011. These began to apply in calendar year 2014 and will be 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. Several of our vehicles were certified early for the 2013 model year and the majority of our remaining vehicles and all engines were certified in 2014. The EPA and NHTSA ~~issued~~adopted a ~~proposed~~final rule on ~~July 13, 2015~~October 25, 2016 with the next phase of federal GHG emission and fuel economy regulations. This ~~proposed~~ rule ~~contained~~contains more stringent emissions levels for engines and vehicles ~~adds regulation of trailers~~ and ~~is anticipated to~~will take effect in model year 2021 and towill be implemented in three stages culminating in model year 2027. We filed comments on October 1, 2015. The EPA and NHTSA published a notice of data availability, requesting comment on additional information the agencies posted in the rulemaking docket. We filed comments on April 1, 2016. All of the comments are available in the rulemaking docket. The EPA and NHTSA posted a prepublication version of the final rule on August 16, 2016, with a version expected to appear in the Federal Register shortly thereafter. We are evaluating the final rule and assessing its impact on us. Canada adopted its version of fuel economy and/or GHG emission regulations in February 2013. These regulations are substantially aligned with U.S. fuel economy and GHG emission regulations. Canada has ~~announced it also is considering a heavy duty phase 2 GHG rulemaking aligned~~issued proposed amendments in March 2017 consistent with EPA and NHTSA phase 2 rules.

In December 2014, California adopted GHG emission rules for heavy duty vehicles equivalent to EPA rules and an optional lower emission standard for ~~nitrogen oxide ("NOx")~~NOx in California. California has also stated that it intends to propose in 2017 a heavy duty phase 2 GHG rule largely harmonized with the federal rule. 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, including NOx from vehicles, at the federal and state levels. 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 those petitions in December 2016, agreeing that future NOx regulations are appropriate and stating that it would begin work on new on-highway heavy duty NOx rules that could apply in model year 2024. 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 ~~impact~~require significant investments of capital and will significantly increase costs of development for engines and ~~production costs for~~ vehicles, and ~~engines. There~~ will ~~also be~~require us to incur administrative costs arising from ~~the~~ implementation of the rules. 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, including NOx from vehicles, at the federal and state levels.standard. 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.

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 and critical accounting estimates are consistent with those discussed in Note 1, Summary of Significant Accounting Policies, to the consolidated financial statements and the MD&A section of our Annual Report on Form 10-K for the year ended October 31, ~~2015.~~2016. During the ~~nine~~six months ended ~~July 31, 2016,~~April 30, 2017, there were no significant changes in our application of our critical accounting ~~policies except for the addition of~~ ~~Inventories~~ ~~specifically related to the valuation on our used truck inventory as described below.~~policies.

To aid in fully understanding and evaluating our reporting results, we have identified the following accounting policies as our most critical because they require us to make difficult, subjective, and complex judgments:

Pension and Other Postretirement Benefits

Allowance for Doubtful Accounts

Income Taxes

Impairment of Long-Lived Assets

Contingency Accruals

Inventories

~~Inventories.~~ Inventories are valued at the lower of cost or market. Our gross used truck inventory increased to approximately $430 million at July 31, 2016 from $390 million at October 31, 2015, offset by reserves of $166 million and $110 million, respectively. The increase in used truck inventory is due, in part, to used truck receipts as a result of trades, repossessions, and end of operating lease cycles exceeding used truck sales. As a result of these market dynamics, we expect it may take several years before our used truck inventory returns to the lower targeted levels. We continue to seek alternative channels to sell our used trucks, including certain export markets, which have resulted in a lower price point as compared to our domestic channels.

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 estimated NRV is subject to change based on numerous conditions taking into account age, specifications, mileage, timing of sales, market mix, and current and forecasted pricing. While calculations are made involving these factors, 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.

Recently Issued ~~and Adopted~~ Accounting Standards

In ~~the quarter ended July 31, 2016, we have not adopted any new accounting guidance that has had a material impact on our consolidated financial statements.~~

~~In May 2014,~~January 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2017-01, "Business Combinations" (Topic 805). This ASU provides a new framework for determining whether transactions should be accounted for as acquisitions or disposals of assets or businesses. This ASU creates an initial screening test (Step 1) 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 (Step 2). Fewer transactions are expected to involve acquiring or selling a business. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. Adoption will require a prospective transition. We do not expect the adoption of this ASU to have a material effect on our consolidated financial statements.

In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows" (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. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017, with early adoption permitted. Our effective date for this ASU is November 1, 2018. Adoption will require a retrospective transition. We do not expect the adoption 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” (Topic 326). The 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. Our effective date is November 1, 2020. Adoption will require a modified retrospective transition. We are currently evaluating 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), 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. The 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 of fiscal years beginning after December 15, 2016. Our effective date for this ASU is November 1, 2018. We are ~~currently evaluating~~in the ~~method~~process of ~~adoption and~~completing our initial assessment of the potential impact ~~of this ASU~~ on our consolidated financial ~~statements.~~statements and have not yet determined our adoption methodology.

6561

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. The ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018, with early adoption permitted. Our effective date for this ASU is November 1, 2019. Adoption will require a modified retrospective transition. We are currently evaluating the method of adoption and the impact of this ASU on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses” (Topic 326). The 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. Our effective date is November 1, 2020. We are currently evaluating the method of adoption and the impact of this ASU on our consolidated financial statements.

Item 3.Quantitative and Qualitative Disclosures about Market Risk

See Item 7A, Quantitative and Qualitative Disclosures about Market Risk,, of our Annual Report on Form 10-K for the year ended October 31, ~~2015.~~2016. During the ~~nine~~six months ended ~~July 31, 2016,~~April 30, 2017, there have been no material changes in our exposure to market risk.

Item 4. 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 ~~the~~ Chief Financial Officer, to allow timely decisions regarding required disclosures.

~~As previously disclosed~~In connection with the preparation of this report, management, under ~~“Item 9A-Controls~~the supervision and ~~Procedures” in our Annual Report on Form 10-K for our fiscal year ended October 31, 2015, we concluded that~~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 ~~were not effective~~ as of ~~October 31, 2015 due to a material weakness in our internal control over financial reporting.~~April 30, 2017. Based on ~~the material weakness, which we continue to remediate,~~that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the quarter ended ~~July 31, 2016,~~April 30, 2017, our disclosure controls and procedures were ~~not~~ effective. In light of the material weakness in internal control over financial reporting, prior to filing this Quarterly Report on Form 10-Q for the fiscal quarter ended July 31, 2016, we developed and completed substantive procedures that allowed us to conclude that the consolidated financial statements in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial position, results of operations, and cash flows for the periods presented in conformity with U.S. GAAP.

The material weakness in our internal control over financial reporting, which is described in our Annual Report on Form 10-K for the fiscal year ended October 31, 2015, and continued to exist as of July 31, 2016, is as follows:

We did not have sufficient controls designed to validate the proper classification of warranty claims data, including type of warranty coverage and product/component, which is used to determine the warranty accrual and expense. This material weakness resulted in misstatements in our warranty accrual that were corrected prior to the issuance of our consolidated financial statements for the fiscal year ended October 31, 2015. The classification errors and resulting warranty accrual misstatements did not materially impact our consolidated financial statements, including our warranty cash outlays for claims. However, a reasonable possibility exists that material misstatements in our consolidated financial statements will not be prevented or detected on a timely basis.

~~Management’s Remediation Initiatives~~

We continue to invest significant time and effort to address the material weakness related to validation and proper classification of warranty claims data used to determine the warranty accrual and expense. Specifically, the following actions were taken:

~~Designed and implemented an automated process to validate proper classification of certain warranty claims data; and~~

~~Increased our investment in training and job tools to improve the process and controls over the validation and proper classification of warranty claims data.~~

While progress has been made, there are additional controls that need to be designed and implemented and existing controls require enhancement to prevent or detect a material misstatement in our financial statements. Until full remediation is complete, we will continue to perform substantive procedures to ensure that, in all material respects, our financial statements are presented in conformity with U.S. GAAP.

(b) Changes in Internal Control over Financial Reporting

We are taking actions to remediate the material weakness related to our internal controls over financial reporting as described above. However, our remediation efforts were not complete as of July 31, 2016. Other than management’s remediation initiatives disclosed above, thereThere 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 ~~July 31, 2016~~April 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

6762

PART II


Item 1.	Legal Proceedings

~~Item 1.~~The information required to be set forth under this heading is incorporated by reference from Note 10, ~~Legal Proceedings~~Commitments and Contingencies

~~During~~, to the nine months ended July 31, 2016, there have been no material developments from the legal proceedings disclosed in our Annual Report on Form 10-K for our fiscal year ended October 31, 2015, except (i) those disclosedConsolidated Financial Statements included in Part ~~II,~~I, Item ~~1 of our Quarterly Report on Form 10-Q for the fiscal quarter ended April 30, 2016 and (ii) those disclosed below:~~

~~Sao Paulo Groundwater Notice~~

On August 31, 2016, the Sao Paulo District Attorney filed civil actions against IIAA and other companies seeking soil and groundwater investigation and remediation, together with monetary payment in an unspecified amount. IIAA has not yet been served with the action.

~~MaxxForce Engine EGR Warranty Litigation~~

In June 2016, the court conducted a certification hearing in connection with the putative class action lawsuit against NIC, Navistar, Inc., Navistar Canada Inc., and Harbour International Trucks in Canada in the Supreme Court of British Columbia.

~~EPA Clean Air Act Litigation~~

On June 30, 2016, NIC and Navistar, Inc. opposed EPA's motion for summary judgment, and NIC cross-moved for summary judgment against EPA. The court set a ruling date of November 17, 2016, the same ruling date previously established for the DOJ’s motion for summary judgment on liability against NIC and Navistar, Inc.

~~IC Bus Civil RICO Litigation~~

~~On August 2, 2016, we filed a motion to dismiss the lawsuit in its entirety.~~1.


Item 1A.	Risk Factors

~~There~~During the six months ended April 30, 2017, there have been no material changes from the risk factors disclosed in our Annual Report on Form 10-K for our year ended October 31, ~~2015, except as disclosed below:~~2016.

We may not complete our recently announced sale of shares of our Common Stock to Volkswagen Truck & Bus GmbH or the related agreements to cooperate in respect of engines, related components and technologies and to form a procurement joint venture, and if completed, we may not realize all or any of the benefits from the contemplated strategic alliance.

On September 5, 2016, NIC and VW T&B entered into the Stock Purchase Agreement pursuant to which NIC will issue and VW T& B will purchase an estimated 19.9% stake (16.6% on a pro forma basis) in NIC and the related Stockholder Agreement, which governs the rights and obligations of the parties in connection with the Share Issuance.

In addition to the agreements governing the Share Issuance, we entered into the License and Supply Framework Agreement and the Procurement JV Framework Agreement with VW T&B. Pursuant to the License and Supply Framework Agreement, the parties intend to enter into individual contracts in respect of the licensing and supply of certain engines and technologies, conduct feasibility studies in order to investigate the feasibility of sharing certain technologies and begin good faith discussions on possible collaboration with respect to certain powertrain combinations and other strategic initiatives. We also intend to enter into certain other commercial arrangements with VW T&B, including the formation of a joint venture focused on sourcing, evaluating, negotiating and recommending joint procurement opportunities, the terms of which are set forth in the Procurement JV Framework Agreement.

The consummation of the Share Issuance is subject to the entry into definitive documentation to form the joint venture contemplated by the Procurement JV Framework Agreement, the finalization of the first definitive contract under the License and Supply Framework Agreement, certain regulatory approvals and customary closing conditions, the satisfaction of some of which is outside of our control. The individual contracts contemplated by the License and Supply Framework Agreement, and the other commercial arrangements and the joint venture documentation under the Procurement JV Framework Agreement have not yet been drafted by the parties and may not be entered into. Therefore, we cannot assure you that the Share Issuance, or implementation of the related strategic alliance with VW T&B, will be consummated at all, or on the terms described in our public filings.

Even if we consummate the Share Issuance, enter into the individual contracts contemplated by the License and Supply Framework Agreement and form the joint venture pursuant to the Procurement JV Framework Agreement, we may not achieve the expected benefits and synergies associated with the collaboration with VW T&B. including realizing any anticipated cost savings from the global scope and scale of the procurement joint venture, securing components and technology from VW T&B or successfully developing future technologies and products and optimizing capital and engineering expenditures for technology and future vehicle development.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds

Recent Sales of Unregistered Securities

~~None.~~On March 1, 2017, we announced the closing of the previously disclosed issuance of 16.2 million shares of common stock of the Company for a purchase price of $15.76 per share and an aggregate purchase amount of $256 million to VW T&B.

Purchases of Equity Securities

None.


Item 3.	Defaults upon Senior Securities

None.


Item 4.	Mine Safety Disclosures

Not applicable.


Item 5.	Other Information

None.

~~Item 6.~~ ~~Exhibits~~


Item 6.	Exhibits



Exhibit:	Description	Page
(10)	Material Contracts	E-1
(31.1)	CEO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	E-2
(31.2)	CFO Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002	E-3
(32.1)	CEO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	E-4
(32.2)	CFO Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	E-5
(99.1)	Additional Financial Information (Unaudited)	E-6
(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

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 Quarterly Report on Form 10-Q for the period ended ~~July 31, 2016.~~April 30, 2017.

7063

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/ S~~AMARA~~SAMARA A. S~~TRYCKER~~ STRYCKER
	Samara A. Strycker
	Senior Vice President and Corporate Controller
	(Principal Accounting Officer)

~~September 8, 2016~~June 7, 2017



	Three Months Ended July 31, 2016												Three Months Ended July 31, 2015
(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	$	21		$	4		$	26		$	51		$	25		$	3	$	30		$	58
Provision for doubtful accounts, net of recoveries	2			(1		)	—			1			2			—		—			2
Charge-off of accounts	(3		)	—			(1		)	(4		)	—			—		(1		)	(1		)
Other^(A)	(2		)	—			2			—			(2		)	—		(3		)	(5		)
Allowance for doubtful accounts, at end of period	$	18		$	3		$	27		$	48		$	25		$	3	$	26		$	54

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