ITEM 1. BUSINESS
Navistar International Corporation is a holding company and its principal operating subsidiary is International Truck and Engine Corporation, (International), formerly Navistar International Transportation Corp. As used hereafter, "Navistar" or "company" refers to Navistar International Corporation and its consolidated subsidiaries.
Navistar operates in three principal industry segments: truck, engine (collectively called "manufacturing operations") and financial services. The company's truck segment is engaged in the manufacture and marketing of medium and heavy trucks, including school buses. The company's engine segment is engaged in the design and manufacture of mid-range diesel engines. The truck segment operates primarily in the United States (U.S.) and Canada as well as in Mexico, Brazil and other selected export markets while the engine segment operates primarily in the U.S. and Brazil. Based on assets and revenues, the truck and engine segments represent the majority of the company's business activities. The financial services operations consist of Navistar Financial Corporation (NFC), its domestic insurance subsidiary and the company's foreign finance and insurance subsidiaries. Industry and geographic segment data for 2000, 1999 and 1998 is summarized in Note 14 to the Financial Statements, which is included in Item 8.
PRODUCTS AND SERVICES
The following table illustrates the percentage of the company's sales of products and services by product line based on dollar amount:
The truck segment manufactures and distributes a full line of diesel-powered trucks and school buses in the common carrier, private carrier, government/service, leasing, construction, energy/petroleum and student transportation markets. The truck segment also provides customers with proprietary products needed to support the International(R) truck and bus lines, together with a wide selection of other standard truck and trailer aftermarket parts. The company offers diesel-powered trucks and school buses because of their improved fuel economy, ease of serviceability and greater durability over gasoline-powered vehicles.
PRODUCTS AND SERVICES (continued)
The truck and bus manufacturing operations in the U.S., Canada, Mexico and Brazil consist principally of the assembly of components manufactured by its suppliers, although the company produces its own mid-range diesel truck engines, sheet metal components (including cabs) and miscellaneous other parts.
The engine segment designs and manufactures diesel engines for use in the company's Class 5, 6 and 7 medium trucks and school buses and selected Class 8 heavy truck models, and for sale to original equipment manufacturers (OEMs) in the U.S. and Mexico. This segment also sells engines for industrial, agricultural and marine applications. In addition, the engine segment provides customers with proprietary products needed to support the International(R) engine lines, together with a wide selection of other standard engine and aftermarket parts. In February 1999, Navistar acquired a 50% interest in Maxion International Motores, S.A., the largest producer of diesel engines in South America. The joint venture produces the current Maxion products in addition to the Navistar 7.3 liter (7.3L) V-8 Turbo Diesel Engine. Based upon information published by R.L. Polk & Company, diesel-powered Class 5, 6 and 7 medium truck and bus shipments represented 91.4% of all medium truck and bus shipments for fiscal 2000 in the U.S. and Canada.
The financial services segment provides retail, wholesale and lease financing of products sold by the truck segment and its dealers within the U.S. as well as the company's wholesale accounts and selected retail accounts receivable. NFC's insurance subsidiary provides commercial physical damage and liability insurance to the truck segment's dealers and retail customers and to the general public through an independent insurance agency system. The foreign finance subsidiaries' primary business is to provide wholesale, retail and lease financing to the Mexican operations' dealers and retail customers.
THE MEDIUM AND HEAVY TRUCK INDUSTRY
The markets in which Navistar competes are subject to considerable volatility as they move in response to cycles in the overall business environment and are particularly sensitive to the industrial sector, which generates a significant portion of the freight tonnage hauled. Government regulation has impacted and will continue to impact trucking operations and the efficiency and specifications of equipment.
The following table shows industry retail deliveries in the combined U.S. and Canadian markets for the five years ended October 31, in thousands of units:
Industry retail deliveries of Class 5 through 8 trucks and school buses in the Mexican market were 32,900 units, 23,300 units and 21,800 units in 2000, 1999 and 1998, respectively, based on monthly data provided by the Associacion Nacional de Productores de Autobuses, Camiones y Tractocamiones.
THE MEDIUM AND HEAVY TRUCK INDUSTRY (continued)
The company's first full year of operations in Brazil was 1999. Industry retail deliveries of Class 5 through 8 trucks in the Brazilian market were 27,800 units in 2000 and 22,400 units in 1999 based on data provided by the Associacao Nacional dos Fabricantes de Veiculos.
The Class 5 through 8 truck markets in the U.S., Canada, Mexico and Brazil are highly competitive. Major U.S. domestic competitors include PACCAR, Ford and General Motors, as well as foreign-controlled domestic manufacturers, such as Freightliner and Sterling (DaimlerChrysler), Mack (Renault) and Volvo. In addition, manufacturers from Japan such as Hino, Isuzu, Nissan and Mitsubishi are competing in the U.S. and Canadian markets. In Mexico, the major domestic competitors are Kenmex (PACCAR) and Mercedes (DaimlerChrysler). In Brazil, the competition is with Mercedes (DaimlerChrysler), Volkswagen, Scania and Volvo. The intensity of this competition results in price discounting and margin pressures throughout the industry. In addition to the influence of price, market position is driven by product quality, engineering, styling, utility and distribution.
From October 31, 2000, the company's truck segment currently estimates $250 million in capital spending and $170 million in development expense through 2004 for development of its next generation vehicles.
TRUCK MARKET SHARE
The company delivered 118,200 Class 5 through 8 trucks, including school buses, in the U.S. and Canada in fiscal 2000 which was comparable to the 119,300 units delivered in 1999. Navistar's market share in the combined U.S. and Canadian Class 5 through 8 truck market increased to 26.9% from 25.6% in 1999.
The company delivered 7,700 Class 5 through 8 trucks, including school buses, in Mexico in 2000, a 60% increase from the 4,800 units delivered in 1999. Navistar's combined share of the Class 5 through 8 truck market in Mexico was 23.4% in 2000 and 20.7% in 1999.
The company delivered 600 trucks in Brazil in 2000, a 20% increase from the 500 units delivered in 1999. Navistar's share of the truck market in Brazil was 2.1% in both 2000 and 1999.
MARKETING AND DISTRIBUTION
Navistar's truck products are distributed in virtually all key markets in the U.S. and Canada. The company's truck distribution and service network in these countries was composed of 888, 927 and 945 dealers and retail outlets at October 31, 2000, 1999 and 1998, respectively. Included in these totals were 494, 517 and 524 secondary and associate locations at October 31, 2000, 1999 and 1998, respectively. The company also has a dealer network in Mexico composed of 68, 60 and 44 dealer locations at October 31, 2000, 1999 and 1998, respectively, and a dealer network in Brazil composed of 17, 14 and six dealer locations at October 31, 2000, 1999, and 1998, respectively.
Retail dealer activity is supported by three regional operations in the U.S. and general offices in Canada, Mexico and Brazil. The company has a national account sales group, responsible for 94 major U.S. national account customers. Navistar's network of 15 Used Truck Centers in the U.S. provides trade-in support to the company's dealers and national accounts group, and markets all makes and models of reconditioned used trucks to owner-operators and fleet buyers.
MARKETING AND DISTRIBUTION (continued)
In the U.S. and Canada, the company operates seven regional parts distribution centers, which allow it to offer 24 hour availability and same day shipment of the parts most frequently requested by customers. The company also operates parts distribution centers in Mexico and Brazil.
ENGINE AND FOUNDRY
Navistar is the leading supplier of mid-range diesel engines in the 160-300 horsepower range according to data supplied by Power Systems Research of Minneapolis, Minnesota.
Navistar has an agreement to supply its 7.3L electronically controlled diesel engine to Ford Motor Company (Ford) through the year 2002 for use in all of Ford's diesel-powered light trucks and vans. Shipments to Ford account for approximately 92% of the engine segment's 7.3L shipments. Total engine units shipped reached 392,900 in 2000, a 5% increase over 1999. This excludes 54,100 units shipped by Maxion International Motores, S.A., the company's 50% owned joint venture in Brazil, to its outside customers. The company's shipments of engines to all OEMs totaled 304,400 units in 2000, an increase of 6% from the 286,500 units shipped in 1999. During 1997, Navistar entered into a 10-year agreement, effective with model year 2003, to supply Ford with a successor engine to the current 7.3L product for use in its diesel-powered super duty trucks and vans (over 8,500 lbs. GVW). In fiscal 2000, the company finalized an agreement with Ford to supply diesel engines for certain under 8,500 lbs. GVW light duty trucks and sport utility vehicles. This contract extends through 2012. To support this program, the company is constructing an engine assembly operation in Huntsville, Alabama, which will be fully operational by 2004.
From October 31, 2000, the company currently estimates $260 million in capital spending and $115 million in development expense through 2003 for the manufacture and development of its next generation version of diesel engines. Included in these amounts is the company's investment in Huntsville, Alabama.
FINANCIAL SERVICES
NFC is a financial services organization that provides wholesale, retail and lease financing of new and used trucks sold by the company and its dealers in the U.S. NFC also finances the company's wholesale accounts and selected retail accounts receivable. Sales of new products (including trailers) of other manufacturers are also financed regardless of whether designed or customarily sold for use with the company's truck products. In both 2000 and 1999, NFC provided wholesale financing for 96% of the new truck units sold by the company to its dealers and distributors in the U.S., and retail and lease financing for 16% of all new truck units sold or leased by the company to retail customers.
NFC's wholly owned domestic insurance subsidiary, Harco National Insurance Company (Harco), provides commercial physical damage and liability insurance coverage to the company's dealers and retail customers and to the general public through an independent insurance agency system. On November 30, 2000, NFC's board of directors approved a plan to sell Harco within the next fiscal year as further described in Note 10 to the Financial Statements.
Navistar's wholly owned subsidiaries, Arrendadora Financiera Navistar, Servicios Financieros Navistar and Navistar Comercial, provide wholesale, retail and lease financing to the truck segment's dealers and customers in Mexico.
Harbour Assurance Company of Bermuda Limited, a wholly owned subsidiary of the company, offers a variety of programs to the company, including general liability insurance, ocean cargo coverage for shipments to and from foreign distributors and reinsurance coverage for various company policies.
IMPORTANT SUPPORTING OPERATIONS
International Truck and Engine Corporation Canada has an agreement with a subsidiary of General Electric Capital Canada, Inc. to provide financing for Canadian dealers and customers.
RESEARCH AND DEVELOPMENT
Research and development activities, which are directed toward the introduction of new products and improvements of existing products and processes used in their manufacture, totaled $226 million, $207 million and $138 million for 2000, 1999 and 1998, respectively.
BACKLOG
The backlog of unfilled truck orders (subject to cancellation or return in certain events) at October 31, 2000, 1999 and 1998, was $1,258 million, $3,352 million and $4,505 million, respectively.
Although the backlog of unfilled orders is one of many indicators of market demand, other factors such as changes in production rates, available capacity, new product introductions and competitive pricing actions may affect point-in-time comparisons.
EMPLOYEES
The company employed 17,000, 18,600 and 17,600 individuals at October 31, 2000, 1999 and 1998, respectively, worldwide. There is an employment reduction anticipated in 2001 as discussed in Note 10 to the Financial Statements.
LABOR RELATIONS
At October 31, 2000, the United Automobile, Aerospace and Agricultural Implement Workers of America (UAW) represented 7,700 of the company's active employees in the U.S., and the National Automobile, Aerospace, and Agricultural Implement Workers of Canada (CAW) represented 1,300 of the company's active employees in Canada. Other unions represented 2,000 of the company's active employees in the U.S. The company's master contract with the UAW expires on October 1, 2002. The collective bargaining agreement with the CAW expires on June 1, 2002. The current CAW contract allows the company to improve productivity through better use of work assignments and manpower utilization.
PATENTS AND TRADEMARKS
Navistar continuously obtains patents on its inventions and owns a significant patent portfolio. Additionally, many of the components, which Navistar purchases for its products, are protected by patents that are owned or controlled by the component manufacturer. Navistar has licenses under third-party patents relating to its products and their manufacture and grants licenses under its patents. The monetary royalties paid or received under these licenses are not significant. No particular patent or group of patents is considered by the company to be essential to its business as a whole.
Navistar's primary trademarks are an important part of its worldwide sales and marketing efforts and provide instant identification of its products and services in the marketplace. To support these efforts, Navistar maintains, or has pending, registrations of its primary trademarks in those countries in which it does business or expects to do business.
RAW MATERIALS AND ENERGY SUPPLIES
The company purchases raw materials, parts and components from numerous outside suppliers, but relies upon some suppliers for a substantial number of components for its truck and engine products. A majority of the company's requirements for raw materials and supplies is filled by single-source suppliers.
The impact of an interruption in supply will vary by commodity. Some parts are generic to the industry while others are of a proprietary design requiring unique tooling, which would require time to recreate. However, the company's exposure to a disruption in production as a result of an interruption of raw materials and supplies is no greater than the industry as a whole. In order to remedy any losses resulting from an interruption in supply, the company maintains contingent business interruption insurance for storms, fire and water damage.
While the company believes that it has adequate assurances of continued supply, the inability of a supplier to deliver could have an adverse effect on production at certain of the company's manufacturing locations. The company's exposure in Mexico and Brazil to an interruption in local supply could result in an inability to meet local content requirements.
Navistar is currently meeting demand for International(R) engines, for both International(R) truck and other OEMs. There are currently no engine component supplier capacity issues. The expansion of engine capacity in Brazil and in Huntsville, Alabama, should enable Navistar to meet any future external customer needs in the light truck diesel market for the foreseeable future.
IMPACT OF GOVERNMENT REGULATION
Truck and engine manufacturers continue to face heavy governmental regulation of their products, especially in the areas of environment and safety. The company believes its products comply with all applicable environmental and safety regulations.
As a diesel engine manufacturer, the company has incurred research, development and tooling costs to design its engine product lines to meet United States Environmental Protection Agency (U.S. EPA) and California Air Resources Board (CARB) emission requirements that will come into effect after 2000. The company intends to provide engines that satisfy CARB's emission standards in 2002 for engines used in vehicles from 8,501 to 14,000 lbs. GVW, as well as heavy duty engines that comply with more stringent CARB and U.S. EPA emission standards for 2004 and later model years. At the same time, Navistar expects to be able to meet all of the obligations it agreed to in the Consent Decree signed in October 1998 with the U.S. EPA and in a Settlement Agreement with CARB concerning alleged excess emissions of nitrogen oxides.
U.S. EPA rulemaking is currently underway for emission standards for heavy duty engines and low sulfur diesel requirements for 2007 and later model years. Navistar is actively participating in this rulemaking to ensure that its products can comply.
In 1999, U.S. EPA and CARB promulgated new emission standards for light duty diesel engines, which cover Navistar's new V-6 diesel engines. On the basis of available technology, compliance with the 2007 standards is dependent upon the availability of low sulfur diesel fuel that is the subject of U.S. EPA's 2007 rulemaking. However, Navistar believes that CARB has exceeded its statutory authority in promulgating these emission standards and in November 1999 filed suit to overturn them. Even if the emission standards are not overturned, Navistar does not believe they will have a material effect on the company's financial condition or operating results.
IMPACT OF GOVERNMENT REGULATION (continued)
Canadian and Mexican heavy duty engine emission regulations essentially mirror those of the U.S. EPA, except that compliance in Mexico is conditioned on availability of low sulfur diesel fuel. The company's engines comply with Canadian and Mexican emission regulations, as well as those of Brazil.
Truck manufacturers are also subject to various noise standards imposed by federal, state and local regulations. The engine is one of a truck's primary noise sources, and the company, therefore, works closely with OEMs to develop strategies to reduce engine noise. The company is also subject to the National Traffic and Motor Vehicle Safety Act (Safety Act) and Federal Motor Vehicle Safety Standards (Safety Standards) promulgated by the National Highway Traffic Safety Administration. The company believes it is in compliance with the Safety Act and the Safety Standards.
Expenditures to comply with various environmental regulations relating to the control of air, water and land pollution at production facilities and to control noise levels and emissions from the company's products have not been material except for two sites formerly owned by the company: Wisconsin Steel in Chicago, Illinois, and Solar Turbine in San Diego, California. In 1994, the company recorded a $20 million after-tax charge as a loss of discontinued operations for environmental liabilities and cleanup cost at these two sites. It is not expected that the costs of compliance with foreseeable environmental requirements will have a material effect on the company's financial condition or operating results.
ITEM 2.
ITEM 2. PROPERTIES
In North America, the company owns and operates 10 manufacturing and assembly operations, which contain approximately 10 million square feet of floor space. Of these 10 facilities, six plants manufacture and assemble trucks and four plants are used by the company's engine segment. Of these four plants, two manufacture diesel engines, one manufactures grey iron castings and one manufactures ductile iron castings. In addition, the company owns or leases other significant properties in the U.S. and Canada including vehicle and parts distribution centers, sales offices and two engineering centers, which serve the company's truck and engine segments, and its headquarters which is currently located in Chicago, Illinois. In June 2001, the company's headquarters will be moved to Warrenville, Illinois. The company's truck assembly facility located in Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the company as collateral for a $125 million revolving loan agreement.
The truck segment's principal research and engineering facility is located in Fort Wayne, Indiana, and the engine segment's facility is located in Melrose Park, Illinois. In addition, certain research is conducted at each of the company's manufacturing plants.
All of the company's plants are being utilized and have been adequately maintained, are in good operating condition and are suitable for its current needs through productive utilization of the facilities. Navistar is currently tooling a new plant in Huntsville, Alabama, to produce new high technology diesel engines and a new plant in Tulsa, Oklahoma, to produce integrated conventional school buses. These facilities, together with planned capital expenditures, are expected to meet the company's manufacturing needs in the foreseeable future.
A majority of the activity of the financial services operations is conducted from its leased headquarters in Rolling Meadows, Illinois. The financial services operations also lease two other office locations in the U.S. and one in Mexico.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The company and its subsidiaries are subject to various claims arising in the ordinary course of business, and are parties to various legal proceedings that constitute ordinary routine litigation incidental to the business of the company and its subsidiaries. In the opinion of the company's management, none of these proceedings or claims are material to the business or the financial condition of the company.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Navistar International Corporation common stock is listed on the New York Stock Exchange, the Chicago Stock Exchange and the Pacific Exchange under the abbreviated stock symbol "NAV." Information regarding high and low market price per share of common stock for each quarter of 2000 and 1999 is included in Note 19 to the Financial Statements on page 59. There were approximately 38,700 owners of common stock at October 31, 2000.
Holders of common stock are entitled to receive dividends when and as declared by the board of directors out of funds legally available therefor, provided that, so long as any shares of the company's preferred stock and preference stock are outstanding, no dividends (other than dividends payable in common stock) or other distributions (including purchases) may be made with respect to the common stock unless full cumulative dividends, if any, on the shares of preferred stock and preference stock have been paid. Under the General Corporation Law of the State of Delaware, dividends may only be paid out of surplus or out of net profits for the fiscal year in which the dividend is declared or the preceding fiscal year, and no dividend may be paid on common stock at any time during which the capital of outstanding preferred stock or preference stock exceeds the net assets of the company.
The company has not paid dividends on the common stock since 1980. The company does not expect to pay cash dividends on the common stock in the foreseeable future, and is subject to restrictions under the indentures for the $100 million 7% Senior Notes and the $250 million 8% Senior Subordinated Notes on the amount of cash dividends the company may pay and is subject to certain debt to equity ratios under the $125 million Mexican credit facility which may indirectly limit its ability to pay dividends.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
This information is included in the table "Five-Year Summary of Selected Financial and Statistical Data" on page 60 of this Form 10-K.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Certain statements under this caption that are not purely historical constitute "forward-looking statements" under the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties. These forward-looking statements are based on current management expectations as of the date made. The company assumes no obligation to update any forward-looking statements. Navistar International Corporation's actual results may differ significantly from the results discussed in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, those discussed under the captions "Restructuring Charge" and "Business Environment."
Navistar International Corporation is a holding company and its principal operating subsidiary is International Truck and Engine Corporation (International), formerly known as Navistar International Transportation Corp. In this discussion and analysis, "company" or "Navistar" refers to Navistar International Corporation and its consolidated subsidiaries. Navistar operates in three principal industry segments: truck, engine (collectively called "manufacturing operations") and financial services. The company's truck segment is engaged in the manufacture and marketing of Class 5 through 8 trucks, including school buses. The truck segment also provides customers with proprietary products needed to support the International(R) truck and bus lines, together with a wide selection of other standard truck and trailer aftermarket parts. The truck segment operates primarily in the United States (U.S.) and Canada as well as in Mexico, Brazil and other selected export markets. The company's engine segment is engaged in the design and manufacture of mid-range diesel engines. The engine segment also provides customers with proprietary products needed to support the International(R) engine line, together with a wide selection of other standard engine and aftermarket parts. The engine segment operates primarily in the U.S. and Brazil. The financial services segment provides wholesale, retail and lease financing, and domestic commercial physical damage and liability insurance coverage to the company's dealers and retail customers and to the general public through an independent insurance agency system. The financial services segment operates in the U.S., Mexico and Bermuda.
The discussion and analysis reviews the operating and financial results, and liquidity and capital resources of the manufacturing and financial services operations. Manufacturing operations reflect the financial results of the financial services operations included on a one-line basis under the equity method of accounting. Financial services operations include Navistar Financial Corporation (NFC), its domestic insurance subsidiary and the company's foreign finance and insurance subsidiaries. See Note 1 to the Financial Statements.
RESULTS OF OPERATIONS
The company reported net income of $159 million for 2000, or $2.58 per diluted common share, which includes an after-tax corporate restructuring charge of $190 million that is further described under the caption "Restructuring Charge". Net income was $544 million, or $8.20 per diluted common share in 1999, and $299 million, or $4.11 per diluted common share in 1998. Net income in 1999 and 1998 included tax valuation allowance adjustments of $178 million and $45 million, respectively. Diluted earnings per share excluding the tax valuation allowance adjustments and the restructuring charge were $5.67, $5.52, and $3.47 in 2000, 1999, and 1998, respectively.
The company's manufacturing operations reported income before income taxes of $139 million in 2000 compared with $474 million in 1999 and $321 million in 1998. Pretax income for the manufacturing operations was reduced $287 million in 2000 by the effect of the corporate restructuring charge. The truck segment's profit decreased by 39% in 2000 while revenues decreased by 4%, compared to increases in profit and revenue of 20% and 6% in 1999, respectively. The engine segment's profit increased by 13% in 2000 and 58% in 1999 compared to revenue increases of 2% and 21%, respectively. During 2000 the company's truck segment was adversely affected by decreased industry volume related to the declining overall industry as well as reduced truck pricing and increases in material costs. The engine segment's profit and revenue increases during 2000 were, in part, due to record levels of engine shipments to other original equipment manufacturers (OEMs). The truck and engine segments' profit increases in 1999
RESULTS OF OPERATIONS (continued)
were attributable to economies of scale in truck and engine production, improved truck pricing and various other cost improvements.
The financial services segment's profit in 2000 decreased $4 million from 1999 primarily due to a decrease in NFC's pretax income from continuing operations. NFC's pretax income from continuing operations in 2000 was $92 million compared to $96 million in 1999. The decrease was primarily due to lower gains on the sale of retail notes and higher losses on retail receivables, partially offset by higher average finance receivable balances. The financial services segment's profit in 1999 was $28 million higher than in 1998, primarily resulting from an increase in NFC's pretax income and a legal settlement in favor of an insurance subsidiary of the company. The effect of the planned sale of Harco National Insurance Company (Harco), a wholly owned subsidiary of NFC, is reflected as a discontinued operation in NFC's financial statements, but the expected loss on disposal is included as a component of the restructuring charge in Navistar's consolidated financial statements, which is further described under the caption "Restructuring Charge" and in Note 10 to the Financial Statements.
Sales and Revenues
Sales and revenues of $8,451 million in 2000 were 2% lower than the $8,642 million reported in 1999, which was 10% higher than the $7,885 million reported in 1998. Sales of manufactured products totaled $8,119 million in 2000, 2% lower than the $8,326 million reported in 1999, which was 9% above the $7,629 reported in 1998.
U.S. and Canadian industry sales of Class 5 through 8 trucks totaled 440,000 units in 2000, 5% lower than the 465,500 units in 1999, which was 19% greater than the 392,000 units sold in 1998. Class 8 heavy truck sales totaled 258,300 units in 2000, a 10% decrease from the 286,000 units sold in 1999, which was a 23% increase over the 232,000 units sold in 1998. Industry sales of Class 5, 6, and 7 medium trucks, including school buses, totaled 181,700 units in 2000, consistent with the 179,500 units sold in 1999, which was 12% above the 160,000 units sold in 1998. Industry sales of school buses, which accounted for 19% of the medium truck market, were 33,900 units in 2000, nearly unchanged from 1999, which experienced a 3% increase over 1998.
While the industry experienced a significant decline, the company's market share in the combined U.S. and Canadian Class 5 through 8 truck market for 2000 increased to 26.9% from 25.6% in 1999. Market share was 29.1% in 1998.
Total engine shipments reached 392,900 units, a 5% increase over 1999. This excludes the 54,100 units shipped by Maxion International Motores S.A., the company's 50% owned joint venture in Brazil, to its outside customers. Shipments of mid-range diesel engines by the company to other OEMs during 2000 were a record 304,400 units, a 6% increase over the 286,500 units shipped in 1999, which represented a 34% increase over 1998. Higher shipments to Ford Motor Company (Ford) to meet consumer demand for light trucks and vans which use this engine was the primary cause of the increases in both 2000 and 1999.
Finance and insurance revenue was $288 million for 2000, a $32 million increase over 1999 revenue of $256 million, which was $55 million higher than 1998 revenue of $201 million. The increase in 2000 was primarily a result of an increase in lease financing, while the increase in 1999 was impacted significantly by greater wholesale and retail financing activity.
The company recorded other income of $44 million in 2000. This decreased from the $60 million reported for 1999, which was an increase of $5 million from 1998. Lower cash balances, which reduced interest income, was a significant factor in the decrease in 2000, while the increase in 1999 was primarily due to a legal settlement in favor of an insurance subsidiary of the company.
RESULTS OF OPERATIONS (continued)
Costs and Expenses
Manufacturing gross margin was 16.8% in 2000, compared with 18.0% in 1999, and 15.3% in 1998. Excluding the effect of the restructuring charge, the company's manufacturing gross margin was 17.0% in 2000. The decrease in margin primarily results from lower new truck pricing, declines in used truck values and increases in material costs. The gross margin increase experienced in 1999 was primarily due to improved pricing and improved operating efficiencies.
Postretirement benefits expense of $146 million in 2000 decreased $70 million from $216 million in 1999, which increased $42 million from $174 million reported in 1998. The 2000 decrease is primarily due to lower pension expense as well as lower profit sharing provisions to the retiree trust, which was partially offset by increased health and life insurance expense. The 1999 increase was mainly a result of higher retiree healthcare expense and higher profit sharing provisions to the retiree trust. See Note 2 to the Financial Statements.
Engineering and research expense in 2000 was $280 million, which was consistent with the $281 million reported in 1999, but an increase from the $192 million in 1998. The increase in 1999 over 1998 reflected the company's continuing investment in its next generation vehicle (NGV) and next generation diesel (NGD) programs. NGV represented 50% of the increase while NGD accounted for another 25%.
Sales, general and administrative expense of $488 million in 2000 was comparable to the $486 million in 1999, which was higher than the $427 million reported in 1998. The 1999 increase was primarily due to marketing programs and the operational implementation of the company's integrated truck and engine strategies.
Interest expense increased to $146 million in 2000 from $135 million in 1999 and $105 million in 1998. The rise in 2000 was partially attributable to the financial services segment's increased borrowing costs related to higher average receivable funding requirements and higher average interest rates. The increase in 1999 was, in part, driven by higher average receivable funding requirements due to higher sales.
Other expense totaled $87 million in 2000, compared with $71 million in 1999 and $79 million in 1998. The increase in 2000 is due to higher insurance claims and underwriting fees.
RESTRUCTURING CHARGE
In October 2000, the company incurred charges for restructuring, asset write-downs, loss on anticipated sale of business and other exit costs totaling $306 million as part of an overall plan to restructure its manufacturing and corporate operations ("Plan of Restructuring"). The following are the major restructuring, integration and cost reduction initiatives included in the Plan of Restructuring:
o Replacement of current steel cab trucks with a new line of high performance next generation vehicles (NGV) and a concurrent realignment of the company's truck manufacturing facilities o Closure of certain operations and exit of certain activities o Launch of the next generation technology diesel engines o Consolidation of corporate operations o Realignment of the bus and truck dealership network and termination of various dealership contracts
RESTRUCTURING CHARGE (continued)
Of the pretax restructuring charge totaling $306 million, $124 million represents non-cash charges. Approximately $8 million was spent in 2000 and the remaining $174 million is expected to be spent as follows: 2001 - $66 million, 2002 - $42 million and 2003 and beyond - $66 million. The total cash outlay is expected to be funded from existing cash balances and internally generated cash flows from operations. The specific actions included in the Plan of Restructuring are expected to be substantially complete by November 2001 and the charge reflects costs and expenses that are incremental to the current period and are directly related to the Plan of Restructuring.
The actions taken to implement the Plan of Restructuring are expected to generate approximately $100 million in annualized savings for the company, primarily from lower salaries and benefit costs, beginning in fiscal 2001. These savings are expected to be more than offset by lower revenue from expected industry driven reductions in annual truck and engine sales volumes.
Components of the restructuring charge are as follows:
The severance and other benefit costs, asset write-downs and losses, lease terminations, loss on anticipated sale of business, dealer termination and exit costs, totaling $286 million, are presented as "Restructuring and loss on anticipated sale of business" in the Statement of Income. Inventory write-down costs of $20 million are included in "Cost of products sold related to restructuring" in the Statement of Income.
A description of the significant components of the restructuring charge is as follows:
Pursuant to the Plan of Restructuring, 3,100 positions will be eliminated throughout the company. Severance and other benefit costs relate to the reduction of approximately 2,100 employees from the workforce, primarily in North America. Of the total workforce reductions, approximately 2,000 will be in International's Truck Group, of which approximately 1,600 are production-related employees, with the remainder impacting the Engine, Corporate and Financial Services Groups. As of October 31, 2000, approximately $7 million had been paid for severance and other benefits for nearly 500 terminated employees. The remaining reduction of approximately 1,600 employees will be substantially complete by late 2001 when the majority of the NGV products will be in production. The reduction is primarily caused by a reduction in the required workforce to assemble the new medium trucks, a lowering of anticipated industry demand for certain products and the movement of products between manufacturing facilities. Benefit costs will extend beyond the completion of the workforce reductions due to the company's contractual severance obligations. Additionally, the severance and other benefits component includes a $12 million non-cash curtailment loss related to the company's postretirement benefit plans.
RESTRUCTURING CHARGE (continued)
In 1997, International announced the extension of its engine contract for V-8 engines with Ford until 2012. This contract extension included the development of new engines that provide better performance and meet stricter emissions requirements. As part of the Plan of Restructuring, the company finalized its plan for this new engine. The plan requires that certain existing production assets be either replaced or disposed. Accordingly, International entered into sale-leaseback transactions in October 2000 for certain of these affected production assets, which resulted in the recognition of a $55 million charge for the excess of the carrying amount over the fair value of these assets. In addition, a charge of $19 million was recorded for the impairment of other engine production assets held for disposal and $9 million was recognized for the write-down of engine and service inventory that will be replaced. International's preparation for the launch of NGV, a new line of high performance steel cab trucks, which begins in March 2001 resulted in the write-off of $11 million of excess truck parts and service inventory related to prior vehicle models. The remainder of the asset write-downs and losses primarily relate to assets that will be disposed of or abandoned as a direct result of the workforce reductions.
Lease termination costs include the future obligations under long-term non-cancelable lease agreements at facilities being vacated following the workforce reductions. This charge primarily consists of the estimated lease costs, net of probable sublease income, associated with the cancelation of the company's corporate office lease at NBC Tower in Chicago, Illinois, which expires in 2010.
As part of the Plan of Restructuring, management evaluated the strategic importance of certain of its operations. On November 30, 2000, NFC's board of directors approved NFC management's plan to sell Harco within the next fiscal year. The effect of the anticipated sale of Harco is reflected as a discontinued operation in NFC's stand-alone financial statements because Harco represents a major line of business and a reportable operating segment of NFC. However, because Harco is not a major line of business nor a separate operating segment of Navistar, the planned sale of Harco does not qualify for discontinued operations presentation in accordance with Accounting Principles Board Opinion No. 30 and accordingly, the anticipated loss on disposal is included as a component of the restructuring charge. Additionally, due to the anticipated sale of Harco within the next fiscal year, all of Harco's assets and liabilities have been classified as current within the Statement of Financial Position. Harco's revenues and pretax income, respectively, were $56 million and $1 million in 2000, $44 million and $5 million in 1999, and $42 million and $6 million in 1998. Total assets, primarily marketable securities, and total liabilities, primarily loss reserves, were $155 million and $94 million, respectively, as of October 31, 2000 and $142 million and $81 million, respectively, as of October 31, 1999.
Dealer termination and exit costs of $39 million principally include $17 million of settlement costs related to the termination of certain dealer contracts in connection with the realignment of the company's bus distribution network, and other litigation and exit costs to implement the restructuring initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow is generated from the manufacture and sale of trucks and mid-range diesel engines and their associated service parts as well as from product financing and insurance coverage provided to the company's dealers and retail customers by the financial services segment. The company's current debt ratings have made sales of finance receivables the most economic sources of funding for NFC. Insurance operations are self-funded.
LIQUIDITY AND CAPITAL RESOURCES (continued)
The company had working capital of $58 million at October 31, 2000, compared to $340 million at October 31, 1999. The decrease from 1999 to 2000 is primarily due to a net change in operating assets and liabilities of $181 million as described below, and an increase in notes payable and current maturities of long-term debt of $290 million.
Consolidated cash, cash equivalents and marketable securities of the company were $501 million at October 31, 2000, $576 million at October 31, 1999, and $1,064 million at October 31, 1998. Cash, cash equivalents and marketable securities available to manufacturing operations totaled $588 million, $1,045 million and $1,010 million at October 31, 2000, 1999 and 1998, respectively. This included an intercompany receivable from NFC of $294 million, $659 million and $106 million at October 31, 2000, 1999 and 1998, respectively, which NFC is obligated to repay upon request.
Cash provided by operations during 2000 totaled $686 million, primarily from net income of $159 million, $199 million of depreciation and amortization, a $124 million non-cash restructuring charge and a net change in operating assets and liabilities of $181 million. Income tax expense for 2000 was $65 million, composed of cash payments of $29 million to federal and certain state, local and foreign governments and deferred expense of $56 million, offset by a $20 million research and development tax credit.
The net source of cash resulting from the change in operating assets and liabilities of $181 million includes a $591 million decrease in receivables primarily due to a net decrease in wholesale note and account balances. The change also includes a $288 million decrease in accounts payable primarily due to a decrease in truck production levels and an $89 million decrease in other liabilities primarily due to a reduction of the payments required by the company's profit sharing and performance incentive programs.
During 2000, investment programs used $807 million in cash principally to fund $553 million of capital expenditures. Capital expenditures were made primarily for the NGV and NGD programs, for a school bus facility in Tulsa, Oklahoma, and increased capacity, infrastructure and facility enhancements at the Escobedo, Mexico plant. Investment programs also used cash for a $361 million net increase in retail notes and lease receivables and a $90 million net increase in property and equipment leased to others. These were partially offset by a net decrease in marketable securities of $136 million and proceeds from sale-leasebacks of $90 million.
Financing activities provided a $175 million net increase in notes and debt outstanding under the bank revolving credit facility and other commercial paper programs, and a $151 million net increase in long-term debt. These were offset by purchases of $151 million of common stock during 2000 in accordance with board approved spending levels.
Cash flow from the company's manufacturing operations, financial services operations and financing capacity is currently sufficient to cover planned investment in the business. Capital investments for 2001 are expected to be $450 million including approximately $105 million for the NGV program and $145 million for the NGD program. In addition to the NGV and NGD programs, capital expenditures are planned to purchase lease options on engine equipment, for a school bus facility in Tulsa, Oklahoma, for leasehold improvements at the company's new headquarters and for normal improvements to existing facilities and products. The company had outstanding capital commitments of $268 million at October 31, 2000, including $59 million for the NGV program and $172 million through 2003 for the NGD program.
LIQUIDITY AND CAPITAL RESOURCES (continued)
The company currently estimates $250 million and $260 million in capital spending and $170 million and $115 million in development expense through 2004 for the NGV and NGD programs, respectively. Approximately $120 million and $50 million of the development expenses are planned for 2001. Included in the NGD amounts for capital spending and development expense are the company's continuing investment to produce new high technology diesel engines in Huntsville, Alabama.
The company's truck assembly facility in Escobedo, Mexico is encumbered by a lien in favor of certain lenders of the company as collateral for a $125 million revolving Mexican credit facility. At October 31, 2000, $23 million of a Mexican subsidiary's receivables were pledged as collateral for bank borrowings. In addition, as of October 31, 2000, the company is contingently liable for approximately $169 million for various purchasing commitments, credit guarantees and buyback programs. Based on historical loss trends, the company's exposure is not considered material. Additionally, restrictions under the terms of the senior and senior subordinated notes and the Mexican credit facility include a limitation on indebtedness and a limitation on certain restricted payments.
NFC has traditionally obtained funds to provide financing to the company's dealers and retail customers from sales of finance receivables, commercial paper, short and long-term bank borrowings, medium and long-term debt and equity capital. At October 31, 2000, NFC's funding consisted of sold finance receivables of $2,693 million, bank and other borrowings of $1,395 million, subordinated debt of $100 million, capital lease obligations of $379 million and equity of $304 million.
Through the asset-backed public market and private placement sales, NFC has been able to fund fixed rate retail note receivables at rates offered to companies with higher investment grade ratings. During 2000, NFC sold $1,008 million of retail notes through Navistar Financial Retail Receivables Corporation (NFRRC), a wholly owned subsidiary of NFC. At October 31, 2000, the aggregate shelf registration available to NFRRC for the issuance of asset-backed securities was $1,783 million. Also, at October 31, 2000, Navistar Financial Securities Corporation (NFSC), a wholly owned subsidiary of NFC, had in place a revolving wholesale note trust that funded $883 million of wholesale notes.
In November 2000, NFC sold $765 million of retail notes, net of unearned finance income, through NFRRC to an owner trust which, in turn, issued securities which were sold to investors. A $5 million gain was recognized on this sale.
During 2000, NFC sold $300 million of variable funding certificates, through NFSC, to a conduit sponsored by a major financial institution and reduced its maximum funding capacity from $300 million to $200 million. In July 2000, NFC issued a $212 million tranche of investor certificates. At October 31, 2000 the revolving wholesale note trust was comprised of three $200 million tranches of investor certificates maturing in 2003, 2004 and 2008, the $212 million tranche of investor certificates maturing in 2005 and $125 million of variable funding certificates maturing in 2001.
In October 2000, Truck Retail Instalment Paper Company (TRIP), a special purpose wholly owned subsidiary of NFC, terminated the previously existing $400 million Asset-Backed Commercial Paper facility and issued $475 million of a senior class AAA rated and $25 million of a subordinated class A rated floating rate asset-backed notes. The proceeds were used to purchase eligible receivables from NFC and to establish a revolving retail warehouse facility for NFC's retail notes and retail leases, other than fair market value leases.
LIQUIDITY AND CAPITAL RESOURCES (continued)
In October 2000, NFC entered into a $500 million revolving retail facility as a method to fund retail notes and finance leases prior to the sale of receivables. Under the terms of this facility, NFC sells fixed rate retail notes or finance leases to the conduit and pays investors a floating rate of interest. As required by the rating agencies, NFC purchased an interest rate cap to protect investors against rising interest rates. To offset the economic cost of this cap, NFC sold an identical interest rate cap. As of October 31, 2000 the interest rate caps each had a notional amount of $500 million and a net fair value of zero.
During 2000, NFC established Truck Retail Accounts Corporation (TRAC), a special purpose wholly owned subsidiary of NFC, for the purpose of securitizing retail accounts receivable. At October 31, 2000 TRAC had in place a revolving retail account conduit that provides for the funding of $100 million of eligible retail accounts. As of October 31, 2000 NFC had utilized $80 million of this facility. The facility expires in 2001.
During 2000, NFC established Truck Engine Receivables Finance Corporation, a special purpose wholly owned subsidiary of NFC, for the purpose of securitizing engine accounts receivable. In November 2000, NFC securitized all of its unsecured trade receivables generated by the sale of diesel engines and engine service parts from Navistar to Ford. The transaction provides for funding of $100 million and expires in 2006.
NFC has a $925 million bank revolving credit facility and a $500 million revolving retail warehouse facility program, which mature in March 2001 and October 2005, respectively. As of October 31, 2000, available funding under the bank revolving credit facility and the revolving retail warehouse facility program was $30 million. When combined with unrestricted cash and cash equivalents, $72 million remained available to fund the general business purposes of NFC. Subsequent to October 31, 2000, NFC renegotiated its revolving credit agreement. The new agreement provides for aggregate borrowings of $820 million and will mature in November 2005. Under the new revolving credit agreement, Navistar's three Mexican finance subsidiaries will be permitted to borrow up to $100 million in the aggregate, which will be guaranteed by NFC. The Statement of Financial Position reflects $775 million of Navistar's bank revolvers due March 2001 as long-term debt at October 31, 2000, since Navistar has refinanced $775 million of the obligation on a long-term basis.
In conjunction with NFC's November 1998 sale of retail receivables, NFC issued an interest rate cap for the protection of investors in NFC's debt securities. The notional amount of the cap, $224 million, amortizes based on the expected outstanding principal balance of the sold retail receivables. Under the terms of the cap agreement, NFC will make payments if interest rates exceed certain levels. The interest rate cap is recorded at fair value with changes in fair value recognized in income. At October 31, 2000, the impact on income was not material.
In November 1999, NFC sold $533 million of fixed rate retail receivables on a variable rate basis and entered into an amortizing interest rate swap agreement to fix the future cash flows of interest paid to lenders. In March 2000, NFC transferred all of the rights and obligations of the swap to the bank conduit. The notional amount of the amortizing swap is based on the expected outstanding principal balance of the sold retail receivables. Under the terms of the agreement, NFC will make or receive payments based on the difference between the transferred swap notional amount and the outstanding principal balance of the sold retail receivables. As of October 31, 2000 the difference between the amortizing swap notional amount and the net outstanding principal balance of the sold retail receivables was $11 million.
At October 31, 2000, the company held German mark forward contracts with notional amounts of $35 million and other derivative contracts with notional amounts of $38 million. At October 31, 2000 the unrealized net loss on these contracts was not material.
LIQUIDITY AND CAPITAL RESOURCES (continued)
At October 31, 2000, the Canadian operating subsidiary was contingently liable for retail customers' contracts and leases financed by a third party. The Canadian operating subsidiary is subject to maximum recourse of $312 million on retail contracts and $33 million on retail leases. The Canadian operating subsidiary, NFC and certain other subsidiaries included in the financial services operations are parties to agreements that may result in the restriction of amounts which can be distributed to International in the form of dividends or loans and advances. At October 31, 2000, the maximum amount of dividends which were available for distribution under the most restrictive covenants was $248 million.
NFC's maximum contractual exposure under all receivable sale recourse provisions at October 31, 2000, was $330 million. However, management believes the recorded reserves for losses on sold receivables are adequate. See Note 5 to the Financial Statements.
The company and International are obligated under certain agreements with public and private lenders of NFC to maintain the subsidiary's income before interest expense and income taxes at not less than 125% of its total interest expense. No income maintenance payments were required for the three years ended October 31, 2000.
In February 2000, Standard and Poor's raised the company's and NFC's senior debt ratings from BB+ to BBB-, and raised the company's and NFC's subordinated debt ratings from BB- to BB+. In May 1999, Moody's and Duff and Phelps raised the company's senior debt ratings from Ba1 and BB+ to Baa3 and BBB-, respectively, and raised the company's subordinated debt ratings from Ba3 and BB- to Ba2 and BB, respectively. NFC's senior debt ratings increased from Ba1 and BBB- to Baa3 and BBB, respectively. NFC's subordinated debt ratings were also raised from Ba3 and BB+ to Ba2 and BBB-, respectively.
It is the opinion of management that, in the absence of significant unanticipated cash demands, current and forecasted cash flow will provide a basis for financing operating requirements and capital expenditures. Management also believes that collections on the outstanding receivables portfolios as well as funds available from various funding sources will permit the financial services operations to meet the financing requirements of the company's dealers and customers.
ENVIRONMENTAL MATTERS
The company has 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, which allegedly have received wastes from current or former company locations. Based on information available to the company, which, in most cases, consists of data related to quantities and characteristics of material generated at, or shipped to, each site 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 the company's share, if any, of the probable costs and is provided for in the financial statements. These obligations are generally recognized no later than completion of the remedial feasibility study and are not discounted to their present value. The company reviews its accruals on a regular basis and believes that, based on these calculations, its share of the potential additional costs for the cleanup of each site will not have a material effect on the company's financial results.
DERIVATIVE FINANCIAL INSTRUMENTS
As disclosed in Notes 1 and 11 to the Financial Statements, the company uses derivative financial instruments to transfer or reduce the risks of foreign exchange and interest rate volatility, and potentially increase the return on invested funds.
DERIVATIVE FINANCIAL INSTRUMENTS (continued)
The company's manufacturing operations, as conditions warrant, hedge foreign exchange exposure on the purchase of parts and materials from foreign countries and its exposure from the sale of manufactured products in other countries. Contracted purchases of commodities or manufacturing equipment may also be hedged.
The financial services operations may use forward contracts to hedge interest payments on the notes and certificates related to an expected sale of receivables. The financial services operations also use interest rate swaps to reduce exposure to interest rate changes when they sell fixed rate receivables on a variable rate basis. For the protection of investors in NFC's securities, NFC may enter into interest rate caps when fixed rate receivables are sold on a variable rate basis.
YEAR 2000
The company had instituted a corporate-wide Year 2000 readiness project to identify all systems, which required modification or replacement, and established appropriate remediation and contingency plans to avoid an impact on the company's ability to continue to provide its products and services. Through the date of this report, the company has not experienced any significant Year 2000 problems.
The company's total cost of the Year 2000 project, which was funded through operating cash flows, was $31 million including $25 million of expense and $6 million of capital expenditures.
NEW ACCOUNTING PRONOUNCEMENTS
On November 1, 2000, the company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended. This statement standardizes the accounting for derivative instruments by requiring that an entity recognize all derivatives as assets or liabilities in the statement of financial position and measure them at fair value. When certain criteria are met, it also provides for matching the timing of gain or loss recognition on the derivative hedging instrument with the recognition of (a) the changes in the fair value or cash flows of the hedged asset or liability attributable to the hedged risk or (b) the earnings effect of the hedged forecasted transaction.
In November 2000, Navistar recorded an immaterial cumulative transition adjustment to earnings primarily related to foreign currency derivatives. Additionally, the company recorded an immaterial cumulative transition adjustment in other comprehensive income for designated cash flow hedges.
In September 2000, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" which the company must adopt for all applicable transactions occurring after March 31, 2001. The company is currently assessing the impact of this standard on the company's results of operations, financial condition and cash flows.
INCOME TAXES
The Statement of Financial Condition at October 31, 2000 and 1999 includes a deferred tax asset of $862 million and $896 million, respectively, net of valuation allowances of $86 million for both 2000 and 1999, related to future tax benefits. The deferred tax asset has been reduced by the valuation allowance as management believes it is more likely than not that some portion of the deferred tax asset may not be realized in the future.
INCOME TAXES (continued)
The deferred tax asset includes the tax benefits associated with cumulative tax losses of $950 million and temporary differences, which represent the cumulative expense of $1,318 million recorded in the Statement of Income that has not been deducted on the company's tax returns. The valuation allowance at October 31, 2000, assumes that it is more likely than not that approximately $226 million of cumulative tax losses will not be realized before their expiration date. Realization of the net deferred tax asset is dependent on the generation of approximately $2,300 million of future taxable income. Until the company has utilized its significant net operating loss carryforwards, the cash payment of U.S. federal income taxes will be minimal. See Note 3 to the Financial Statements.
The company performs extensive analysis to determine the amount of the deferred tax asset. Such analysis is based on the premise that the company is, and will continue to be, a going concern and that it is more likely than not that deferred tax benefits will be realized through the generation of future taxable income. Management reviews all available evidence, both positive and negative, to assess the long-term earnings potential of the company. The financial results are evaluated using a number of alternatives in economic cycles at various industry volume conditions. One significant factor considered is the company's role as a leading producer of heavy and medium trucks and school buses and mid-range diesel engines.
The 2000 income tax expense was reduced by $20 million for research and development tax credits that will be taken against future income tax payments related to research and development activities that occurred over the last several years. In 1999, as a result of increased industry demand, the continued successful implementation of the company's manufacturing strategies, changes in the company's operating structure, and other positive operating indicators, management reviewed its projected future taxable income and evaluated the impact of these changes on its deferred tax asset valuation allowance. This review was completed during the third quarter of 1999 and resulted in a reduction to the deferred tax asset valuation allowance of $178 million, which was recorded as a reduction of income tax expense resulting in an effective tax rate of 8%. In addition, a $45 million reduction in the allowance was recorded during the fourth quarter of 1998 based on a similar review. Management believes that, with the combination of available tax planning strategies and the maintenance of significant market share, earnings are achievable in order to realize the net deferred tax asset of $862 million.
Reconciliation of the company's income before income taxes for financial statement purposes to U.S. taxable income for the years ended October 31 is as follows:
BUSINESS ENVIRONMENT
Sales of Class 5 through 8 trucks have historically been cyclical, with demand affected by such economic factors as industrial production, construction, demand for consumer durable goods, interest rates and the earnings and cash flow of dealers and customers. Truck sales in 2000 have been hindered by a number of factors including higher fuel prices, driver shortages, higher interest rates, and increased new and used truck inventories. The demand for new trucks reflected these adverse conditions as the number of new truck orders dropped significantly throughout 2000, reducing the order backlog. The company's U.S. and Canadian order backlog at October 31, 2000 was 24,000 units, compared with 57,300 units at October 31, 1999. Historically, retail deliveries have been impacted by the rate at which new truck orders are received. Therefore, the company continually evaluates order receipts and backlog throughout the year and will balance production with demand as appropriate. To control costs and align production schedules with demand, the company reduced its production schedules during 2000 through shutdown weeks at the Chatham and Springfield Assembly Plants.
The company currently projects 2001 U.S. and Canadian Class 8 heavy truck demand to be 181,600 units, down 30% from 2000. Class 5, 6, and 7 medium truck demand, excluding school buses is forecast at 108,000 units, 27% lower than in 2000. Demand for school buses is expected to decrease 6% in 2001 to 32,000 units. At these demand levels, the entire truck industry will be operating below capacity. Mid-range diesel engine shipments by the company to OEMs in 2001 are expected to be 295,700 units, 3% below 2000, reflecting an anticipated softening in passenger car demand.
The company announced in May of 2000 that its Green Diesel Technology (tm) will be available in the summer of 2001 on the International(R) rear engine school bus with an International(R) 530E engine. The technology will surpass emissions standards while maintaining an engine with diesel's power.
In fiscal 2000, the company finalized an agreement with Ford to supply diesel engines for certain under 8,500 lbs. GVW light duty trucks and sport utility vehicles. To support this program, the company is constructing an engine assembly operation in Huntsville, Alabama.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The company's primary market risks include fluctuations in interest rates and currency exchange rates. The company is also exposed to changes in the prices of commodities used in its manufacturing operations and to changes in the prices of equity instruments owned by the company. Commodity price risk related to the company's current commodity financial instruments and equity price risk related to the company's current investments in equity instruments are not material. The company does not hold any material market risk sensitive instruments for trading purposes.
The company has established policies and procedures to manage sensitivity to interest rate and foreign currency exchange rate market risk. These procedures include the monitoring of the company's level of exposure to each market risk, the funding of variable rate receivables with variable rate debt, and limiting the amount of fixed rate receivables, which may be funded with floating rate debt. These procedures also include the use of derivative financial instruments to mitigate the effects of interest rate fluctuations and to reduce the exposure to exchange rate risk.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK (continued)
Interest rate risk is the risk that the company will incur economic losses due to adverse changes in interest rates. The company measures its interest rate risk by estimating the net amount by which the fair value of all of its interest rate sensitive assets and liabilities would be impacted by selected hypothetical changes in market interest rates. Fair value is estimated using a discounted cash flow analysis. Assuming a hypothetical instantaneous 10% adverse change in interest rates as of October 31, 2000 and 1999, the net fair value of these instruments would decrease by approximately $5 million in each year. The company's interest rate sensitivity analysis assumes a parallel shift in interest rate yield curves. The model, therefore, does not reflect the potential impact of changes in the relationship between short-term and long-term interest rates.
Foreign currency risk is the risk that the company will incur economic losses due to adverse changes in foreign currency exchange rates. The company's primary exposures to foreign currency exchange fluctuations are the Canadian dollar/U.S. dollar, Mexican peso/U.S. dollar and Brazilian real/U.S. dollar. At October 31, 2000 and 1999, the potential reduction in future earnings from a hypothetical instantaneous 10% adverse change in quoted foreign currency spot rates applied to foreign currency sensitive instruments would be approximately $10 million in each year. The foreign currency sensitivity model is limited by the assumption that all of the foreign currencies to which the company is exposed would simultaneously decrease by 10%, because such synchronized changes are unlikely to occur. The effects of foreign currency forward contracts have been included in the above analysis; however, the sensitivity model does not include the inherent risks associated with the anticipated future transactions denominated in foreign currency for which these forward contracts have been entered into for hedging purposes.
STATEMENT OF FINANCIAL REPORTING RESPONSIBILITY
Management of Navistar International Corporation and its subsidiaries is responsible for the preparation and for the integrity and objectivity of the accompanying financial statements and other financial information in this report. The financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and include amounts that are based on management's estimates and judgments.
The accompanying financial statements have been audited by Deloitte & Touche LLP, independent auditors. Management has made available to Deloitte & Touche LLP all the company's financial records and related data, as well as the minutes of the board of directors' meetings. Management believes that all representations made to Deloitte & Touche LLP during its audit were valid and appropriate.
Management is responsible for establishing and maintaining a system of internal controls throughout its operations that provides reasonable assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use and the execution and recording of transactions in accordance with management's authorization. Management believes that the company's system of internal controls is adequate to accomplish these objectives. The system of internal controls, which provides for appropriate division of responsibility, is supported by written policies and procedures that are updated by management, as necessary. The system is tested and evaluated regularly by the company's internal auditors as well as by the independent auditors in connection with their annual audit of the financial statements. The independent auditors conduct their audit in accordance with auditing standards generally accepted in the United States of America and perform such tests of transactions and balances as they deem necessary. Management considers the recommendations of its internal auditors and independent auditors concerning the company's system of internal controls and takes the necessary actions that are cost-effective in the circumstances to respond appropriately to the recommendations presented.
The Audit Committee of the board of directors, composed of six non-employee directors, meets periodically with the independent auditors, management, general counsel and internal auditors to satisfy itself that such persons are properly discharging their responsibilities regarding financial reporting and auditing. In carrying out these responsibilities, the Committee has full access to the independent auditors, internal auditors, general counsel and financial management in scheduled joint sessions or private meetings as in the Committee's judgment seems appropriate. Similarly, the company's independent auditors, internal auditors, general counsel and financial management have full access to the Committee and to the board of directors and each is responsible for bringing before the Committee or its Chair, in a timely manner, any matter deemed appropriate to the discharge of the Committee's responsibility.
John R. Horne Chairman, President and Chief Executive Officer
Robert C. Lannert Executive Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
Navistar International Corporation, Its Directors and Shareowners:
We have audited the consolidated financial statements of Navistar International Corporation and Consolidated Subsidiaries as of October 31, 2000 and 1999 and for each of the three years in the period ended October 31, 2000 as listed in Item 8
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
Executive Officers of the Registrant - ------------------------------------
The following selected information for each of the company's current executive officers was prepared as of December 15, 2000.
Other information required by Item 10 of this Form is incorporated herein by reference from Navistar's definitive Proxy Statement for the February 20, 2001 Annual Meeting of Shareowners.
ITEMS 11, 12 AND 13
Information required by Items 11, 12 and 13 of this Form is incorporated herein by reference from Navistar's definitive Proxy Statement for the February 20, 2001 Annual Meeting of Shareowners.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
Financial Statements - --------------------
See Item 8 - Financial Statements and Supplementary Data
Schedule Page - -------- ----
II Valuation and Qualifying Accounts and Reserves .....................
This financial statement schedule of the company is filed as part of this Form 10-K and should be read in conjunction with the Consolidated Financial Statements, and related notes thereto, of the company. All other schedules are omitted because of the absence of the conditions under which they are required or because information called for is shown in the consolidated financial statements and notes thereto.
Finance and Insurance Subsidiaries:
The consolidated financial statements of Navistar Financial Corporation for the years ended October 31, 2000, 1999 and 1998 appearing on pages 11 through 39 in the Annual Report on Form 10-K for Navistar Financial Corporation for the fiscal year ended October 31, 2000, Commission File No. 1-4146-1, are incorporated herein by reference and filed as Exhibit 28 to this Form 10-K.
Exhibits Page - -------- ----
(3) Articles of Incorporation and By-Laws ............................. E-1 (4) Instruments Defining the Rights of Security Holders, Including Indentures ......................................... E-2 (10) Material Contracts ................................................ E-4 (21) Subsidiaries of the Registrant .................................... E-7 (23) Independent Auditors' Consent ..................................... 68 (24) Power of Attorney ................................................. 66 (27) Financial Data Schedule ........................................... * (28) Navistar Financial Corporation Annual Report on Form 10-K for the fiscal year ended October 31, 2000....... *
*Filed only electronically with the Securities and Exchange Commission.
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 financial statements and notes thereto in the 2000 Annual Report on Form 10-K.
Exhibits, other than those incorporated by reference, have been included in copies of this report filed with the Securities and Exchange Commission. Shareowners of the company will be provided with copies of these exhibits upon written request to the Corporate Secretary at the address given on the cover page of this Form 10-K.
Reports on Form 8-K - -------------------
The company filed a current report on Form 8-K with the Commission on October 31, 2000 in which the company announced a fourth quarter charge against earnings related to restructuring operations and launching a series of new products.
NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ----------------------------------
SIGNATURE
Pursuant to the requirements of Section 13 and 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NAVISTAR INTERNATIONAL CORPORATION - ---------------------------------- (Registrant)
/s/ Mark T. Schwetschenau - ---------------------------------- Mark T. Schwetschenau December 20, 2000 Vice President and Controller (Principal Accounting Officer)
EXHIBIT 24
NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES ----------------------------------
POWER OF ATTORNEY
Each person whose signature appears below does hereby make, constitute and appoint John R. Horne, Robert C. Lannert and Mark T. Schwetschenau and each of them acting individually, true and lawful attorneys-in-fact and agents with power to act without the other and with full power of substitution, to execute, deliver and file, for and on such person's behalf, and in such person's name and capacity or capacities as stated below, any amendment, exhibit or supplement to the Form 10-K Report making such changes in the report as such attorney-in-fact deems appropriate.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
EXHIBIT 24 (CONTINUED)
NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES -----------------------------
SIGNATURES (Continued)
NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
EXHIBIT 23
INDEPENDENT AUDITORS' CONSENT
Navistar International Corporation:
We consent to the incorporation by reference in the Registration Statements, including post-effective amendments, No. 2-70979, No. 33-26847, No. 333-25783, No. 333-29735, No. 333-29739, No. 333-29301 and No. 333-77781 of Navistar International Corporation, all on Form S-8, of our report dated December 11, 2000, relating to the financial statements and financial statement schedule of Navistar International Corporation and of the financial statements of Navistar Financial Corporation, appearing and incorporated by reference in this Annual Report on Form 10-K of Navistar International Corporation for the year ended October 31, 2000.
Deloitte & Touche LLP December 20, 2000 Chicago, Illinois
SCHEDULE II NAVISTAR INTERNATIONAL CORPORATION AND CONSOLIDATED SUBSIDIARIES
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VALUATION AND QUALIFYING ACCOUNTS AND RESERVES FOR THE YEARS ENDED OCTOBER 31, 2000, 1999 AND 1998 (MILLIONS OF DOLLARS)